Female Speaker:
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Breanne Dougherty:
Welcome everybody to this episode of EnergyCents the S&P Global podcast where we discuss all things at the intersection of energy and finance. As always, I have Hill Vaden with me here today. Hi Hill, how you doing?

Hill Vaden:
I’m doing well Breanne. How are you?

Breanne Dougherty:
Pretty good, although, you know, we don’t normally like to schedule things at the end of that we’re recording this at the end of the day of a Friday. That I think has been particularly exhausting for all of us that are on this call today. So which is probably case in point which is I guess explains why we’re recording this story it on a Friday. It was the only time all three of us could figure out when to do it. So, needless to say it’s been a long week.

Hill Vaden:
Yes, its feel really whiplashed.

Breanne Dougherty:
And it’s the closure of January, so I guess this just speaks to the broader sentiment I have on January 2021 to be honest, exhausting. Okay, so interesting. Yesterday, I think it came out a couple days ago but be honest I just got to the new story yesterday. Super Bowl’s coming up in a couple weeks and I found it interesting to read that Budweiser’s pulled out, they’re not doing ads, Coke, Pepsi, [indiscernible] [00:01:36] as well, all these traditional Super Bowl commercial giants aren’t doing commercials.

Budweiser came out, I think and said that they’re doing it because they want to redeploy the funds to help support vaccinations in some capacity. And then, and Coke and Pepsi came out with, we looked at where we want to invest dollars right now. We felt there was greater purpose for it to go elsewhere. And then, it’s also the first time that there’s a home team playing in the Super Bowl because it just so happens that it was going to happen in Tampa Bay and Tampa Bay made it in as of last weekend’s games.

So, who knew that the Super Bowl would be this -- it was going to be different anyways because naturally we’re in the midst of a pandemic and that still exists. But also, it seems like there’s going to be a little bit of a different field to the Super Bowl as a whole, I don’t know. Taking these giants of advertising out of Super Bowl commercial set seems pretty big to me.

Hill Vaden:
Yeah. And it would think really so, I wouldn’t thought that people watch TV, right? I mean if I’m going to cut my budget on the Super Bowl that the TV budget would be, so last thing that I cut. Because people may not go to the Super Bowl in Tampa but they’ll watch it on TV and why not [overlapping conversation] [0:02:46.1].

Breanne Dougherty:
Nobody is anything else to do elsewhere.

Hill Vaden:
Yeah.

Breanne Dougherty:
And I’ve already watched everything on Netflix and Hulu. I mean, I’m probably going to watch the game. I’ve literally got nothing else to watch or do.

Hill Vaden:
You’re allowed. I think and I don’t know I may try to Google as we’re talking. So but my wife is from Tampa, from the Tampa area. And Tampa has a big festival every year called Gasparilla, which is some sort of like Mardi Girl like, Tampa Festival that might be over Super Bowl weekend. But, it’s right around this time every year, I’ve never been. They could be a fun time to be in Tampa, you know, COVID excluded.

Breanne Dougherty:
Oh, I was going to say with social distancing. Although, you know, I don’t know different norms and different places these days with respect to social distancing and mask wearing. So, I’m not quite sure with the environment as around, Tampa Bay around that. But anyways, there’s not many things as I said, I’ve run out of -- I feel like every night, I flipped through the various streaming services, I have to try to find something that I’m interested in watching. And I think I’ve watched everything. So, I’m down to looking both forward to the Super Bowl.

Hill Vaden:
You’re watching the Super Bowl. That’s good.

Breanne Dougherty:
I hear the weekends doing a halftime performance that apparently is longer than ever been done before so maybe that will be interesting. Yeah, this is the highlight [overlapping conversation] [00:04:09], really, you know, the bottom line is we’re all very fortunate. But yeah, I could use a little bit of injection of something new into my entertainment at this point I feel. Other than you, you know what, Hill you bring me entertainment every single day.

Hill Vaden:
Oh, we got Karim.

Breanne Dougherty:
And we got Karim here, he is one of our all Stars, you’re right, we have Karim here.

