October 28, 2021

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Oil at $100? | InvestorPlace

Has green energy gotten ahead of itself? … why oil demand isn’t disappearing anytime soon … bitcoin breaks up $50,000 and appears poised for more gains

 

Oil prices just hit a seven-year high.

On Monday, the Organization of the Petroleum Exporting Countries (OPEC) along with some non-OPEC countries that also produce oil, a group that’s called OPEC+, decided against increasing oil supply.

Despite pressure from the U.S. and India, OPEC+ decided to maintain its prior supply plan, which is to add 400,000 barrels per day of crude to the market for the month of November.

Here’s CNBC with the outcome:

Brent futures gained 2.5% to close at $81.26 on Monday, notching its highest settle for three years.

WTI rose 2.3% to end the previous session at $77.62, reaching its highest settle in almost seven years.

Both oil contracts are up around 60% since the start of the year.

In our February 19th Digest, we noted that, long-term, our world is moving away from oil, toward renewable energy.

We highlighted a series of facts and statistics supporting this conclusion, one of which was the Biden administration’s plans to make the U.S. a 100% clean energy economy with net-zero emissions by 2050.

But as we wrote in that Digest

There’s a lot of time between now and 2050 for a profitable oil trade.

***There’s an argument that the world has gotten ahead of itself in terms of the transition from fossil fuels to green energy

From AdventuresInCapitalism:

I’m all for using “green energy.” However, I’m a realist—you need to first build the “green economy” before you shut off the “carbon economy” …

Almost every day, we hear of a different policy plan to reduce energy production. We learn of new mandates, new taxes, more cancelled pipelines, more cancelled permits, and more penalties. What we don’t hear about is where the replacement energy comes from. The wind doesn’t always blow and sometimes it is cloudy…

Billions of people in developing economies want a Western standard of life—complete with a Western level of energy consumption. These people refuse to pay for “green energy,” especially when the “carbon economy” is so affordable.

Or maybe, they have the pragmatism not to build “green energy” while the technology isn’t fully proved-out.

Maybe they’re looking at spiking gas prices in the UK, spiking electricity prices in Europe, factory shut-downs in China, rolling blackouts in California and asking if the “green economy” is right for them.

Developing nations intend to consume more. Western nations intend to consume more. China intends to consume more. At some point, declining production will slam into rapidly increasing demand. It will only be solved by higher energy prices.

The clearing price will stun people.

To the point above, as much as we all might want renewable energy sources to drive the global economy, that’s not realistic in the immediate future. To illustrate, take President Biden himself.

As noted earlier, Biden wants to make the U.S. a 100% clean energy economy with net-zero emissions by 2050. But what’s he doing in the here-and-now as energy prices surge? He’s asking OPEC+ to ramp up the global oil supply.

We want green energy, but at least for the time-being, our world needs oil.

This points us toward the same conclusion from our February Digest: “There’s a lot of time between now and 2050 for a profitable oil trade.”

***In February, we put three potential short-to-medium-term plays on your radar

The first was the Energy Select Sector SPDR Fund ETF (XLE) that holds oil heavyweights including Exxon, Chevron, ConocoPhillips, Schlumberger, Occidental, and Valero to name a few.

The second was Diamondback Energy (FANG), which is a Texas-based energy exploration company.

And the third was Exxon (XOM), the massive multinational oil and gas company.

Where do things stand today?

Over a period in which the S&P has climbed 10.3%, and the Nasdaq 3.8%, XLE, XOM, and FANG have climbed, respectively, 22%, 18.6%, and 57.5%.

Plus, Exxon – which we highlighted for its cash-flows – has paid two dividends in the 5%-6% annualized yield range.

Looking forward, Goldman Sachs recently upgraded their year-end Brent price forecast to $90 a barrel, up from $80. And Bank of America Global Research says we could hit $100 per barrel this winter.

As I write Wednesday, crude is down about 2% alongside the broader market selloff. In the immediate short-term, it wouldn’t be surprising if prices moved lower from here. That’s because the oil trade is extremely overbought at the moment. Be cautious about initiating a new trade right now.

