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Widow-maker trading | Energy & Inflation | WTI & SPR [The Week Ahead – 19 Dec 2022]

Explore your CI Futures options: http://completeintel.com/inflationbuster

Gasoline prices have continued to decline in the US. Big Fed meeting. 50bps. JPow insists the terminal rate is 5.5. Markets seem to want a rosier picture. How do you trade this? Bob Iaccion shares his expertise.

We’ve seen some weakness in crude prices, of course, and consumers are seeing a bit of a break with energy prices. Jay Powell doesn’t see inflation abating soon – he seems to believe it’ll be persistent. Part of that must be with energy. Our Complete Intelligence US headline CPI forecast looks at a reacceleration in early Q2. Is that around the time Josh expects energy prices to re-accelerate or does he have a different expectation – and why?

Tracy posted a really interesting chart recently. We’ve been talking about the SPR releases for a long time, but this chart is super stark. She walks us through what this means.

Key themes
1. Widow-maker trading
2. Energy & Inflation
3. WTI & SPR

Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Bob: https://twitter.com/Bob_Iaccino
Josh: https://twitter.com/Josh_Young_1
Tracy: https://twitter.com/chigrl

Listen on Spotify here:

Listen on Apple Podcasts here: https://podcasts.apple.com/us/podcast/complete-intelligence/id1651532699?i=1000590512224

Transcript

Tony

Hi, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by, by Bob Iaccino. Bob is with Path Trading Partners. We’re also joined by Josh Young. Josh is with Bison Interests, and Tracy Shuchart, who is with High Tower Resource Advisors. Guys, thanks for joining us today.

And Bob, I know this is your first time to join us and I really appreciate you taking your time. I’m always really shocked by the the quality of people who will talk to us, which is just amazing. So it’s, it’s great to have you here. And Josh, this is your second time and you have just hit a lot of home run since your fund started. I think you’re up 140% or something while the industry index is down like 20% or something. Is that right?

Josh

I can’t talk about my performance.

Tony

Okay. So I think you’re doing pretty well. So I’m just really grateful to have you guys here. We’ve got a few key themes here.

Of course, there’s been a lot of macro data out and some of that stuff has been classified by a few people as kind of widowmaker trades. So let’s get a little bit into that with Bob.

We’re going to look at energy and inflation and Josh is going to lead on that. And then we’ll look at WTI and the SPR with Tracy. So Bob, let’s start. You had sent this tweet out from Emma a few days ago where she says that markets kind of are believing what they want to believe and it’s really a trap and some of them are kind of widowmaker trades.

So can you talk us through that? Of course. We just had the big Fed meeting with a 50 bps rise and JPowell now insists that the terminal rate is 5.5 or somewhere around there. We saw PMIs come out today that were a lot lower than expected. We saw a downward revision in unemployment by over a million jobs sorry, of employment by over a million jobs. So why do markets continue to want to see a rosier picture or where are we right now and where is it going?

Bob

Well, it’s interesting, Tony, and again, thanks for having me. When you’re looking at equity markets specifically okay, let’s just talk when we talk about markets in a general sense, we’re usually talking about equities, which is one of the things I think the mainstream gets wrong. 

But when we’re talking about equities, you’re talking about just a natural upward bias. There’s many millions and billions of dollars that go into 401ks and long only mutual funds every single month that people don’t even look at. So when all else is equal, you have a slight upward bias in equities. 

And therefore it kind of stands to reason that people in general, investors, retail investors, want things to go up. And I suspect when somebody starts trading I remember I gave a speech pre COVID and somebody came up to me and said, I don’t understand how you trade the ES, which is S&P futures. I said, what do you mean? They said, well, stocks always go up, right? So sometimes you can be short ES. And I’m like, oh, my Lord, let me show you a chart. Stocks don’t always go up. If you take a look at an equity chart going back to 1920 or however long you want to be, yes, it is angled this way.

But when you see what’s going on right now, there’s a lot of old adages in the markets that I honestly can’t stand. But one of them gets repeated a lot is, you can’t fight the Fed. And most people are trying to fight the Fed. And Jerome Powell keeps coming out there and says, why are you guys fighting me? So the more and more stern Jerome Powell gets about interest rates, the more and more the markets get comfortable with what the Fed is doing and saying, sort of, and I’m paraphrasing what I think the market would be saying as a whole, “okay, we know what you’re doing now, so we’re comfortable with it, and we’re just going to buy stocks.”

And that seems to me to be troubling. It’s interesting because I’m bearish medium to long term, but I own the S&P Futures right now. I actually bought them on the first day of the fourth quarter with a mindset toward this type of activity. I said, okay, the fourth quarter is going to be higher than the third quarter, so I can go ahead and buy a small ES position within the context of my thesis that toward the end of the first quarter, beginning of the second quarter, I think equities dump again. I don’t think that the lows that we saw in October are the ultimate lows for this particular bear market.

Tony

So you’re saying that selling out of Trump’s NFT doesn’t mean we’ve hit the bottom yet or whatever.

Bob

I took screenshots galore of that Trump Superman thing with the laser. I’m like, if he could have a body like that, so can I, right? By eating McDonald’s and drinking Coke. I thought that was amazing.

No, I mean, again, these kinds of things a lot of people would think is peak bullishness just in any market overall. It certainly is probably peak bullishness, at least in the short to medium term and NFTs that that happened.

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Why do you think we’ll continue to see ES rise through, say, first quarter? Like, what are you seeing? Is it sentiment or is it some of the data coming out?

Bob

It’s the data being done and it’s the big events being finished. So, again, as I mentioned the beginning of this conversation, Tony, all else equal equities have an upward bias. And I said to myself, okay, we’ve got one more Fed meeting, one PCE, one CPI, a couple of small to medium sized business PMIs in the form of the S&P PMIs, and then not a whole lot. 

So given that backdrop, people say, okay, we’re still near enough to the lows, or this is probably the lows. Even some of the people that I respect a lot think that the October lows are the lows, and I just happen to disagree with them going into next year. But they’re probably, they’re likely this is not a bold statement, the lows for 2022. It’s not a very scary thing to say considering we’ve only got, what, ten trading days left, 20 trading days left at the most. 

So from that perspective, I feel very comfortable with the buy at the end of the third quarter and sell somewhere near the beginning of the first quarter position that I put on and I have a break even stop. I mean, I’m not going to lose money on this trade, which means I’m not going to pay a whole lot of attention to it anymore.

Tony

Right? Okay, very good. So, Josh, let’s talk about the data for a minute. Josh highlighted a chart that was sent out today looking at the difference, say, the divergence between hard and soft economic data. And hard economic data is still relatively positive, significantly more positive than the soft data.

So can you help us understand what’s the difference between hard and soft data and then what’s your view of the divergence between hard and soft data?

