Kaoboy Musings

Share this post

Re: Oil/Inflation/USD-Clash of the Titans.

www.urbankaoboy.com

Discover more from Kaoboy Musings

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.
Over 9,000 subscribers
Continue reading
Sign in

Re: Oil/Inflation/USD-Clash of the Titans.

It's OPEC+ vs. the Fed. Who will win?

Michael Kao
Apr 3, 2023
41
Share this post

Re: Oil/Inflation/USD-Clash of the Titans.

www.urbankaoboy.com
16
Share

The Greek mythology nerd in me can’t help thinking about this old 80’s flick given today’s surprise OPEC+ cut:

Twitter avatar for @UrbanKaoboy
Michael Kao @UrbanKaoboy
What we’ve got here is a Clash of the Titans: 1. OPEC+ (the “central bank” of Oil) curtailing SUPPLY 2. Fed and other CB’s working to curtail DEMAND The problem for OPEC+ is that high prices into a slowing economy ALSO work to curtail demand.
5:27 PM ∙ Apr 2, 2023
75Likes4Retweets

OPEC+ surprised the world today with voluntary cuts totaling 1.65 mmbpd if you include Russia’s 500kbpd seasonal “cut.”

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

Discounting those barrels as well as the temporary Kurdish disruptions of 400kbpd last week (expected to return to the market in the next several weeks), Lakshmi at Capital One thinks the real cuts are closer to 800kbpd.

This is still a large number, and the solidarity amidst Core OPEC was unusual, especially when you consider UAE’s previous hesitancy to anger the US.

Twitter avatar for @UrbanKaoboy
Michael Kao @UrbanKaoboy
This is a big number. Glad we refilled our SPR...oh, wait. I thought Fed Policy was going to be "Higher For Longer" BEFORE this. Interested to see how all the Pivot Posse Assets react to this.
Twitter avatar for @chigrl
Tracy (𝒞𝒽𝒾 ) @chigrl
Voluntary cuts from May to Dec 2023 (from current policy) Saudi Arabia 500k bpd UAE 144k Oman40k Kazakhstan 78k Kuwait 128k Iraq 211k Algeria 48k https://t.co/fyWfBwiQ2s
2:56 PM ∙ Apr 2, 2023
100Likes7Retweets

I had two initial reactions to this:

  1. OPEC+ is seeing something nasty brewing from a demand standpoint and wanted to get ahead of it.

    Twitter avatar for @UrbanKaoboy
    Michael Kao @UrbanKaoboy
    The timing of this OPEC+ decision is curious. I wonder if Russia is finally NEEDING to shut-in (due to China/India being tapped out from a demand perspective) and the other countries just fell in-line to show solidarity? @BurggrabenH
    Image
    2:38 PM ∙ Apr 2, 2023
    62Likes6Retweets
  2. MbS (Mohammed bin Salman) really wanted to stick it to Biden once again after last year’s embarrassing “Fist-Bump Fiasco,” potentially setting up an Oil spike right into an election year.

Twitter avatar for @UrbanKaoboy
Michael Kao @UrbanKaoboy
This is a massive FUCK YOU to the current Admin. Our West Paper emphasized the policy dichotomies between the Semiconductor and Oil & Gas industries.
Twitter avatar for @UrbanKaoboy
Michael Kao @UrbanKaoboy
It is finally out! This is the paper I co-wrote & presented at West Point on 2/9/23 along with Lt. Cmdr. Mike St. Pierre of the Royal Canadian Navy @mik_sinclaire. It is entitled "USD Primacy in an Era of Economic Warfare." https://t.co/0PDT5qVIfr
9:41 PM ∙ Apr 2, 2023

I’ve been pondering this all day and am leaning mainly towards Reason 1 (although I’m sure there’s a little bit of Reason 2 mixed in), mainly because this move seems at odds with OPEC+’s more typical Long Game:

Keep prices at a “Goldilocks” level that is high enough for its members to remain very comfortable but not high enough to incentivize significant non-OPEC SUPPLY additions or longer-term behavioral changes on the DEMAND side.

This cut, while unequivocally bullish commodity prices in the short-term, is NOT great for the longer-term Supply/Demand picture because it makes the longer-term Supply Curve more ELASTIC while potentially doing the same thing to the longer-term Demand Curve.

