Is The US Winning The Oil Game?

1.) TRENDS – Prices trend. They don’t move randomly over time, no matter how many textbooks try to convince you otherwise. Trends exist because people exist, and their behavior isn’t random. Volatility, on the other hand, doesn’t trend; it mean reverts. In other words, from higher volatility tends to come lower volatility. And from extreme volatility compression comes volatility expansion. Lately, volatility has been mean reverting much faster than it used to. We just watched the CBOE Volatility Index (VIX) go from above 30 to below 20 in eight trading days. That’s not normal if you’re thinking about it in terms of decades past. VIX simply measures expectations in volatility for the S&P 500. Higher VIX means bigger daily swings; lower VIX means things are more calm. It spikes when people are buying protection because they are afraid. But that rush for protection also sets up an unwind, taking VIX from high to low. Mean reversion. And that is what is happening faster than it used to. Over the past decade, these moves from extreme fear back to relative calm are getting resolved in a matter of weeks, not months or quarters like we saw in the prior decades. And it is that RoC (rate of change) that is the story.

2.) MARKETS – We’re getting close to the end of the week, and CTAs are still in “buy” mode. Just to reiterate how powerful CTA and Vol Control Funds are, I recently wrote about how CTAs were “offsides” and were likely big net buyers in a flat, up, or down tape (market). Sure enough, the S&P 500 gained 9.8% in just 10 trading days. That puts it in the 99.7th percentile of all 10-day returns in history. Since 1950, we’ve only seen about 20 instances where stocks rallied this much in such a short period of time. These are momentum thrusts. We know from experience that these thrusts consistently show up early in new advances, not near the end of them, and forward historical returns back that up. Over the next 12 months, the S&P 500 has averaged close to 19% after these kinds of moves, with a strong track record across most timeframes. However, that doesn’t mean that markets can’t or won’t digest their recent gains. That is an increasing likelihood. Does that mean that markets go straight down from here? No. It just means a little rest and relaxation would not be surprising.

3.) OIL – Amongst all the noise of oil scarcity and problems for the US, is what actually happening the US winning? The Iran war, interestingly, brings the US close to a net crude exporter for the first time since World War II. Net imports of crude oil, or the difference between imports and exports, narrowed to 66,000 barrels per day last week, the lowest on record in weekly data that goes back to 2001, while exports climbed to 5.2 million bpd, the highest in seven months. Top buyers included the Netherlands, Japan, France, Germany, and South Korea. A vessel carrying 500,000 barrels of crude signaled it was en route to Turkey, which would mark the first U.S. export to the country in at least a year. The U.S. can export as much as 6 million bpd simply based on limited pipeline capacity and vessel availability. On an annual basis, the U.S. was last a net exporter of crude in 1943.