“…large supplies of gasoline which is, in the battle of tomorrow, as necessary as blood” - Georges Clemenceau

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Editor’s note: skipping next week on account of travel; back on October 11th -

SPREADS.

Price chased headlines this week.

Oil slipped under $100 on Tuesday on the East-West restart & Hormuz reopening hopes. Brent then jumped 3.9% Wednesday after Pezeshkian’s “never surrender” at the UN, settled at $106.60 Thursday & gave back 2% Friday to $104.32 on signs of progress w/ Iran.

The spreads were more honest:

• WTI traded as much as $12 under Brent on Thursday - the widest since early May (with current levels near that).

• Gulf Coast diesel was ~$210/bbl on 22 Sep (EIA spot) - more than $110 over WTI.

A crack that wide isn’t a crude shortage. It’s a shortage of refining & delivery.

North Sea grades are still standing in for missing Gulf sours. Sverdrup offers hit Dated+$35 last week (Bloomberg), vs a record Platts assessment of +$19.55. There’s been little fresh pricing since - watch whether premiums ease as Yanbu comes back.

Then, Wednesday’s scare: a Politico report that a 90-day US fuel-export ban was being prepared knocked ULSD down ~5% intraday.

• The White House denied it, & ULSD settled 3.4% lower at ~$4.78/gal.

• It’s also what WTI’s discount is pricing - diesel trapped at home means US refiners need less crude.

At the pump & in the tanks:

• AAA diesel set a record $6.53 this week.

• EIA distillates drew to ~107.4mb (w/e 18 Sep) while crude stocks unexpectedly built 3mb.

Crude building, distillate drawing - the week in one print.

And it’s leaking into everything else:

• Diesel & jet costs are now being passed through into cargo pricing.

• The Fed hiked to 3.75-4% this month & has pencilled in another before year-end. Cleveland’s Hammack warned “an inflationary mindset could start to set in.”

So why was a ban plausible enough to trade?

5wks to the mid-terms…

…w/ retail diesel at a record.

The Catch-22 from two weeks ago (strike & own the war, or sit tight & own the inflation) has a third door: keep US fuel at home & export the shortage.

It’s closed for now…

…but the market now knows the door is there -

YANBU.

On Thursday night the Houthis claimed ballistic & cruise missiles & drones at Aramco’s Yanbu refinery & a “sensitive target” in Riyadh.

Riyadh says it intercepted six ballistic missiles.

Per ISW (25 Sep), Yanbu has been the main target since July - to “maximize Saudi political and economic costs.”

The terms for stopping…

• End Saudi military activity & support for anti-Houthi forces.

• Lift controls on Houthi-held ports & airports.

• Pay war reparations & civil-servant salaries.

• Hand the Houthis control of Yemen’s oil & gas.

Two weeks ago Riyadh was asking Washington for strikes. This week help came from other capitals - & it’s defensive:

• Macron pledged “soldiers, radar systems and defense systems” to protect Yanbu.

• London committed one RAF Voyager for “defensive air-to-air refuelling” - time-limited & under review.

• Saudi, Pakistani & Turkish foreign ministers met Thursday to call an urgent meeting of their military chiefs under the Mecca defence pact.

ISW’s read: the Houthis are now in a bind. Hit partner forces & invite a much bigger response - or leave them be & watch the campaign lose its edge.

Meanwhile, the barrels:

• The East-West line restarted Tuesday, “pumping at a low rate.” Aramco aims to get back to its pre-attack ~4mb/d (capacity 7mb/d), w/ full recovery 6-8wks out (Reuters).

• JPM had Saudi crude through Hormuz at ~2.9mb/d in the six days to 18 Sep.

• VLCC rates hit a record $1.27m/day on Monday (Reuters), w/ transfer capacity off Oman reportedly maxed out.

Saudi’s Red Sea route is under fire, its Hormuz route runs at record freight…

… & the air cover is arriving just as Yanbu & the East-West line decide how many Saudi barrels reach the market -

REFINERIES.

Kyiv’s MoD counts six refineries hit in a week, at ranges of up to 1,600km:

• Moscow (Kapotnya), 19-20 Sep - Reuters: crude runs stopped after both primary distillation units caught fire; repairs “could take several weeks.” ~230kb/d.

• Ufa (Bashneft) & Samara (Kuibyshev), 21-22 Sep - fires at both, primary-unit damage at Kuibyshev.

• Perm (Lukoil), 24-25 Sep - primary unit hit, operations suspended per Reuters sources.

• Novoshakhtinsk, 24-25 Sep - Rostov’s only refinery, “temporarily” suspended per the governor.

• Ilsky, 25-26 Sep - confirmed by Kyiv’s General Staff.

Note where the damage keeps landing: primary distillation - the front door of the plant. Hit it & nothing downstream runs.

That’s a products problem:

• Less refining tightens Russia’s own fuel market & cuts the diesel & jet it can export - into a distillate market that’s already lost much of its Middle East supply.

• It also tends to push more Russian crude toward export - & Washington now has a tool aimed at the buyers. The Russia-Iran sanctions act Trump signed on 18 Sep allows tariffs of up to 100% on the five largest buyers of Russian oil & gas.

None imposed yet.

India says it’s “studying” the law… the question is whether India & Arab buyers cut anyway -

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HORMUZ.

Friday’s close priced progress. The weekend didn’t deliver it.

• Iran’s seven-day plan went public Friday: ~$12bn of frozen assets released, oil sanctions lifted, the US naval blockade ended & fighting stopped, incl. in Lebanon - then Hormuz reopens.

• Trump reportedly rejected it Saturday.

• Overnight into Sunday, explosions near Qeshm, w/ unconfirmed claims that anti-ship missiles & drones were fired at commercial vessels. Tehran hasn’t confirmed any attack.

The squeeze on Tehran keeps widening:

• Per the WSJ, Treasury has pressed 50+ countries to cut Iran’s banking & aviation links. Oman, the UAE, Turkey, Azerbaijan & Georgia have cut ties w/ Iranian airlines or banks.

• Javi Blas flagged the Hormuz wording out of the Trump-Xi summit. The White House fact sheet: no country can be allowed to “impose tolls on international waterways.” Hormuz isn’t named - it doesn’t need to be.

Weeks of absorbing shocks have used up the market’s buffers.

The next one lands on a market w/ no slack…

… & Monday opens on a rejected plan & explosions off Qeshm -

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OTHER.

• Argentina LNG Update: US EXIM / Trump backing Milei’s LNG

• Exxon & Socar: Shale JV in Azerbaijan

That’s it for this week -

"Safety and certainty in oil lie in variety and variety alone" - Winston Churchill

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CAPITALS.

War reached capital cities this week.

The Houthis hit Riyadh for the first time, and overnight into Sunday Ukrainian drones hit the Gazprom Neft refinery at Kapotnya - inside Moscow’s city limits.

Meanwhile, Dated Brent printed around $132 & every North Sea grade cleared $150 on a dated-plus-differential basis.

Starting w/ Riyadh…

Per the ISW, the strike is part of a Houthi campaign to impose maximum political & economic cost on Saudi Arabia until Riyadh yields.

• Inside Yemen, pressure around Taiz continues (Saudi media claimed a government-aligned seizure of Jabal Naman), which ISW reads as serving near-term economic aims & the longer goal of controlling Yemen.

Last week Trump declined Saudi requests to strike the Houthis.

