Every Wednesday and Sunday morning I record a private podcast for my patrons. I cover gold, silver, oil, the Dow Jones and Bitcoin at a minimum. This past Sunday I mentioned during my oil commentary I thought the six-month long weakness in oil was overdone.
Last week’s price action clearly agreed with me as the futures markets finally saw some position squaring into the quarterly close on Friday.
At least that’s what I thought at the time. It turns out that there were a lot of people who must have known that OPEC+ was going to announce a surprise production cut while I was yammering into a microphone Sunday morning. Because they bid oil up into the quarterly close using the tailwinds of strong closes across the entire ‘tangible assets’ space — gold, stocks, US treasuries, industrial metals, etc. — as cover.
The ‘deflation trade’ hit its peak when Brent crude futures bottomed near $70 per barrel on March 19th.
Thanks to OPEC+’s announcement Brent Crude gapped open at ~$85 per barrel. West Texas Intermediate (WTI) moved above $80 and the Brent/WTI spread is trending towards $3.
It was $8+ a few months ago. This is very good news for US producers and exporters. The oil market had a fundamental supply and demand mismatch. Back in January even the IEA was talking nearly a 1 million bbl/day mismatch between supply growth (<1 million bbls/day) and demand growth (>1.9 million bbls/day). And that was with a recession on everyone’s lips to start the year and China locked down.
Today their outlook more sanguine but mostly on disruption due to the embargoes against Russian oil. That disruption, like all things, is temporary. Transport costs will go up due to rising inefficiencies but the structural demand will stay the same.
This supports, not undermines, higher oil prices.
Goldman Sachs, whose statements one should always salt to taste, has been screaming that the action in the oil pits has defied reason for months. As long-time readers well know I’ve been complaining that this move down in oil into the $70’s was complete nonsense, a product of futures manipulation through headlines and always dubious inventory data.
Watching the Volatility Splash By…
I’ve watched the volatility in oil explode since “Biden’s” war on Russia began.
You can see it clearly in the weekly charts… just look at the candlesticks on each half of the chart below (demarcated by the vertical black line). You don’t need numbers or years of market analysis behind you, just use your eyes.
The war isn’t just being fought on the ground in Ukraine. It’s being fought in the capital markets. Oil is the most important market in the world, far more important than the US dollar or the US Treasury markets.
Here I disagree with Martin Armstrong, not because those markets aren’t bigger and affect global capital flows more than oil (they do), but because without a relatively stable market for pricing oil there can be no trade.
The instability of our interest rate and currency markets are downstream of this increased volatility in oil.
The same thing, by the way, happened to the Dow Jones after President Trump was elected. I had to alter my data sets for calculating my quantitative tools for assessing the weekly state of the Dow because volatility tripled. This made older data useless in assisting me in seeing the odds of moving higher or lower week to week.
Targeting the US stock market with volatility was a way to undermine Trump while pushing the US dollar lower even though Jerome Powell was trying to raise interest rates pre-COVID-19, only to be attacked via COVID and Trump’s short-sightedness.
The main point is this: the way to destroy a market is to make it too volatile for the average person or even small hedge fund to trade. Constantly whipsawing the price from hither to yon and back again makes it impossible for the small players in the futures markets to maintain their margin requirements. Eventually, they are either the victim of ‘volatility washing’ or just give up and go trade something that isn’t batshit insane.
When you do this, flush out the small specs (speculator,s) you decrease market liquidity and make it the plaything of those with the deepest pockets. This has been the playbook used in the precious metals for years which guys like Craig Hemke (TF Metals Report) and others rightly complain about.
Do you see why OPEC+ would announce a major production cut at this moment in time? Brent is becoming a broken market.
Biden left the US vulnerable to a price shock with an empty SPR while preparing for at least one ground/naval war.
Europe is already screwed. Lagarde is defending the euro to offset energy imports at higher prices from the US, now Europe’s largest supplier.
This is killing US/EU credit spreads. Because Lagarde can either protect credit spreads or she can protect the euro but she can’t do both without outside help.
Biden was supposed to help Europe (and Davos) by selling them the SPR as the price came down and shutting out Russia via sanctions and Janet Yellen’s moronic price cap. They were supposed to have control over oil prices such that they could drive them into the $50s or even the $40s to break Putin’s and bail out Europe’s economy.
This would have crushed inflation, stopped the interest rate hikes, and quelled the unrest around the continent.
Instead OPEC+ did exactly what you would expect them to do in this situation, announce a production cut and force the central banks of energy importers to defend their currencies.
The guy laughing his ass off right now is Jerome Powell.
Look at the markets this morning and you’ll see what I see — a massive cost-push inflation trade. Gold through $2000, Silver up, Oil up, bond yields down, stocks up strong.
But at the same time those signals can also be reinterpreted as ‘money getting to ground’ rather than being unleashed because of new economic growth.
Either way it doesn’t matter, these market reactions tell you headline inflation, not just core inflation, is likely to stop falling here as oil reverses and OPEC+ takes it back towards $100/bbl.
Oil’s not done rising here. OPEC+ will protect its collective bottom line and push the fiat boys to their limit.
I mean if someone declared war on you would you sell them your main export and the literal fuel for that war at a major discount?
Only if you hated your own country…
… but enough about Barack Obama.
As I discussed in that video for my patrons, Saudi Arabia is making very big moves to alter its allegiances — away from the West and towards the RIC Alliance (Russia, Iran, China). This is the core of the much wider BRIICSS alliance — which now includes India and Saudi Arabia.
These are permanent moves, making a massive oil refinery deal with China, normalizing relations and becoming a ‘dialogue partner’ with the Shanghai Cooperation Organization (SCO), just to name a few.
