Joel’s Resource Report – High Risk Hedging
Morning all. Given global and macro events we’ll no doubt be in for another interesting week – albeit somewhat lacking in sport.
I have no idea what the market will do although the following is a high risk investment/trade idea which I believe has large upside and could act as hedge for oil investors – buy companies that own Very Large Crude Carriers, also known as “VLCC’s” (oil tankers).
Oil production up – VLCC demand up
The Saudis have ordered their state-run oil company Saudi Aramco to increase production to the “maximum sustainable capacity” and they’re discounting it by $6 to $8 compared to benchmark pricing. They’ll be producing over 2 million extra barrels a day.
A few days ago, the UAE joined the maximum production party. Ordinarily they’d produce a maximum of 3.5 million barrels but they’ve announced that they’ll produce 4 million barrels a day.
All that oil needs to be transported and rates for VLCC’s are exploding. Saudi has in some cases paid 10 times more than the average price per day to charter the ships.
Oil price in contango – VLCC demand up
A commodity is in contago if today’s price is lower than the forward price – you can buy today and sell more expensively at a later date.
The opportunity for oil traders is clear as discussed here.
Excess oil production has to go somewhere – VLCC demand up
This scenario assumes a 10% reduction in oil demand. In 2017, road accounted for 50% and aviation for 8% of oil demand according to the OECD (Organisation for Economic Co-operation). Some planes will still be flying and people are still using cars. Countries such as Italy, France & Spain are in lockdown – oil demand must be plummeting in such conditions.
Alexander Stahel on Twitter brought the idea to my attention (@BurggrabenH).
A few companies that provide exposure as provided by A.I.C: Euronav, DHT Holdings (DHT – USA) and Teekay Tankers (TNK – USA).
I’m not suggesting investors rush out to buy shares in these – it is an idea for investors to research and a potentially interesting hedge for oil investors. The downside risk is that the oil price war collapses and VLCC rates collapse.
I don’t currently hold any of the shares listed but may have purchased some Euronav shares which owns over 80 ships by the time this article is published.
Till next week – stay safe!
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