Twitter avatar for @UrbanKaoboy
Michael Kao @UrbanKaoboy
Two things to keep in mind: 1. This just adds to spare capacity net of the Turkey outages last week which will reverse. 2. This continues to put a drag on demand into an already slowing global economy.
3:11 PM ∙ Apr 2, 2023
52Likes5Retweets
Twitter avatar for @UrbanKaoboy
Michael Kao @UrbanKaoboy
I actually think this is short-term bullish but maybe not that great longer-term for the Supply/Demand Singularity argument as these cuts ultimately make the LT supply curve more ELASTIC given expanding spare capacity.
3:22 PM ∙ Apr 2, 2023
57Likes1Retweet

Oil DEMAND is notoriously INELASTIC in the short-term, but if spot prices stay high for an extended period of time — ESPECIALLY AT A TIME WHEN GLOBAL TIGHTENING IS CAUSING AGGREGATE DEMAND DESTRUCTION FOR ALL GOODS AND SERVICES — behavioral changes and substitution effects can cause longer-term DEMAND ELASTICITY.

This tweet sums up the zeitgeist for the Average Joe out there (absent the joking part):

Twitter avatar for @RumbleDore_NFT
Rumbledore @RumbleDore_NFT
@Amena__Bakr @saylor_go_brrr I am also cutting back too. From today forward I’m going to cycle my bike on days when ✔️it doesn’t rain ✔️the sun is out ✔️it’s not too warm ✔️there is no snow So I’ll be on my@bike twice this year
6:26 PM ∙ Apr 2, 2023

It is NOT CLEAR to me that OPEC+ has the winning hand here in the Clash of the Titans between the Central Bank for Oil versus the Central Bank for USD.

I was in the “Higher For Longer” camp even before this surprise cut, although the markets disagreed; today’s OPEC+ action is very significant, because it potentially resets the clock on the Fed’s Inflation Fight and therefore has ramifications for ALL ASSET CLASSES.

OIL started the Inflation Conflagration in 2021, which eventually spread into stickier components. If Oil is ascendant once again, it calls into question the entire imminent Fed Pivot thesis, which many asset classes are pricing in.

Twitter avatar for @UrbanKaoboy
Michael Kao @UrbanKaoboy
This potentially brings us back to Square One with respect to Inflation, circa 2021. OIL is what STARTED the Inflation Conflagration. HIGHER FOR LONGERERERER.
10:14 PM ∙ Apr 2, 2023
54Likes8Retweets

From my perch, Oil Inflation is of key importance because Oil is a critical factor of production for so many parts of the global economy, ranging from transportation to petrochemicals. Furthermore, it is an “OPEX COMMODITY.”

I wrote this thread back in March, 2021:

Kaoboy Musings
Re: 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…
Read more
3 years ago · Michael Kao

This is the first thread I wrote in late 2021 linking Oil Inflation to the rise of the USD Wrecking Ball. I invoke it once again given OPEC+'s surprise cut today because it is relevant yet again.

Kaoboy Musings
Re: Oil and the USD Wrecking Ball.
I am going to pull some of these thoughts together here. Since the current decade is already looking like the 70’s in many ways (ignominious defeat on the global stage, energy crisis, inflation, new ABBA album, etc.), let’s go back to something else that happened in 1974: the establishment of the PETRODOLLAR system…
Read more
2 years ago · 2 likes · 1 comment · Michael Kao

It will be interesting to see how the Pivot Posse reacts to this development:

Twitter avatar for @UrbanKaoboy
Michael Kao @UrbanKaoboy
Watch out for the Pivot Posse: $BTC Gold High Duration Equities and Bonds
10:22 PM ∙ Apr 2, 2023

This development complicates so many things. I’ve previously characterized this environment as a GEOPOLITICAL MOSH PIT, where every Central Bank will watch out for domestic interests first and foremost INCLUDING THE FED. Now that OPEC+ (the Central Bank of Oil) has entered the fray, watch out.

Kaoboy Musings
Re: Inflation/Geopolitics-Geopolitical Mosh Pits & Sovereign Debt Endgames.
I am not just talking about the obvious geopolitical conflicts like Russia/Ukraine or China/Taiwan/US. I am talking about conflicting ECONOMIC incentives between regions even among traditionally allied economic/geopolitical blocs. STRUCTURAL INFLATION is at the HEART of the matter, not just from an energy/resource scarcity dynamic, but also from the CONF…
Read more
a year ago · 1 like · 2 comments · Michael Kao

Given the ramifications of a severely prolonged Inflation Fight reminiscent of the stagflationary 1970’s at a time our SPR has been gutted to levels not seen since the early 1980’s, you see what I mean by this tongue-in-cheek remark. Who knows what will break in the Shadow Banking sector as collateral damage of the Clash of the Titans? Will MbS collide into MBS?

