Thread by @RonStoeferle

Just finished reading the new piece by #ZoltanPozsar "Oil, Gold, and LCLo(SP)R...Fascinating read (as always), here are some highlights:

"The SPR is like the o/n RRP facility. It can be tapped when oil levels are tight. But the SPR is finite, and recent releases have brough reserves down to levels
we haven’t been at since the 1980s. The 400 million barrels left in it isn’t much:

it could help police prices for a year if we released 1 million barrels per day (mbpd), half a year if we released 2 mbpd, and about four months if we released 3 mbpd."

"..worst case, the SPR is empty by spring (next April), at which point the oil market is in the same spot as the repo market in 2019: zero balance in the o/n RRP facility to tap. And unlike reserves, which the Fed can easily print, “you can’t print oil to heat, or wheat to eat”".

"Yes, we are headed toward a recession, but unlike in 2008 or during Paul Volcker’s reign, oil prices aren’t collapsing as production capacity hasn’t grown recently (shale is fantastic, but production is not growing; shale was a sugar high and we are coming off the high."

"Look at the tit-for-tat measures so far: you invade Ukraine, I freeze your FX reserves; you freeze my FX reserves, I make you pay for gas in rubles; the West boycotts my Urals, I’ll ship it east…the West caps the price of Urals, let them, but I’ll make them pay in gold."

"To use Pippa Malmgren’s terms, World War III already started, it’s just that it is a hot war in cold places (in space, cyberspace, underwater, and Svalbard) and
a cold war in hot places (militarizing islands in the Pacific and mines in Africa)."

"$60 per barrel for Russian oil equals the price of a gram of gold.Let’s imagine this set up as a peg.The G7, led by the U.S.,effectively pegs the U.S. dollar to Urals at $60 per barrel. In turn, Russia pegs Urals to gold at the same price (a gram of gold for a barrel of Urals)."

"The U.S. dollar effectively gets “revalued” versus Russian oil: “a barrel for less”. The Western side is looking for a bargain, effectively forcing a price on the “+” in OPEC+. But if the West is looking for a bargain, Russia can give one the West can’t refuse: “a gram for more”

"If Russia countered the price peg of $60
with offering two barrels of oil at the peg for a gram of gold, gold prices double."

"Russia won’t produce more oil, but would ensure that there is enough demand that production doesn’t get shut. And it would also ensure that more oil goes to
Europe than to the U.S. through India. And most important, gold going from $1,800 to close to $3,600 would increase...

the value of Russia’s gold reserves and its gold output at home and in a range of countries in Africa. Crazy? Yes. Improbable? No. This was a year of unthinkable macro scenarios and the return of statecraft as the dominant force driving monetary and fiscal decisions."

"Russia’s decision to link gold to oil could bring gold back as a settlement medium and increase its intrinsic value sharply. Banks active in the paper gold market would face a liquidity shortfall,

...as all banks active in commodities tend to be long OTC derivative receivables hedged with futures (an asymmetric liquidity position)."

"Basel III was designed to keep banks from doing things that could hurt them, but as the mini-budget has shown and Russia’s response to the cap might show, Basel III won’t protect from states doing things that could end up hurting banks."

"Just as the German industrialist who built a successful business over a lifetime and outsourced only one thing to the German government – energy security – ...

...banks have been managing their paper gold books with one assumption, which is that states would ensure gold wouldn’t come back as a settlement medium."

END of #Thread

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