Narrative Follows The Price, Remember That

The oil market is full of irony. Just 3 months ago, people were tripping over themselves about the possibility of World War 3, and fast-forwarding 6-weeks later, people forgot all about it.

In April, when geopolitical risks were herding people into calling for the possibility of $100/bbl oil this summer, we wrote a piece at the time titled, "Geopolitics Dangle The Prospects Of Higher Oil Prices, But Fundamentals Lag." In it, we said:

The prospects of geopolitical risks escalating have prompted some to believe that oil could spike to as high as $100/bbl. But we've been in the business long enough to remember Abaqiq, which physically took supplies off for a short while only to see both energy stocks and oil sold off materially after.

Geopolitical risk is like the carrot to the donkey for oil bulls.

It's ever-present but always far away. My advice to anyone trying to find a true edge in oil trading/investing is to ignore geopolitics. While it's never your job to completely disregard it, my advice is to heavily discount it unless something actually happens.

So as geopolitics dangles the prospects of higher oil prices for many, real oil watchers should know that the fundamentals have recently worsened. In our Monday WCTW, "Follow the Process." We pointed out that Asian topping margins have gone negative and crack spreads are following suit. Refining margins will be the leading indicator for crude this year, and with refining margins peaking and still trying to find the bottom, crude won't get the tailwind it needs.

At the time of the publication, it wasn't a popular piece as Twitter was all over the possibility of an outright war and the possibility of pushing prices higher. But as any veteran oil trader should know, geopolitical risks are temporary and distract oil markets from what's important.

But today's price move is different and let me explain why...

There are times in the oil market when the fundamentals are moving in one direction, but financial flows are moving in the exact opposite. Call it recession risk, macro hedging, CTA positioning, or whatever you want, the reality is that financial flows aren't going into oil, and instead, speculators are shorting oil for whatever narrative that's currently present. And the narrative is usually developed from the price action itself creating a reflexive feedback loop that continues until a "catalyst" jolts it the other way.