Tuesday, 13 November 2018

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Wednesday, 13 April 2016 13:55

The Bearish Case Against Oil Gets... Bearier... Featured

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My 15 year old son and I went to the NY Hedge Fund Roundtable event on the energy sector at the Penn Club last week. It's good to have your children see you perform. The discussion surrounded the price of oil, LNG and the impact Elon Musk is having on the oil industry.

Stephen Schork of the Schork report was the standout personality of the panel (buyside vs sellside panelists) basically echoing what yours truly has been telling you.

  • A) the presidential candidate front runners are jokes.
  • B) be bearish on oil short to medium term. Schork said the big oil pop of late was due to the biggest short squeeze the market has ever seen.
  • C) Electric cars, more fuel efficient gas cars, and additional supply coming from a more diverse set of players bring more supply and less demand.
  • D) The socio-political angle stemming from the US-fueled Sunni/Shiite split in Irag is woefully underrated.
  • and E)..... Well...

Some of the guys from the sell side were of the opinion that although economic growth in China has slowed, its still growing, and oil demand will be driven by that. They also stated that EU economies are recovering. After all, their finance and banking arms are doing a lot of (near record?) equity deals to finance the better equipped US shale producers - at least that was what I was told. Then again, a birdie in my other ear told me that the banks are doing a lot of equity financing to unload their unfunded energy loan exposure to unsuspecting equity muppets... I'm sorry, clients. After all, why opt for expensive equity when debt is NIRP-powered? I'll tell you why, because you can't get the loans, and the guys with the loans are trying to shove them off to the next sucker.. er, eh... client.

This wouldn't be the first time, if it was true. 

You know I couldn't sit by idly and let that "Everything is Awesome" nonsense fly. My son was there, abnd he's too old for Legos! I stood up to paint a picture to the panelists and audience as follows....

The pic shows what most ne

ed to know in terms of price stability. Supply outstripped demand. For those thinking China will add to demand vs subtract from it, keep hope alive. China's banking system is rife with NPLs (non-performing loans, the thing that took down Leman, Bear and AIG), amid what appears to be an obvious property bubble - plus you can't trust their financial reporting.
The EU area has the exact same problem - NPLs everywhere, bubblistic real estate and negative rates. These are not the characteristics of nations that will support an INCREASE in oil demand. A crash is much more probabilistic.
Then there is that $35,000, autonomous electric car that Elon Must announced, and was oversubscribed almost immediately. Those Google self driving cars, that everyone is trying to emulate. Shale producers getting the efficiency/cost cutting religion to more effectively compete with the Saudis. 
I hear the Saudi break-even for oil production is $3-$5 per barrel, way below the $40 to $60 of US/shale producers, and even considerably below the $30 of the new tech guys. It's way below the $100-$130 of the Venezuelans, et. al. (Uh Oh!, defaults cometh!). Even the Saudis have a problem though, for although their raw production costs are under $6 per barrel, they need ~$75 per barrel to balance their budget, without which and over time, causes significant social unrest in their educated populace.At least, that's what I've heard from guys who at least sound very smart.
Add to this the apparently massive supply buildup and there's no wonder why the smartest guys in the room who are not on the sellside are bearish. Zerohedge and Reuters did a good job of illustrating this:

Shipping data shows that some 50 supertankers are currently anchored in or close to Singaporean waters for refueling, maintenance or waiting to deliver crude to refineries or be used as floating storage.

This can be seen in the following Reuters photo of oil tankers lining up on the eastern coast of Singapore.

As well as the following Marinetraffic map.


So, go ahead, be bullish on oil, listen to the sell side brokers, analysts bankers and sales guys spin you a tall tale.

Oh yeah, in case you didn't know, you can use smart contracts and blockchain to take a bullish or bearish position on oil or the publicly traded equity or debt of any oil company on a P2P basis, without counterparty risk, credit risk, a brokerage account or even a conventional exchange. 

Reference this smart contract setup through Veritaseum:

oil short via USDEUR pair

Why pay for your short oil with a USD/EUR pair? Because the banks in the euro zone are going to need more ECB welfare, which will put even more pressure on the euro relative to the dollar. It's free leverage... That is if we're right. EU banks don't only have exposure to each other (bad enough) and the deteriorating EU economy (worse) and the continuous buildup of NPLs (horrible, but  nobody is admitting it) but they also have exposure to this oil mess. It's not just US banks, you know - as excerpted from "The First Bank Likely to Fall in the Great European Banking Crisis" proprietary research report...

 EU banks exposure to oil

Anyone interested in knowing more about the first company to issue public smart contracts traded on the public blockchain, or the company to file the first patent applications for the use of blochchain tech as applies to capital markets (yes, we were the first) or the only company that is creating on-ramps to the blockchain-powered peer-to-peer economy (think peer-to-peer capital markets vs. the legacy hub and spoke model) should contact me directly (reggie AT veritaseum.com. We have a lot to talk about.  

 

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