Hill Vaden:
Always entertaining.

Breanne Dougherty:
And actually, that’s a good pivot because…

Hill Vaden:
From Tampa Bay to Karim.

Breanne Dougherty:
From Tampa Bay and the Super Bowl to our quarter back here at S&P Global, Karim Fawaz.

Hill Vaden: The top rating able in the Markit.

Breanne Dougherty:
That’s right, that’s what we’ve got with us today, we’re very excited. And as we said it’s been a particularly exhausting week for Karim because he said to be on point tackling with all things, all things related to the oil market. And this morning he actually had a webinar, where he was, we were talking about all these things. And we wanted to have you wanted to sort of delve into some of those topics, you know, a little bit more thoroughly at least the ones that we want to delve into a supposed to, you know, you have to give the whole spiel in a webinar which includes base case and stuff. So, can we talk a little bit about the fact that we’re not quite here on a physical recovery point, but oil prices were telling me we are, so what’s happening?

Karim Fawaz:
Sure, hey guys, thanks for having me on again, always fun to join. It is, I mean you kind of you set up in a great way which is prices over the past couple of months, I mean since the last time I was on have rallied quite significantly, right. We’re up 50% or so on Brent and WTI. If you look at the picture from a physical standpoint on oil, it doesn’t look a whole lot better than it did a couple of months ago. COVID is still raging, cases are still rising, demand globally is still pretty subdued. I mean, we’re still not back to normal and most of the major markets particularly, Europe and North America you had another wave of shutdowns and restrictions.

So, you’re not really at that deliverance point from a physical standpoint but the markets have moved ahead. And the key reasons for Atlanta as we think about why that’s happened. There’s a few catalysts, I mean you can guess them probably. The first being that the vaccines have come on and as these vaccines are being rolled out, the market has developed a consensus expectation now that. By the second half of this year, the demand will be recovering strongly. Life will be going back to the way we know it pre-COVID and with it, it will bring that recovery in oil demand that mob up a lot of the excess on, in the market.

The other assumption then the other factors that come into plays in a big way and we’ll talk a bit more about that today. I suppose is, is really the cycling of money in financial markets back towards commodities and within commodities the quintessential commodity being oil. And that’s been happening across the board from metals to other commodities from industrials to oil and it’s kind of really pushed up the overall flow of capital into the futures market and into oil in particular pushing prices higher.

And the third factor I would say is really what Saudi Arabia did earlier this year by setting a floor under prices at $50 a barrel and coming out and cutting production unilaterally goes to say, it’s basically sending a signal to the market, to the paper markets that we are here to defend prices, we’re here to push prices higher and we’re willing to do it even if it means going below.

And the confidence of those three factors Vaccine commodity reflation and Saudi put, if you want on prices, all of that together has given the market enough confidence to really act on that anticipation of the second half or whenever that recovery comes that you can start buying into this rally even if it hasn’t started yet. And it’s really interesting in the sense that for us who do supply demand, I mean you do it on the gas, had obviously Rianne [Phonetics] and others that look at Energy markets.

When you’re stuck doing on supply demand basis, it’s hard to see it in the balance, what’s the trigger that push you so fast, but that’s kind of the magic of oil over the past. I mean, decade or so has been. Once that conviction gets anchored in Market expectation, it can run and it can run for a while.

Breanne Dougherty:
But then do we run the risk then of paper market getting ahead of the ball on this, right? I mean…

Karim Fawaz:
It is, I mean it is getting a bit ahead of the ball. Basically, what it does is it shifts where the pressure is. So, when prices increase organically say, on a supply demand basis progressively as demand recovers prices start rising, incentivizes a bit more supply on a progressive basis to meet that need that creates an inorganic tightening of the market that’s constructive on a sustained basis.

When prices front run if you want fundamentals or push ahead of demand which is what’s happening now. Basically, it’s shifting all that pressure instead of prices being the regulator of supply, back to supply being the regulator of itself. And basically, that supplier around the world will have to control their volumes in a way that the recovery plays out the way markets expect. So, it’s shifting a lot of that pressure from the price to OPEC plus producers on the, you know, Saudi Arabia and Russia in particular but also a lot of other producers and in that group have spare capacity.

