Oct 16, 2020 37:33 min MINS

EnergyCents- Ep. 11: Twilight Zone or SuperCycle?: Near-term expectations for oil markets

Raoul LeBlanc

Karim Fawaz

Oil prices have hovered around $40/bbl for several weeks after extreme volatility led to negative prices in April 2020. Investors are watching OPEC+, the potential resiliency of North America shale, and a US presidential election for signs of what to expect from oil markets in 2021. Karim Fawaz and Raoul LeBlanc return to EnergyCents this week to share their views on what to watch for.

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EnergyCents- Ep. 11: Twilight Zone or SuperCycle?: Near-term expectations for oil markets - Transcript: Announcer 1 (00:03):
This episode of EnergyCents is brought to you by S&P Global's Financial and Capital Markets Energy Advisory Group. Our team of experts provides the investment community with actionable insight and integrated thought leadership that identify the trends and trendmakers of global energy markets. Solutions cover the full energy and natural resources sector, from traditional fossil fuels to emerging cleantech ideas and supply chains, and are available via recurring reports, webinars, robust data sets and personal engagements with experts.

Breanne Dougherty (00:32):
Welcome to EnergyCents, the S&P Global podcast where we explore all things at the intersection of energy and financial and capital markets. As always, Hill Vaden is here with me today. Hill, anything new since the last time we spoke? I am going to mention that Hill and I speak probably 5 to 10 times a day. So, I'm not sure if you have anything new.

Hill Vaden (00:53):
I heard on the radio today that it is the anniversary of the first Peanuts comic strip.

Breanne Dougherty (00:59):
Oh.

Hill Vaden (01:01):
So, that's kind of cool.

Raoul LeBlanc (01:02):
Is that like 100 years?

Hill Vaden (01:04):
I don't know. I don't know. [crosstalk 00:00:01:06].

Raoul LeBlanc (01:08):
At least 50 or 70 or something.

Hill Vaden (01:11):
Yeah. It's got to be, I would think, at least in the 50s just based on the style of clothes that those kids wore.

Raoul LeBlanc (01:16):
That Charlie Brown wears, yeah. His color combo.

Hill Vaden (01:20):
Right.

Raoul LeBlanc (01:20):
Yeah. That yellow and brown.

Hill Vaden (01:23):
It's also the anniversary of Twilight Zone, which is maybe ominous for our forecast, and Kid A if you want to feel old. So, 20 years ago, Kid A was made, which I still think was a cool album, but now it's like that old guy saying that Steve Miller Band was cool when I was growing up.

Raoul LeBlanc (01:41):
Which was true, and still is.

Breanne Dougherty (01:44):
Although I worked with-

Hill Vaden (01:48):
So, that's the only [crosstalk 00:01:45].

Breanne Dougherty (01:48):
I have to say, I worked with a guy and he had a, I think it was a ten-year-old son or something like that. And he comes into work one day and he says to me, "So, my son's really into Velvet Underground." And I was like, "What? That's incredible. Good for you, that your son is into something that isn't necessarily just on the radio all the time."

Hill Vaden (02:06):
Was he expressing concern, or was he encouraging the interest?

Breanne Dougherty (02:11):
I'm not sure. He might've been concerned. I, of course, thought it was very...

Hill Vaden (02:17):
You got a cool kid.

Breanne Dougherty (02:18):
Yeah. All right. Twilight Zone though. As you said, it's been an ominous sign perhaps, but it's also perhaps a little bit fitting. We're here to talk about this week, oil price formation and potentially some gas price formation chat. But let's be honest, by the time we all get going, we might only hit on one of those. We have Karim Fawaz with us and Raoul LeBlanc, who are often guests with Hill and I. And they always bring fantastic banter and knowledge to the table, so we're very excited to have both of you with us again today.

Raoul LeBlanc (02:51):
Thank you very much.

Karim Fawaz (02:52):
Thanks for having us.

Raoul LeBlanc (02:53):
I feel like we're in the... It's a good thing. The Twilight Zone is a good theme here because we are in that, in terms of oil price, at least for the North American guys. $40 is not great. They can't grow. They can't make money. But at the same time, they're, in general, not going out of business. Although, that's not true for everybody.

Karim Fawaz (03:13):
[crosstalk 00:03:14].

