Weekly Summary in Three Parts (5/22)

I. Energy Sector Thoughts & Observations
II. Portfolio Thematics & Positioning
III. Random Market Thoughts & Observations
I. Energy Sector Thoughts & Observations

Daily vol in sector & crude remains high

Energy beats S&P 500 but can’t keep up with Russell 2000
I. Energy Sector Thoughts & ObservationsDaily vol in sector & crude remains high Energy beats S&P 500 but can’t keep up with Russell 2000
I. Energy Sector Thoughts & ObservationsDaily vol in sector & crude remains high Energy beats S&P 500 but can’t keep up with Russell 2000
I. Energy Sector Thoughts & ObservationsDaily vol in sector & crude remains high Energy beats S&P 500 but can’t keep up with Russell 2000
Crude strip vs energy subsectors
Crude strip vs energy subsectors
Crude strip vs energy subsectors
Crude strip vs energy subsectors
Crude curve progression – almost an entire cycle in < 6 months. Today’s curve continues to head flatter vs March/April

Timespreads tightened to neutral-ish levels
Crude curve progression – almost an entire cycle in < 6 months. Today’s curve continues to head flatter vs March/AprilTimespreads tightened to neutral-ish levels
Crude curve progression – almost an entire cycle in < 6 months. Today’s curve continues to head flatter vs March/AprilTimespreads tightened to neutral-ish levels
Regional crude diffs continued to tighten suggesting 1) NAM supply overtightened in May and 2) Shut-ins gradually returning to market. Brent-TI spread discouraging crude exports – wouldn’t be surprised to see this reach parity in ’20-’21
Regional crude diffs continued to tighten suggesting 1) NAM supply overtightened in May and 2) Shut-ins gradually returning to market. Brent-TI spread discouraging crude exports – wouldn’t be surprised to see this reach parity in ’20-’21
Regional crude diffs continued to tighten suggesting 1) NAM supply overtightened in May and 2) Shut-ins gradually returning to market. Brent-TI spread discouraging crude exports – wouldn’t be surprised to see this reach parity in ’20-’21
Market is decidedly in the “return shut-ins” phase. Would expect E&Ps to hold off on next phase, “working DUCs” ‘til they feel OK about crude price stability (for more than a few days at least)
Equities vs crude rate of change ‘18-’19 & ‘20 post OPEC+ collapse. Slowing crude gains are slowing equity gains. Time to consolidate
Equities vs crude rate of change ‘18-’19 & ‘20 post OPEC+ collapse. Slowing crude gains are slowing equity gains. Time to consolidate
Equities vs crude rate of change ‘18-’19 & ‘20 post OPEC+ collapse. Slowing crude gains are slowing equity gains. Time to consolidate
Near term nat gas outlook continues to deteriorate. Global gas prices took another leg down this week as Europe NG storage unseasonably high.
Near term nat gas outlook continues to deteriorate. Global gas prices took another leg down this week as Europe NG storage unseasonably high.
Near term nat gas outlook continues to deteriorate. Global gas prices took another leg down this week as Europe NG storage unseasonably high.
Backing up gas into US. US LNG export terminal feedstocks decline as export cargoes cancelled en masse (>10 June, >17 July). Could see feed gas drop to 4-5 Bcfd this summer
Europe is the global nat gas dumping ground. With high storage, need to adjust S/D to stay within capacity limits. Means reduced LNG imports & reduced imports from Russia & Norway

1) Daily Norway exports to Europe
2) Global LNG volume on water >20days
Europe is the global nat gas dumping ground. With high storage, need to adjust S/D to stay within capacity limits. Means reduced LNG imports & reduced imports from Russia & Norway1) Daily Norway exports to Europe2) Global LNG volume on water >20days
Europe is the global nat gas dumping ground. With high storage, need to adjust S/D to stay within capacity limits. Means reduced LNG imports & reduced imports from Russia & Norway1) Daily Norway exports to Europe2) Global LNG volume on water >20days
Net NG spec futures positioning overlaid w 12 mo strip. Sentiment ran ahead of fundamentals after US producer shut in anncmts. Often see px pullback after peak in net spec positioning
A digression on refining – troubles are a'brewing

Refining cracks are terrible today. Yet refiners are running harder and building product inventory
A digression on refining – troubles are a'brewingRefining cracks are terrible today. Yet refiners are running harder and building product inventory
A digression on refining – troubles are a'brewingRefining cracks are terrible today. Yet refiners are running harder and building product inventory
Cracks for both gasoline and diesel have been trending down lately. Distillate cracks stand out at lows for the past decade

Today gasoline is worth more than diesel. This relative valuation premium has been a rarity in the last several years
Cracks for both gasoline and diesel have been trending down lately. Distillate cracks stand out at lows for the past decadeToday gasoline is worth more than diesel. This relative valuation premium has been a rarity in the last several years
Cracks for both gasoline and diesel have been trending down lately. Distillate cracks stand out at lows for the past decadeToday gasoline is worth more than diesel. This relative valuation premium has been a rarity in the last several years
Exploration into anomalously weak distillate.

