By: Wilson

I’m not going to sugarcoat this; we are now in the worst of both worlds. One signal I gave myself after the midterm election blue tsunami was to watch Trump’s words for clues, and boy, it doesn’t look good.

The broader equity market finally sold off yesterday as people are attributing the material sell-off to liquidation. But instead of asking why we were there in the first place, first-level thinking never ceases to amaze me. The equity market should never have rallied after the Iran War started. Inflation was going to spike along with oil; we had an impending shortage and no resolution on the horizon, and tech stocks were trading over 30x earnings. You can’t reason with insanity, and this time was no different, but I digress; it’s not even about the equity market today.

The problem is incentives. Shortly after the midterms, I had the thesis that he would blame the Democrats for anything bad that happens to the economy, the stock market, or... you guessed it, the oil market.

And boy, Trump did not disappoint.

Soon after, he followed up with another one, and I quote, “You only have yourselves to blame!“

You see, the market continues to believe that President Trump is a hard man to read. I have a surprise for you, he’s not. The idea that Trump always chickens out isn’t the correct diagnosis because you have to think about incentives. He’s only TACOed because 1) he wanted to win the midterms and 2) he wanted to push stock prices up and oil prices down.

And that’s why the political messaging immediately after the midterms told you everything you need to know about incentives. He is now changing gear. If the stock market rallies, it makes him look bad, and if oil prices go down, it will be the Democrats.

I wrote on Monday in my WCTW piece that it’s all about incentives. Trump could still choose to not attack Iran, but the idea that he will come to a quick peace deal is just lazy thinking.

Why?

Because we are now in the worst of both worlds.

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By: Wilson

Even a blind squirrel finds a nut. That’s how I really feel about my memos over the past 2 weeks.

October 8 - AI Fatigue

October 14 - I just don’t see how this ends well at all

Since April, I have been baffled by the broader market’s move higher. Then June came along; Trump timed the MOU signing with the largest IPO in history, SpaceX, and it all made sense. It was all just a pump job.

And for a short while, everyone thought the conflict was over. Crude oil is well supplied, and we have a refinery shortage. Now it’s a tanker shortage. Meanwhile, the market fixates on whatever is rallying in front of them and global oil buffers are running out.

First, we saw product storage run out. China, which relies heavily on Middle East crude imports, banned product exports at the start of the war, bought the world exactly 3 months by draining crude oil inventories, and ran out of domestic product inventory. During this period, market commentators were so eager to point to demand destruction of 4 to 5 million b/d.

Well, where the hell are they now?

Yeah, that’s right. It wasn’t demand destruction; it was bad data. Those pesky satellite onshore crude oil inventory data providers don’t really know what’s going on in China. Even my subscribers thought I was crazy when I had intel that China was set to resume crude buying back in June. But it is what it is; I’m not here to argue about historical facts; I’m here to make money.

Perhaps all of my ranting isn’t doing anyone any favors. I mean, seriously, who the hell reads this stuff anyway?

Well, too bad, I’m going to rant anyways, because I just can’t believe we had to go through 6 months of this stupid shit only to be back in the same spot we were in April. We are literally looking at operational minimums in global crude oil storage ex-China, and the broader market is still spitting distance from all-time highs. How the hell does any of this make any sense?

Yes, I sound like I’m crazy, but I’m not. The world has never seen a supply outage this large or this long. Never. And the last time it was even remotely close to this (1973-1974), the S&P 500 got destroyed.

Looking at history, the OPEC oil embargo only lasted until March 1974. That’s 6 months, and the deficit gradually increased. This time around? We are in month 8 and likely to get worse.

We are not ok. I don’t know what drugs everyone is on right now, but we are not ok. People are still ignorant of what’s to come when we physically run low on crude oil. Those pesky oil shuttle runs, contingent on the bravery of someone willing to make life-changing money, won’t last forever. It’s like a toothpick holding up the global economy today. You really can’t make this stuff up.

Now don’t even get me started on the geopolitical issues that appear to be heating up. The all-or-nothing nature of this conflict should unsettle anyone who spent just 30 minutes thinking about it. And don’t say that you don’t know; just think. How do we resolve this? Game it out, and if you try, you will realize that none of the scenarios you list resolve this issue.

Again, I think my issue is that I’m always too damn early. I look at a problem, focus on what matters, and immediately assume everyone else will reach the same conclusion. No, and it obviously hasn’t been the case for most of my career. I’m usually early, which is the same damn thing as being wrong, but I’m here to tell you that this is really just the beginning.

The market consensus still believes the Strait of Hormuz issue is transitory. That somehow both sides will find some middle-ground solution, like Iran “secretly” letting oil flow without any tolls, or the US “secretly” giving Iran an airplane full of cash so that it doesn’t escalate further.

Whatever fancy theory people come up with nowadays doesn’t address two core issues:

• How does Iran prevent future escalations?

• How do the GCC countries prevent Iran from controlling the Strait of Hormuz?

When you put these two problems side by side, you realize you can’t solve one without the other question collapsing. That’s the issue, and that’s why it’s all or nothing. If Iran is allowed to control the Strait of Hormuz, then 20% of global oil supply will be under its control, and the global economy will be held hostage forever.

For educational purposes, oil is an extremely sensitive commodity to small changes in supply and demand. A 1 million b/d surplus or deficit can change prices by $25-$40/bbl. That’s why OPEC+ exists to manage the supplies of the market, but if this torch is passed to Iran, you can bet that they will abuse the power.

Maybe it’s because I’ve been doing this global oil supply & demand modeling for over a decade that I truly appreciate how much pricing power they will have in the future. Some generalists simply don’t comprehend how much a 1% change can matter. Well, it does, and now that the conflict is here, there’s no going back.

So when you give Iran ~20% of global oil supplies, you are effectively making it the most powerful oil producer in the world. That’s the reality, which means that there’s no way the US or Israel can accept this outcome.

Again, if you game this out, you will realize that no matter what scenario you come up with, the end result is the same. It’s a binary outcome, which means things have to get a lot worse before they get better.

I guess time will tell whether I’m just stupid and crazy or that I’m actually seeing things correctly. I’ll let the future decide my fate. Let the bloodbath begin.

Analyst’s Disclosure: I/we have a beneficial short position in the shares of ARKK either through stock ownership, options, or other derivatives.

By: Wilson

I am a value investor by nature, but my investing experience has taught me to be more attuned to sentiment and price action. As Jon and I look at the broader investing landscape through the lens of energy specialists, I don’t see how any of this will end well.

Jon published a WOMM piece yesterday saying he doesn’t see any bargains in the market. It’s a public article, and it’s worth 6-7 minutes of your time to read it. In general, we are on the same page, and while Jon is more conservative and leans towards doing “nothing,” I am a bit more adventurous (and stupid), as I put on a small short position on ARKK.

