I’m going to run through a few seemingly unrelated facts here fairly quickly, but the message is: the North American energy market is so opaque right now—because fundamentals are changing so fast—that my #1 2015 credo—SMALL POSITIONS—still holds true.  And be prepared to change your mind in a hurry.

This is the chart that is giving oil investors around the globe—but especially in North America—complete fits:

This custom chart comes from my colleague Steve Zachritz—the Zman in Zman’s Energy Brain (I’m a paying subscriber and nobody covers US E&Ps better).

It shows what we all know and talk about—the increasing US production after such a sharp drop-off in the rig count.

First off, nobody expected the upstream producers to have so much discipline in dropping rigs that fast (though considering how much debt they have it should not have been).

Then we all waited for production to drop….and we are still waiting.  That is, if you pay any attention to the EIA weekly production number.   As the oil price crisis hit late last year, I wrote a story—and it was my most widely read story at www.seekingalpha.com that the EIA Wednesday morning production number was the #1 factor investors were using to move oil prices (you can read the story again here: http://oilandgas-investments.com/2014/oil-prices/the-oil-price-is-all-about-one-number-right-now/ ).

Well that number has now become…shown for what it is really…is the best way to say it.  The EIA guesses at that number every week—though assuredly based on some methodology.  On May 22, they made a big revision to US oil production—up some 300,000 barrels a day, from 9.2 to 9.5 million bopd.  (Now strangely the oil price did not react to that news—which was bullish for oil.)

The EIA at the time admitted they do the best they can—but that number has lost a lot of credibility now.  It’s not completely meaningless, but most investors are now much more focused on oil inventories than production.

They don’t trust it anymore.  And from my talks and from my own sense of the market, most—but not by a lot—think that US production number is lower than the EIA is reporting.  I wrote about that last week, referencing the Raymond James research from June 2015—you can read that story here: http://oilandgas-investments.com/2015/energy-services/how-the-iea-and-eia-are-getting-it-wrong/

This week there is another big draw in oil inventories, which gives the bulls—and anyone not believing the EIA weekly production stats—a lot of ammunition.

And there’s a lot on the line here—stocks have gyrated crazily—everyone down 50% + Oct-Jan, then the leaders bouncing back 50% of that loss, then everyone coming down to lows again last week….

So there are a lot of capital gains on the table here with such low valuations on a few stocks…when oil MAY not deserve to be down here at $50—if in fact the EIA numbers are not just wrong, but VERY wrong.

Now, not only is the supply side wrong, the demand side could be wrong as well, as my article last week shows.   The Market was wrong last fall when it said that oil demand was historically inelastic—meaning demand wouldn’t change much if prices lowered.  That was clearly…wrong.  Demand has soared…but it may be even higher than we think.

Oilprice.com published some proprietary info by Mike Rothman of Cornerstone Analytics in New Jersey.  I’ve spoken to Mike and asked him for an interview, but he declined and I respect that; he runs a very high end newsletter that talks oil supply and demand.

He’s kind of like a barrel-counter.  He is very well plugged in at the highest levels of OPEC.  And he has been a big believer for years that overall oil demand is under-reported,  but right now it’s REALLY under-reported—to the tune of some 2.5 million barrels a day.  I would never republish Mike’s stuff myself (nor would any of you right…??), but if it’s in the public domain from somebody else, well, here it is.

You can check out Mike’s graphs at the Oilprice story – http://oilprice.com/Energy/Crude-Oil/The-Multi-Trillion-Dollar-Oil-Market-Swindle.html )

If Mike is correct, oil is actually about to undersupplied very soon, and the world could see dramatically higher prices this fall.

But really…when will we know? Basically when one big customer runs out of supply.

It’s like the natural gas theory—is supply peaking now and about to head into a hard decline?  We won’t know until it’s too late and some source is exhausted to the point it can’t meet demand (the imminent REX pipeline reversal could be a potential for that…)

Natural gas production has been flat in the US for most of the year now, but is up 3-4 bcf/d over last year.  That has kept prices 50-60 cents higher/mcf than I expected so far in both Canada and the US (I actually expected Canada to be more like a full dollar/mcf lower than the current $3 or $2.80/GJ).

Is the Marcellus peaking?  Will the new pipelines out of the Marcellus flood North America with even cheaper gas?  Nobody knows.

What does ALL that mean for investors like me and you?  Long term, I don’t think that much.  I now have just small positions in all my other junior oil producers, and whether I win or lose on those is irrelevant to the size of my portfolio.

The lesson? SMALL POSITIONS.  There is such a good chance that the energy supply and demand numbers we see are SO WRONG because things are happening SO FAST.  It makes writing a newsletter where you make your trades public bloody humbling I’ll tell you that.  But I’m not shy about admitting when I’m wrong and changing my mind.

I still see oil prices capped at $65, as international supply still seems robust and the US industry has made it clear a lot of production comes back at that price.  The EIA supply and global demand numbers would have to be VERY wrong for oil to go above that IMHO.

Certainly here in North America, Canadian production coming back online negates the first half million barrel a day drop in US shale production.  I would think that’s a year out. Canadian discounts, or differentials, are already increasing and we could see rail once again become economic this fall to transport oil. (Though, the way stocks are trading the Market is clearly not concerned about this right now.)

One other reason for my $65 cap idea is that the spare capacity in the world is no longer just in Saudi Arabia.  In the lead up to $147 oil in 2008, only the Saudis had spare capacity.  Now Iran, Iraq, Libya and most importantly, the USA—has spare capacity.

Editor’s Note–I only have ONE BIG POSITION in 2015.  And it’s in an energy company in where the price of oil doesn’t impact it’s bottom line. It’s an out-of-the-box story.  It falls in between analysts’ coverage. Nobody knows about it–a true undiscovered gem.  And yet it pays a huge dividend, and the latest quarterly financials says the business is growing strongly. Here’s the name and symbol–RISK FREE

Keith Schaefer