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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-The Great China Re-Opening (Or NOT).

I would LOVE to be proven wrong on my ST bear view on Oil given my LT bull positioning, but anyone betting on a big rebound based on the Great China Re- Opening needs to be very careful.

Michael Kao

Dec 22, 2022

Yesterday, Lakshmi from Cap One put out her last note of the year and focused on PRODUCT demand. Remember that refiners consume Oil, and consumers consume products.

Some sobering charts follow:

Drilling down (pun intended) to the US:

Look at China now -- NOT exactly picture of burgeoning economic health.

Imho, US-centric Oil investors have been lulled into a false sense of security in our artificially depressed stocks thanks to SPR releases. Despite this "tightness," forward curves are now in contango in the front. Why?

Take a look at Global Product Stocks.

Now look at China. As @BurggrabenH was early to point out, CHINA IS AT PRODUCT TANK-TOPS -- and not the Lululemon kind!

OIL FORWARD CURVES HAVE HAVE SNIFFED OUT A BACKING UP OF REFINING RUNS AND TIGHTENING BRENT-WTI BASIS HAS SNIFFED OUT EXCESS US BBLS BEING DISPLACED INTO GLOBAL STOCKS.

Those who have followed me for a while know that I've had an LT Structural Bull thesis on Oil since 2016, expressed through a post-reorg PE with a 10-year horizon.

That does NOT mean there can't be bearish ST cycles within LT structural cycles.

Kaoboy Musings

Re: Mental Model-Destructive/Constructive Interference In Econ Cycles

Econ cycles come in varying wavelengths; LT cycles = long wavelengths & ST cycles = short wavelengths. ST cycles often oscillate within LT cycles. In Oil, LT cycles are driven by capex cycles that have 5-10 year gestation periods and primarily affect SUPPLY. ST cycles are driven by the macroeconomy and primarily affect DEMAND…

a year ago · 1 like · Michael Kao

At the beginning of 2021, the stars lined up from BOTH a LT and ST perspective, and I was very BULLISH Oil:

Kaoboy Musings

Re: Crude Oil/Macro-This Butterfly Has Big Wings.

“Capex commodities” include lumber and industrial metals that are required for building things. “Opex commodities” like food and especially energy/oil (the biggest cap-weighted commodity by far) are consumed on an ongoing basis just for human survival…

3 years ago · Michael Kao

Oil made a HUGE move during 2021 through Q2'2022, and I became CAUTIOUS in April, 2022 (a wee bit early, but it turned out to be the right call):

Kaoboy Musings

Re: Oil-Trying To Cut Through The Noise.

Cap One provided some useful data points today in a client call, which I will summarize below. Obviously, A LOT has happened since my last update 6 months ago, but I still think signal:noise is very low right now. Rather than give the illusion of false precision, I'll cover broad strokes which I hope to be generally accurate…

2 years ago · Michael Kao

I sounded further warnings this summer as the USD Wrecking Ball shot the moon:

Kaoboy Musings

Re: Inflation/Macro-Asian Contagion 2.0?

Pretty much everything on my list has since been litigated ad nauseum by everyone EXCEPT for my allusion to “’97-’98” which I will dub “Asian Contagion 1.0,” or “AC1” for short. No, I’m not talking about a pandemic; I’m talking about a CURRENCY CRISIS and its impacts on everything else…

a year ago · Michael Kao

I also pointed out the LACK OF SIGNAL in current US "physical tightness" IF THERE IS DEMAND DESTRUCTION INTO INELASTIC SUPPLY:

Kaoboy Musings

Re: Oil-Forward Curves & Holy Grails (or Lack Thereof).

First, let me dispel the notion that there is an easy, tried-and-true leading indicator/model for predicting price movements of Oil, or for that matter ANYTHING. Ridiculous notions of “stock-to-flow/halving models” for $BTC come to mind. Second, let me dispel once and for all the notion that CURRENT FORWARD prices in the curve reliably predict FUTURE SPO…

a year ago · 1 like · Michael Kao

And here we are:

- Forward curves in contango in the front

- China at product tank-tops
- Demand slowing worldwide

What would change my thinking in the ST?

If the Forces of Supply Curtailment (EU Embargoes leading to Russian shut-ins) and/or additional OPEC+ cuts EXCEED the Forces of Demand Destruction. Been saying this for months now.

I had hopes that EU Embargoes forcing Russian shut-ins might induce a ST spike and actually made a little $ in November riding that theme, but I had little conviction it would last so I took the $ and ran.

Nevertheless, this is something to watch:

Here's the problem:

The EU Embargoes might be self-defeating.

Here's the other problem:

MbS let his ego to "stick it to Biden" get the better of him and acted too early.

And finally, of course, we have a Fed that is hell-bent on creating enough DEMAND DESTRUCTION (of everything, not just Oil) to stuff the Inflation Genie back into the 2% bottle.

"But even 2008 barely saw much actual demand destruction!"

Here's the problem with that argument: it's not just about demand destruction, it's about TOTAL DEMAND SHORTFALL AGAINST EXPECTATIONS:

The good news is that the USD Wrecking Ball has taken a breather (for now), as the world seems to over-weight second derivatives of price (slowing CPI GROWTH) vs. the still extremely high first derivatives of price and extrapolating this to an imminent Fed Pivot.

The bad news is that I think the imminent Fed Pivot thesis will get rug-pulled and we will see another resurgence of the USD Wrecking Ball.

I remain optimistic for 2024 and beyond, but it's simply too cloudy right now for me to see the ST/LT stars aligning.

END OF ORIGINAL THREAD