You see, from the lens of an energy specialist, what we are seeing in the oil market today is just the tip of the iceberg. The Strait of Hormuz issue will be an ongoing conflict, and the market still sees it as transitory.

Why? How could that be?

It’s pretty simple really. Most people are too lazy to do the work. No, I really mean it. They look at the price action and conclude that nothing meaningful is going on.

S&P 500 near an all-time high? Yeah, it’s probably a nothingburger.

Nvidia guidance shows stellar AI demand growth? Yeah, it’s probably a nothingburger.

Over the past decade, energy has been the sector where you throw your career away. For those of us who survived, the numerous battle scars can fill a bookshelf. I can’t count how many times I thought about quitting. You can read through the archive in the “memo” tab to get a glimpse of the pain we all had to go through.

But now that energy is front and center in the global investing landscape, most people are still choosing to ignore it because it’s transitory. IEA, the energy agency created to help the world avoid an oil shortage, continues to blatantly publish reports that sound like propaganda pieces.

“We will be fine,” it says.

Source: IEA

All you have to do is compare its forward oil deficit projections today with what it published in June. Another quarter went by; it revised the deficits higher, changed the Q4 2026 surplus into a deficit, and then continued to forecast a 2027 surplus.

Seriously, that’s not analysis. That’s Excel drag on steroids.

And although this kind of stuff gets on my nerves, as you can probably tell from the tone of this memo, it still gives me hope that the worst is ahead of us. It’s usually never a good thing when IEA panics, because when it does, it’s probably the time to sell everything.

But if my read on the market is right, the only way we reach the “fevered” sentiment point is for the broader market to sell off.

From a relative-price-action standpoint, I believe we are approaching a major turning point.

Nasdaq to XLE

For those who have been with the service since 2020, you may recall the tech-to-energy charts I used to post. Now in fairness, I have called for tech to underperform energy a few times since 2022, and all of those calls have been dead wrong. But with the backdrop we are seeing in oil, I don’t see how this ends well this time.

Sentiment

Markets are efficient and inefficient all at the same time. What we are seeing today is an inherently reflexive market environment. Outperformance begets outperformance as traders assume what’s going up must keep going up.

The extremes have gotten more extreme over the past decade as passive investing makes the active moves more prone to violent swings. The herding effect therefore makes asset classes that aren’t usually correlated become correlated. This is why it is obvious, even to the naked eye, to see unusual market moves, like tech vs. energy.

And no, tech and energy were not always inversely correlated. The correlation got extreme in 2022, and it has continued ever since.

That is why I think something similar will happen this time, and why I’m writing what I’m writing.

Now, if I turn my attention to the sentiment factor, I believe that over the coming months, the market will shift its view of the Strait of Hormuz issue from transitory to prolonged. When that happens, the broader market and energy stocks will reflect it. But I don’t think that will be the time to get out just yet.

Instead, I think from a sentiment standpoint, the time to get out of everything in energy is when the market believes that this conflict will never end.

As I wrote before, my issue is that I’m always early. I realized back in April that this issue would persist much longer than people think. I made an oil trading mistake in May thinking that the market would see it the same way, then the June MOU came and I got my ass handed to me.

I still firmly believe the Strait of Hormuz issue is all-or-nothing, meaning things have to get really bad before they can get better. Using this logic, market sentiment will likely signal when we’ve reached a major turning point. The only scenario I can think of is if people assume this conflict will never end.

As usual, this will coincide with some ridiculous move in oil that our imagination probably can’t fathom, and by this point, I will hear about going long oil from the most random people.

That will be the time, but it probably also means nothing good will happen in anything else for a while.

Analyst’s Disclosure: I/we have a beneficial short position in the shares of ARKK either through stock ownership, options, or other derivatives.

By: Wilson

I have been using AI religiously since early 2025. The innovation is amazing. It makes your life a lot easier; you learn faster, and, hell, it lets you do things you never thought possible (for example, I have zero coding experience).

But over the past few months, I saw a dramatic drop in AI usage. Not because it’s no longer useful; I still use it daily, but it feels like something else entirely.

Let me explain.

People have been abusing AI lately. This is especially the case in the writing world. My god, where do I even start? The amount of AI-written garbage being published these days is completely out of control. In fact, I have seen some writers literally write prompts that copy my article formats and writing style. How do I know that? I’ve tested it, and it’s good, but it’s not the original.

And it’s obvious at first glance that it is written by AI. I get it. Writing isn’t for everyone, but please at least try to be original. If we make mistakes, that’s part of what makes us human. Writing is no exception. I would argue that the writing style itself is what draws in readers.

For me, I have always been a very straight-to-the-point writer. I don’t want to waste your time. If I’m bullish, I will tell you. If I’m bearish, I will tell you. I don’t beat around the bush or play wordsmith. I don’t hedge my writing. So yes, I’ll be stupidly wrong sometimes, but hey, that’s the price of being genuine. I can live with that, and since my pocketbook is tied to my writing/bets, so be it.

But the more I browse content these days, the more I find myself completely turned off by AI-produced content. The lack of thought, the lack of originality- it’s a real turn-off. It’s such a turn-off that I’ve resorted to using Google again, which is probably a tale. Even though Gemini pops up as the first prompt, it’s still very useful for things like “how many calories does this exercise burn, etc.” I think the general sense of AI fatigue is real. What was an extremely useful tool to start off with is being overly abused to do the wrong things.

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By: Wilson

I don’t know about you, but I have never seen a more polarizing commodity than oil today.

Ok, maybe I lied: silver, gold, uranium...

Commodities tend to bring out some of the more extreme personalities in the investing world. But then again, commodities with loyal followers who eat bouts of shit every few months tend to do that. I guess you can say that with stocks as well.

But not to digress, my point is that with the current oil rally, I have never seen the bears and bulls so at odds. If you take a step back, and you told anyone a year ago that the Strait of Hormuz has been semi-closed for 6 months and asked them what the price of crude oil would be, they wouldn’t have said $100-$110. Unless, of course, that person is a bear like Robin Brooks, who just doesn’t know what he’s talking about half the time.

The point is that the oil long trade was obvious, but markets have a way of tormenting those who treat it as such. Unlike previous oil rallies that fizzled away, like the 2022 Ukraine/Russia war, this oil trade refuses to fizzle away.

Why?

Because the Strait of Hormuz issue is an all-or-nothing affair. Either Iran controls it, or it doesn’t. But then again, we are kind of living in this weird world right now where Iran is firing at tankers, and the US continues to escort tankers out.

So I guess there is a middle ground? Sure, but it’s not sustainable.

What is clear to me is that this oil rally is extremely hated. I think by this point, everyone who watches price action can probably figure that if oil continues to rally from here, the broader market won’t do well, and Treasury yields will continue to rise. At some point, if the oil rally gets too intense, the global economy will go into depression, and oil demand will fall.

