This week covers: oil market technicals, intermarket signals and macro risks, supply considerations, and inflation implications...
Q2 2022 hedge fund letters, conferences and more
1. Oil Support: WTI is at a key level here, and again we are faced with that open question — is this test of support going to be a launch pad, or a diving board?
Source: @matthew_miskin
2. "Crude oil right on the precipice"
Yep. Aside from that key support level, also worth tracking is the 40-week moving average as upside momentum shifts to nascent downside momentum.
Source: @saxena_puru
3. Resistance, Risk, and Volatility: It’s easy to miss it, but worth emphasizing — WTI crude has now twice attempted, and twice failed to breakout to new highs.
Now with the the implied volatility index for oil (basically the VIX of the oil world) trending up, WTI crude is at risk of dropping back to next logical line of support ~$75
Source: @topdowncharts
4. Breakevens: This one of those situations where markets rhyme and echo, and while the chart is a day or two out of date, the key message breakevens are sounding is that inflation/growth risks are turning down... oil is on notice.
Source: @BurggrabenH
5. Metal Meltdown: Similarly, industrial metals are going into freefall as demand doubts come into focus — the implication for energy prices being that weaker demand will ultimately translate into weaker energy prices (industrial metals are usually the first to know about global macro inflection points!).
This is probably as good a chart as any for tracking a prospective shift in macro-market narrative from inflation risk to growth risk.
Source: Chart of the Week - Heavy Metal Omen for Energy Prices
6. Recession Drawdown: "Recessions see oil prices fall by 20% to 70%"
So basically, being bullish on oil at this point is either betting against history or betting against recession.
Source: @IanRHarnett
7. Emerging Demand: China (and India) oil demand is pretty much on an exponential path... Also in the immediate term, China is reopening from covid lockdowns (albeit tentatively, and still somewhat stop-start) and potentially(?) stimulating (again though: still waiting for more detail and concrete actions on that front), so it's not all doom and gloom on the outlook as such.
Source: @RichardDias_CFA via @MichaelAArouet
8. Tactical Petroleum Reserve: US has been frantically dumping its strategic reserves. That’s a major short-term (finite) supply headwind for oil prices...
Source: @StephaneDeo
9. Rushin’ Back: Another supply headwind = the return of Russian oil.
"We're definitely seeing more Russian oil routed through the Middle East. *Routed* being the operative word."
Source: @ayeshatariq
10. Inflation Implications: If WTI crude simply stays at current levels (let alone potentially dropping further), inflation is likely to drift lower.
There are few reasons for this... e.g. the importance of energy prices in the CPI, the pass-through/indirect effects of energy prices, the influence of surging energy prices/inflation on Fed policy (and hence significant monetary tightening, which reduces demand and boosts USD: another headwind to oil), and the demand aspect in that at the margin it also reflects swings in demand. So again, we could soon see the macro-market narrative shift from inflation risk to growth risk.
BTW, one of my US clients mentioned to me that the inflation outlook is a hugely political issue, which was kind of astonishing to me — I could not care less about whose team wins, I am just trying to figure out the macro-market currents …and how to best position for that. But I am a simple man!
Source: @topdowncharts
Article by Callum Thomas, ChartStorm.
