Energy Prospectus

Do you have an opinion as to how an oil/gas price rise will begin? If you had to opine, aside from opec saying they will cut production, which would be an obvious catalyst, do you think it will require a catalyst to kick-start prices, or will be see a two steps forward, one step backward type scenario?
Also, would you expect a turnaround similar to the last energy price turndown even though circumstances are different? I know you have no way of really knowing, but I am curious as to your thoughts. Thx.

Except for the big drop in oil prices in 1986, which lasted over four years, all previous price cycles have lasted approximately two years. The bottom is usually tested two or three times before the oil price begins to stair step back to the long-term trend line. We just completed the 3rd test of the low for this cycle.

Be clear that the march back up is NEVER in a straight line.

The long-term trend line needs to be adjusted for the U.S. dollar. See: http://www.marketwatch.com/investing/index/dxy/charts

Let's say the long-term trend "as adjusted" is now around $75/bbl.

I am bullish on oil prices moving higher because I believe the global market is much tighter than IEA and EIA are leading us to believe.

Here are a few things that should make oil prices move up:
> Obviously, OPEC can push oil price up very fast just by announcing a small production cut. I'm sure Saudi Arabia is under a lot of pressure to do just that.
> U.S. oil production is on decline. It peaked at 9.7 MM BOPD in March and I think we are already getting close to 9.0 MM BOPD and we are clearly heading to a number under 8.5 MM BOPD. When this is confirmed by EIA, the oil price should move higher. Plus, Non U.S. / Non-OPEC production is sure to be on decline as well. At the EnerCom conference, Core Labs said they think it will be a million barrels per day less in 2016. They see big problems in Russia due to lack of money being spent on field maintenance.
> We need to get passed the "China" fear, which IMO is over-blown primarily because their energy mix is heavily weighted to coal (60%). Their demand for oil is primarily related to the HUGE increase in auto, SUV and light truck sales in China. Vehicle sales have slowed in China, but not all that much.
> We need to get passed the fear of Iran flooding the market with oil. This fear is grossly over-blown.

One thing that puzzles me the most is that we have never seen OPEC spare capacity this low. I doubt there is even a million barrels per day of excess capacity in this world. Plus, the Middle East and North Africa are a mess. Oil supply from that region is at tremendous risk. There should be more geopolitical risk premium in the oil price.

Oil is the world's most important commodity. Every price cycle reverses, and this one is no different. Supply / Demand is tightening and the price of oil must move above the F&D costs before capital will be deployed to get the new supplies this world needs.

Thx so much.