Oil's Bullish Case: Harris Kupperman Exerpts:
Governments around the world are stimulating demand. They’re going crazy. They’re printing money and subsidizing users. At the same time, they’re making it amazingly painful for producers to produce oil. They’re withholding permits and blocking pipelines.
They’re already talking about excess profits taxes and carbon taxes are next. Why would anyone increase production under these circumstances? Hence, non-OPEC production isn’t going up much.
So, OPEC is left to make up the balance. They can talk about raising production by 400k/d, but they’re already almost out of spare capacity. They aren’t even hitting their own internal targets. It’s increasingly out of their hands at this point. Oil is going higher.
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Q; What one sector of the equities market would you dive into now if you had to pick only one - and why?
It’s not an equity, but if there was one asset to focus on, it would be long-dated OTM oil futures options. They’re the purest way to get long inflation and they’re mispriced compared to the potential upside. All sorts of right-tail assets seem mispriced, but the IV on oil futures options seem particularly mispriced as it is so cheap compared to the parabolic upside potential.
In terms of equities themselves, I think offshore oil services are about to really inflect.
With Brent at $86, demand for offshore production will come back in a major way. Especially because many Western governments are making it so painful to explore and produce oil domestically. As a result, the incremental supply will come from places that need the oil revenue—much of this will be offshore.
Meanwhile, much of this offshore equipment trades at tiny fractions of replacement cost. At the top of the cycle, these companies often trade for a few times replacement cost. I think we’re about to a surprising move in the price of oil, and these equities are the fulcrum security in the oil sector—but since most have restructured in bankruptcy, they have clean balance sheets and minimal risk if I’m wrong and the sector doesn’t inflect.
Oil is about to surprise people—offshore hasn’t moved yet. That’s where I’d be focusing my time, but buying the 2025, $100 strike oil call just seems like a more elegant way to play this with a lot less operational risk and a whole lot greater upside potential.
What's your broader view on markets in 2022? Will they stabilize? Full on crash? Rotation from growth to value?
I think the market will have a lot of volatility, but sort of go nowhere. Instead, I expect a huge sector rotation from Ponzi and high-multiple growth to industrials and commodities.
A lot of these “old economy” businesses trade at low single-digit multiples on cash flow and fractions of replacement cost. They’ve been ignored for years, they’ve cut costs, consolidated and not invested much in capacity. We’re at the part of the cycle where they finally earn huge returns. That’s where you want to be.
Meanwhile, as the Fed raises rates and tightens liquidity, the high-multiple stuff will get bludgeoned. It’s amazing how many multi-billion market cap stocks are down 75% from the highs last year, yet they still seem ludicrously expensive. This will eventually get corrected and corrected with a lot more pain.
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Part 1:
https://www.zerohedge.com/markets/oil-out-opecs-hands-and-going-higher Part 2:
https://www.zerohedge.com/markets/oil-traders-will-break-fed-and-make-jerome-powell-cry-uncle