This week he reportedly reviewed strike options at Camp David - then returned to Washington a day early.

• The State Department issued a Middle East security alert citing the potential for unforeseen escalation.

• ISW sees multiple signs that fighting between the US & Iran and its partners may expand imminently.

On the other side, Tehran’s answer came from its highest operational headquarters:

• It claims intelligence that the US intends to resume strikes on Iran & has put forces on high alert.

• If struck, Iran would attack US bases & interests - and show no “restraint or decency” toward regional countries that support the strikes.

The ISW reads that last line as aimed at the neighbours - pressure on the Gulf to talk Trump out of it.

Stack it on last week’s tape - Bab al-Mandeb, Hormuz, the East-West shutdown - and this is no longer Houthi harassment at the periphery.

Capital-city signalling, US decision time & Iranian escalation doctrine…

… all inside the same 48hr window -

MOSCOW.

Kapotnya is ~220 kb/d nameplate & has historically supplied a large share of the Moscow region’s gasoline, diesel & jet (not a marginal topping plant).

• Russian authorities described one of the largest drone waves of the year against the Moscow region, w/ fire & damage reported at the plant (early claims point to a primary processing unit).

Tom Kloza’s read (we agree): if Kapotnya is seriously impaired, Muscovites lose a huge slice of local product & diesel gets another rally impulse.

On election weekend, no less -

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PRODUCTS.

Products are (still) the problem:

• GasBuddy has the top 10% of US stations above $7/gal on diesel, the bottom 10% around $5.83 & the median near $6.39, w/ further gains expected.

• The FT’s chart shows diesel pulling away from crude - the signature of a refining & availability problem, not a simple crude shortage.

Russian product exports were already impaired by earlier strikes & export curbs.

Gulf barrels are constrained by war risk.

Kapotnya is another chip out of the same pile.

And the physical barrels agree:

• @Big_Orrin has every North Sea grade at $16-$24 over Dated.

• June Goh (Sparta) had Johan Sverdrup at about Dated+$22 & Forties at about Dated+$16 midweek, w/ medium sours holding a clear premium to lights & NW European margins still strong enough to keep secondary units full.

While there’s scarcity pricing in the physical complex…

… the market is saying that Northern Europe wants the barrels & is paying for them.

Inventory headlines matter less than what can clear the water & the rack this week.

And the mid-terms are now 6wks out -

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OTHER.

• Noam Raydan’s Seatrade conversation on Iran’s attack pattern on shipping & what operators should expect next

That’s it for this week -

“The control of the sea, by maritime commerce & naval supremacy, means predominant influence in the world” - Admiral Alfred Thayer Mahan

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CHOKEPOINTS.

The Gulf oil system lost its redundancy this week.

Hormuz is still contested, the Houthis now sit on the approaches to Bab al-Mandeb, and on Thursday the East-West pipeline - the Saudi bypass that moves barrels around Hormuz to Yanbu - was hit & shut.

Brent went from roughly $97 to around $108 inside a week & US diesel printed a national $6 handle for the first time.

Riyadh confirmed the East-West shutdown after multiple attacks on Thurs.

• OSINT & US reporting put the drones’ origin in Iraq’s Maysan province (not Yemen), which widens the set of launch points Riyadh has to defend against.

The line had been carrying ~7 mb/d around Hormuz, and Yanbu exports are expected to fall until repairs are done.

Trump reportedly declined Saudi requests - across two calls with MBS - to strike the Houthis as they closed on Bab al-Mandeb.

Riyadh is absorbing drone hits from the Iraqi side & Houthi pressure on the Red Sea without US strike support.

On the Red Sea side, the Houthis seized Perim (Mayun) & pressed Mocha & the coast.

• ISW & AFP now describe operational control of Yemen’s west coast and islands, meaning that Iran now has leverage on both sides of the Gulf system.

Meanwhile, Hormuz stayed active:

• CENTCOM destroyed five Iranian crude carriers on Sept 8th, after IRGC hits on a US warship, with strikes near Kharg & Jask.

• At the same time, TankerTrackers had blockade-line exports averaging above 10 mb/d for the first time in two months, w/ the UAE, Iraq & Kuwait near pre-war levels, via clandestine Hormuz crossings.

Barrels are moving…

… through a strait where vessels were hit - by both sides - this week…

Products are the problem (and where scarcity shows):

• US gasoline hit $4.31 nationally yesterday, $1.33 above where it was at the start of the Iran war.

• Diesel crossed $6 nationally for the first time per GasBuddy.

Retailers are flagging $4 gasoline as the level where consumer spend breaks, and diesel is feeding into grocery inflation.

And the political Catch-22…?

• If Trump increases US military activity in the region - in an attempt to free-up chokepoints & drive down prices - then he suffers the wrath of American voters’ anti-war sentiment.

• If Trump does nothing, then he suffers the wrath of American voters’ anti-inflation sentiment.

As mid-term elections are 7wks out, expect the pressure to hold.

The timing isn’t a coincidence -

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OTHER.

• Dan Pickering’s thoughts on China & Demand

• Javi Blas on Russian refineries

• Recommend Odd Lots’ (always great) interview w/ Robert Friedland on the topic of copper

That’s it for this week -

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"OpenAI spent $15MM in tokens to solve a problem with a $1MM prize. Standard AI economics here" growing_daniel (Daniel Francis)

Editor’s note: a couple days late; I’ve been building a model on the AI complex, from the perspective of the commodities of compute & tokens.

The meta-takeaway is that you can build a very robust, global dynamic market model, using primary & alternative data sources, w/ corporate finance & econometric logic interwoven, in ~10 days, for very cheap.

The most practical takeaway follows -

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STANDARD AI ECONOMICS.

The AI market is a commodity market…

“NVIDIA compute is fungible, durable & highly rentable. It is a productive, revenue-generating asset” - Jensen Huang

…that - in many ways - looks similar to the oil market.

While there are many topics worthy of discussion, Frontier Lab Economics (i.e., the economics of firms like Anthropic & OpenAI), stand out.

In the analogy to the oil market, Frontier Labs are the AI market’s refiners.

For the refining market, a standard economic measure is the crack spread.

Crack spreads don’t vary too widely (and are reasonably healthy at the moment).

Conversely, in the AI market, the Frontier Labs’ current spread - call it the Rack Spread - looks more like buckshot than a distribution:

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Standard AI Economics has been & looks to continue to be (with 1, maybe 2 very large exceptions), that Frontier Labs operate at massive, negative gross margins.

That cannot persist indefinitely.

That reality has - and will increasingly - require significant equity funding in the short-to-medium term (hence, IPOs are inbound).

When & how that money slows will likely have profound impacts on both equity & credit markets, as well as token & compute prices.

On the highest level, there are (in both my opinion & the LLMs operating my model) seven other signposts - beyond funding - in the compute & token markets that have the capacity to affect outside equity & credit markets.

Commodity markets are notoriously hard to model - dynamic variables reflexively interact.

That said, there’s never been an easier / faster / cheaper time to do it -

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OTHER NEWS.

• More on Venezuelan Oil Structuring

• Schrodinger’s Strait of Hormuz Continues

If anyone is interested in discussing modelling out the AI / Compute / Token Market, then shoot me an email (doing information exchanges, locally / London, for the time being) -

"If you are perceived as weak, you invite irrational demands" - Lee Kuan Yew

Editor’s note: if you’re interested in the Venezuelan debt restructuring, I’ve saved down a data-pack spreadsheet; Sanctions Licences & Forward Catalysts are of note -

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A NEW DEAL.

