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

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

www.urbankaoboy.com
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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:

Kaoboy Musings is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

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…
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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:

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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):

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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…
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2 years ago · Michael Kao

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

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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:

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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…
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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

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