Biotech Is Not A Bubble

Biotech Is Not A Bubble

With the SPDR S&P Biotech ETF XBI [disclosure: We hold no position in XBI] within 5% of its all time highs, we hear a lot of people calling biotech a bubble. Let’s be clear, biotech is not a bubble. There are may be many bubbles out there, but this is not one. And if that is too much of a leap for you to take, then assume biotech is a bubble but that it will get a lot bigger, so big that Trump is going to have to invent a new word to describe it (my vote is for Yugenormous).

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After falling 50% from the peak the SPDR S&P Biotech ETF XBI has almost fully recovered and is within 5% of the all-time highs. Despite this resurgence, some biotech companies irrespective of the quality of their drugs are still down over 90% from their 2015 highs.

These companies to the community at large are practically untouchable. Fund managers are afraid to touch them because they are too illiquid. And even if analysts understood the science (which they don’t), they won’t bother to cover companies of so little consequence, which means retail investors know nothing about them as well.

In short, these are hated companies, and yet these companies were able to tap the market for funding at an extreme overvaluation back in 2015 allowing them to ride out the storm which we have believe is now over.

We’ve begun to see flows come back into some of these “left for dead” companies. Some of which have doubled and tripled without any news whatsoever. To be clear these are hated rallies, simply for the fact that no one owns them. And for some perspective a company that falls 90% then doubles is still down 80% from its highs. The bull market in biotech is still in its infancy and we think the macro backdrop supports this for three main reasons:

 

1. The regulatory backdrop in the US for bringing new drugs to market has never been better. Meanwhile, big pharma companies, with their dwindling legacy pipelines and boatloads of cash, have a decision to make, develop new drugs, buy new drugs at a premium, or fade away. Gilead’s recent $12B acquisition of Kite Therapeutics is likely to be the beginning of a wave of acquisitions.

2. The 2nd largest and fastest growing market for pharmaceuticals, China, is in the early stages of opening itself to big pharma.

Red tape is being cut in China as well.

“Under China’s new rules, data from overseas clinical trials can be used for drug registrations in the country. “

China’s large population combined with its environmental and pollution problems combined with a poor diet/lifestyle have been a perfect storm for creating massive demand for high quality pharmaceuticals. From McKinsey:

“China faces mounting medical needs—for example, it has 114 million diabetic patients and more than 700,000 new cases of lung cancer diagnosed each year.”

But don’t forget, the rest of the emerging world is growing and gaining wealth.

As the emerging world’s middle class grows, so too will its demand for prescription drugs. Not only will this create profits for US drug companies, but it will also reduce their reliance on overcharging US consumers for access to medicine. This in turn will reduce the cost of health care in the US at the same time quality of care improves…

3. It’s 2017 and we are still using chemotherapy and statins to treat deadly diseases. This is simply appalling. The truth is that advancement in pharmaceutical care since the War on Cancer was declared back in the 1970s has been pathetic, especially when you consider the amount of money thrown at the problem.

But that too is finally changing. Real drugs offering real improvements in patient outcomes are coming down the pipeline. Cancer, alzheimer’s, cardiovascular disease, mitochondrial malfunctions, you name it there’s likely a drug coming to change patient outcomes for the better. And as these drug breakthroughs come to light we believe this sector will experience yet another euphoria driven bubble that could make the 2015 peak look like an ant hill. 


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

Big Week For The Once Mighty Dollar

Big Week For The Once Mighty Dollar

Be warned, this is a short post.

Janet Yellen and the Fed surprised markets this week by actually doing what they said they would do. Shocking!

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If you could not tell from the tone of my first sentence, I was not in the least bit shocked, and had shorted some EURUSD. What I was not expecting, however, was that despite the Fed’s hawkish surprise, the dollar barely budged.

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The lack of a dollar move is especially concerning when we consider the context of the move. So far this year the DXY has fallen over 11% against the backdrop of consistent Fed tightening.

Meanwhile speculators haven’t been this short the dollar in over 4 years.

The lack of a dollar rally at this juncture given spec positioning and the dollar’s dramatic fall is a bit concerning here for those of us who were trying to catch a bottom in this dollar rout (guilty). Now it’s only been a few days since the Fed indicated its hawkish intentions, but if you were to ask me right now, I’d be leaning towards a continued breakdown in the dollar.

What’s interesting about this continuation of the dollar’s fall is the threat it poses to the low volatility regime we find ourselves in. Large moves in any direction for any major asset class is bound to cause ripples even if the move is initially seen to be as a positive.

