Why Aren’t You Short Oil Yet?

The price of crude oil has continued to crash, and it’s only looking to go lower. In fact, when compared to the oil bull market of 2007-09, oil’s current trajectory looks eerily similar. On Wednesday, the global benchmark for oil slipped under $100 for the first time since April. Contrast this with the fact that oil prices were trading above $120 barely a month ago!

And what comes next? Well, if this pattern continues, oil is due for a major crash. Indeed, we are getting a bonafide repeat of 2008 in the commodities markets, including oil. And these commodity wipeouts only happen when the markets shift to a recessionary trade.

A few weeks back, we brought attention to our “short oil” thesis, and we’ve become increasingly bullish on this idea. Why? Because oil performs terribly in recessions, and that’s the base case at this point. Now, analysts are lining up to give their short oil forecasts

I see a lot of folks attempting to buy the dip, and this is one falling knife that you’d do better to back away from.

Renewable energy, however, is a completely different story.

As opposed to fossil fuels, clean energies have very positive learning curves. That means that the more we use, produce, and learn about them, the cheaper they become. And in fact, the oil giants themselves are not investing in ways to better produce oil – they’re putting their money into hydrogen instead.

Makes sense. Big Oil companies are best-suited to bring the Hydrogen Economy out into the spotlight. Their engineers are well-equipped to work with products on a molecular scale, as hydrogen requires. Not to mention that it can be pumped into natural gas pipelines and gas stations. The logistics behind hydrogen are similar to that of fossil fuels, and that’s why Big Oil giants are shifting their attention to it.

Elsewhere in the recessionary landscape, we’re hearing a lot about a housing market crash. Well, that’s not very likely. Because over the past 60 years, there have only been four instances of sustained home price contraction. The housing market moves at a snail’s pace. And because of that, it takes a long time for strong home price appreciation to fall to negative growth. It would be unprecedented for home prices to plunge into the red from where they are today. From that perspective, anyone screaming “housing market crash!” is greatly overstating the situation.

Demand is a proven, durable driver, even during recessions. It’s still strong today. And considering that the current housing supply is so low, prices really can’t depreciate. Home builders are losing confidence and are holding firm in their prices. And so are home sellers. We may see a brief decline in the market for a few months, but then it’ll be business as usual once again.

Now, what does that mean for Opendoor (Nasdaq:OPEN)? Well, it sells homes over a 90-day period and gains a 5% commission per home sale. Home depreciation is usually around 1% per month. So, after three months, it may lose 3%, but it will still sell on a 2% gross margin. Indeed, it’s still a positive gross margin business even if the pricing algorithms were terrible (and they’re not). More likely, it should be able to reel in between 4% and 8% margins — and that’s not priced into the stock at all. Bottom line here: I’m very confident in Opendoor’s model.

Trading action this week indicates that the market is fully embracing a recession. Stocks are down. Yields are crashing. Oil is falling under $100. When a recession is happening, you have to think about what will happen after. Indeed, every recession is followed by an expansion. It’s time to welcome the long-term thinking.

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