And since the Saudis are not a ‘democracy’ their government cannot be gamed through electioneering. The diplomatic moves they make today will stick and alter the landscape of global trade for the next generation or two.
Crown Prince Mohammed bin Salman is pretty pissed with “Biden” which underscores his regional foreign policy moves.
Take a look at this heat map of global shipping and you tell me how the “Biden” apparatchiks spin this defeat into a ‘no biggie’ like they do with every Russian victory in Ukraine?
This is one of those pictures that change the way you see the world. I always ‘knew’ that the Arabian landmass was important but words sometimes just don’t cut it. Sometimes you have to see it.
Davos declared war on oil the second Russian tanks crossed the border into Ukraine last February. They attempted to bully OPEC into isolating Russia, kicking them out of OPEC+.
They failed spectacularly.
The defection of the Saudis is the biggest strategic defeat of this entire war. Without a compliant KSA there is no controlling oil prices and, by extension, the ability to control asset prices worldwide through currency trading.
Here we are 13+ months into this fight and Ukraine has all but lost the war. Bahkmut is done. Zelenskyy has lost the support of the military and only the warmongers at the top of NATO and the EU want this war to continue.
And continue it will. Finland’s Davos government fell on its sword on its way out the door to make it a combatant by joining NATO. There is too much smoke out there that the West is gearing up for an industrial war against Russia and China in the 2024-25 time frame. They may lose in Ukraine but another front is just around the corner.
But for all of the focus on Ukraine and the insane tragedy of it, the oil pits and the diplomatic backrooms is where the war is really being fought.
MOIA or Bust
I’ve been screaming MOIA – Make Oil Investible Again — for months in my public interviews because this is how we begin to rebuild what these vandals have already broken. They still have control of the baseball bat in the global economic China shop.
In order to MOIA the producers have to take control over the market. There is no better way to do that than to force a $10 reversal in price in a few days to volatility wash the big Davos specs out of the market and move a greater percentage of oil trading off US and London markets.
In March 2020 what kicked off the financial crisis wasn’t COVID-19, it was OPEC+ saying no to production cuts at Putin’s insistence. I wrote a blog post about Russia saying “No.” While I’m not fully in agreement with this article today, knowing that Davos used this moment to begin its war on humanity through COVID-19, the basic premise is still the same.
Putin said “No” to Saudi Arabia to become the de facto leader of OPEC+ by using his lower production costs to get the Saudis to knuckle under and stop playing footsie with the US who was using them as a weapon against Russia and the entire Global South.
This was Putin’s opportunity to finally strike back at Russia’s tormentors and inflict real pain for their unscrupulous behavior in places like Iran, Iraq, Syria, Ukraine, Yemen, Venezuela and Afghanistan.
He is now in a position to extract maximum concessions from the U.S. and the OPEC nations who are supporting U.S. belligerence against Russia’s allies in China, Iran and Syria.
We saw the beginnings of this in his dealings with Turkish President Erdogan in Moscow, extracting a ceasefire agreement that was nothing short of a Turkish surrender.
Erdogan asked to be saved from his own stupidity and Russia said, “No.”
This was the turning point in the oil markets. Russia used its position as the supplier of the marginal barrel to force OPEC to heel and put pressure on US neocon foreign policy.
Of course Europe would cut itself off from Russia, since it’s been their stated policy for decades, c.f. the Climate Change Hoax. But if you do that and don’t bring the producers to heel, if you don’t break the cartel, you can’t control the price.
Putin gaining control over OPEC+ and then treating the cartel, which the US had been trying desperately to break, like kings rather than ‘the help,’ he set the stage for the last year when the KSA led the rest of OPEC in defying the US/EU/UK over sanctions on Russia’s markets.
Davos’ response was predictable, attack oil prices through the futures markets by destroying liquidity while forcing prices below the all-in-sustaining costs for countries like Saudi Arabia.
Powell undermined Yellen’s quest to break oil by pressuring European capital markets while they were vulnerable to not only energy price shocks but also interest rate and credit shocks.
Viewed that way the mother of all financial nuclear weapons has detonated over Europe but the radiation cloud hasn’t quite killed everyone.
The Saudis, predictably, courted China to pay in yuan and join the institutions built by Russia/Iran/China to limit their currency exposure and bring down their internal costs.
All Russia and KSA had to do then was wait for the perfect moment (1st trading day of Q2 2023) to reverse the March 2020 “No” moment, by supporting oil prices rather than consolidating power over them.
What this does now is ensure that any war the neocons have planned for the future will be fought with much higher interest rates, much weaker currencies and much higher effective oil prices.
Cost-push inflation will return in the 2nd half of this year. “Biden” won’t be able to refill the SPR. Debt ceiling talks should end with Matt Gaetz telling “Biden” and Yellen to pound sand, we’re cutting spending while the leveraged Eurodollar markets continue shrinking alongside the petrodollar.
And the neocons, at that point, can only whimper and try one last time to engineer a false flag that no one will believe, because they’ve cried ‘Russian bear’ too many times. The recession on the horizon Powell has purposefully engendered to wipe out the dumb collectivism subsidized by Yellen’s ZIRP bucks should drive political instability in Europe that far dwarfs the carnival barker sideshow of Trump’s indictment.
Tree meet saw. Check and mate.
Join my Patreon if you want to MOIA
Tom, what is your take on Jamie Dimon allegedly suggesting that governments should seize private land to build wind and solar farms in order to meet net zero targets (this as per The Telegraph)? Why is Dimon sounding like a Davos man all of a sudden?
A little bit of Davos pandering to open up negotiations for their terms of surrender.
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