The issue here is that the ECB and the BOJ have kept rates so low for so long that the savers in their respective countries have been forced into incredibly dumb trades. For example, being long USDs and long USTs…

Read that number again, and then read it again. European investors bought almost $600B of US debt last year. Perhaps these foreigners are the real speculative position we should worry about. The dollar has fallen 15% against the euro this year alone. At what point does the fall in the dollar become too painful? How many years of income must these foreigners lose to currency effects before they start to hit the sell button?


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

 

Long Day’s Journey Into Night: A Bear’s Search For Proper Shorts

Long Day’s Journey Into Night: A Bear’s Search For Proper Shorts

As a pessimistic China observer (naive western perma bear), I’ve wanted to short emerging markets for sometime. For my sake I’ve been very patient on this trade and haven’t fancied a go on the dark side, unless you count my 2nd failed attempt to short the Superhuman Canadian Banks. Luckily there was an ongoing implosion in US retail industry that has kept me busy. But even that trade appears less appetizing these days. So here I am, a bear without anything to short, which is partly why I’ve turned my attention to the rip roaring Emerging Markets, but I swear I have other good reasons.

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Whatever happened to Brendan Fraser? I guess the same question could be asked about the dollar bulls.

 

Anyway you slice it, USD positioning is not only incredibly bearish, but just 9 months ago incredibly bullish. The shift in investor positioning  is enough to give a person mental whiplash. Why the sudden shift you ask?

Such a shift in sentiment is not without a narrative to support it.

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I’m not mocking the proponents of this theory, although it certainly seems like I am, I swear (see previous Mummy reference) that I’m not. I just happen to sincerely doubt the speculators who switched from net long to net short are capable of such deep thought and will only come to their sense after they realize they’ve overreached.

As the infinitely evil DarthMacro likes to argue the USD will lose reserve currency status eventually but until then there are likely to be a few tradable scenarios in which we don’t have to sell the dollar into oblivion. Now MIGHT just be one of them…

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Because last time I checked, the USD is still THE world’s reserve currency.  As much as certain countries want to shift to a new regime, the high levels of debt and fragilities built into the current system make that virtually impossible. A clear example is the EU and the Euro. Although recently, some rather smart people have started to suggest that in fact the EU can handle a stronger Euro.

The note was from September 5th, but little did I know, 2 days before I made this tweet that in fact the French had begun to protest the much needed labor reform, although not in “great” numbers. There’s a star wars reference in here somewhere…

And yet, despite the mild protests, if your are an exporting economy and your currency strengthens 15% against a major trading partner, it’s going to hit you no matter what. Just look at the German DAX (blue) versus the Euro (black).

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By the way, before I go any further, is there a more bullish sign out there than a heavy exporting economy’s stock market moving up in lockstep with a stronger currency?  I’m sure some really smart macro guys picked up on this, unfortunately I was not one of them. But I digress because right now the DAX is having trouble rallying into this “excessive” Euro strength.

It’s bad enough for Germany, but what about countries like Greece, Spain, and Italy who were already suffering under a currency too strong for their own good. Fellow European exporter, Sweden has seen its economy take a turn for the worse.

Why is this significant?

After doing a little digging (aka a simple google search), I found Sweden’s top ten export markets to be as follows: Germany (10.3%), Norway (10.1%), US (7%), Denmark (6.9%), Finland (6.7%), UK (5.9%), Netherlands (5.3%), Belgium (4.5%),France (4.3%), China (3.8%) and Poland (3.2%).

Sweden mostly exports to Northern European countries. Meanwhile a large part of the resurgent EU story is actually a southern rebound story. Countries like Italy and Spain even Greece have started to show signs of life. Of course the Euro was already too strong for these countries. One can only imagine what the 15% rise YTD has done to their future growth prospects.

It is important to remember that the level of a currency is not as important as the magnitude and direction of change. The last time the dollar was at this level in 2014, emerging markets were undergoing a massive correction, commodity markets were in complete disarray and china was seemingly on the verge of a complete implosion. Once again I reiterate this does mean I think the EU is about to implode under a stronger Euro, just that the monetary union’s economies are about to take a breather…

Speaking of China, the rising power seems to be making trade deals every day to wean itself off its dependence of the US and the USD.

