Wednesday, July 11, 2018

Oil Wars 2.0: Ponzi Reflation Has Ended

The Ponzi reflation trade is the most crowded trade in the history of the planet. Prepare for reversal of fortune...

Global Oil Wars 1.0 began in 2014 and ended in 2016 with the "surprise" announcement of an OPEC output cut. Oil War 2.0 has now begun:

When oil peaked at $150/bbl in July 2008, it took all of five months to plunge crude prices -80%, to erase the four year mega oil rally. Erasing this rinky dink charade will be measured in days or weeks, not months, because it was all smoke and mirrors. 

As we see below, compared to 2008 production cuts, this rally was not due to significant output reductions. This fake rally was due entirely to crude futures speculation. After all, why bother cutting production when you can just ramp the futures market? 

When OPEC/Non-OPEC members cut oil production in early 2017, it confounded oil industry skeptics. However, it didn't confound whoever was front-running the futures market the entire time. The oil futures market and oil futures positioning had bottomed out almost a year prior to the actual production cut. Even as the broader oil community was skeptical, "someone" else had 100% conviction. The lesson learned is that one should never bet against someone who controls the outcome of the game. 

Subsequent to the bottom in crude prices, and futures positioning, both peaked when the actual agreement took effect in January 2017. Next, the market and positioning drifted lower, until the agreement was renewed in May 2017, after which both shot higher. That latter part of the rally was concurrent with respect to positioning. Then, earlier this year, in February, oil positioning (red) rolled over. Well ahead of when OPEC announced they were increasing production, three weeks ago.

All of this chicanery can be seen via this chart: 

In summary, the Ponzi reflation trade is now over. Therefore, falling oil prices will crush the eminently crowded short bond trade:

What does record bond short positioning buy in terms of higher yields?

Short squeeze

"Unfortunately, our 2018 S&P profit estimate is off by a minus sign"

Speaking of end-game charades, here's another one:

"The Rising Wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows"

One rising wedge stock is responsible for over one third of the S&P 500's year-to-date returns. Holy fuck. 

Prepare for island reversal of fortune