We know that flailing hedge funds, chartists, the freaking strong dollar and China phobia are at the heart of why oil goes down every day. We know that there's a big fund on the wrong side of the trade that's being broken and, until it does, we might now catch a bottom.
But how about something that doesn't get talked about at all? How about the fundamentals of supply and demand? No, I am not talking about the Wednesday inventory numbers. I am not talking about the Baker Hughes rig count. I am not talking about the pundit class.
I am talking about someone who has been right all of the way.
I am talking about David Demshur, CEO of Core Labs (CLB), the company that makes sure you are drilling where there is oil, whether it be a new prospect or an old one where new technology can pull it out of the ground.
That's who knows.
He knew it was coming down. He knows core data and he knows what's really available in inventories and production and what's chimerical. No noise.
That's why his conference call yesterday was the single-best one I have heard on the topic. It's why I am just going to quote the darned thing, so you know what the smartest guy in the patch is saying.
Here he goes, with a slight annotation by me where he is abstruse.
"Core believes that worldwide crude oil supply and demand markets are well on their way to a balance at year end 2015. On the crude oil supply side, U.S. production peaked in April of this year." (In other words: the marginal producer of oil has finally slowed production four months after people thought it did.)
"One only needs to look at Bakken production, which peaked in December, and Eagle Ford production, which peaked earlier this year. With respect to decline curve rates of 70%, 40% and 20% for the first three years of production in these tight oil plays, significant year over year declines will manifest themselves as 2015 progresses. And into sharp declines if activity levels remain at constant levels into 2016. (Translated: these wells aren't all that deep and much of the oil is gone right in year one.)
"Ditto this analysis for the Permian Niobrara and all the liquids rich unconventional plays, from peak US oil production numbers earlier this year of 9.5 million barrels. Core believes that US production will decline over 500,000 barrels through year end 2015." (Meaning: There will be a 10.5 percent decline in production by year end and it will only get worse in 2016.)
Meanwhile, deep-water fields production, particularly from Petrobras (PBR) will be muted and additional production from both the Middle East -- which he admits is running full out -- and Russia cannot be maintained because if you pump as fast as they do you get too much water in the wells and that will cause permanent damage.
Now, where Core could be wrong is that Demshur relies on IEA figures showing that demand will increase 1.4 million barrels a day causing balancing of supply and demand by 2015.
In other words, the marginal barrels go away and the glut is gone by the end of the year.
If that's the case, obviously you would be buying now, six months ahead of when the market tightens, the typical discount rate I apply to these kinds of events because you want to be early, not late.
Now, again, if China falls off a cliff then its demand will decrease and he's wrong about the use of oil. But I do not think anyone in the world, except for maybe Andrew Gould, former CEO of Schlumberger, and Paul Kibsgaard, current CEO, know more than Demshur. They are the only ones that also have the worldwide supply picture in view.
Bottom line: short-term hedge funds, dollar, weekly numbers, charts and fears about China rule.
Intermediate term: Russia and the Middle East stop their insane pumping and the U.S. starts its way back to the old rate of supply. That's enough to make oil go higher no matter what the mechanics of the spot market dictate.