Joel’s Resource Report – Getting Trumped
(The Midcap Report is back tomorrow. In the meantime, here are some comments from Joel on recent action in the oil space.)
A few weeks ago I wrote that I’d started to buy oil shipping tanker shares.
The idea is that far too much oil is being produced and that it has to go somewhere – first land storage, and then onto ships. The demand for ships will therefore shoot up.
This appeared to be proven correct as day rates were about 10x as profitable as normal and there was a highly profitable contango trade available for oil traders – if they could store it.
Given my increasing conviction about the idea, I’d invested more than 15% of my portfolio in it, before scaling back the position slightly.
Then on Friday, tweets by President Trump caused the largest intraday oil price spike in history. The tweets are as follows:
This caused the prices for tanker shares to dump about as fast as oil producing shares were going up. Some of the tanker companies were down as much as 25% intra-day.
As my positions were tanking (pun intended), I realised that I was massively over-exposed to tankers – instead of being able to calmly add a few more tanker shares on the dip, I felt sick. Being overexposed is great when a position is going your way – when its not, you very quickly learn your risk tolerance and conviction.
Being able to sleep at night comfortably with your positions is worth more than money. I therefore took the difficult decision to more than halve my exposure. Having been stung from over-exposure in both RockRose and tankers, hopefully I’ve learnt my lesson!
The thesis that oil storage appears to be running out continues to be reported upon.
Oil price – further developments
Late last week, there was news that an emergency OPEC+ meeting would be held on Monday (today).
That meeting has now been cancelled until later in the week after Saudi Arabia claimed Putin had blamed Saudi for the OPEC+ failure.
Saudi Arabia and Russia look increasingly unlikely to cut in the absence of global co-operation.
If I were Russia/Saudi Arabia, I would say to Trump – “Mr Trump we’re very willing to cut our production by the amount you and other G20 nations do.”
Ironically, OPEC+ is currently doing what the US has always argued for – allow the market to determine oil prices.
Meanwhile, Trump wants to protect US jobs and is now considering Tariffs on oil coming into the United States.
Given that the US is a net exporter of oil, this is unlikely to make a dramatic difference to prices. It does however mean that Russia/Saudi Arabia are even less likely to co-operate with the US on oil.
You can hear Trump’s latest statement on OPEC+ cuts here:
VIDEO: Just when I thought it couldn’t get any weirder, it just did. Trump: “Look, I had been against OPEC all my life; because what is it? It’s illegal, you can call it a cartel, a monopoly […] I could care less about OPEC” | #OOTT #OilPriceWar pic.twitter.com/f2yEcTZuxD
— Javier Blas (@JavierBlas) April 4, 2020
Trump needs to support the US Shale Industry – it fits with his theme of supporting American jobs, and he wants to win another election – how exactly he goes about supporting US shale will be interesting to see.
He states that the oil price war is bad for Saudi Arabia and Russia – I’m not sure I agree with this statement. The low oil price does means that many oil & gas companies will go bust, limiting supply naturally.
After 3, 6, 12 months etc OPEC+ could have taken substantial market share and starved the sector of capital – all of which would allow prices to return to the stratosphere within three years time. They would then more than recoup their current losses.
For now I suspect the oil price will continue to be ultra-volatile although market participants may start to take Trump’s words with a pinch of salt.
Till next week!