Excellent material, in particular I think the point about investing during the bottom of the downcycle into companies with a high ROCE is crucial because this is in sharp contrast to the way many oil analysts and business invest - they try to time oil prices (which are much spikier and more difficult to predict).
Question for you, perhaps you could even devote a substack to this (?) because a lot of investors need clarity: given the $100+ Brent prices today, and the risk of demand destruction through a recession because of rising interest rates, rising fuel prices and rising political tension in Europe, some analysts think we may be nearing recession/demand destruction zone soon which will drop crude prices; do you still think we're at the early stages of the longer ROCE cycle even if crude prices drop over the next few years? Or does this 2020 to 2022 represent a very compressed bottom to top cycle for prices that also represents a very compressed ROCE cycle?
Thank you very much your kind words and comments. Your question gets to the heart of the Super Vol (vs Super Cycle) mindset. Given the fragility of both supply/spare capacity but also demand along with energy transition policy volatility and usual geopolitics, there is absolutely no certainty on cycle duration. I don't believe we are currently at a demand destruction price, but the question is really when do we think recession kicks in. It is less about a specific oil price and more about an accumulation of weights on economic growth that drives that consideration. The oil price that "caused" demand destruction will be a backwards looking number in that it will be global economic weakness that triggers a collapse in crude (some chicken vs egg aspects).
I do think this is worthy of a stand alone clarification post...its a great suggestion.
As for duration of ROCE super cycle, I believe that when we reach 2030 and look back at average ROCE over the 2020s for top 2 quartiles of energy companies, ROCE will be double-digit to mid teens on average. For the median company, ROCE I expect will be 8%-10%, which is much improved than the 0%-4% of the 2010s.
Incredibly, there are many parallels between the COVID discussion and Climate change. In both cases there is a level of intolerance that will make us all better off.
Doubly support your comment on free speech. Not for anyone person or group to dictate to others, at least in this country. Worryingly, that is the path many now advocate.
Thank you Humberto. As I mentioned, I was leery about bringing up a "non-energy" controversy. But I actually think it very much applies to what has been a pretty bad dialogue heretofore from just about everyone involved in energy & climate. We need to hear more voices. And silencing those we disagree with it can't possibly be the right way to go (obviously there are exceptions, but the bar should be high).
Hello Arjun,
Excellent material, in particular I think the point about investing during the bottom of the downcycle into companies with a high ROCE is crucial because this is in sharp contrast to the way many oil analysts and business invest - they try to time oil prices (which are much spikier and more difficult to predict).
Question for you, perhaps you could even devote a substack to this (?) because a lot of investors need clarity: given the $100+ Brent prices today, and the risk of demand destruction through a recession because of rising interest rates, rising fuel prices and rising political tension in Europe, some analysts think we may be nearing recession/demand destruction zone soon which will drop crude prices; do you still think we're at the early stages of the longer ROCE cycle even if crude prices drop over the next few years? Or does this 2020 to 2022 represent a very compressed bottom to top cycle for prices that also represents a very compressed ROCE cycle?
Thank you very much your kind words and comments. Your question gets to the heart of the Super Vol (vs Super Cycle) mindset. Given the fragility of both supply/spare capacity but also demand along with energy transition policy volatility and usual geopolitics, there is absolutely no certainty on cycle duration. I don't believe we are currently at a demand destruction price, but the question is really when do we think recession kicks in. It is less about a specific oil price and more about an accumulation of weights on economic growth that drives that consideration. The oil price that "caused" demand destruction will be a backwards looking number in that it will be global economic weakness that triggers a collapse in crude (some chicken vs egg aspects).
I do think this is worthy of a stand alone clarification post...its a great suggestion.
As for duration of ROCE super cycle, I believe that when we reach 2030 and look back at average ROCE over the 2020s for top 2 quartiles of energy companies, ROCE will be double-digit to mid teens on average. For the median company, ROCE I expect will be 8%-10%, which is much improved than the 0%-4% of the 2010s.
Incredibly, there are many parallels between the COVID discussion and Climate change. In both cases there is a level of intolerance that will make us all better off.
Doubly support your comment on free speech. Not for anyone person or group to dictate to others, at least in this country. Worryingly, that is the path many now advocate.
Thank you Humberto. As I mentioned, I was leery about bringing up a "non-energy" controversy. But I actually think it very much applies to what has been a pretty bad dialogue heretofore from just about everyone involved in energy & climate. We need to hear more voices. And silencing those we disagree with it can't possibly be the right way to go (obviously there are exceptions, but the bar should be high).