Breanne Dougherty (03:13):
Okay. Well, there's a good question for you, Raoul. So, okay. Let's just be careful about this. It is not that $40 is going to be the new $60, is it? We're not looking at something or other where there's going to be these huge cost rundowns, where, all of a sudden, once again, shale oil [crosstalk 00:03:33].

Raoul LeBlanc (03:33):
No, I think we're at a very different situation than we were in 2015 and 2016 for two reasons. Number one is you can't get much more blood from the service sector. I mean, their costs have come down. And, at the same time, you have seen a modest high grading, and people were drilling some pretty good wells. But I think 40 is too much. And so, I don't expect to see the very strong reduction in sort of breakevens and capital efficiency gains that we were lucky enough to have to readjust as we moved from a 100 to 60 or or 55.

Raoul LeBlanc (04:12):
Some people will do fine, but, as a whole, particularly in this new era of discipline, when everybody's supposed to be giving money back, it just doesn't leave enough money to grow, I don't think. And therefore, the whole price formation mechanism, and, Karim, you could talk to this, that has taken place in the last really seven years, US grows like pretty gangbusters at any price sort of above 50. I think that doesn't work at 40.

Karim Fawaz (04:41):
Yeah. No, and I would say just from a global standpoint, I don't think 40 works for the global upstream industry as a whole. The same way it doesn't work for the US, I don't think it works for the global upstream sector in terms of, whether it's IOCs, NOCs, governments that are dependent on oil revenues. So, I think that whole side of the oil market ledger does not function at these prices.

Karim Fawaz (05:03):
The reason we are at these prices and we're sustaining this environment is, to a large extent, reflecting both the fact that demand is depressed and will remain depressed until we get out of the COVID crisis, and that you're coming into the end of the year with a lot of inventories on the sideline. So, you do have that big weight looming over the market. But as you come out of the COVID, kind of think a bit beyond the COVID crisis, $40 is not a sustainable price environment. And I don't think the market expects it to be. If you look at forward curves, the back end of the forward curve, it is showing you that the market is still looking at 50 to 60, or 50 to $55 a barrel for Brent as that potential long-term environment.

Karim Fawaz (05:43):
Now, the debate, I guess is, "Is 50 to 55 today the same as it was three years ago, given the reactivity of the US?" and that's where I think we can have a more interesting discussion, because I think things are changing there. What 50 to 55 did for the US in 2017 and 2018, which was flood the market, does it do that again now? I don't think so, or at least not as much.

Breanne Dougherty (06:07):
So, if we think about that, if it doesn't do that as much and your assumption is correct, then it points to a potential for oil markets to have more prolonged periods of upside, do you think, that we can go up over the 60? If we're talking to everybody's happy in a range of the 50 to $60, that definitely points to how long can we sit in positions in 65 to 85, or positions in 30 to 50?

Karim Fawaz (06:36):
Yeah. I think it does set you up for a more constructive environment versus where the market perception was after 2018. So, basically, if you think back to 2018 was, it was a very sobering lesson on how the US can overwhelm the global system. The problem with the US isn't necessarily the reactivity, and Raoul makes that argument often, which is the reactivity of the US on its own is a stabilizing force rather than a destabilizing force. I think the problem with the US was always the magnitude of growth and how much oil can come once that green light kind of is... or when the light turns green. And 2018 was very kind of traumatizing in a way for the market because you had Iran coming off, you had demand relatively healthy, and still the US managed to really overwhelm the market in a dramatic way over the course of that year and into early 2019.

Karim Fawaz (07:31):
So, I think when you think about the medium term, I guess the discussion is if that reactivity is less, is the reactivity gone altogether? Is the threshold shifted up $5, $10, $20? Where is that next threshold for the US? And secondly, from a magnitude standpoint, what does the green light do when it shows up, and how fast? And I think that's still drag, ultimately. So, the threat of the US on prices on the upside isn't gone. So, if prices do move up to say $70 for WTI, I don't have any... and, Raoul, feel free to disagree. I think at $70 for WTI in this state of the industry, it might take time to get the system back up and running in growth mode. But you will move back to growth mode; there's just so much capital coming in.

Raoul LeBlanc (08:19):
We will. Yeah, there's a lot at that point, right? I agree with that, Karim. So, yeah. I'd like to say at any given price they'll produce less than they would have when they were in total, all-out growth mode, but there is a price at which they can still, and will still, be able to flood the global market and give back some money. That's the key. If they can do that, I think increasingly, incrementally, they move each dollar into a higher growth proportion and a lower return portion.

