The story is nothing new, it has been known for quite some time that the U.S. may hold the largest oil reserve ever. That reserve, dubbed the Green River Formation, stretches across western states Colorado, Utah, and Wyoming, and is sitting on mostly federal lands, making it much easier for the government to drill for the resource. So how big is the biggest reserve ever? It is estimated that this area contains a massive three trillion barrels of oil, half of which is currently recoverable. To give you an idea for how significant that number actually is, three trillion is approximately equivalent to the rest of the world’s proven reserves combined. But if this discovery is old news, why isn’t anyone talking about it? [see also 25 Things Every Financial Advisor Should Know About Commodities].
Physically getting to the reserve seems to be one of the issues at hand, and one of the reasons why this deposit is not making headlines around the world. Developing oil shale and fracking technologies seems to be necessary before this reserve can be effectively tapped. In recent years, however, oil technologies have been rapidly improving, and accessing this reserve seems to be a legitimate possibility in the coming years. Many are already discussing the benefits of job creation as well as the ability for the U.S. to become the world’s largest producer of crude oil. This of course would match up well with the fact that we are by far the biggest consumers of the fossil fuel, burning nearly 19 million barrels of oil per day [see also 25 Ways To Invest In Crude Oil].
What to Watch For
This has the potential to be a major development for not only the U.S. economy, but crude oil itself. As a commodity, crude has been steadily dropping in recent weeks, as many feel that is was overvalued due to fears of a Middle East conflict arising. But if the U.S. becomes the world’s largest producer, prices will be cheaper at the pump and we will hardly have to worry about instability in foreign producers. Investors will also need to keep in mind what will happen to the price of crude oil if there is a sudden injection approximately equal to all proven reserves, essentially doubling the world’s supply. While this is assuming that the entire reserve will eventually be recoverable (an absolute best-case scenario), even a jump of 1.5 trillion barrels could bottom out crude prices and could destroy a lot of positions that traders have built up.
Obviously, the time line for this reserve will be relatively long and likely slow to develop, but investors/traders still need to keep a watchful eye on developments concerning what happens with the Green River Formation. Below, we outline several ways to make a play on this developing trend [see also How To Profit From Rising Gasoline Prices].
- Crude Futures: The most direct method of making a play will come from futures contracts for WTI (not Brent). Investors have a multitude of options to choose from on the NYMEX as well as contracts extending out 5+ years. For those looking to make a bet on a longer timeline, an option contract on one of the larger futures may be your best bet as it allows you to make handsome profits and comes with much less liability than outright owning futures contracts.
- 3x Inverse Crude ETN (DWTI): This ETN is designed to profit from crude’s demise by applying a -300% leverage to WTI contracts. If this reserve is tapped and crude prices crater, DWTI may be the perfect place to sit. Note, however, that the fund is very small, with just $0.6 million in assets, so it may not be around long enough to see this development unfold.
- Exxon Mobil (XOM): Of course, using a major oil player is not necessarily a direct play, but it will definitely give you exposure to this reserve. This play will be rather interesting, as a wealth of supply could bottom prices, but it also grants incredible export opportunities to the Exxon’s of the world, which could push the stock higher. It all depends on who gets to drill and extract this reserve.
Disclosure: No positions at time of writing.