Putting aside what the Strategic Petroleum Reserve has now become, an oil price manipulator rather than used for legitimate replacement of disrupted deliveries of barrels, Biden Capital Management has a pretty good trade on. They started shorting oil at around $105-$110 in late March 2022 and even pressed all the way down to current levels. As they have now stopped on the short side, the question is when to cover. In December the Department of Energy said they wanted to buy 3mm for delivery to the SPR next month with hopes to make that purchase at around $70. Well, over the weekend the DOE said no to the offer of barrels by the oil companies without stating why. If it was a price thing, the DOE better reevaluate that criteria with China now just about fully open.
When the DOE picked the $70 price, China was still in selective lockdown. The facts have now changed and just imagine if oil prices immediately rise from here (as I think they will) and the DOE ends up not refilling the SPR at all from a current inventory level that is the smallest since 1983.
I can’t emphasize enough my belief that the China reopening is HUGE news and not being fully appreciated with its impact not just on China but on the world, particularly other Asian nations and anyone else who does a lot of business with them. Their reopening should be viewed thru the same lens as the reopening in the US, Europe and everywhere else, an unleashing of consumer behavior and spending (however tempered for some by high inflation over the past yr). China’s population of 1.4b people is about 17% of the world’s population and after essentially being locked up for 3 years, they are now liberated.
SPR Inventory in barrels
Post payroll number and the below 50 ISM services print, we start the week with the fed funds futures pricing in just a 22% chance of a 50 bps rate hike on February 1st. We’re coming to the end of this aggressive rate hiking but again, it’s now a matter of how long rates stay at current levels and the refinancing pain those with floating rate debt and/or debt coming due this year need to endure. And don’t forget QT.
Speaking again of the positive of China’s reopening for those that do business with them, in today’s Eurozone Sentix Investor Confidence index, the current situation was unchanged but expectations rose. Sentix said “There is a glimmer of hope for Asia at the start of the year: expectations for the Asia ex Japan region (especially China) are rising dynamically. The end of the restrictive Corona measures in China is generating hopes of better times ahead.” As for the current situation, Sentix said “the economic environment remains challenging.”
European bonds are weak this morning with yields higher and US Treasuries are following. An ECB internal report came out that highlighted “wage growth over the next few quarters is expected to be very strong compared with historical patterns,” reminding us that the ECB will keep on keeping on with its rate hikes and the initiate QT soon. The euro is higher too while European stocks continue rally on China hopes. The DAX in particular is up by 5.4% ytd.
It’s international markets time to shine relative to the US this year after many years of similar calls and dramatic underperformance.
Sentix Eurozone Investor Confidence index
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.