Twitter avatar for @UrbanKaoboy
Michael Kao @UrbanKaoboy
And so once again, both MbS and MBS are gonna be problematic for Risk Assets.
10:43 PM ∙ Apr 2, 2023
38Likes2Retweets

My list of worries now includes:

  • The Fed now has no choice but to stay tight until something truly breaks (you ain’t seen nothin’ yet).

  • A re-ascendant USD Wrecking Ball might ignite China’s Debt Bomb.

Kaoboy Musings
Re: Geopolitics/Inflation/USD-Ball In A China Shop.
While the past week in the financial markets has revolved around the demise of Silicon Valley Bank and the ramifications therein, I personally don’t think the extremely poor risk management practices of a bank focused on banking the most speculative sector of the economy will lead to a major domestic banking crisis. Consequently, I do not believe it der…
Read more
7 months ago · 48 likes · 17 comments · Michael Kao
Twitter avatar for @UrbanKaoboy
Michael Kao @UrbanKaoboy
For all the hoopla around the Xi/Putin/MbS Bromance, consider the impact of today’s OPEC+ decision: -China imports 80%-90% of its Oil -Higher Oil increases likelihood of CNY printing/devaluation -Higher Oil emboldens Fed and strengthens USD -Oil is invoiced and denominated in… https://t.co/sZIaCL33kM
Twitter avatar for @UrbanKaoboy
Michael Kao @UrbanKaoboy
This is a DISASTER for China. Stronger CNY -> Collapsing Current Account Surplus Weaker CNY -> Importing Inflation Scylla, meet Charybdis. https://t.co/83GtqU9Mzt
4:25 AM ∙ Apr 3, 2023
7Likes1Retweet
  • A DOE devoid of fossil fuel experience not to mention common sense may revive catastrophically stupid ideas again, e.g. the Export Ban. (See below)

Kaoboy Musings
Re: Oil-The Admin’s “Kobayashi Maru.”
Despite pursuing a myriad of policy missteps that have simultaneously alienated OPEC+ and disincentivized investment in the domestic O&G space, the Admin has embarked on an unwinnable rhetorical war against rising energy prices. I have been speaking with several industry experts over the last several days and have compiled a list of FOUR possible policy …
Read more
2 years ago · Michael Kao
  • OPEC+ going for short-term gains now may sow longer-term seeds for more Supply AND Demand ELASTICITY.


Parting thought:

Remember this tweet from beginning of 2022?

EVERY SINGLE ELEMENT IS STILL TRUE.

Twitter avatar for @UrbanKaoboy
Michael Kao @UrbanKaoboy
Musing 2 of the Day: The setup: 1. Stagflation/energy crisis not seen since 70’s… 2. …leading to tightening ahead of RoW… 3. …creating USD Wrecking Ball reminiscent of ‘97-‘98 4. Everything Bubble that makes ‘00-‘01 pale 5. Rising geopolitical tensions Buckle up!!😬😬😬
9:37 PM ∙ Jan 20, 2022
517Likes76Retweets

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

41
Share this post

Re: Oil/Inflation/USD-Clash of the Titans.

www.urbankaoboy.com
16
Share
16 Comments
Share this discussion

Re: Oil/Inflation/USD-Clash of the Titans.

www.urbankaoboy.com
A Common Sense American
Writes Decentralized Intelligence Subs…
Apr 3Liked by Michael Kao

Great insight and perspective, Michael. The CB needs to stay higher for longer; with that, I agree. Rather than "break" something that will force them to pivot, I trust they will do whatever possible to dismantle the castles they've built on sand slowly. So be it if that means a lost decade with high unemployment and depression-like conditions. So long as it's orderly, the Fed wins, and we get another chance at organic capitalism vs. the zero-bound financialization of fraudsters the pivot crowd is accustomed to and counting on.

Expand full comment
Reply
Share
May
Apr 3Liked by Michael Kao

It looks like the situation is working in favor of Russia and China. I think the Biden Administration must do something to reverse the trend. The United States can produce oil and natural gas, Europe and Japan can't withstand the inflationary oil and gas for any longer.

Expand full comment
Reply
Share
1 reply by Michael Kao
14 more comments...
Top
New
Community

No posts

Ready for more?

© 2023 Michael Kao
Privacy ∙ Terms ∙ Collection notice
Start WritingGet the app
Substack is the home for great writing