Josh

Yeah, so I focus more on sort of the energy side than the general broader market data side. But it is interesting. So the hard data and my understanding of this is the measures of actual activity and the soft data is more measures of sentiment or sort of modeled or forecast activity. And then I guess where I sit on it is I’m looking at actual oil and gas consumption data, and it looks a little weak. And so when I look at it looking a little weak, and that doesn’t mean I’m bearish I like the supply situation a lot. It’s very bullish, and that probably overwhelms. But from my perspective, tracking oil and gas consumption, it looks like maybe some of this ostensible hard data isn’t as hard as it’s represented. So that’s my take on that.

Tony

Let’s talk about that a little bit. Bob, you seem to be a little bit skeptical of some of the hard data.

Bob

Yes.

Tony

What do you think is a little bit overstated right now?

Bob

Well, I’ll give you an example. This past non farm payrolls report. Negative 40,000 on retail jobs. When have we seen that going into a holiday season? It’s likely that a lot of it has to do with seasonal adjustments in my view, because how do you correctly adjust for seasonality that changes every season, along with technology changing every single season at a rapid pace what seasonality may or may not look like?

So I’m not a conspiracy theorist by any stretch of the imagination, but hard data produced by the government is where there is possible manipulation. I’m not accusing anyone of manipulating anything. I’m just saying that’s where it’s possible. In sentiment data, that is the survey respondent sentiment. That’s what it is. And that generally shows up in hard data. 

Josh mentioned in his tweet about this divergence between hard and soft. Right now we have a divergence between iron ore and crude oil prices, right. Which has a very positive correlation over time. We can look at the data. Josh can look at the data, and so can Tracy better than I can, and say, okay, I believe these will converge, and I think this one will leave because it’s data.

Sentiment, you can’t say, that’s not the respondent sentiment, whereas data coming out of the government, if you believed the government’s data isn’t manipulated, then the data is what it is. But when you look at something so strange as retail employment falling going into the holiday season, that’s either economically catastrophic. Is that a word? Economic catastrophe?

Tony

Sure. Catastrophe.

Bob

Economic catastrophe. Or it’s wrong. One of the two. Catastrophic. That’s what it’s right.

Tracy

And we have all these huge revisions and the employment data every month, right. Going back, they’ll revise two, three months back.

Tony

They’ll revise two years back, Tracy. There are generally four revisions on OECD country data, and so they’ll go two years in and revise stuff. And whenever I see an initial kind of print of economic data, I always say, and you see this regularly on Twitter is I say, I’ll wait for the revision. And it’s not the first revision. It’s typically the second or third revision.

My view is that the first two say the initial print and the first revision are really PR for every macroeconomic print. Not just in the US. Globally. And then we start to kind of see back adjustments of what really happened. So I just don’t understand why initial prints of economic data move markets. I don’t understand why the financial media make a big deal about these initial prints of data because they’re wishful thinking. In the same way, Bob was talking about how investors have a rosy view of stocks always going up. Macro data typically has the bias of those government statisticians either too negative or too positive.

Okay, good. So is the view, guys, that the soft data will pull the hard data down? Is that kind of where we’re kind of falling on this?

Bob

It’s definitely my view. I mean, again, if that’s your sentiment, something has to happen to flip that sentiment. I always like watching the politicians. I don’t make political statements on shows like this. I make political statements, unfortunately, at the dinner table. But when you’re talking about political statements, you’ll see jobs are strong and you’re making enough money to pay for the inflation. That doesn’t change the reality on the ground for people. You’re not going to actually have somebody say, well, the President said, I have the money to pay for this, so everything is fine. So I always believe that the sentiment is much more reliable than the data, even though it shouldn’t be that way. It really should be the opposite.

Josh runs a fund and he can’t talk about his performance even though the performance is real data. That’s what his performance is. I was at a fund of funds years ago as part of the investment committee. We had nine full disclosure, was a low volatility fund. So our biggest up year was about 90 basis points. But we never had a down year. I’m sorry, 3.9 basis points, 390 basis points. But we never had a down year in nine years.

And our auditors and our regulators said we couldn’t publish that performance. And when we said why, they said, because it implies that you can’t have a down year. Well, yeah, if you’re stupid, it implies that.

But, you know, this was our actual performance, but we can’t put it forward. Josh has great performance and can’t talk about it. And this is the same kind of thing where to me, the sentiment will pull the actual data down and then you question whether that’s going to be manipulated for political gains or not by either side.

Tony

Right, exactly. Not one party or the other. It’s both parties.

Bob

Absolutely.

Tony

We don’t figure that anybody individually.

Tracy

I mean, I think the employment data has been wrong all year, for two years now. You just look at labor force participation rate and how many people are multiple jobholders, not single job holders. And we just had that huge revision of 1.1 jobs.

Tony

Yeah. So we saw jolts turn over a couple of weeks ago and then we have this downward revision of jobs. So if we look at the Fed’s mandate, they’re kind of not really doing either, right? Either they’re not doing either or they’ve already achieved the job stuff which they said six months ago that they hadn’t achieved and they continue to persist that they haven’t achieved. So is it fair to say that with the downward revision and employment data and the downward trend in jolts data that they’re kind of getting there already? So this is kind of a bad news is good news thing potentially?

Tracy

Potentially if the market chooses to read it like that. I don’t think the algos know how to read it that way. But yeah, I mean, it’s possible. We already are at 4.5% with all these revisions on unemployment.

Tony

Right? Okay, very good. So we’re going to get off the macro data for a minute. We’re going to move to energy prices. Actually, we’re going to stay on some macro data for a little bit. I put on the screen our Complete Intelligence CPI forecast and what we’re looking at potentially is a gradual rise of CPI accelerates a bit in April and goes into the summer.

Explore your CI Futures options: http://completeintel.com/inflationbuster

So it’s possible, according to our forecast, that we do see a second bump in CPI. I have to say there is no human intervention in this. This is all machine driven. And so we’re reading things in the markets or the machines are reading things in the markets that are saying we could see a second bite of inflation coming in, say end of Q1 or early Q2.

So Josh, the question for you is we’ve seen some weakness in crude prices and consumers are seeing a bit of break with energy prices, gasoline prices and so on. But we saw from the Fed meeting that JPowell doesn’t see inflation abating anytime soon. So it seems like it’ll be fairly persistent. How do you expect energy prices to fit within that?

Are you seeing energy prices accelerate quickly or do you expect energy prices generally? Of course, I know there are different segments, but generally do you expect them to kind of accelerate quickly or do you see kind of a delayed acceleration of energy prices?

Josh

This is a great opportunity to run real briefly a potential economic analog to where we are in some respects. And the potential economic analog is the Asian financial crisis, the ’97 and ’98 scenario. And where that might be real similar to what we’re seeing now is one, we’re actually seeing consumer deposits start to fall with loans increasing. We’re seeing mortgage rates start to fall even though the Fed reset or keeps raising rates. And so we’re seeing the housing markets start to clear and then we have this very low labor force participation, sort of similar to what you saw in prior periods.

