MBCC Trading Highlights 17th November'22 - Markets are moving from inflation to deflation.....what does that mean?
We are moving from an inflationary cycle to a deflationary one, and what does that mean? Commodities move down! Oh no, but everyone is long and every single sell side shop is pushing it, including the famous Goldman Sachs, talking about how the rolls are positive yield given the backwardated curves. Sure, that made sense 6 months ago, but will that make sense in 2023? No. As we have said time and again, spreads and curves just tell you where the system has come from, not where it WILL go. For that, one needs to do some real work.
The economy is slowing and just like in past “bull” cycles like 2001, 2008 (famously), and 2022 (still debated in circles but a matter of when not if), Oil prices peaked after the economy and Equity markets, but then BOOM, it fell like a stone confusing all the “tight supply” bulls. It is inevitable. We are moving into a recession, and Oil has no place staying this high especially when demand is so weak. We have run our forward looking cross asset demand indicators, and only see weak demand. It is easy to focus on the supply side, but no one bothers to understand demand, but then of course houses downgrade their so-called demand numbers after prices have fallen 40%+.
Everyone is long XLE 0.00%↑, Oil Majors, and Oil stocks in general - they have MASSIVELY outperformed the Oil price itself. We have been saying the Oil price will fall since the HIGHS reached in March of $135/bbl. - all that talk of Russian Oil being lost, we kept saying it would be rerouted which it was, look at our past tweets. Prices are down $50+/bbl. and sell side is still fixated on Oil is running out. Yet these Equities are trading like Oil is going back to $100-$120+…..see the anomaly?
Oil has been in a boring range, and now as we break the low end of the range, wait for the Energy Equities to get a reality check and portfolios scramble to lock in profits.
We are moving into a deflationary world, and Commodities cannot win in both inflation and deflation. Something to think about.
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