Good Tuesday evening MacroEdge Readers & Community,
Today we saw notable signs of the war resuming with the US escalating through more powerful airstrikes against Iranian assets that have since paused as of about 2 hours ago. Chris Wright came out with a statement to put an intermediate top in the substantial rise in oil and fuel prices, stating that 17 million barrels had flown through the Strait of Hormuz on Monday… (which we know will be changed or refuted by the end of the week by someone else within the Administration). The situation for refined products continues to get tighter with PADD5 diesel going for almost $210/bbl today and NY Harbor diesel over $200/bbl… These prices are high and they’re already bleeding into everything more greatly. While they’re impacting performance of things like aviation and logistics immediately, we’re also seeing them reflected in higher commods and ag prices - which is something we will continue to discuss in greater detail as we now approach the October (clock hitting zero) month as I refer to it as.
We also saw a second ‘TACO’ announcement from Barak at our favorite tabloid Axios stating that the strikes today bought at least a month in Hormuz flows. While this is absolutely false, they stemmed the immediate overnight gains, and we’ll probably see sideways to down action on the week if we don’t see an escalation in tanker attacks. It’s par for the course given where we’re at, but have no doubt that they’re starting to panic about the potential for $7/gal average national diesel prices and $6/gal gasoline prices just 2 months from the midterms. Iran is back above the $85/bbl Brent threshold, and the most likely roadmap from here is a retest of the ‘handle’ triangle on the technical pattern we’ve just broken out from, and then much larger upside from there.
On the equity side of things, I continue to expect them to try and continue the sideways action for as long as feasibly possible to get OpenAI and Anthropic IPOs through the pipeline - and the charts and interest in the broader AI thematic are starting to dramatically cool off their fervors from earlier in the year. I had several interesting conversations today on what’s next for AI and data centers, and I agree with some of the conclusions that we’re given from people far smarter than I on the sector… Right now, it continues to look like the party is just coming to a slow stop rather than ending abruptly - with markets undergoing a distributive phase similar to that seen in 2000… What’s even more interesting is that I think the FOMC meeting this month doesn’t matter a whole lot in terms of whether or not yields do the tightening or Warsh raises by 25bp. The reality is bond vigilantes have started to price in both sovereign risk again, and a greater risk of the Strait of Hormuz staying closed for a very extended period of time - and that’s landed us back at a 10Y over 4.8%, and the need to wheel out the fake headlines again for temporary reprieve… such is this ‘game’.
DTCR ETF, signs of distributive action:
This evening we’re going to briefly dive into the four sections below - looking at the recent signs of escalation, and how they contribute to the staircase to the TACO. Additionally, we’ll look at the recent price action in oil, and provide an update on the technical outlook and scenarios there. The market for diesel and refined products continues to tighten in both the US and globally, which will impact inflation greatly, especially for producers, but it will also have major midterm impacts - and Iran is betting on being able to weather economic calamity over the next two months from a near freeze-out of exports. Finally, we’ll take a brief look at the Nasdaq and the sideways action of the last two months - and whether or not an inflationary environment that we find ourselves in will actually be good for the concentrated AI-heavy index…
Let’s dive in.
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Signs of Escalation = Staircase to the TACO?
Trump escalated attacks notably today - hitting targets across Iran, as well as energy infrastructure, and power infrastructure. Generally, when we start climbing the escalation ladder more rapidly - they are trying to buy time through a looming ‘TACO’ announcement - ie: something like a temporary ceasefire, and I expect that this time is no different.
The difference this time is that oil inventories are in a much worse spot both in the US and internationally, and product prices are at/near all-time highs across the board - from jet fuel, to diesel, etc. Once things like Urea and NatGas start moving, that will only add to the inflationary process, and I think the Trump admin has one can kick left before we see things get significantly worse come the end of November if there is no resolution regarding Hormuz and Bab. We shall see, but as discussed in the next section, the continued theme and strategy is one of patience.
Oil Takes a Seat at the Blackjack Table - Patience, Patience, Patience
The question of whether or not front-month WTI will hit a ‘blackjack’ now over the next 12-18 months now is becoming more of a ‘when’ rather than a ‘it won’t happen’. With inventories as tight as they are, the TACOs are going to continue to become less effective, and from a fundamental and a technical standpoint - the current midterm setup warrants continued patience, but also confidence in price direction given where we’re at. With WTI back above $91/bbl in a very confident move, even a retest of the breakout won’t meaningfully impact the price trajectory to a higher destination then where we are at now.
The technical setup should push WTI back to cycle high levels - and there are a few ways we can get there. The most likely outcome is that the last TACO is blown and we see WTI retreat to the mid-high 80s in a retest of the breakout point, though a continuation sees mid-90s before a brief pullback and then higher. Note that my illustration is not to be used as a timing instrument, as I continue to think things tighten significantly from October, onward.
It is quite possible now that we see oil begin a move to the 2008 cycle highs in the high 140s to low 150s, even, so don’t rule out that scenario as I put those price levels at about a 50/50 chance right now, and will continue to raise that as Hormuz remains closed through the end of the year.
