U.S. crude oil production is expected to continue its decline in the coming few months. The recent small uptick in U.S. rig count will not matter because few U.S. crude oil producers have started drilling activities. Instead, they are start to clean DUCs wells. But we have to understand a very important point.
Cheap DUCs were most drilled to increase the company's loan value so they could borrow more money to keep the lights on. Moving these cheap DUCs into the production takes time. In the best case, it would take at least three months before new output comes online. There is usually a lag between a price signal and production impact of about 4 to 7 months. In the meantime, we will still hear news of increasing rig counts. However, its impact on oil prices and the declines of U.S. crude oil production will be meaningless until months later.
WTI will soon hit $60!
The IEA increased its forecast for oil demand growth in 2016 from 1.2 million barrel/day to 1.3 million barrel/day as a result of higher than expected growth in oil demand in the 1Q16.
Given the current positive oil market outlook for the second half of 2016, and taking into account the above four factors; weaker U.S. dollar, augmented outages, drawdowns in U.S. crude inventory and declines in its oil production, oil prices are set to go higher in the coming weeks. Unless an unexpected negative event takes place, oil prices will be above $60/bbl by August.
The same story holds true for natgas.
Chesapeake will hit $6.50 by about the same time WTI hits $60! Natgas will also hit $3.50 or $4.00 at about the same time.
By January 2017, Chesapeake will hit $10 share!
