Thread by @The_RySci

Consider this my mega thread coming out party 🥳 #EFT. I don’t typically make long threads or comments, instead preferring to spend my time scanning for more data, info, guidance, and articles from from those that I consider much more knowledge than myself in the O&G space. 1/

Before we get started I want to make clear Im not attempting to claim any of the ideas put forth below as my own. It is intended to be more of a summary/combination of recent articles from some of the best minds I’ve been able to find on this platform. 2/

I will do my best to add these articles and tag those whose thoughts have heavily included my thinking here to the appropriate tweet in the thread. Please give these people a follow if you don’t already. Here we go….. 3/

I MESSED UP - A Rant
Well it’s been a wild few weeks and ya boy is down big from the early June peaks. My biggest weakness in investing…I tend to have very high conviction in my calls. 4/

This clouds my ability is properly asses tail risks and market dynamics/macro factors outside of the fundamentals I typically base my calls off of. So, been doing a lot of thinking about what’s occurred specifically in O&G and how I could have better managed my risk. 5/

But rather than dumping all my holdings and calling it a year since Im still up vs the S&P by 100% ytd, I decide instead to obsessively comb every inch of #EFT for any info and articles on what the hell is happening while recalibrating my expectations for the rest of the year. 6/

Buckle up cause based on what I’m seeing we’re in for a ride that only the strongest stomachs will survive.
We’re at an interesting crossroads where sentiment has arguably not been lower since March/April ‘20…. 🫠 7/

Yet we’re at ~$95/bbl $8.3/mmbtu and the physical market is screaming that we’re as short supply as we’ve ever been. Square that peg… cause I can’t. 8/

Now, I absolutely expected a pullback in equites but if anyone says they saw a +30% drop in a two week liquidation of energy stocks coming they are lyingggggg (3rd biggest drop in 30 plus years as I’m sure most of y’all know). 9/

Rather than boring y’all with more “state of the O&G market and why the selloff doesn’t make sense from a fundamental and physical market perspective”… (we’re still short supply, demand looks good considering what product prices got to…there done). 10/

What I’m going to touch on some here is more the mechanical/cyclical nature of the paper market/equites. Which brings me to my first major point.

The market is ALWAYS right

Not accepting that the market is right is a great way to 2x down on stupid and blow up your account. 11/

Now, that being said…. The market may come to a very different conclusion tomorrow….and it’ll be right then too.

So, what the hell is going on, how do we prepare ourselves for what the market might conclude tomorrow and how do we calibrate our risk tolerance to that…??? 12/

Here’s how I’m thinking about it and hopefully I can untangle the jumbled mess in my brain effectively so you get something from it.

What follows is a overview of multiple articles and podcasts. 13/

The main points involve the inherent tension in Malthusian bull markets @Haymaker_0 , the area under the curve as it applies to energy prices @LynAldenContact , and the low liquidity currently in the market causing a volatility trap @ArjunNMurti 14/

The big moves in O&G prices recently comes down to the dearth of liquidity. OI is very low given prices levels from a managed money/CTA perspective. This creates higher levels of volatility and a recursive feedback loop of tightening margin requirements and higher vol 🔁 15/

This brings me to my next point on Malthusian bull market mechanics. Malthusian markets operate on fear. With the long term structural bull market for O&G in place and western leaders constraining supply… 16/

The Fear is that there won’t be enough O&G/Energy supply to go around. 17/haymaker.substack.com/p/the-inherent…

But, even though the long term bull is in place, if it’s fear that rules the day, then any downward corrections can and will be mind bending in its velocity and depth. As seen in the most recent sell off as the fear of an ever deepening global recession as taken hold. 18/

I’m not gonna really touch on the fundamentals of a recession as they apply to O&G but considering during the GFC oil demand went down ~1Mbpd (‘09 avg vs ‘08). And we are drawing ~1Mbpd globally with China still reopening and a coordinated SPR release over 1Mbpd…. 🧐 IDC 19/

It’s important to understand here too the fear (of missing out) played a roll in the O&G equites rug pull as well. Based on what I’ve seen, many believe major market participants were positioned in energy equites to offset their tech losses, piling on in a momentum trade. 20/

This was likely expressed though margin positions as well. So while funds are attempting to raise cash the fear of recession hit + the big June CPI print, 75bps Fed raise, and all headed into a monster options expiry week…the rush to the door ended up being truly biblical. 21/

This triggered numerous others to offload their positions as margins calls came and others piled on to ride the short wave that was quickly snowballing. And that’s how Exxon goes down 20% in 14 days while making the most amount of $/day in the history of the company. 22/

Other things to consider. Obviously high energy prices are contributing to inflation concerns and therefore recession concerns as the fed tries to reel everything in. I believe their efforts will amount to holding a beach ball under water. 23/

But why? And what is the effect of higher prices on demand? This is where the area under the curve comes in. It’s not only how high prices go it’s how long they stay there. Impact to the consumer must be considered as a function of price plus time. 24/ lynalden.com/the-area-under…

