As 2022 wraps up, one of the few assets that for a while was generating a positive return is now stuck with stocks and bonds in negative territory. Crude oil futures
which reached over $130 in March, are now around $74. For the year, the front-month contract is down 2%, though that’s better than the 10% retreat for the S&P U.S. government bond index and the 16% decline in the S&P 500
Ever the contrarian, Kevin Muir of The Macro Tourist wonders if there’s an opportunity here. The former institutional equity trader said the fundamentals really haven’t changed very much. “Many of the bullish fundamental arguments are equally valid today as they were back in March, but the main difference is that market participants had previously pushed prices to levels where much of that good news was built into the price, whereas now, little is incorporated. Back then, we needed everything to go right (or wrong depending on how you look at it) for oil prices to rise. Today, we need much less,” says Muir.
Macro Tourist/Philadelphia Fed
Look at some of the reasons.
The Strategic Petroleum Reserve, a seller through 2022, is now poised to become a buyer, to refill reserves.
The U.S. dollar
seems to have turned over. “It is doubtful that the USD will prove as much of a headwind to crude oil performance in 2023 as it was in 2022,” says Muir.
Interest rates also are not likely to climb as aggressively as in 2022.
The Fed’s survey of professional forecasters finds the highest probability that there will be negative growth over the next four quarters in the history of the index. “I like trades where there is a fair amount of pessimism baked-in. Often, they have a way of surprising to the upside,” he says.
But the main element of his oil thesis revolves around China. He says that oil demand there plummeted because of the country’s strict zero-COVID policies. He says the sooner China gets through a hard winter COVID-wise, the quicker things will get back to normal. “Although others view the China COVID situation as crude oil negative, I think they are looking too closely at the short-term picture and failing to realize the long-term positives. Come spring, the Chinese economy might be ready to take off and experience growth the likes we haven’t seen since pre-COVID,” says Muir.
He does specify that he does not want to buy the front-month contract. “I have no desire to be exposed to the vagaries of OPEC meetings, China COVID developments or the further unwind of overloaded speculators. No, I want to bet on the long-term positives reasserting themselves in the next year,” says Muir.
Crude futures contracts 36 months out look like a “bull market that has paused, and is simply correcting.” He said he’s started a long position in the Dec. 2024 West Texas Intermediate contract
U.S. consumer prices inched up 0.1% in November, and by 0.2% at the core — both coming in below economist forecasts. Prices fell for used cars and trucks, medical care and airfares. The year-over-year CPI rate decelerated to 7.1%, the slowest pace since December.
U.S. stock futures
surged after the CPI data come in cooler than forecast, with the Dow contract
recently up 750 points. The yield on the 2-year Treasury
fell 20 basis points, and bitcoin
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