Drilling down on upstream oil spending

Brent oil prices stayed in a healthy $70–$90/bbl range over the 18 months from 4Q23–1Q25. Yet the oil services index fell almost 30% during this period. This was because during this period OPEC+ was forced to increase and extend production cuts to prop up oil prices. Thus, we saw this “healthy” $70–$90/barrel (bbl) Brent oil price range as disconnected from the fundamental supply-and-demand reality of global oil markets. The result was that OPEC got stuck in a vicious cycle of cutting production to prop up oil prices even as global demand growth started to slacken, and non-OPEC production surged. The result was that upstream spending growth continued to slow and ultimately crested in 2024.

The lack of fundamental support for an ostensibly “healthy” oil price, accompanied by strong growth in longer-cycle Middle East & Offshore (especially deepwater) investment, incentivized short-cycle North America shale to continue to grow, albeit at an incrementally slower pace. U.S. shale was also helped by growing efficiencies and oilfield services (OFS) cost deflation. Thus, true oil market fundamentals were on the brink at the start of President Trump’s second term and quickly started to fall apart post “Liberation Day,” with the simultaneous OPEC+ move to accelerate production adds hurting OFS more than any other oil & gas (O&G) subsector.

Intuitively, “demand” and “price” should be the same thing. But with OPEC (and now OPEC+ in its latest avatar) working as a highly influential cartel on the supply side, oil prices can be squeezed higher by strangling supply. Thus, as post-COVID oil demand growth slowed in 2023, OPEC+ intervened and reintroduced (and over time ramped up and continued to extend) production cuts to successfully put a floor under oil prices. Yet this started to reflect in lower activity and thus upstream spending, first in U.S. Land (2023–24) and Saudi Arabia (2024–25), and then elsewhere. The key here is that upstream spending, and thus OFS demand, is tied to the “demand” for more oil and thus more drilling and not higher just oil “price” (if oil prices are artificially propped up, it doesn’t lead to more drilling).

All of this led us to be biased negatively on OFS over the past 12 months, most clearly in our 2025 Year Ahead note, where we forewarned of not one but two tough years for OFS (2025–26E).

It is important to note that while there is one big upstream O&G spending cycle globally, there are 2 very distinct cycles within it: 1) shorter-cycle U.S. Land spending cycle, which is the first to go up and down, and 2) International & Offshore spending cycle, which is slow to go up and also down. It’s not just the frequency but the amplitude of these two cycles that is very different. The upside and downside in the U.S. Land cycle is much more pronounced than International & Offshore cycles. Much of the difference in the amplitude of U.S. and International cycles is in 1) duration, and enforceability, of contracts (better in International & Offshore than in U.S. Land) and 2) barriers to entry and pricing power (again, better in International & Offshore than in U.S. Land).

We think International upstream spending peaked in 2024 and will decline at least modestly in 2025E & then again in 2026E. The pace of this decline will vary, in part depending on oil prices. But the direction of travel is unlikely to change, pending any major supply disruptions. U.S. Land upstream spending, on the other hand, can go anywhere from flattish to significantly lower in 2H25 and 2026, depending on oil price trajectory (and to a lesser extent U.S. natural gas price trajectory). We think horizontal U.S. Land rig count can fall ~50 rigs (~10% from early-May level) if West Texas Intermediate (WTI) oil price stabilizes around $60/bbl, and as much as ~125–150 rigs (~24–28% from early May level) if WTI falls sustainably to $50/bbl. More importantly, such an activity falloff can lead to a meaningful OFS pricing erosion (given lower differentiation in U.S. Land vs. International), which hurts U.S. Land OFS profitability even more than the activity reduction.