Energy Prospectus

See: http://www.eia.gov/petroleum/drilling/#tabs-summary-2

The U.S. Energy Department reported April 13 that output from the Bakken, Eagle Ford and Niobrara will decline by 70,000 barrels of oil per day in April. This is also the first report to indicate that total U.S. onshore oil production is on decline.

EIA also reports that natural gas production is beginning to decline.

With the HUGE drop in active drilling rigs, I believe the rate of decline will accelerate this summer to over 200,000 BOPD each month during the 2nd half of this year. U.S oil production peaked at 9.4 million barrels per day in mid-March. I believe U.S. production will fall to under 8.5 million barrels per day by the 4th quarter.

Once the major shale plays roll over, it will take a massive effort and lots of money to reverse the decline. We want to own upstream companies that are poised for growth when oil prices rebound.

This is why oil prices are up today and likely to go higher.

This is also why so much oil has been going into storage. The "Smart Money" saw this coming month ago and they have been hoarding oil.

From a Morgan Stanley report I got this morning: "Attractive 3-6 month risk/reward with a 3-to-1 upside-to-downside ratio. Today, (i) both oil prices and US rig counts are 50% below the peak and (ii) stocks are trading at ~1.5x their book values, near historical lows witnessed in ‘86 and ‘09. Based on what we have seen in prior cycles, these characteristics translate into a very attractive risk reward, with 30-40% upside if commodity prices improve, but only 10-15% downside if oil prices pull back from current levels."

I have seen this in every oil price cycle. After the Wall Street Gang milks all they can out of falling prices, the tone rapidly changes and they tell their clients to start buying.

I think I heard you say at the last luncheon that U.S. crude production would start declining at the rate of 200k barrels per month beginning in the third quarter. I am trying to reconcile that with RJ's recent report that the Bakken would reach peak in July and reach the trough in November and the peak to trough decline would be 5%. This seems like a modest decline compared to your stated projection. Comments?

My SWAG is based on the fact that we have over 30,000 horizontal shale wells declining at 20% to 50% per year and we are now completing a lot less new wells to replace that decline.

Bakken is now in Spring Break-up, so activity is way down. Completions will pick up a bit in June, but I cannot see how production will go to a new high.

My prediction is a SWAG and RJ has access to a lot more raw data.

BTW no one (including RJ) thought U.S. onshore production would be on decline this early.