Episode Details

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We recorded this video podcast on Wednesday, March 18. This week we address five questions that have arisen regarding our views on the potential long-term impacts of the war in Iran.

* Does our Super-Spike oil demand destruction framework need adjusting for an abrupt geopolitical spike?

* What advance warning signs are we watching to assess economic damage and risks to capital markets?

* How does Iran impact our view of the traditional energy profitability cycle and terminal value recognition?

* Does the war change which regions we prefer for future CAPEX?

* How does Iran impact our Power Surge (power super-cycle) view?

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SLIDE 3: Super-Spike Framework In A Geopolitical Event?

Key points:

* Our March 2005 “Super-Spike” framework was used to assess how high oil prices could reach in order to slow oil demand growth to levels of available supply in an environment of structurally strong global GDP growth (BRICs expansion).

* We chose “super” to indicate the oil upcycle was multi-year in nature. We chose “spike” to remind ourselves and our clients that inevitably oil would surely rollover as cycle dynamics ensured a future period of oversupply (or under-demand).

* At the end of the day, the super-cycle is always one of sector profitability, with oil prices just one (important) component along with costs and capital intensity.

Current environment:

* The War in Iran and closure of the Strait of Hormuz is not analogous to that 2004-2014 period. This is an acute geopolitical disruption.

* Therefore, the framework we used over 2004-2014 has its limitations. Most notably, the sudden, dramatic jump in oil prices could mean that absolute levels do not need to reach the heights implied in the table on the right.

* It also suggests that “Super Vol” remains the better framing for energy commodity markets, including crude oil, oil products, and global spot LNG prices.

* Be wary of perma bears and perma bulls! For the bears: cycles have to play out. For bulls: it is always a cycle.

Exhibit 1: “Super-Spike” oil demand destruction framework

Source: Bloomberg, EIA, Federal Reserve, Veriten.

SLIDE 4: What Advance Warning Signs Are We Watching?

* Bull to bear can happen quickly and unexpectedly…July to December 2008 saw WTI drop from over $140/bbl to under $40/bbl.

* How can one differentiate between the July 2007 collapse of two Bear Stearns credit funds and the March 2023 issues with Silicon Valley Bank?

* So why worry this time? The closure of the Strait of Hormuz is simply intolerable if measured in months rather than weeks. The Age of Drones is a game changer, as we see in Russia-Ukraine.

* Fortress balance sheet, understanding controls and contracts, and aiming to not only survive but thrive during turmoil is the goal.

SLIDE 5: How Does Iran Impact The Profitability Cycle

Key points:

* It remains our view that traditional energy is firmly within a new profitability super-cycle that began in 2021 and would be expected to last 10+ years.

* Structural profitability cycles are inherently long-term in nature, 10-15 years up, 10