As part of my ongoing analysis of $FLS (Flowserve Corporation), a global leader in the design, manufacture, and service of flow control systems—including pumps, valves, seals, automation, and related services for the oil and gas, chemical, power, and water industries—it’s essential to understand the broader energy market context in which the company operates.

The first chart compares the price of oil in both nominal terms (blue line) and inflation-adjusted terms (red line). A striking feature of the chart is the dramatic spike in oil prices during mid-2008, when the inflation-adjusted price of oil exceeded $220 per barrel. In contrast, current oil prices are significantly lower, both in nominal and real terms, highlighting how much less expensive oil is today compared to that historic peak.

Turning to the second chart, we see the evolution of land and offshore rig counts in North America. Historically, geopolitical tensions in the Middle East have had a pronounced impact on the US economy, mainly due to the country’s reliance on imported oil. However, the shale revolution has fundamentally altered this dynamic. The 2000s saw a substantial increase in the number of rigs operating in the US, coinciding with significant advancements in hydraulic fracturing (fracking) technology. This surge in domestic production has reduced the US economy’s vulnerability to external oil shocks and has been a key driver of energy independence.

Interestingly, the most recent spike in oil prices did not result in a proportional increase in rig count, as seen in previous cycles. This could suggest several things:

  • Higher Break-Even Prices: Many fracking wells now require higher oil prices to be economically viable, as the most accessible reserves were tapped during the initial fracking boom.
  • Productive Well Inventory: A substantial inventory of productive wells may still exist, reducing the immediate need for new drilling activity.
  • Industry Caution: Operators may be exercising greater capital discipline, focusing on maximizing returns from existing assets rather than aggressively expanding capacity.

For Flowserve, these dynamics are highly relevant. The company’s growth prospects are impacted by capital spending cycles in the oil and gas sector, which are influenced by both oil prices and geopolitical stability. While current Middle East tensions have injected fresh volatility into the market, the structural resilience provided by U.S. shale production and a more cautious approach to new drilling may temper the impact on equipment demand in the near term.