The Trump administration has done every conceivable maneuver thus far to tamper with the oil rally. It first resorted to fake peace-deal headlines, then SPR releases, then more fake deal headlines. Now, it is out of ammo on the TACO tactic. The last remaining one is to use what remains of the US Strategic Petroleum Reserve. After that, if the conflict still isn’t resolved, it’s either more escalation or total capitulation.

But what’s funny about the sentiment I’m seeing on social media today, and among my subscribers, is that even the bulls just hate oil with a passion. Never mind the oil bears that are getting their faces pounded in. The bulls themselves are hating the very trade that was obvious to everyone at the start.

Speaking purely from a sentiment standpoint, I have seen more people quit oil trading in the past week than before, not because the oil trade went wrong, but because they have made money and never want to touch it again.

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In the battle of giants, we are but mere ants hoping to side with the right giant. One wrong step and oops, see ya later.

As I have written over the past month, the oil market is at a precarious turning point. One flawed assumption I had going into the “timing” part of the oil trade was that we needed elevated crude oil prices in August and September leading into the midterm elections. I don’t think that’s necessarily true. I think the timing is closer to September/October.

It appears the economic pressure is first unfolding in product inventory, which can be best illustrated in these three charts:

Gasoline

Distillate

Big 4 (US crude with SPR, gasoline, distillate, and jet fuel)

Now, what you will notice in the gasoline chart is that we are at an all-time low for this time of the year. That’s a big no no.

Why?

Refineries perform seasonal maintenance from mid-September into early November. This semi-annual maintenance gets the refinery ready for the winter demand months and, more importantly, keeps the refinery running smoothly to keep unforeseen operational issues at bay.

But with the strong refining margins refineries are enjoying today, most are choosing to delay maintenance, which will be an issue during the winter months. And this is where it gets alarming.

Gasoline storage is already too low for comfort. Driving demand does not meaningfully taper off for another 2.5 to 3 months, which means that if refineries don’t operate at 17+ million b/d, we will have localized shortages. Now, one thing to consider is that the US could just choke off gasoline exports, but the rest of the world, suffering from the same gasoline/distillate shortage issue, will just bid prices up and push exports higher.

In layman’s terms, if demand isn’t curtailed or gasoline exports don’t drop, we’ll have no cushion a month into the midterms.

For distillate, the situation is worse.

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By: Wilson

It appears the Trump administration is going all in on economic fury, since Operation Epic Fury didn’t succeed in opening the Strait of Hormuz.

According to comments made by Treasury Secretary Scott Bessent today:

Watch this ⁠space for more announcements ​coming next week because we ​are going to apply measures like have never been seen in ​the history of economic ​isolation on a country.

It will be a combination of economic ​isolation like ​the ⁠world has never seen before, and the ​continued blockade in the ​Strait ⁠of Hormuz that will keep anything from going in ⁠or ​out of ​the Iranian ports.

Iran is about as sanctioned as you can get at this point. The only way for Bessent to pull off a real sanction is if it goes all out on the Chinese. But even if that happened, China would just ignore it and continue doing business the way it has been.

What’s funny about this new strategy of “waiting it out” or playing for time is that the US thinks it has the variable time on its hands when it’s the exact opposite.

In Goldman’s latest oil report, it posted this chart, which will likely get heavily scrutinized by Bessent tomorrow.

But the drop in visible total oil inventories is obvious since most of it came in oil-on-water. If the Strait of Hormuz shuts off, oil-on-water falls, which translates into lower onshore inventories.

China, which was somewhat immune to the initial drop in crude imports, is no longer showing the same invincibility now. Suddenly, onshore crude oil inventories are falling as if some underground storage was drained first.

Surprise!

And as I wrote in June when the MOU was first signed, China’s onshore oil inventories won’t build despite higher crude imports. Why?

Black box in, black box out.

Going forward, China has two choices:

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On July 4, I published a memo titled, “It’s Now Or Never.” The timing of the memo coincided with The Economist’s publication of a piece detailing why it got the oil call wrong.

Since then, Brent has rallied ~16%.

On Thursday, The Economist strikes back with another beautiful headline:

Gulf states should make a deal with Iran on Hormuz.

And with that, another chart is born.

It is incredible how The Economist perfectly captures the consensus thinking. “How to make Iranian blackmail less painful,” they said.

Incredible.

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By: Wilson

I am not that smart. If you are subscribed to me thinking that I’m smart, you are shit out of luck. Thankfully, investing/trading does not require raw intelligence. It just requires someone humble enough to admit that they aren’t that smart and, more importantly, learn from their own mistakes. As Buffett always said, temperament is more important than IQ (I hope he is right).

Long-time readers will know that I have no problem admitting to my mistakes. I own up to them because my profit & loss is tied to my writing, analysis, and trading decisions. If I’m wrong, I lose money. If I’m right, I make money. Nothing more, nothing less.

With that, it’s important to write a reflection memo piece on the things that didn’t go so well on the oil trade so far.

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By: Wilson

I might need to be admitted to the insane asylum soon. I went through 6 sell-side reports today, all assuming some type of return to normality within 60 days. Goldman is assuming the end of July; Morgan is assuming the end of August; HSBC is assuming sometime in August; JPM is assuming sometime in Q3; and so on.

Perhaps I’ve been reading too many OSINT accounts or following the tanker vessel counts a bit too closely. But can someone please help me understand how we are going back to normal anytime soon?

Here are some charts from Morgan Stanley:

Crude Oil Exports

Transits out of MEG

Transits into MEG

And here are some charts from Goldman:

Flows out of SOH

Production shut-in

Imbalance

So let me understand this correctly. Since June 17, we have released the floating storage that had been stuck due to the closure of the Strait of Hormuz.

Energy Aspects estimated that ~150 million bbls exited since June 17, which equates to ~8 million b/d. Most of that is due to the stranded barrels leaving, which still leaves production shut-in (optimistically) at ~6 million b/d.

Even Goldman’s own analysis assumes there’s still a ~6.6 million b/d flow difference despite the recent pickup. But the oil market is in a glut because of ~150 million bbls exiting?

What?

Every sell-side analysis I’ve read so far rhymes with something along the lines of this:

We estimate the Strait of Hormuz flow to normalize by ___. We project that the global oil market will be in a steep surplus going into 2027, which should help build global oil inventory buffers. We expect UAE to increase production higher than previous years because it has exited OPEC and will ramp production. Non-OPEC supplies have also increased versus pre-war expectations, and we expect some type of structural demand destruction that came from this conflict.

I must be insane. I just can’t believe the analysis I’m reading these days. Either I am the dumbest human being on the planet, which I am open to admitting at any time, or everyone has completely lost their minds.

