On August 17th, I wrote an article titled “The Big Long.”
Since then, most of the events that I thought would occur have occurred. And our book has done reasonably well, increasing at a faster rate than the S&P Oil and Gas Exploration and Production ETF.
But with all the indications now that we’re heading towards much more escalation in the current month and that the whole situation of stocks and flows is getting more and more complicated, I believe it is time to recenter the book on plays that make a bit more sense given the current environment.
It was always expected that this would be how I would proceed. I’ve signaled many times that I would add to winning positions and curtail losing ones, and this is exactly what I am doing today. Beyond a separation between winner and loser, it’s more okay, given the scenarios in which I expect WTI to go up, but Brent also to have a violent move up. In between now and mid-November, we need to find places where we have high talk on those movements.
And this is where we must move some of the book away from more of a resilience trade (or places where hedges reduce the amount of upside that’s available to us) and find purer expressions in the equity world of what we want to express.
What price is the barrel that the company sells?
How much of that price does the company realize?
How much of what it realizes goes down to the shareholder?
So if you’re building a portfolio with hedged, Canadian, diversified, and long-dated energy stocks, that’s exactly what you want.
If you don’t quite know which which way this conflict will go. Now that we want to express our view with much higher conviction (it was, of course, already quite high conviction with the 45% exposure), I’m looking for less resilience in some places and more talk. This will inform, in a lot of sense, the names that are going and coming out of the portfolio and those which are coming in.
The big move is still brewing
On the twenty eighth of September, I said that this conflict had no choice but to re-escalate. Since then, ever more tankers have been hit inside of Hormuz and outside of ports in the region, with the IRGC saying that they will extend targets to any ship in the region which they believe does not comply with their rules.
The Houthis have escalated their war in Saudi Arabia, targeting both civilian infrastructure and the East-West pipeline, as well as different refineries and oil fields throughout the country. This is putting a strain on what can possibly come out of the country in the upcoming month. Regardless of the exact details of when the pro-Houthi propaganda is being oversold on X or the Saudi Arabia government messaging is being too conservative on X, there is a clear case to be made that my general thesis of this conflict reescalating is playing out.
Dated Brent, which is the price of physical cargo that actually clears, has been trading well above futures for the whole quarter, which is exactly what an actual squeeze looks like. Europe is going into winter with its gas storage 71% full, which is the lowest since the records began in 2011, and all the while Qatar gas is still stuck behind the Strait of Hormuz.
Our position in PetroBas has paid off extremely well, and I believe it will continue to do so. I’ve been looking for names which would fit the same bill and which would benefit members equally going forward.
If you join Babylon Burns today, you’ll get this summary, which gives you exactly where my mind is at with the energy trade: what it’s leaving and why, and what we’re doubling down on. This will help you inform your views on the entire Hormuz selection and not the Hormuz selection on the whole Hormuz trade.
Beyond that, tomorrow I’ll be releasing an article on my favorite other Hormuz trade, which is totally ignored by most of the markets, misunderstood, and which I believe has maximum convexity going into the fourth quarter.
On top of this, you’ll get access to the Babylon Burns web application, which comes with custom charting software, member videos, analysis, and live notifications on the portfolio.
Given the success that Babylon Burns has had since I launched in mid-August, I cannot guarantee that I will be able to onboard members at account prices for much, much longer. When demand is too high, of course, the economic response is to ration the market with price. However, if you join now, you’ll join at a much more reasonable price, and all it would take, really, is one good idea to pay off in your portfolio to pay for the whole subscription.
Join Babylon Burns today.
