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12 mars 2016

Selling oil, waiting for abundance

Executive Summary

A quick (and simplified) overview of the oil price development, including Iran ramping its production, Saudi-Arabia refusing to cut production, overflowing storage and the risk of rogue contango.

What I'm doing about it, i.e., my personal investments - tactical and strategical.

And some ducks... (and doomsday scenarios). And DIKs

walks talks looks like a duck

Readability: Including the summary, and this, it's a fairly quick and easy read at 2011 words (10 minutes) and an F-K US school grade score of 10.


The table below shows my (simplified) view of the oil situation. I assume you are a grown up that understands it's not the complete picture. I also assume you understand I'm not recommending anything. It's all just entertainment. Disclaimer here.


To the left are variables supporting higher oil prices

To the right are variables that could cause significantly lower prices again; possibly new lows

Broken oil producer budgets Iran ramping production
Storage situation exaggerated Saudi-Arabia wants shale out
Price momentum Marginal storage left for futures arbitrage
Potential production cut Recession is coming, lower demand*
Capex cuts Dead cat short squeeze bounce ending
Strategic bombing = prod cuts (renewables - long term)
I'm selling oil :)  

*incl China

It's all Bernanke's fault, just as everything else

The story so far: low interest rates and QE drove higher oil prices as well as heavy (mal-)investments* in shale production. (*investments that only made sense in ZIRP La-La land).

Once enough new capacity was in place (it took a few years to complete the malinvestment projects), sub-par economic growth (and thus lower demand) contributed to storage all but overflowing and consequently a sharp drop in oil price.


They key is OPEC and shale budgets

Saudi-Arabia, Kuwait and UAE have exacerbated the situation by increasing production in an attempt to fix their broken budgets (they need to sell more at lower prices) while crushing the shale industry at the same time.


Oil prices have jumped on hopes alone

Very recently, the oil price has bounced by more than 40%, due to short covering and speculation amid hopes of an OPEC production cut. Several countries, including Russia and Nigeria happily fuel such speculation (to mitigate their budget deficits).


Productions cuts are highly unlikely

In the real world, however, Iran is looking to ramp its production back to "normal". Before that is accomplished, there is very little chance of any production cuts anywhere. This will take some time.

My guess is that oil speculators will be sorely disappointed when production cuts meetings are postponed or cancelled, while storage inches closer and closer to full capacity.


The storage crisis haven't even begun

Nota Bene that storage isn't full yet; that the storage crisis haven't even begun. Also note that Iran is just starting to ramp, they aren't actually producing more yet... It will probably take several more months to reach absolute full capacity in storage facilities, and several quarters or more for Iran to reach normal production levels.


Without arbitrage, exploding contango could obliterate ETFs

When there is no more room for front end/next month futures contract arbitrage, through temporary storage (when back yard containers of barrels are full, as well as tankers and ordinary storage), there could and should be a devastating price plunge in the front end contract. The resulting massive contango (Next month's price less this month's price; which could be repeated month after month) will erode any investment based on rolling oil futures forward, e.g., through an ETF like USO or Olja S.


Just knowing about it doesn't fix it - that takes time

This situation could go on for several quarters, maybe a year... or more, while Iran is increasing its production and OPEC is falling short of promises of production cuts again and again, perhaps most notably at the supposed meeting on March 20.


I'm selling

Due to the reasons stated above, I have sold my Brent ETF (Olja S) as well as the oil junior ShaMaran (which is still waiting for its "first oil" and has some cash flow problems, but trades at what might turn out to be just 1x P/E a few years hence).

I've also sold some but not all of my DNO shares. DNO could be a strong Buy for the coming 3 years, but there is a definite risk of a deep downturn before that, even if the company doesn't have the same financial problems as ShaMaran.

DNO is probably a much better bet already at current prices than any oil futures ETF or derivative.


Don't short what should eventually double

I won't go short though. And I'm actually not that confident in cancelling my longs either. The reason is that a sustainable oil price probably is somewhere between 60-100 USD per barrel for the coming few years (rather than the current $40), once the current storage crisis is sorted out. In between however, the front end contract could easily fall back to 30 and even below 20 USD/barrel. 

