OSL Trader View | Weekend Digest

Friday April 24, 2020

What the Oil?

Care to contango? I’m sure by now you’ve digested your fair share of explanations as to what in the world happened - from insufficient storage to costs associated with physical delivery; and the fallout of Saudi Arabia, Russia and America.  But for an asset this big to flip into negative territory, with the underlying re-engineered by barrels of ETF managers who weren’t able to reflect a value below zero (because equities don’t go below zero) makes this event a different story to decades ago. The average retail investor is the one to bear the full brunt of the impact though, seeing their seed money go to zero, lost in the gargantuan hole of a petrodollar.

Trump has filled his strategic reserves for pennies on the dollar, WTI June/July futures have bounced back albeit at subdued levels. The global freight train being out of action for a mere quarter has laid destruction to the industry. The exposure by our banking systems have been scaled back drastically from the weighting oil and gas debt had on their respective balance sheets, but it still ain’t zero. 

I haven’t heard any millennial say “I think oil and gas is sexy and want to be a part of it”, and rightly so. Environmental issues are much closer to the hearts of this generation than those that have come before, so to hold this industry in low regard, following decades of spending billions of dollars to promote anti-environmentalism propaganda is more than fair.  As for the professional money managers? Well, money talks and if these companies are willing to go out on a ledge to deliver yield, however egregious the logic is, the income funds of the world will happily scoop these players up. 

Alberta Tar sands, (left) before and (right) after

In the landscape where Fed bailouts come in a don’t-pay-dividends package, and Goldman Sachs is refusing to deal with companies with 100% white, male boards, could it be that the non-renewable energy sector has seen the last of its heydays? Whatever the result, hope this puts a lid on shale gas, fracking and all these other extraction methods.  These “old white dudes” may have laid waste to their future Board chances as they’ve laid waste to the lands that enriched them - left barren.

CME futures got a boost from Renaissance Technologies, the legendary quant fund that has been killing it since inception, as it was revealed they’d been cleared to trade $BTC futures in a form ADV filed at the end-March. The news caused open interest to recover monthly highs. At least 80% of the top 20 players in bulge bracket IBs are low touch and RenTech is the king of them all. Surely this must have triggered some FOMO across the HFT/quant fund space...

From contango’s with oil to tangos with digital assets:

  • While more than 43,000 millionaires get a $70B break from the Coronavirus Aid, Relief and Economic Security (CARES) Act, the average American benefited from a measly $1200 cheque gifted to them by the US government.  In a now deleted tweet by Coinbase CEO Brian Artmstrong, FOMO seemingly kicked in and allegedly sent many running straight to their favorite digital asset trading venues. 

  • Awareness of digital assets has been climbing slowly, but surely. As per the latest Economist survey, “Cryptocurrency awareness in developed economies reached 79% (92% in developing ones).”

  • Asian governments continue to show up their American counterparts: Singapore has opted out of their cut from airdropped digital assets and as the PBoC confirms the closed circuit pilot projects in Shenzhen, Suzhou. Xiong’An & Chengdu, they’ve hinted at aspirations to roll out the DCEP and have it available before the 2022 Winter Olympics.

  • Sensing a changing regulatory environment, private companies are taking these cues to push their own respective digital asset boats out, the latest being ICBC issuing a white paper on their blockchain capabilities; the first of its kind from a commercial Chinese bank, let alone one of the top four.

  • As ironic as a centralized custody solution for a decentralized digital asset sounds, I find it difficult to see how any professional money manager would opt for the latter and the ongoing hacks underline the point. DeFi lending platform dForce saw their $25mn assets on platform emptied, only to see it returned in full a week later as the hacker realized his IP address had been exposed. They allegedly suffered the same attack a’la DAO 2016. There was another breach in the EOS ecosystem in which an EOS wallet provider (article in Chinese) just called it a day snatching the $52mn in $EOS on balance, and yet another failed attack on PegNet. DeFi is still a concept being tested. Looking for an insured, trusted, battle-tested custody solution? 

Geopolitical strife is serving as a painful reminder that government fiat can and will be less than paper if it is mismanaged. But at the same time fuels the conversation for widespread and expedited digital asset adoption:

  • Demand for bitcoin in Argentina has exploded as the country is on the brink of a ninth sovereign default;

  • If I had to choose a contrarian investor to trump them all, it would be Nassim Taleb, the author of The Black Swan and the man just put out a tweet urging Lebanese to resort to $BTC as the government drains the wealth out of its people.  

  • The US senate just approved another $484bn for COVID relief on top of the existing $2T and the UK government wants to dish out a £1.25 billion (US$1.53 billion) rescue package for high-growth businesses. You’ve all heard that one guy say “...we don’t really need digital assets in developed countries” -  true, that the guys pulling the lever on the printing presses have quite literally unlimited resources, but surely this can't go on forever? 

The threads on the emperor are looking mighty thin…

And if that fails, well, no money no honey and all these income funds are going to have to have a serious look at their portfolios because it seems like both banks and the oil and gas companies will be tighter with these unsustainable gifts. HSBC & Standard Chartered, and now the RBI stepping. 

There have been a ton of awesome developments in the space including Coinbase’s participation in DeFi via their Oracle, Facebook on their Libra, Algo joining the Wallstreet Blockchain Alliance. The one stat that made my day was the number of ethereum smart contracts deployed in March 1,971,632 +75% MoM at an all-time high. While the detractors will surely scream it was a result of a drop in cost to deploy the smart contracts, I’ll take it. Keep BUIDLing, buy Bitcoin. 

May the trend be your friend… Happy Trading!


For some added weekend reading, here’s some news that caught our eye:

 

Happy trading!


May the trend be your friend!   

 


 

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