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1w ago on

Time to take prompt oil profits. I am taking profits on prompt oil and products into the midterms. The regime trade stays on. It comes back to the two trades I described this morning. The war trade pays on the price of the barrel: prompt crude, products, the windfall on barrels already in the ground. It is eight months old. The regime trade pays on the cost of replacing the barrel: rigs, services, local production, bypass capacity, firm power and storage. It is the structural supercycle call we made in 2020, driven by deglobalisation, debasement and electrification, compounded by underinvestment. The war brought that trade forward, but it did not create it. A reminder of the scorecard: commodities are the best-performing asset class of the decade: the S&P GSCI has returned about 260% since we called for the supercycle in October 2020, against 121% for the Nasdaq and 120% for the S&P 500. Commodities were already ahead of both before Hormuz - it just widened the gap. Why take profits now? Escalation would be so catastrophic for food and fuel supply chains that neither side will pursue it, while a lasting deal is equally elusive. The compromise is managed instability, with Schrödinger's Strait at the heart of it: a Strait that is neither open nor closed. That caps the prompt barrel. It does nothing to cheapen the next one. It has been a fantastic run. USO is up 144% this year. Energy, where the refiners and integrated majors carry the product exposure, is up 60%, the fifth-fastest run to a 50% gain since 1990, and the Munificent 7 did it on a Sharpe ratio around 2. The war trade has paid. My view on the regime is unchanged. Eight months into the closure, the world is rebuilding its physical system around the expectation that the Strait closes again: Gulf producers loading outside it, Italy restarting nuclear, the Dutch reopening North Sea gas, China sitting on 1.4 billion barrels. These are long-term investments in energy security. None of it dissipates when the ships come back. The investment to support that regime has barely begun. Oil is near $100 and drilling has hardly moved. Upstream investment is still well below its 2015 peak and refining investment sits at a decade low. Calendar 2027 Brent trades above every forecast on the Street: a long-term supply problem that nobody has yet been paid to fix. A supercycle is a capex cycle. The owners of the molecule get paid first. The builders get paid next. Prompt oil prices a war. Long-dated oil prices a regime. Trade the first, own the second. I have cut most of my prompt oil and product exposure and kept a small position in case hostilities resume after the midterms. If prompt prices fall from here I will not be in a hurry to rebuild them. The money has moved to the services and producers that build the regime. The first leg has paid. The second is still being built. These are my personal views and positions, not investment advice.

Higher for longer - that was the core message in my discussion with @CNBC Squawk Box Europe this morning. Everyone is focused on the spot price of oil. But look further out: calendar 2027 Brent is holding around $97 a barrel. That’s close to $100 priced in for an entire year, not simply a short-term spike. That has implications for everything from industrial and agriculture production to transportation costs and inflation in the months ahead. Now look at energy equities. The Munificent 7 are hitting all-time highs as the back end of the oil curve approaches $100. This is looking increasingly structural, not transient. It's the Revenge of the Old Economy in action. The old economy is short-duration, asset-heavy and benefiting from higher commodity prices, whereas the new economy is long-duration, asset-light and increasingly exposed to higher interest rates and inflation. The irony in all this is that the old economy is fuelling the new economy. AI needs electricity, transformers, copper, high-voltage cables and critical minerals. None of that exists without the physical world. ‘Generalists’ in the market are beginning to recognise what specialists across the physical economy has been telling us for some time: higher for longer isn't just centred on bottlenecks and disruption to the flow of hydrocarbons out of the Strait of Hormuz. Instead, it’s a structural shift that is likely here to stay. We’re electrifying the world for many reasons, chief among them the so-called energy transition. The original driving force of the transition, led by the Carter administration, wasn’t the need to adopt clean energy with climate change in mind; it was driven by an urgent need for energy security in response to the oil shocks of the 1970s. We’re seeing a repeat today: the crisis in the Strait of Hormuz and bottlenecks elsewhere, impacting our ability to source and transport hydrocarbons, is forcing states to turn to electrification. Great discussion with @cnbcKaren and Steve Sedgwick - thank you for having me on.