In any case, I'm expecting a quite prolonged storage crisis, up until Iran is content, shale is dead, and Saudi-Arabia, Kuwait and UAE can agree on the necessary cuts. I plan to buy more DNO, ShaMaran and USO long before that of course, but only when Iran has ramped significantly or we've hit new lows for oil, oil companies and the stock market in general. This might happen already this April,or as late as April 2017.

We'll see. I'm not sticking around for the downturn, except maybe with a marginal position in DNO.



If it walks like a duck, talks like a duck and looks like a duck, it probably is a duck. 

Oil prices pass the duck test of a recovery: unsustainably low prices, rising, breaking key levels, talks of production cuts...

On the other hand, so do storage problems (which pointy in the opposite direction): almost full, meaning the real problems haven't even started, Iran not backing off, neither is Russia or Saudi-Arabia. Shale still lingers as the walking dead.

Another walking, talking, living, sitting duck is the economy. Most pundits talk of low risk of recession. However, a select few, very mart people, point to a combination of factors: duck tail, duck beak, duck feet, duck feathers, duck calling sound etc., all clearly pointing toward there being a recession duck swimming around in plain sight.

I'm squarely in the "dead cat bounce" camp regarding the oil price and stock market, and in the "given these variables, including the stock market there is almost invariably a recession" group of people.

One caveat though: In 2009-2012 I used to say "this won't be too bad if we normalized rates to 4% and some other things". Now I'm leaning more and more toward "we are beyond thinking about investments, and more about defending civilized life as we know it". I'm sure many more make the same assessment, including policy makers.


There is no turning back from full retard central bank policies

That means the powers that be truly will do "whatever it takes" (as Draghi's Full Retard Threat went back in 2012) for as long as they can, thus making the final crash even worse.

As time passes and policy makers venture further and further into retarded measures, I'm becoming less and less certain of my forecast of a "pretty bad but not catastrophical outcome quite soon". Instead I see increasing risk of a blowout on the upside followed by something on the downside we haven't seen since the 1920's crisis in Germany and the Great Depression in the U.S. in the 1930's. 

The best long term outcome would be a normalization of stock markets, interest rates and debt burdens as soon as possible. There actually are some promising signs in that direction. But then again, there is Draghi (ECB), Ingves (Sweden) and Kuroda (Japan) trying to get into the history books with a particularly toxic variation to the Rio Spread Theme*. Maybe war is the only "solution" after all.

*The Rio Spread means taking a huge bet in the market and going to Rio for unlimited celebration. If it works out, it works out. If not, you stay there. The DIKs (to which Mark Carney of the BOE is very close to being added) will either miraculously save the economy, or (much more likely) ruin it completely. Either way, they will get their place in the history books.

I think the ECB reaction was quite expected (except the rebound afterward). The Fed is more important though. My guess is we'll get the exact same reaction after the FOMC meeting (except the rebound) as after ECB, i.e., reflexive buying followed by heavy selling.


How an economy grows

Saving enables investments which lead to better tools and infrastructure and thus increased productivity and falling production costs and selling prices.

Falling prices typically lead to increased consumption, but if it doesn't, it means more room for even higher savings and investments and higher growth. 

Somehow many economists have misunderstood this completely and think that lower prices (like spring sale, summer sale, Christmas sale etc.) mean less consumption. And even if it does, what's bad with that? Nothing! people will buy what they want and need, no matter the direction of prices. And if they were to limit their purchases somewhat that only means more saving and room for investments and even higher growth.

So, saving=>investment=>low prices and high growth=>both increased consumption and investment and thus even higher growth in a virtuous cycle.

Most economists want higher prices, which lead to less room for consumption and investments and thus both lower supply and demand => lower growth, less wealth, even less room for saving and investment, and so on and on in a death spiral.


Invest responsibly. Remember that investing is 80% psychology. The other half is patience.