Two days ago, President Donald Trump announced what he called the biggest oil deal ever struck.

A new company, formed by the American government and a private operator it has not named, will develop 17 Venezuelan fields containing what Caracas describes as a “proven potential” of 65BN barrels.

Delcy Rodríguez, Venezuela’s interim president, filled in the terms on August 30th:

• A 25yr agreement;

• $100BN of investment;

• More than $209BN of tax revenue for the state; and,

• A production target of over 1.5MM barrels per day (b/d).

America takes 55% of effective output and the right to buy oil at cost, for its strategic petroleum reserve and its armed forces.

Its operator remains unnamed, and America’s majors have so far kept their distance.

Rory Johnston, of Commodity Context, offered Canadian viewers a useful corrective on CBC this weekend (politics aside, it was very informative - link here).

The 65BN barrels - he argued - is a red herring. Venezuela already claims the world’s largest proven reserves (dubious, on account of economic recoverability), at north of 300BN barrels, and still pumps barely 1MM b/d (less than a fifth of Canada’s output).

Rory rightly argued that reserves were never the constraint.

Capital & courts were (and are).

What is genuinely new in Trump’s deal is the equity.

Washington’s theory, as Johnston reads it, is that American companies have been expropriated in Venezuela before and will not return without protection; if the American state owns a slice, the investment is de-risked.

Politically (in Venezuelan domestic politics), Johnston suspects the opposite.

And we agree.

Placing the American government on the ownership register of 17 fields in a country with a long history of resource nationalism creates, he says, “a very obvious point of political friction”.

The Venezuelan opposition has already rebuked the deal.

Ricardo Hausmann - a Harvard economist and former Venezuelan planning minister - called it shameful and denied that interim president Delcy Rodríguez has the legitimacy or the constitutional power to sign it.

That objection will recur.

There is also a technical error at the heart of the White House’s sales pitch.

President Trump says the deal more than doubles American reserves and will lower prices at the pump. But “reserves” is doing two jobs.

Proven reserves are barrels in the ground; the Strategic Petroleum Reserve is barrels in salt caverns on the Gulf Coast.

Venezuela produces a heavy, diluted bitumen that is, as it happens, currently unsuitable for storage in those caverns. The barrels are real; the syllogism is not.

For Canada, Johnston’s verdict is calibrated rather than alarmed. Venezuelan heavy crude competes directly with Canadian heavy sour on the American Gulf coast, where Canadian producers have enjoyed an unusually strong position while Venezuela was sanctioned.

More Venezuelan barrels mean an incremental drag: perhaps $4-5 a barrel weaker on Canadian export grades than would otherwise obtain. That is a real cost, not an existential one. Most Canadian barrels land in the Midwest, and Venezuelan crude would have to travel north to contest them.

The subtler risk is psychological.

Ottawa’s trade negotiators have long assumed that Canadian heavy oil is the one export America cannot replace. Johnston does not think this deal changes that arithmetic - doubling Venezuelan output would not displace Canadian barrels - but he does think Washington believes it does, having heard the claim repeated often enough by allied commentators.

Negotiating leverage is partly a matter of belief.

Ottawa may find itself arguing against a fact pattern that does not exist, which is harder than arguing against one that does -

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A $240BN PROBLEM.

All of which lands on a country nine years into default and four months into an attempt to escape it.

On May 13th, Venezuela, announced a comprehensive restructuring of the Republic’s & PDVSA’s obligations, hiring Centerview Partners (Matthieu Pigasse).

Bondholders are owed over $100BN, with the total debt perimeter and claims reconciliation likely totaling north of $200BN (data-pack link here).

Reconciling it is the mandatory first step, and it took Iraq - the closest sovereign precedent - from ‘05 to ‘08 to implement its deal.

All the while, almost nothing else has moved.

The debt sustainability analysis promised for June was derailed by the earthquakes of June 24th, which killed some 5,400 people & caused damage the World Bank puts at $19.6BN.

Venezuela has chosen a homegrown analysis rather than an IMF programme, seeking access to roughly $5BN of its own reserves at the fund rather than a loan.

Above all, negotiation remains illegal.

General License 58, issued on May 5th, authorizes advisers and nothing else: not settlement, not payment, not direct talks between debtor / creditors.

Issuing new bonds would require amendments to two further licences.

The Venezuela Creditor Committee - Fidelity, T. Rowe Price, Morgan Stanley, GMO, Greylock and Mangart, holding over $10BN - expanded in July in preparation for conversations that it is not even permitted to have -

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REFEREE, BANKER, CUSTOMER.

Here, the two stories merge.

In Venezuela, America’s formal vetoes include the authorization of:

• Any negotiation and/or agreement;

• The issuance of new bonds; and,

• The disposal of Venezuelan oil revenues in support of a deal, including oil warrants (because an executive order of January makes it guardian of those revenues, of which perhaps $5-7BN remain)

To that list must now be added a fourth role.

Washington is not merely the gatekeeper of the cash from which creditors must be paid; it is a counterparty taking the barrels - at cost - that generate it.

The tension is not subtle.

Venezuela nets roughly $19 a barrel under the new arrangement against a $65 benchmark.

Trump has said that he does not want a debt deal that bleeds off money he would rather see spent rebuilding the oil industry. That preference has now been converted into contract.

Oil warrants - the standard device for giving creditors upside in a commodity restructuring - are worth less when the upside barrels are already spoken for.

Then there is the courtroom, and the irony.

The interim government’s authority is contested: under Articles 233 & 234 of Venezuela’s constitution a vice-president may act as president for no more than 180 days, that the lapse expired without elections being called, and that Delcy Rodríguez’s acts are therefore void.

And recent precedent in American courts have already shown the instinct: in the PDVSA 2020 litigation, a New York court held that whether PDVSA had authority to pledge Citgo shares was a question of Venezuelan law, because due authorisation is always a matter of local law.

The doctrine that could void a bond exchange could void an oil contract, and vice versa.

Washington now has a direct commercial interest in which way that runs.

Talks between the government and the opposition-led assembly of 2015 began on August 1st, aimed at electoral reform.

No date has been set for a vote; Marco Rubio speaks of “months and weeks, not years”.

Stating the obvious, 2027 is more likely.

Legitimacy is not a philosophical nicety here but the thing that determines whether a restructuring signed in 2027 survives to 2030.

A deal struck by an unelected government, with an American state-owned counterparty holding the best fields on 100yr development rights - a term difficult to reconcile with the 25yr agreement interim president Rodríguez describes - is precisely the deal a future elected government would be tempted to reopen.

Creditors, who have bid the bonds into the mid-50s, are pricing an orderly outcome.

They may get one.

But they should notice that the largest single influence over their recovery is now also the largest single buyer of the oil that funds it, and that it has never been obliged to choose between the two -

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OTHER NEWS.

• Venezuela weighs leaving OPEC

• Venezuela: The reported US business partner

• A sharp observation from Benedict Evans

• On tokens - noteworthy from Jamin Ball

Next week’s note will likely be back on the topic of compute -

“One day it'll come out that the CIA infiltrated Western consulting firms and convinced Saudi to blow its wealth on LIV Golf, The Line, domestic soccer, Lucid, a ski resort, an artificial lake, World Cup stadiums & a giant cube instead of converting it into geopolitical influence.” - John Arnold

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Editor’s Note: A day late. Built a model of the integrated Argentina LNG project - saved here.