Hill Vaden (08:50):
Will they be allowed to do that in the sense that I'm picking up that the reason North America was able to grow so quickly during the last downturn is because they took it out of the highs of the service sector?

Raoul LeBlanc (09:02):
Yeah.

Hill Vaden (09:02):
And the service sector's not able to go any lower $40, right?

Raoul LeBlanc (09:06):
Yeah.

Hill Vaden (09:06):
So, if you get back to 70, isn't the service sector going to take that [inaudible 00:09:09]?

Raoul LeBlanc (09:10):
It's a good point. Margin migration is going to be a fact of life. At some point, the service sector will not... But, again, at any given price, there's less service sector money because the activity level's lower. What drives the service sector is the, of course, the balance between the amount of service sector equipment out there and the demand for it. So, if you have sort of restrained demand, what really needs to happen... What would it take to get the service sector really back? I think it would be a series of mysterious fires that would actually remove some of the steel that's out there because what's happening now, and if you look at this with the Schlumberger/Liberty thing, is, okay, Schlumberger now... That equipment's not gone; it's just in the hands of somebody who bought it for pretty cheap, yeah?

Hill Vaden (09:57):
Yeah.

Raoul LeBlanc (09:57):
And can now reoffer it to people at a lower price.

Hill Vaden (10:02):
What about labor?

Raoul LeBlanc (10:03):
... and that keeps margins pressed. Labor will be tough. Right now, there's pretty abundant labor in the US because of the COVID crisis. But increasingly over time, it will be hard to get these people back. And so, you're going to have to offer them significant bonuses and incremental wages to lure them back.

Hill Vaden (10:22):
So, potentially on timing, right?

Raoul LeBlanc (10:24):
Yes.

Hill Vaden (10:24):
... that if it's two years, three years out, you could bring people back, but they're not going to know how to [crosstalk 00:10:28].

Raoul LeBlanc (10:27):
Well, yeah. Then you've got the people that weren't there before, and they're going to have to learn, which means... Anytime anybody learns any industrial process, going to be slow, inefficient and accident-prone.

Hill Vaden (10:42):
Which maybe takes the steel off the market.

Raoul LeBlanc (10:44):
Maybe. We'll see.

Hill Vaden (10:46):
I think the last time, Breanne, that we had Karim on, we were talking about negative oil. And it was much more exciting from a volatility standpoint, then it's range-bound within $40 again for as far as the eye can see. Never say never, but is it safe to say that the excitement has kind of passed us and it's more in a range-bound world for the near term?

Karim Fawaz (11:12):
I mean, in the short term, it's really symptomatic of the conditions we are in the market. You have a market manager in OPEC Plus that's so far has been able to keep physical markets within a relatively managed band, with some weakness recently showing that there are cracks in that whole effort. But nevertheless, they have managed to keep, in an environment of extremely uncertain demand, you're aren't seeing big stock builds. You're seeing modest stock draws around the world. So, the system is in rough balance, at least for the time being. Obviously, you can't say never, especially in the middle of a health crisis that could turn quite rapidly into another wave of shutdowns around the world, where demand collapses again and you'll be longing for the days of stable $40 oil of the summer. So, I mean, I think those risks are still very much there.

Karim Fawaz (12:04):
I think what's going to be interesting is, as you go through the next couple of quarters, I think markets have realized that this is the type of environment we're going to be stuck in until we can work down some of the surplus inventories, surplus spare capacity you have in the system. I think as you get into that process, that will be interesting to see how much prices rally from there and where that next plateau is as you transition out of the COVID-19 kind of crisis and towards what markets see as the medium-term band. And that's what's going to dictate a bit, do you move back into a 50 to $60 world? Do you zoom into a 60-plus world, because you're convinced that a supply gap is around the corner just because the US isn't growing, no one has sanctioned any projects for a number of years, et cetera, et cetera? The demand, that the peak demand, fears are overblown or at least they're much slower-moving than people commonly think. I think that's the way you can have that bullish narrative.

Karim Fawaz (13:06):
The problem is, and this brings it back to the US and how the US interplay happens, how long can that be sustained? I think the question is, can you go back to a price formation environment of pre-shale, where you can have multi-year bull runs without supply responding rapidly to correct the market? I don't think you can, at least as we stand today looking at the US sector. I think you still have some bullets in the chamber to use if prices do overshoot. So, can you close the shale Pandora box? I don't think so, at least here in the next couple of years.

