Last week, the U.S. E&P community came to Houston for their annual pilgrimage to the Mardi Gras of oil and gas – Winter NAPE (or as the AAPL prefers, NAPE Summit). AAPL estimates that NAPE attracted more than 15,000 attendees, 850 exhibitors and 225 marketed prospects (the latter showing how far NAPE has journeyed from its roots).
Naturally, commodity prices were the dominant topic of conversation. My own personal observation was that the majority of people I talked to or heard talking about prices were optimistic and anticipated a fairly quick recovery; at least to a "happy medium" in the $70-80 range. Curiously, some of the people whose opinions I respect the most (and you know who you are) were inclined to believe we have not yet seen the bottom of the price plunge.
But back to those who were bullish on commodity prices. Since leaving Houston Friday morning I have wondered about their optimism and its sources. One possible reason for optimism is that, according to Baker Hughes, the U.S. rig count fell again last week, now reflecting a steep decline that is virtually unprecedented, and almost certainly steeped than the decline in 2008-2009.
At the same time, however, domestic oil production continues to climb. This apparent paradox resulted in Bloomberg noting that rig counts may not really tell the whole story. As Bloomberg detailed, several factors contribute to the disconnect between rig count and oil production. For example, technology improvements "have helped overcome the natural depletion of existing wells." Perhaps more significantly, "[a]s drillers cut costs, the less efficient equipment is idled first while the best machinery is dispatched to the most promising acreage, which boosts the amount of crude produced for every rig in the field." The bottom line is more rig cuts are going to be needed in order to hold oil production flat.
Moreover, just this morning, Business Insider reported that Goldman Sachs is opining that U.S. oil production will not be slowed – at least in the near term – by the decline in oil rigs. "And as Goldman sees it, if production remains near these multi-decade highs, even with the recent reduction in rig count, oil prices are going lower."
But what about the (maybe mildly muted) optimism from the E&P community so prevalent in Houston last week? Wikipedia defines a "delusion" as "a belief held with strong conviction despite superior evidence to the contrary." It would seem, to this lay person, that the line between rationally optimistic and delusion might get fairly blurry at times.
Which leads me to wonder – were those forecasting a short-term, V-shaped recovery last week optimistic or delusional? Only time will tell.
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