Yes, B7, some points you make are why I continue to have some "interest" in the sector. Many discuss "Demand destruction" but I agree the focus should be on "Supply destruction". Without investment, real supply/demand economics should reappear. Price volatility definitely became forefront (last 5 years especially) when US Shale production became an issue for global producers. We are only now seeing the dismantling of over-levered US producers which should ultimately (hopefully from a price perspective) wash out "some" uneconomic US production and improve $WTI. I think some have unrealistic expectations of where Crude prices are sustainable. In March, I was purchasing oil stocks & direct commodity derivatives because $20 WTI is simply not sustainable regardless of sector out-of-favour. Likewise, a $100+ WTI was never realistic either.Brewmaster7 wrote: ↑ Good post and think you are right in some respects. I also think you have to consider the context of commodity prices when looking at what has happened to valuations over the last five years. Volatility in oil and gas prices has created a cloud of uncertainty in the cash flows and returns of E&P companies. That volatility has mostly been a downward trend with very few periods where prices have spiked up. The ESG movement has made it easier for for institutional investors to 'give up' on the sector, but it is really just due to poor returns and uncertainty of cash flows.
The reason to own the sector at this point is for the recovery of demand, whenever that happens. If you believe things will normalize and people will begin flying again, the demand for oil will return to similar levels as pre-covid. When it does return, the supply side of the business which has been severely damaged, will not have the capital or the ability to respond the way it has over the last decade. This is why the companies that remain in the game will be beneficiaries of much higher commodity prices and this time, will have a much improved cost structure and capital discipline to provide high returns to shareholders. If or when that happens, institutions will have a much tougher decision to make on whether they want to sacrifice returns by not owning 'dirty oil' for ESG reasons.
A long-term (70 Year) Chart shows that the basic median price has been $50 WTI. Periods above / below are largely anomalies but clearly for almost a 20 year period (1950's>70's), oil pricing was largely stagnant.
70 Year Oil Price Chart_MacroTrends
Additionally, I fit O&G's into my lower $USD outlook. While Gold anticipates the same, other commodities should benefit as well in this event.