Oil

The FT ran with a cool graph highlighting the OPEC+ production cuts, and the general market commentary was “how sustainable is this”.

It does look quite crazy, and it is a “difficult to grasp” strategy from OPEC.

Occam’s razor (the simplest explanation is usually the right one) would suggest they are just making a mistake, ceding share and to let it continue. With Brent above $80 there’s just no need to be pulling your supply from the market, and essentially inviting US producers to fill the gap.

The less optimistic / more cynical take is that it is a set-up for a rug pull, and that once major US production is “settled in” SA floods the market, takes oil to $20, bankrupts half the market, and then after a year or two returns to normal production, with fewer players left.

But in a sunset industry, where the future is maybe 20 years before everyone’s share starts to go down, that’s…just not necessary.

Co-ordination is the name of the game, here, for sun set industries, and by co-ordination, OPEC are literally a cartel, in which co-operation and co-ordination is in the name.

We’ve taken our energy exposures up from zero to a touch under market weight in our direct equity portfolios, mainly because we can see the tail risks from geopolitical risk, and, the starting point of valuations (STOs, Woodies, they are quite cheap, some 20-30% below the market multiple, at a time when oil prices are quite good, and the immediate near term outlook is also quite good).

But we’ve got the above in the back of our minds. So it’s never likely to be a big overweight, at least at this stage.

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