Unlike accounting, which looks backward and locks history in place, market forecasting piles up a host of assumptions, selects the path of greatest probability, and calculates a number for the future. And as those assumptions turn into realities, that forecasted future gets adjusted to bend into those realities. The wise forecaster reviews his past work, identifies errors, celebrates correct guesses, and learns from the iterative process.
Our firm publishes the Oilfield Market Report, which is quite popular around the world in the corporate suites of service companies, oil companies and investors. October 1st each year is the introduction of our following year forecast and since October 1st is just around the corner, I’m taking this time to see how our forecast from a year ago played out as this crazy year unfolded.
1 October 2019: Spears published the new OMR, stating that the following year, 2020, would see oil prices average $55 and, with international activity rising, global oilfield spending would hit $287 billion. Frac activity in the US had been quite strong early in 2019 but was sagging by end of summer. Oil companies loudly proclaimed we’re going to live within cashflow, so Spears’ outlook was positive, but not enthusiastic. Hey, we still had international and offshore going for us!
1 January 2020: With US drilling activity ending 2019 with a whimper, but oil prices strengthening, Spears raised our oil price forecast for 2020 to $57 but nudged our oilfield spending lower to $284 billion. Few, if any, took news seriously about a strange virus that was sickening people in Wuhan, China. My wife and I flew to New York to watch “Too Kill A Mockingbird” in a packed theater March 1st. No one was wearing a mask.
1 April 2020: In the prior 30 days, America realized that Europe’s shutdown to halt COVID’s spread needed to be implemented immediately. The economy, drilling and frac stopped cold. In the middle of the battlefield with nothing “known” to cling to, Spears released the updated OMR for 2020, reducing spending and oil price to $211 billion and $32, respectively.
1 October 2020: With two quarters under our belts and with the industry settling into its new, lower pace, Spears will release its next OMR with 2020 spending around $193 billion…a full $90 billion LOWER than we had projected one year earlier.
Our track record over the last 25 years has been generally pretty good – we’ll be +/- 10% a year out most years, but our ambitious goal is +/- 5%. It never crossed our minds, however, to factor in GLOBAL PLAGUE as a driver of oilfield spending. The cost of that global plague? $90 billion to the oilfield service sector in a single year. Capital, people, supply chains – all were teed up to support $287 billion in work in 2020, with that work spread around the planet. Instead, we got $193 billion.
PS. When we release the new Oilfield Market Report on October 1st, it will have the 2021 global spending estimate. We still have a month to tweak the numbers, but it looks like $170 billion and, unlike year’s past, this particular forecast includes “global plague” as a driver.