Have any of the dollar bears asked why China needs to do these trade deals in the first place? Oh yeah, because the US is a key trade partner and the USD is an ESSENTIAL cog in global trade as it stands right now. Removing the USD from the global economy would be tantamount to bleeding the global economy dry. Global trade would grind to halt, and everyone would be worse off. No one wants that. But I digress…

Because China’s economy has been running hot on the back of a poop ton (technical term) of stimulus and the weaker dollar.

What is often missed in this post Jan 2016 correction world is that China has gone from an exporter of deflation to an exporter of INFLATION, and given the fall in the USDCNY this should show up in the US in a big way towards the end of the year catching a lot of people off guard.

Can rates in Europe and Japan going to follow the US higher? With the NIRP and QE programs still in place I’m not so sure. Draghi certainly has the potential to tighten, so I won’t count the euro out. But the yield curve controlled Yen in this scenario?

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At the very least, it seems like we are setting up for a bit of 2016 Q4 redux, where rates in the US rise higher than they do in the EU and Japan and the dollar strengthens. Given investor positioning, rising rates and a stronger dollar could set up for quite the pain trade. Not only are investors very bearish the USD, they are also very long UST duration.

Retail investors going hard in the paint for that $TLT.

Should probably ask some of my millennial friends what they think of dividend stocks.

And just so we are clear on the size of the potential tinder available to such a pain trade…

 

If you’re an EM investor it might even get worse, because China’s economy due to base effects and waning stimulus is set to slow into the end of the year.

Did Klendathu find his desired short trades? Perhaps. It seems that higher US rates are in the cards, and given USD positioning, we could see a rebound in the USD, but I wonder if we have in fact seen the highs for the USD this cycle.


 

DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

 

Buy Low: Cripples, Bastards and Broken Things

Buy Low: Cripples, Bastards and Broken Things

I’ve struggled to write this article for over a month now. Thinking about the most clever way to talk up the bull case for oil. With the potential breakdown in the USD I thought about just saying dollar bear market = commodity bull market. But let’s face it, that’s far too obvious and I’ve already done that

” I believe on a cyclical basis that commodities have bottomed or are in the process of bottoming. Maybe oil retests the 2016 lows, but overtime it should head higher, US shale be damned.”

Then I thought about incorporating the oil bull case with the fiat bear case. Because when every central banker is behaving like the Mad King Aerys Targaryen, shorting fiat in terms of real assets is a no brainer (maybe some other time though).

Instead, I thought it important to focus on something Opa used to tell me:

 “Buy low.”

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RIG, a company we own through the ETF OIH, is down over 95% from its ATHs and was recently trading at the lowest point in its 23 years. To put that in perspective, RIG fell 50% FOUR times. The multi year trend of rising RSI momentum and repeated failure to mark a new low is reminiscent of the pattern in the Euro we saw at the in December of last year. To be clear this trade is not without risks.

But as contrarians we welcome such news. If we look at the broader OIH ETF which includes as basket of these names. We’ll see a similar pattern bottoming pattern to RIG’s.

OIH123.pngThink about what this chart is telling you. Think about the statement the market is making in regards to the oil industry. Offshore oil drilling is dead.

If US shale is really a technological revolution, why have the producers underperformed the commodity since the bottom in 2016?

And yet we are led to believe that oil prices will be contained in a 40-60 range. As Jawad Mian recently noted, complacency towards this mythical range is reminiscent of the view from 2011-2014 that oil would remain above $100 in perpetuity. And with the largest cut in capex since 1998, this seems unlikely to say the least.

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Meanwhile, it’s been up to US shale to make up the difference in capex. I’ve recently read a couple of skeptical reports on the technological revolution that is the US shale industry. One of which comes from my friend @IndiePandant who makes a strong case that the shale revolution is not all it’s cracked up to be.

Then there’s a man who is as smart as he is skeptical, Russell Clark, who brings up a number of key questions in a recent piece such as the rapid decline rates of US shale, the heavy concentration in the Permian and Eagle Ford plays, and the incredibly poor returns on capital. And then of course there’s the plateauing US rig counts.

If the rig count is plateauing, why are predictions for US oil production growth continuing to rise?

 

And if the bearish oil case was only a bullish US shale case, that might be enough, but it gets better much better…

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In case you haven’t learned to zig when The Economist zags yet…

The “Electric Vehicle crushing oil demand” story is completely overblown. Mass adoption, or even marginally higher rates of adoption continue to be pushed further and further out into the future. Meanwhile oil demand is booming baby.

