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1/n This #thread will argue that a unique set of historical contingencies has obscured a looming problem for the #oil mkt, one which has been *delayed* by unprecedented events & interventions but not negated. We believe that in 6-8 wks the mkt will be subject to extreme turmoil
/2 RECENCY BIAS: one can hardly read an article on oil w/out being told of crude’s supposed ‘weakness’ since last June’s highs, often accompanied by de rigueur chart crimes showing month-after-month of lower prices. These charts, of course, cherry-pick a ST price spike to make
/3 the case that Demand has somehow collapsed. This is nonsense & ignores the extraordinary SPR maneuvers that were employed in the wake of Russia’s invasion. Simply put, if ~600k b/d are dumped from the SPR, oil prices should drop, & they did. Extra SUPPLY. 222mm bbbls. Historic
/4 But there’s an elephant in the room: if Demand were really *that* terrible & you dump that much oil on the mkt, we know from March 2020 what happens. Prices would get obliterated. That’s not what unfolded, though. $80 Brent is not consistent w/ a Global Recession. Never was.
/5 Oil would be much lower if the econ had truly crumbled. But it’s not, for a reason.
SIGMA SIGMA SIGMA
In March, when a rates-driven Bank Panic arrived—*not quite ex nihilo, but not widely predicted, either—the pain for certain Macro & Commodity HFs was swift. Over a 4-day
SIGMA SIGMA SIGMA
In March, when a rates-driven Bank Panic arrived—*not quite ex nihilo, but not widely predicted, either—the pain for certain Macro & Commodity HFs was swift. Over a 4-day
/6 span, successive 3-Sigma rate moves forced prominent oil mkt participants to dump financial Length. If Rokos & Pierre A, eg, are forced to unwind at once, the paper oil mkt will unwind w/ them. Negative Gamma exacerbates the move & crude tanks. But one must ask: is a Black
/7 Swan rate event—at odds of ~50-million-to-one—synonymous w/ Macro economic meltdown? Not quite. That is, a forced de-leveraging & reduction in VaR by commodity-specific shops does NOT by itself mean that the underlying commodity is doomed.
OPEC-PLUS
One of the most common
OPEC-PLUS
One of the most common
/8 misconceptions about oil relates to #OPEC prod cuts. Namely, the attendant time-lag for cuts to hit EIA data. The physical oil mkt is slow-moving. A tanker loaded in KSA will take ~44 days to reach the Houston Ship Channel. Thus, cuts that ‘start’ on May 1st will not impact
/9 data until mid-June. This leads inexperienced pundits to prematurely pronounce that the cuts ‘aren’t working’ or won’t matter. These are amateur takes, & the key data to be watching rn is *loadings.* And these data confirm that the cuts are real & will print mid-June. Data,
/10 not guesswork.
MANDATORY SPR bbls
By end-June, the most recent batch of ‘planned’ SPR sales—26mm bbls—will wind down, just as the OPEC cuts begin to print. Herein lies the problem: Macro oil tourists have dumped Length & Shorted certain categories at the *exact wrong time.*
MANDATORY SPR bbls
By end-June, the most recent batch of ‘planned’ SPR sales—26mm bbls—will wind down, just as the OPEC cuts begin to print. Herein lies the problem: Macro oil tourists have dumped Length & Shorted certain categories at the *exact wrong time.*
/11 Children playing in the sand before the tidal wave hits. Come late June, inventories will begin to draw at a rate that will force a Hobson’s Choice for the WH: drain the SPR further, risking political blow-back & burning powder in a non-election year; or sit idly by as the
/12 full extent of the Crude mkt’s imbalance emerges & oil spikes in 2H. Neither is appealing for the admin, but we think the mkt will be allowed to ‘run hot’ in the back half of ‘23. If it is, the likelihood of record-high crude in the coming months is non-negligible.
CHINA
CHINA
/13 Oil Bears want the mkt to believe that Chinese Demand is lackluster & will remain so *indefinitely*. This, frankly, is naive. We have already seen that Xi will risk losing face—Covid-zero walkback—to prop up the econ & keep ppl out of the streets. And while there are v real
/14 issues w/ China & its property mkt, in especial, wrt to Oil Demand the needle is moving higher & not lower. In other words, it’s specious to suggest that China, alone, will be a material headwind to the point of suppressing *global* Demand, esp in light of India.
INDIA
The
INDIA
The
/15 burgeoning population of the subcontinent, paired w/ an insatiable Demand for energy, will help propel the current (nascent) Super Cycle for oil—that so many have already written off. Indeed, within a matter of months the recent weakness for crude will be but a diesel haze
/16 in the Bhiwadi twilight.
Delayed is not canceled. Rates are not oil. Demand is not weak. And the path for crude in the coming months will be sharply higher. You can bet against it, but you’ll lose.
Thanks for reading, as always, DYODD. /end
#OOTT #oil #OPEC #EFT #Htown
Delayed is not canceled. Rates are not oil. Demand is not weak. And the path for crude in the coming months will be sharply higher. You can bet against it, but you’ll lose.
Thanks for reading, as always, DYODD. /end
#OOTT #oil #OPEC #EFT #Htown
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