Ignore The Paper Tiger At The Vienna Circus. Focus On These Five Trends Instead

There’s an OPEC meeting this week, have you heard? In a Google News scan Monday morning, we counted more than 100 articles about OPEC published in the last 24 hours alone. Enough will be written this week about the pageantry in Vienna to fill a small library. Endless speculation leading up and coverage in the wake amounts to a giant distraction for most everyone in upstream except traders.

Will oil prices be volatile this week? Yes. Could the OPEC meeting outcome swing oil down to $35 or up to $55 in fairly short order? Yes. Are there more important things upstream decision makers should focus on, things in their control? Yes!

Recent history tells us that every OPEC member wants a cut, but no one wants to cut their own barrels. This makes the group a paper tiger – all talk and appearance but little actual power (or desire) to execute on wishful supply reductions. And it makes the hyper-coverage this week noise not signal.

In this post we frame OPEC outcomes, but focus more on trends that we think industry leaders should focus on this week if they want to get ahead of peers that are falling into the OPEC analysis paralysis trap. Here’s the first two trends (free trial subscription unlocks all five):

1. Playing In The Band. Companies from E&P to service and drilling should develop three playbooks for next year. One for $30 oil, one for $45 oil and one for $60 oil. No matter what the OPEC meeting outcome is, oil prices could move around in this band next year as the glut persists (but starts to erode) and non-OPEC production (particularly the US) is scrutinized. With oil prices entering a third year of depressed levels relative to recent history, the E&P budget process is more critical than ever. It’s no longer good enough for companies to set a single capex figure based on a static oil price deck. We submit more E&Ps will be prepared to move budgets around in a range next year, playing in the band depending on what the oil markets give them. And that means the entire oilfield value chain should be prepared to execute several game plans as well, setting expectations for activity levels across a range of potential oil prices. More nimble activity levels will be a key feature of future cycles, starting in 2017.
2. Opportunities From Improving Natural Gas Fundamentals. With all the focus on oil, the US natural gas outlook is quietly improving. This could open up some opportunities that those following every OPEC twist and turn may miss. Just three weeks ago, some analysts were writing natural gas off for the winter, and nat gas prices were down 25% from this year’s highs. Now front month NYMEX spot prices are above $3 again for the first time in a month, poised to test 2016 highs. Support from colder winter weather forecasts, improving 2017 fundamentals, and a less crowded long trade provide a more supportive construct for prices over the next several months.
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