I've taken a position in oil: will this be rags or riches?
A brief look at both sides of the oil argument
As I write these words I’m slightly up on my oil trade. That’s after being down 20% just a few weeks ago. Thankfully I’ve spent a lot of time in crypto and volatility doesn’t scare me. Being down 20% is called just another Tuesday afternoon in Bitcoin.
Of my current position in XOP, I invested 75% at $154 and the remaining 25% at $112. My break even is at $140.
Oil is one of the biggest debates in macro right now, with intelligent people taking stands on both sides. Marko Papic was on Blockworks arguing that the oil rally is over, while others like David Hay (Macro Voices) and Josh Young (The Investor’s Podcast) have said we’re nowhere near the top.
Oil bears
Recession will kill demand
Saudi will pump more
Something something solar panels
Europe has enough gas reserves, won’t need to use oil for electricity generation
Oil bulls
So much supply has come offline that we have to rally
Europe will substitute oil for natgas in generating electricity
Saudi cannot pump more
Cessation of SPR release will cause supply shock
Market is so tight that any disruption will cause spike
Interpretation?
I’ve listened to both sides of the argument and I’ve come to believe that oil is going higher. This is my first oil trade, what the fuck do I know??? But it appears that bullish arguments for oil make the most sense.
I can’t help but think that supply is so tight that a single accident could cause a major supply shock. Take Russia, for example. Russia is shipping their oil out on tankers instead of sending it through a pipeline. Problem is, the west has stopped insuring Russian shipping.
Tankers must have insurance.
So Russia has set up a fund and they’re insuring ships now. That’s all fine and dandy, but what if a rusty ‘ol bucket runs aground and the country of bears and vodka has to spend a billion bucks to clean up the dirty pelicans? That would break the back of their insurance fund and possibly eliminate their capacity to do future business. What will the crude price be if Russian oil exports go offline?
Markets are FUBAR, oil is $200 a barrel.
Adding to my position
In light of where I think oil prices are headed I’m increasing my position in the industry. I just put 1% of my assets into Laredo Petroleum (LPI) at $63.25.
I now have about 8% of my assets in the oil and gas industry. I will post an update when my position changes. I don’t have a stop-loss set for any of these orders, I plan to give the trades plenty of time to find their legs.