And you see this, they say, what is it that good times lead to weak men, and then weak men lead to bad times, and bad times lead to strong men. And sorry for the gender aspect of that, but just sort of the general idea. When I see all this, I think that there’s a real chance that we see much higher consumption of real goods and real inputs. And then when I tie that so that’s relevant for the inflation question as well as for oil and gas in particular, because there is this huge non participating aspect of the labor force that is increasingly likely to participate as NFTs and crypto and various day trading, tech stock and other sorts of speculative activity comes down.

And then there is this other aspect, which is that with oil and gas starting to come into China more, and other commodities potentially coming into China as they reopen and restimulate, there is the potential for inflation on raw materials and deflation on consumer goods and other stuff that China exports. And so it’s a sort of very weird, messy time. I’m not sure, I think that tech equities rebound like they did after that ’97, ’98 time frame. But other than that, it looks like sort of the most similar to maybe that plus 2003, something along those lines.

And I’m interested in your guys take on that, because it seems like we have room, actually, for significant uptake in demand, not just in China, for oil and gas, even in the US potentially, as employment potentially improves, just because you have all these people, you have all these open jobs still, especially in the low end, and you have a lot more people who maybe are relevant for those jobs and more interest in them now.

Tony

Yeah. So when you talk about uptake so if we look at China, for example, there were zero international flights going into China from, say, 2020 until, what, this month, right? Something like that. International tourist flights. And those are restarting. And so that’s just one kind of proxy indicator of, say, trade, the economy, travel, other things. Right. So do you have a view on that, on, say, passenger flights into China, tourism in China and how that would impact, say, crude?

Josh

So I have a better view on China to China flights than China to international. It actually does look like there’s a lot more bookings for international to China and vice versa flights, but there’s not a lot more actual flights yet. But there are way more China to China flights. We’re actually up from a low of two weeks ago or two and a half weeks ago. 

We’re up about 100%, actually, maybe even more than 100%. And again, the data is not perfect, but I’ve been posting daily seven day average lag data just to to sort of show a moving average, and the moving average is up over 100% for that. So just those China to China flights, it looks like, represent about 200,000 barrels a day of jet fuel consumption and jet fuel is very oil intensive. 

You use more than a barrel of oil to get a barrel of jet fuel because of the energy component and because of various other aspects of that refining process. And so also, jet fuel consumption historically has been a good proxy for oil and gas consumption in an economy. If you’re using more jet fuel, you’re using more gasoline, you’re using more diesel, you’re using more coal and natural gas and various other things.

It’s a great sort of real time economic proxy. And there’s lots of this is one of the places where I disagree on the sentiment surveys. I’m an economist by training and education. And the problem with surveys is that there’s no money in them, right? So people just tell you whatever they think, whereas consumption is actual money. It’s a buying decision. It’s not a speaking or a writing decision. 

And the consumption matters more. So these real time actual consumption indicators are very promising, it looks like, from China, even as there’s headlines of Beijing is totally shut. So the headline is that and then the consumption data is that the consumption is way higher. I’m going to go with the consumption data, and that looks very promising. Again, that’s only part of this theory, and I’m interested in your guys take on it to the extent that you’re.

Tracy

Open to talking about bob was talking about iron ore earlier, and they came out overnight, actually, and said they have a state buying purchasing iron ore is how they purchase it now. They started about a year ago, and so they said they’re going to start buying iron ore again. So really, to me, that does say they are really getting ready to sort of push this stimulus, and they really want that 5% GDP for next year because of how much it has come down and how much has been lagging over the last two quarters, including this quarter. 

So to me, hint, not that just them saying no more COVID passenger. I’m looking for real things that they’re actually doing. So look for them to start buying hard assets and buying sort of in the material sector and that’s kind of to me, that, okay, we’re ready to stimulate this economy.

Tony

Okay, that’s fantastic for everyone, right? I don’t think anybody in the world wants China to fail because it hurts everyone. There’s such a big economy, and especially their Asian neighbors, but also their big trading partners like the EU and the US. So I hear a lot of kind of sour China sentiment and people kind of cheering China failing. And I don’t think anybody in reality wants that to happen because it would hurt all of us.

So since we have three energy experts on, I guess let me ask you about China’s position with their crude reserves. Are they pretty tight? Do they have a lot in storage? Do they have stuff contracted? Like, if they grow, how will that impact the spot price.

Tracy

Well, they will have to buy more because when oil prices were at their peak just a few months ago, even though they were closed, and even into 2021, when oil prices really started to spike higher, they used a lot of their SPR, especially starting in summer of 2021. So they started using a lot of their SPR because they like cheap commodities and oil prices were Spiking. And so I do know that, you know, from what we can tell, you have to remember, we only know what’s above ground that we can see by satellite. We have no idea what’s underground for for what they have in storage. 

I just want to preface that, because a lot of people say you don’t know what time. So we do know some storage. So what we can see is that they have drawn down their SVR quite significantly. If they start opening up and they need to purchase more, especially with kind of these oil prices lower and then being able to strike deals with Russia right now, I do think we’ll start to see them purchasing a lot more, not just for consumption now, but to refill their SBR.

Bob

Again, I’ll defer to Josh and Tracy more about China. I’m actually much more knowledgeable about Japan than I am about China, but from a perspective of what they’re likely to do there’s, the interesting sort of component of Chinese culture can be quite monolithic. And if you have sort of spikes in COVID cases and it brings about this sort of I mean, they obviously protested Lockdowns, but there were reports overnight about Beijing looking like a ghost town today because cases were spiking again. 

And you could see this potential sort of spike in demand and then drop off in demand. And that would likely be the last drop off where I suspect that the demand that we saw here in the US. China’s demand, would increase three and four fold of the spike that we saw here in the US. Which is why I kind of agree with Josh’s overall bullish sentiment, even though we haven’t quite reached my downside WTI targets that Tracy and I talked about a couple of weeks ago. From that perspective, though, there is an interesting possibility of this downturn. But to Tracy’s point, I don’t think the Chinese government stalls their purchases because of their SPR usage.

It’s called an SPR globally, but they certainly use it quite a bit more than we do here in the US. To manage their it’s almost like a hedge account for them, where they sort of buy and sell much more rapidly in store. And they do the same thing with copper. And it’s interesting because when the copper market started really getting into the headlines and Spiking three years ago, there was all this talk about copper inventory and copper being used as a currency in China. You can store copper for quite a bit longer than you can store fresh crude oil. It’s got to be rotated.

Tony

So that’s a great point. That’s great. Okay, so speaking of SPR, Tracy, you punched out a chart this week on WTI versus SPR, WTI price versus SPR, and it looks like that divergence is pretty stark.

So you guys just mentioned China drawing down their SPR. The US. Has drawn down its SPR. So can you talk us through what this chart means and really what it means for crude prices?

Tracy

I mean, really what it’s showing is it’s showing all of the times that we’ve pretty much needed to tap into the SBR because of an actual emergency. You can see the difference between when we had to tap the SDR and say war or Katrina or Libya, right, how little that was compared to a non emergency event, that we drew it all the way down. 

