Oil Is The New Oil

We are approx. 2 months away from realizing you can't print energy.

Month In Review - October:

The biggest news of October by far was OPEC’s announcement that they would curtail production up to a MASSIVE 2 mmBBLs/Day in response to expected demand weakness based on recession fears.

What’s important here is not only the announced production cuts, but the message OPEC is sending to the rest of the world, in particular the USA: ‘ We will not subsidized your energy costs while you placate to ideological extremists’ (Paraphrased).

Implications for capital Markets:

Floor price for oil, $80 Crude? ($100 - $20 crack spread = $80)

This chart illustrates a key tenant of my Oil thesis: OPEC+ have effectively placed a $80 floor on Crude, (recently backstopped by the US government saying they’ll buy Arabian Crude should it fall to $75) with demand destruction appearing to be felt at a price of $180 (Crude + refining margin).

This may well be the new range for some time.

So, how do I use this to determine a valuation for WTI?

Simply subtract the typical refining margin ($20/BBL) from the ceiling, suggesting that if unimpeded, Crude could rise to $160 before significant demand destruction kicks in.

See my latest podcast with Oil expert Shubham Garg from White Tundra Investments where we discuss this very phenomenon here

As such, I am very comfortable modeling my Oil producers valuations at $80 WTI and with the futures curve still in backwardation, I think that certain Oil producers represent a generational opportunity at 30%+ FCF at $80 WTI.

Jerome Powell Breaks the bank (of England).

Making headlines was the treat of British Pension funds becoming close to insolvent on the back of margin calls. With the rising USD, UK institutions have been forced to liquidate due to their shortage of foreign reserve assets and as such the GBP has indeed copped a pounding (above). I am avoiding GBP denominated assets for now.

When a developed economy sees its currency depreciate by circa 20% in a year, it’s time to call the system into question. This is just one of many reasons why I suspect precious metals are about to have their time again.

November:

The two most important events in November are:

• The Fed meeting Nov 2nd, where they’re expect to stay the course and announce another 0.75% rate hike

• SPR release ending (supposedly). Us mid term elections should complete by the end of November, leading to a relenting of the pace of SPR release. It is noteworthy that Oil inventories have been drawing even in the face of record SPR releases and with China still under lockdown.

I expect the recipe of SPR release slowing + Russian crude coming offline + China reopening (eventually) = rapidly accelerate the draw in an already low oil inventories.

I continue to add to my oil holdings, which leads me to this month’s spotlight stock analysis.