Commodity markets are spot assets, meaning they cannot overlook the various short-term shocks and air pockets, in the same way, discounting assets as equities and bonds can. As such, the asset class is outlandishly volatile, and virtually everyone’s speculative position remains hostage to the non-stop stream of macroeconomic, political, and financial market crosswinds.

 After 30 years of yelling at my screen, I concluded oil is just one of these weirdly fascinating assets that leave you massively exposed to short-term machinations even though you have the general long-term direction of travel correct.

Currently, two main questions for the oil market are:

  1. Will Russian production decline
  2. How bullish for oil is China reopening?

Speaking from a long oil position, the market is too far over their skis at this stage of the reopening. And very susceptible to both the US recession and central bank rate hike risk.

In China, high-frequency data focuses on city/metropolitan zones and may skew more positively even as the outbreak spreads more intensely in rural areas. Hence with most folks relying on City landscapes mobility, it only captures some of what is going on country-wide.


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Indeed, this is particularly important if the post-Chinese Lunar New Year (CNY) Covid wave spikes after people return from visiting their families in rural areas. It could offset the pre-CNY -driven mobility bounce in oil markets.

While most oil traders, including yours truly, base-cased a reopening path similar to other Asian economies, such as Japan, with a long lag between domestic and international reopening. However, China opened up domestic and international travel in one go, forcing oil traders to move into catch-up mode. That said, the need for more available flights, not to mention the absorbent cost of travel, is holding tourism back and hurting end demand.

But getting back to my initial view, the oil market needs to eventually start reflecting lingering economic scars that could greatly hinder consumption. So, while we fully agree China reopening portends enormous upside potential, we are bulls; lingering domestic post-pandemic financial scars and the omnipresent US recession risk will likely cause a few nailbiters through Q1, keeping us cautiously so.

On the Russian side of the equation, will Russian production decline? The short answer is yes, which should be bullish for oil but not immediately.

Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT