OPEC’s Counterattack…

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The Federal Reserve has been attacking inflation. The problem is that after printing trillions of dollars, they’re ill-equipped to succeed at their task. Partly, this is because all that cash has to go somewhere and partly this is because their mandate does not extend into ensuring that global energy production expands. While Owners’ Equivalent Rent and wages have remained elevated, those are often seen as the “good” sort of inflation—or at least the benign sort. Meanwhile, all other forms of inflation tend to be characterized as “bad” and frequently the “bad” inflation is caused by elevated energy prices, which then increase the costs of producing and transporting everything else. Therefore, despite the Fed ignoring the inflation they caused for well over a year, it appears that when oil cleared $100 a barrel, the Fed finally felt that they had no choice but to do something.

The problem is that the only ways to reduce the price of oil are to produce more of it or consume less of it. It’s hard to produce more when the President and many of his powerful oligarch buddies are aggressively intervening to ensure that it’s difficult to expand or finance production. Meanwhile, no one wants to invest when there are constant threats of excess profits taxes, carbon taxes, expropriation and price caps. Since the obvious solution has been made nearly impossible, the Fed has been forced to embark on a plan to reduce global energy consumption.


How do you reduce oil consumption?? Well, it seems that their plan is to create a global depression. So, in my opinion, after a decade of paying lip-service to “inclusive economics” and “closing the wealth gap,” the Fed has been forced to pivot and as a consequence destroy the finances of the world’s poor, in the hopes that they’ll consume less oil. For the past half-year, this plan has unfolded with the usual crescendo of mini-temblors as global growth screeches to a halt and over-leveraged institutions find themselves on the wrong side of asset depreciation. The Fed appears well on its way towards creating an economic crisis that will reduce global energy consumption—consequences be damned.

Naturally, most global citizens do not want a lower standard of living so that US consumers can continue their orgy of excess. In fact, many global citizens owe their current standard of living due to elevated energy prices. Hence, after watching Biden liquidate the Strategic Petroleum Reserve in order to improve his polling numbers, while watching the Fed directly target their standard of living and that of their customers, OPEC has had enough. They’re going to do something about the Fed and its war on oil. OPEC has finally launched a counterattack. Last month, they agreed to cut output by 100,000 bbl/d. It was meant as a warning that went unheeded. Tomorrow, I believe they’re going to Blitzkrieg the Fed.

No one knows how big the cuts will be and frankly, I don’t think it matters how large they are. Instead, the message is clear—the Fed can crash global GDP in their fight against oil, but OPEC wields a much larger stick and will cut production even faster. In fact, OPEC appears willing to DO WHATEVER IT TAKES if the Fed continues on this path. OPEC has drawn a line under the price of oil and told the Fed that it’s wasting its time. OPEC controls the price of oil and oil is the world’s Central Banker, not the Fed.

On Monday morning, the market heard that message loud and clear. The Fed is trapped, oil is going higher, and the Fed is powerless to contain it. Why would the Fed continue trying to blow up the world’s financial markets if oil will not bend to their will??

Let’s look at a country like India that imports almost all of its energy. The Federal Reserve has effectively been saying, “they’re a poor country, we’ll break them and then global oil consumption will decline and US citizens will have cheaper oil.” Meanwhile, OPEC is saying, “India is a large and growing customer of ours. We’ll defend them against the Fed. Sure, they’ll pay more for their oil, but that’s much better than having the Fed detonate their currency, banking system and economy.” The battle lines are now drawn and OPEC is taking the mantle from the Fed. The market is loving it.

The Fed tends to be the last ones to realize anything when it comes to economics and the markets, so they likely haven’t internalized what OPEC just told them. However, the stock market understood it instantly, having one of the largest 2-day rallies in years. We’re getting much closer to “The Pause”. The Fed still needs to break something before they can declare victory and reduce rates, but The Pause feels near—maybe not near in terms of price, but certainly in terms of when they pause. OPEC’s counterattack has changed the calculus and I believe the Fed is now on the backfoot. If you can’t win at something, why try?? Especially if you’re going to leave casualties all over the financial markets.

On the topic of OPEC, here’s some quick math. By my estimates, global supply and demand are roughly in balance today. This is constantly in flux, but this is where I see things headed… Add in 1.5 million bbl/d of global SPR releases that will end soon, add in 2 million bbl/d of reduced demand from Chinese covid lock-downs that appear to be ending, add in 1 million bbl/d that Russian oil will decline by in 2023 (at a minimum), add in the 1 million bbl/d that global demand seems to expand by each year and assume that global supply somehow grows by 1 million bbl/d (though it isn’t clear where that growth would be coming from) and you have a 4.5 million bbl/d swing in 2023. Now add in whatever OPEC chooses and you realize that there’s an imminent and exponential crisis for the consumers of oil.

Of course, the Fed could destroy enough global GDP to erase 4.5 million bbl/d of global oil demand and stop the price from exploding, but OPEC just told them that they’ll DO WHATEVER IT TAKES. Do you think the Fed continues its war on GDP when they now know they’ll fail to contain the price of oil??

In 2023, I believe energy will be the only thing that matters to investors. Everything else, including the Fed will be a side-show. Who’s ready for the insanity wave?? Ever since Monday, I’ve been maxing it all out in energy. I’ve been ripping right-tails all over the screen. Oil is going to wreck all the other CUSIPS. The S&P is partying this week because the Fed is cornered by OPEC, but that’s only because speculators don’t realize what this means for the price of oil.

We just had a half-year pause in my oil thesis, now I think it’s about to resume with the sort of vigor that comes from a good long nap. Hope you’re ready…

Disclosure: Funds that I control have an obscene amount of energy exposure. Equities, options, futures, futures options, ETFs, you name it, we probably have it…


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