We've Seen This Movie Before

There's no substitute for experience... You can have all the advice in the world on how to handle a situation, but nothing compares to the experience of actually having been there before. It holds true in investing as well as in life. One of the greatest feelings as an investor is being able to say, […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] We've Seen This Movie Before By Whitney Tilson --------------------------------------------------------------- [Billionaire investors brace for a final surge in this asset]( Billionaire investors have poured in cash ahead of what could be a massive surge for this mystery asset. It's not gold. It's not lithium or copper. And it's got nothing to do with AI, Big Tech, or EVs. Yet, it could show you as much as 10x returns – [follow this link for details](. --------------------------------------------------------------- There's no substitute for experience... You can have all the advice in the world on how to handle a situation, but nothing compares to the experience of actually having been there before. It holds true in investing as well as in life. One of the greatest feelings as an investor is being able to say, "I've seen this movie before... and I know how it ends." That's the current state of the oil market... and we have seen this movie before. []It's following the script of a classic rom-com. Two people meet (investors and oil stocks), and they fall for each other. They have some laughs along the way and get to know each other better. But then, something happens that threatens the relationship. Ultimately, it gets resolved and with it comes a happy ending. In fact, today's flirtation between investors and oil stocks doesn't just follow any script, but the plot of 1994's Four Weddings and a Funeral. It's an up-and-down love story where celebrated events (weddings) are punctuated by turmoil, while difficult times (funerals) bring everyone closer. It maps perfectly to recent events in the oil market. (And, of course, there's a happy ending.) We have four primary reasons to be optimistic here... Each one is a bullish supply point that has the ability to turn the market by itself. Together, they make us more bullish than ever. Of course, the negative is the possibility of a recession. That's the only reason the stocks are where they are today... and it increases the chance of a happy ending. So in today's essay, let's walk through the first two of these bullish factors... - []OPEC is cutting OPEC is a powerful cartel that influences the global oil market. It consists of 13 oil-producing member countries, like Saudi Arabia and Kuwait, who altogether account for about 40% of the world's oil production and 60% of the world's oil export market. This position of power enables OPEC to manipulate global oil prices and supply, and thus, control production. OPEC is crucial to keeping the oil market stable. It regulates the amount of oil entering the market by setting production quotas for its members. This setup allows OPEC to respond to shifts in demand and keep prices stable. And right now, OPEC is cutting production. In October, OPEC agreed to cut 2 million barrels per day to stabilize the market. Then, in April, it surprised the market by announcing another 1.7 million barrels per day of cuts. In the immediate aftermath, oil prices spiked, though they've since eased lower (more on this later). And in early June, Saudi Arabia announced another 1 million barrel-a-day cut. Then, in early July, Saudi Arabia said it would extend its cut of 1 million barrels per day for another month to include August... and said that the cut could be extended further. OPEC means business. Without high oil prices, countries like Saudi Arabia can't afford to balance their budgets, so OPEC is doing what it takes to keep oil prices up. Equally important is OPEC members' adherence to its targeted output. OPEC members like Nigeria and Iraq are well-known for their willingness to ignore cartel guidelines and pump well over their quota allowance. However, in the current market, these countries are hitting their quotas and sometimes even coming in low. It's unlikely to be a sudden gesture of goodwill, but rather their tired oil infrastructure, which is creaking after years of underinvestment. But the result is the same: Not only is OPEC announcing low production, but its members are also following through with it. --------------------------------------------------------------- Recommended Link: [The only money-making acronym you need to know for 2023]( Soon, the acronym "PVAB" could be as commonplace as "ASAP" or "TGIF." But if you don't know it yet, you're not too late... 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But prices have since fallen well below that level. The reality is, Russia never left the energy market at all. Let that sink in... For all the noise being made by politicians on both sides of the Atlantic, Russia is right where it has always been. In fact, in March, the International Energy Association ("IEA") announced that Russian production had reached its highest levels since April 2020, prior to COVID, and of course, prior to its invasion. But there was a wrinkle: Russia's oil revenues were down 43% from the prior year. Selling more and getting less... What's going on? Russia is not in OPEC, but with its oil-producing allies such as Kazakhstan, it has formed an uneasy alliance called OPEC+. (Remember, OPEC countries have no real love for the U.S. or any of our Western allies.) Together, they have found ways to get Russian crude into the global energy market through China and India. Western countries, which accounted for 90% of Russia's pre-war demand, have now banned those imports. So Russia – aided by secretive, private energy trading firms like Trafigura and Vitol – is placing those barrels into non-Western markets. In China, oil giants like Sinopec have continued to honor their long-term contracts with Russia. This is perhaps no surprise. After all, Chinese President Xi Jinping wrote his doctoral thesis on Russian natural resources, and he has long been a champion of trade between the two countries. Their proximity and long border has always been a huge source of trade, and that has only intensified as Russia has looked for export markets. In India, domestic oil giants like Bharat Petroleum and Indian Oil have been buying millions of barrels at a time, refining them for domestic use. Unlike China, which is linked to Russia by pipeline, Indian oil comes in by water. Therefore, favoring Russia has pushed out barrels from other producers. Why? Simple. Russian oil is being marketed at a huge discount. With Western demand falling apart, Russia is offering massive price cuts to anyone willing to take on its oil. And in emerging markets, it has found buyers. But all of this comes at a price. [][]In the near term, Russian President Vladimir Putin flooded the global market, looking to raise revenues to fund the war on his Western front. The effort is ultimately sapping its energy production in three ways... First, the revenues they are raising are far less than they were prior to the war. That's less money for reinvestment. Second, the money it's raising is going toward its war efforts and away from the oilfields. This matters because of the third point: Russia is unable to reinvest in its infrastructure. Remember, oil is a depleting asset. You drill your best well first, and after that, you're left with your lesser wells. Over time, oil companies combat this by reinvesting in better production equipment. Technology for finding oil, equipment for drilling the well, infrastructure to lift and produce the crude itself... it's a constant uphill battle. And that's for a well-funded private oil company. []For the crippled Russian state apparatus, it's going to lead to irreversible decline in production, slowly but surely. That means the market got the Russian invasion wrong twice. Its first error came after the invasion, when the market expected (and got!) Western sanctions... But those sanctions didn't impact the flow of Russian oil as predicted. And now, with all the oil being shipped, the market isn't ready for the inevitable decline in that flow. Tomorrow, I'll cover the next two bullish factors for oil... Stay tuned! Best regards, Whitney Tilson P.S. Even as the world moves toward renewable energy alternatives, we're nowhere close to ending our relationship with gas and oil. We just aren't ready... and that's creating a kind of perfect storm for investing in fossil fuels. 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