New Oil Catchphrase - 'Medium For Longer'

by: Options Trader


Schlumberger's CEO provided a keynote address at the Scotia Howard Weil Energy Conference.

"Medium for longer" is SLB's new phrase to describe oil price outlook.

Oil bears have nowhere to run with their "lower for longer" scenario.

Since oil broke below $40 back in December 2015, the prevailing sentiment/catchphrase was "lower for longer." Nobody really provided a price range for the term "lower," but most investors understood it to mean the $30-$40 per barrel range with occasional dips into $20s. A large number of mainstream experts and Seeking Alpha authors wrote article after article propagating this theory of "lower for longer" by diligently analyzing vast amounts of incorrect and imperfect "data."

In no particular order, the following "data points" were the basis of hundreds of bearish articles since December:

  • U.S. shale breakevens are below $40 per barrel.
  • 4,000 DUCs would flood the market as soon as the prices move above a certain threshold. The threshold itself has become a moving target, with the latest being $40 per barrel.
  • Iran flooding the market with 500k barrels per day and quickly ramping up to 1 million barrels per day.
  • Storage overflowing and swimming pools becoming a new venue of oil storage.
  • Demand slowing down due to economic slowdown in China and the U.S.
  • U.S. supply staying resilient due to "efficiencies" and lower breakevens.

Despite such strong theoretical headwinds, the price of oil has made a 50% move higher since Feb. 11. Shlumberger's (NYSE:SLB) CEO came out a with a new term in his keynote address at the Howard Weil conference. The new catchphrase is "medium for longer," implying a new price band, which certainly looks to have a higher ceiling than the previous "lower for longer" terminology.

SLB, which is an undisputed leader in the industry, unequivocally stated that "efficiencies" are a result of deep price concessions provided by service companies to operators. It is not due to some new magic formula/technology that allowed E&Ps to cut operating costs. Moreover, despite massive cost-cutting exercises, shale companies are still bleeding cash flow like there is no tomorrow and are only being kept afloat by a record issuance of equity since the beginning of the year.

It's a massive, incompetent lie to claim that U.S. shale is about to ramp up completion activity because that would suggest a substantial increase in SLB's revenue, whereas SLB is claiming that the industry has entered into its third and strongest downturn since rig counts began plummeting in October 2014. The company sees its revenue down 15% sequentially in Q1 2016, implying oil service activity has been atrocious since the beginning of the year. But I assure you that detailed report several weeks from now will show North American activity to be down more than 20%-25% sequentially, as the Middle East will offset some of the company-wide decline SLB is projecting.

Furthermore, SLB stated that second quarter will be even weaker than the first quarter, suggesting DUCs will remain grounded and the story of quick U.S. shale ramp-up will remain a fairy tale propagated by uneducated bears. Subsequently, SLB warned that when price of oil rises enough to justify a ramp-up in activity, service costs are going to go through the roof due to massive capacity reductions undertaken by industry participants. This would further cripple the questionable, if not Ponzi-like, economics of shale drilling.

There are many other important takeaways from the keynote address by Paul Kibsgaard. To gain further education on the topic, I suggest reading it in its entirety. It would especially be valuable to so-called expert oil bears out there, who seem to be in quite a limbo to explain the recent rise in oil prices that began short five weeks ago. The newly coined catchphrase of "medium for longer" might have a slightly more durable shelf life than "lower for longer." Nonetheless, I expect it to be quickly replaced with the decade-old "the cure for low oil prices is low oil prices" in the not-so-distant future.


Disclosure: I am/we are short DWTI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.