It is a long time since I wrote a report on oil. Off late, I have had a few requests to write on oil. By the way in my over two years of reports on oil, I have had a 100% success rate. For reference, you may check out my older reports over the past two years. That does not guarantee that I will be right always.
If you are an active trader, trading in oil is not easy. The volatility that you face can be so unpredictable and huge that you will be forced to take your stop losses at the wrong time. So if you don’t care about stop/ losses your position size has to be within your maximum risk tolerance.
The best way to get exposed to oil is to buy quality oil companies out of US and Canada and most of them pay good dividends too. Why US and Canadian companies? With the new climate regulations and ESG compliance, most US and Canadian companies have an ESG compliance officer on their board. Oil companies from developing countries may be wanting in this area and they can be vulnerable to huge litigations and fines if they are caught not meeting the international standards. The other way to get exposure to oil is to buy the Energy Select Sector SPDR Fund (XLE). This is an easy choice. I have suggested this many times in my past reports.
This report could be slightly longer and may be in two parts. Let me digress a bit. At the depth of the pandemic, something very unthinkable happened. While the price of oil was already down by two-thirds from its highs prices went negative. How can that happen? Those are some of the mysteries of the futures markets. Those interested can look up my past articles to find out the details about what happened then. It is an interesting chain of events. For a brief moment in time, in theory, you could have gotten about $38 to take oil just off someone’s hands. It didn’t last long. Within a day oil was back to $10 a barrel. In another two months, it was trading at $40 a barrel.
The real epiphany for oil happened with the Biden administration coming to power. Biden administration’s views on climate and their plans to deal with fossil fuel companies and future explorations were long well advertised. So when it became clear that Biden is going to be the President, I first put out a report on oil saying that being long oil is a no-brainer trade. I think oil was trading at around $26 then. Since then at various stages, I put out reports saying oil is still a buy on any pullback but never a short trade on oil.
Why was I so bullish on oil? Most importantly activists want big energy companies to stop finding new oil because they yearn for an alternative- energy reality that simply isn’t here as yet. Now they have a government in place that fully backs their agenda.
The results are twofold. First, existing oil companies aren’t going to invest in the future. Instead, they will return tons of cash to their shareholders. Secondly, since they are not investing they are not finding more of the gas and oil that we need. A huge demand and supply issue has been created for at least a decade.
The current supply/demand problem is not part of a typical cycle. In a normal cycle, this is what happens. Prices rise for some reason may be due to a supply disruption or a spike in demand. Those high prices cause companies to go out and look for more oil and gas. Large oil companies are willing to make huge amounts of capital investment meaning they will find more of the stuff from the ground and with higher prices they are also able to make good profits even if the whole exercise was expensive.
Finally, we end up with too much oil and gas. It floods the market and prices crash. The cycle repeats again. It is not the case anymore. There is a policy decision in most of the developed economies to not invest in fossil fuel companies anymore. Stay tuned for the next report.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.