Energy Prospectus

This is why the oil price reacts each week to the declining active rig count. It is important to understand that the active rig count will not increase until next year no matter what oil prices do because capital spending for the remainder of 2017 is already locked in. There is at least a three month lag between a significant change in commodity prices and a change in the active rig count. Now read this carefully. - Dan

"Based on our updated drilling models, we expect that US crude production will now grow by
only 600,000 b/d from January 1st to December 31 - a far cry from the +1 mm b/d that most analysts
expected only a few months ago. The IEA has revised down its estimates for 2017 US production
growth by 200,000 b/d since July, however it is still expecting huge growth of 1.2 m b/d from the US
in 2018. Quite frankly, this cannot happen without either a huge surge in drilling productivity (highly
unlikely) and/or a dramatic increase in the rig count. And remember, the US is by far the largest source
of expected non-OPEC production growth next year. The next largest source of growth, Brazil, is
only expected to be one-fifth that of the US. The rest of non-OPEC, excluding the US and Brazil, is
expected to be up only 170,000 b/d in 2018 in total. If the present US oil rig count holds (presently
at 743), we project US shale growth to be only between 400,000 to 500,000 b/d in 2018. For shale
oil production to accelerate from here, dramatic increases will be needed in the rig count, which would
require much higher oil prices. Given our present calculation of drilling productivity, we calculate
the US oil rig count would have to surge to over 1,000 if shale oil production were to grow at 1
mm b/d year-over-year rates. Given today’s oil prices, and given that the US rig count has now
actually declined over the last six weeks, we believe this to be impossible."
- Goehring & Rozencwajc Associates Natural Resource Market Commentary October 20, 2017

I doubt that there will be a significant increase in the active rig count in 2018 even if WTI goes to $100/bbl because completion equipment, crews and infrastructure are already maxed out.

If you want to read the full report, send me an email and I will forward it to you. dmsteffens@comcast.net

Conclusions of the GRA report mentioned above. Note that the report is dated October 20, 2017. On October 19th WTI closed at $51.29.

> Oil and refined product inventories have now drawn down to the point that we should see upward pressure on oil prices.

> We have seen a large slowdown in US shale production growth. < As I have posted here many times, EIA has been over-stating U.S. oil production since March. - Dan

> Because of DUC liquidations in the short term, we have overestimated drilling productivity growth. Lower drilling productivity will mean less production growth unless we see large
increases in the rig count. Today the oil rig count in the US is actually falling.

> On a longer- term basis, our analysis tells us that we have hugely overestimated recoverable reserves in the oil shale plays. Sustained production growth in both the Bakken and the Eagle Ford shale will be extremely hard to achieve. 1 mm b/d production growth year-over-year from the shales will be extremely difficult to reach.

> More and more evidence is emerging that EIA and IEA have significantly underestimated oil demand growth coming from India. Never before have we had over four billion people in the
middle of their intense period of oil consumption. Led by India, look for global oil demand to significantly and continually surprise to the upside.

MY TAKE: There has clearly been a "Paradigm Shift" in the minds of the speculators who set the price of oil in the futures market. Take a look at a long-term oil price chart and you will see that the price of oil can move rapidly up or down. The global oil maket is clearly UNDERSUPPLIED. Global inventories are coming down faster than they did in 2007. In early 2008, the price of oil spiked to $147/bbl and NO ONE SAW IT COMING. - Dan