In a nutshell, the bull case is that the current cycle will be different. Moreover, the growth of renewable energy challenges the long-term future of oil exploration and production companies. The bears see the current cycle as inevitably playing out similarly. Furthermore, I've included a chart of the global oil rig count to show how investment in supply tends to ramp up in response to rising prices the 2010-20215 period is a great example. The chart below shows how these cycles play out regarding oil, metals, and minerals prices. One year, demand is soaring, prices are soaring, and the industry is struggling to keep up the following year, even a slight drop in demand produces a steep fall.Īn example of this cyclicality comes from the price of oil dropping to around $19 a barrel at the height of the lockdowns in the spring of 2020 and rising to over $100 a barrel in 2022. That's why specific commodity prices tend to be highly volatile and cyclical. In typical cycles, high prices induce investment in supply expansion (in this case in oil and industrial metals like copper), which leads to overcapacity when end demand starts to wane with slowing economic growth. It boils down to supply and demand considerations. For example, in the current downturn, there's a raging debate over just where economically sensitive commodity prices are heading - the resolution of which either makes stocks like heavy equipment maker Caterpillar ( CAT -1.65%), oil services provider Baker Hughes ( BKR -2.18%), and copper miner Freeport-McMoRan ( FCX -1.51%) raging buys or stocks to avoid. However, each cycle is also different, with its own set of nuances and areas of possible investment. Every economic cycle is the same: growth, slowdown, decline, growth, slowdown, decline, etc.
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