Now, Biden has said this really just showing the magnitude of this SPR draw for literally no reason. But if, you know, Biden did say that he was looking to refill it at 68 $72, we have gotten down on that in that area. We haven’t really been able to stay there. But it is possible that we could be looking at, by our calculations, Q2, they could possibly be looking to repurchase if oil prices are down there, which there’s no guarantees with China reopening and sort of seasonal tendencies and what have you. Generally, we see about mid February through summer really starts to kick in higher demand season, and you start refining for summer grades and things of that nature. But it is possible that we could see the US.

Kind of start at least thinking about repurchasing Q 223 again, that would buoy oil prices as well and kind of put a floor underneath it.

Tony

Okay, so that kind of reinforces the headline CPI data that I put out there saying, say, March, April, May, things really could tick up. I think it’s silly to expect crude to be down at that level, especially, as you guys say, if China is opening up, if they’re refilling their SPR, if the US. Is refilling SPR, that sort of thing. So that’s all super interesting. Is there anything on energy that we’re missing right now, guys? I just want to make sure going into the end of the year that we’re covering the areas we need to COVID on energy. What are we missing?

Josh

So I’ll jump in on this just real quick. On inventories, there’s a lot of uncertainty. Like Tracy was saying, we don’t really know how much oil is in storage in China right now. The way I approach it is just to assume the worst to some extent to to underwrite to that and then, you know, understand sort of upside. And the worst case is, is somewhat bad. Like it looks like for, for oil prices, it looks like there might be two or 300 million barrels of oil and storage in China. 

More than some of the most optimistic analytics services or whatever are showing. And it is, in theory, possible, right? They have big caverns. They could store it like we do. It’s possible. To the extent that that’s the case, it still might not matter, because as China reopens, to the extent on the low end, again, of Chinese consumption, maybe you get another 2 million barrels a day or so of consumption versus where it’s been. And maybe they were importing a million barrels a day to store up until this point. 

So you still have a delta of a million barrels a day. And so if you have 200 million in storage, 200 days from now you’re out of storage and you’ve been importing, you end up with this, like, million or 2 million barrel a day need to draw on world inventories.

But world inventories are really low ex China. So you end up with a situation where on the low end for recovery, you end up with an undersupplied situation. And that’s not assuming any Russia disruptions on the high end, if you end up with a sort of three or 4 million barrels a day. 

Again, what Tracy and Bob were saying about the imports of iron ore and some of these other indicators, if those are right, and we end up on that sort of higher end of demand, which we also saw in the US. As we reopened, I mean, things could get crazy real fast, and China could end up looking like the world leader in oil trading from having imported and stored all of this oil to the extent they have it. 

And then the last thing oil was in Biden’s buy target range, and they were selling from the SPR, not buying it in the last week or two. So that tells me it’s very unlikely that there’s repurchases of oil into the SPR anywhere close to these price levels and anywhere close to these economic circumstances.

Tracy

I mean, I think most people agreed they probably won’t buy back in the SPR, but they say they will. But I think if that even happens, we won’t see that until at least three of 2023. But again, prices will probably be higher than where they want them to be to purchase it anyway. But I do lean towards the fact that it’s going to be a very long time before they actually start repurchases.

Tony

Okay, great.

Bob

I have a couple of closing things, if I could, because first of all, I like Josh until he told me he was an economist. But I think that’s more of a strategist. We’re like a strategist, and we’re like the little brother of economists, and we’re always jealous of that. They get to put the economists, find their name and strategists. I could just say I’m a strategist. No, I don’t have to show a degree to do that. But from a perspective of the SPR, I worry about the political, the future political implications of what the administration did. If you look at the exact somebody sent me the exact definition of what the SPR is supposed to be and I guess in that context he used it correctly, right? 

But I think I know at least Tracy and I agree that it was used incorrectly here because it was just a price increase. It wasn’t really an emergency. Prices were coming off on their own. Biden’s own. Treasury put out a report in July that said the SPR release only affect prices somewhere in the range of $13 to they revised that from about $28 to pump.

So it wasn’t even that big of an effect through Biden’s own. Treasury said this it’s not me saying this, but I worry about the future of prices are up, let’s dump a bunch because we’ve got midterms coming. And then next thing you know, there’s a massive outbreak of some sort of geopolitical problem in the Middle East and there’s a real emergency and we don’t have what we need. So that’s my concern about that. The last thing I’d like to say isn’t really energy based, it’s more about CPI. 

I was on a Twitter space yesterday waiting for the mic. I never got the mic, and I heard somebody who I won’t mention say prices are decelerating at an accelerating rate when the exact opposite is actually true. Prices are accelerating at a decelerating rate. They’re not decelerating an accelerating rate. People forget. First of all, I don’t like the Consumer Price Index, but that’s a whole nother podcast. CPI is exactly that. It’s the consumer price index. It’s an index. If you go to the St. Louis Fred website and you look at a chart of CPI, it’s basically always increasing, right? That’s why the Fed’s target is a 2% increase in prices.

If we’re in the midst of disinflation, not deflation. And I think sometimes the public doesn’t realize, they’re like, oh, prices are coming down. No, they’re actually not. The rise in prices is actually slowing down, but they’re still rising. It’s like if you went to buy a car for $22,000, I don’t know where you’d get that, but and you go the next month and it’s up $23,000, and then you go the next month, that’s up 23,100. Prices didn’t go down, they just increased at a slower rate. And I’m going to be saying this everywhere I appear from now because I think the public’s misunderstanding of what’s happening with inflation, maybe I’m going to affect sentiment if I say it too much. Josh, I don’t know. But that’s the issue I have in terms of CPI specifically, and energy is obviously a huge part of that.

Tony

Well, I tweeted out almost the exact same thing this week about CPI, about inflation, and inflation isn’t falling right. The rate of price rises is slowing and there’s just a huge misunderstanding of that. So before we close up, as we go into these last ten or so trading days of the year. What are you guys thinking about over the next couple of weeks? Is there anything that’s on the top of your mind as the year closes? Josh, let’s start with you.

Josh

Sure. So people have talked a lot about this. We haven’t talked about this yet. The divergence in between oil prices and oil and gas stock prices, especially on the large cap and mega cap side. And I think people forget that commodity prices other than the spot price are not predictive. The forward curve is not predictive. It’s terrible. It’s used as a hedging mechanism that’s used as a prediction mechanism. Equities are forward looking and they’re not perfect, but they’re one of the best prediction mechanisms that we have. 

And so energy stocks, oil and gas stocks are telling us that oil prices are likely to be higher, similar to your analytics software and the pundits and what. The sentiment is terrible in saying that oil prices will be lower and the price has deviated in the short run with the equities. So it does look like the more likely scenario, just even using that heuristic, is that oil prices go higher again, ignoring all the fundamentals and whatever. And so the interesting thing is, if that’s right and oil prices go higher, it might send those oil and gas stocks even higher.