And the US and US producers which obviously, we talk a lot about and how they respond to now. And environment that’s a lot more attractive in terms of prices and cash flows then it was looking as these companies were going into budget setting season last fall with prices in the low forties for WTI. That cash flow inflation that they’ve seen over the past two months really changes the equation for them in terms of what they can do. And the question is going to be how fast that translates into supply.

But together what all of this is to say, anticipation isn’t necessarily a bad thing if the anticipation is anchored in legitimate trajectory for fundamentals to follow. If you need something to happen for that to hold that’s where it gets ties here. And this is where we are now which is, you need supply to be restrained collectively over the next 18 months for that big recovery markets are expecting and our pricing in at this point to play out.

Breanne Dougherty:
I guess you flag at that Saudi put is critical in that.

Karim Fawaz:
Yeah.

Breanne Dougherty:
At least right now.

Karim Fawaz:
It is because it’s important in the sense that what the Saudi put does is, it adds a layer of deterrence on the short side effectively because it, it shows you that there is a large producer in the market willing to do what it takes to scare away and to deter any risk kind of short appetite picking back up if fundamental start to weaken. So, you have that intent and the Saudi Oil Minister, Abdulaziz bin Salman has been quite clear and how he fashions himself which is “ala Greenspan” in his own words so you can take that lightly.

But at the end of the of the way, he sees his role in managing the market is basically keeping speculators on their toes, keeping the markets on edge and one way they try to do that is this unilateral cult which was a surprise and not expected by the market at all. And that’s the type of tool, we will continue using, I think over the next couple of years as they try to push prices higher.

I think the bottom line is also from Saudi Arabia that they do what they want higher prices. So, most of last year was really dealing with the crisis and the demand crisis, the COVID crisis. Now, as we’re looking ahead, they’re starting to shift their priorities back to where they were before the COVID crisis hit, which is, they need higher prices as soon as possible and they’re going to do whatever they have to do to try to make that happen.

Hill Vaden:
The shale sector has been so disrupted and paralyzed that the higher prices were going to not necessarily bait a bunch of rigs back to action?

Karim Fawaz:
That’s one of the bets. So, one of the bets is that the demand recovery holds, which obviously you can say with certainty at this point. There’s more certainty now than there was six months ago, with the vaccines rolling out. But you never know just how fast the global economy and the global demand is going to come back.

The second as you said is, that supply, now that prices have moved into the mid-fifties to mid-sixties range, don’t react strongly and that the US not just because it’s gone through so much but also because of the pressures that shareholders are putting on companies to divest through a kind of shift capital away from growth CapEx budgets and towards returns lowers the elasticity of supply on the upside. And basically, the bet they’re making is that, even as prices rise into this higher range, US supply growth will remain within a manageable range for them from a physical standpoint.

There’s a third bet they’re making which we haven’t really talked about, we talked about in the past before the Biden election. I remember when we were on which was, this Iran, this potential Iran return. And that’s the third bet they’re making, which is that the return of Iran over the next couple of years. If it does happen, we’ll be slow and gradual and it won’t be a sudden gush that dumps two million barrels a day into the market and kind of floods everything.

So, that’s a lot of bets, obviously, there’s a lot of that’s a lot of exogenous factors that really, they don’t control, they don’t control any of them or [Overlapping Conversation] [00:13:25] somewhat. And in the past these types of bets haven’t worked out, great. The only difference though, the advantage they have this time around or at least in 2021 and less so slack next year is that, demand will be recovering a lot. Obviously, you’re coming out of a very deep crisis. So, sequentially you will have room in the market to absorb incremental supply even in a messier way probably than they would have liked. But you are seeing, you know, five, six, seven million barrels a day, potentially of higher demand over the next 12 to 16 months. That’s going to help absorb a lot of that slack.

