Inventory collapse

For a long time I have illustrated how US inventories anticipated price movements. The inventory news continues to suggest oil price increases. Without substantial imports or a much sharper rampup in US production than is likely given the current (slowly rising) rog count, oil prices are unlikely to decline and likely to remain strong.

For a long time I thought 75-80$ oil was the Goldilocks price. Any projects that aren't seen to be economic at these prices are probably not very good projects. Product prices aren't so high that demand will drop appreciably. The major exporters area all happy with these numbers.

What keeps us from going back to 100$ oil? If you had asked me a few months ago I would have given you 10 reasons. Now I am down to one. It is a bad idea. The US industry will overreact and drive service prices up. Efficiencies in oilfield operations will decline. Exporters will bring every barrel on. Operators will pursue marginal projects and the environmental impact will not be good.

Keep your eye on these numbers. Seasonal declines should lower inventories and we have a legitimate chance of localized shortages. That Keystone XL pipeline would have been a better idea.

Beneficiaries? OFS companies and oil and gas operators mainly. Incrementally, the oily companies with high operating costs will see the biggest multiples of cash flow (not that they are great investments).

Hang on to your hat and hope we are at 80 by yearend and not 100!