Energy Prospectus

West Texas Intermediate oil futures extended strong gains on Wednesday, after data showed that oil supplies in the U.S. rose less than expected last week, easing concerns over weak demand.

Read: http://www.investing.com/news/commoditi ... ort-368463

As I mentioned in the newsletter, the refiners are just getting started gearing up for winter when demand for heating oil spikes. In November, I expect to see weekly declines in the U.S. crude oil inventory. I also expect to see weekly declines in the active rig count.

When these two weekly reports are both bullish, we should see a rebound in oil prices.

BTW Europe is expected to have a cold winter, so their refiners also need to produce more heating oil.

“We believe that the worldwide crude oil supply and demand markets are well on their way to balance by year-end or in early 2016….Core continues to see a V-shaped recovery getting underway in 2016.” —Core Labs (Oil Services). As you read this post, keep in mind that Core Labs has offices all over the world and it is run by some very smart people who do know what is happening in the real world (unlike Wall Street analysts, most of who are in their 20s and have never lived through an oil price cycle).

This is taken directly from Core Labs conference call transcript:

David Demshur, Core Laboratories NV - Chairman, President & CEO:

Thanks Chris. First, a current macro view from Core Laboratories. We believe that the worldwide crude oil supply and demand markets are well on their way to balance by year-end or in early 2016. On the crude oil supply side, US crude production peaked in April 2015, at over 9.6 million barrels of oil per day.

Last quarter, Core projected US production to fall over 500,000 barrels per day by year-end 2015, owing to high decline curve rates associated with the over 5 million barrels of oil being produced from tight oil and unconventional reservoirs. These projections proved to be too conservative as US production has already fallen by 500,000 barrels a day based on current information. And Core now believes, that US production will fall over 700,000 barrels per day by year-end 2015.

This generates an estimated net crude oil decline curve rate for US production of approximately 7.8%. More than twice Core's newly estimated net worldwide crude oil decline curve rate of 3.1%, up 60 basis points over earlier estimated worldwide crude oil decline curve rates of 2.5%.

The 60 basis points increase is tied directly to the elevated early year net decline curve rates of 70%, 40% and 20% for the first three years of production, respectively, from tight oil and unconventional reservoirs. Therefore, applying the estimated 3.1% net crude oil production decline curve rate, to current worldwide crude production of approximately 85 million barrels per day means the planet will need to produce over 2.6 million barrels of new oil by this time next year, or production will yet again fall internationally.

To maintain current levels of production a year from now, the planet will need to produce 2.6 million new barrels. That's just not going to happen. To make up for some of this deficit, producers can produce crude from the world's dwindling spare capacity which currently is near zero. Internationally last quarter, Core believed that the ultra-high levels of Middle East production were not sustainable. And production cuts were announced within weeks of our last quarterly EPS release.

Core believes that Middle East production levels will continue to fall in Q4 led by declines in Iran, notwithstanding unknown and unpredictable crude oil supplies from Iran. Other than the opaque market of Iran, Core sees no large viable additions to crude oil supply in 2016 to offset the estimated 3.1% net worldwide crude oil production decline curve rate. Therefore, international production will continue to fall below today's unsustainable levels.

On the demand side, the latest IEA estimates are for demand to increase 1.8 million barrels of oil per day in 2015 followed by another 1.2 million barrels increased demand in 2016, trumping all of the mixed economic news from Asia-Pacific, especially China, recently in the news. Paradoxically, so far in 2015, China demand for crude oil continues to occur at record levels. Therefore, Core continues to see a V-shaped recovery getting underway in 2016. The industry is still left-hand side of this V going into Q4, perhaps with activity up-ticks in early 2016.