A High-Upside Potential, High-Risk Opportunity Levered to Oil and a Cyclical Recovery
Highly levered exposure to an emerging cyclical recovery, with 10x+ potential and high risk
Tensions between the U.S. and Iran are elevated, with negotiations today likely to leave both sides unsatisfied and continued US military buildup in the region. As I highlighted in my recent article, Hidden Iranian Oil Supplies Increase Oil Geopolitical Risk and Upside Potential in Oil Prices, President Trump has threatened military action unless Iran makes concessions on its nuclear program and support for regional militant groups, after reports of mass-executions by Iran’s regime despite multiple Trump-imposed “red-lines.”
Elevated tension raises the risk of disruptions to Iranian oil production and exports, as targeting oil infrastructure would be a strategic way to severely constrain the Iranian regime’s primary source of revenue. These developments also increase the risk of disruptions through the Strait of Hormuz, a critical chokepoint through which nearly one-fifth of the world’s oil supply flows each day.
Oil market fundamentals are tightening too beyond geopolitical risk, as non-OPEC production is expected to begin declining this year and OPEC spare capacity has been materially reduced following the unwind of recent production cuts. As can be seen below, US shale production is rolling over, even in the famously prolific Delaware Basin portion of the Permian Basin, with the early indicator of natural gas going into gas processing facilities showing production flattening out.
This leaves the oil market unusually sensitive to supply disruptions and exposed to fundamental upside as demand grows more rapidly than supply.
There is one segment of the oil market in particular that has outsized exposure to this dynamic. It has the potential to bring on large amounts of incremental oil supply over time, yet its capacity to do so is both fixed and shrinking.
In this sense, this segment sits at the nexus of oil supply and demand. It is needed to help close what could become a significant gap in global oil balances, but the supply of these assets cannot respond quickly.
This supply/demand mismatch creates powerful leverage. When demand for these assets rises against a constrained supply backdrop, the value of the assets can increase rapidly, and the related equities can re-rate dramatically. There is one opportunity in particular that incurs the risk of loss but offers unusually asymmetric upside to this potential outcome, a potential 10x+.
Disclaimer: This is for informational and educational purposes only. This is not an offer, solicitation, or investment recommendation. Please consult an advisor and do your own diligence. Past performance may not repeat itself.