ARGENTINA.

The Vaca Muerta has been in the news; among other reports, the basin is attracting investment from a wide range of characters.

From Peter Thiel to Harold Hamm, capital is coming in.

Which begs the question - is the easy investment, YPF, a good one?

Yesterday, BofA reiterated its buy rating on YPF, with a deep dive on its domestic LNG project.

The high-level pitch:

• A $51BN, 18 mtpa integrated project,

• That earns 23-28% levered IRRs; and,

• Is worth $4.1BN to YPF - none of which is yet in their target price

So, we rebuilt the project economics from the ground up using BofA's assumptions.

Our operating numbers land within 3-4% of theirs…

…our returns don't.

We get ~20% & ~24% IRRs & roughly $1.7BN of value to YPF.

Differences aside, both results say the same three things:

1. The project works;

2. The RIGI is non-negotiable; and,

3. The LNG price makes / breaks it -

CHOKEPOINT FATIGUE.

Geopolitics (as well as Javier Milei’s government) are driving investment into Vaca Muerta.

And LNG is the angle:

• Roughly a fifth of the world’s LNG moved through the Strait of Hormuz in ‘25

  • Since the Iran conflict began, tanker traffic through the strait has collapsed & Qatari LNG output is running about 90% below last year’s levels

• Despite record growth from the US & Canada, global LNG supply is expected to fall year-on-year in ‘26

  • If Qatar is still offline in 4Q26, then lost volumes would exceed the Russian pipeline gas Europe lost in ‘22

• European storage is sitting near ‘21 seasonal lows after a poor injection season & a record-hot summer

The strategic conclusion is simple: buyers & investors are now willing to pay a premium for large, low-cost supply that sits nowhere near a chokepoint -

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YPF & THE LNG PREMIUM.

We built the project as an integrated, nominal-dollar model (well-vintage upstream, midstream/LNG segment, project-finance debt, FCFF/FCFE), using BofA's assumptions where relevant, and filled the gaps left with our own assumptions.

Operations reconcile almost exactly:

Returns don't.

What that means per share: BofA's $4.1BN of YPF value across both phases is about US$10 per ADR - roughly 20% of the current price.

Our $1.7BN is ~$4 / ADR.

Either way it is real value that’s not baked in, and either way it is a decade-long option on LNG prices -

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OTHER.

• Strongly recommend BofA’s YPF/LNG update

• Chamath on the compute commodity

• Interesting update from Ramp on AI/Token consumption

Hasta la vista -

“The captive's real raw material is the parent's credit rating” - Grant's Interest Rate Observer

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Editor’s Note: last week, I stared at a rabbit hole. This weekend, I hopped down it. Over the course of this past week, there was a fair amount of discussion about Nvidia’s credit insurance & captive finance businesses. This was an itch I had to scratch - as banker, I covered GE Capital & GM Financial. I wrapped-up my thoughts below -

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CAPTIVE FINANCE.

Last quarter, Nvidia reported operating income of $53.5BN & other income of $15.9BN.

Almost 25% every pre-tax dollar came from marking-up their portfolio of investments.

Without selling anything -

That’s a large - volatile - non-operating component sourced from the same end-market as the operating one.

This isn't a criticism.

It's a classification problem, and classification problems are where most analytical errors begin.

Ask which reference class a situation belongs to, before asking what will happen inside it. The base rates for a chip company and for a financial guarantor are not remotely the same.

A semis analyst asks about ASPs, mix, the next architecture, etc.

A guarantor asks about attachment points, correlation, collateral triggers, and what happens to the asset side when the liability side is called.

What’s unusual & worth calling out about Nvidia is that it’s two things (and not simply flagging it as the Central Bank of AI):

1. A monoline financial guarantor, selling its credit rating - writing protection on third-party obligations, earning a fee, living or dying on whether the book is diversified. Nvidia's capacity backstops, revenue floors and lease guarantees are functionally this, with the premium taken in kind rather than in cash

2. A captive finance company, existing to move product by financing the buyer. Historically, analogs included GMAC, GE Capital, and IBM Credit. Nvidia's equity book and its role as originator for the recently announced platforms are functionally this - delivered as equity & guarantees rather than loans, so it never appears as a receivable

Traditionally, a monoline's risk is concentration. A captive's risk is funding.

And both have credit exposure.

Nvidia has taken on a monoline's concentration profile while avoiding a captive's funding profile, and almost everything below follows from that split:

Source: Nvidia Form 10-Q, 26 Apr ‘26; counterparty 8-Ks & press reporting. %s derived against $195.5BN of shareholders’ equity. [Note, I’m skeptical of the OpenAI / Ohio bit] -

The signed, capped contingent book is $16.2BN, or 8.3% of book equity.

The tail everyone is actually worried about is twenty times larger and consists of:

• One set of talks; and,

• One set of MOUs…

…nothing material is committed -

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THE EQUITY BOOK.

Instead of traditional debt financing that captives typically focus on, Nvidia has leaned into direct equity investing in its customers. [for what it’s worth, GE Capital did do this - at a smaller scale - for many years ago, without major issues].

And performance is great.

This book has never seen a down cycle: $5.3BN of unrealized gains against $199MM of cumulative losses and impairments.

The cause for pause is the growth of the book:

• Nvidia invested $17.5BN in private companies & infrastructure funds across the whole last year

• In the first quarter of fiscal 2027 alone it purchased $18.6BN - against $649MM in the same quarter a year earlier

One quarter exceed last year’s total.

And then there’s OpenAI…

…which most commentary read backwards.

In Sept ‘25, Nvidia announced an LOI to invest “up to $100BN in OpenAI progressively as each gigawatt is deployed.”

• By December, the CFO confirmed no definitive agreement existed

  • The commitment was excluded from data center bookings guidance; by January reporting had negotiations on ice

• In Feb ‘26 it was replaced with a $30BN direct equity stake, closing at an $852BN post-money valuation

Read as a retreat, that’s a 70% reduction in exposure.

Read as risk, it’s closer to the opposite.

The LOI was economically a strip of deployment-contingent call options.

• Nvidia would fund only as gigawatts came online

  • If OpenAI deteriorated, Nvidia could simply stop

• The optionality sat with Nvidia and cost nothing to hold. The replacement is unconditional equity at a fixed valuation

Nvidia gave up the option and took the position.

The notional fell 70%; the delta went to one -

CREDIT INSURANCE COMP.

On correlation, the analogy holds exactly.

In a world where AI compute demand decelerates, the equity book falls, the capacity backstops trigger, the lease guarantees trigger, the residual support triggers, the receivables deteriorate, the supply commitments become excess inventory, and core product revenue falls.

That’s textbook wrong-way risk: the protection pays out precisely in the states where the protection seller’s own value is impaired.

AIG FP & the monolines that failed in ‘08 ran net par outstanding at roughly 100-150x claims-paying resources.

That leverage was the business model.

Nvidia’s contracted contingent notional is 0.1x book equity , and only ~2.0x including the entire unsigned tail.

