The spot price of oil is worth keeping a sharp eye on. With West Texas Intermediate (WTI) oil having jumped past $105.00 a barrel, oil stocks are moving again.
Geopolitical tensions certainly have added a bit of a premium to oil prices, but there's been resilience in spot well over the last couple of months, and it's based on the prospects of a stronger U.S. economy.
And that strength in oil prices, while never helpful for consumers, is happening in the face of the highest amount of U.S. crude oil production in 20 years.
The primary consequence of stronger oil prices for the consumer is obviously the bill at the pump. But it's also in the infrastructure that is struggling to keep up with the production boom. U.S. oil production has overtaken pipeline capacity and railroads are making up for the transportation gap.
In the first half of 2013, 356,000 carloads of crude oil and refined petroleum products were moved by rail, according to the Association of American Railroads (AAR). This equates to 1.37 million barrels of oil being shipped every day, according to the U.S. Energy Information Administration (EIA).
There is now a 60,000-car order backlog for oil railcars in the U.S. market.
Based on the latest 2013 monthly output numbers, the EIA says the U.S. is producing 7.2 million barrels of crude oil per day. The majority of the increase in rail transportation of the commodity is due to the huge growth in Bakken oil production, mostly in North Dakota-which doesn't have enough pipeline capacity. (I'll be travelling to the Bakken oil region shortly for a first-hand account of the production boom.)
The EIA recently noted that the increased transport of Bakken oil by rail has narrowed the difference in oil prices between Bakken crude and international benchmark Brent crude oil to less than $5.00 a barrel. According to the agency, a declining spread between benchmarks reduces the incentive to ship oil to coastal refineries.
So the numbers are very clear: U.S. oil production is rising, along with the fast-growing trend of transporting oil by rail; but oil prices are not falling with the increased supply. The consumer is paying more, while investors reap the profits.
And oil stocks are moving commensurate with stronger oil prices. I still maintain the view that most investors should definitely consider some exposure to the large-cap oil and gas energy industry as part of a long-term equity portfolio.
Alternative energy is also attractive, but definitely more speculative and often without dividend income. (See "How Rising Oil Prices Can Help Your Portfolio.")
Keep in mind that WTI oil prices are up approximately $20.00 per barrel from this time last year. With the summer driving season in full swing and lasting geopolitical tensions in the Middle East, oil prices are likely to stay high.
Solely from the investor's perspective, it should continue to be a good year for the large, integrated energy companies. But it's not one consumers will enjoy.