Breanne Dougherty:
Well, it’s interesting because Hill and I had a conversation recently with Michael and Brian and for podcast listeners that would have been I think the last episode. Where, we talked about -- hard to keep track at this point. Where we talked about how there has been a rush, obviously, back into the energy space as oil prices going up, right? And equities have surged alongside oil price.

Did this surprise us because I mean, in general, the last two years, I guess, the conversation is centered around you know, definancialization of oil markets and that there’s been a redirection of traditional market participants away from oil and gas and back to maybe towards renewables and things of that. It’s not that we haven’t seen flows into renewables, we definitely have seen that. But what do you think the last month has taught us with respect to that trend?

Karim Fawaz:
No, I mean, I think it’s been interesting because it shows you again and again and we’ve seen it time and time again, after every downturn, you have the same thing happened in different ways which is, you have as the market crashes, this kind of early believe that money is flowing out of the sector, it might never come back in. This is a long term sent downtrend we saw it in the early years of the 2014, ‘15 downturn.

At a certain point, the psychology shifts and when it does and it shifted in 2016, 2017, money came flowing back in a big way. You had this super, this first, I would say the first super cycle narrative come out, the loss of investment on the supply side is going to set up, you know, a super cycle for commodity prices. It didn’t really play out the first time around but you’ve seen that come back into play here again, since last fall.

I think all of this goes to show again, at least to me, is you know oil at the end of the day has become beyond strictly a physical market and a very deep physical market and large fungible market across the globe is that, it’s still one of the most important, if not the most important, kind of financialize commodity markets out there. It’s a financial asset. And as a result of that, it has some of the features, a cyclical feature that make it attractive during these types of shifts in the paper mark, in the financial environment. And you’ve seen that pretty quickly happened on the commodity side.

And as you said, also on the equity side, you’ve seen that reflection play out. Part of it is hopeful, it’s always this hope that we -- the worst the crisis is, so basically that’s the kind of blessing of the curse. And the curse of the oil market which is, the deeper the crisis is the more optimistic we are and markets become that eventually, on the other side of it is going to be very constructive.

I think that’s where some of the changes that have happened in the oil market over the past few years are interesting to think about because the premise behind that thinking historically has always been that, it’s a cyclical market and eventually, you will come back to scarcity of supply and you need to incentivize more supply from more expensive places which will justify higher prices et cetera, etcetera. So structurally, oversupply is temporary, scarcity is permanent.

Once, Shale came into the equation, once speak demand became a part of the conversation, a lot of those elements as you think about oil beyond the next two years have changed. And the interesting part is, from a financial standpoint what we’ve seen over the past few months as a sign of that hasn’t really kind of matched that shift that we’ve seen from a physical and structural standpoint. So, it’s interesting to think about, at least to me, at what point does that reckoning happen is that, how many of these false restarts where markets get excited, hope for that big super cycle that doesn’t play out the way they expect supply response. How many of these you have to go through before you start to have a reckoning of, perhaps, this whole technical narrative just isn’t holding anymore.

Hill Vaden:
So, I mean, looking forward are we expecting some degree of calmness? Is there some expectations of, like range bound prices that operators can kind of make decisions with some level of confidence or are we expecting volatility?

Karim Fawaz:
I mean, in the next couple of years we do expect some, at least, based in our base case forecast, we do expect some level of stability here to, in this $55 to $65 a barrel price range. I think we’re in that price range, you end up will ultimately depend on some of the things we talked about earlier. How fast Iran comes back? How much the US response? And how Saudi Arabia can manage the physical market and manage its relationship with Russia and the OPEC closed group?

So, a lot of these supply side factors will determine on what end of that band you’re on. But you have transitioned, I think, pretty steadily here. As demand recovers, you should sustainably be out of that post COVID ban that we were stuck in for most of last year which was in the mid to low forties and into that higher price range.

