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Gold/Mining/Energy : Strictly: Drilling and oil-field services
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To: Douglas V. Fant who wrote (24287)6/17/1998 8:28:00 AM
From: marc chatman  Read Replies (2) of 95453
 
Doug, perhaps you can help clear up an issue which has been bothering me. Several posters have been hoping that a further OPEC production cut will bring supply down and increase the price of crude. I believe their thinking is that the higher price of crude will stimulate drilling activity and day rates.

But is this really the case?

Is it the price of oil which drives E&P budgets and, thus, drilling activity? Or is it revenues for the E&P's which cause them to adjust their drilling budgets? If it is the latter (my intuition tells me it should be), then selling substantially less oil at higher prices doesn't do much to increase revenues. And, if revenues are down, won't the amount budgeted for new drilling also stay down?

I'm thinking that there needs to be both good demand and firm prices to support growth in drilling activity. If we get only the price increase, then any resulting rise in stock prices may be a selling opportunity, as opposed to cause for rejoicing. Am I off base here? Will higher crude prices, at lower sales volumes, cause the oil companies to spend more on drilling?

A few people on the thread have been focusing on demand (PL, and maybe a couple of others), and they are making a lot of sense. Maybe we are at or near a bottom (I doubt it), but it could be a year or two before growth gets back on track.
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