Raoul LeBlanc (13:46):
One question I have, Karim, or one thing I was thinking about on the way in this morning was we've been hanging out around 40 bucks. And one of the things that you and Roger sort of worked on in the past were these cycles. And it struck me that whenever you have a lot of stability, ironically, you become vulnerable to sort of momentum cycles or... And I wonder if we're seeing one last couple of days, right?

Karim Fawaz (14:14):
Yeah.

Raoul LeBlanc (14:14):
... where it hangs around 40, and then all of a sudden, it takes a loop and maybe it goes up for a few days, but it increasingly maybe it's going to go down 4 or $5 and then come right back up, right?

Karim Fawaz (14:25):
Yeah.

Raoul LeBlanc (14:26):
... as people, the speculators, come in and take... drive it one way. It's like nobody has a clear conviction on where it should go and therefore, if it moves, everybody just has to follow, the people who have gone along to start the cover. Do you see those short cycles, in terms of price formation?

Karim Fawaz (14:42):
Mm-hmm (affirmative).

Raoul LeBlanc (14:42):
Who cares about the price, but price formation. Do you see that at work now?

Karim Fawaz (14:46):
Yeah. I think we're seeing that. We're seeing that since the start of September. I think the way to think about it is, short cycles or short-selling cycles were very prominent during the downturn in '16, '17. '15, '16, '17, really. They kind of faded over 2018 and 2019 largely because the market was tightening. So, the biggest deterrent to short cycles ultimately is physical markets being tight and OPEC Plus market management being such that it deters any short appetite because if you're on the short side and prices go up, you stand to make a big loss versus the opposite, which is if you're long, you can just stay long and wait it out.

Karim Fawaz (15:26):
I think what's happening now is a mini short cycle, I would say. It's within the price band we've been in since the start of the summer. And it would be interesting is if you start to see faith in OPEC shake a bit, that they can't keep the physical market tight, and that deterrence that OPEC Plus established over the early part of the summer fades. I think that's where you can see more violent cycles, which we had a lot of during the last downturn, where you go from 45 to 32 and back up. I think for the time being, as long as physical markets are within a relatively narrow band, I think that likelihood is low. But if you do start to see bigger demand losses, signs that OPEC Plus can't manage the market as effectively as it's telling the market it is, I think that's where you can see these cycles come in.

Karim Fawaz (16:15):
I think the other thing, and the other part of short cycles which is interesting, and it fits with the short cycle in the physical sense which we think about with the United States, is how long can this price environment last, given that the US can respond within two to three quarters? So, how long can price moves be? Everything is collapsed in terms of timeline. Everything is happening faster because if prices go too low, you know that the US is going to slam the brakes or going to drop rigs or production is going to start responding. If prices go too high, vice versa. So, I think that's the other catalyst, I think for short cycles, is just the nature of the industry is moving faster than it used to.

Raoul LeBlanc (16:54):
It's a good point. Well-

Breanne Dougherty (16:56):
So-

Raoul LeBlanc (16:56):
Go ahead. Go ahead, Breanne.

Breanne Dougherty (16:58):
I was just going to say. So, Karim, you mentioned, especially when we're talking about the very near term as we're range-bound in this $40-type level, what I'm hearing here is that really what's going to be a determining factor during this range-bound time period is OPEC Plus, right? And what [crosstalk 00:17:14].

Karim Fawaz (17:13):
And demand, obviously.

Breanne Dougherty (17:15):
And demand, yeah.

Karim Fawaz (17:17):
Demand is really the overarching challenge here, and the uncertainty around demand. So, it's basically what demand does, and then how OPEC Plus responds, I think is the nexus over the next couple of quarters.

Breanne Dougherty (17:30):
So, are there any price levels that you think that once they're hit, we start seeing those cracks within OPEC Plus are going to start becoming more brutally apparent? For instance, where Russia might say, "Hold on a second," which is what started a lot of this crisis at the beginning of the year, right?

Karim Fawaz (17:45):
Yeah.

Breanne Dougherty (17:45):
So, I mean, are there sort of, let's call them trigger points or price points that we should be watching for that [crosstalk 00:17:52] sensitive?

