How Bad Is the Oil Oversupply?

02/25/2015 12:01 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

A recent research report, says MoneyShow's Jim Jubak, is likely to influence the direction of crude oil prices and Jim shares his strategy for investors.

The official take from the US Energy Information Administration is that US oil production will rise another 7% to 8% in 2015. That, of course, would mean more oil on the market, lower oil prices, etc., but there's a really vigorous descent and an important descent coming from some of the companies at the core of the US natural gas and oil boom and the shale geologies.

On February 19, we had a statement from, this was the conference from EOG Resources (EOG), a key producer in Eagle Ford, one of the most productive areas of the oil shales, saying, well, bad news, they missed their earnings figure, they were going to cut capital spending by another 40%, but what they were also saying that was really important is that they saw their production being flat for 2015. They were going to have growth in the first half of the year, but then growth was gradually going to slow and it was going to bottom around the middle of the year and then the year as a whole was going to be flat. This is still a controversial decision.

There's some conflict going on here, but I'm starting to hear this more and more from key players, so I take it seriously that it's coming from EOG Resources. I've heard this same thing recently from Pioneer Natural Resources, another big shale producer, and these are the companies that know. What EOG is saying is, “Hey, you know, we're still going to make a big profit out of our core areas,” but what they're basically saying is their pretax return on investment for their most productive areas in the Bakken, in Eagle Ford, and the Delaware geology would be around 35% if oil sold for $55 a barrel.

That's not enough to make them certainly abandon production or cut it back, but that's the core region and what they're saying is they're starting to see enough decline outside the core regions to lead their production to be flat.

If that's what we're seeing, I think what we're starting to see, my scenario for the oil prices, for the oil stocks, has been that we're going to see some kind of bottom around the middle of 2015. That's what I'm hearing support for that from companies like EOG and from Pioneer Natural Resources. It's certainly not a given, but I think we're starting to move towards something that might actually look like there's enough evidence to say that's true and that's what we ought to bet on when we make our investments.

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