"You can see why I no longer am swayed much by the rig count. The shale strategy is getting clearer, with producers developing a large number wells in preparation of anticipated increases in the price of oil.
Again, the nature of these wells is that they can be very quickly brought online, which is a major disruptor to the way the industry has operated in the past. It reduces the leverage of OPEC, and allows companies to sit and wait if they want before starting production. This is a tremendous moat, although it will require companies with deeper pockets and investors that understand these new market conditions.
When I say it's a moat, I'm talking about the shale industry as a whole, not necessarily individual companies within that market. They can come and go, but the business model itself is here to stay.
OPEC can cause some short-term pain, but it will eventually have to deal with shrinking revenues as well, and some member countries are already calling for cutbacks in production in order to benefit from higher oil prices. The Saudis are resisting that, and until and if they come on board, the oil will continue to flow from the Middle East and other countries part of OPEC.
Shale is going to win this part of the oil battle because once the initial investment in wells is over, companies can sit and wait until the price of oil improves. When OPEC cuts back and the price rises, they can quickly move into production and benefit from it. When OPEC cuts back, they can reduce production and wait until the price rises again.
My view is that OPEC understands the threat it is now under, and is going full out in an attempt to subdue the shale market. It can't work because of the nature of shale production itself, and all it can do is delay the fact there is a new player in town, and it will be able to compete side-by-side with it in the years ahead. Patient investors in companies with exposure to shale will eventually be rewarded.
Oil rig counts? Who cares? Oil's sitting in shale waiting to be quickly brought into production based upon market conditions."
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