Oil Shaka . . . Eventually

June 29, 2023

Finally.

I’m on vacation.

Well not “vacation vacation” per se, but a fund manager’s version of “vacation,” which is to say I still do the normal work things that I do . . . and then “vacation” in the afternoon once everyone wakes.

Ahhh . . . vacation.

So as I plunk down in this wicker chair in the lobby of my hotel, right next to the koi fish pond, I get to soak in the cacophony of sounds.

Gentle Hawaiian music in the background. Cheerful chirping birds and a soothing waterfall. A light breeze from the trade winds fills my senses with the subtle subconscious suggestion . . . “relax bra-dah . . . you’z in Hawaii.”

Thanks Mr. Friendly-Hawaiian-Man in my head.

It’s hard to turn off though.

It’s hard when you’re primed to constantly seek out new information and to dive deeper.

You see the inconsistencies everywhere.

This koi pond for example . . . peaceful and tranquil. Something I’ve been sitting next to the past 5 days.

“Oh look they’re racing each other!” the kids always say.

Look closer my pint-sized friend. That’s ain’t tranquility . . . it’s territoriality. The big ones assert dominance and the little ones get bullied. There’s fewer fish today than yesterday . . . that’s called M&A.

“Daddy, this man is strange!”

Or this.

A giant shaka sculpture, which is a greeting of peace and love. My kids wanted a picture. So I took one . . . of the plaque.

Who knew hang-loose came from an industrial accident and light schoolyard bullying. Kids are mean. Turning lemons into lemonade, or coconuts into . . . oh I don’t know, coconut cream pie.

We do it in life and we do it on vacation I suppose. Enjoy that happy divide between perception and reality.

Heck we’re doing it in the markets as usual with claims that oil may never go up again. Forever in the $70s since inventories aren’t draining, maybe even $60s, or $50s if a recession comes. Well I guess, but there is that little thing called seasonality, and as my friend Clement notes . . . you are here.

Seasonality . . . “Brah, you keep saying the same-ting and it’s not drawing.”

It will Kimo, it will . . . just be patient, and yes I just named you Mr. Imaginary Friendly-Hawaiian-Man in my head.

“Even if it does, China’s stocking and will release. Malasadas for everyone! Howzit going to work?”

You ever pull up a chart to see what that looks like? China restocks when it’s low and destocks as oil prices rise.

By the time they do that though . . . oil prices are already rising.

We’ll talk more about the overall picture for oil when we release our quarterly letter in a few weeks, but there’s a tension in the global economy right now. Energy costs are sagging, but the economy is strong. How does that make sense? In the US, we have home sales climbing . . .

consumer confidence high . . .

travel demand exceeding expectations . . .

and GDP revising higher . . . .

Yet, energy prices are treading as if the recession is around the corner. Perhaps it is, but that’s decidedly not what the economic data is saying.

What’s instead happening is a dislocation between perception and reality. The acceptance that there are enough barrels for everyone, and everything that we are, or want to do. You can see it in the data. Prices are “looking through” the looking glass, and disregarding the source of supplies.

See all of this commercial stock? We good.

Umm . . . you might need those later. Nah brah, finite replaced with ad infinitum.

Sure it’s okay to siphon from Strategic Petroleum Reserves, turn a blind eye to “sanctioned barrels” from Iran, Venezuela and Russia, and short oil in the paper markets so we can financially bet on a recession, but once tapped, or drained, or suppressed, what then?

Like the kids in the pool, oil becomes the beach ball under water. That’s the reality, and when that reality reappears again, it’ll have knock-on affects galore. Inflation reappears, the Fed’s forced to raise rates again, financial conditions tighten, and the economy slows. Demand wanes, but enough to overcome the supply deficits that engender the rising energy prices in the first place?

There’s so many threads to pull here, but it’s not a clean picture.

What is though is what we’re doing today. Seasonality will collide with the consequences of destocking. It’s all unsustainable, that we’re sure of.

“Relax bra-dah . . . you keep talking seasonality. Sure, sure, seasonality, big word . . . okay. I play you a song on my ukulele. Calm you down.”

But . . . it’s . . . unsustain . . .

Oh, pretty.

“Relax. Bra-dah”

Ok.

Mahalo.

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