Now a few things things with this consideration, we arguably tested the current upper limits of prices in June with % of global gpd spent on energy hitting ~8%, 25/

where end user demand grinds to a halt (gasoline and diesel were pushing $180/bbl, extrapolate FX effects to other nations = worse), prices don’t have to keep going up for O&G equities to do very well, very higher prices still haven’t triggered a new wave of investment. 26/

And here lies the major issues. The current energy crisis will not be solved until capital returns to the industry and a new capex cycle is entered. Period…. 27/

It is highly likely we are in the midst of a new round of price discovery necessary to bring about the needed capex and new supply required to meet demand. The effect of monetary policy and inflation cannot be understated here. 28/

With the amount of money pumped into the system the currency debasement vs crude prices (you can’t print commodities) could result in a stepwise and permanent change in the new normal for oil prices. Would be very similar to the 70s when we went from $5 to $20/bbl avg 29/

This price discovery will absolutely involve highs/lows as the market tries to establish the upper/lower bands, weighing demand destruction vs capex increase + demand growth. 30/

We are likely in a period where the market is trying determine where that lower band is 31/ hfir.substack.com/p/the-oil-mark… @HFI_Research

This is critical to form a new higher base case for equites from which analysts can work off of and will ultimately lead to the next stage of the bull market in the O&G equites. 32/

One of the mental traps I certainly fall into, that goes hand in hand with assessment of tail risk, is thinking too linearly about my returns. Applying linear logic to non linear systems can get you upside down trading in a hurry. 33/

I have to continually remind myself that if I believe a O&G stock is gonna generate X% returns over the next decade (price appreciation, dividends, buybacks include) that path to those returns will much more resemble a sine wave rather than a straight line. 34/

So with this in mind how do we create a new base case for prices and how should be think about investing in O&G equites around that? This is something I like to do and also what I failed to reevaluate in June. 35/

It’s a risk skew based on a simplified probabilistic scenario analysis. Here’s what I’m now thinking the probability we see (or stay around) the following crude prices over the next 12months is… 36/

$60 (10%) $80 (10%) $100 (40% - this represents the current $90-$110 band) $120 (20%) $150 (20%) The average of these sets the baseline at $108/bbl with the risk skew in the other direction if your above or below that point. 37/

This is where I messed up, in early June with prices at $120/bbl the risk skew was glaringly to the downside even under this decidedly bullish scenario. 38/

At the very least I should have hedged a percentage of my call option positions that has ballooned to a considerable % of my portfolio (hedging is preferable to selling for me in this case due to tax considerations) 39/

Now coming full circle…. Back to volatility. I want to make it very clear that high volatility is going no where. So the amplitude of that sine wave on our journey to mega returns is gonna make for a wild ride of highs and lows. 40/

Recently listened to a podcast that covered this and putting some real numbers behind it. The amplitude of our sine wave we can think of as std deviation moves in prices from our baseline. 41/

Currently a 1 std deviation moves in crude oil price is $20/bbl….. that’s obviously a lot. Here’s the kicker. To get on this ride you need to be comfortable with at least 1.5-2 std deviation moves and more like 2-3. 42/

I think it goes with out saying a $40-$60/bbl move down in crude prices will absolutely destroy O&G equities prices. But that’s what could happen under a recessionary flash crash whether it’s fundamentally justified or not. 43/

The good news is that likely nothing structurally will have change with respect to the supply side constraints and the market will quickly move back into a shortage of supply with equites rapidly recovering along with crude and nat gas prices. 44/

So bottom line….
Set a baseline and revaluate the scenarios based on the most up to date info you have, don’t focus on picking the highs and lows.
Hedge big positions, especially options
Have dry powder for the dips 45/

Last, Set your exit strategy/know when to get out: For this cycle, return of capital and a massive O&G capex boom will give you the signal we are entering late cycle and the end of the bull run, until then Get Long and Buckle Up

Cheers! Enjoy Roll Call! 46/End @EnronChairman

Feels appropriate to add a couple more tweets to this thread with more of accounts I follow that have no doubt influenced my views on the O&G market though their thoughts/data and therefore this thread @DevoutDriller @anasalhajji @CornerstoneOil @Josh_Young_1 @kingofcrude

@WarrenPies @Rory_Johnston @OpenSquareCap @crudegusher @staunovo @garquake @EnergyCynic @EnergyPeddler @TomLoughrey_LFE @AndurandPierre @econ_713 @ViscosityRedux @WhiteTundraSG @JavierBlas @UndervaluedOnG @ericnuttall @chigrl @PauloMacro @chilling_dc @UrbanKaoboy @TigerTrader41

@markfny By no means an exhaustive list but all these accounts as well as those tagged earlier in the thread are tireless in the content and data they provide, mostly for free 🙏 If your curious about probabilistic analysis, I applied the teachings of Smarter, Faster, Better 📚🍻

How could I forget @RaisingTheBAR47 for the sarcastic shit-posting 😎