Oil has been bouncing off $50 throughout 2017. $50 oil got investors excited in the first half of the year, which drove US land oilfield equipment and service spending quite high, quite quickly. In fact, $50 oil in 2017 will double oilfield industry spending over 2016 – to $90 billion. US Land Oilfield Market (Billions)

Oil has been bouncing off $50 throughout 2017. $50 oil got investors excited in the first half of the year, which drove US land oilfield equipment and service spending quite high, quite quickly. In fact, $50 oil in 2017 will double oilfield industry spending over 2016 – to $90 billion.

US Land Oilfield Market (Billions)

If you look at this chart you see a 2018 market that grows over 2017. Except this is not what happens in actuality. It’s not an optical illusion, not a case of “new math”. Instead, this is a case where calendar quarters tell a MUCH different tale than calendar years, and it’s all because the industry is stuck in $50 Purgatory. Q3 2017 – the quarter we just finished – was probably the last quarter to enjoy significantly increased spending in the US land oilfields for a while. In Q4 at $50, drilling is down a bit. While completions are still rising, the two combined are almost offsetting. And at $50 through 2018, not much changes in the US oilpatch. A similar situation happened from 2012 to 2014. The price of oil stabilized just below $100, and spending in the oilfield went flat for a couple years. In fact, spending declined in some areas because increasing competition drove service costs down faster than drilling activity increased. So in 2018, if oil prices stay at $50, US land oilfield spending will be higher than 2017, but only because all 4 quarters of the year will be higher than the first 2 quarters of the prior year -- not because spending is increasing in all areas steadily over the year. Graphs can show a nice trend, but the devil, as you can see, is always in the details. What is the probability that 2018 will be higher? If oil prices are $60 instead of $50, a lot. $60 oil will make EVERY quarter in 2018 higher than EVERY quarter in 2017, not just the first two.

If you look at this chart you see a 2018 market that grows over 2017. Except this is not what happens in actuality. It’s not an optical illusion, not a case of “new math”. Instead, this is a case where calendar quarters tell a MUCH different tale than calendar years, and it’s all because the industry is stuck in $50 Purgatory.

Q3 2017 – the quarter we just finished – was probably the last quarter to enjoy significantly increased spending in the US land oilfields for a while. In Q4 at $50, drilling is down a bit. While completions are still rising, the two combined are almost offsetting. And at $50 through 2018, not much changes in the US oilpatch.

A similar situation happened from 2012 to 2014. The price of oil stabilized just below $100, and spending in the oilfield went flat for a couple years. In fact, spending declined in some areas because increasing competition drove service costs down faster than drilling activity increased.

So in 2018, if oil prices stay at $50, US land oilfield spending will be higher than 2017, but only because all 4 quarters of the year will be higher than the first 2 quarters of the prior year -- not because spending is increasing in all areas steadily over the year. Graphs can show a nice trend, but the devil, as you can see, is always in the details.

What is the probability that 2018 will be higher? If oil prices are $60 instead of $50, a lot. $60 oil will make EVERY quarter in 2018 higher than EVERY quarter in 2017, not just the first two.