There’s sort of this sort of soros reflexivity that happens with those sorts of things. So I think it’s worth touching on. Many people are posting about it, talking about how they need to converge. And actually I just think you got to understand what they are and what they are.

Tony

That’s a good point. Tracy, what are you thinking about going in last two weeks now?

Tracy

That chart is everywhere. To be honest, I’m still looking very closely at open interest in the oil and gas mark, oil in particular. A lot of length has come out of that contract. People just aren’t interested. A lot of people took profits because it was one of the more profitable commodities. Right. Over the last year or two years, we haven’t really seen anybody actively short that market short. 

Open interest has actually declined a little bit, but not as much as length. So if people get interested in this market again, there’s a lot of room to the upside if people jump in because that length has been taken out of the market. So I’m watching that towards the end of the year in particular, see what happens after the beginning of the year. See if this market find some more interest.

Tony

Okay, all three of you are being pretty subtle about your expectations for energy prices. Bob, why don’t you close out? What are your expectations going into the last two weeks of the year?

Bob

First of all, I agree. I think there’s almost I shouldn’t say this, but I think there’s almost no way energy prices continue lower on the crude oil side and natural gas is doing what natural gas is going to do. So I think overall energy prices go up. Electricity prices are going up. And given that backdrop, if the three of us are right, by the way, if I mischaracterize what you two think, please jump in. If energy prices go higher, there’s very little chance in my view, that of the three possible scenarios for the Fed that the right one can come true in the Fed’s view. 

So I’m actually more looking at EPS estimates for equities need to come down, earnings estimates need to come down, and the Fed is either going to have to a admit to a higher inflation target or B accept a higher level of inflation without saying so, or equities have to make a new low. And when that low happens, if that low happens, I should say if it’s a very good opportunity for industrials and consumer staples to sort of get in and kind of ride the recession wave back up as the economy itself restrains inflation by us going into some sort of a shallow or deep recession.

The other two things I would say is there any way I can get an economist title without putting in the work that Josh did? If anyone knows how to do that, absolutely. Just put it on your bud, Josh, don’t let me do that. You actually worked for it. And then the last thing I would say, if anybody wants to send me a bottle of Blantons, I’m willing to give you a free trade that is guaranteed to either make or lose money.

Tony

Hey Bob, just kind of latch on to what you just said about energy prices rising and industrials. So we’ve seen through 2022, a lot of industrials and retail firms raise price. Okay. And consumers have accepted that price. But if you’re saying that commodities are generally going to rise yes. Does that mean that we’ll see margins compress for those industrials okay?

Bob

So in the short term, consumers are.

Tony

At a threshold where they can’t accept higher prices soon.

Bob

So if you guys remember, you look back to the Great Recession in 2008, the last thing people did was let their car be repossessed. That kind of shows you the inelasticity of energy demand in general. People were defaulting on their mortgages before they let their car payment go into default. So from that perspective, people might be overestimating how far demand for energy can drop even in a recession. I’m making a correlation that probably isn’t accurate, but just anecdotally that’s something that we’ve seen. And it’s the same thing with heating and cooling your home. 

People are probably less likely to stop heating their home. They’re probably more likely to accept cooling at a little bit hotter of a temperature. So going into summer it may not be as apparent, but I do think that when we come out of it, industrial utilities, energies and consumer staples are going to lead us as most times coming out of recession simply because of the first things that people start spending again on and they’re the last things that people stop spending on. So I like those things coming out of what I expect to be a fairly decent drop and end of the first quarter, beginning of second quarter next year.

Tony

Very good, guys. Thank you so much. I really appreciate your time. This has been fantastic. So have a great weekend. And have a great weekend. Thank you.

Categories
Week Ahead

Crude Oil Supply: The Week Ahead – 29 Aug 2022

Learn more about CI Futures here: http://completeintel.com/2022Promo

Crude and energy are on everybody’s minds, and we spent a lot of the Week Ahead parsing the details. Saudi Arabia came out with some comments about restricting their crude supplies to global markets, and we also have a detailed discussion on the SPR release in the US – when will it end, how will that impact crude prices, etc. 

We also discussed Jackson Hole drama and the conclusions of Powell’s latest speech. Powell really didn’t say anything new, so why are equity markets reacting so dramatically?

And will we finally get some stimulus from China’s government? We’ve seen movement in tech stocks and some talks of the stimulus release, but we expect more after the US election. 

Key themes

1. Crude oil supply: Saudi/UAE cuts vs SPR

2. Jackson Hole Drama

3. China Stimulus (Finally?)

4. What’s ahead for next week?

This is the 31st episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.

Follow The Week Ahead panel on Twitter:

Tony: https://twitter.com/TonyNashNerd

Albert: https://twitter.com/amlivemon/

Sam: https://twitter.com/samuelrines

Josh: https://twitter.com/Josh_Young_1

Listen on Spotify:

Transcript

Tony Nash: Hi, and welcome to The Week Ahead. I’m Tony Nash. This week, we’re joined by Josh Young for the first time. So I want to thank Josh a lot for taking the time to join us. We’ve got Albert Marko and Samuel Rines. We’re lucky to have these three really valuable guests.

Before we get started, I’d like to ask you to like and subscribe to this YouTube channel. You’ll get reminded every week. Give us comments on the show. We always look at the comments. We always respond to the comments. So thanks for taking the time to do that.

We also have a promo for our product, CI Futures. That product is $50 a month right now. You can go month to month with it, try it out. We cover about 900 assets with weekly forecasts, and we do about 2000 economic variables with monthly forecasts. So check it out. We’re transparent. We disclose our error rates for every month. So it’s good information.

We have a couple of key items this week. First is the crude oil supply. We had Saudi Arabia come out with some comments about restricting their supply. We also have some information on the SPR release in the US. So we’re going to ask Josh to leave the discussion on that. 

Obviously, Jackson Hole drama. We’re probably the only people not leading the Jackson Hole today. But there are some meaningful things happening. There are some things happening that are not meaningful, and Sam will talk us through that. 

And then when we finally get some China stimulus, I think that’s a real question and Albert will lead us on that.

So Josh, thanks again for joining us. You put out a tweet earlier today about the UAE supporting the Saudi comments on supply restrictions.

Can you talk us through that and help us understand why did that happen and why is that important?

Josh Young: So the UAE is supporting what the Saudis and other OPEC members are doing in terms

of threatening to cut production based on the combination of lower price, as well as their observation that there may be some paper market price manipulation and disconnect from what they’re seeing as the largest sort of combined suppliers in the oil market. And it’s particularly important that the UAE did this because what we saw at Bison was that most of the OPEC members were actually producing their maximum production capacity. And when you produce that maximum, the fields aren’t designed for that. It’s sort of like driving with your foot all the way down on the gas 100% of the time. You’ll break your car and you’ll crash.

And so a lot of these fields and their processing facilities, they’re just not designed to run at this. It’s a theoretical capacity that’s supposed to run for a week, a month, three months, not how they’ve been running it. And so there’s a lot of pressure on a lot of fields in many of the OPEC countries to actually reduce production slightly, so it’s not a surprise.

