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Oil Prices Gain 2% on Tightening Supply

Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Is This Indicator A Warning on Energy's Most-Loved Firms?

A series of data came across my desk yesterday from an unusual source. That made me wonder if the U.S. onshore oil boom is headed for tougher times.

Mortgage data.

The numbers came from the National Association of Home Builders (NAHB). Who this week published their "Leading Markets" index. Showing which parts of America are showing the highest levels of activity in terms of economic growth and home price increases.

This week's survey was cheered by the housing industry as good news. Showing that many markets across the U.S. have returned to pre-recession levels.

But there's something odd about which markets have seen a rebound. Take a look at the list below of the strongest local housing markets:

Baton Rouge
Honolulu
Oklahoma City
Austin
Houston
Harrisburg
Pittsburgh

It's immediately obvious that with the exception of Hawaii, all of the best-performing U.S. housing markets are clustered around shale oil and gas. In Texas, Oklahoma, Louisiana, and Pennsylvania.

The pattern becomes even clearer looking at the NAHB list of strongest small metro areas: Odessa and Midland, Texas; Bismarck and Grand Forks, North Dakota; and Casper, Wyoming. North Dakota of course being driven by the Bakken oil play.

On the one hand this is great news for the oil business. Showing just how strong the U.S. shale "miracle" has been. And proving that resource development can be a powerful driver for economic growth.

But it also sounds a warning. Showing just how much money is being pumped into the local economies of shale-producing regions.

Such an influx of cash into small places will cause big inflation. That's of course a pain for homebuyers and anyone who happens to be on a low income here. But it's also an issue for oil companies themselves. Inflation will hit labour and services costs, and rates for needed supplies in drilling and pipeline construction.

Such cost escalation is a silent killer of play economics. We've seen such costs erode investment returns before. In places like the Canadian oil sands and the Australian LNG sector.

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This is going to be a mounting issue for much-loved shale producers in America. Watch out.

Here's to small town blues,

By. Dave Forest


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