Big Oil
July 6, 2021
–It’s all about oil this morning as the OPEC meeting disintegrated. CLQ1 currently 76.50, up 1.34. I’ve attached a chart which shows that a long term trendline off the 2008 high has been violated, though technical details probably aren’t all that important in the current environment. A BBG article this morning notes the Dec’21/Dec’22 Brent spread in deep backwardation, and says the last time it was here was 2011 to 2014, when oil was around $100/bbl. CLZ1/CLZ2 is currently 7.31 with the front contract at a premium (backwardated). Of course, that’s often an argument for ‘transitory’: temporary shortages now will give way to more reasonable prices in the future. Perhaps so, but CLZ1 is around 72.50, and the 100 calls on that contract are now 0.35/0.37 with over 20k in open interest; they were around 25 cents the last time I has looked. I can’t help but recall the somewhat famous line by Dennis Gartman in January 2016, “In my lifetime, we will not see $40 crude oil again for longer than a week.” Of course, if you Google $100 oil, you can find many forecasts of that level with one notable one in 2017 by Goldman. With the market shunning productive investment in fossil fuels in favor of “green” technologies, it shouldn’t be a surprise that oil has the possibility of strength well into the future. What it means for rate policies is an open question, though the RBA took a baby step in trimming QE from $5b A$ per week to $4b. In the US, what the man in the street will see is higher gas prices, with government officials reassuringly saying that inflation is not a problem.
–There’s an amusing interview with Charlie Munger where he praises the Chinese authorities for shutting down Jack Ma and his attempts to expand into the sphere of banking. Currently, China is putting a heavy hand on Didi due to data violations. (I suppose the breach is that the data is supposed to flow directly to the central government). In any case, it’s a somewhat interesting contrast between China’s crackdowns on the largest companies and the new US antitrust chief, 32 year old Lina Khan, famous for her articles on monopolistic practices, especially those of Amazon. The famous antitrust action was back in 1911 when Standard Oil was broken up (just to bring it back to our initial topic). Now it’s not big oil, it’s big data. From an Atlantic article fawning over Khan: “When a company has such power, Khan believes, it will almost inevitably wield that power far and wide, distorting not just the market itself, but the whole of American life. With sufficient power, companies can commission studies, rewrite regulations, bulldoze neighborhoods, and impoverish education welfare systems by securing billions in sweetheart tax cuts.” [I couldn’t resist using this quote, because I suspect the slant is much more of the Atlantic author’s than Ms Khan’s. That’s just the way it is. Better to go to Khan’s source material of course. “We cannot cognize the potential harms to
competition posed by Amazon’s dominance if we measure competition primarily through price
and output.” I for one, wish her well in stopping the abuses of the social media system, but again, I suspect she is up against forces that require more authoritarian power than she could ever hope to wield].
–In spite of Zoltan Pozsar’s warning about possible shifts in funds related to the recent increase in the RRP rate that could cause higher short end funding costs and possibly spill over into longer dated assets, rate futures are building slightly on Friday’s strength. Just look at the oil curve. It’s transitory.
https://www.agriculture.com/news/business/crude-oil-will-not-stay-above-40-again_5-ar52205
https://www.theatlantic.com/magazine/archive/2018/07/lina-khan-antitrust/561743/
https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=5785&context=ylj