Summary - selling oil, waiting for abundance

In short, I'm selling oil due to the storage situation, that will only get worse until Iran has reached full production and OPEC cuts can be seriously considered.

I don't dare shorting though. Quite the opposite; I'll look for (oil company) stock bargains in the expected carnage (blood in the streets).

I've gradually had to "refine" my general outlook from "bad" to "binary". I'm staying short the stock market but even that feels less and less palatable these days. Gold and silver are the only things that feel OK. I'm even leaning closer to getting some physical gold to complement my paper gold. So far, however, I haven't, and I just don't want to be that pessimistic.

I mean, the 2020's promise to be the best era ever (so far) for humanity, with widespread abundance provided by AI (did you see AlphaGo's victory?), nanotech, biotech, robotics etc. Billions of people coming online, sharing knowledge and using ever accelerating technological tools to create more and better solutions to everything than at any time in human history. And then we haven't even mentioned the 2030's!!

We just have to pass this little "bump" provided courtesy of Draghi, Ingves, Carney, Kuroda etc. (including Yellen of course, but she's no DI...)

What goes bump in the night?


Ingves negative interest rates are FUN



Janet Yellen


I want to put my wisdom in you

I may have gone overboard with that Will Ferrell-inspired book cover I tweeted the other day (the Tweet, viewer discretion is advised).

The message is the same though. I'm not blogging, podcasting and writing for financial gain, I just want more people to become aware:

Aware of themselves, aware of the world, aware of their career possibilities, of their investment opportunities, of the fantastically bright future that awaits.

So, please share this article, bookmark this site, subscribe to my newsletter and download and read my first e-book about the investment guidelines I picked up during a decade and a half as partner, managing director and portfolio manager at Futuris - The European Hedge Fund Of The Decade.

If you have already downloaded the book but never opened it, try just the first page summarizing my ten most important investment rules. Please.

Taggar (blogg): 
9 augusti 2015

Time to buy oil: Fighting Bulls & Catching Knives

Summary: I'm thinking of buying oil

That's about it for this time: The oil price is down to multi year lows, and below marginal cost of production (debatable), and thus I feel like buying some.

The rest of this 15-minute article is an introspection into my own functional Asperger syndrome (a bit like Michael 'Big Short' Burry who made a fortune in the housing crash of 2008), my contrarian inclination, and why crowd independence can be a significant predictor of success in the stock markets.

Do you have similar personality traits and have you learned to benefit from them?

crude oil 1yr


WTI Crude below 44



Dyed-in-the-wool contrarian

Oil is crashing - I'd better buy soon! (That's what I did earlier this year, then sold when the bounce turned into an upward trend. Now I feel like buying again, just as people start panicking with WTI crude below 44 [I'll buy Brent, though])

Gold is crashing - How soon can I get my hands on some (more)? (That's what I thought about a year ago, and now again as gold is falling even deeper. I'm thinking more and more of getting physical)

The above trades went pretty well, but as a natural contrarian, I am usually wrong, or at least way too early (which amounts to the same thing). I also just never get to enjoy riding a trend for very long.

asperger 3

That's how I'm wired; I don't get caught up in crowd events like concerts or sports, and I instinctively distrust trends.

Growing up, I was often the odd one out. Or just plain odd. It took at least 30 more years before I realized why...

On the other hand, I assimilate facts at face value and I'm patient, really patient. In the long run*, I usually win (on the market) against the socialized lemmings that eventually fall off the cliff. They, however, typically feel better** most of the time.

* (unfortunately, that might be when we're all dead - my current big market short might fall in that category)

** feeling at all counts as 'better' ; )


Being asocial made independent views natural

I hate people - or so I thought about a decade ago (N.B. I was 33 by then, so hardly a spring chicken). Then gradually I realized I just liked to be alone, reading, learning, thinking and solving problems (which was impossible with people around - imagine trying to concentrate sitting alone in a dark room, knowing there is a large venomous spider, snake or similar there with you).

