Market Beat: Dissecting An Oil Trade
Exploring how the tea leaves could have been read with oil's recent fall. Plus: the consumer is strong, and there are still plenty of jobs out there.
Thanks for reading! Today I’ll be taking a slightly different approach by analyzing the recent fall in oil. As always, please consider sharing this with anyone you think may be interested. Cheers!
Topping Out?
Yesterday, analysts at J.P. Morgan rocked the oil market a bit by noting that demand destruction for hydrocarbons has begun, again. Demand destruction of oil is a major philosophical question for the industry in that one has to continually question whether or not dwindling use of oil is terminal or just a result of higher prices. It’s also a touchy subject to broach among traders who just recently thought that $100 would be a thing (and it may be, who knows?).
At the end of the day, however, most of us in the market are just trying to make a buck, and there’s little benefit (beyond intellectual gratification, and what’s that worth, really?) in pontificating endlessly (like I do) about these questions. What I’d like to do here is point out how a hypothetical person could have predicted, with these very particular existing conditions, that the price of oil was hitting some frothy highs (not investment advice!).
To start, every American is well aware that prices at the pump have been rising, and it makes sense to think that drivers would eventually pull back in spending where and when they can. The wider market certainly seems to have bought into the J.P. Morgan narrative, falling 14% in the last six trading sessions.
While this sudden fall may seem like a surprising turn of events (the oil market usually seems about as clear as mud unless you have commodity-trader level access), there were signs available to the public that might have tipped off a savvy investor (NOTE: remember that nothing here is investment advice! Just trying to piece together an interesting move in the market and what could have precipitated it.)
Just last month the American Petroleum Institute published its monthly statistical report that both crude oil production and refinery capacity utilization continued to trend at the top of five-year averages.
This heightened production and price also ran up into seasonal factors to consider, as the driving season of summer was coming to a close. While this isn’t exactly a surprise since traders account for the seasonality of gasoline consumption, there were signs that consumers were pulling back harder than what could be expected given recent data.
The U.S. Energy Information Administration, for example, in its report on national gasoline stocks, showed that supply of gasoline has rapidly jumped over the past few weeks, from the bottom of the 5-year range to the upper quartile (after spending virtually all of 2023 in the bottom or outside of the 5-year range).
While not perfect, the upward trend of supply provides a reasonable indication that the other side of the equation—demand—is waning, especially considering that production has been quite high over the last year and have not moderated.
The final ingredient here is a bit of market froth: the CME’s commitment of traders report as of September 26th, 2023 for WTI Crude showed that more managed money (i.e., non producers or those speculating on the price of the underlying commodity), had seen long positions (the blue bar in the chart below) rise to new highs for four consecutive weeks.
For some additional context, short positions as a percent of open interest fell from 7.8% short to 1.7% short from June 2023 to September 2023, while long positions for the same time frame grew from 10.8% to 18.9%. As a general rule of thumb, I always like to think that when markets lose their balance between supply and demand (or long and short), a stage is being set for some kind of move (My opinion! Not investment advice!)
In other words, while investing is incredibly difficult, and while things always seem so nice and clean when conducting a post-mortem on a trade idea (as we’ve just done), it is not a venture beyond the reach of the ever-curious, or the dedicated, even without access to the most highfalutin research available.
Other News
Americans Be Spending
A Bloomberg opinion piece today outlines how the American consumers have befuddled economist with their collective resilience—and argues that things aren’t likely to change. Interestingly, the article claims that savings buffers have not been impacted by the current inflationary environment. This is an interesting counter point to what I’ve been thinking for some time, and the article, I should note, doesn’t grapple with the looming shadow of student debt payments which are set to resume this month.
Still Plenty of Jobs
The labor market still seems to be rolling along, as initial filings for unemployment came in today at 207,000 which was below the consensus estimate of 210,000. While I know that the unemployment report is something that the market really leans on when considering what the Fed will do, I have to wonder at whether the utility it holds today is the same as it did in years past, especially considering the U.S. labor force participation rate is sitting at levels not seen since the 1970s.
Final Thoughts…
Rising interest rates mean deficit fears are back, baby. Discussing three myths of the bond market. SBF’s ex-girlfriend is going to spill the tea. After failing before in Europe, GM is setting itself up for fresh failure on the continent once again. Walmart is nixing degree requirements for some corporate jobs. Rising levels of economic nationalism will make the world poorer (otherwise known as de-globalisation).