There is no evidence happening in the Strait of Hormuz that leads me to believe that any semblance of normality is coming anytime soon. The US and Iran are actively bombing each other, the US is forced to escort ships through the Oman lane with AIS turned off, and sell-side analysts are assuming normality to return by the end of the month.

This is not an analysis anymore. This is wishful thinking.

In COVID, I remember sitting in my office in April and reading about how:

• Oil inventories are going to hit tanktop everywhere. Tanker rates are going to skyrocket due to floating storage demand.

• Permanent demand destruction is coming. Global oil demand will never surpass 2019 levels again.

• Oil markets will take years to recover from the inventory build-up, and we may not see $50 to $60/bbl crude for at least 3-5 years.

And as I was reading through these reports, I was simultaneously attending board meetings for Gear Energy about how we needed to drastically shut-in production because crude oil was trading below our operating breakeven. Where was the analysis about the production shut-in? Where was that analysis?

I remember thinking in 2020, I must be insane. There is no way the investment community doesn’t realize that when oil falls below operating cost per barrel, producers are forced to shut-in production. This is an inevitable outcome for producers worldwide. Even if OPEC+ producers didn’t want to shut-in barrels, they had no choice. Prices are too low, so production cuts were an inevitable outcome.

And a month later, production shut-in was all anyone talked about. I just sat there in complete disbelief. Something that was so insanely obvious was overlooked by the whole market.

Well, this time isn’t any different...

As an energy specialist, it is impossible to make a prediction about the future if I don’t know who ultimately controls the Strait of Hormuz. Anyone making predictions beyond Q3 is fooling themselves. The fact that we still have this volatile of a geopolitical landscape all but guarantees that any forecast will be wrong.

How are people so confident that everything will be back to normal so soon? Iran wants control of the Strait of Hormuz as a permanent deterrent. The US and Gulf allies cannot give Iran control of the Strait because it would make it the most powerful oil producer in the world.

This is not difficult to understand. It is not rocket science. Either Iran gets control, or it doesn’t. But assuming everything will be normal is pure insanity. And the fact that the investment community has piled on the short side just makes it even more asinine.

Long-time readers will know that I have no issue admitting that I’ve made a mistake and learning from it. But this is something I simply do not comprehend. We have not resolved a core issue that continues to plague the oil market. Production shut-in persists and with the Oman lane being heavily contested now, inbound tanker flows will be restricted again, which all but guarantees a slower production restart timeline. And the longer the conflict drags on, the more the barrels stay shut-in, and the more onshore inventories have to drop.

Sure, global oil inventories got a temporary boost from floating storage that’s being released, but it’s a blip.

This issue will persist so long as the core issue remains. And if the conflict for the Strait continues, then the production shut-in math will get worse, which will all but guarantee more inventory draws.

Now that China is back and has lifted the export ban on products, we will see just how quickly those floating storage barrels are absorbed. With elevated refining margins, China is the only place with excess refining capacity, and I fully expect it to be utilized.

We will see just how much longer the market buys into the narrative that things will soon return to normal.

Insane Asylum

I know I’m not a normal person, but I know I’m not crazy. What we are witnessing in the oil market today is history in the making. We have never had Brent short positioning this high and global crude oil inventories this low.

Now if you put this into a net long Brent perspective, you get this chart below:

In essence, the oil market is saying exactly what sell-side analysts are saying. Normality is here, the Strait of Hormuz is back to normal, and the oil market is about to see a record surplus.

The only other time Brent net long positioning was this bearish and global onshore crude oil inventories were this low was back at the end of 2024. The market expectation was that 2025 would see builds.

And in fairness, the market was right. We had OPEC+ announce a truncated production increase on the same day that Trump announced the tariff Liberation Day. So global oil inventories built up, mostly in China buying for the SPR, and the sentiment was right.

But there’s a lot more at stake this time around. At the end of 2024, the oil market was normal. There was no active conflict. We didn’t have missiles flying back and forth and tankers getting hit. We also didn’t have the swing buyer (China) reduce crude imports by 50%, only to start buying again when the floating storage barrels came out. And we didn’t have ~6+ million b/d of production shut-in, the largest supply outage in history.

All the while, global oil inventories are low and going lower. If the production shut-in doesn’t come back anytime soon, those draws will continue. That’s the reality.

So whether I’m insane or not, only time will tell. Perhaps we can all look back on this and laugh at how crazy 2026 was. I just hope we can do it with a fatter bank account.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of USO, UCO, BNO either through stock ownership, options, or other derivatives.

It’s now or never for the oil market. We have washed out sentiment to the point where either oil prices move violently higher, or any semblance of a normal market is thrown out the window.

On Friday, we had the most infamous signal in markets hit: The Economist.

Oh my...

To add more fuel to the fire, Brent positioning has completely washed out.

Exhibit A

Exhibit B

And on the fundamental side, these are the updated charts:

Brent vs 3-2-1 Crack Spread

Gasoline vs WTI

The gasoline vs WTI chart is so wild that I actually want to explain this.

In the history of the oil market, there’s only ever been one time where gasoline materially outperformed WTI, and the reversion ended the week after.

One week, that’s it. That was during COVID. And the outperformance was because WTI briefly went negative during April 2020.

Outside of this, there has never been a point in time when gasoline has outperformed WTI by this much.

Never.

So the week is gone. Done. And gasoline remains elevated. Gasoline spreads are saying to me that they are only going to go higher.

Gasoline isn’t going lower. It’s going higher, which means crude will have no choice but to go higher.

What about China?

Oh, China is buying. You will only see it after the fact. Positive refining margins sparked buying, but what we really need is public visibility into their buying. Sinopec needs to return in a way that shows China is back, so they need to play their game, get it over with, and show up visibly.

And you know what’s going to be funny about the Chinese buying? Similar to how no one could see the inventory draws on the way down, no one will see the inventory builds on the way up.

Black box in, black box out.

Oops, I guess that’s just how murky data works.

Real Talk

The Strait of Hormuz conflict is far from over. If you think about it from a game theory standpoint, it’s now or never for the Iranians.

Iran knows that if the US plays a war of attrition, it will lose 1,000 out of 1,000 times. You need the US to give up because of political pressure, and the easiest way to get that is through economic pressure.

We are now in the heart of the driving demand season. Global product inventories are low. SPR flow is running out. US commercial crude inventories are reaching levels at which US crude exports are shutting off. The rest of the world might have some barrels out of the Middle East that can last them through August or September, but what about after that?

What happens if China absorbs most of the barrels and there’s still 5 to 6 million b/d of production shut-in?

Most people seem to be paying attention only to what’s in front of them, not to what’s ahead. It’s like a man falling from a 40-story building, and you ask him if he’s ok on the 5th floor.

Yeah, he’s ok, but he’s not going to be in about 2 seconds.

