We could finally be back on a path to over $100 a barrel, a number we haven’t seen in almost half a decade.
While $100 oil doesn’t sound like a positive for your daily commute, it is good for oil investor portfolios.
Oil prices have been in a tough place since the mini-crash in 2014. What’s helping push oil higher now is a right-sizing of supply-and-demand.
Many of the major producers in the Middle East have curbed production, and production from other international sources could fall even further.
Venezuela’s oil output is falling the country continues to experience unrest. Once a top 10 oil producing country, the U.S. Energy Information Administration (EIA) shows that Venezuela’s oil production has fallen 30% in the last two years. A decline that’s expected to continue as the country struggles to keep oil companies happy given delayed and missed payments.
Then there’s the recent U.S. withdrawal from the Iran nuclear deal, which could further lower global oil supply. With U.S. sanctions of Iran back in play, the demand for Iranian oil is in jeopardy.
Oil demand is expected to outpace supply heading into 2019. This could push the price of oil to above $100 a barrel in the next year.
But this comes even as U.S. shale production is still growing at a brisk pace. The U.S. is now producing over 10 million barrels of oil per day for the first time since 1970.
Texas Oil Well Drilling Still Booming
Production is booming in Texas oil wells and across the major U.S. shales. Oil produced from U.S. shales, which is part of the country's onshore oil production, is expected to break a record in June, with the Energy Information Administration (EIA) projecting 7.18 million barrels per day in production.
Driving that growth in Texas.
Texas oil wells have been a boom, calling home to in the most productive U.S. shales. This includes the Permian Basin, the largest shale in the country. Oil production from the Permian is expected to account for over 45% of the U.S. shale oil output next month. More pipelines in the Permian basin are coming online in the next couple years, which will support the ability to bring even more Texas oil to market for meeting demand.
The second largest U.S. shale, the Eagle Ford in South Texas, which will hit 1.39 million barrels of oil in daily output next month. This is the most oil coming from the Eagle Ford since February 2016.
But it’s not just Texas, there’s the Bakken shale in North Dakota. This shale will hit its highest output since June 2015, with expected production of 1.24 million barrels a day.
Tax Smart Oil Investing
For investors looking to take advantage of higher oil prices, directly investing in oil wells offers the best tax breaks in the industry. More importantly, these are the best tax breaks of nearly any industry you’ll find.
The government doesn’t offer such aggressive tax incentives for any other industry. That’s because the government encourages oil industry investing. The idea is to encourage investors to invest directly in oil wells, ultimately to help the U.S. become energy independent.
But you won’t get these type of benefits from investing in large oil companies. These tax breaks and incentives are reserved for small companies. The government encourages direct investment in small oil companies.
The rewards, or tax breaks, for investors include hefty deductions that can reduce income, and in some cases offset wage taxes or capital gains taxes of other investments.
To start, oil wells investors can take advantage of the intangible expenditures of drilling. This includes chemical and labor costs, which can be upwards of 80% of the cost of a well. All of these are 100% tax deductible for investors starting in the first year the money was invested. Then there are the tangible drilling costs, which includes equipment and can be deducted as depreciation over a period of years.
But perhaps the most prized tax break is the oil depletion tax deduction.
This is one of the most important tax incentives for oil companies. The 1990 Tax Act allows investors who have invested directly in small oil companies to exempt 15% of their income from federal taxes.
Investing directly in oil wells is one of the best investments for accredited investors, especially considering the ability to tax-sheltered income. It reduces an investor’s tax burden, but also provides unique upside as oil prices chart a course for getting back to over $100 a barrel. As oil prices head higher, it’ll also bring stronger returns on investment for oil wells. A win-win for investors; higher returns and unrivaled tax breaks.
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