A sustained 50%-utilisation stress across the signed book costs roughly $13-16BN over six-year windows on a gross cash view: 2-3 weeks of quarterly revenue, before crediting the ~105k GPUs of capacity Nvidia takes delivery of and can use internally, and before the $10BN+ of hardware margin already booked selling those fleets.

The question of capitalization is answered - it’s a non-issue -

THE COMPUTE FACTOR RISK.

On its captive programs (investments & OTC credit derivatives), Nvidia’s risk is really on the residual value of its GPUs.

And that is a derivative of the compute forward curve (demand).

It goes without saying that the current zeitgeist is that we are in a compute shortage - and that demand could not be stronger.

Data supports the narrative:

• Coreweave recently signed a contract to rent out (six-year old) Nvidia A100 GPUs into ‘29

• Nebius’s earnings call included auctioning their services

• CCIR’s research (excellent) shows consistently strong demand

Both for Nvidia’s captive programs & anything beyond Nvidia (GPU-related), the answer to all of this is building a compute factor / beta.

For Nvidia’s exposures, it reasonably straight-forward (as I showed last week via SharonAI example).

The further you get away from those direct relationships, the more likely it will be a regression against historical compute prices / forward curve movements -

THE AI CAPTIVE.

Nvidia is not the Central Bank of AI.

Nvidia is currently the bridge to accelerating the AI buildout.

To Jensen’s credit, he’s figured out how to:

1. Accomplish being the bridge,

2. While making money,

3. In a (financially-speaking) regulatory-light manner

But he can only bridge so-far; that’s what this week’s announcement was about.

Step 1 was finding the capital - check.

Step 2 is finding or bridging the credit insurance (on residual values).

There is a market precedent outside of Nvidia.

Earlier this year, USD.AI partnered with Barker, who underwrote the residual risk, with it being reinsured by Munich Re.

The next step for Nvidia either looks like that at scale, or continuing to onboard that risk & building the world’s largest Captive Finance business -

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OTHER NEWS.

• Malaysia is booming (you guessed it)

• Peter Thiel buys into Argentine Shale

• Oracle data center has a pipeline delay

• Geopolitics move sideways

• Europe heads into winter with 17yr-low gas inventories

Hope y’all had a good weekend -

“It is hard for us … to even see a scenario … that would see us losing one dollar in any of those transactions” - Joseph Cassano, president of AIG FP, August 2007.

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AI FINANCIAL PRODUCTS.

The failure & bankruptcy of Lehman Brothers kicked off the financial crisis.

The next day, AIG (specifically, the subsidiary AIG Financial Products) almost took down the global financial system, with the last-minute US government bailout preventing the a total system collapse.

That AIG (an insurance company) was so exposed to Lehman Brothers - to the extent that AIG was going to be forced to file for bankruptcy the following day - caught the world by surprise.

Absent that bailout, a bigger surprise would have followed - a cascade of American bank failures, rolling into global bank failures (again, absent many more bailouts).

The culprit - AIG Financial Products - focused principally on OTC derivatives.

Earlier this summer, SharonAI (a NeoCloud customer of Nvidia) disclosed enough of their contract terms with Nvidia to work out the contract economics (SemiAnalysis has a very good note on that topic, if you’re curious).

Putting the contract economics aside, the backstop provided by Nvidia is an OTC derivative - one of many.

In options language, this specific trade is short skew, short the left tail, collecting participation carry...

… aka the payoff signature of an insurance underwriter.

And that sounds like AIG FP.

This trade is exposed to wrong-way risk - the put pays out precisely in the scenario where:

• Nvidia’s core chip demand;

• Its equity; and,

• Its other backstops are all deteriorating, simultaneously.

Which, today, is … hard for us … to even see a scenario …

All that said - if I was Nvidia, I’d do the trade.

But I’d also press for the development of compute futures, and I’d do whatever I could to develop a robust third-party derivatives market.

The risk exposures from these transactions are both complex and - once a competitive derivatives market is developed - not strategic.

Technically, this Nvidia OTC derivative is a strip of physically-settled, volumetric put options on GPU rental revenue with declining strikes, premium received as fractional call participation at the same strikes - a vendor-written participating collar whose function is credit-wrapping merchant compute risk.

Also known as a mouthful…

…which the market hasn’t fully digested -

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OTHER NEWS.

• A Yen-tervention

• Warsh is a hard-read

• ConocoPhillips change of guard

Hope y’all had a good weekend -

“This isn't the last situation I will have to deal with this week” - John Tuld (Margin Call)

Editor’s Note: having tied the knot earlier this summer, I sympathise with Leopold Aschenbrenner’s last minute wedding challenges -

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MAJOR EARNINGS.

Exxon & Chevron reported a combined - incredible, but expected - Q2 earnings of $26.5BN, on higher realised upstream & downstream prices, as the war in the Middle East continues.

Despite Exxon being more exposed to the Middle East than some of its larger peers (Strait of Hormuz closure reduced production by ~750kboed), production ex-Middle East was strong.

Chevron had the better quarter of the two, with much strong than expected US downstream results, reflecting strong refining & chemicals volumes + margins, helped by export / policy tailwinds (Jones Act relief, etc.).

Ironically, the geopolitical tailwinds - driving these heighten levels of success - are shifting at home; in the weeks leading up to earnings, Trump ordered a DoJ probe into domestic energy price gauging, calling out Exxon & Chevron specifically.

While these politcal events are - and will continue to be - out of the control of management, it’s clear that levers within their control are being executed to perfection -

AWARENESS.

Leopold Aschenbrenner - professionally - had a rough week.

Putting this week aside, he had been on one of the best two-year runs in recent history.

It all kicked off on June 4th, 2024:

• Leopold publishes: SITUATIONAL AWARENESS: The Decade Ahead

• He goes on Dwarkesh - for 4.5 hours - outlining what is to come in AI

• He announces he is setting up a hedge fund to bet on it

What he wrote & said was compelling: >10MM people saw the Tweet, listened to the Pod, or read his document.

The initial result:

• As a 22yr-old, he was able to initially raise >$200MM for his fund

• His initial investors were up 10x from inception on June 30th ‘26

• His fund was up >400% in H1 ‘26

Along the way, Leopold discovered fund leverage…

…unfortunately, before he could develop a situational awareness of volatilty.

Last week, he navigated margin calls from his lenders with a block sale of much of his public portfolio to Citadel.

However, Leopold did manage to - in his own words - live to fight another day (and attend his wedding) -

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OTHER.

• IYKYK: very entertaining post, on many levels

• Love to see an Alpine High reference

Final thought on Aschenbrenner: I think he’ll continue to be ahead of AI-related catalysts / trends, and I think he’s very well liked by many Anthropic employees, who will likely invest in him once they have liquidity, which means that he has a chance to pull this off -

“Tell me what you pay attention to & I will tell you who you are” - José Ortega y Gasset

Editor’s note: weekly publishing going forward.

Last week, we published on Nebius (a NeoCloud), highlighting the lack of substance to Jim Chanos’s critiques of the NeoCloud buiness model; the share price has rebounded by 30%+.

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BEHIND THE METER.

Go-forward datacenter power demand is beyond grid capacity.

That’s not new news.

In 2025, ~10% of US datacenters had any onsite generation.

Regarding new datacenter projects, we expect that over half will prominently feature onsite generation.

Per Bank of America, ~160GW of planned onsite gas generation projects are in the works (by the way, BoA’s latest report is excellent & well worth the read).