Karim Fawaz (17:53):
Yeah. I think it's not really going to be a single price, but it's kind of a price move overall. If you do see prices past $50 a barrel sustainably and hold above that level, which is telling you that the market is tightening quite fast, starting to look beyond the crisis, I think, at that point, you start to see some of the strategic discussions between Russia and OPEC come back to haunt you in a way. There is still a lot of spare capacity across the group. It's around 8 million barrels a day of oil on the sidelines. So, I think once prices start moving out of this range and into the higher range, I think you're going to see a lot more pressure internally to start bringing back barrels faster.

Karim Fawaz (18:32):
On the downside, I think as long as prices are below $50 a barrel, and we're now comfortably below that level, I think there is still a united front and a united fear of that demand risk and the risk to see prices fall back into the 30s that's keeping everyone engaged and at the table. And I think that's going to remain at least for the next couple of quarters because we don't see that type of tightening that would move you sustainably above $50 a barrel at this stage.

Hill Vaden (18:59):
That's the spare capacity from OPEC Plus that would come back first, right? Raoul, you talked about the signal to drill before. And I would think that in the US, you're going to need a sustained price of $50. It's going to be a brave CEO that puts crews back to work with two weeks of $50 or four weeks of $50, right? How much-

Raoul LeBlanc (19:22):
Yeah. Well, more importantly than even sort of coming to trust the price, I think is actually making some real, measurable, announceable headway on things like debt reduction and dividends and share buyback and improving your balance sheet. Putting you in a better situation. So, people have started putting completion crews back to work from the really low level that we had in June. So, that's happening. They feel good enough about that, but it's still pretty anemic.

Raoul LeBlanc (19:54):
And we're having a lot of debates with our clients about whether the fourth quarter here is going to see steadily improving oil production in the US. And our view tends to be that no, we're not really going to see much in the way of that because there's not much money left in the budget. Everybody wants to hit their budget. Nobody wants to go blow over their budget in a year where prices are down. So, we'll see.

Raoul LeBlanc (20:19):
I had a question to throw out maybe to Karim. In your mind, when you think about price formation itself, what's being baked in terms of the election, and in Iran and Venezuela and Libya?

Karim Fawaz (20:35):
I mean, Libya, obviously, is coming back as we speak. That's been part of the headwinds that we've seen over the past couple of weeks, is that some of the Libyan volumes that have been offline are coming back. So, that's getting priced into the market.

Karim Fawaz (20:46):
I don't think Iran returning is priced in, in any meaningful way, or by an election to a large extent has really started to trickle in. I think it's added to the overall headwinds that we've seen since the start of September, but I don't think you're seeing a big move on fundamentals in a Biden world or the return of Iranian volumes with the market is in the offing.

Karim Fawaz (21:12):
Iran is still a major risk, obviously. It's 2.5 million barrels a day of oil sitting on the sidelines, 2 million plus in production, more than that in exports that could come in relatively quickly if that deal comes back. I think that risk is still there. And I think it's going to affect, not just fundamentals in 2021, but also how markets think about that medium-term squeeze, if you do get that political barrel layer offsetting the slowdown in the US, offsetting the loss of projects elsewhere. Does it just ruin the upcycle because you're sitting on 2, 3 million barrels a day of spare crude that's going to come back in the next couple of years? And I think that's the balloon and the risk that markets are, to some extent, pricing, but I don't think in the short term in any meaningful way in [inaudible 00:22:02] prices.

Hill Vaden (22:02):
So, you mentioned the election, which we had a debate this week. And the president came up positive with COVID today. If Biden were to win, if it's not priced in, is that bullish? Is a bearish? I guess Iran is baked into that somewhere as well.

Karim Fawaz (22:22):
Yeah. I mean, I think it's a mixed picture. It's a difficult equation. I think the short term, from an oil market, if you take it strictly from an oil market fundamental standpoint, supply and demand, I think in the short term, it's probably leaning more bearish than bullish. It is the move on Iran, the move of potentially easing sanctions on Venezuela, although that physical capacity has been hit pretty hard. On net, the supply coming from a loosening of the sanctions policy would far outweigh potential demand headwinds from a shift towards greener policies or more climate-friendly policies domestically. And Raoul can add to that.

Karim Fawaz (22:58):
I think our view on Biden, and he's made it quite clear in debates and in his remarks over the past month or so, is he will not be advocating for a ban on fracking. Whatever kind of regulations on the industry come in might have an impact on cost, might have an impact on volumes on the margin, but will not change, in a very meaningful way, the path of production over the next couple of years the same way it would Iran and Venezuela. So, I would say on that, it's probably a net negative for fundamentals in the short term. In the medium to long term, I think it's a mixed bag between negative demand policies and potentially negative supply policies overall.

Hill Vaden (23:42):
Raoul, do you agree?

Raoul LeBlanc (23:44):
Yeah, I would say that. I mean, in a lot of ways, I think that people may impute a lot of meaning to the election results in terms of the oil and gas, but beyond Iran, I think it's a bit of a non-event in the short term, right?

Karim Fawaz (23:57):
Yeah.

Raoul LeBlanc (23:57):
It will take a long time to get things in place, except maybe for Iran, right?

Karim Fawaz (24:02):
Mm-hmm (affirmative).

Raoul LeBlanc (24:02):
And policies and passed and funded and all that stuff. It's going to take multiple years. And frankly, you may not see the impact of any election until the subsequent election or term of the president.

Hill Vaden (24:20):
So, kind of separately, but looking at some of the investor implications of all of this, I read two reports this week, one of which I'm sure you all looking at... I think it was an environmentalist group talking about production growth. A lot of the projects are still in the hopper. And there's upside risk to production when you look at what's in front of particularly the global majors today. The other report was from more of a kind of financial advisory-type person and his prediction, with no fundamentals, which he was quick to note, was that energy is going to be the best performing sector over the next 10 years, 5 to 10 years. And his logic was basically when things get this bad and everybody goes the other way, it's going to support... This is the black swan.

Raoul LeBlanc (25:06):
Mean reversion, yeah?

Hill Vaden (25:06):
Yeah. This is the black swan.

Raoul LeBlanc (25:08):
So, a random walk down Wall Street, right?

Hill Vaden (25:09):
Exactly.

Raoul LeBlanc (25:10):
... is the black swan. Yeah. Well, I do feel like the rhetoric and in some ways the policy and the narrative is so far ahead of... I go back to consumer reality, that Europe is approaching 50% in some countries SUV sales. SUVs never were a thing in Europe, but now they're getting to be 50% in certain key markets. That's pretty crazy.

Raoul LeBlanc (25:33):
And Americans, I look at hybrid vehicles, which came out 15 years ago. I don't know why everybody in the country doesn't own a hybrid. It just makes sense. But it still costs two or $3,000 extra, and people don't want it. And so, I look at those and think, "That's going to run into this rhetoric about this." And so... think there's something there.

Raoul LeBlanc (25:56):
I also do believe in mean reversion. The things that aren't trendy tend to eventually find their right place, whether it's above, below or close to where they are now. But then you go back to some things that you may have ignored. We ignored energy in the '90s. And it had its big day in the sun in the next decade.

Karim Fawaz (26:18):
Yeah. I'd push back a bit on that analogy with the '90s and the 2000s. I think some parts have changed in a very dramatic way. I think the debate ultimately, for kind of the cyclical case, which is we're still in the same downcycle. As you come out of this, the loss of investment in upstream, the demand being not as bad as the media portrays it to be in the next decade or as some kind of more conservative forecasts put that, that it sets you up for a sustained supercycle. If you just stay patient enough to wait it out, you'll be rewarded at the end.

Karim Fawaz (26:57):
I think the key difference though with the 2000s is a couple of things. But the main thing, the biggest thing was you were facing an environment of accelerating demand growth globally. So, not just demand growth stayed, but it actually accelerated quite significantly in the following decade, which kind of put you in that situation.

Karim Fawaz (27:17):
Now, we can haggle about SUVs in Europe, we can haggle about whether the peak is in 2030 or 2035 or 2027, but, at the end of the day, I think it is a fair assessment to say that the base of demand growth is decelerating over the next two decades. The rate of demand growth will be declining versus what we had, especially in the 2000s, but also even in the 2010s and the past few years before the COVID crisis. Instead of growing a million and a half barrels a day, you're going to be growing a million barrels a day, 500,000 barrels a day, so on, so forth. So, the treadmill is going to be slowing.

