Back in November we chronicled the (quiet) death of the Petrodollar, the system that has buttressed USD hegemony for decades by ensuring that oil producers recycled their dollar proceeds into still more USD assets creating a very convenient (if your printing press mints dollars) self-fulfilling prophecy that has effectively underwritten the dollar’s reserve status in the post WWII era. Now, with oil prices still in the doldrums, oil producers are selling off their USD assets in a frenzy threatening the viability of petrocurrency mercantilism and effectively extracting billions in liquidity from the system just as the Fed prepares to hike rates.
Stanley Druckenmiller, the man who achieved the impossible 30%+ annualized returns during more than 30-years period active trading career just gave an interview and shared his market views.
Gold, crude oil and U.S. equities are dollar denominated, are notional inflation hedges, and have reliable long term price records. Two anomalies pop out in the relative value across this threesome...
For the 14th week in a row, US crude inventories rose; but against expectations of a 3.5mm build (and weak API overnight), DOE printed a mere 1.294mm bbl build - the lowest since the build streak began on the first week of January. Crude prices are spiking on the news (though we note last week saw the biggest build in 30 years with the 2 week average above trend). Total crude inventrory continues to make new record highs (and pressure Cushing capacity).
So the Chinese economy is weakest in 6 years, there is a record inventory, near-record production, and record drop in rig count... and now WTI Crude has surged to its highest since Dec 2014 (running stops above last week's highs).
If yesterday stocks surged on the worst 4-month stretch of missing retail sales since Lehman, one which BofA with all seriousness spun by saying "it seems not unreasonable to suspect that the March 2015 reading on retail sales gets revised up next month", then the reason why futures are now solidly in the green across the board even as German Bunds have just 14 bps to go until they hit negative yields and before the ECB is fresh out of luck on future debt monetization, is that overnight China reported its worst GDP since 2009 together with economic data misses across the board confirming China's economy continues its hard landing approach despite a stock market that has doubled in the past year.
With EIA forecasting $250/bbl crude oil in the next 20 years, one wonders how long before 'muscle' or 'firewood' returns as the world's major energy source?
After last week's record inventory build, it is perhap sno surpriose that API reports a 2.6mm build (below expectationsfor a mere 3.5mm bbl build). If this is confirmed by DOE data tomorrow, this will be the 14th week in a row - the longest streak on record. More importantly, the Cushing inventory build rose more than last week (+1.3mm vs +1.2mm) - this is the 18th week in a row of inventory builds at Cushing (which is now over 90% full - 70.8mm bbl capacity).
Something is off: either US oil production is set to tumble, leading to another junk bond, and equity, rout among the energy companies (which as noted earlier are now trading at a near record high 32x forward PE), or oil production will continue rising and lead to another steep drop in prices, because without a dramatic pick up in demand, all this extra oil is merely piling up in Cushing and in various other storage hubs around the country, where it is merely awaiting for the tiniest increase in oil prices before hitting the market.
The EIA's annual energy outlook has something for everyone as it attempts to forecast energy markets out to 2040. For the bears, US crude oil production is expected to rise (even more than they had forecast last year - before the price collapse) as it seems, according to EIA the only thing more stimulative for oil production than high prices is low prices. For the bulls, EIA exuberantly forecasts prices soaring to over $240 by 2040 in a high growth environment. Crude prices are dipping modestly from their ramp highs.
Amid just another morning melt-up in stocks and crude, we thought the following chart might help some with their investment decision-making process...
Just as we warned previously (here, here, and here), the knife-catching, contango-crushed, BTFDers that piled over $6bn into Oil ETFs have severely underperformed this year. The USO ETF has fallen by more than 9% since the start of the year, whereas front-month U.S. oil futures have dipped by less than 3% on account of roll costs, and as of last week, investors have started to exit this massive position en masse. As Reuters reports, outflows from four of the largest oil-specific exchange traded funds reached $338 million in two weeks to April 8 - the first since September and largest since Jan 2014. It seems Goldman was right about "misguided retail investors."
Judging by the recent action in equity futures, the continuously rangebound US market since the end of QE may be entering its latest downphase, catalyzed to a big extent by the recent strength in the JPY (the EURJPY traded down to 2 year lows overnight), especially following yesterday's not one but two statements by Abe advisor Harada saying a USDJPY at 125 isn't "justified" and a 105 level would be appropriate. A level, incidentally, which would push the Nikkei lower by about 20% and crush Japanese pensions which are now mostly invested in stocks. Not helping matters was the pause in the Chinese and Hang Seng stock bubbles, with the former barely rising 0.3%, while the former actually seeing its first 1.6% decline after many days of torrid, relentless rises.