If oil can't go up on Middle East friction, real tension among Gulf States, where 30% of the export oil passes to oil-starved markets, when will it go higher?
Good question. Because if you were an oil bull before this moment, you really have to question your thinking.
But there is an answer. And it is buried in the Schlumberger (SLB) conference call from last quarter: when the deep water oil wells begin to run out.
The oil service companies know more than most about supply and demand, and SLB knows the most. It was the first to lay off people because it saw the downturn coming, and it's been the last to hold out against the bulls, just saying there is no bottom.
If you want to chart their words, just take a look at its stock, which took a precipitous downturn when it refused to call a bottom on its conference call, unlike pretty much everyone else in its industry.
Because the real deep water wells, the ones that have far more capacity to produce oil, the ones that can, at times, produce 20x as much as a single good shale prospect, are still in great shape and there's been no need to drill new ones due to that worldwide capacity.
Worse, even in our own country the big offshore wells are producing monster amounts of energy. The ones that were started chiefly by Chevron (CVX) after the 2010 Macondo oil spill died down started to produce oil in huge quantities just this year. They will have all-time peak production this year, at 1.91 million barrels per day. That's almost 300,000 more barrels a day more than last year.
So, you may think that we could cut back in production at some point. But the opposite is happening, especially as our rig count continues to escalate.
Now, the one thing that's in the oil bulls' favor -- and Schlumberger has been telling people this -- is that most deep new deep water projects around the world have stopped since 2015. That's a chief reason why Schlumberger's earnings have been so subpar vs., say, Halliburton (HAL) , which services proportionately much more onshore drilling.
By next year, some of the older deep water wells that had been producing such sumptuous amounts for nation states in and out of OPEC will begin to experience worrisome decline rates. Only then will prices get tighter, and it will take too long for new projects to come to the market.
That will be the first time that supply, which is so bountiful, will come into question. Right now, though, we are still in the grips of speculators, speculators who Carley Garner, our expert, would tell you, have way too much oil on their hands.
You can't expect a real panic to liquidation to even start until $43 a barrel. We're four dollars above that level now. I don't think anything can bottom in the equity markets until we get to that liquidation.
The issue is that we are in financial -- read hedge fund -- hands until those deep water wells are in question, and they aren't even in question for another year.
So, until then we are going to be in a mode of boom and bust among speculators, not countries. That means, regardless of demand, which is coming along slowly, we are going to play back and forth with the worst possible holders with a cap at $50 where the U.S. shale players sell futures to bring in cash flow.
I know this is a dire forecast. But it's from the best of the best, Schlumberger, and it is distinctly against their interests to give it.
But, to me, it's all that matters, and it means playing a waiting game and trying to get in and out of the group depending upon speculators blowing up and short-squeezes -- and almost no one is that nimble.