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This week we stick with the video format to provide an update on “where are we in the cycle” for traditional energy.

Key messages:

(1) We are still early in a new structural bull phase for ROCE.

* ROCE vs WTI is holding up well, despite sequentially lower oil prices

* LTM ROCE remains at or above 20% for the fifth straight quarter

* Net debt has ticked up off recent lows, but traditional energy balance sheets overall are much improved

* CAPEX remains in check and well below danger zone levels.

(2) We are early in the market moving past the idea that oil & gas is a sunset industry.

* Traditional energy has now fully recovered lost ground at the start of COVID relative to the S&P 500, ICLN “Clean Energy” ETF, and forward oil prices.

* Looking over longer time periods, traditional energy is still trailing other areas by large margins.

* Most importantly, there remains a very wide gap between the sector’s discounted S&P weighting (now about 4.5%) versus ROCE, a gap we expect to narrow via an eventual re-rating higher of traditional energy.

* We continue to believe oil demand will grow, excluding recessions, for the foreseeable future; arguments calling for “peak oil demand” are in the process of being obliterated.

(3) For the time being, we still prefer “super vol” over “super cycle” to describe the commodity macro backdrop.

* In the near term, we are in an environment of rocky GDP in the three largest oil consuming areas—China, Europe, and the United States.

* We are not yet in a period where oil prices can rally into strengthening GDP, as we saw in the 2002-2008 cycle.

* The oil cost curve is narrowing and steepening , suggesting a supply crunch is coming.

* But range bound long-dated oil (60 months forward) reinforces our “super vol” rather than “super cycle” perspectives.

This will be our final Super-Spiked of Summer 2023; we will return the Saturday after Labor Day. We hope everyone enjoys the last days of summer!

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⚖️Disclaimer

I certify that these are my personal, strongly held views at the time of this post. My views are my own and not attributable to any affiliation, past or present. This is not an investment newsletter and there is no financial advice explicitly or implicitly provided here. My views can and will change in the future as warranted by updated analyses and developments. Some of my comments are made in jest for entertainment purposes; I sincerely mean no offense to anyone that takes issue.

📜 Credits

* Intro & Outro music: Wolf Hoffman: Concerto for 2 Cellos in G Minor, Rv 531: I. Allegro Moderato.

* This episode of Super-Spiked Videopods was edited and produced by Veriten Productions.

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