We are not ok. If Iran contests the Oman route, that’s an estimated ~6 million b/d of flow that will be cut off. UAE, which saw exports surge to ~4 million b/d in June, will drop back to ~2 million b/d. The rest of the Middle East won’t be able to get the flows out in a manner that they like. Meanwhile, Iran will keep exporting its ~2 million b/d as if nothing happened.

But the US can never let that happen. The US can never let Iran control the Strait of Hormuz, because if it does, it will be able to hold the rest of the world hostage. So the only way out is through escalation, which is all but certain to make things worse before they get better.

That’s reality.

So yes, let sentiment reach rock bottom while the world experiences the largest production outage in history.

Let inventories decline further while Brent short positioning stays at all-time highs.

Sentiment is bombed out. It’s now or never.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of USO, UCO, BNO either through stock ownership, options, or other derivatives.

By: Wilson

I understand some of you are new to oil. I get it. The 20% drawdown in oil is pretty surprising, given the supply-and-demand backdrop.

If this is your first rodeo in oil trading, it can be a brutal way to be introduced to how volatile the commodity is. Some of us who were unfortunate enough to have been involved with oil will tell you that this is not even in the top 5 of bad events.

With that, let me walk with you through some historical parallels and why this time is not as bad as you think.

Editor’s Note: Free subscribers can use the one-time unlock feature to read this.

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Wow, this is incredible.

Goldman conducted a survey that showed 839 respondents were overwhelmingly bearish on oil.

That’s incredible. I have traded oil since 2019 and followed the oil market closely since 2015. So it’s ironic that I can tell you precisely at each major point in the oil market over the past decade how accurate this survey is.

Hint, these guys are contrarian indicators.

• End of 2016: OPEC+’s first production cut since the start of the oil price war (late 2014).

The survey was very bullish on oil. The OPEC+ production cut wasn’t implemented to its full effect. OPEC+, as usual, kept producing the same barrels until Saudi Arabia’s energy minister (at the time), Khalid Al-Falih, threw down the gauntlet in mid-2017 and targeted US commercial crude oil inventories.

• Middle of 2018: Iranian oil sanctions.

Of course, who can forget my favorite moment in my career so far: Iranian oil sanctions. In March 2018, the Saudis’ efforts to target US commercial crude oil inventories began to pay off. Couple that with Trump talking about leaving the JCPOA and sanctioning Iranian oil exports, and oil prices entered an uptrend.

Survey participants were more bullish in mid-2018 than they are today, despite Iranian oil sanctions impacting only ~1.5 million b/d, whereas we are losing ~11 million b/d today.

This is stupidity at its finest.

• March 2020: COVID.

As the saying goes, price changes the narrative; market participants were overwhelmingly bearish on oil after the COVID lockdowns, when the opposite should’ve been true. I vividly remember that in March 2020, I was the only one who talked about how forced production shut-in would balance the global oil market. It wasn’t until a month later that the consensus came to that view. At the time, if you were brave enough, you could have bought companies like Suncor for below PDP value (proved developed producing, aka, equivalent to net-net of value investing).

• 2022: Ukraine/Russia.

Last but not least, who can forget Russia’s invasion of Ukraine. In March 2022, the IEA wrote that Russia would lose ~3 million b/d of crude oil production. Oops, Russia didn’t lose anything, and crude exports surged contrary to expectations.

Instead, the IEA convinced everyone that production losses were imminent and coordinated a global SPR release over ~260 million bbls.

OPEC+ also began unwinding its production cuts, and the Biden administration turned a blind eye to Iranian crude exports.

But, of course, these survey participants remained bullish on oil prices throughout this period despite no visible supply loss.

What’s the takeaway here?

Do the opposite.

Whoever Goldman is surveying is so clueless as to the point of blissful ignorance.

As Sun Tzu (or Don Tzu) said, “Never interrupt your enemy when he is making a mistake.”

For anyone bullish on oil, this survey is the greatest blessing. You should print this chart out, frame it, and your future generation should thank these 839 respondents for it.

If you are one of those respondents and you are reading this article, thank you. Thank you for being so oblivious. If you don’t understand the oil math, don’t; I don’t want you to.

In the meantime, let the fastest visible onshore oil inventory declines continue. If an outright shortage is what’s needed to wake market participants up, then so be it.

We are going full speed into the wall and there’s no reversing this now.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SU, USO, UCO, BNO either through stock ownership, options, or other derivatives.

By: Wilson

I came across some charts today from The Crude Chronicles that motivated me to write this piece. It helps that Amazon surprised everyone today that it is going to spend $200 billion in capex.

Source: The Crude Chronicles

That’s an eye-opening chart.

The Amazon announcement will make it 2 tech companies spending more money on the AI buildout than the entire “Western” oil & gas companies.

And who said oil & gas is a capex-intensive business?

In a November Memo I wrote titled, “Shitty Businesses.” People who invest in tech aren’t familiar with what a shitty business really is. In oil and gas, that’s a dime a dozen.

Why? Because you need to spend money to make money.

What’s the holy grail of running a business? A business that can make money without you having to invest/spend money.

Hedge funds are great businesses. Your operating costs are fixed, performance fees offer optionality upside, and scale begets scale. But the problem with hedge funds is that you need 1) a track record, 2) the ability to deliver market-beating returns, and 3) size.

So the barriers to entry are high because you can’t just start one tomorrow (well, you can, but you get the point).

Let’s use another example, the Substack subscription business.

Your product is your research/article, you spend time, publish it, and your economies of scale are infinite. One article could get you 1, 100, or 1,000 subscribers. The incremental cost of getting an additional subscriber is zero.

Over time, if you maintain a good reputation with a good track record, scale begets scale, readership begets readership, and the virtuous cycle grows. The key to maintaining a profitable/growing research service is to 1) control your costs, 2) control your overhead, and 3) improve the quality of the research/product. The issue is getting the publicity needed and the initial readership. That process is a grind, and it’s one of the many reasons why readership eventually funnels upward (to the most popular services).

Now, take the subscription business and add a new element to it. Instead of original content generation, you “spend” money to create content. You hire people to write articles. Without an effective way of controlling this cost, the returns are extremely unpredictable.

Sure, you might scale faster by branching out into more sectors or topics, but you also run the risk of diminishing the economies of scale of the business. In addition, you introduce key man risk where one of your contributors might decide to jump ship one day. In essence, the returns greatly diminish when you introduce this new element (hiring) into the equation. You no longer enjoy the infinite economies of scale.

What does that have to do with tech capex spend?

Tech was always considered a low-capex intensity business. That’s what made it so attractive for investors. You spend X on developing software or a product, you sell it, and the incremental cost of selling additional units were diminimis.

