mishandling taiwan
market vibes
May 14…)
in the news
The opening ceremonies for President Trump on his arrival in China were an unequivocal demonstration of respect. China obviously wants to revive a high level of trade with the American consumer markets because they need a deep market to sell their products. The group of American senior business people and cabinet members are on the ground to do deals, many of which were on the runway in advance and China seems eager to engage.
Meanwhile in the Strait of Hormuz a tiny group of military leaders are very effectively holding the entire planet hostage with some ski-boats and tube rockets (ht ymeg) and using 90 million innocent Iranian men women and children as human shields. The Kremlin has confirmed Putin will be arriving in Beijing on a date TBD next week.
in the markets
Another tentative ATH in stock indexes this morning. Oil is unch at $100/barrel. Metals are a little lower, bonds and dollars a little higher. There’s no point in doing a checkdown of technical development because there isn’t any overnight development to analyze.
in oil
The DOE reported crude stocks drew 4.3 million barrels to 452.9 mb yesterday (slightly below the 5-year average). Gasoline inventories fell a seasonal 4.1 mb (now 5% below average). Distillates were up 200k bbls (9% below 5-year average).
Refineries are running at 91.7% utilization because margins are high albeit lower yesterday on a weak demand report.
The SPR reported a record 8.6 mb withdrawal (1.23 mbpd), entirely due to the U.S. IEA emergency release commitment. Combined total exports of all petroleum fluids were 13.137 million bpd (all-time high 14.179 mbpd in late April). Crude imports were 5.9 mb of which >4.06 mb were from Canada and 600k were from Venezuela.
Bottom line, the industry is running hot but well under its red line; aggressive runs and exporting record volumes. The oil industry is behaving similarly to the precious metals miners… responsibly raking in cash. It is sustainable as long as prices remain stable and do not spike higher. This is the sweet spot.
Products supplied stayed soft at 19.89 mbpd meaning demand is noticeably weakening. FWIW demand was often higher 20 years ago.
Silver is beginning to consolidate a new long-term value area which may take a few months depending on how the world unwinds the wars and Equity/GDP valuations normalize. GDP can go up a lot and stocks can moderate their trends. I could see that if oil goes lower and rates get out of the clutches of the FOMC.
I have a weekly chat this morning because we seem to be auctioning prvious prices within a larger range. This my sense of what silver might do between now and Jackson Hole or the beginning of Q 4. Weekly stochs are neutral.
This is a 1 year compression study illustrating the most actively traded price in silver from May 2025 50 May 2026 is $76.25 ish with a wider range of heavily traded prices between $72 and $80. There is a void from $96 to $102 and a huge void at $55. These are the area where above and below silver is likely to under and over valued.
in the stock market
A large part of inflation is excessive leverage. M2 is flying higher, margin debt is flying higher. The Rule of 20 was an eye opening 32 yesterday. meanwhile auto loan delinquencies are at records because of leverage. Anyone can buy a car with a Big Mac and a heartbeat.
The 6% headline increase in PPI was substantially driven by energy. Gasoline + 15% alone was more than 40% of it. CPI same trickle up idea. AI can lower the hedonic level of output but it can’t open the Strait of Hormuz. The breadth problem is AI vs Main Street and lower oil will lower rates which will help both.
In other markets, according to Chinese state media (Xinhua, CCTV) and multiple international reports, Xi emphasized that the Taiwan issue is the most important in U.S.-China relations. He stated that mishandling it could lead the two countries to “collide or even conflict,” pushing bilateral ties into a “very dangerous” or “extremely dangerous” situation.
Soybeans fell 34 cents.
my vibe
Last Friday the CFTC reported combined net spec length in WTI, Brent, RBOB, heating oil, and gasoil at 644,000 lots or 644 mm bbls…. 1.7 X the US SPR, > 50% of China’s massive hoard…. and 4 times larger than all reserves in all of Europe. This is the stack of chips currently on the table betting on an oil panic. Hold that thought.
On February 26 spot month WTI had a range of $59.61 to $62.72. Let’s imagine for a minute there was no war, no bombings, no blockade of the Strait of Hormuz. Instead I decided while sitting here in my library here in Morristown New Jersey to buy 80,500 lots of NYMEX WTI and/or its swap equivalents of Brent and refined futures products… every day for the next 8 sessions February 27 to March 9. On March 9, I stopped buying and did not buy another contract for the next 75 days.
Now look at the chart below. Readers of market vibes are a sophisticated community. I ask you. Would the chart below look any different?
I am not saying there was not a blockade or $100 billion spent on killing fewer than a few days of average KIAs in Ukraine. Or that Iran was not bombed into chaos and massive social suffering. I am not saying that did not happen. What I am saying is this.
Every missing barrel of jet fuel can be found rolling forward every month on the futures board. Every barrel of IEA SPR emergency releases goes straight from the salt caverns to the futures markets. There may have been a brief and very modest deficit of 500 to 600 mm bbls or 8 mm bpd that has been offset by demand destruction.
From a high level, the spec position in futures is only a part of the aggregate risk-on long position in structures, swaps and curve risk, cracks and options, equities, commodity and oil ETFs and options on same. The last time the same COT net spec long position was net short was in mid 2024. After a lifetime of trading commodities and oil, I can say with confidence this metric will be net short again.
In the movie Moneyball Peter Brand says it’s all about getting the game down to one number… OBP. In markets today it’s oil.
nerdy but good surprisingly good
So far the coverage in China is like watching a moon landing.
Peace out
JJ
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two things, first, great rendition by those kids, thanks for highlighting. second, as I consider Xi and Taiwan, at this point I would contend it is his problem completely. He simply cannot make the sale to the people there that they would be better off as part of China rather than independent. I guess the fact that per capital income in Taiwan is $42k in Taiwan and $14k in China is a very steep hill to climb. But also, he has never had to make a sale, he rules with an iron fist and everyone in China does what he says. so he just doesn't know what to do.
JJ, I really enjoy your many scenarios on oil as you are so deep in the knowing. What's still making me wonder: where are the much higher real prices east of the Strait in your equation?