I don’t have a lot to add this week to our Alerts letter last week, which called incredibly correctly that oil was not about to get away despite the OPEC announcement and was far more likely to moderate back towards $80 a barrel, as opposed to moving towards $100.
I maintain that call through the midterms and have suggested two things: First, that if oil prices were to continue climbing towards triple digits, President Biden would initiate another one-time large release from the SPR to counteract traders’ enthusiasm. That would again chase those short-term bulls away who got all excited about buying oil in the mid-80’s after the OPEC 2m barrel cut. It is looking more and more that not only was my call dead-on accurate, but that President Biden need not resort to another manipulation of oil markets using the Strategic Petroleum Reserve before the midterms.
Second, there is nothing but bad news and bad news tellers in markets right now, and zero chance in my view that the Federal Reserve won’t again plump for another 75 basis point rate hike in early November. Between the two threats, no risk assets have much hope of a sustainable rally, at least until after the midterms.
Since I have some time then (and so do you), let’s talk about something else:
Joe Biden is the greatest oil trader who ever lived.
People who read me probably know which way I lean politically. But I’m hardly ready to excuse any behavior that Democratic administrations display. And in using the Strategic Petroleum Reserve more aggressively than I’ve ever seen in my near 40 years of following oil, I think it’s only fair to call out Biden here for extreme market malpractice.
All Presidents have used the various tools at their disposal to some degree to keep gas prices in check during midterms. Trump’s transactional plan with the Saudis was to offer a pass on the Jamal Khashoggi assassination and a $23b sale of sensitive F-35 fighter jets to Saudi Arabia and Saudi ally UAE; planes that 3 previous administrations had passed on selling to anyone in the MidEast. For this, Trump got his barrels and oil prices plummeted in the fall of 2018.
Biden clearly isn’t the ‘dealmaker’ type – but he also didn’t feel he couldn’t do a bit of large scale market manipulation instead, using the emergency reserves of the United States to scare the bejeezus out of any traders thinking about holding oil from the late summer into November. While the total releases of 350 million barrels from the SPR isn’t a practical flooding of the global market, it was a strong signal for traders to stay the hell out of the way of the United States, who was working frantically for (a very short term) drop in gas prices. Don’t be long, the US was saying to traders – you stand to lose a lot of money.
Remember, from a fundamental supply/demand view, this may be the MOST BULLISH oil market I’ve seen in my entire 40 year career following oil. Russia bans and oil isolation, US shale production discipline, OPEC production shortfalls, post-pandemic pent-up demand, Iran sanctions, Nigerian unrest – it goes on and on – all of it swamped momentarily by US pressure from the SPR, Federal Reserve inflation ‘targeting’ and dollar strength.
And these financial ‘tricks’ have been incredibly successful in annihilating oil prices, fully knocking nearly 40% off the price of a barrel of oil from the highs ($123 – $76), and gas from over $5 a gallon to under $3, before rallying a bit after the OPEC announcement.
That’s what makes Joe Biden the greatest oil trader ever.
Think about it – he’s sold 350m barrels of oil between $100 and $120, and is now looking to buy it back for around $80. Let’s say he could buy it all back around $85 – that’d be something like a $30 profit on 350 million barrels – that’s a little more than 10 billion dollars. Nice trade, huh?
Makes Enron look like Playskool.
If Biden were another President, with such tremendous trading profits in hand, he might look for some way to take a cut for himself. But I digress. It’s enough of an outrage for me, a lifetime believer and trader of (semi-) free markets and capitalism to watch the United States play the whale in this oil poker game, with enough chips to make sure that the small bettors are forced to run and hide – and the game go in their direction.
I’ve watched for years as the Federal Reserve has played market manipulator with interest rates and quantitative easing to move stocks and bonds and other distressed assets, particularly in financial crisis periods. But at least their excuse was that they were working to move markets in the interest of financial stability, as misguided as that sometimes might have seemed.
With Joe Biden, the greatest oil trader the world has ever seen, there’s nothing behind it but political expediency.
And that bothers me – a lot.
That’s all for this week.