Unsurprisingly, gas producing regions represent most of the projects. Texas alone is responsible for ~60GW of projects in various stages of development.

Ohio, Pennsylvania, & West Virginia combine represent another ~40GW.

Assuming half of the projects come to fruition at ~80GW of BTM gas, 440 TWh of implied BTM gas generation works out to roughly 10-11 Bcf/d of incremental demand, at simple-cycle heat rates if fully realized.

And, this demand forecast has been a hot conversation…

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DYNAMIC SYSTEMS.

Matt Smith has made a controversial return as a podcast guest to Invest Like the Best.

Among other ventures, Smith was previously the Founder / CIO of Deep Basin, a data driven energy equities hedge fund.

In his latest podcast appearance, Smith put forward a natural gas thesis which was a masterclass in precision applied to a static picture.

His forecast is granular, modeling every well, pipeline, and processing plant in the incumbent basins, and - in doing so - he has built a snapshot of the gas market as it exists at $3.50/mcf, extrapolating that snapshot into a world where prices supposedly go "unbounded".

The flaw: his demand side is dynamic, but his supply side is frozen.

The ever-clever X account NextWaveEFT succintly captured the analytical flaw & the major implication in his review of the interview:

“What I believe Matt [Smith] and many others miss is in 10 years, in a $4-5/mcf world, it’s likely we once again have 100 nat gas operators across the L48”

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OTHER NEWS.

• Brent hit $100 on continued Iran-related conflicts

• Lastest disconnects on datacenter discourse

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That’s it for this week - hope y’all enjoy the weekend -

“Compute is the new oil. Like every commodity before it, it needs a real derivatives market,” Tarek Mansour, CEO of Kalshi

Editor’s Note: This note was bumped up, given recent developments; a second primer
- on NeoClouds / GPU Datacenters - has been uploaded & will be freely available for a limited time.

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CRUDE.

First-thing-first → on oil.

Petroleum & LNG transport challenges are a boon for refining margins.

Just three commodity vessels passed the Strait of Hormuz yesterday, the fewest (daily) since May.

Simultaneously, the Ukrainian drone campaign against Russian shipping is growing - 12 ships were hit, including an LNG transporter & an oil tanker.

Unsurprisingly, the refining market has reacted:

As gas winter gas storage in Europe looks to be challenging, petroleum reserve stocks remain low, and crude/LNG transport disruptions trend in the wrong direction, the expectation should be that US Independents & Refiners have an excellent H2 ‘26 -

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COMPUTE.

Demand continues to outpace supply.

Specifically, for the latest Nvidia GPUs.

Therefore, compute rental prices are going up.

Given the uncertainty surrounding where demand lands, and the certainty of the debt capital required to build currently planned GPU datacenters, the development of a derivatives market for hedging is both natural & necessary.

In practice, similar to the US LNG export market, the hedging function has been absorbed by large, investment grade counterparties in the form of long-term contracts.

On that note, two days ago, Kalshi announced the launch of Compute Forward Curves.

Given the shear volume of project finance debt against the build-out of GPU datacenters (1.5% of US GDP in Q1) - with a highly volatile underlying asset - quickly building a mature derivatives markets is imperative to bridging the gap between the stable cash flows debt financing requires & the volatile spot price of GPUs -

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OTHER.

• Jim Chanos has been posting about NeoClouds; we’ve found it a bit strange, as there’s no shortage of data available to get to the bottom of the economics

  • Wrote a few thoughts on that topic, here

• As it relates to energy, creating a forecast for Frontier Lab demand & GPU supply are likely the leading indicators for marginal electricity & gas buyers over the next two years

  • And it’s never been easier to leverage LLMs - as a tool - to conduct that analysis -

“The energy sector is often viewed as one that should be traded - and isn’t investable - like other sectors” - Toby Loftin

Editor’s Note: I’ll be writing on this topic for a few weeks.

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THE ANALOGY.

It’s been a minute…

Since I last wrote, a new - multi-trillion-dollar - market has emerged at an unprecedented pace.

The token market is on a course to rival the US mortage and oil markets in size.

The most common analogy - and a poor one at that - has been to the Telecom Bubble (and Bust) of 2001.

All the while, the obvious parallels have been to the development of the oil market, at the inflection of the automobile.

As gasoline is to transportation, tokens are to intelligence.

Google is the only vertically integrated player → an Integrated Token Company (ITC), per se.

Amazon & Microsoft are increasingly concentrated in the Midstream Token market.

Meta (fka Facebook) has ambitions to play in the Midstream & Downstream Token markets, while SpaceX has quickly entered both - as a serious player - in a matter of months.

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PRIMERS.

I’ve strangely found myself, as a long term - nearly 10 year - shareholder of Amazon & Microsoft, having personal equity exposure to this generational inflection.

And I could not answer basic questions about “what this inflection means”…

Back in April, Thomas Kurian, the CEO of Google Cloud (not known for hyperbole) made the following statement about Token Demand:

“I think for the next 10 years there will always be more demand than supply.”

Is it tradable, or investible?

And where does that distinction lie, across the vertical?

Kurian’s statement & a combination of self-interest & curiosity were the catalysts for what follows.

I wrote two Primers on the Midstream and Downstream Token Markets, as well as a deep-dive on SpaceX (a firm that - on the AI/token side of things - is operating in both).

Today, I’m sharing the first - a primer on the Downstream Token market, titled Frontier Labs: The Economics of Intelligence Production.

• Later this month, I’ll share a primer on the Midstream Token Market

• And if you’d like, email/DM me for a copy of some work on SpaceX

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OTHER.

• I have money (rather boring) on France to win the World Cup

  • I would love to be talked out of this bet & into another

  • If you have a better World Cup bet, would love to see it

Matt

“This aggression will not stand, man” - The Dude

**If you enjoy this newsletter - do us a favor & forward it to your friends or colleagues**

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**Note: we will be writing sporadically, for the indefinite future; if the note is too “hot”, it will only go out via email (will not be available on the site); the aim, at this point, is for a monthly note**

MACRO.

Over the past few weeks, LNG cargos have been rerouted from South Asia to Europe, depriving the former markets of gas. Many crops in Ukraine - the breadbasket of Europe - will not be planted.

The real-world economic consequences of recent economic warfare has only just begun.

The race to fill up gas storage for next winter will result in political & economic turmoil. And when spring turns to summer, we’ll begin to see the fallout in agricultural markets.

While Russia is the target (and will be the biggest loser) in this unprecedented economic war, other economies will also suffer.

The lowest bidders (the poorest markets) will likely see orders unfilled.

And note that revolutions often follow lesser events of economic unrest.

In thinking about what may transpire, we’ve found ourselves thinking about the 2nd & 3rd order effects of what may come to pass.

The following interviews & research have either been predictive of recent events or - we believe - have the capacity to be predictive going forward (beyond 1st order effects) -

Research / Data / Commentary:

• The artist(s) known as @ViscosityRedux published a comprehensive analysis of the potential energy shortages resulting from recent sanctions

• Alex Turnbull on Sanctions Evading

Podcasts:

• An interview with Julia Friedlander - a former policy advisor for Europe in the U.S. Treasury Department’s Office of Terrorism and Financial Intelligence - on economic warfare & sanctions; previously, her role at the Treasury was executing sanctions

• In an interview from December, Russian-born Dmitri Alperovitch - the former CTO and co-founder of CrowdStrike, the world’s largest cybersecurity company - makes the call that Putin will invade Ukraine

• Last week, following the invasion, Dmitri Alperovitch returns to be interviewed on the topic of Russia & Ukraine - and his correct calling of the matter

We’ve thought a lot about a ~90sec tangent in an interview from 2018 with Fabrice Grinda (a former emerging markets tech entrepreneur & venture capitalist) on emerging market risk.