Karim Fawaz (27:55):
So, the question is, can you get the perception of resource scarcity that you had in the 2000s to come back? And that's the part that's more difficult at this stage because, first of all, the US has changed the perception of resource abundance versus scarcity in general. You now have a firm, entrenched belief that you have oil available at a certain price if you need it. Versus in the mid-2000s, at a certain point, it was peak oil, it was no projects in the cupboard, it was, "We haven't discovered enough resource," that it put undue pressure on OPEC Plus... not OPEC Plus at the time. It was OPEC. But OPEC had no spare capacity left. China was growing fast. They didn't have inventory buffers, et cetera. That whole notion of resource scarcity that dominated the early 2000s, early to mid-2000s, just isn't there anymore. And can you get that? I think that's the more difficult one to get to.

Karim Fawaz (28:46):
And as long as you don't have that psychological perception of resource scarcity, it's hard to see sustained price upside beyond what we've been talking about earlier is, moving from 50 to 60 to 60 to 70, it can be done just through the lower reactivity in the US. But do you get 80, 90, 100, the supercycle-type prices that people are warning of? I think that's still a difficult thing to see at this stage, at least in my mind.

Breanne Dougherty (29:16):
Yeah. And I think I agree with you, Karim, because when I think about it, and this is another topic to explore in another conversation, but that's exactly why we're seeing the devaluing and the pullback in investment in exploration. Resource scarcity isn't really making headlines these days. I think the fact that we've got a stable discovered resource base within the US from an unconventional standpoint, and even potential... Hill was chatting with you, Karim, I know about unconventional opportunities that might be emerging globally as well that could have some real running room to them. I find it hard to believe as well that from how the supply landscape has shifted, that we would ever get back to an environment where that resource scarcity was driving market momentum.

Karim Fawaz (29:59):
Yeah. I think you also have a lot of projects around the world. You have a healthy backlog of projects between Brazil, between other regions of the world that were discovered during those hundred dollar-years in the 2000 and early 2010s, I think that are still there on top of the unconventional resource.

Karim Fawaz (30:17):
I think you can get back there from an upstream standpoint. As you work through that queue, as the US matures and that growth trajectory bends, you can get that supply side potentially perception get there. But the problem is if you're investing in the market today, and you're saying, "Demand is going to peak eventually sooner or later," whether it's the late-2020s or early-2030s, so you don't have that anxiety of, "We're heading for a cliff... " be able to produce enough oil to meet demand and you're heading for a big squeeze. I think that concern is going to take time to come back, if at all.

Raoul LeBlanc (30:57):
Yeah. Just thinking about press formation though. One of the things that I do think, and we're part of this, is that when people think about, okay, the energy transition. I mean, the new fad for 2020 is everybody's making a goal for 2040, 2045, 2035, 2050. Very long-term goals about when they're going to hit net zero, or what they're going to do, or have this, as if it's going to be some smooth kind of little incremental transition and each year it's going to be just like the last one, except a little bit less or a little bit more.

Raoul LeBlanc (31:29):
And I just think that we may have a number of wild cycles in the energy side, on power, on solar, on costs, on margins, to get there. I just feel like the scale of this system is so large. And generally, it would take 50 to 100 years to change. And to try to do that in even long-term times like 20 or 30 is going to create all sorts of dislocations for good and for bad as we move through... So, I [crosstalk 00:32:01].

Karim Fawaz (32:01):
Yeah. I tend to agree with that. And that's the big challenge, which is money can flow out a lot faster than industries can turn over, than real capital stock can turn over, than demand can transition at a scale that we have. And what we're seeing now is money is moving out and it's moving out fast. So, that leaves you in an interesting situation where you're asset rich, capital poor. How does that evolve in terms of price formation? How does the market interpret that as you come out of this whole COVID-19 environment? I think that's going to be the next... That's going to be the dominant story, I would say, of 2021, 2022. Probably more 2022 than 2021 since we're still going to be recovering next year.

Hill Vaden (32:50):
So, given all that, I mean, it sounds, Karim, that you're, I guess, taking the other side of the idea, that the energy sector, specifically oil and gas, is going to be the best-performing sector of the next 5 to 10 years, that there's just too much demand concern and too much available supply.

Karim Fawaz (33:06):
I mean, I don't know about the rest of the sector, so I won't make a call on a relative performance versus the rest of the economy. But I mean, as I started by saying, I do ascribe to the notion that as we come out of this cycle, you are adding into an environment where you could see prices sustainably move into a higher price range, and potentially a higher price range than we had in 2018 and 2019 just by virtue of the transformation of the US shale sector.

