Updated: I was right. Just a touch too early. Never did I think I would see the day....

For the first time ever you can now be paid to have oil!!

If you're quick, when the contract expires tomorrow you can be paid $13.98 for holding that barrel. Not bad ey.

In my recent blog post, I outlined the reasons why oil prices were going lower (admittedly, I changed my mind then said higher, then changed my mind again and said lower after the OPEC+ agreement) and turns out I was right.

I was a genius and was short the whole time, netting a $30 profit on each barrel of oil I was short (which for the record was 50).

Not quite. I exited my position as soon as Trump tweeted about a possible Saudi Russia deal.

$1500 missed. Damn.

Anyway the point is this; if you have a thesis, you're fairly sure it's right, stick with it.

That being said, after the announcement of a possible cut I have no regrets about exiting the position as otherwise we would have been way outside of my risk parameters and I would have had to put up margin which would have terrified me.

So what has caused this catastrophic collapse of the price? 

It's quite simple really, this is a contract which expires tomorrow, so if you buy now that oil is going to be turning up on your doorstep, and who really wants barrels of oil right? Unless you've been living under a rock you've heard about the virus and crisis it has caused. There is no demand for oil, essentially buying now is like hoping for a rebound at some point in the future. A barrel of oil is big, takes a lot of room to store - it's expensive too! That's why the price is so low.


Anyway, we live and learn. These are strange times indeed.



Since I started typing: 

Update: 

I had a couple of questions from a few people about what happens to prices now, so I thought I'd add this on to the current blog post on oil.

Essentially, we now have a new futures contract which expires at a later date. Therefore, the price of this contract is positive because people are expecting the demand for the oil to recover as soon as the virus restrictions worldwide are eased.

However, we have already seen some massive drops in the price of this contract, with the price moving aggressively downwards for two days in a row.

The current price for a barrel for delivery on the June contract is around (+) $10.

My expectations are that as we move closer to the deadline for the expiry of the next contract in a month, we see a similar price movement because I do not expect world economies to significantly get back to business by mid-May. Thus, we could see oil sink lower again.

Gold is Golden Once More

Everybody knows that gold is a haven asset. However, during the recent Coronavirus Crisis, all markets appear to have been selling off, and this included gold (see below diagram). Only recently, has gold regained its lustre, soaring in the last couple of weeks once more. The purpose of this article is to try and hypothesise why gold was not acting as a haven asset for a few weeks, and why now it has regained its status as the ultimate safe-haven asset.

Why is Gold a Safe Haven? 
To understand the way which gold has reacted, it first helps to consider why gold actually functions as a safe haven in the first place. The main reason why gold is a haven asset is that it is precisely that; a physical asset. Regardless of any macroeconomic event, gold is still something physical which can be owned, and it has retained its value throughout the millennia.

Secondly, gold is a hedge against inflation. Due to its status as a physical asset, if inflation is expected to rise then it is rational to expect gold prices to rise in line with inflation.

Finally, in the era of fiat currency where our paper money is worth effectively nothing in terms of asset value, if interest rates are near zero you might as well hold gold rather than cash.

Why did gold prices fall from the start of March? 

Financial media has posited a number of reasons why gold price collapsed in March. Firstly, there has been an argument made that because investors were losing so much money that in the rush to liquidate stocks, they had to sell gold to cover the value of their losses - as with any supply increase, this drove down the price.

Secondly, there has been an argument that many people in Asia who hold hereditary gold have been taking advantage of higher prices and selling heirlooms, the extent to which this is true is probably rather small, but it is possible that there was initially some increased supply on the market when gold hit a multiyear high.

Thirdly, and I have no evidence for this; it is just a theory. I believe that the price of gold was driven up before the bulk of the equity market sell-off because investment banks were pre-positioned to anticipate an increase in the price of gold. I.e. They expected the market to fall and for gold to act as a safe haven, so they pre-purchased a large quantity of gold ready to sell to investors. This drove the price up toward the high point seen in the diagram above.

However, when the market rout actually came, the demand for gold was not as high as expected due to the speed of the rout, and therefore banks had to exit their positions. This is entirely hypothesised, but it would also partly explain some of the action in the Treasury market.


Why did gold prices rise in the last few weeks? 

But then, everything changed. Suddenly, the Central Banks of the world stepped on the accelerator regarding monetary stimulus.  The Fed 100 basis points interest rate cut can be seen clearly on the diagram above with the large green candles in the gold price from the 15 March (where the Fed, in an unprecedented manner, could not wait another few days until its policy meeting, instead acting on a Sunday!)

Furthermore, the rich have been worried and there has been a dramatic rush for physical gold. Gold dealers around the world are struggling to find gold to sell, with one stating that if anyone wants to seek bullion, he wishes them all the best, but he cannot deliver.

