Energy Prospectus

Crude oil prices went down after the EIA issued a rather bearish crude oil storage report, with WTI dropping to $45.25. However, an hour later WTI began a steady march back up and closed at $46.85. That is quite a move off the low.

When the EIA weekly report comes out, the initial reaction is always to the change in storage. However, in the details we find that U.S. crude oil production dropped 76,000 barrels per day in the week that ended 10-9-2015. See for yourself here: http://www.eia.gov/dnav/pet/pet_sum_sndw_dcus_nus_w.htm

As you know by now (or should know by now), the weekly EIA numbers are rough estimates at best that are based on out-dated formulas. During major oil price cycles they are even less accurate. A few weeks ago, EIA was forced to admit they had over stated U.S. production by an average of 300,000 barrels per day in the 2nd quarter. That admission is what caused WTI to move from $38 to $45 in a few days during the last week of August.

U.S. oil production is falling and I believe it is falling even faster than the EIA is reporting. As this sinks in on Wall Street more money will move back into the energy sector.

If we can't trust the United States government, than who can we trust??????????????

I am now expecting the number of rigs drilling for oil to drop below 500 by Christmas. In addition, a high percentage of the horizontal wells are not being completed. Baker Hughes reports the active rig count each Friday. They don't have a multi $Billion dollar budget like the U.S. Department of Energy, but they seem to generate more accurate numbers. Weekly double digit declines in the rig count are sinking in on Wall Street.

Paal Kibsgaard, Chairman and Chief Executive Officer of Schlumberger, in a company-issued press release.

The SLB executive said the oil market is “still weighed down by fears of reduced growth in Chinese demand and the expectations regarding the timing and magnitude of additional Iranian supply.”

However, Kibsgaard did mention the supply/demand imbalance continues to tighten and the significant budget cuts on the production side are beginning to take effect. “We expect this trend to continue as the oil market further recognizes the magnitude of the industry’s annual production replacement challenge,” he added.

Oilservice companies, on the other hand, are still expected to bear the brunt of the reduced drilling plans. “The market outlook for the coming quarters looks increasingly challenging with activity expected to be reduced further, as lack of available cash flow exhausts capital spending for a number of our customers, leading them to take a conservative view on 2016 E&P spending in spite of any gradual improvement in oil prices,” Kibsgaard explained. Management does not expect current activity to offset typical seasonal impacts in Q4’15.

The forecast may place the balance sheets of smaller oilservice providers at even greater risk. SLB and Halliburton (ticker: HAL) are supergiants in the sector and can adjust their prices accordingly to maintain market share. Smaller providers do not have that kind of flexibility.

Crude prices rebounded sharply in early Asia on Friday as overnight declines provided a new buying opportunity even as the U.S. remains significantly oversupplied.