Optimism is important. It’s a trait that I have long been short on but actively work to develop almost every day. Maybe today I will lose the taste for cookies which will help me lose weight. Maybe today Hugo the dog will decide he doesn’t want to attack me. Maybe today, after doubling the first hole, I am optimistic I will get 2 eagles and a hole in 1 to be able to get back on track. Not surprisingly, optimism has limits when reality sets in.

That’s the context through which I want to approach oil prices and the stimulus package: optimism versus reality. Oil demand is sticky and inelastic, which is why it’s relatively easy to do macro work on the commodity and predict the direction it will go. Remember on March 8 when Saudi Arabia lowered the price of bbls by $6/bbl to try to “stimulate demand” as they opened the taps to 12 mmbo/d? Did it work? No. Relative to the base case of demand that existed before Covid, what could have stimulated the world to use more? We already were driving, flying, and making plastics at the highest rate ever. Would a $3/bbl price change make someone say “you know what, I AM going to drive across town for breakfast”?  In the grand scheme, oil makes our life convenient, the decision to burn more is much more marginal than any of the other decisions we make.

I raise this point because I read stories of optimism of a commodity price super cycle that will happen sooner than later. From mid-March through the beginning of May, the world was consuming 35 mmbo/d less than it was producing and for 45 days, those barrels were stored.  Today, Libya and Iran are still massively under producing capacity capacity.  OPEC+ has almost 8 mmbo/d shut in and cheating is rampant. Projects in Brazil, Guyana and Suriname are set to come on line. To me, it will take a lot more than a year to rebalance inventories around the world and ultimately, OPEC will need to be producing at 100% of capacity BEFORE natural supply-demand mechanics take over and I get bullish.

2021 is a write off. Maybe 2022 looks better… but at some point we can no longer print free money without accepting that there are long term consequences to that decision. We can’t keep employees in industries – like airlines, hospitality and commercial real estate – without having structural layoffs that result in permanent job loss and a recession/depression.

I’m optimistic that a vaccine will help the vulnerable feel safer. I’m optimistic that after 6 months of “2 weeks to flatten the curve” citizens of the world are ready to get back to going to work, but the economic damage of an economic recovery that has disproportionately crushed the 40% of Americans that didn’t have $400 for an emergency will have ramifications that we can’t predict today. Hope isn’t a plan. And that’s why I remain short E&P companies.

#hottakeoftheday