In the case of Meta, you have a social media platform like Instagram; scale begets scale, content begets content, and advertisers rush to your platform to spend money. You control user data, you know what time of the day they log on, what they see, what they like, and you can tailor each advertisement to their usage/behavior. You charge a premium advertising rate relative to peers because you have a competitive advantage. So long as people use the service, you have an enduring competitive advantage.

And the same scale dominance applies to every other major tech company, Amazon, Alphabet, you name it. As time goes on, you get bigger and bigger, and the smaller competitors exit the business. That’s how you build shareholder value.

But AI has upended all of that. If you don’t spend money on developing the infrastructure or the AI models, you risk falling behind, and if you fall behind, you are dead. Or at least that’s how a lot of the big tech guys are thinking about this. Apple is an exception here, and what’s ironic is that its failure in rushing towards a competitive AI model might actually turn out to be a benefit later on.

Only time will tell, but for how much longer will investors endure this period of rapid capex expansion?

And this is best illustrated by another amazing chart from The Crude Chronicles.

What preceded the crazy capex spend we saw from 2004 to 2014 in oil?

The decade-plus oil bear market we had to go through from 2015 to today.

What does that mean for tech? I don’t know, but this level of spending can’t continue.

Parting Words

Energy investors learned this the hard way. Fracking was revolutionary, but most investors didn’t make money from it. Oil and gas companies borrowed money to invest, leaving investors holding the bag. Growing production was the name of the game; whoever had the highest growth was winning all the investor attention. Then it all ended in 2014, and again in 2018, and again in 2020. Now discipline is the name of the game; everyone focuses on delivering free cash flow for investors, paying down debt, and maintaining rock-solid balance sheets.

Energy companies didn’t have this “come to Jesus” moment overnight. The market pounded this mentality into them for 5 years AFTER oil prices collapsed. For god sake, from 2017 to 2018, US shale grew US crude oil production by over ~150k b/d per month (+1.8 million b/d per year).

And if you go back in time, no one in energy thought, “Well, shit, if I grow this much and my competitor grows this much, doesn’t that mean we are all screwed?” Yes, but where was the discipline when it was obvious?

I do wonder if history rhymes here for the tech boys chasing the dream of AI. I’m not a specialist in that field, so my opinion on this shouldn’t matter. But I’ve seen a thing or two about bear markets and technological innovations; sometimes, they aren’t necessarily good for investor pocketbooks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

By: Wilson

In the past few weeks, I’ve been driving with absolutely nothing playing in the car. No radio, no Apple Music, no Audible, no podcasts, nothing, just total silence.

I wanted to spend the time to think, allow myself to let my mind wander. And when I do that, I have the tendency to dwell on my past mistakes. What I could’ve done, what I should’ve done differently, and how I can learn from those mistakes.

Perhaps it’s a genetic defect. I rarely spend time on the things I do well. Perhaps it’s just being too critical of myself. I rarely let myself celebrate any success. The way I look at it: if you aren’t trying to get better, then you will never get better. So spending time thinking about what you did well won’t actually make any difference. I guess that’s why I focus on the mistakes. So the more I let my mind wander, the more frustrated I get.

How many more “lessons” do I need before I actually get good at this game?

If I were to evaluate myself, I know for a fact that I’m not that smart. Jon Costello, HFIR’s head of research, is 10x smarter than I am. Despite having over 13 years of experience under my belt, I have made many investing mistakes more than once, which already puts me in the category of the dumbest people on Earth.

P.S. The three categories:

• Smartest - People who learn from other people’s mistakes.

• 2nd Smartest - People who learn from their own mistakes.

• Stupidest - People who never learn from any mistakes.

So yes, progress is never smooth, especially for me.

Progress

There is hope for even people like me at the end of the day. How do I know that for certain? Well, I will have to go off on a tangent: golf.

I’m not athletically gifted at all. I played tennis in high school and thought I could become a tennis pro. When I tried out for my university tennis team, I lost 6-0, 6-0. I think I won a total of 20 points. Thankfully, I’m not that dumb anymore, but you get the point.

I’ve always dabbled on and off in golf because my dad was a professional golfer on the Asian tour (back in the days). I played during my summer breaks where I would spend time in Shanghai mingling with my dad’s successful business students. I learned a lot of valuable business lessons back then that I still use today.

When I first started, I was terrible. It started with the slice problem. The driver swing was so bad that caddies (yes, they have them in Asia) would have to bring sand bottles to the tee boxes because I would make a divot. And then I had the chunks, the shanks, and every imaginable golf problem you can imagine.

But slowly, with enough practice, you start to get the hang of it. By year 2, I started to shoot in the 70s, but with the occasional blowups that followed any good round, as all golfers know.

After I started HFI Research in 2015, I put golf on hold and focused entirely on building the business. It wasn’t until COVID (2020) that I picked the sport back up, but with a different mindset. I was tired of having volatile rounds. One day, it could be in the 70s, and the next day, it could be in the 90s. That had to stop, so I figured, why don’t I use a checklist approach to playing golf, similar to that of investing?

I mean, we all have some level of mental checklist when we invest. Some of us write it down, some of us keep it in our heads, but we all use it to some degree.

Could it work for golf?

Yes, it did, and it worked wonders. The handicap dropped from 7 to a +2. I knew I was not athletically gifted at all, so I focused my attention (during practice) on making the preshot routine idiot proof. If I made a mistake, I would go back to the routine and refine it. Slowly but surely, progress was made, but it was slow.

Again, for people with zero talent like me, the progress is never smooth. There are months or even years where it feels like you are stuck, constantly refining the approach hoping that one day you can break through.

Fast forwarding to today, it’s as if all of the progress unfolded in the blink of an eye. I shot two back-to-back rounds of 63 (-9) and 68 (-4). The 63 was shot from a course rating of 71 and the 68 was shot from a course rating of 76.4. This produced an average handicap index of -6.9, which was the lowest I’ve ever averaged.

So yes, even for people like me with no talent, progress can be made.

Just Keep Going

I was reluctant to post this memo at first. I twiddled with the conclusion section for hours. I thought I would write a reflection section talking about my mistakes, then I thought, what’s the point?

Then I pivoted to writing something about how I’m going to get better, but then I thought, what’s the point?

And it wasn’t until a subscriber of mine posted the beautiful three words, “Just keep going.” That really nailed it on the head.

Just keep going. It reminds me of my favorite book, Shoe Dog, where Phil Knight gave himself this advice:

Let everyone else call your idea crazy... just keep going. Don’t stop. Don’t even think about stopping until you get there, and don’t give much thought to where “there” is. Whatever comes, just don’t stop.

~ Phil Knight, Shoe Dog

I guess during times of trials and tribulations, all we can do is keep going. Survive to fight another day, learn the countless lessons that you thought you would learn the first time but don’t, and just keep going. If we aren’t moving forward, then we are dying, and that’s all there is to it.

