Energy Musings - November 3, 2025
Oil prices are down in anticipation of a looming supply glut. Other industry factors besides supply/demand drive oil cycles. They may be signaling that we are close to starting a new oil up-cycle.
Is A New Oil Up-Cycle Beginning?
On Wall Street, you learn that conventional wisdom is often wrong, which is why investors are always shocked when stock prices do the opposite of what was expected. With 55 years of experience in the financial side of the energy business, we have witnessed numerous instances where the future took a different course than expected.
A chart from The Crude Chronicles, tracking inflation-adjusted oil prices since the Civil War (when the U.S. oil industry began), shows six distinct industry cycles. In the industry’s infancy, prices were high and volatile. That was because demand was primarily for lighting and medicine, limited markets. Pricing was volatile because the industry was regional. The discovery of additional fields and the rise of Standard Oil led to lower oil prices and greater price stability, which was facilitated by the development of a national market.
The six major cycles of the global oil industry.
Changes in macroeconomic and geopolitical events mark each of the six identified cycles. We were born in the latter years of The War Years cycle, so we have lived through the last three industry cycles. Our energy career began a few years before the trough of the oil industry’s Golden Age. When you are actively involved in an industry, it is challenging to step back and grasp the cycle’s perspective and the conditions that shape it. We are too busy focusing on the business moves needed to prosper—or maybe survive—over the next few years.
The times that come closest to stepping back are when making long-term capital investment decisions. However, not all industry macro data is available to help understand where the industry is in the cycle. For example, understanding the relationship between industry well productivity and development costs is key to understanding the cycle. This is more important for explaining the collective actions of exploration and development companies than obsessing about global oil and supply balances.
Well productivity and development costs go in cycles.
In the chart above, we see the cyclicality of well productivity. The cycle becomes clearer when annual data are averaged over a longer time period. In this case, The Crude Chronicles used a three-year average to generate the well productivity chart. This smoothing eliminates the impact of changes in producing basins driven by non-geological factors.
The chart also shows the cyclicality of well development costs, especially when expressed in constant dollars. The history of the oil industry easily explains this cyclicality. The highly productive fields of the early 1900s, which had powered the industry’s early growth, began to decline, forcing the industry to explore less productive basins, which in turn led to higher development costs. Once these new fields were online, productivity increased, and the pressure to conduct more exploration and development was reduced, resulting in lower costs.
The cyclical relationship was even clearer after the host countries reclaimed the vast Middle East oil concessions. This forced the Seven Sisters oil companies to seek alternative supplies, necessitating increased development spending and the exploration of less productive fields. A similar pattern emerged in the 2000s, when China’s demand for oil prompted the industry to seek even greater supply. A significant portion came from the oil shale revolution in the United States. Initially, these wells were expensive to drill and complete; moreover, the industry needed to build massive new infrastructure to handle the increased output, which pushed up development costs.
Currently, the industry believes that well productivity is declining due to the aging of shale oil wells, and that the industry will need to spend significantly more in the future to sustain and increase production, resulting in higher development costs. Underlying these concerns are multiple assessments. The International Energy Agency projects that more oil will be needed in 2050 than is currently being consumed. Given the accelerating decline rates of oil and gas wells, the IEA states that the industry needs to invest $540 billion annually in exploration to maintain current output by 2050. This is about three-quarters of what OPEC Secretary General Haitham Al Ghais said the industry must invest to meet the 23% increase in primary energy demand his organization predicts by 2050.
The need for a greater oil supply in the future underlies the long-term positive story for energy companies. However, in the near term, fears about oil oversupply in an economy believed to be limping rather than soaring have forecasters calling for lower oil prices this winter and through 2026. This oil glut is exemplified by a chart showing the acceleration in oil supply growth predicted by the U.S. Energy Information Administration in its latest Short-Term Energy Outlook.
The well-forecasted oil supply glut.
As can be seen, at the start of 2025, the EIA predicted that oil inventories in OECD countries (the Western developed economies) would rise at a rate of 3% this winter. Now it shows a rate of increase of 9%. Such a high rate has not been experienced since the 2020 COVID and 2015 OPEC vs. Shales battle. Both events led to sharp drops in oil prices, including a brief plunge into negative territory in 2020.
The supply question is front and center as the OPEC meeting over the weekend aims to decide how much of its idle oil supply may be returned to the market. Predictions are that the group will agree to add 137,000 barrels a day back into the supply. However, virtually all OPEC producers, except Saudi Arabia and the United Arab Emirates, are at their capacity. Therefore, the belief is that only about half the target number will actually reach the market, which would ease the supply growth.
Two key questions are exactly how much capacity OPEC producers currently have and how it might be declining due to age. That is why OPEC reportedly hired consultants to verify national capacity figures independently. These figures have been self-reported by OPEC members, making it politically challenging to gauge supply additions.
Additionally, there is the issue of how aggressively the U.S. enforces its sanctions on Russia and its two largest oil companies. Russia has not been pushing OPEC+ to increase exports, suggesting it is having challenges increasing its production, given the attacks on the nation’s oil infrastructure by Ukraine. Russia lacks much storage capacity, so as its refineries have been damaged, production may be choked off by logistical issues that cannot be quickly resolved.