Gold has restored its haven status, and as more central banks decide to turn the money printer on, it seems only likely that the price of gold will roar higher in the near future.

Updated Update: Oil is Heading Lower

Here is the original post:


Given that oil prices jumped 12% overnight, perhaps this is a slightly interesting title for this blog post. However, it is my firm belief that oil prices in the short-term are heading lower, and I wouldn't be surprised if we saw West Texas Intermediate Crude drop below $15 a barrel (it is currently trading around $22 a barrel and my prediction therefore anticipates a 30% fall in oil prices).

I will outline the reasons below, and then create a trade strategy.

It is also worth noting that I rebought shares in Shell after they crossed below 1000GBX and then rode the 40% wave back upwards for a tidy and rapid profit.

My first reason for being bearish on oil is that there remains both a demand and supply crisis. Demand for oil has fallen by at least 20% per day and is likely to fall further as the crisis drags on through April. There is clearly going to be reduced demand from America across the board for at least all of April as the social distancing measures remain in place. Secondly, despite China deciding to accumulate another 60 million barrels to take advantage of low prices, they have significantly underestimated the spread of the virus and it seems possible a second wave could hit China and wreak havoc on their economy once again. For this reason, the outlook will continue to be weak on the demand side for the foreseeable future, no matter how many barrels China buys.

Secondly, there is a supply crisis. Saudi Arabia reached the end of its production cuts on March 31 and is now pumping oil like there is no tomorrow. Given that the Saudis are likely to increase production by as much as 2 million barrels per day in their price war with Russia, there will only continue to be increased supply on the market. This will drive prices lower amid a demand crisis.

Thirdly, the oversupply is currently so dramatic that there is nowhere to store the oil. Oil tankers around the world are full, and therefore it won't be long before the price really has to come crashing down to incentivise companies to find somewhere to stick their oil. Already, oil tankers are taking long routes in order to use up more fuel. Not to mention, for oil companies like BP, the cost of storing oil is soaring due to the immense demand for oil. In landlocked countries, refineries are losing money on every barrel they process, and will therefore slow or completely stop production - this means that pipelines and supply routes will shutdown as there is simply nowhere for the oil to go. It would not be surprising to see producers start to pay to offload their oil before long.

Fourthly, Trump may be promising the world when it comes to making a deal with Russia regarding oil, but has everyone forgotten about the trade war? He is notoriously difficult to deal with, and therefore it seems unlikely that any meaningful agreement could be reached. More likely, he will proclaim that he is tariff man.

....I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN

— Donald J. Trump (@realDonaldTrump) December 4, 2018

Ok, so the four reasons above paint a fairly bleak picture for the outlook for crude prices going forward. So, what's the trade? 

Firstly, I remain at least partly long in Shell, they are less exposed to the crisis and the balance sheet remains strong to promote the dividend. Therefore, it seems likely that they will eventually get through the crisis.

However, BP looks in a far worse position to weather this storm. Firstly, when you consider PE ratios, BP is far more expensive than any of its peers, and it also requires a higher price per barrel than many rivals to make its dividend affordable. Whilst it does have approximately $32 billion of cash available to it, this will quickly run out as by my calculations BP loses roughly $50 million a day at these current prices in its oil production. Therefore, I am short 100 shares of BP in anticipation of further downside in the stock and a relative valuation correction is imminent. This is my favourite kind of trade as the macro analysis is weak on oil and this is backed up by fundamental weakness in the stock.

Similarly, to be extra risk-loving (and to follow my new favourite phrase: "If you're going to be short, be short. " I am also short in CFDs on crude futures directly, although I stress this was already the case due to my hedges against my position in Shell.

In order to be rigorous, I would exit the position if there were to be a material narrative shift in the oil demand or supply situation. Presently, this is a demand and supply crisis, but if it were to become just a demand crisis (due to the Saudis and Russians negotiating a truce) then it would be possible for oil to rise again back toward $30 per barrel.

Secondly, I would exit the short position on BP by the end of April, as it seems unlikely that the dividend is going to be cut and I would therefore like to exit before any dividend payments have to be made. Similarly, we do not yet know fully how much summer will impact the spread of the virus, and it seems likely that by May there may be some green shoots starting to show on the demand situation - particularly if China can avoid a second round of the virus.


Update: Trump says the Saudis and Russians are each cutting half of their daily production. You could not go far wrong by doing the opposite of all my recommendations.

I have exited all of my oil shorts hours after I created them. Good thing I was on the ball otherwise losses would have been massive.

Update 2: Oil is heading lower. New news says that the Monday OPEC+ meeting is now not going ahead based upon a new rift between the Saudis and Russia.

Maybe I should stop trying to predict oil price directions? Or perhaps the world of geopolitics is as convoluted as ever.