So instead of promising myself that I will get better or that I will learn from my mistakes, I guess the inevitable choice we all can make at the end of the day is to move forward.

Just keep going and know that progress is never smooth.

By: Wilson

We live in an interesting time. President Trump held a meeting with some of the top energy executives this past Friday, and the mandate from the top is to have US oil companies invest huge sums of money to revitalize the Venezuelan oil sector. Meanwhile, the President also wants $50/bbl WTI.

You can’t have your cake and eat it too.

As we detailed in our piece on Venezuela, it will take years of capex and billions of dollars before we see any meaningful increase in Venezuelan oil production. The first major hurdle is the legal framework behind any joint venture deals going forward. Some questions that oil majors will want answers to are:

• What is the royalty split with PDVSA?

• Who controls the barrels? (i.e., extraction, handling, loading, selling, payment)

• In the event of another government change, what’s the clawback and legal mechanism to protect the investments?

• Will there be enforcement in the event of theft and other illegal activities?

The questions go on and on, and until the new government is stable and there are legal frameworks in place that make any future deals bulletproof, Venezuela is uninvestable, period. Exxon’s CEO isn’t wrong and the truth hurts, but what no one seems to be talking about is the other point that was made last week.

WTI at $50/bbl makes the entire energy sector uninvestable.

And there lies an even bigger issue on the horizon. Just as the world is about to find out how much spare capacity OPEC+ holds today (watershed moment of 2026 write-up), non-OPEC supply growth ends at the end of 2026, and the current administration wants even lower oil prices. This won’t end well at all.

Sentiment Bottom

Towards the end of 2025, we took our XLE short position off the table.

Why?

It’s too much of a consensus trade. Everyone appears to be bearish on oil. Some of my favorite sentiment indicators are flashing right now, and here they are:

Cramer

Goldman’s Clients

IEA

Energy as a % of US ETFs

WTI to Gold

The key lesson I’ve learned from my years of following the oil market is that fundamentals do not call bottoms or tops; sentiment does. And if there’s one thing common, it’s that the world is almost universally bearish on oil today.

Fundamentally, one can make the argument that the “bottom” won’t happen until H2 2026, but the oil market never bottoms or tops when you want it to. If there’s a bottom, it will likely coincide with some significant news event (such as a peace deal or the like), and people will think we will have a surplus forever. When that happens, you will see us get really aggressive on the buying.

Until then, it pays to keep following these sentiment indicators. Perhaps it gets worse, but bottoms take time, and if you remember in 2020, the catalyst to buy (with the least amount of risk) was when the Pfizer COVID vaccine was announced. The signal will be obvious; you just have to pay attention and care.

Rant Time

It frustrates me to no end when people think cheap oil prices will last forever. It won’t. To understand why the oil market is where it is today, we all have to be thankful for the Permian. Without this play, we would all be trying to figure out where we can find supplies to meet the insatiable demand.

Again, for those keen on statistics, here they are:

• Permian added 4.72 million b/d of crude oil production since 2015.

• OPEC+’s effective spare capacity today is 1.73 million b/d.

• Delta = ~3 million b/d

If oil prices averaged over $100/bbl, would we have been able to supply the ~3 million b/d difference? Maybe, but the Permian did it with oil averaging in the $60s. And it’s evident by the competitiveness of the Permian that no other plays in the world could even come close.

But the Permian isn’t forever. There’s an end, and Exxon is eating all of the last low hanging fruits from its acquisition of Pioneer. Yes, the Delaware Basin outperformed a lot this year allowing Exxon to be the only producer to show material gains y-o-y (+300k boe/d , almost the entirety of the US crude oil production increase), but Midland Basin wasn’t so fortunate. Producers like Diamondback are instead opting to save the best for when oil prices are higher, as any competent/disciplined producer should do. But the Exxon growth spree has an end to it too.

By 2030, Exxon expects total liquids in the Permian to grow by ~800k boe/d, and that’s it. No more growth, plateau forever, and this is just a few years away. What happens after 2030? Where will we find another Permian? Guyana, which was supposed to be the largest offshore oilfield discovery over the last decade will only supply ~1 to ~1.3 million b/d of supply growth by 2030.

Without another Permian, the world won’t be so lucky. The low oil prices we are seeing today won’t last, and sadly, it’s too little too late already. Oil is uninvestable in a lot of people’s mind and energy companies have taken note. Instead of reinvesting excess free cash flow in exploration and development, companies are instead buying back shares and paying dividends. Yes, shareholders will benefit, but the world is more f***ed.

It is what it is.

All the while, the current administration, which is supposed to be pro-energy, is actively trying to push oil prices into the low $50s, making oil, already uninvestable, more uninvestable. What a bizarre time we live in. You would think that with Chris Wright at the helm, the administration would have a better pulse on the realities of the US shale industry, the very industry that saved the world from what would have already been a global oil supply crisis. Instead, they are trying to slow it down.

It is what it is.

Whatever happens to the oil market in the years to come is the result of everything we’ve done up to this point. After being beaten down for 12 years, most people have forgotten what it’s like to set a capital budget without being paranoid about prices collapsing in the months ahead. What about demand? What about OPEC? The constant paranoia will impact capex spending for years to come even if oil prices move higher. That’s what happens when you structurally beat down the very industry that’s keeping the world running. But again, it is what it is.

The truth is $50 oil is uninvestable. You can’t make fairy dust numbers work. The truth will be obvious in the months and years ahead, and I hope we can look back on this memo and realize what a precarious time we’ve lived through.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of FANG either through stock ownership, options, or other derivatives.

By: Wilson

Energy is one of the few sectors in investing with the highest amount of shitty businesses. For most investors, the allure of energy is that it offers:

• Inflation protection.

• Dividend.

• Cyclical upside.

• Boom-bust swings.

What kills most energy investors is the following:

• Constant inventory replacement (oil and natural gas wells deplete over time).

• Operational execution risks (drilling results may vary from one region to another, i.e., different levels of “tiers”).

• Management execution (inventory runs low, management either drills/explores organically or “acquires”).

• Macro commodity risks, i.e., the boom-bust cycle of energy commodity prices.

Most of the risk in energy investing can be defined by two easy-to-understand financial categories:

• Revenue: The price you receive for the commodity you sell (oil, natural gas, NGL, etc).

• Capex: The cost to replace existing production and the cost associated with creating incremental production growth.

Obviously, during the good times, revenue vastly exceeds capex, producer discipline go out the window, and capex ramps. Those are usually signs of the end of a bull cycle. Similarly, when capex drops, producers push production down, then we start to see the cycle turn.

The differentiating variables here that make an oil/natural gas producer better than a competitor can be summarized below:

• The repeatability and consistency of the reservoir. How consistent are the drilling results from one region to the next?

• How long do the inventories last? Is it capital-intensive? Does it require a lot of “de-risking”?

