Energy Prospectus

Am I imagining things, or are more analysts predicting lower and lower average prices for 2016? I know you said that the next few months will be iffy, but, if you listen to the noise, it doesn't look like $60 oil is in the cards. What do you see that most of the others don't? By the way, Oxford Club just wants to sell subscriptions, so it is hard to listen to what they think.

Lower production and increasing demand will eventually cause oil prices to increase. Oil is the world's most valuable commodity. The price cannot stay below the finding & development costs for long. Keep in mind that existing wells decline at an annual rate of 5% to 7%, therefore we must find and develop new oilfields just to stay even.

OPEC could push oil prices higher tomorrow if they'd just come out and say they are serious about working on a plan to get Brent back to $60. Assuming they can't or just won't do that, then it will take a bit longer, but it will happen. SEE my Final Thoughts in the newsletter we sent out yesterday.

As I have posted here many times, these oil price cycles last about two years. We are now in month 19 of this one. The reason for two years is because when prices first start going down it takes about a year before you see a slow down in production. For example, in mid-2014 oil prices started declining but the active rig count kept increasing until October, 2014. U.S. production kept increasing until April, 2015. Production peaked at 9.6 to 9.7 million barrels per day. Today U.S. black oil ("crude") production is approximately 9.1 million barrels per day and it is falling by at least 100,000 barrels per day per month. See the EIA's Drilling Productivity Report at: http://www.eia.gov/petroleum/drilling/#tabs-summary-2

U.S. oil production would have declined further had it not been for several large Gulf of Mexico production platforms that came on-line.

The rate of Non-OPEC production decline will accelerate in 2016. Non-OPEC production comes primarily from the U.S., Canada, Russia and Brazil. They all peaked in 2015.

Upstream companies are slashing drilling budgets, which can be seen in the rapid drop in active rig count. Non-OPEC production growth slowed in 2015 and it is going to drop in 2016. My guess is that Non-OPEC production will drop by 1.0 to 1.2 million barrels per day this year. Global demand for oil will increase by about the same amount.

Upstream companies survive these price cycles by "hunkering down"; cutting capital expenditures and living within cash flow. Hunker Down Mode will increase in intensity this year because so much more production is unhedged. I worked for Hess Corp. 1983 to 2001. We survived periods that were much worse than this one.

Global demand growth is RELENTLESS. If you ran a 50 year chart of oil demand (really demand for refined products) you would see only a couple years of soft demand growth and each one was immediately followed by a year of higher than average demand growth. Demand for refined products increased 1.8 to 2.0 million barrels in 2015. Demand is expected to increase by 1.0 to 1.5 million barrels again this year. See chart at: https://www.iea.org/oilmarketreport/omrpublic/

Lower fuel prices does increase demand and it also increases SUV sales.

On January 4, Raymond James energy team published a report on why they believe oil prices will be soft in the first half of 2016, then move higher. They expect the price to bottom in Q1. If you would like to read their report, send me an e-mail dmsteffens@comcast.net

Raymond James energy team said this on January 4, 2016: "Our current oil model has global oil inventories growing through 1Q16,
keeping prices depressed near current levels for the next several months. By 2Q16, however, we think global oil inventories will
begin to shrink modestly even though OPEC (including Iran) will likely be producing all-out. Solid global demand growth (we project
1.4 million bpd), combined with declining production both domestically and globally, should lead to a meaningfully undersupplied
global oil market by mid-2016. We expect draws of over 500,000 bpd in 3Q16 and 2 million bpd in 4Q16. From a timing
perspective, we expect to see WTI prices jump from an average of $40/Bbl in 2Q16 to $60/Bbl in 3Q16. Given the devastation of the
service industry, this bullish momentum should continue through 2017 (WTI average of $75) and into 2018 (WTI average of $70)."

"With 2016 capital budgets being set right as oil prices hover near decade-lows, it is readily apparent that spending reductions (versus
2015 levels) will be severe. The low oil and gas prices, combined with depleted hedge books and anticipated borrowing base cuts,
are forcing companies virtually across the board to reduce drillbit spending. Needless to say, this level of austerity will have a direct
impact on production during the year. Production declines will be partially offset – although not by the same magnitude seen in
2015 – by: (1) sustained activity resulting from lower service costs; (2) continued improvements in drilling and production
efficiencies; and (3) the completing of DUCs (drilled but uncompleted wells). Taking all of the above in to account, we would
highlight a selection of top picks in the space. Among large-caps: Concho Resources, Devon Energy, Hess, Marathon Oil, Occidental
Petroleum, and Pioneer Natural Resources. Among small/mid-caps: Diamondback, Energen, InterOil, Laredo, Memorial Resource
Development, Parsley, and RSP Permian. For those looking for higher-beta, especially beaten down names to own once the smoke
clears and the markets gets closer to the anticipated 2H16 oil recovery, we’d highlight Oasis, TransGlobe and Whiting."