20YR distillate inventory seasonality through the roof – yikes. What gives? Refiners playing curve contango & using storage to sell forward
Exploration into anomalously weak distillate. 20YR distillate inventory seasonality through the roof – yikes. What gives? Refiners playing curve contango & using storage to sell forward
Exploration into anomalously weak distillate. 20YR distillate inventory seasonality through the roof – yikes. What gives? Refiners playing curve contango & using storage to sell forward
Increasing runs in weak px environment should result in continued distillate builds, further pressuring pricing. Crude & distillate producers responded to severe contango opposite one another. Crude producers removed supply, while refiners ramped. Look for cont’d builds
Increasing runs in weak px environment should result in continued distillate builds, further pressuring pricing. Crude & distillate producers responded to severe contango opposite one another. Crude producers removed supply, while refiners ramped. Look for cont’d builds
Increasing runs in weak px environment should result in continued distillate builds, further pressuring pricing. Crude & distillate producers responded to severe contango opposite one another. Crude producers removed supply, while refiners ramped. Look for cont’d builds
Increasing runs in weak px environment should result in continued distillate builds, further pressuring pricing. Crude & distillate producers responded to severe contango opposite one another. Crude producers removed supply, while refiners ramped. Look for cont’d builds
Prices move inverse to inventory trends 12 mo diesel strip (inverted) vs US distillate inventories. Looking through weakness in current cracks, refiners are still incentivized to run based on forward cracks.
Prices move inverse to inventory trends 12 mo diesel strip (inverted) vs US distillate inventories. Looking through weakness in current cracks, refiners are still incentivized to run based on forward cracks.
Prices move inverse to inventory trends 12 mo diesel strip (inverted) vs US distillate inventories. Looking through weakness in current cracks, refiners are still incentivized to run based on forward cracks.
Diesel curve in deep contango. Considerably weaker vs 3 months ago. More runs, more builds, lower prices
Diesel condemned to languish for a while. Gasoline economics will have to do heavy lifting for refiners. There again, a problem

Driving roughly back to Jan levels. Normally, US would be 10-15% higher than Jan at this point . Less upside to gasoline dmd today vs early Apr
Diesel condemned to languish for a while. Gasoline economics will have to do heavy lifting for refiners. There again, a problemDriving roughly back to Jan levels. Normally, US would be 10-15% higher than Jan at this point . Less upside to gasoline dmd today vs early Apr
Diesel condemned to languish for a while. Gasoline economics will have to do heavy lifting for refiners. There again, a problemDriving roughly back to Jan levels. Normally, US would be 10-15% higher than Jan at this point . Less upside to gasoline dmd today vs early Apr
Look to exports. Refined product exports had grown to ~2.5 mmbbld up from 0.5 mmbbld 10 years ago. Split has been ~2/3 distillate & 1/3 gasoline
Of the many tailwinds US refiners have enjoyed the last few years has been increasing product exports, almost all growth going to LatAm countries – esp Mexico & Brazil
Of the many tailwinds US refiners have enjoyed the last few years has been increasing product exports, almost all growth going to LatAm countries – esp Mexico & Brazil
Of the many tailwinds US refiners have enjoyed the last few years has been increasing product exports, almost all growth going to LatAm countries – esp Mexico & Brazil
Post Covid product exports have fallen off a cliff
With chronic underperformance from state refineries, Mexico has been a home for a good chunk of US gasoline exports in recent years.

