The small caps increased spending by 75% over Q3 2020. That was the lowest spending quarter in the history of the shale in-dustry. So the current increase is impressive in percentage terms, but it is still among the lowest. Over the first nine months of the year, total spending is still down 12% for those companies. Their overall hydrocarbon output, including NGL’s and natural gas, rebounded to previous levels, although Q3 levels were slightly down on Q2. The underinvestment theme keeps coming back. And the data for the listed oil companies show that output levels remain range-bound at current spend-ing. The question is how long this plateauing of production can be maintained, when input prices are rising. If oil companies increase spending, then it will be in part to offset higher costs. In other words, they will get less bang for the buck. Yet, in the end, the oil companies are there to make money. And that is what they are doing. Also, the smaller companies. In the 63 quarters since the nominal start of shale in 2006, the small caps have delivered five quarters of positive free cash. All those are since Q3 2020. They have now reached $7 bln positive free cash over these five quarters, and the total cumulative since Q1 2006 stands at -$167 bln. It is no wonder then that capital discipline is imposed. Shirts have been lost. And the consequence is underinvestment. That is a concept that is relative to demand and should be seen in the context of affordable prices. Price will regulate matters in the end. ADNOC’s CEO suggested that some $600 bln needs to be invested annually. That has not happened since 2014. In his words, “the world has sleepwalked into a supply crunch after nearly a decade of underinvestment”. Although the decade time span is somewhat of a poetical liberty, spending is now down for its seventh year. The $600 bln target would imply spending levels seen over the period 2011-2014, when Brent averaged over $105/bbl.  Perhaps OPEC+ is targeting those levels, as the group continues to resist increasing output, despite White House threats to release oil from the SPR or use other tools to bring the price down. Despite this cap-ital spending discipline which the IEA recognises, the Agency reported on Tuesday that the US will increase production to re-reach previous peaks by end-2022 as the current oil price gives incentive to drill. OECD Industry storage levels are below the five-year average, and the Agency sees a bumpy road ahead as oil supply increases, leading to falling prices, while the high prices of natural gas and coal boost demand for oil, that “could keep the market in deficit through at least the end of the year”. In short, the market is set for volatitilty.

Economy

The debate about inflation is raging. The central banks are becoming celebrities with their numerous speeches. Transitory or not transitory. While the topic may seem remote, real wages in the US for instance were reported down 0.5% in Octo-ber. Inflation is outrunning nominal wage growth, with the latest print in the USA at 6.9%, the highest since June 1982. As it stands, the inflationary pain will last some more time. The producer price indexes are at historical highs. India’s wholesale price index for October printed 12.5% on year ago levels, well above the expected 10.9%. It takes time for producer input cost inflation to work its way through to the consumer. It is a similar process as getting oil from the well to the service station. It is not just in India that this process is underway. In the USA, the PPI final demand is upstream of the consumer price index, and it was up 8.6% in October in the USA. The PPI intermediate demand in the USA is broken down in four stages, increasing-ly further away from the consumer. These prices have jumped 20-28% in October. They will get to the end-consumer at some point. Politicians see the link between oil prices and inflation and voter happiness. The US Senate majority leader called on the US President to release strategic reserves. The central banks and politicians may find themselves cornered in the wake of years of underinvestment. Rosneft suggests that a super-cycle has started, ENI expects that $100/bbl oil will lead to demand destruction. High prices are needed to bring about supply relief for de-mand. High prices lead to inflation. Inflation leads to unhappy consumers and vot-ers. Wage rises lead to stagflation and so the central banks are against that. Wage stagnation leads to exhausted purchasing power. Fighting inflation means higher in-terest rates, which leads to squeezed household budgets. And very likely also low-er financial markets as well as lower commodity prices.