• Is the management team consistently improving drilling results over time? Is the management team improving the cost structure over time?

• Finally, what is the broader capital allocation policy? Does the management “chase” ideas (acquisition mentality) or does the management focus on organic idea development (buying land, etc)?

So if you want to boil down to what makes a shitty energy “producer” investment, you have to look for the following:

• High capital efficiency (not a good term in this case): the cost of replacing production.

If an oil or natural gas producer has a very high capital efficiency, it means that replacing 1 boe/d of production decline would be more costly than for a competitor.

If we use Canadian oil sands as an example, the cost to replace production is between C$18k to C$30k boe/d. And since Canadian oil sand production has a low decline rate (usually less than 10%), the yearly “maintenance” capex is low.

Similarly, a producer from a US shale region might have capital efficiency of $18k to $24k boe/d, but because the decline rate is usually 3-4x that of the Canadian counterpart (30-40%), the “maintenance” capex would be much higher.

I’m not saying US shale oil producers are shitty businesses. I’m just saying that from a capex standpoint, the higher the cost of “maintaining” your business, the shittier you are, relatively speaking. More on this later as I will branch off into the tech sector.

• Reserve Life: The lower it is, the shittier it is. The higher it is, the better it is.

This is obvious for many reasons. Every oil and natural gas producer has to publish a year-end reserve report. In the reserve report, reserve evaluators publish a figure called “reserve life index.” This RLI determines how long the reserves will last using a base production rate. You can calculate this yourself using the current production run rate and dividing it by the total reserves.

If certain oil or natural gas plays have a lot of variability and unpredictability in their operation, then it will be difficult to “model” the expected inventory level. I’m going to use oil sands as an example again because it is the best example here.

Oil sand producers like MEG Energy that just got sold to Cenovus had a reserve life index close to 50 years. Most of the reserves were proven, so it makes it very easy to predict just how much oil will come out with each new well (oil sand is a bit different, but please bear with me here). In the world of energy investing, assets like these are considered “high quality” because MEG had one of the best capital efficiency metrics in the energy sector, and the free cash flow generation ability was high. Couple that with a high RLI, and you have a high-quality producer.

Note: Yes, I’m bitter that CVE bought MEG out.

So if you want to understand what a shitty business looks like, then all you have to do is look for the exact opposite of MEG. A producer with less than 5-6 years RLI usually means trouble. It’s not rocket science.

Now it needs to be said that just because you have a reserve life index of 5-6 years doesn’t actually mean you will run out of reserves in that timeframe. Every year you spend capex on drilling and de-risking inventory, you will “add” to your reserves, and every day you produce oil or natural gas, you will reduce your reserves. At the end of the year, you tally up all the differences, and you come to a final figure.

As a result, a producer with a 5-6 year reserve life index might just keep chugging along at 5-6 years for 5-6 years. That’s not a joke. But the difficulty here is that they need to constantly de-risk or buy land. This makes the execution part more risky, and anything more risky is shittier by definition.

Editor’s Note: There is a lot more to cover on this topic, but that’s for another day. Below is really the point I wanted to make.

Why am I going on this rant?

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By: Wilson

It’s hard to find “value” these days. In the energy world, there are some important investment themes we see for the years ahead, but the issues are 1) timing and 2) value. These themes are:

• The end of non-OPEC supply growth is coming. The oil market will be heading for a structural supply deficit after the 2026 to H1 2027 glut.

• In order to meet the supply growth needs for the decades ahead, offshore will be a key sector. This is a multi-year trend.

• Natural gas and Uranium will be the key to fueling the AI datacenter demand boom in the years ahead. Massive LNG export expansion in the US will fundamentally alter the way global LNG is priced.

Many of these long-term energy themes take a long time to play out. There are many peaks and troughs along the way, and the journey is usually never very smooth. While it’s my job to help you navigate through, readers must understand that when there’s nothing “cheap”, it’s my job to tell you the truth whether you like to hear it or not.

On Oct 22, I published a piece on the “major” changes I’m making to the HFI Portfolio. The key premise here is that a lot of the mistakes I’ve made so far in my career have to do with position concentration. I’ve vowed to keep position sizes below 10% and work harder at finding more ideas.

Well... we did find more ideas, and sadly, a lot of you don’t really care about them (lol).

What are those ideas?

Read more

The last 10 days have been very hectic. I am currently on the road, so the write-ups have not been on their normal publication schedule. So here's a more informal update for my thoughts on the latest idea discussions, oil, and natural gas.

Sable

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By: Wilson

If I had a time machine, I wouldn't hesitate a second and travel back to 2018. That was the worst year of my life. For those of you who haven't been with us for that long, I will give you a brief summary of what happened.

2018

Going into 2018, we were convinced that oil prices were skewed to the upside. OPEC+ started cutting oil production at the end of 2016, and while the first half of 2017 saw global oil inventories balloon higher (thanks to cheating), the discipline from OPEC+ in H2 2017 brought balance back into the market, and visible oil inventories started to plummet.

The Saudis, in particular, targeted US commercial crude inventories with a targeted export reduction. This translated to a significant drop in US commercial crude storage, with the bottom around 380 million bbls in August 2018.

For the HFI Portfolio, we went into 2018 guns blazing. We had just made California Resources one of our top holdings, and the stock had performed splendidly.

Fast forwarding to March 2018 and President Trump (first term) decided to sanction Iranian oil exports. The mere threat of sanctions sent oil prices higher along with energy stocks. Our long position in CRC (cost basis of around $7) went to $35 by May 2018.

The good times were here, and I thought I was the king of the world. HFI Portfolio was up ~60+% for the year, and all was well. Iran was going to lose 2 million b/d, and there was no one who was going to save us from a structural supply deficit.

Sounds familiar?

And then came October 2018, that's when hell broke loose. Brent peaked at $80/bbl and CRC peaked at $45/share. Following the June 2018 OPEC+ meeting, the Saudis told the market that it was going to increase production by ~1 million b/d to offset the barrels lost from Iran.

But by October, and with oil prices surging, Trump decided that it wasn't the right time to sanction Iran, and instead, issued waivers. This immediate rug pull sent oil prices tumbling and coincided with one of the worst streaks in oil trading in history (down 11 days in a row in November 2018).

In addition, and this was the most important one, US shale was meaningfully surprising to the upside. US crude oil production saw growth of +250k b/d per month. And by the time the dust settled, US crude oil production had reached 12 million b/d (up from 8.8 million b/d at the beginning of 2017).

The combination of higher supplies from the Saudis and no sanctions being imposed on Iran sent oil prices and energy stocks tumbling.

Instead of finishing the year up 60+%, we were down 42.2%.

So yes, that was the worst year ever, and I don't ever want to live through that again.

Why am I telling you this story?

Because there are a lot of similarities to today.

2018 Redux

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