Signs of What's to Come

US supermajors are expected to greatly increase capital spending in 2011 and beyond with Chervon leading the way. Besides the billions of dollars that this will involve, this is significant because it is a sign that better times are coming—at least for the oil and gas industry. The Great Recession proved to be a very difficult time for the energy industry, so much so that demand for oil declined for the first time since 1983. The narrower profit margins over the last couple of years have meant that energy companies are not spending nearly as much as they did before the financial crisis. Lesser capital spending means that companies are not doing as many exploration endeavors as they would like.

The reason that oil and gas companies are now able to afford greater spending is due to rises in demand which is bringing prices of crude oil back up to more normal levels. Oil prices had been $145 per barrel—an unprecedented high—just before the financial crisis in July of 2008, they then tanked to just $40 per barrel. Oil is now back up to $80 per barrel and it is expected to more than double in the next two years due to increased demand.

I believe the prospect of oil prices doubling in the next two years makes US oil companies a potentially very strong investment, and at least a very secure investment. Oil companies are using their greater profits to explore more oil producing regions within the US to tap large quantities of previously unattainable reserves. Marcellus Shale in Pennsylvania and New York is particularly promising and it could prove to be a safer bet than the Gulf Region and other off shore projects, which oil companies expect to made more expensive by increased government regulation in the wake of the BP oil spill.  Overall, US oil companies are poised for strong growth in the near future.

Sources: The Wall Street Journal, Picture, Standard & Poor