【The Oil Cycle Is Far From Over #6】Short-term crude oil prices are being controlled; in the long run, the gold-oil ratio will inevitably revert.

【Answer 1】 Mountain Range Summary: The Valuation Reconfiguration of Oil Majors When the long-term crude oil price center shifts upward, oil demand continues to grow, and oil companies’ cash flows and dividends become sustainable, the entire industry’s valuation logic will shift—from cyclical-stock valuation toward value-stock valuation. For years, oil stocks have been viewed as quintessential cyclical stocks, valued using a low-PE-to-buy, high-PE-to-sell logic. At cycle peaks—when oil prices soar and oil companies post explosive profits—the market deems such earnings unsustainable and assigns low PEs, typically only 8x–12x. Conversely, at cycle troughs—when oil prices collapse and corporate earnings plunge or even turn negative—PE ratios balloon, sometimes turning negative. In 2022, when oil prices breached USD 100 per barrel, ExxonMobil’s PE stood at just 11x, while the S&P 500’s overall PE was 17.6x. The market’s rationale was clear: such high oil prices were inherently unsustainable, current profits represented a cyclical peak, and thus warranted no premium valuation. But what if the oil price center isn’t merely fluctuating cyclically—but undergoing a systemic, structural upward shift? What if oil companies’ earnings cease swinging wildly—and instead sustain high profitability and generous dividends for years—even at oil prices above USD 100? This transition is already underway. By August 2026, ExxonMobil’s P/E had risen to 19x, and Chevron’s to 17.8x—levels unimaginable five years ago, when an oil stock trading above 12x was considered expensive. Oil majors have undergone profound transformation since the negative-oil-price shock of 2020. U.S. shale producers abandoned volume growth targets and redirected free cash flow toward debt reduction, dividends, and share buybacks. Giants like ExxonMobil and Chevron now deliver stable dividend yields of 4%–5%, backed by annual buyback programs worth tens of billions of dollars. For long-horizon investors, reliable cash returns have grown more attractive than tech-sector narratives. After five years of disciplined cash generation, major oil companies have significantly deleveraged—net debt ratios now commonly sit below 20%, with robust interest coverage ratios. No longer capital-hungry “money-burning machines” perpetually drilling new wells, they’ve evolved into steady “cash cows.” Meanwhile, ESG-driven narratives are receding; systemic bias against fossil-fuel industries is fading, and capital is beginning to flow back into this sector—undervalued for a full decade. In summary: Mountain Range’s long-term outlook for crude oil can be distilled as follows—short-term prices are being controlled; medium-term demand deficits will prevent sustained suppression; and long-term, the oil price center will be forced upward. Over the next one to two years, oil prices will likely remain confined within a relatively narrow range, shaped jointly by the U.S. presidential election cycle, the Fed’s rate-cutting pace, and OPEC+’s market-share competition. The U.S. will continue deploying tools—including SPR releases, diplomatic pressure on OPEC, and futures-market regulation—to curb excessive price spikes. OPEC+ will maintain production cuts to support the floor—but avoid pushing prices so high as to damage demand. Macro-oriented financial funds will continue amplifying volatility within this constrained band. During this phase, the extreme divergence in the gold-oil ratio may persist—or even widen further amid near-term recession fears. In the medium term (2028–2030), the consequences of chronic underinvestment during the low-oil-price era (since 2014) will surface: new field developments will lag, existing fields will decline faster, and U.S. shale output may begin falling.

After four consecutive days of falling oil prices, airline stocks rose 5% while energy stocks fell 3%: Which companies’ profits is the capital market reassessing?

【Answer 2】 Why do airline stocks rise 5% while energy stocks fall nearly 3% when oil prices drop? Because crude oil is revenue for oil companies—but a cost for airlines. At first glance, it’s simply a commodity price decline. Beneath the surface, however, lies a fundamental reallocation of profit across the supply chain—from upstream to downstream. On September 21, international oil prices fell for the fourth consecutive trading day. The Energy Select Sector SPDR Fund (XLE) declined ~2.88%; ExxonMobil fell 3.20%; ConocoPhillips dropped 3.26%. Meanwhile, United Airlines rose 5.22%, American Airlines gained 4.71%, and Delta Air Lines climbed 3.62%. This set of data can be interpreted on three levels. Level One: Operating Leverage of Energy Companies on Oil Prices Suppose an oil company sells 1 million barrels of crude daily at USD 105 per barrel, with an all-in cost of USD 60 per barrel—yielding ~USD 45 per barrel in operating profit. If oil prices fall to USD 100, revenue drops ~4.8%, but per-barrel profit falls from USD 45 to USD 40—a 11.1% decline. In other words, a sub-5% oil price drop can trigger over a 10% profit contraction. Real-world oil firms also bear fixed costs—depreciation, exploration, labor, pipeline transportation—that don’t fall in tandem with oil prices. Thus, the closer oil prices approach marginal cost, the more sensitive profits become to price changes. The market extrapolates this impact forward: lower profits imply reduced free cash flow, potentially constraining share buybacks, special dividends, and capital expenditures. That’s why energy stocks often price in several quarters of future earnings deterioration as soon as oil prices begin falling. Of course, the energy sector isn’t monolithic. Upstream exploration firms are most sensitive to oil prices; integrated oil majors can partially offset volatility via refining and marketing operations; refiners focus on gasoline, diesel, and jet fuel crack spreads; and oilfield service providers depend on oil companies’ capital spending plans. Hence, equating “bearish on oil” with “bearish on all energy stocks” is an oversimplification. Level Two: Airlines’ Profit Leverage on Fuel Costs Now consider a simplified airline model. Assume annual revenue of CNY 10 billion, non-fuel costs of CNY 7 billion, fuel costs of CNY 2 billion, and operating profit of CNY 1 billion. If fuel costs fall 15%, the airline saves CNY 300 million. Assuming unchanged ticket prices, load factors, and other costs, operating profit rises from CNY 1 billion to CNY 1.3 billion—a 30% increase. A mere 15% fuel-cost reduction drives a 30% profit surge—this is airlines’ inverse operating leverage. Thus, after consecutive oil-price declines, airline stock gains reflect not just “saved fuel expenses,” but rather the market’s upward revision of the company’s margin and cash-flow expectations. However, one easily overlooked detail matters: airlines consume jet fuel—not Brent or WTI crude directly. Whether falling crude prices translate into real cost relief for airlines depends on refining capacity, jet fuel crack spreads, fuel hedging contracts, and procurement price lags.

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