Q: "Was curious if you have a theory on why seems to be strong while the DXY has held in there pretty well. Has the set up changed where you might get more bullish on oil?"
A: The setup hasn’t changed from our perspective. We definitely think a lot of this rally in oil is a function of what has quickly become a semi-consensus narrative on the buy-side – i.e. the Druckenmiller “dollar decoupling” view. He’s been right thus far in the YTD, as the inverse correlation has essentially dissipated:
Oil is still broken quantitatively, but our intermediate-term TREND line of resistance of $57.54 is definitely within striking distance:
To the extent this squeeze overcomes that level and decides to test the next probable mean reversion zone, there’s a lot of risk to manage between last price ($55.95) and our long-term TAIL line of resistance of $72.12 – 29% that is!
While crude oil would still be broken from a long-term perspective on any price below $72, it’s hard for any investor to be short for a move like that, which is probably why short positions in the futures and options markets dropped -10.6% WoW in the most recent reporting period. Anyone who shorted crude around its YTD lows is likely being forced to cover on any semblance of a developing bullish narrative.
To that tune, our recent discussions with investors suggest there is a sizeable contingent of investors who believe the eventual [negative] supply response will prove to be sustainably bullish for crude prices, but we do not buy that narrative. We actually think domestic production growth will actually start to re-accelerate then, given how sharply it decelerated in recent months. E&Ps are in the business of producing crude oil; they can’t sit on the sidelines in perpetuity.
When does the pain trade on crude end? We continue to view the 4/29 FOMC statement as a catalyst for immediate-term dollar debasement and reflation plays like energy and emerging market assets are definitely front-running what we think will be a dovish statement, on the margin, in light of the recent trend of disappointing economic data.
- Keith discussed this dynamic in last Friday’s Early Look: http://app.hedgeye.com/m/rBF/aQSyH1/i-love-debate.
- Additionally, I was on Fox Business yesterday morning juxtaposing this multi-duration (i.e. TRADE vs. TREND) view: http://video.foxbusiness.com/v/4172381727001/retail-sales-rise-in-march---/?playlist_id=3166411554001#sp=show-clips.
From there, we think the DXY trades higher into the summer months as our policy divergence theme carries on. Neither Draghi nor Kuroda will allow the USD to sustain a series of lower-highs vs. the EUR and JPY, respectively.
Long live the currency war,