It is likely that the weaker dollar combined with China’s fiscal stimulus have reawakened global oil demand. Although Emerging markets are not booming like they used to, they are still growing, and require more and more energy to fuel their growing economies. So not only is it likely that have we overestimated future oil supply, it’s likely we have underestimated future oil demand as well.

At a time when the all knowing oil gods cannot survive,
perhaps it is time for contrarian millennials who know nothing to thrive.


 

DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

USD Bull Market: Hanging By A Thread

USD Bull Market: Hanging By A Thread

The US dollar is the most important variable in macroeconomics and it has reached a critical juncture. After hitting multi-decade highs, the BIS labeled “global risk indicator” has fallen over 10% and is now on the verge of breaking key technical levels. In short, the USD bull market is hanging by a thread.

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Speculative dollar positioning was deeply caught off sides at the peak and has since flipped bearish. From the FT:

“Investment funds last year wrongly ramped up their bets on the greenback climbing, but according to CFTC data they are now net “short” for the first time since mid-2014 — after which the US currency went on a wild rally.”

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Conventional wisdom here suggests, you go long the dollar with a well defined stop…

And yet, structurally, the dollar looks as weak as it did back in the early 2000’s.

The parallels don’t stop there.

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Even though the dollar has not yet officially broken down against other major CURRENCIES, there are major breakouts in financial assets that are very sensitive to the dollar. Perhaps most importantly are the Emerging Markets which using the total return of the ETF $EEM as a proxy are breaking out of a decade long consolidation.

Even the much hated Caterpillar, a global economic bellwether, which had suffered declining sales for over 3 years before recently returning to positive sales growth has hit all time highs.

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The new all time highs in both CAT and EEM are reflections on the falling dollar and global growth which hit a post crisis high. More than 2/3rds of OECD countries are actually experiencing “accelerating growth”.

But global growth cannot continue without a response from the commodity complex (another dollar sensitive asset class) which appears to be finally emerging from a +5 year bear market. Gold, the ultimate short dollar trade and usually the first mover of any commodity bull market, bottomed in 2015 and has recently broken above its multi-year downward trend line.

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Copper and other base metals have been on a rampant run as of late as well.

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Here’s a chart of Alcoa, also breaking out of its post-GFC box.

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If that wasn’t enough, here comes the Fed to bottom tick commodity based inflation.

Fed trolling aside, while the dollar has not yet broken down completely, the price action across EM equities and commodities suggest that it is highly likely that the dollar has further to fall… BUT!

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But that does not mean the dollar is about to break down. I don’t think the Fed is aware of the full effects of its Quantitative Tightening (QT) program. As the Fed readies its QT, the US treasuring is planning to further drain dollar liquidity by issuing $500B of new notes by the end of the year.

So when you combine the falling dollar liquidity at a time when speculators are on the other side of the boat with a key technical stop, you get a no brainer trade. Especially if you are someone like me who is positioned for some of these longer term bearish dollar trades, it makes too much sense not to hedge some of that risk over the shorter term. As such, the Klendathu Capitalist has started buying dollar calls. We’ll see how that works out for him. Cheers!


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

Opa

Opa

It’s been over a month since I published something on this blog, making it the longest period of quiet I have endured since I fully dove into the world of finance back in December of 2015. At the time, I was on track to play professional Smite, a Multi-Online Battle Arena game or MOBA. At the time I had received a few offers from professional teams to join them in the upcoming season. Fate had other plans.

I woke up on the morning of December 12th to discover my dog of 3 years Dragon had died that night. I found him at the foot of my bed lying motionless on the floor. His sudden death, forced me to take stock of my life. I was depressed, overweight, and stressed beyond reason. I may have climbed to the pinnacle of my “sport” but without my best friend it was a hollow achievement. Later that week, I decided to rededicate myself to the craft of finance, focusing specifically on global macro economics, figuring that if I could climb to the top of one game I could do it again.

I bring this up, because once again I find myself wracked with the sudden departure of another dearly beloved family member, this time, my Opa, Leonard E. Baum. Many in the financial community will know him as a legend, the man who helped build the foundation of mathematics which supports our modern society, but to me and my family he was always just Opa.

He never bragged to us about his accomplishments. In fact, he rarely talked about them. He kept that part of his life a secret, only leaking small details here and there when we probed him enough, like the time he admitted to cracking a certain Russian leader’s personal code.

And despite his penchant for silence, I was able to learn of some of his most inspiring trades.

