OPEC meets and the price of oil goes down (or up). President Trump tweets and the price of oil goes up (or down). We plan, we forecast, we budget, we hire (or fire), we watch pipeline construction – all with an assumption about the main driver of the oil and gas industry: the wellhead price of a barrel of crude oil.
At the end of October 2018, Spears & Associates assumed that oil prices would continue to rise through 2019 based on an apparent scarcity of oil due to massive under investment in new oil developments over the last 4 years. That oil price assumption drove us to make certain forecasts – the global drill bit market, for example. That market’s chart, laid out quarter by quarter from Q1 2016 through Q4 2019, can be seen below.
Also seen on the chart is our adjustment to that market forecast now assuming that oil prices sag into the fifties through mid 2019 before rising to $65 by year end 2019:
That tweak – a 2019 oil price of $70 now dragging along at $60 – robs $300 million from the drill bit market in 2019, removing over 10% of the market’s revenues on a 15% decline in oil price assumptions.
Markets go up and down, the oilfield cycles, and this is logical to us.
But here’s what doesn’t make sense: The world’s largest drill bit manufacturer is Schlumberger. In the next twelve months, their expected bit sales will be lower by 10%, but still almost 50% higher than its 2016 cyclic low. So why is SLB’s share price almost half its 2016 share price?