And we forecast that there would be some discussion of this given the high run rate versus their spare capacity. UAE in particular does have some remaining spare capacity, so what we’re seeing is cohesion within OPEC along with supply exhaustion of the other OPEC members. So it’s actually a pretty big thing, and I don’t think people are really picking up on it too much. Although maybe it’s why oils flat up a little.

TN: With the market down a lot today. Is this something that will start small incrementally and then it will accelerate? Meaning will they cut off a little bit of supply and then over time, maybe they take some fields down for maintenance or something like that, and then you start to see bigger chunks? Is that a possible scenario?

JY: Yeah. Honestly, I don’t know exactly what the path will be. I just know that they see it. We were joking before the show that, hey, maybe they’re following my Twitter feed and a few other people’s been observing these problems with the oil market and sort of weird trading patterns versus very strong physical demand and sort of very strong indicators.

And you see Saudi has a very high price relative to their benchmarks. Right. Their poster price, especially Asia, has been very high and usually that’s associated with price strength, and instead we’ve seen price weakness. So I think they’re very frustrated by that, but they may wait for some other things. So oil prices to fall a little more or some other sort of signal, maybe some small amount of demand destruction to the extent that happens. I think it’s a little hard, just given the Saudi relationship  with the US and their sort of hope to maintain a lot of their alliance and their alignment with the west. 

So I think they need sort of an additional catalyst. That being said, once they do it, they might… I don’t know if they start small and then go big, or they might just go big. They might just say, hey, we’re cutting by a million barrels a day. We increased by four over the last year and a half, and we’re fully supportive of the market. We might go a lot bigger if necessary, and there’s a disconnect and we’re going to support it.

TN: Okay, so how much of this is related to the SPR release? Is the SPR release having such an impact on prices that the Saudis are kind of fed up with it, or are there other factors?

JY: I actually don’t think it’s related to the SPR release almost at all. It does look like it’s a little related to some of the job owning around a potential agreement with Iran. And there’s a lot of disagreement in terms of how much oil production could come on if Iran came to an agreement with the west and sort of restarted. JCPOA. I’m in the camp that there’s not a lot left to produce and to export. You can see the amount is getting exported to India and various other countries. It’s up a lot from the last time this was floated, six or seven months ago. So whatever that capacity was for Iran to export, it’s less.

But I think it’s partly tied to that because Iran is a regional foe of Saudi Arabia and UAE and several other OPEC countries. So I think it’s a little bit of that. And I think it’s a lot related to the paper market trading patterns and just this really big weird disconnect where you see consumption fine and you see price down and it’s probably messing up your CI Futures forecasting a little because you’re probably tracking the consumption and the consumption is fine and the price is down. And it’s like. Okay. The inventories are down. This is weird. Again, excluding SPR, when the SPR stops releasing, obviously you’d expect price to recover substantially absent a million barrels a day of demand structure.

TN: Is that what you expect when the SPR release is done, that’s late October or something, right, do you expect prices to rise notably? 

JY: Yeah. And I think like, the EIA forecast for shale production growth and sort of overall US oil production is just totally off base. They haven’t reset it, even though I think they had like a million barrels a day or something forecast for growth. And I think we’re at sort of 300,000 barrels a day so far this year and pretty flat. And the rig count is not up that much, and the frac stack count is definitely not up enough. So I think there’s sort of this disconnect. 

There also in terms of this mark to model from a production perspective versus what’s actually happening in the field.  And then you look at it’s not hard to see who the big producers are on the public side and then which ones had forecast growth and how much they’re actually achieving. 

It’s really hard to reconcile their forecast for production growth versus what’s actually happening. And we’re really well situated for this because we spend most of our time we talk a lot about macro, we spend most of our time just like looking at individual companies and evaluating them and evaluating their securities. And so I think it’s part of why we’ve had such a powerful voice from a macro perspective, because we’re spending most of our time talking to these companies, looking at the rigs, looking at other services, figuring out the bottlenecks, and looking at some of the local stuff.

And when you do that and you step back and say, these numbers don’t make sense, and the companies are not tracking anywhere close to that. So back to SPR, that matters a lot because we’re not achieving the production that is being forecast. And it seems like a lot of market participants, or at least prognosticators, are just accepting as a given. That means that at whatever point… I’m not saying that the SPR release stops in October. They may continue it, but at whatever point, there is a finite amount of oil there. And we’re hitting tank bottom on some of those caverns that are releasing oil. At some point we just run out or we stop releasing and whatever that point is, absent significant demand destruction in a very deep recession, I think we see a lot higher oil prices.

TN: So in terms of the SPR release, you said, you talk about being empty, this sort of thing. How much do you think are you still thinking kind of October? Are you thinking they’re going to continue, but it would kind of have to trickle out, not at the same rate they had been releasing to date. Right? Because they are short on supply in the SPR.

JY: Yeah, I don’t think it has to trickle out. I think they could produce pretty hard for another month or so, and then it starts becoming more of an issue. But as you get down to it, looks like the numbers around 20% or so for any of the individual storage facilities, and for some of them, it might be a little higher, some of it might be a little lower. You start having issues with contamination as well as just physical deliverability, actually extracting it out. 

And I think people take the numbers a little too seriously. And it’s very weird because no one trusts the government about certain things and then other things they just blindly say, oh yeah, it’s right. It’s from, okay, try to reconcile that.

And I think when you talk to engineers and some of the people that have worked on these facilities, their observation is that it’s reasonable to expect less deliverability. But there are enough of the facilities that aren’t drawn down enough that they should be able to supply. I don’t think we’re really hitting deliverability issues yet, but I think we’re likely to start to hit them, let’s say over the next month or so.

TN: Okay. So kind of when we take what you’re talking about and we look at, say, the potential impact of crude prices and refined product prices on inflation and energy prices generally on inflation, seems to me that you’re implying that towards the end of the year we could see those prices rise fairly quickly. Is that fair to say?

JY: It is. But at the same time, gasoline prices are still down a lot. These will start to tick back up the gasoline, which is a big consumer factor, as well as it gets felt through a number of different aspects of the economy. So at least for now, that’s not so much of a risk. But yeah, definitely. Sort of later on in the year, one could expect that. 

And one other way to look at that is there’s been a divergence, and I’ve ignored these historically, to my detriment. There’s been a divergence in between the oil price and oil and gas equity prices and oil and gas equities have done a lot better over the last, let’s say, month and a half than oil prices have. And it looks like the equity market is telling us that the companies… 

I mean, one, the companies are just very cheap, so I would think naturally they should rise. But the degree of divergence is so much that it seems like the equity market is making a forward looking bet on higher than strip prices in the future. And the forward market and the oil paper market is making the bet that it will be lower.

So there does seem to be a noteworthy divergence that could mean much higher inflation, like you’re saying, but it might also be that shelter matters a lot more and some other stuff matters a lot more, and it might really take diesel rising a lot and gasoline rising a lot to actually shift back into high inflation.

