Volatility Spiking Creates Huge Opportunities

1) OIL – Seven days ago (FEB 26^th), when oil was trading around $65/barrel, I wrote that a break above $68 and a run toward $90 would not be surprising.  Since then, we’ve, of course, had a “catalyst” in the Iran attack on Feb 28^th. Of course, I had no idea that would happen. But now that oil is breaching $100/barrel, things are changing. Too many “pundits” are screaming “oil at $140 and the world is ending.” Noise. Here are the facts: 1.) Iran is running out of missiles. Today they fired one missile at Israel. 2.) Iran has no production capacity to sustain a long conflict. 3.) Iran has no navy capable of blockading the Strait of Hormuz. 4.) Iran has no mines in the Gulf/Straits of Hormuz. The problem with ships crossing the strait right now isn’t even Iran. It’s insurance. Because of the chaos, insurers stepped back and ships hesitate to cross. That will be solved.  All the major powers in the world are united around one objective: keep the Strait of Hormuz open. High oil hurts almost every advanced nation on earth. It damages growth, causes inflation, and instability. The world’s richest and most powerful countries want lower energy prices. Now, the catalyst is strategic reserves. Reserves are not meant to replace total production. They are meant to supplement supply during disruptions. The US still has massive domestic production and access to imports, which means reserves don’t have to cover the entire market. They are released gradually to stabilize prices. When reserves are used alongside ongoing production, they can last for a very long time and have a powerful effect on the market. On top of that, the G7 is discussing releasing up to 400 million barrels from strategic reserves to stabilize markets. That combination can push oil prices lower much faster than people expect and buy time for Israel and the United States to finish the work more calmly while the Strait of Hormuz is secured. And when this is over, the panic premium disappears and a peace premium replaces it. That’s when oil crashes. The same conditions that created the opportunity for oil at $68 are now pointing the other way. Give it three to six months, and I believe you will see oil sub 60.

2) RATES – On Thursday last week, I commented that it “would not be a huge surprise” to see the US 10YR Treasury tap 4.21%.  Overnight, that rate hit 4.22% and has since backed off to 4.16%.  What I’m looking for now is for that rate to drop back below 4.12% and ultimately below 4.08% to resume a bearish (downward) bias.  Right now, it remains more neutral than anything.

3) VOLATILITY – I think this week could very likely mark the peak of Iran-related fears. By next week, it would not be a surprise to see things begin to calm down. I say this not as an opinion, but as an observation of the current conditions. VIX spiking to 30 is likely to be an important opportunity. The spike is driven by the current situation around Iran and the Strait of Hormuz, with crude oil over $100 per barrel.  VIX opened at 35.12 and is now at 31.78.  Oil hit a high overnight of $119.54 and is now at $100. That is a huge reversal for oil...one of the largest reversals ever. Both are signaling overbought and “sell”. Whenever volatility (VIX > 30 / OVX (oil volatility) > 103!!) spikes like this you must ask a simple question: Is this a systemic crisis or temporary panic? During the Global Financial Crisis and COVID, VIX was effectively uncapped. Why? Because nobody knew what would happen next. The system itself looked like it might break. In those environments, VIX can go anywhere. But the current situation is completely different. If you believe, like I do, that the spike in oil and VIX is driven by temporary panic over a solvable geopolitical situation, then the conclusion becomes obvious. Global interest in keeping oil flowing is huge. This situation will be resolved. When? I don’t know. But markets don’t wait for final “resolution” before making a move. If it was systemic and “the end of the world”, do you think gold would be down -1.5% this morning?  Yeah, me either.