Thursday's Silver Lining From The Oil Patch

Todd Shriber
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Today was one of those days where there is simply no sugar-coating things in the financial markets. If it could have gone wrong, it probably did as the Dow Jones Industrial Average careened to its worst-one day loss since 2008. Oil was no peach either. NYMEX-traded crude for September delivery plunged $5.30, or 5.8%, to $86.63, good for the lowest closing price since Feb. 18. All of 2011's gains in oil futures have now vanished.

There is no getting around it: Thursday was a blood-bath for riskier assets, namely equities and commodities, and the search for a silver lining when it comes to the oil industry could prove to be a voyage to nowhere because, not to be trite, there was not much in the way of good news flowing from the oil patch today.

However, there is on sliver of good news and it pertains directly to one oil stock. Problem is the news broke so late in the day that it had no help of salvaging a glum intraday performance for this company. I am referring to Royal Dutch Shell, Europe's largest oil company, and its ongoing quest to drill in Alaska's Arctic region. For a quick refresher on Shell's trials and tribulations in Alaska, I encourage you to quickly review my commentary on the subject from late June (HERE).

The good news is that after spending almost $4 billion over the past five years for the right to drill in the Beaufort and Chukchi Seas, an investment that to this point has yielded zilch in the way of actual oil output, the Interior Department has tentatively agreed to allow Shell (RDS-A) to drill four exploratory wells in the Beaufort Sea in the summer of 2012.

As I noted in my June commentary, for those that are supporters of increased offshore drilling or that are long Shell stock, it is not unreasonable to view the Anglo-Dutch oil giant as a victim of bitter rival BP's (BP) malfeasance in the Gulf of Mexico. After all, the government-imposed moratorium on deep-water drilling following the Gulf spill last year blocked Shell's Alaska plans from proceeding this year as the company had originally intended. Actually, the company was ready to go back in 2007, but that is a story for another day.

Personal politics aside, it can be argued that maybe, just maybe the good news for Shell in Alaska is indicative of the White House finally awakening to the pivotal role energy production plays in terms of job creation and economic growth here in the U.S. As I frequently say in my market wraps for Option Investor, politicians are quite adept at reading calendars and before we know it, another election year will be here. Why not approve more offshore drilling with the hopes of bolstering what are currently anemic employment numbers?

Not to be understated is the fact that allowing Shell to get going in Alaska is, for lack of a better way of framing it, kind of a big deal. Reserve estimates for Beaufort and Chukchi range from nearly 27 billion to 30 billion barrels of crude and 130 trillion cubic feet of recoverable natural gas. Simply put, the recoverable gas alone is decades worth of U.S. consumption.

Again, there is no escaping Thursday's blood-letting, but for one day at least, it looks like the bureaucrats finally did something positive for the energy business and U.S. energy independence.