Much like the stock market, there is anxious coverage devoted to the oil industry. Analysts discuss statistics threadbare, and conscientiously follow every twitch and flutter on every graph, all in order to be able to help those with interests in oil – drillers, investors and transporters, among others.
There is such a thing as too much news coverage, however. With the endless information available, it can be hard for anyone to make sense of it all. What are you supposed to pay attention to, and which stats can you safely ignore? What are the patterns that are supposed to emerge?
Here are three important areas where too much information has created a certain kind of mythology – making some details seem more important than they really are.
Domestic Inventory Levels
Domestic oil inventory levels are often used to explain fluctuations in oil prices. Experts, however, tend to regard domestic levels as irrelevant. These tend to not have a significant effect on overall price levels; It is global inventory levels that play a meaningful part in pricing determinations.
Close reporting of domestic inventory levels is an American phenomenon; it is rarely done elsewhere. American business publishers deal in this information simply because it is easy to find. Prompt and precise global inventory levels can be harder to get accurate information on.
It’s important to understand, however, that one doesn’t need granular information on global inventory levels to be able to make meaningful decisions. Coarse data tends to be useful enough, according to Sigma Drilling Technologies, manufacturer of high-tech pulsation solutions for drilling operations.
It is reliably reported today that global crude stocks are below five-year average levels, and current stock levels will probably improve over the rest of the year. Meanwhile, demand looks strong with growth projected at about 1.8 million bpd. While this information isn’t up-to-the-minute, it is relevant to the kind of long-term decisions that those invested in the industry need to take.
OPEC’s Production Caps
The choices made by OPEC member states in capping their oil output are closely watched by the business media. It makes sense because the less oil there is on the markets, the higher the prices go. It’s important to understand the limits to the ability of these countries to influence prices, however. The three million bpd that these output caps amount to, while sizable, are no more than 3% of global capacity.
When OPEC countries decide to ramp production back up, prices will rise at first. Once they settle, however, there is little else that the cartel can do; there isn’t much wiggle room left there. It’s also important to not forget that American shale isn’t a bottomless resource. Growth levels of the past may be hard to re-create in the future, given that the Tier 1 fields have been tapped to the point that they are beginning to run out. Future expansion in Tier 2 fields will be harder and will require a greater level of investment.
Investment Numbers
Investment levels in drilling and rig maintenance are reported on a month-to-month basis. This, however, tends to not offer meaningful insight into the state of the oil industry.
According to Sigma Drilling Technologies, historically, investment in drilling and rig maintenance has lagged actual need. Investment tends to pick up well after need for it is felt. Investors tend to not respond quickly to a slowdown in the market, either, continuing well past the point that investment is needed.
These past two years have actually seen substantial underinvestment in not only the drilling of new wells, but in pulsation dampeners and other rig-related equipment. This means that investment is probably about to pick up substantially in the near future. This isn’t information that one would gather from daily oil industry reports, however.
As much as attention as the oil industry gets in the business press, it isn’t always the kind that is useful. The long view, rather than narrow focus, is what delivers useful information.
