In Ag Engineering school we didn’t study literature. If we had, perhaps I would have read Shakespeare’s Macbeth and been warned away from joining the family’s energy forecasting business: "If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me."
Everybody at Spears & Associates operates under the following guidelines: We are paid to accurately guess the future, not precisely measure the past. Except for our accountant.
We measure and then forecast markets. Our usual unit of measurement is the US dollar, whether we are looking at drill bits, dissolving plugs, or pipe-lay vessels. We also use the US dollar to measure and forecast regional markets, such as the US land oilfield equipment and services market.
This is how easy it is to forecast:
Take the US land oilfield market as an example. The following chart covers 2014 through 2020 and compares each year’s average oil price with that year’s US land oilfield spending:
Do you see the pattern that I see? If you could know next year’s average price of West Texas Intermediate Crude Oil, then you could guess within +/- 10% what next year’s spending on oilfield services will be in the US on land. How hard is that?
Since this is so easy, let’s look next at geophysical spending around the world:
Ooops, that didn’t work so well. Let’s try Schlumberger – they are the biggest and global and surely their sales move with oil price:
Or maybe not. Darn.
Why does WTI fit so perfectly with US land OFS and so terribly with everything else? We think this is why:
In the US, most oil and gas is owned by individuals, the tax rates are well known, the oil companies are not state owned and there is a massive service and equipment infrastructure that allows activity in the field to be very reactive to commodity price.
Everywhere else there is a “rent” negotiated between the oil company and the host government that owns the hydrocarbon resource base, and it is this rent rate that often outweighs the impact of the daily price of oil.
As a result, activity in the US is highly correlated with oil price, while markets and companies like Schlumberger that are primarily international and offshore are largely uncorrelated with oil price. That said, $100 oil is good for everybody (except the consumer)!
In 2020 and 2021, activity in the US and companies focused on the US will suffer terribly. Meanwhile, companies primarily working elsewhere in the world will do okay – not great, but okay. We say this knowing full well that we do not fall in line with others looking at 2021.
Or as Edgar R. Fiedler wrote, "The herd instinct among forecasters makes sheep look like independent thinkers."