Hi Arjun - another great piece and thanks again for taking the time to prepare and distribute these. I find them really helpful and informative. Being able to deal with the vol. irrespective of where you sit within this sector is so important. Cheers John.
As you note, we are in for significant volatility (and Crude Volatility is a great explanation of this, I've studied it carefully). In a nutshell, Crude Volatility's theory is that the 'floor' on price volatility ultimately is the price where shut in has to happen and the 'ceiling' on prices is demand destruction brought on by high prices, prices bounce between floor and ceiling in a violent way in the absence of an effective swing producer, each peak and trough setting the conditions for the next peak and trough.
Can we assume for a moment that we have hit something like demand destruction recently with the recent ~$120 spike, and that this may contribute to a recession soon, and that recession lowers prices through demand destruction. Let's assume that we also have a structurally tight supply side due to ESG and little CAPEX.
Question: if we have a near-term price bust and a recession, on the other side of that recession will the basic pattern be a spike upwards in price to demand destruction and then a slowdown, then another spike up towards demand destruction and another slowdown, etc.? In other words, is it reasonable to think that because of limited CAPEX and a demand destruction ceiling that we're just going to keep seeing spikes up to the ceiling followed by slowdowns? (Hope the question is clear, trying to understand that general pattern here).
Hi. My base-case view is that we are on-track for what you suggest which is we toggle between demand destruction prices that cause GDP slowdowns/recessions but as soon as GDP picks up, we get a recovery in oil due to lack of CAPEX, etc. Overall, I think it translates into a constructive crude market but one marked by quite a bit of volatility as we keep bumping up against demand destruction pricing.
Hi Arjun - another great piece and thanks again for taking the time to prepare and distribute these. I find them really helpful and informative. Being able to deal with the vol. irrespective of where you sit within this sector is so important. Cheers John.
Thank you John.
Hello Arjun,
As you note, we are in for significant volatility (and Crude Volatility is a great explanation of this, I've studied it carefully). In a nutshell, Crude Volatility's theory is that the 'floor' on price volatility ultimately is the price where shut in has to happen and the 'ceiling' on prices is demand destruction brought on by high prices, prices bounce between floor and ceiling in a violent way in the absence of an effective swing producer, each peak and trough setting the conditions for the next peak and trough.
Can we assume for a moment that we have hit something like demand destruction recently with the recent ~$120 spike, and that this may contribute to a recession soon, and that recession lowers prices through demand destruction. Let's assume that we also have a structurally tight supply side due to ESG and little CAPEX.
Question: if we have a near-term price bust and a recession, on the other side of that recession will the basic pattern be a spike upwards in price to demand destruction and then a slowdown, then another spike up towards demand destruction and another slowdown, etc.? In other words, is it reasonable to think that because of limited CAPEX and a demand destruction ceiling that we're just going to keep seeing spikes up to the ceiling followed by slowdowns? (Hope the question is clear, trying to understand that general pattern here).
Best,
J
Hi. My base-case view is that we are on-track for what you suggest which is we toggle between demand destruction prices that cause GDP slowdowns/recessions but as soon as GDP picks up, we get a recovery in oil due to lack of CAPEX, etc. Overall, I think it translates into a constructive crude market but one marked by quite a bit of volatility as we keep bumping up against demand destruction pricing.