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KAOBOY MUSINGS and its associated podcast KAOS THEORY focus on the intersection of Financial Markets, Macroeconomics and Geopolitics. I've spent 30+ years as a trader/hedge fund manager and now manage money for my family office across many asset classes.

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Re: Oil-High Level Macro Thoughts For My LPs.

These are excerpts from my YE'22 letter to LPs.

Michael Kao

Dec 19, 2022

“The macro outlook for oil is complicated going into 2023, characterized by a tug-of-war between forces of supply curtailment (EU embargoes/price caps on Russian oil and products + OPEC+ quota cuts) and forces of demand destruction (global recessionary headwinds clouded by China’s troubled COVID reopening policies).

The much-touted China COVID Re-opening as a short-term boon to oil demand is also not a given, especially since Chinese refining capacity appears to be tapped out already.

The Biden Administration has also indicated $70 as the level at which they will refill the SPR; I’ll believe it when I see it.

I believe that the first half of 2023 represents the most risk for oil prices, as unemployment may finally tick higher as companies battle recessionary headwinds.

As I have indicated in my past updates, I have been cautious on oil prices since the spike in Q2’22 given the Fed’s determination to take inflation back down to their 2% target and causing the USD to strengthen against almost every global currency.

Although the macro headwinds heading into 2023 appear daunting, my longer-term outlook on oil remains bullish as we approach what I call the Structural Supply/Demand Singularity point, where even a recession-impacted aggregate demand level for oil EXCEEDS global spare capacity.

I believe that the aggressive global central bank War On Inflation will likely produce short-term cyclical deflationary headwinds to oil but will only exacerbate the longer-term capex starvation for the industry."