OPEC Versus the Shale Revolution

“If you need a deal badly, you’ll get a bad deal.” ~ Louis-Vincent Gave


It’s taken OPEC over a year to get this production cut in place. And like past cuts, this one too is riddled with flaws. It’s only for 6 months. Indonesia dropped out. Saudi Arabia was forced to admit defeat. Libya and Nigeria are set to erase at least half the cut in the next year. The list goes on and on. 

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For those of us who enjoy the hindsight of history, it’s been fun to watch OPEC do battle with the shale revolution. The slow march of technology occasionally moves further and faster than many anticipate. OPEC, like John Henry has been forced to learn this lesson the hard way.

This deal will serve the shale producers in North America much more than the citizens of OPEC. Producers are rushing to hedge their production for the next 12-18 months, so in the next oil price downturn, when OPEC is forced to flood the market, they’ll find a much more resilient North American shale industry. I am very bearish oil. I think we’ll see oil in at least the low 30’s sometime in H2 2017.

On the flip side, OPEC has managed to prop up the price of oil. This time last year oil was in the 30’s. I think there’s a good chance OPEC will be able to maintain the price of oil above $45 for the next 2 months. Which means on a YoY basis, inflation is likely to pop even more than it already has.

Bonds will not have a good time. What I’m looking to do is hedge my long term short oil thesis with a short term short bond position, particularly EM bonds. With the sell off in bonds as strong as it is, I wouldn’t be surprised to see them correct a bit and offer a better opportunity from the short side.

Disclaimer: This blog post is not advice to buy and or sell securities. I am merely informing you of my intentions. If you act on the words of a twenty something millennial over the internet you have only yourself to blame.




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