Oil and gas

We executed a small O&G trade in our direct equity sleeves. The price of oil spiked when war between Hamas/Israel broke out, roughly ~$15 worth of risk premia by our count.

That spike unwound quite quickly, as no other combatants entered the fray (a larger conflict in the middle east).

The OPEC+ meeting “kind of” came and went without much change, a larger cut then expected, but entirely voluntary, and not super clear how much of it was actually “new”, as opposed to already announced capacity reductions.

Stocks like Woodside and Santos have sold off quite heavily, so both the commodity itself and the listed producers have moved in tandem.

At the same time, the administrators of the US Strategic Petroleum Reserve stand ready to seemingly “buy as much as they can”.

Now, we are still quite sure that over the long-run hydrocarbons lose to renewables, but equally, there are some solid exposures with strong balance sheets, good free cashflows, operating in relatively safe geographies that we think can hedge some left-tailed risks, and help bridge the gap between the now and the medium run.

The number of wars seems to be going up, and the water in the Suez Canal coming down, so it is possible to imagine dislocations down the track, and a modest position that pays decent carry seems reasonable.

Our direct equity sleeves are still very defensively positioned, albeit now slightly less so (a hedge trade can be defensive, but in general, I would not want to put the words “oil and gas” alongside the words “defensive”).

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