The last weeks have been eventful from an information perspective. On Monday, August 22, Bloomberg published an interview with Saudi Arabia Energy Minister Prince Abdulaziz bin Salmin. In it, he noted that the “extreme” volatility and lack of liquidity means the futures market is increasingly disconnected from fundamentals and OPEC+ may be forced to cut production. He noted that “This is detrimental because without sufficient liquidity, (Note: In the paper market), markets can’t reflect the realities of the physical fundamentals in a meaningful way and can give a false sense of security at times when spare capacity is severely limited, and the risk of severe disruptions remains high.” Just as Alan Greenspan originated the Fed Put, beginning a 25-year bull market in equities, and Mario Draghi turned around the euro after July 26, 2012, by offering to do “Whatever it takes,” we may be at a similar place for oil from OPEC.
I also read a wonderful Second Quarter 2022 Natural Resource Market Commentary by the money manager, Goehring & Rozencwajg, titled “Why Resources During a Recession?” A popular trade since June has been to sell oil and buy tech, given that energy prices would fall in a recession, like the Great Financial Crisis of 2008. By looking at historical precedent, G&R discourages investors from using recessionary fears as a reason to sell commodities. Current economic conditions are not like the GFC of 2008, and commodities provided significant and positive returns during both the Great Depression of 1929 and during the 1973 Recession. In 2008, we had the shale revolution plus prior over investment in energy infrastructure. In the years during the Great Depression, and 1973, we had significant underinvestment, more analogous to today.
In this volatile environment, it highlights the importance of having facts at your fingertips. For example, with or without an Iran deal, inventories of diesel and heating oil are tight in the Northeast US. The Biden Administration is even threatening to reduce exports to Europe and South America. Were such a scenario to play out, product tanker rates would spike as diesel would need to come from the Middle East, China, and India for those markets. TradeWinds News this morning (8/29/22) highlighted that a Trafigura tanker trip to Ecuador may herald a new outlet for Russian diesel. Many investors are looking to the past decade to choose their spots. It may be a very different playbook going forward.