In my late 30's I eventually understood that I actually liked people; in the right doses, and in non-learning and non-performance contexts, and when I presented my conclusions from my alone-time. I never labelled myself with Asperger syndrome though - until just the last few years, when I was 35-40.

I've never been accused of jumping to conclusions. On the contrary, rather being a bit retarded ;)

Five-six year ago, I felt a kind of kinship with the Asperger-diagnosed investor Michael Burry, when he was portrayed in The Greatest Trade Ever (2009) and The Big Short (2010). At the time, however, I thought it was just wishful thinking that we shared any deeper similarities. "I'm a bit like Steve Jobs, I like Apple products too".

I actually had read the (amazing) book "The curious incident of the dog in the night-time" by Mark Haddon 5 years earlier, in September 2005. It is written from a person with autism's perspective. I did see some vague similarities, but mostly I got upset when the boy couldn't control himself better... (sic), and it never struck me I could be diagnosed with a anything remotely similar to what Christopher had.


Discovering autism spectrum disorder

My closest friends and girlfriends (and their parents, not to mention mine) knew about my condition long before I did (I just learned yesterday that as early as 2002 or 2003, my girlfriend and her father discussed my potential autism due to my folding my underwear. Other close friends diagnosed me the first time we met, or so long ago that the exact timing is irrelevant).

Many immediately sensed I was different, but didn't get a specific term for it until much later. Asperger wasn't standardized as a diagnosis until the 1990s (and by then I had already gone to college to study finance and thus escaped the system)

They never said anything to me, which was probably for the best*.

*I sometimes wonder if I performed better not truly understanding my particular condition. Had I known, I might have tried to second guess myself, with unpredictable and unstable results. Trying to be contrarian is not a sustainable path; you'll soon lose track of what is your true stance.

asperger 2 asperger



Advantage Asperger

Peter Thiel has quipped that entrepreneurs with functional autism spectrum disorder ("Aspergers") have an (unfair) advantage in Silicon Valley. Among other things, they can benefit from having a more singular focus, less or no trouble with rejection or going against the grain, and sometimes even special skills.

Hedge fund managers often profit from the same characteristics*: being naturally contrarian, independent of herd behavior**, weighing wins and losses equally, being cool under pressure, unemotional, and generally thinking in absolutes and facts, rather than relativistically and fads. A big drawback, however, is the inability to ride trends* to their conclusion (bubble peaks, and depression troughs).

* Not all of course; far from it

** which brings back memories of when I thanked "the long only crowd for creating opportunities to go short which led to my fund's win" (read more in my free eBook)

I've never felt comfortable in crowds. It's not that I'm actively uncomfortable; I can stand by myself for hours just observing, but I have trouble following and participating in several conversations at once, in particular in noisy environments. And, more importantly, I hardly see any upside from being in a crowd, unless you hope to meet somebody new, or if you are normal and social and can appreciate the crowd vibe, that I never even perceive (alcohol helps though).

I think a big part of my hedge fund's success was our independent thinking, our unbiased view of going long and short respectively, and not being connected with the European and UK hedge fund "clubs". In as much, I am grateful for the personality traits I have, be they clinical ASD or not, even if they make me slightly handicapped socially.


Suspense and surprise

The inspiration for this article actually came from a recent Freakonomics podcast about movie and book plots (and news shows).

When the hosts and the guest proudly described how popular TV shows, movies and books often use a formulaic approach - with three major twists and a certain technique for maximizing the uncertainty (suspense) about the next step, as well as the eventual surprise - I almost felt physically sick.

That's why I tend to not like ordinary books or TV shows. I want facts, or a story line that progresses from point A to point B, preferably with a message. If the facts are surprising, all the better, but please, please, hold the manufactured artificial suspense - in particular if you have no facts or bigger story to convey.

I guess that formula works for people who are interested in people

Some TV series exhibit a really good first season, where everything is thought through from the pilot to the season finale. Unfortunately right at the beginning of season two most fall back on a formula of single or double episode tasks and excursions, spiced with mostly annoying flash backs.