Karim Fawaz (33:34):
I think the part that I'm less comfortable with, at this stage, is seeing that sustained supercycle-type environment, where prices steadily keep rising with little response from the fundamental side. I still think the US will respond. I still think you have the resources available in the short term. And I think demand, as you said, and as I said earlier, demand is decelerating. That treadmill is getting easier to meet. And in the short term, that's still the driving kind of problem. You won't see that psychological threshold of abundance to scarcity happen, at least not in my view, in the next couple of years.

Hill Vaden (34:13):
All right. And Raoul, I think you're getting pulled into another meeting, so I don't know if you have any last thoughts before we wrap up.

Raoul LeBlanc (34:22):
No, I think that we got to think about have another quick discussion at some point about the gas. So, you got oil price formation, which has taken on some interesting new elements. And interestingly, the gas side has been inversely related in terms of the overall correlation of prices, in the last couple years. And that's may still be the case, but finally to gas' advantage.

Hill Vaden (34:46):
Hope springs eternal.

Raoul LeBlanc (34:48):
That's right.

Breanne Dougherty (34:48):
Yeah. It definitely warrants a whole nother discussion for sure.

Hill Vaden (34:55):
Yeah, I think so. And I know that was, as we talked about it during the beginning of the call, Bree, you and I were talking 5 to 10 times today, and that was one of our conversations just yesterday. So, maybe that's a good, call it a cliffhanger for another episode.

Breanne Dougherty (35:13):
That's a cliffhanger. There you go. Yeah, we're just throwing out teasers at the end of this, just to bring all of you listeners back for more. Stay tuned.

Hill Vaden (35:21):
Well, good. Well, thank you. So, Raoul had to walk away. We were actually taking this call in the same room today, which is the first time we've done a podcast in the same room since COVID started.

Breanne Dougherty (35:33):
It's very modern of you. Yeah

Hill Vaden (35:36):
It is. And our microphone was busted. [crosstalk 00:35:41].

Breanne Dougherty (35:41):
But it all worked out in the end.

Hill Vaden (35:43):
I hope so. So, thank you, Karim.

Karim Fawaz (35:46):
Sure.

Hill Vaden (35:47):
You are a... Who's the guy on Johnny Carson that always used to bring zoo animals or wild animals? He was a regular. Jack [inaudible 00:35:55]. That's kind of-

Breanne Dougherty (35:58):
Oh, Jack. Yeah, yeah, yeah. [Inaudible 00:00:36:00].

Hill Vaden (36:02):
Not to compare ourselves to Johnny Carson, but you are our-

Breanne Dougherty (36:06):
Oh, speak for yourself there, Hill.

Karim Fawaz (36:09):
I'm a friend of the show. I'm a friend.

Hill Vaden (36:11):
A friend of the show. There you go.

Breanne Dougherty (36:12):
A close friend of the show. I actually think, Karim, here's a little bit of insider information. I think your podcast is still our highest-rated.

Karim Fawaz (36:21):
Nice.

Breanne Dougherty (36:22):
I think. So, you bring the listeners. We might have you on more frequently.

Karim Fawaz (36:28):
Happy to join. Happy to join. Whenever you need me. There's always something going on in the oil market, so I'll always have something to say.

Breanne Dougherty (36:38):
So true. Well, thank you very much for joining us today, and we will-

Karim Fawaz (36:42):
Thanks for having me.

Breanne Dougherty (36:42):
... of course, speak with you soon.

Karim Fawaz (36:43):
Great. Thanks.

Hill Vaden (36:44):
Great.

Karim Fawaz (36:45):
Thanks, Hill. Thanks, Breanne.

Announcer 1 (36:48):
To read additional insights from our team of experts, visit our blog at www.ihsmarkit.com/energyblog. You can also find our experts on social media by searching for "S&P Global Energy" on either Twitter or LinkedIn. Have a topic idea or want to send us feedback? Email our podcast team at energycents@ihsmarkit.com.

Announcer 2 (37:09):
This podcast contains information and insights copyrighted by S&P Global. To learn more about S&P Global Energy Solutions, visit ihsmarkit.com/energy. That's I-H-S-M-A-R-K-I-T dot-com, forward-slash energy.

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