That said, after we see some mean-reversion, look for prices to grind higher.

Bottomline, in the medium-term, there’s still juice in this trade. We’ll continue to keep you up to speed.

***Meanwhile, yesterday, Bitcoin broke through the key psychological level of $50K

Bitcoin is roaring so far here in October – up 24%.

Over the last two days, it has easily broken through the $50,000 mark and is trading at $54,281 as I write.

While we’re pleased to see this strength, we’ve written many times that long-term crypto investors should be monitoring adoption, not price.

On that topic, here’s Bloomberg:

Bank of America has launched research coverage of cryptocurrency and digital assets due to “growing institutional interest” and the massive appetite among retail clients. 

“If you look at the number of corporates mentioning crypto on their earnings calls, that’s gone from about 17 last year to about 147 in the most recent quarter,” Candace Browning, head of global research at BofA Securities, said Monday in an interview on Bloomberg TV’s “Surveillance” show.

“This isn’t just Bitcoin anymore, this is digital assets and it’s creating a whole ecosystem of new companies, new opportunities, and new applications.”

Over the weekend, our crypto specialist, Luke Lango, commented on this adoption to his Crypto Investor Network subscribers:

The fact of the matter is that there is simply too much positive fundamental news flow for the markets to send cryptos much lower. Simply consider some of these headlines from the past week:

  • Buy Now, Pay Later (BNPL) leader Affirm is launching a whole suite of new crypto products, including offering customers the ability to invest in cryptos.
  • Down in Miami, they’ve launched a thing called MiamiCoin, which essentially allows folks to buy a crypto, stake it, and share the profits of that staking with the city in a 70/30 split – instead of paying taxes!
  • Visa is reportedly working on an interoperable hub that will allow for cross-chain transactions and transfers, something we see as a huge trend in the crypto markets right now that will help increase ease-of-use and lower barriers to entry.
  • Switzerland launched its first crypto fund.
  • Ukraine just passed legislation to legalize cryptos.

Folks, there’s simply too much good news here to keep cryptos down for long. 

***The difference between serious investors and the short-term speculators helps explain recent volatility

When crypto is climbing, speculators who want a quick buck jump into the trade, often with highly leveraged positions.

But when crypto prices fall, that leverage cuts deep, forcing heavy selling by those same speculators. Selling begets more selling by other speculators until we’re back to the long-term investors with “strong hands” who aren’t shaken out.

We saw this with the run-up in bitcoin’s price as we approached September 7th – when El Salvador officially made bitcoin legal currency. When that date came, more seasoned investors took profits at the expense of less-savvy speculators. This drove prices down, leading to more selling.

Of course, who’s buying from these scared speculators when prices drop to attractive levels?

The seasoned, strong-hands investors.

On that note, here’s what’s been happening recently, from CryptoPotato:

While Bitcoin corrected and consolidated in the low $40k area with very bearish sentiment, on-chain metrics continued to show that long-term holders firmly held while leverage on derivatives and weak hands were flushed out.

Even as BTC corrected for multiple weeks, spot exchange reserves have declined by over 14,000 BTC showing strong accumulation. Spot exchange reserves have been trending lower since July 26th, 2021 as BTC continues to be scooped up and withdrawn from exchanges.

This is a very bullish signal as the cryptocurrency is becoming scarcer in liquid form, making it more difficult for large institutions to accumulate it without moving prices higher.

It will be volatile, but crypto momentum continues snowballing. Keep your eyes on the long-term, be patient, but keep holding.

I’ll give Luke the final word:

We’re invested in cryptos because we believe in their long-term value creation potential – not because Bitcoin could go from $40,000 to $60,000 over the next months. Rather, because Bitcoin can go from $40,000 to $500,000 in the long run.

And, to that extent, we’re very happy with where we are today: Invested in the best crypto projects with the biggest long-term upside potential.

Lots of good stuff to come over the next few years. 

Have a good evening,

Jeff Remsburg

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