I guess that formula works for people who are interested in people, and who like the feelings that suspense and surprise provide. I just keep wondering, when will the real story materialize?! OK, back to business:


Oil, investing and Asperger

My style of research and analysis, as well as portfolio management was (and still is) pretty straight forward:

I checked the available facts. I made plausible assumptions about the future regarding the variables themselves, the operations and management of the companies and the stock market environment (including risk tolerance and valuation paradigm).

Then I recommended/bought whatever was really "cheap" (a very complex situation-dependent notion), sold whatever was really, really expensive (twice the margin of safety needed), and didn't give a damn about the usually more than 90% of the market in between. The latter means I let my Excel models rest until something triggered (don't ask) my interest in those companies again.

Then I waited. And waited. And waited... (well, I of course kept digging and looking for better opportunities, or reasons my investment was or had turned wrong. I also traded a bit on top of the basic investment - adjusting perhaps a fourth up or down depending on weekly and monthly fluctuations)

...Which leads us to oil. I made my first investments in oil early this winter/spring, 21 years after getting my first job in the finance industry. The same goes for gold, although I bought and sold my first batches of gold a year or two earlier. Pound Sterling and USD... Same story, with my first transactions in 2013-14.

The good thing with my particular point in the ASD spectrum is that as long as the facts don't change, I am infinitely patient.

The drawback is that I get hamstrung regarding speculating, riding trends, joining fads. I can of course, I not sealed off from the real world, it's just that it feels so uncomfortable I can only do it for very short periods of time if the variables are wrong.

-Unless I'm dealing with inherently worthless factors, such as fiat currencies and gold :). Then I can speculate with ease of mind.


Fighting Bulls & Catching Knives

So, oil, gold, what have you, drops sharply and suddenly my spider sense tells me to buy (I'm not talking about perma-bulls buying every little 10% dip. I'm talking about -40% at least), right when most people just want to get rid of their assets at any price.

Often, I short too early, fighting every bull I see, and then hang on to those shorts like a pit bull, all the way to the peak and down again.

Then I buy 40% down (if that's enough to normalize the price or make the asset cheap), catching knives with both hands, and keep buying at -50%, -60%, -70% and so on, and hopefully make a decent return when fortunes turn - right before selling way too early again.

As long as I keep a sizable margin of safety and my sense of intrinsic value is well honed, I make good returns over the cycle. But in between, sometimes... (so be careful in trying to follow my lead; perhaps you are better off just buying and holding)

Oil, however, actually is quite a different story than gold or currencies (FX). Oil has a production cost, and a business value. And now the price has not only more than halved in short order, it is also way below assessments of marginal production cost (65 USD for Brent), even if we are going into a super recession in 2016-19 (before the Age of Machines and Solar start in the 2020s).

In the very short term, oil of course can, and probably will, fall even lower than right now, due to Saudi Arabia's need of money, Saudi Arabia's will to destroy the shale industry, the coming global recession and China slowdown and shadow banking implosion, general oil price trend etc.

On the other hand money will keep being printed, and the global economy will at worst stand still nominally before expanding again. Hence, my best guess is that the oil price will bounce back to at least the marginal cost of production (for a volume at least on par with demand today) within two years.




I'm tempted to buy oil now, but maybe you shouldn't be

That's why I'm suddenly (starting Friday August 7) tempted to get some exposure to the (brent) oil price again. That, and my inherent contrarian disposition (I hate people and crowds ; )

Do you know yourself well enough to be trusted with your own money on the financial markets?

If you're not completely sure, subscribe to my newsletter for future updates, and read my free eBook to get a sense of the psychological prerequisites for investing. Feel free to share this article with anybody you think might be interested.

And just a few facts to round off: A standard oil barrel contains 42 gallons or 159 litres and weighs a little more than 300 punds. The 42-gallon standard oil barrel was officially adopted by the Petroleum Producers Association in 1872 and by the U.S. Geological Survey and the U.S. Bureau of Mines in 1882, since the full-sized 84 gallon watertight barrel simply was too heavy to handle for one person.

oil barrels

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