You can have that one, @annmarie.  It’s a vibe contract with the vibe set in Washington. The reason it’s a vibe contract is that ICE Brent never touches a wet barrel. Instead it converges to a futures contract on Dated Bent and is cash settled, making it a derivative on a derivative. Whether Washington sold barrels is irrelevant, it is the undenied threat that matters here because it has become unpriceable risk that discourages market participants which has caused a sharp decline in open interest, creating this disconnect with reality. As we discussed earlier, the impact goes beyond pricing. Futures markets exist to help participants hedge risk and guide them on investments. When those signals become distorted, hedging becomes harder, hedgers become hesitant and physical scarcity can worsen. Washington may be focused on keeping the screen price down, but that doesn’t solve the physical shortage. It makes it worse in the end.

I joined @FerroTV and @annmarie on @Business earlier today to discuss the latest on the energy market. The global energy crisis that we’re in the midst of goes well beyond the Strait of Hormuz, where the cost of moving oil are potentially approaching $1 billion a day in additional costs. That is unsustainable. But that’s just one part of the picture - there’s disruption across the Black Sea corridor, regular strikes on Russian refining infrastructure, Houthi-inspired obstructions in the Red Sea and the Bab al-Mandab, not to mention climate-related bottlenecks including the Rhine at historic low levels and a Panama Canal that LNGs are struggling to transit. And yet: everyone remains fixated on Brent. I call Brent a "vibe contract" because its price is increasingly disconnected from the reality of the physical energy markets. Diesel is at record highs. Gasoline prices are rising. The cost of physically delivering energy is moving higher - but Brent isn't reflecting the full extent of that disruption. Why? The answer lies within price discovery. If you're a hedger facing physical exposures that are substantially above the benchmark price of Brent, how can you accurately manage that risk? The more uncertain the market is, the more difficult it is to participate in said market, and the less confidence that is generated within the futures market. That last point is absolutely key. Futures markets are critical for the market avoiding potholes that might lie ahead. They anticipate the potholes that in turn lets traders adjust their behaviour and avoid the hazard.  If the futures market isn’t operating as it should, investment is impacted, behaviours change, people fail to price risk accurately and so they cannot anticipate the pothole - they drive straight into it. It can have profound consequences on the global market. The White House may be focused on getting through the midterms in a few weeks, but I struggle to see a straightforward resolution to addressing the reality of the market right now. Watch my discussion in full below and thanks again to the team for inviting me on. https://t.co/UG26IrubP6

I joined @BloombergTV's @FerroTV and @annmarie to discuss the current energy market and why the abundance illusion is fading. During the initial phase of the Middle East disruption, we saw a coordinated release of strategic reserves, from the U.S., Europe, Japan, alongside China and other Asian consumers flexing their substitution and drawing inventories, particularly products. That created weak oil prices and the illusion that the market was well supplied. However, crude oil prices are the noise, and product prices are the signal. The 3-2-1 Crack reached an all-time high of $70/bbl this morning. At $85/bbl Brent that’s $155/bbl product basket. And remember no one consumes crude oil, only products. This is why crude oil prices are the noise. Phase 2 of the US-Iran conflict is now starting from record low inventories, with multiple pressure points across the system — the Red Sea, the Strait of Hormuz, the Black Sea — alongside significant refinery outages. In fact, I’d argue I’ve never seen an energy environment this stretched. At the same time, there’s a major disconnect. Despite the pull back in crude oil prices, commodities are still the best performing asset class, up 34% ytd with the petroleum index up 81% ytd. Scarcity and debasement are still a core driver of investment returns despite the themes being underinvested and uncrowded trades. Commodities are the best place to hide with tech and equities poised for a correction. Own HALO (Hard Assets Local Operations) via commodity indices. Watch the full interview here: https://t.co/IW1tfvVdjf