I think the biggest debate now on the market is whether that 60 to 65 upper end, progressively becomes 70 plus as you get into the medium term 2023 onwards. Are you heading into a structural tightening path or a super cycle type environment as you look into the medium term? I think, we at least on our side, we still feel that it’s very premature to be calling for it. I think, the elements that I was referring to a minute ago, on the reactivity of supply and the slowdown in demand are still big drags on that super cycle narrative to materialize.

Hill Vaden:
And to me, reactivity, that would be the reactivity based on existing projects and, or title oil, because expiration is more or less.

Karim Fawaz:
All right. So if you think about the Cap -- I mean, obviously you can’t deny that the exploration portion of the E&P. If you want CapEx is getting cut very heavily, it’s where a lot of the deepest cuts are happening. I think hunting for new resources at the frontier is that much lower rate than it has been at any time in the recent past. I think the problem that, well not the problem for the market but from a cyclical standpoint we think about from a super cycle discussion you’re not short resources.

So, unlike where you were in the early 2000s, in the early 2000s you’re coming into that decade with accelerating demand and a lack of resources in the cover. So, you have to incentivize, companies to go out further field either at the technological frontier, you know, Shale, deep water, ultra deep water or places like the Arctic or pre-salt et cetera to find new resources.

We’re not in that type of environment from the supply side, right? I mean, we have enough resources in the US. We have on the onshore side, we know where the wells are, where the place are, obviously we have a capital allocation and capital cash balancing issue at how to develop these resources effectively but you don’t have a lack of molecules in the US.

And in the global side, you have a lot of projects still on the drawing board they’re pretty far along that can be sanctioned in the next few years. The vast majority of them break even below $60 a barrel brand. It’s now the exception rather than the rule that breaks even above that level.

So, it’s really less a question about economics or resource as much as a question about company behavior and that’s where it gets a lot trickier. It’s how these companies, these operators be it on the US side behave in terms of revenues versus, returns versus growth. And on the international side in terms of portfolio decisions, you know, do you sanction these 10 projects or do sanctioned five projects and the cash that you were going to devote to those extra five projects go to power renewables or dividends whatever it is.

So, I think that’s going to be where a lot of the discussion is going to happen in the next few years, not as much on do we have the resources to meet the demand need but more how does the companies deal with the carbon constraint from a peak demand. And from an Energy Transition standpoint and the capital constraint from a shareholder pressure monetized now, we don’t want you to be investing in 15 year projects. We would rather you give us back the money now.

I think those are the two big challenges for companies as they think about the next few years. But in terms of projects and US supply, I think the subsurface is there. It’s just a matter of all the companies develop it and to bring it back to the talk about super cycle a bit earlier, what I meant by reactivity of US is -- and Breanne, you know this well as we’ve talked about it quite a few times in the past few weeks.

As prices increase the trade off in the US becomes a lot easier for companies. So, whereas in the mid-50s there is a real tradeoff between growing production and returning cash to shareholders as you get into the $65, $70 range, it becomes a lot easier for companies to do both and by do both it’s easy to slip from instead of returning 30% to shareholders are returned 20% to shareholders. And instead of growing $500,000 barrels a day, here the US has grow a million one.

And as we model the US, it’s very easy for that shift happen with relatively small increments in prices just because that’s how sensitive the system is overall and how magnified small increments in prices become in terms of incremental cash flow. So, as prices rise, we think that elasticity of US supply is lower than it was, you know, in 2016, ‘17, ‘18 but it’s still there and that’s still the structural dragged I think on prices as you come out of this post-COVID, you know, period in 2021 and 2022.

Breanne Dougherty:
You’re right and it’s definitely there above $60. I mean, it did definitely not there, you know, between 45 and 55. But definitely as you rise above $60. So, reinforces what you’re saying there about really being range bound. What I find interesting, if we talk about like, let’s and maybe this is, you know, it’s not philosophical but it’s headed in that direction so prep yourself guys.

So, if we think about where oil markets are going, if I’m seeing things such as a range bound because of the physical nature of the market or what we’re seeing in the physical side of the market that things are pretty range bound. Well, that’s great for the physical market, right? Allows for a good investment or the investment that needs to happen we can all live in this range bound but let’s be honest paper markets don’t love range bound, right?