He bought Amazon so long ago, that his brokerage firm did not have electronic records of the date. During the depths of the GFC when everyone thought the world was going to end, he was buying Citi Bank, temporarily holding the market at $1. Although it briefly broke $1, he never sold and like Amazon still held those shares till his death. Despite these incredible trades, when I asked him just a week before his death, what his best trade was, he without hesitation responded “Julia”, my late grandmother.

It’s no wonder why I’ve always held him in such high regard. But to me, despite those incredible accomplishments he’ll always be the one who taught me how to multiply large numbers when I was three. In fact he gave me so much mathematical instruction that by the time I entered the first grade I was already doing fifth grade math. My elementary school teachers hated accommodating their lesson plans around me.

What is not widely known though were his story telling capabilities. Most children got simple bed time stories, but Opa would give us his rendition of the Iliad and the Odyssey so often that “sulking in his tent like Achilles” became a common phrase around our household.

Little did I know how inspirational these stories would be to me later in life. I wrote my first ever screenplay loosely based on Opa’s serial tellings of the knight Kay who would travel around the world killing witches and freeing princesses and the like. Like his stories, mine too starred a knight, although not in shining armor, his name was still Kay. And even though Opa was legally blind, and even though it was a beyond awful piece of writing he still found a way to read it. He was even kind enough to tell me how much he liked it, noticing the mathematical patterns embedded within.

Fortunately for readers of this blog, I won’t make you read it. Instead, let me leave you with a piece of Opa’s own writing. A critique of what he saw to be his strengths and weaknesses as a trader. I hope you will find it has insightful as I have.

Leonard E. Baum’s Paper On His Trading Capabilities

OPEC: Stronger Than It Looks

OPEC: Stronger Than It Looks

The author ducks.

Peering up from the keyboard with a flame retardant helmet and goggles to protect his most delicate of features he writes…

OPEC is stronger than it looks, much stronger. I’m reminded of the lava planet battle between Anakin Shalewalker and OPEC Wan Kenobi in Star Wars Episode 3.

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You see, OPEC Wan Kenobi has the high ground and is better positioned to withstand an attack. He repeatedly warns young master Shalewalker any attack is folly.

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But Shalewalker is young, arrogant, and brash. He ignores master OPEC’s warnings and attacks anyway, ramping up production like no one ever thought was possible. But it’s still not enough to overcome OPEC Wan Kenobi’s superior positioning and the young jedi ends up a cripple for the rest of his life.

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Incredible puns and film references aside, I think US shale (and the cheap dumb money that flowed into it) will end up doing a great service to OPEC. Thanks to US shale the price of oil has been suppressed for over 2 years now. With the oil price persistently low, companies are loathe to invest in future production.

Even though we’ve seen a dramatic reduction in capex, the major oil companies saw their debt almost double from 2012 levels. From Reuters:

“Five of the largest publicly traded oil companies – BP, Chevron, Exxon Mobil, Royal Dutch Shell, and Total – are trying to work down debts that totaled $297 billion at the end of December. That nearly doubled the companies’ 2012 debt levels.

But even with oil prices about 70 percent higher than a year ago, most companies have yet to reach the point where their cash flow covers annual shareholder payouts and expansion projects vital to the industry’s long-term survival.”

The major oil companies decided instead of producing more oil in the future, they’d rather give money they don’t own to their shareholders…

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And what did OPEC do during this time? They added 2m bbl per day of production.

Instead of taking on debt, OPEC members dipped into their pile of savings while at the same time investing in future production.

While reducing crude demand locally through renewable energy investments and tax incentives.

That’s all well and good, but US shale is still ready as the swing producer to put a $60 cap on the oil pice right? The magnitude of the drop in capex suggest that’s highly unlikely.

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With the recent ramp up in shale production focused in the most lucrative areas. The easy oil although not gone is quickly being drained. Repeated frac-hits (where a rig drills into another operating well) might be reducing the efficiency of shale wells.

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The high decline rates of shale wells is another major headwind to sustained production growth. Lastly, US shale’s ability to ramp up further production will be limited by rising service costs.

In the end, we may discover that the technological revolution of shale has as much to do with technology as it does with free money.

Unlike its competitors, OPEC has not produced oil at a loss. It has not spent money it doesn’t have. It has increased investment and now stands to profit from the myopic behavior of yield starved investors. With the world potentially on the eve of a new commodity bull market, the author quite likes the position of OPEC as a future supplier of oil demand that is highly unlikely to fall off to this supposed EV revolution (a discussion for another time).


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, what follows is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!