When Trends Go From Seemingly Linear to Exponential

A Detailed Review on Oil and the Setup As It Stands Today

I want to start today’s note with a comment about exponential growth — a concept with which investors are familiar, but which human beings have a natural biological limitation in fully appreciating — as part of a broader discussion on the latest developments in the oil and energy products market.

“How did you go bankrupt?”
”Two ways. Gradually, then suddenly.”

― Ernest Hemingway, The Sun Also Rises, 1926

By now we have all seen more “no big deal” reactions to the energy crisis than we can probably recall. The FT quote earlier this week captured the view perfectly:

As I have continued my dialogues on the ongoing crisis with oil professionals who, like me, have traded and observed the oil and products markets for decades, the conclusion is universal: pros are in headshaking disbelief, while generalists or non-commodity investors by and large don’t care. Holding this internal tension has been challenging in recent weeks, but as I have been long oil in size since January on a thesis that originally had nothing to do with the war, it has also not been a debilitating P&L problem. I was also lucky enough to torque the upside ahead of the Ayatollah’s assassination using the concept of Shrub’s Razor in honor of my dear friend Le Shrub. Initially my view was that the attack would come mid February as the 47th US President attacking on the 47th anniversary of the 1979 Revolution was too absurdly comical not to trade, and when that window passed, I tried again on the Purim Blood Moon (Jewish holiday celebrating the defeat of the evil Persian advisor Haman who wanted to destroy the Jews). Needless to say, Shrub’s Razor has served us well.

Shrub’s Razor is a philosophical trading principle whereby the funniest, most absurd outcome is also the most likely one.