A new report published by Carnegie Politika by Sergey Vakulenko suggests that U.S. sanctions are designed to send a message to Vladimir Putin about his actions related to the Ukrainian ceasefire, rather than remove huge oil volumes from the market. China and India seem unlikely to cease buying Russian oil, but that remains to be seen. However, the report suggests that the outcome of the sanctions will be to remove upwards of 700,000 barrels per day from the global market, thereby tightening the supply-demand balance somewhat.
In analyzing the oil industry cycles, The Crude Chronicles presented an interesting chart showing that commodities have moved in tandem for centuries. To mitigate the volatility commonly experienced by commodities due to economic and natural events, the chart utilizes a 10-year moving average for the year-over-year percentage changes. This smoothing still allows the long-term trends in commodity markets to emerge.
Commodity prices reflect their role in economic activity.
The tendency of commodity prices to move in unison is a reflection of their role in promoting overall economic growth. Therefore, the fact that most commodity prices have been rising together in recent years, since the end of the pandemic in 2020, demonstrates how economic growth has pressured commodity producers to increase their supply, which in turn requires higher prices.
Although oil prices have been weak recently, it would not be surprising for them to rebound, especially if sanctions and physical damage from Ukrainian attacks limit Russian supply. We could find that the global oil supply is much tighter than many people believe.
Another intriguing clue about future oil prices can be found by examining the history of oil prices and total production costs. As the chart below shows, the ratio of the current oil price to production costs is at the bottom of the historical range of the average, plus or minus 1.5 standard deviations. As history shows, the only times this ratio has fallen below the low end of the range were during periods of significant economic or geopolitical events. That does not mean we cannot experience such an event, but the odds favor the next sustained move in the relationship being upwards, suggesting higher oil prices.
Amazing stability between oil prices and production costs.
Again, The Crude Chronicles utilized the oil price-to-total production cost ratio to develop an oil price forecast. It is pictured in the chart below. We are not endorsing the price forecast, but merely presenting it to show that if future trends follow historical patterns, oil prices are likely to rise rather than fall significantly.
Rising production costs are expected to drive up oil prices.
Arjun Murti, the former Goldman Sachs oil analyst famous for having called the industry Super Cycle of the early 2000s, has recently discussed his view that the oil industry cycle is closer to or at the bottom of the latest mini-cycle. This suggests to him that the next move for oil and oil equity prices will be upward. Murti is now a partner at Veriten LLC, an energy research, investing, and strategy firm, and a Senior Advisor at Warburg Pincus, a global private equity firm. He continues to publish his Substack newsletter, Super Spiked, and sits on the board of directors of two oil companies and several energy institutes.
In his recent presentation on the oil industry’s mini-cycle, Murti presented two key charts. The first shows the relationship between real WTI oil prices and the industry’s cash return on gross capital invested (CROCI), Murti’s preferred metric for measuring the industry’s financial performance. What is seen is that the industry’s current profitability (within a purple circle) is below the five-year rolling average. When quizzed on why Murti didn’t believe the current profitability wasn’t mid-cycle, rather than the bottom, like in 2016 and 2020, he noted that the dramatic decline in 2015, when oil prices fell from over $100 a barrel to $50, had devastated the industry. However, it wasn’t until the 2020 bottom due to the pandemic and negative oil prices that investors demanded that managements embrace financial discipline that favored debt repayment over re-investment in exploration and development that failed to meet company cost of capital thresholds, with the balance of cash returns being returned to shareholders in the form of dividends and stock buybacks. Therefore, Murti believes the 2025 profitability is more in line with those mini-cycle lows during 1998-2009.
Oil industry profitability is in line with past mini-cycles.
The other chart Murti emphasized was that the relationship between the market weighting within the Standard & Poor’s 500 Index and the earnings weight was out of alignment. He highlighted numerous times when the relationship diverged. In each case, the relationships were reestablished. That does not mean that the earnings contribution will not return to the market weight. However, if the cycle is on the verge of an upturn in profitability, the market weight will likely rise to meet the earnings weight.
Oil company earnings are not adequately reflected in the stock market.
Finally, to further understand another factor, besides oil supply and demand, that influences oil prices, we should consider the economy’s position within the credit cycle. The Crude Chronicles compiled the following chart, which illustrates the long history of changes in global money supply in relation to changes in oil prices. The right-hand side shows the chart from 2019 to now, with the change in money supply lagged by six months. In other words, it takes six months for expansions or contractions in money supply to impact economic activity, oil demand, and oil prices. Most major economies are easing their monetary policies, which means more M2 is available and is likely to increase in the foreseeable future. Therefore, current conditions suggest that oil prices are likely to rise in the foreseeable future.
Easy credit has expanded the money supply and increased economic activity.
We have presented these charts to help readers understand that the oil industry experiences both long-term and short-term cycles. That reality is often lost on people because of the significant volatility, noise, and speculation surrounding the industry and its future. The media focuses on the extreme conditions the industry may experience – soaring oil prices, booming activity, and oil gluts, to name a few.
The history of industry cycles and what drives them is often forgotten, although it can be a valuable way to remain grounded during periods of substantial industry turmoil. Those of us who have lived and worked through many of these cycles should periodically step back and help ourselves and others to understand the ups and downs of the oil industry. These cycles are one reason why this industry has had so many “characters” and “legends” – individuals who have mastered cycles and amassed fortunes, or were colorful while losing them. We have been fortunate to have met and talked with many of them over the years. The one given about the oil industry is that it is always interesting.