Harvest Rock Advisors, LLC

“O” Fer

It’s hard to admit being a lifelong Baltimore Orioles fan.  Once a storied franchise, the O’s have been one of the worst-run organizations in all of sports for nearly four decades.

I suffered through 1988 with their embarrassing “0” and 21 start to the season – 21 straight losses! – far and away the worst start in baseball history.

Since then it’s been season after season of mediocrity or worse, until 2018/2019 and the utter collapse of Chris Davis.  His hitting ineptitude is breaking century-old records, making front page news and he’s the poster boy for the worst team in baseball.

Through Wednesday, Davis has gone 50 straight at bats without a base hit – incredible.  His hitless streak shattered the record of 46 hitless at bats set back in 2011.  I read there’s been twenty-thousand major league baseball players, which puts Davis’s hitting futility in its proper perspective.

Last season, Davis set the record for the worst batting average in baseball history at .168 and clearly the past off-season did nothing to improve his batting form.

For perspective, Davis is a first basemen and even pitchers (National League) are ringing up more hits.  For O’s fans, the extra agony is that Davis is smack in the middle of a bloated $161 million seven-year contract – all guaranteed money – struck by the team’s incompetent front office, so Davis and O’s fans have three more years of abject suffering.  The contract is being referred to as the worst in baseball history, which is nice.

Even worse, the O’s allowed the best third basemen in baseball - Manny Machado - to leave this past offseason because they didn’t have the money to sign him, in large part due to Davis’s contract.  I run my fantasy baseball team better than this.

Baseball already has a term for hitting incompetence, referred to as the “Mendoza Line”.  This turn of phrase was coined in 1980 when the uber-light hitting shortstop for the Seattle Mariners, Mario Mendoza, flirted with an anemic .200 batting average all season.  George Brett, the hall of famer who was flirting with an epic .400 batting average the same season, famously referred to the “Mendoza Line” as hitting below .200 and the term stuck.

In the future, the phrase should be renamed the “Chris Davis Line”.   And his name will be used as a negative verb, such as “don’t Chris Davis your homework project, son”.

I’m not trying to be mean, but you can tell by watching Davis at the plate that he’s stubborn and won’t change his hitting approach.  That makes it hard to feel sympathy for his epic struggles and for his role in Camden Yards charging $10 for a beer.

Let’s stick with the “O” theme this week and look at the crude oil market from an investment perspective.

What’s most interesting about crude oil has been the disruption across global oil markets propagated by US shale drillers over the past decade.  In 2008, the US energy industry produced about five million barrels of crude oil a day and was just a bench player in the global oil industry.  Moreover, the US was importing a large amount of crude oil at the time. 

Roll forward to 2019:  The US has more than doubled crude oil production to over twelve million barrels per day and last year the US surpassed Russia as the world’s largest oil producer. 

In fact, the US is now a net crude oil exporter, which is really messing with the OPEC cartel since it has lost its key role as the world’s swing producer.

It’s conventional wisdom that Saudi Arabia needs global crude oil prices to stay above $80/barrel  to produce enough profits to pay for its massive social welfare programs.  Saudia Arabia dominates OPEC and their coordinated production cuts have lost much of their leverage as the US shale drillers can produce oil at $50 per barrel and still make a satisfactory profit.  This new dynamic has kept oil prices lower than they would be otherwise.

You could develop a sore neck watching gyrating oil prices since 2014.  After collapsing 80% from late 2014 until 2016, crude oil rallied, peaking at $75 per barrel by the fall of 2018.  Like most asset classes, oil prices collapsed in 4Q18, falling 40% to $45 per barrel. 

And, like most asset classes, crude oil has rebounded strongly in 2019, up nearly 50% to the mid-$60s.  The hot mess in Venezuela plus OPEC and Russia coordinated production cuts have helped put a floor under oil prices and assuage worry about an oil inventory over-supply as the global economy softens.

The next key event that could drive crude oil prices higher is the steep new restrictions on sulfur emissions for container ships instituted by International Maritime Organization as of January 1st, 2020. 

Commercial ocean container ships are powered with bunker fuel, which is a dirty, high-sulfur by-product of refined sour crude oil; it is one rung up from tar.  It is estimated that the 50,000 ships burn bunker fuel and account for 90% of all atmospheric sulfur emissions – they’re big polluters.

Starting in 2020, the IMO will cut the permissible sulfur air emission limit by seven times its current level.  This draconian change will mandate expensive capital investment in new scrubbers or a change to a cleaner oil-based fuel source, which is more likely.

We believe this environmentally friendly regulatory change and the broader shift away from high sulfur sour crude to sweet crude oil will benefit US producers and represents a structural change in world oil supply / demand, thus creating new investment opportunities.    

For example, rising exports of US shale oil drive more pipeline investment to increase transport capacity.  Refineries will enjoy more demand to produce cleaner burning oil.  And energy debt will be needed to finance additional infrastructure to support the favorable industry growth.

Rising oil prices would mean higher prices at the gas pump, but it could also open the door to some new investment opportunities as well.

Until next time, be well….Tim

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