pebblewriter

Tag: Khashoggi

  • The True Price of Oil

    As enjoyable as it is filling up the Family Truckster for only $2.36/gallon, what if it meant the the death of thousands of Kurds?  Here’s what we know.

    For months, OPEC ignored Trump’s demands to bring down the price of oil.  Trump was correctly concerned that spiking oil prices would push inflation to new highs (they did) and thus cause interest rates to reach unsustainable levels (they did.)

    Trump’s tweets began in April…

     

    …but, oil prices continued to climb until October 3 — which just happened to be the very day headlines proclaimed that Jamal Khashoggi was murdered in the Saudi embassy in Turkey, presumably at the direction of Saudi Crown Prince Mohammad bin Salman.

    Since October 3, oil prices have dropped over 40%.  Coincidence?

    We commented back in October about the connection [see: Coincidences and Consequences] and speculated that it would finally give Trump the leverage he needed to force oil and gas prices lower.

    Condemnation of Saudi Crown Prince Mohammad bin Salman was nearly universal.  The lone holdout/apologist?  Donald Trump.  Highlights from his statement:

    …the Kingdom agreed to spend and invest $450 billion in the United States…it could very well be that the Crown Prince had knowledge of this tragic event – maybe he did and maybe he didn’t!  King Salman and Crown Prince Mohammad bin Salman vigorously deny any knowledge of the planning or execution of the murder..we may never know all of the facts surrounding the murder of Mr. Jamal Khashoggi. The United States intends to remain a steadfast partner of Saudi Arabia…

    It’s not much of a leap to conclude that the price for Trump’s equivocation was a big decline in the price of oil.  CPI, which reached 2.95% in July, came in at only 2.18% in November.  In December, it will likely return to below 2% as the YoY delta in gasoline prices turns negative.

    The 10-year treasury, which topped out at 3.25% on Oct 5, is back down to 2.75%.  The Fed is under renewed pressure to scrap plans for additional rate hikes.  Mission accomplished.  But, there was one thread which threatened to unravel the whole deal.

    According to Turkish President Recep Erdoğan, recordings of the entire incident were shared with the US, the UK, France, Germany and Saudi Arabia.  He specifically mentioned providing a copy to Secretary Pompeo and to the CIA, which shortly afterwards concluded that MBS was behind the killing.

    Caught between a rock and a hard place, how could Trump convince Erdoğan to refrain from publicly releasing the recordings?  Apparently after deciding that handing over Gulen would be a little too repugnant, even for Trump, he handed them an even bigger prize.

    Without US troops at their side, most observers believe the Kurds in Northern Syria will be easy prey for Erdoğan. He has graciously agreed to postpone the massacre.

     

     

  • Coincidences and Consequences

    It’s interesting how Khashoggi’s murder top-ticked oil and gas prices…

    …and, so soon after Trump’s latest demand that OPEC lower oil prices.

    I’m certainly not insinuating that Trump had anything to do with Khashoggi’s murder.

    But, OPEC ignored Trump’s Sep 20 demand.  Two weeks later, oil prices had spiked 10% higher.  Since Oct 3, the day of the murder, WTI has fallen 14.5% and RBOB has fallen 16.7%.

    As Churchill famously said, “never let a good crisis go to waste.”

     *  *  *

    Sometimes it’s quite difficult to anticipate a major market move.  You’ve got hundreds of companies, all with their own earnings, outlooks, and market-moving headlines.  Then, there’s the economic news of the day, both domestic and foreign.  And, of course, there are geopolitical developments such as who’s dismembering or cozying up to whom?

    And, sometimes it’s not so difficult at all. It can be as simple as the VIX chart we’ve discussed all week.  From Time to Panic on Tuesday:

    Note that VIX need only break the purple TL [for SPX to bounce.] If VIX doesn’t break down, this should be the end of the line for this bounce.

    It didn’t bounce.  SPX plunged.  Next?

    Or it can be slightly more complex, but still fairly straightforward — such as is the case with oil and gas.

    As we all know, central bank support (low interest rates, among other accommodations) has been critical to stock prices since 2009.  Low interest rates, of course, rely on low inflation.  And, low inflation relies to a great extent on low oil and gas prices (more accurately, low MoM and YoY increases in those prices.

    From last April in Oil & Gas, Inflation and Interest Rates: A Delicate Balance or Goal Seeking?

    The complicating factor, of course, is that oil and gas prices took over the job of stimulating algos (chief among the 90% of all trading activity which is conducted by machines) to drive stocks higher.

    Most recently, oil, gas and SPX all bottomed on Feb 11, 2016 and oil and gas prices played an integral role in stimulating the subsequent rally.  The most important nudge was in December 2017, when oil and gas prices broke out of an already rising channel.

    To chartists, and to algos, this is a very bullish maneuver.  It also has the effect of driving inflation and interest rates higher. CPI rose from 2.11% in December 2017 to 2.95 in July 2018.  The 10Y rose from 2.31% in December to 3.24% just a few weeks ago.

    The Fed told us they were okay with this, that they were going to let the economy and inflation “run hot.”  I was among the many doubters, citing the damage that higher rates would inflict on our already alarming budget deficit, but darned if they didn’t do it anyway. I suppose that, at the end of the day, a temporary increase in the rate at which the debt and interest expense are expanding was less important than having a higher perch from which to crash rates during the next GFC.

    Stocks ignored the implications for a while, happy to play follow the leader with oil and gas prices.  The day that RBOB popped out of the rising purple channel was the day that SPX popped above its 2.24 Fibonacci extension at 2703 – a level which might otherwise have provided serious overhead resistance.  It can be seen as the horizontal, purple trend line on the chart below. In early February, though, RBOB’s breakout faltered.  No surprise, but SPX followed along, suffering its biggest and sharpest decline in years.  Like magic, RB quickly popped back above the purple channel top – rescuing SPX and helping it back above 2703.

    Note that SPX went on to new all-time highs in September, only after RB backtested the purple channel and bounced higher.

    And this lovely little correction we’re enjoying?  SPX topped the day that RB failed to break out of the falling yellow channel (also the day of Khashoggi’s murder.)  SPX fell through its 200-day moving average on the day that RB plunged back below the purple channel top.  And, SPX plunged below 2703 on the day that RB fell out of the falling yellow channel.

    With the elections less than two weeks away, I’m not expecting a sharp rebound in oil and gas prices any time soon.  So, the algos will have to rely on other tools — such as VIX, which has now shed 12.5% since tagged our 26 target yesterday.

    So far, VIX’s decline has produced a pretty nifty bounce.  Is it enough to offset weakness in oil and gas and a hawkish Fed which has been browbeaten by a “low-interest rate president?”

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