Karim Fawaz:
Yes.

Breanne Dougherty:
Well, they tend to like volatility, right? And then we have this against a backdrop of the general migration out of oil and gas. I mean, are we potentially going to move into a world where oil liquidity goes down relative to where we are right now? Or are we just so liquid that even a slight pullback in that isn’t making an impact?

Karim Fawaz:
I think it’s a great question, I don’t, I mean we haven’t seen it obviously even the past 6 years which have been pretty bad if you look at it on a price chart. I mean, you’ve had the volatilities. So, volatilities will keep some speculative appetite in there. I think in terms of overall paper markets interest, I don’t think all parts of the paper market behave or want the same thing.

There’s a significant part of the paper market investment exposure in oil currently that’s made up of entities that are in oil not because they care necessarily about oil itself but because they see correlations between oil. And other financial markets beat currencies, gold other commodities, as it’s used as a hedge, it’s used as a hedge against currency for specific countries that are big producers of oil et cetera. In that environment it’s, some range bound trading could be helpful.

In terms of does it reverse, does it become boring or not, you know, not attractive as long term investment. I think, it’s interesting because the way I think about it always is, we think about always financialization as a mid-2000s really phenomenon early 2000s. But if you think about it, I mean, a lot of the benchmarks, the paper markets for both Brent and WTI were established much earlier than that. It was in the late 80s or early 90s.

But for a decade between, you know, late 80s and early 2000s really went nowhere. It didn’t have a lot of attention, a lot of money flowing in. The reason was we were stuck in an oversupplied or structurally over capacity oil market for a decade and it just didn’t attract a lot of money into it. What really acted as the catalyst on the upside was that whole mid 2000 super cycle narrative and that long term belief, I was talking about earlier that you’re scarce and eventually prices will start rising because there’s a slow elasticity of supply and a high elasticity of demand to economic growth.

So, if economic growth is higher, you’ll demand more oil. Supply can’t respond fast enough which will require more and more supply from further away and more expensive barrels in turn justifying higher oil prices. I think that whole physical dynamic that’s behind the scarcity narrative and the financialization narrative behind oil. And its correlation effectively to a lot of the macro indicators which is correlated is changing, I don’t know how long it will take for that to permeate into psychology and behavior of diversified investors that don’t care about oil for oil sake or short term prices sake, but I think it is a risk.

The reason why I’m also skeptical of that really happening in a big way is once these, we haven’t seen the financialization at a scale, we’re talking about here really ever. I mean, it’s very difficult to reverse course liquidity, breeds liquidity. So, the fact that a lot of people are in oil will continue to make it a viable currency and risk on asset. So, it’s hard to see just what would be the trigger. I think some triggers can be, if you do have a liquidity issue similar to what we had in the WTI market last year, where you do have that type of breakdown that shakes the markets faith and the ability of the benchmark to be stable as long term investment.

I think that’s the type of thing that can affect interest in investing in it. But I think outside of that it’s hard, it’s really hard to move this big market over a short period of time. So, it’s going to take a long time. But I think if you do enter this peak demand environment in the longer term, the reservists that open interest progressively unwinds and unwinds and you’re left with a smaller market overall. It’s just hard to see how long it’s going to take.

Hill Vaden:
What I think, I mean, you talk about the early 2000s, one of the big differences between then and now is, you know, the rise of China what was growing so fast and demand associated with it.

Karim Fawaz:
Yes.

Hill Vaden:
Which has, you know, that’s beginning to plateau or not rising as fast at least and there’s a whole new you know, vehicle fleet that China and others relying on. So, it’s hard to look back at that as a, you know, potentially affair analog for where we are today I would think.

Karim Fawaz:
Exactly I mean, that’s a big part of our argument, why kind of any comparisons to the super cycle of the mid 2000s a bit misplaced even if you have one aspect which is similar which is the loss of investment because of low, sustained low prices for 5, 6 years. Eventually coming back to haunt you on the supply side where tightens, the market I think the demand side of the equation is dramatically different. The two things I would say there are dramatic different on the demand side.

