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.