Roughly a decade ago, he the made the call that specific political choices would lead to negative economic outcomes for investments in many emerging market economies.

It has - unfortunately - been a great call -

OTHER NEWS.

• This event will cause prices to inflate, globally (and monetary policy won’t solve it)

• How a Nickel becomes a Dime

• Doomberg on the LME crisis

• A California VC Narrative Violation

• We warned a Russian friend of this possibility a couple weeks ago; if you have Russian friends, it may be worth reminding them that many countries in the Americas (especially the US & Canada) were built by people leaving bad situations in Europe

That’s it for now - hope y’all enjoy the rest of your week -

“Strikes and gutters, ups and downs” - The Dude

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"So the universe is not quite as you thought it was. You'd better rearrange your beliefs, then. Because you certainly can't rearrange the universe" - Isaac Asimov

**If you enjoy this newsletter - do us a favor, forward it to your friends or colleagues**

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Editor’s Note: Well, we’re back for the 3rd time in 2x weeks. We’re still not promising a regular schedule…

Following-up on Last Week's Note:

• The equities we highlighted w/ Russian exposure were down an avg of 12%

• Excluding IOC's, our list was off 17% on avg

• At the same time, the S&P was ~flat

Going forward, there's 2x major risks that - in our opinion - are not fully priced into the market:

• The partial removal of Russian & Ukrainian commodities (e.g. coal, oil, gas, wheat, metals) from global markets in 2022

• The impact on banks w/ exposure to these markets, and the cascade of counterparties that will have liquidity issues as a result of bank stresses

Expect wheat (and thereby corn & rice) prices to continue to rise - aside from price increases, this will cause geopolitical instability in emerging markets (e.g. the last time there was a spike in wheat prices, the Arab Spring happened).

And - unless the practice of “self-sanctioning” reverses - energy commodities should also continue their rise.

Regarding banks - there’s 2x concerns:

• Direct Russian exposure

• Exposure to Russia-linked collateral

The banks that we highlighted last week had relatively large businesses, physically in Russia.

The comparatively unknown issue of financings - with Russia-linked collateral - will play out by ~end of the month:

• Loans (like RCFs) that financed Russian collateral will face defaults or deficiencies, needing the be restructured or refinanced

• Both the banks & the borrowers will face stresses, causing counterparty issues to arise

• The worst case scenario for non-Russian firms is a full collapse of the Russian Central Bank / Banking System

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Other Notes & Thoughts:

• No one seems to be preparing for a Firebird Round 2…

• #OSINT is Twitter’s opensource intelligence community - we’ve added a few of its most active accounts to our Russia | Ukraine Twitter List; within that community, @Osinttechnical is noteworthy

• An alleged letter from an FSB whistleblower (Russian version; English translation here); take it with a grain of salt, misinformation from both sides is high

• Expect a mass-exodus of Chinese / Russian money from London & Switzerland to Singapore & Dubai (recent sanctions have spooked more people than were actually targeted by those sanctions)

• Will & Robert - our friends who were in Mariupol a few days back - made it out in one piece… by the skin of their teeth -

That’s it for today - catch y’all next time -

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“It is a matter of life and death. So the EU will provide weapons for Ukraine’s armed forces. It is the moment to stand up and to speak out” - Josep Borrell, High Representative of the EU for Foreign Affairs

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Editor’s Notes:

• We have friends w/ family in Kyiv & Lviv; there are a number of ways to support - an easy one is World Central Kitchen

• This piece - like the last one - is a one-off

We may not be back for a while -

SELF-SANCTIONING.

Russian exposures aside (above), there are reports of “self-sanctioning” in the crude & products trade.

While energy exports were excluded from sanctions, some of these commodities are traditionally financed via European bank trade finance desks.

That appears to be disrupted; unsurprisingly, Brent Crude is up 5% tonight.

That trade may run for a while -

BANK RUNS.

The ECB Says Sberbank Europe Is Failing or Likely to Fail. The inverse of this situation - European banks with Russian subsidiaries - will likely play out en masse in the next few hours, when Russian markets open.

RUSSIAN EXPOSURES.

France - Renault in particular - has disproportionately large Russian exposures.

Outside of France, Coca-Cola HBC (listed in London) - the Eastern European / Russia / CIS Coke bottler - faces material volatility going forward.

Non-traditional resources:

• A Twitter account following Russian air-force radio communications

• Flight tracking (unusual flight pattern changes have materialized ahead of official announcements)

• If you have not read The Prize, *read it now*

That’s it for tonight - hoping for a swift end to this chaos -

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“... in moments of crisis our thoughts do not run consecutively but rather sweep over us in waves of intuition and experience...” - John Le Carré

Russia - a few things of note:

• Two weeks ago, we were convinced this would happen

• Last week, we heard a good argument (from a George Friedman interview) on why Russia *would not* do what they just did (and subsequently had less conviction)

• Last night, we set up a Russia-focused Twitter List for the purposes of following coming events

The Friedman interview is still worth listening to, as it contains valid takes on expected Western responses to this event.

For those unfamiliar with George, he’s had - in the past - US / Russian / Asian / Euro Generals (among others) on payroll as sources; he probably (still) does today.

That said, we still think an invasion is imminent.

A final note re/Russia: for those who want photographic updates, Robert Cooper (this guy) - a friend from South Texas - is on assignment as cameraman for journalist Will Cathcart.

They’ll get unreasonably close to the action. Hopefully, not too close…

Re/ our overdue China work: we’ve amassed too much to publish in email form; TBD on how we will publish it, but it will not be coming imminently -

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Q: “What was the single biggest driver of the deal for XEC?”
A: “It makes us a better company”

@NextWaveEFT: ‘Nailed it’ (sarcasm)

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CHANGE OF CONTROL.

Merger arbitrage usually refers to an investment strategy - whereby - an investor simultaneously purchases the stock of merging companies, *exploiting* market *inefficiencies* before a merger.

In the absence of a reasonable explanation for the Cimarex | Cabot merger, investors & analysts are voicing that the tables have been turned.

The merger appears to trigger change of control clauses.

And management appears to be using *the merger to exploit an executive compensation inefficiency*:

“Ryan Lance at COP had notoriously massive change of control of like $120MM at one point. They changed it, but at a glance he would get 2-3x his comp of around $30MM. So (COG) Mr. Dinges $40MM is... modest?” - Paul Sankey

In support of this argument is a history of alleged misalignment of incentives at Cimarex:

Since 2014, there have been 160 insider transactions at Cimarex:

• 152/160 were sales

• Total sold: $85.2MM

• Total bought: $570K - @EnergyCynic

The great thing about public transactions is that the market’s vote is transparent.

*Both* COG & XEC traded down ~7%, on a day when almost all other E&Ps were up -

DEMAND.

• China’s oil demand has already reached pre-pandemic levels

• US mobility recovered to 16% below pre-pandemic levels

• Goldman sees oil hitting $80/bbl

Oil demand appears to be recovering faster than excess supply (Iran, etc.) is hitting the market.