TN: Okay, is that divergence between only upstream companies or is it upstream midstream? Is it the whole stack? What is that divergence? What does that include?

JY: So I’m most focused on upstream. I don’t actually remember whether it also included the pipelines and services. But on the upstream, definitely both the large cap, the XLE ETF that includes Exxon and Chevron and stuff, as well as XOP, which includes sort of independence.

TN: Fantastic. Okay, Josh, that is excellent. Thank you so much for that. On that inflation topic,

let’s move to Jackson Hole. Of course, there’s a lot of breathy analysis of Jackson Hole over the last couple of days, and there will be over the weekend. But Sam Rines, who has the most valuable newsletter that I know of that’s available in America today, covered this week, and there’s a chart that he has in there looking at the meeting probabilities and also looking at the headlines that may or may not come out of Jackson Hole.

Sam, can you talk us through that? And what do you expect some of the conclusions to be?

Sam Rines: Yeah, so I thought it was really interesting. The Fed said nothing all that interesting today. I mean, it might have been a shock to people who weren’t paying attention, but the Fed just reiterated about, I don’t know, 99% of what it’s already said and set it in different words. And Powell said it basically eight and a half minutes. Right. That was the big change. All he did was take a bunch of time out of the speech, condense it and say, we’re not pivoting. They were never pivoting. The pivot was out of the picture at the last meeting. He made that pretty clear during that press conference. 

So it’s really interesting to me that there was an actual equity reaction to it. It’s also really interesting

that there was relatively little reaction out of Currencies, relatively little reaction out of global interest rates and only a reaction on the equity front. It was like it was a shock to the equity guys, and everybody else was like, yeah, we need that. So I think that was really the big takeaway was it was a shock to the equity

markets, but everyone who had to be paying attention for the last six months was like, yeah, no big deal.

So Jackson Hole I think one of the things that I had said about it in the newsletter was, you’re not going

to learn anything new. And the only thing that we learned was that Paul was going to say absolutely nothing new and absolutely nothing interesting, and equity markets would still react to it in a pretty meaningful way. The idea that we were going to go to 4% and then stay at 4% was already priced in to Fed fund futures through the end of ’23.

So this whole idea that Powell somehow shocked the market. It’s one of the more entertaining things

today, in my opinion, is just that equity markets were so taken aback by it while you had three or four basis point moves in interest rates across the US curve. And just a big shrug. 

To me, the big news today was probably out of Europe where people were potentially discussing 75 basis

point hike from the ECB. The Czech Republic doing an emergency meeting on energy.

There were some more interesting things that happened in the market today, but I think I overlooked in favor of an eight and a half minute speech by somebody just re iterating what he had already said 900 times.

TN: So let’s talk about Europe a little bit, because that’s interesting. I mean, Europe is in a world of hurt, right? We’ve talked about that several times. So what do you think the path for the ECB is from here? Do you think they’re going to hike 75?

SR: No, I think they hike 50. I think 75 is probably a little too aggressive for them. I mean, we were talking about ten basis points three months ago as being something that we thought would be interesting. And now the idea of floating 75, I think that was mostly to defend the currency, right. They knew that there was a known that you were going into Jackson Hole and if you front ran that with the leak that you might go 75, you’re going to defend your currency somewhat against a potentially hawkish Powell. It’s pretty straightforward in terms of defending a Euro at one. So I think that was basically the case. Call 50, maybe 75, I don’t really care. They’re going to hike, and they’re going to hike in a pretty meaningful way, particularly for a place that is already screwed. Right into the recession, right? Yeah.

I think it’s a pretty interesting opportunity to go long the long-end booned and short the Euro. Yeah, we’ve talked about that a few times here and that’s great.

TN: Okay, guys, what else do you have on the, Albert, Josh? Are you guys hearing anything else on US economy or Jackson Hole? 

Albert Marko: Sam mentioned about the equity reaction. How much of that is really because

of the low liquidity right now? There’s no traders really out there, no volume out there really, at the moment. 

SR: But liquidity works both ways, right? If you have low liquidity, you can rip it. It can get ripped either way. And I think what you saw immediately following his speech was you saw a leg down, then you saw 1% leg down, 1% leg back up, and then a two to 3% leg down, depending on what industry you want to look at. Right. So liquidity works.

AM: But you’re right, nothing was new. That rally that they launched for the weeks prior to that, you expected them to go hawkish after that, what are they going to do? Go dovish and go to 4400, 4500 and look ridiculous? Nothing new came out of this. He’s right about that. 

SR: I think there was an opportunity for them to potentially begin to say, hey, we’re going 50s and then 25s, and then we’re going to pause at 4% and we’re going to see how much we’ve ruined everything. There was the potential for that.

But then when you get STIs, you get financial conditions ripping higher, you have meme stocks

coming back into the news. Yeah. The Fed is not going to consider that type policy. If anything, they’re going to look at that and say, hey, it looks like short term neutral is a little bit higher than we thought it was. We need to move a little further and then begin to pause.

So if anything, the equity rally going into Jackson Hole was more problematic for equity markets than people thought. 

TN: So do you think some of those 25 expected 25s could be 50s in say, Q4?

SR: I don’t care if they’re going to get to four and then they’re going to stop and they’re going to get to four before they’re going to get to four around December and then they’re going to see what kind of carnage they’ve done. If they haven’t done enough carnage, they go higher. Pause there.

TN: That makes sense.

SR: The pace is probably I would say the pace kind of matters for shock and all purposes,

but in general the pace is kind of meh.

The end is really important and the length of staying at the peak is what is truly the most important thing here. If they’re there for a year and a half and they don’t care about a recession, that’s one thing. If they’re there for six months and cut by 75 because we’re in a recession, then go back, that’s a different thing. But I really don’t care how quickly they get there.

TN: Okay. And the run up to the midterms has no bearing on what the Fed is going to do, is that? 

SR: None.

TN: None. Okay. I just hear that from time to time. Well, the midterms are coming, so the Fed

is going to just relax for a few months.

AM: You hear that mainly from me. From my perspective, it’s always been like when I say Fed, I want to say Treasury and Fed together because of Yellen.  But sometimes they have those concerns. Like they don’t want the current administration looking bad. I had a midterm. Yeah.

SR: That should sail.

AM: Well, that should sail because just because of the ridiculous antics that they pulled recently with inflation, it’s being ridiculous. So you’re right, that ship has sailed.

TN: Well, I mean, are they ridiculous or not? I mean, inflation has definitely risen and they’ve definitely taken action to offset inflation.

AM: Yeah, they’ve done that in a vacuum because China is not online yet and Europe is a complete disaster at the moment. Right. And we haven’t had a real event to drive oil up into like the 130s, 140s again. God forbid we have a hurricane in like a week that goes into the Gulf of Mexico while Grandhome is sending out letters to all the refiners saying you can’t export anything anymore. There’s plenty of room. 

TN: She’s encouraging them. She’s not requiring them. Right?

AM: Yeah. Okay, well, we’ll see about that.

