Of Schlumberger, Asian Tigers and $10 Oil (SLB; HAL)

I once had to tell an analyst who insisted on saying Slum-burger "If you don't pronounce it 'Shloom-bear-zhay' I won't listen to you.

The key concern for folks who think about this stuff  is: "Are the oil markets telling us something about the larger economy or not."

And just to make things interesting, we're getting different messages from the equities than we're getting from the commodity.
From Forbes:

Memories Of Houston, The Last Oil Plunge, And $10 Crude

In 1997 I was working for Bloomberg News in Houston and starting to shift my focus from technology to some of the emerging oil-service stocks that were bringing 3D imaging and high-speed computing to the oil patch. I hadn’t spent much time  reporting about the oil industry before that because it just wasn’t exciting in a world where practically the entire sector outside of ExxonMobil could fit within Microsoft MSFT +2.91%’s market cap.

Just as things were getting interesting, however, the oil-service stocks started to slide. I called the analysts and nobody had a good explanation why. Oil demand was still growing, driven by Asian economies that were expanding at a 7% annual rate. The Organization of the Petroleum Exporting Countries still seemed to have a stranglehold on oil prices, as U.S. crude production, which peaked at around 10 million barrels a day, was down to below 6.5 million barrels a day and falling steadily.

Yet here was Schlumberger SLB +1.41%, the queen of the oil-service sector, falling from a peak split-adjusted price of almost $44 in September 1997 to $36 in January on its way to below $22 by July 1998. Halliburton HAL +2.06% plunged from almost $27 to $13, and Weatherford International fell from $16 to below $5.

Only later did the entire world realize that Mr. Market, by taking down the oil-service stocks in late 1997, was predicting the Asian financial crisis that would emerge full-blown in 1998. According to this informative bit of Congressional testimony from 1999 by John Lichtbau, then chairman of the Petroleum Industry Research Foundation, Asia/Pacific demand including Japan accounted for 80% of global demand growth from 1990 to 1997, and still expanded by 750,000 barrels a day in 1997. But inventories were building up by the end of the year, perhaps one of the telltale signs investors collectively saw when they started bidding down oil-service stocks.

The single most important reason was, and still is, the Asia/Pacific economic recession, which started in the second half of 1997 but was not recognized by international financial institutions until several months into 1998.

By 1998 Asia’s demand had shrunk by 350,000 barrels a day amid a growing financial crisis that should sound familiar to anybody today. Economies stumbled as companies that borrowed in dollars found it impossible to repay with earnings denominated in falling local currencies. The relative price of oil, denominated then as now in dollars, skyrocketed. The global price of oil which had risen smartly to a nominal $25 a barrel in early 1997 (the equivalent of $36.78 today), plunged below $10 a barrel and as low as $6.31 for heavy Mayan crude.

Also like today, Saudi Arabia was dealing with significant new supplies of oil it couldn’t control through OPEC. That left the raw power of discipline through lower prices, which Saudi Oil Minister Ali Naimi recalled in this fascinating Dec. 21 interview required him to deliver a blunt threat to Venezuela’s state-owned PDVSA in 1997 of what would happen if it continued to exceed its production quota:

The head of PDVSA was convinced he could produce as much as he liked, and he boosted production from just over 2mn b/d to 3.7mn b/d, while their minister kept telling us that they were sticking to their quota. In Jakarta, I told him he had two choices: either to reduce output, or that we in OPEC would split the surplus. He said he would reduce output, but I expressed my disbelief. Then, we split the surplus. The Asian recession occurred, production was high, and the price fell. This is true....

...MORE

The reason to pay attention is "them wells don't frack themselves", the average is three or four fracks per well, over the lifetime of the well.
A nice little annuity for the service companies.