Top 12 media myths on oil prices

THE upstream oil and gas industry is not a black hole. There's no mystery wrapped in an enigma here. There are a lot of meetings with engineers, chemists and geologists. There's a constantly evolving learning curve. And then there's all the regulations and compliance. But all-in-all it's pretty straight forward, that is, until the media gets a hold of it. That's when it becomes complicated. It's as though we are getting reports from the mysteries of the deep ocean or life in the great galaxies beyond. There is so much hyperbole and unsupported guesswork that investors don't have a chance. So, in a small effort to set the record straight, let's see if we can't dispel some of the misinformation.

Misperception No 1: Goldman Sachs knows what is going on. This is incorrect. Goldman Sachs should not be quoted extensively. They are notoriously wrong when forecasting tops and bottoms. What they are good at is jumping on the bandwagon and stoking fires. Their forecasting always seems to be done through a rearview mirror and their calls for peaks and troughs are always overdone. Back in July 2014 when WTI (West Texas Intermediate or Texas light sweet crude oil) was peaking, they were calling for more, even as the US dollar was showing signs of strength (and we know what happened there) and as oil inventories were beginning to wash up over our ankles. And then when we are forming a bottom in January and retesting it in March, they were calling for a deeper bottom. And then there was 2008. Remember the calls for US$150 and US$200 oil from Goldman and Morgan Stanley? That was right before we went to US$40 and then some. (To be fair, Ed Morse from Citi called the top but he overshot the bottom. We're not going into the 20s).

Misperception No 2: The "non-productive rigs" are the first to go. This statement is a little baffling because all drilling rigs are productive, some are just more efficient. H&P's Flex 4 and Flex 5 rigs are state of the art. But these rigs are stacking up just as fast as the less efficient rigs that require more man hours but are not as expensive to contract. Have a drive past H&P's Odessa yard. It's stocked full of these Flex 4s. Rigs are enormous which makes them costly to move around. You're not going to bring in a dozen or so tractor trailers and a few cranes to move a rig back to Texas or Oklahoma, and hire the same sized fleet to bring in the newest generation rig. The closer truth is that the ones that are running in particular areas - that have not been let go - will continue running in those areas. And what the oil companies are going to do is put pricing pressure on their driller for not having supplied the cat's ass in the first place.