JY: She’s making them an offer that they can’t refuse. So my general take was just like, I’m not a Fed watcher. My general take was kind of stagflation coming out of this. Right? It’s like policy that can’t get too extreme to really like they’re going to try to torch the economy, but they’re also not going to go to a 15 interest rate or anything like that. They’re going to go to a four or whatever, and maybe they’ll go slower or faster.

I think there’s some political motivation there. So maybe they go slower and then they turn on higher after the election. Maybe not. Unclear. Kind of doesn’t matter from my perspective.

What does matter is, like Albert was saying, I think there’s a decent shot that we end up with higher oil prices. We end up with other factors. So, like, there are various drivers that are pushing, especially in the rental market, shelter higher, not lower. And so with persistent inflation in the biggest household bucket, and then with a likely move higher this winter in oil and diesel and probably also gasoline, it’s going to look pretty ugly. And if you have them stopping kind of at four, maybe going to let’s say five or something, but inflation is at ten or nine or whatever, right? Some directionally, really high number. At some point, you just start ticking in where you have negative real and positive nominal, and that’s just hard to break unless they go a lot higher. But if the economy is sucking, that makes it really hard. So that was my sort of general take from what they were saying.

AM: I wanted to come back and ask you about the SPR just real quick about the oil in it. Some of it has got to have degradation, and there’s a lot less barrels there that they can actually release. They might have to stop in end of September. You might start seeing oil rise even before October.

JY: Yes. My base case is not that. My base case is there’s a little bit of contamination, but they’ve managed to reduce that either by not pulling from the caverns that have had contamination historically or by treating the oil or something. My base case is that the oil there is extractable, except they can’t get the last barrel because there’s a certain percentage that needs to be there for the caverns to continue to be

functional, and they’re not going to destroy the storage caverns just to get the last oil. That’s my base case.

But I think there’s a reasonable expectation that there’s less oil there, given the history of contamination and the issues. And they did have a big draw this past week, but prior to that, they had multiple smaller draws. There’s also the crude quality thing, which I’m not really in the crude quality matters camp. I think there’s sort of this bizarre notion that crude, which is mostly fungible, really matters. It did to some extent before you could export oil and before various changes in US refineries.

At this point, it matters a little in terms of getting a couple of dollars, more or less per barrel, depending on transport cost. But I don’t think that’s really affecting the global balance. And I think it’s sort of like

a magic trick, right? It’s like focus on this and not like the thing that actually matters.

And so I’m glad you didn’t bring it up. I guess I brought it up and I just don’t think it matters, though.

TN: Great. Thanks for that, guys. Okay, let’s move on to China. Albert, over the past a week or so, we’ve seen a number of stories saying that China fiscal stimulus may finally be coming.

And we’ve seen some movements, say, in China, tech stocks, these sorts of things. So can you talk us through what you’re seeing with China in the stimulus camping? And why now? They’ve waited so long. Why would it be coming now?

AM: Well, it’s coming out because the policy and the dollar is so high, the Chinese economy is struggling at the moment and they come out with these mini stimulus announcements and there were shots across the bow. I mean, the worst thing right now that the Fed can happen is China stimulating commodities ripping at the moment, that would be absolutely atrocious. Inflation will start going higher and we seen like Josh said a 10% CPI prints coming out and they’re going to be forced to do 75 basis points again. It would throw a wrench in a lot of things and it’s not good if they stimulate it right now. 

But after the election, after the US election, they can do what they want to do because they have their own interests at heart at the moment. They cannot let the Chinese economy fall to a point where they can’t recover in the near future.

TN: So what do you see coming out in the near term? This $229 billion bond sale? That was a start, right? So do you see more than that or dramatically more than that coming out? And how quickly do you expect? 

AM: Yeah, I expect by January that will have a significant stimulus package coming out. This little SEC audit deal was basically a gift to delay it as much as long as they can.

TN: Okay, very good. And then so you don’t expect a significant amount of Chinese stimulus before, say, December or something like that?

AM: Yeah, before December. 

TN: Okay. Sam, what do you think about that? Do you think China stimulus hurts the US? 

SR: I really don’t think that the Fed would care or go 75. I mean, it’s commodities, right? And the Fed tries to ignore commodities as much as possible. So yeah, you’re going to get a rip in oil because there’s not enough oil to go around, there’s not enough oil for China and it’s going to coincide with the end of the SPR release. So you’re kind of screwed there. 

Copper, all that stuff goes higher. I don’t think the Fed cares. The Fed is going to try to cut that out. Then they’ll pivot core and you’re going to have a really weak Renminbi and you’re going to have probably at least a little bit of a pass through to US consumers on the goods front as you get goods to flow back. 

So you could actually see kind of an interesting offset where core goods kind of begins to decline on a Chinese reopen. Commodities rip and you get the, hey look, it looks like core is moving back towards two. We’re not going to have to raise rates as much because we don’t really care about headline, we can’t control oil, we can’t pump more oil. 

So I think it’s a weird kind of catch 22 where the Fed is going to have to pivot from talking about headline to talking about core. But I think they’re happy to do it as long as that core is really moving lower because I think they know they’re screwed on energy. They’re in so much trouble in energy, commodities, et cetera, that there’s nothing they can do.

TN: I think you’re right and we’ve needed a weaker CNY for about six, seven months now. So I think it’s about time and we’ve started to see it move, but I think we’ll start to see it move more dramatically soon.

Okay, guys, let’s start looking at the week ahead. Just a quick kind of round the horn of what do you think, Albert, what are you looking for for the coming week?

AM: I’m looking for a little bit of a rally back off these loads here, try to bring it back to 4200. I just personally think that the economy is in trouble, they’re delaying a recession as long as they possibly can, but it’s coming. So I think a little bit of a pump next week and then probably heading back down into September.

TN: Okay, Sam? 

SR: Oh, I agree with Albert there. I think the knee jerk reaction today to the Fed is going to be unloud as people begin to look at what really went on in rates. What’s going on in FX. The concentration should be on what’s going on in Europe. And the flow versus the stock problem that nobody seems to be able to figure out. Which is you can stock as much gas as you want in a bunch of caverns in Europe. If you don’t have flow over the winter, your stocks really don’t matter. I think there’s going to be a little bit of a realization that stock versus flow matter more than stocks and at some point you’ve got to figure that one out. So that’s what I’m watching.

TN: Interesting. Okay, Josh, what are you looking for in the week ahead?

JY: Just more information on oil demand. So we’re starting to see reports of surprise, higher oil demand than people would have thought, which coincide with actual reports of oil demand when you look at the raw data. So that should be interesting to see sort of how that gets processed and then sort of how oil price may or may not get suppressed. Again, just as we get more good data points, price should go higher, but it doesn’t seem to want you for now.

TN: Very good. From the energy capital of the Universe in Houston, Texas, Josh Young, Sam Rines.

Guys. Thanks very much. Albert, thanks. Have a great day, have a great weekend and a great week ahead.