Anyone who has been watching the stock market knows that it has been exceptionally volatile lately and that the trend, though there have been ups and downs, is mostly down. The global economy is unstable, and the effect on the oil and gas industry could be significant. Douglas Becker of Bank of America told attendees at the RMI Oilfield Breakfast on November 12 that they should listen to the stock market because it is a leading indicator of oil patch fundamentals. According to Becker, although the stock market isn’t perfect, it has predicted three of the last 10 down cycles. “There is real information here,” he said, “and things could get worse than the industry expects in the short term (the next 12 months).” One of the indicators Becker pointed to was the rig count, which is just beginning to decline. Though there has been only a small dip in utilization numbers, Becker believes there is a 35% probability that conditions could achieve lows similar to those seen by the industry in the 1980s. The market shows offshore drilling stocks trading at 60% of net asset values, Becker reported, despite backlogs of tens of billions of dollars on the books for the largest drilling contractors. And the predicted growth rate for oil service companies in the coming year is 1.8%, well below the healthy level of 3%, he said. “The possibility of a multi-year global recession is not insignificant.” The repercussions of the drop in oil price could be great. If E&P companies reduce their spending, the result will be a drop in global production, which will affect other industries. Though Becker had little good news to share over all, he said there is light at the end of the tunnel. One positive development is OPEC’s production cut of 1.5 MMb/d from the quota of 28.8 MMb/d, which took place at the end of October. Saudi Arabia, the largest oil producer within OPEC, recently announced a 5% cut in production to Asia (175,000 b/d) beginning in December. And according to Becker, further cuts could be announced at the next meeting, to be held in December. Although there is some good news in the works, the primary message is one of caution. The upcoming downturn is going to hit hard, and it could last longer than a lot of people think. (http://rmi-houston.com/OBFPresentations/Douglas_Becker.pdf to view Douglas Becker’s complete presentation.)