You mentioned China accelerating obviously, the global demand was accelerated on an annual basis versus the prior decades. So, if you think about the 2000s, oil demand was growing around a million and a half barrels a day, year versus a million barrels a day year on average in the 90s. So, not just this demand growing at a healthy rate but it’s also accelerating.

You had obviously the whole psychological elements around peak oil and supply scarcity. But if you look at demand over the next couple of decades I mean, we can debate and I don’t know, I can’t remember if we discussed this last time I was on. But you can debate as long as you want where peak demand ends up being because 2027 or 2032 or 2025. But I think everyone can agree to a large extent that the rate of growth over the next two decades is going to be much slower than it was over the past two decades.

So, every year you are going to need less and less oil to be on to less and less supply to meet the incremental demand because the rate of demand growth is slowing. I think that’s the treadmill in the market is the dimension that gets lost of it in the hole which year does demand peak discussion.

The other different difference between now in the 2000s which is important also to remember is, beyond just the rate of demand growth is, well there’s one and I mean there’s a big difference. In 2000 there was remarkable instability in Iraq and other Middle East countries that has somewhat stabilized. To some extent but geopolitical risk goes hand in hand with the scarcity perception is it’s psychology that amplifies it. So, if you have supply fears, geopolitics amplifies it in a big way because you have this conviction that or short supply and the base load supply that you’re assuming in the market is volatile.

If you think about where we are now you had the attack on cupcake last year. You had Iran entirely exit the market between mid-2018 under the sanctions Venezuela collapsed, Libya collapsed. A lot of these factors have gone through without necessarily causing what probably in the 2000 would have caused the $10, $15, $20 spike, have gone through unnoticed. And that’s because psychologically, you have, the market has transitioned to this notion of the resource there. You do not need to just have prices excel significantly higher in order to unlock that supply from somewhere else. I think that’s…

Breanne Dougherty:
I think that’s the big difference, right. Because this is the difference between there really thousands I would argue that, in order to put on incremental supply back then you thought you were having to bring on large oil, sands project or have big exploration discovery. Whereas, now you have got an onshore US Shale supply source that earlier in the conversation we talked about is perpetually being told to rein it in, right.

So, you know I guess, when I think of 2000 serotype there. Well now, we are talking whether what you know as you said, you could argue which day, which year is peak demand. But I mean it’s on the horizon. And then you have got a totally shifted supply narrative in the sense that we don’t need to go out there and have the giant discovery and spend those dollars. So, you know, it is very hard, I think to make the comparisons back to that.

Karim Fawaz:
So back to what you were asking earlier that, if you’re thinking about it from a paper market standpoint, what’s the long-term investment thesis? If you’re not trading oil for oil sake on a short-term basis, what’s the long term investment thesis on the commodity side? The equity side is a completely different story. Some companies might have a value proposition whereas stable oil price in a specific range creates the conditions where they could return money on a consistent basis to shareholders and attract capital. So, I think the equity side is going to be very specific to what the companies are doing.

But from a commodity standpoint, I think if you lose that conviction that structurally on a long-term basis, you’re in a rising price environment. I think that’s where you could lose some of that speculative interest. And it’s become such a big part of the market and the financialization of oil has become such a big part of how oil price formation happens. I think that’s where it can start shift in pretty major ways.

But the problem is again going back to what I was talking about earlier. How long it takes for that to permit. Because, we’ve seen it time and time again. Optimism, you know, hope springs eternal, there’s always the next. So, now is going to be this five, seven years from now is going to be sweet spot exhaustion in the US, we haven’t explored anywhere. The Permian can’t grow anymore. Even though demand is plateauing, no one has discovered anything. Everyone is investing in offshore wind.

Breanne Dougherty:
Are they regulatory hurdles or…?

