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Is it time to sell your shares in oil producers?

The price for crude oil has dropped 15% in the last three months, down from US$110 per barrel in September to US$93. The fall has mirrored other commodity products like precious metals and industrial metals and has in part been attributed to a big increase in oil production in the US.

Bloomberg’s BusinessWeek last week reported that for the first time since February 1995 the US produced more crude oil than it imported. US oil production in October was reported at 7.7 million barrels per day, compared to 7.6 million barrels per day being imported.

According to the BusinessWeek article, the US met 86% of its domestic energy needs in the first five months of 2013, which is the highest level since 1986. A lot of this seems to stem from the huge increase in US shale oil and gas production, which has given new life to US oil and gas fields in the same way it has done with Australia’s own Cooper Basin.

This year the Cooper Basin has seen its highest energy production in 20 years as companies including Santos (ASX: STO), Beach Energy (ASX: BPT) and Drillsearch (ASX: DLS) undertake aggressive drilling programs and hit record production volumes.

But as the US increases production and self-sufficiency, this could continue to place pressure on the price big energy companies receive for their oil and gas, limiting their profitability.

So should you take this as a sign to sell your shares in big energy? Value investing legend Warren Buffett would argue “no” after his company Berkshire Hathaway (NYSE: BRK-A) hoovered up US$3.7 billion of shares in oil and gas giant Exxon Mobil (NYSE: XOM).

Shares in Exxon Mobil trade at 12 times the company’s earnings, while Australian oil and gas producer Woodside Petroleum (ASX: WPL) trades at around 10 times. Additionally oil production organisation OPEC has increased its forecast for oil demand growth in 2013 on the improving state of world economies.

Foolish takeaway

While it is difficult to guess where the price oil will go in the short term with the impact of higher US production and potentially increasing demand, the tick of approval from one of the world’s best long-term investors suggests that big energy companies with long-term prospects still have a place in your portfolio.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned.

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