In the fourth quarter of 2018, I penned a quick note highlighting a set of conditions which had in the past been fairly consistent in providing asymmetric short opportunities in the energy complex. It turns out that note was prescient as we saw a number of blow-ups transpire in the energy complex, crescendoing perhaps with the infamous video from OptionsSellers.com
Earlier in the first quarter, our models took a long position in Brent. One of the factors employed was an observation pertaining to a shift in the oil futures curve, which had moved into a fully backwardated state. At the time, the WTI curve looked nothing similar, hence our reticence to take on a full position.
Fast-forward to today and amazingly the exact opposite set of conditions has manifested. I use the word amazing because of how quickly we appear to be in a situation where dynamics have suddenly shifted in favor of oil producers.
Figure: WTI Oil Futures Present vs. 1 month ago
In recent days we have seen a major inflection in WTI. With both Brent and WTI in backwardation, coupled with what is clearly an uptick in cyclical growth from the December lows, the chances for a major upward move in oil have increased significantly in our estimation. To be fully transparent, we have had a full position in crude oil futures for a few days now.
Overall, the current period feels awfully like other late-stage energy price blowoffs which finally tipped the global economy into recession. Among them are 2007/2008 and 2000, but 1990 also comes to mind (albeit that was associated with Gulf War I).
All data for this note was sourced from Bloomberg and Stockcharts.
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