Karim Fawaz:
A regulatory hurdles or something happens in Saudi Arabia. And suddenly your 10 million barrels a day that you were taking for granted are no longer reliable sources of supply in the market. Whatever it is things can happen fast, to change that dimension. But it’s going to be the further out you go from the 2014 crash which is really, when I think about it as the start of this phenomenon. At 2018, I think is the point where psychology really shifted in a major way because it’s the point where you had that hope of a sustained recovery and the US grew two million barrels a day, on prices that were you know poultry. And by comparison, we’re in the mid-50s or low 50s even for WTI. And you had two million barrels a day in the year across in the US.

So, I think 2018 was when that psychology shifted off. If prices go up this system is now big enough and deep enough that it can rapidly overwhelm whatever physical market condition you have. And I think as you go through the next decade there is going to be more and more of that. But the longer it goes on, the more it is going to be brought into question for a lot of the diversified investor base off, you know, why am I in here.

Hill Vaden:
What, I mean as we’re thinking about you know in the next 12 months or something that the rest of the calendar year the next 11 months. You know that there is, it sounds like an expectation of relative [distorted] [00:35:22] I think then we are going to put a paper or something in the Wall Street Journal about virus alley. In terms of kind of a range bound. Virus alley by the way, it sounds like a very strange street to be walking down just for what it’s worth. But if we’re in some sort of range valley in virus alley, what is there any sort of sign post or catalysts that you’re watching, that it’s going to take us out of virus alley and on to kind of easy street or some other street that we do not want to be on.

Karim Fawaz:
I mean.

Hill Vaden:
You want to be on. You know we do not want to be on Virus Alley or any offshoot any link to the virus alley.

Breanne Dougherty:
What are those streets so good?

Karim Fawaz:
None of those are good. But I mean the sign posts are pretty clear at this stage. It’s really going to be a matter of countries lifting restrictions. And the only way that happens is by vaccination rates, getting to critical mass in different countries around the world and countries becoming comfortable enough to live most of the restrictions they have currently on life as we know it. I think it is going to take a while, I mean our expectations still is that it is going to take. It is going to be a process, but we still see that by July, August of this year you should start to see 50%, 60%, 70% of the world normalizing bit and helping demand recover.

So, I think that is going to be the big sign posts. Obviously, the problem with anticipation is that still 5/6 months away. So, for the market now we have rushed to this recovery world but you still have to sit through the next five months and watch the news flow which has not been great. Obviously, you have these rising cases demand, still not great new variants et cetera. That’s when some of these kinds of that anticipation can be shaken because, it can start to see you know further and further away. So, I think once you get to that demand recovery it is going to, you are going to be probably one of more sustainable path away from virus alley. But until you get demand really getting back close to normal. I think markets are going to have to remain jittery.

Breanne Dougherty:
And I guess rather than watching that news flow then, give yourself a break and watch the Super Bowl next weekend. Finest the Budweiser, you think that I’m sponsored, I am not. To be honest, I could really care less. But as I pointed out earlier, I don’t really have anything more to talk about [indiscernible][00:37:51]

Hill Vaden:
On the plus to the winner of the Tampa is only like now an hour and a half or something from Orlando. And so remember Joe Montana with his famous plug. If I’m going to Disney World.

Breanne Dougherty:
Somebody could actually go.

Hill Vaden:
You could just get in the car [overlapping conversation] [00:38:05]

Breanne Dougherty:
Rent out the park for his family. And then, they can go enjoy Disneyworld in a very socially distanced enjoyable manner. We will wait to see if that is what happens. All right, well, thanks again Karim for joining us. As always it is a pleasure. And you gave us plenty to think about. And of course, you’ll be back. How could we…

Karim Fawaz:
Thanks for having me.

Hill Vaden:
Well, let’s regroup. We’re probably, we can always regroup later in the spring to let us to see if that, if we’re still in virus alley or we made it out. With, if we are still with then you’re in virus ally.

Breanne Dougherty:
Oh dear. All right. It should be Karim. All right. Thanks guys.

Hill Vaden:
Thank you.

Karim Fawaz:
Thanks.

Breanne Dougherty:
Thank you everybody for joining us on this episode. Speak to you soon.

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