We could go with more details, but - TBH - S&P put together an infographic that visualizes the story better than we can tell it.

Check out the infographic here -

OTHER NEWS.

• Japan & others push back on IEA report

• White House EO on climate

• Bids come in for Shell refinery

• Shell sells separate refinery to Pemex

• LP ESG #s

That’s it for this week - we’re betting on Chelsea & ManU - catch y’all next Tuesday -

“We are masters of the unsaid words, but slaves of those we let slip out” - Winston Churchill

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ECONOMIC SHOCKS.

The world appears to be dead-set on supply, demand, & supply-chain shocks:

• Covid-related trade disruption,

• *Hopeful* energy policy, &

• Helicopter money…

…are leading to:

• Port bottle-necks,

• Higher energy prices, &

• Labor shortages (Uber drivers now make > than some banking analysts)

Right now, the semiconductor shortage is the supply problem in the world.

The shortage is is hitting everywhere…

…from server-farms to *farming* itself:

“The worldwide shortage of computer chips will impact all aspects of agriculture for the next two years and beyond.  Almost every piece of farm equipment, like most everything else in our lives, needs a computer chips to operate.”

“Due in part to the Covid 19 Pandemic, there is a massive worldwide shortage of chips; and the industry is unable to meet the skyrocketing demand. Industry sources say the current shortage will not be resolved until sometime in 2022” - Gary Truitt

Assuming that gets solved, we expect that - in the long term - oil & oil products will take the pole position.

If governments even attempt to follow the IEA’s latest report guidelines, then the outcome would be something on the scale of the 1973 oil price shock (~300% price increases).

The press has even called out the absurdity of the report:

“Finally, the IEA has a credibility problem. The agency was saying the opposite (we need more investment in oil) as recently as 2017. So either it was completely wrong then, or perhaps it's now. But the old messages from the IEA, and the new ones are difficult to square” - Javier Blas, Bloomberg

Unfortunately, the world has been trending towards the absurd…

We’re reminded of the Hunter S. Thompson quote:

“When the going gets weird, the weird turn pro”

Today, there’s no shortage of policy “pros” doing weird things -

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OTHER NEWS.

Michael Burry (of The Big Short fame) is massively short Tesla…

…that trade has functionally stolen the name “widow-maker trade” from those lost souls who’ve bet against Japanese government bonds…

The event has our attention -

• On Montney well economics

• The German / Coal drama continues

• US lender recovery rates drop

• Dutch Nat Gas trading booms

• Gulfport is heading back to the NYSE

• On the SPR drawdown

• Ownership of US equities by age

That’s it for this week - we’re rooting for the Spurs & Golden State on Thursday night - catch y’all next Tuesday -

“Our goal is to make money, and not creating problems for society,” DarkSide [group that attacked Colonial, from the FT]

Editor’s Note: Matt is working w/ the Marshall Society on their digital speaker series.

Tomorrow, the Marshall Society is hosting a panel on the virus / recovery efforts.

Panelists:

• James Sweeney - Chief Economist / Americas CIO at Credit Suisse

• Dr. Claudia Sahm - Former Section Chief at the Federal Reserve

• Jeanna Smialek - Federal Reserve Reporter for the NYT

Y’all are welcome to join (panelists will be taking questions live) - the event kicks off at 6pm London time (1pm NYC / noon Texas) tomorrow.

Event link / details -

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COLONIAL CYBERATTACK.

On Friday, the Colonial Pipeline suffered a ransomware attack. The hacker-group DarkSide is allegedly behind the attack.

Colonial is responsible for delivering 40%+ of the American Southeast’s gasoline supply. Obviously, an outage of this sort can affect gasoline prices.

This event further raises cybersecurity concerns about American infrastructure.

But - putting that aside - the public response from the hackers stole the story…

…it read like a passage from absurdist fiction:

“We are apolitical, we do not participate in geopolitics, do not need to tie us with a defined government and look for other our motives.

“Our goal is to make money, and not creating problems for society.

“From today we introduce moderation and check each company that our partners want to encrypt to avoid social consequences in the future” - DarkSide

Joe Weisenthal (Bloomberg) had a few good takes on the ordeal.

The FT noted:

“In a sign of how ransomware has become a professionalised industry, DarkSide operates its own “press office” and claims to have an ethical approach to choosing its targets” - FT

What’s clear - from this attack (and, well, all recent major hacks) - is that hacking risk is a tail risk that the market (industry) is not appropriately valuing -

OLD WORLD ATTACKS.

Rocket-fire has followed a conflict at Jerusalem’s al-Aqsa mosque.

Israeli police & Muslim protesters clashed over planned home evictions & restrictions at the mosque.

Hundreds of Palestinians were wounded - Hamas responded by firing ~200 rockets.

Israel then responded to Hamas:

“The Israel Defense Force’s spokesman Jonathan Conricus said the military had a ‘green light’ to hit military targets until Hamas ‘gets the message and learns its lesson’” - the FT

Politics aside, history would tell us that Hamas has not quickly gotten “the message”.

We expect to see that Israel will continue to respond with (more) air-strikes.

And - as of today - we don’t expect these events to escalate into a larger conflict -

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OTHER NEWS.

OPEC+ restraint appears to to be faltering…

• Iron ore prices hit records on Monday

• The biggest jobs (data) miss on record

• Check out pg2 of JPM’s annual energy report

That’s it for this week - check out the panel tomorrow - catch y’all next Tuesday -

"It's important not to overreact to this volatility in prices resulting from the unique circumstances of the pandemic" - John Williams [NY Fed President]

Editor’s note: A few weeks ago, we were alerted to the fact that the spot price of bee-tee-cee traded below the CME futures contracts. On the surface, that’s free money.

We’re guessing a few of you were also aware - here’s the best thread we’ve seen on the trade (and its risks).

OK - back to oil -

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Q1.

Diamondback reported Q1 adjusted EPS & EBITDA of $2.30 & $836MM, beating consensus estimates of $1.83 & $740MM.

M&A was the story.

• This is the 1st quarter post the QEP / Guidon acquisitions

• Diamondback also announced two divestures

Oasis (emerged from Ch.11 in Nov) is buying Diamondback’s Williston Basin assets for ~$745MM, financed entirely by debt (via their RBL & a bridge).

Considering recent history, that’s aggressive.

Diamondback also sold a small chunk of non-core Permian assets for $87MM.

Hedging hurt a bit, and will continue to - throughout 2021 - at these oil price levels.

[re/ FANG: we liked the presentation of the tables (above) from BAML]

From the other side of the world, Aramco reported Q1 net income of $21.7BN (also beating consensus estimates).

When you produce numbers like *that*, you get to skip the analyst Q&A call.

And Aramco is doing just that.

Later today, Conoco, CDEV, PVAC, Pioneer, & Devon report, among others -

OTHER NEWS.

Mohamed El-Erian has recently made a few good points about the Fed, bank policy distortions, & global supply chain issues. We think the latter faces structural / policy concerns going forward, even if (or when) short-term issues are addressed.

And we don’t think that’s a good thing.

• Did Munger slip the Berkshire successor?

• Pickering enters EVs (listen on Clubhouse, on Wed)

• A great thread on L/S

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That’s it for this week - hope y’all enjoy Cinco de Mayo w/ a couple Mexican Martinis - catch y’all next week -