1) US gasoline exports Mexico vs Rest of World
2) Decline in Mexico domestic refined product supply
With chronic underperformance from state refineries, Mexico has been a home for a good chunk of US gasoline exports in recent years. 1) US gasoline exports Mexico vs Rest of World 2) Decline in Mexico domestic refined product supply
With chronic underperformance from state refineries, Mexico has been a home for a good chunk of US gasoline exports in recent years. 1) US gasoline exports Mexico vs Rest of World 2) Decline in Mexico domestic refined product supply
Developments in Mexico are challenging US product export paradigm. LatAm still struggling through Covid lockdowns with hits to eco activity. Storage @ 90% capacity. Concurrently, govt is mandating more domestic refinery production & imports from Asia refineries are ramping
Developments in Mexico are challenging US product export paradigm. LatAm still struggling through Covid lockdowns with hits to eco activity. Storage @ 90% capacity. Concurrently, govt is mandating more domestic refinery production & imports from Asia refineries are ramping
Developments in Mexico are challenging US product export paradigm. LatAm still struggling through Covid lockdowns with hits to eco activity. Storage @ 90% capacity. Concurrently, govt is mandating more domestic refinery production & imports from Asia refineries are ramping
Plateauing gasoline demand, moribund diesel demand, and pressure on product exports … US refiners are in for a tough slog with financial performance set to be the weakest in nearly a decade – as the group multiple is 50% above mid cycle
Plateauing gasoline demand, moribund diesel demand, and pressure on product exports … US refiners are in for a tough slog with financial performance set to be the weakest in nearly a decade – as the group multiple is 50% above mid cycle
Plateauing gasoline demand, moribund diesel demand, and pressure on product exports … US refiners are in for a tough slog with financial performance set to be the weakest in nearly a decade – as the group multiple is 50% above mid cycle
II. Portfolio Thematics & Positioning

Performance for week ending 5/22
II. Portfolio Thematics & PositioningPerformance for week ending 5/22
II. Portfolio Thematics & PositioningPerformance for week ending 5/22
Crude has bottomed, but near term skew tilted negative lest this become (another) self-defeating rally.

Poor refining economics materializing as producers bringing shut-ins back as demand & exports pressured. Pushing on a string
Gas equities need to pay for lower summer/fall ’20 before potential ’21 upside

Focused on ‘21/’21 efficiency. Prefer stability vs debt-induced shut-downs

As market accepts need for shut-in bbls, focus turns to next tranche of supply: DUCs
Balance sheets will matter as market internalizes limited medium term upside to crude

Long-short pairs in the book:
CVX-XOM
EQNR-RDS/A
VLO-PSX
MPC-HFC
PBF-DK
COP-EOG/OXY
PXD-HES
FANG-CXO
PE-XEC
NBL-DVN
WPX-MRO
APA-CLR
LNG-COG
OVV-MUR/EQT
CRK-RRC
CNQ-SU
HAL-SLB
BKR-HP
NOV-FTI
WHD-PTEN
III. Random Market Thoughts & Observations

MSCI Value/Growth performance vs G20 & BRICS GDP. Value performance, including energy, is ultimately tied to EM growth

Does bounce in ‘21 off the decimated ’20 base make the case for a bounce?
Value/Growth vs Oil
Misc hedge fund positioning stats from GS. Hedge funds running decent net long, of course. Crowded like sardines in the same names. 10yr low in energy weighting. Small tilt at the margin recently into E&P
Misc hedge fund positioning stats from GS. Hedge funds running decent net long, of course. Crowded like sardines in the same names. 10yr low in energy weighting. Small tilt at the margin recently into E&P
Misc hedge fund positioning stats from GS. Hedge funds running decent net long, of course. Crowded like sardines in the same names. 10yr low in energy weighting. Small tilt at the margin recently into E&P
Misc hedge fund positioning stats from GS. Hedge funds running decent net long, of course. Crowded like sardines in the same names. 10yr low in energy weighting. Small tilt at the margin recently into E&P
Misc hedge fund positioning stats from GS. Hedge funds running decent net long, of course. Crowded like sardines in the same names. 10yr low in energy weighting. Small tilt at the margin recently into E&P
Though they’re still short Energy
Though they’re still short Energy
Though they’re still short Energy
Trend of crowded shorts outperforming crowded longs continued this week.

Value outpaces Momentum as well
Trend of crowded shorts outperforming crowded longs continued this week.Value outpaces Momentum as well
Trend of crowded shorts outperforming crowded longs continued this week.Value outpaces Momentum as well
VIX futures net spec positioning off record net short level. Does VIX stay stable but elevated here? Futures curve flat vs backwardated in early 2Q
VIX futures net spec positioning off record net short level. Does VIX stay stable but elevated here? Futures curve flat vs backwardated in early 2Q
VIX futures net spec positioning off record net short level. Does VIX stay stable but elevated here? Futures curve flat vs backwardated in early 2Q
VIX futures net spec positioning off record net short level. Does VIX stay stable but elevated here? Futures curve flat vs backwardated in early 2Q
Trends & precedents in recoveries (energy ~25%) & HY defaults
Trends & precedents in recoveries (energy ~25%) & HY defaults
Trends & precedents in recoveries (energy ~25%) & HY defaults
As eco activity resumes in 2H20, supply bottlenecks may emerge and initiate a bounce in inflation off a very low base. Still low in absolute sense, but positive inflection. Crude vs CPI below
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