JUSTINE UNDERHILL: Welcome to Real Vision's Trade Ideas. I'm Justine Underhill.
And earlier today, I sat down with Tony Greer of TG Macro to get his take on the oil market.
It's oil month here at Real Vision. We recently aired an expert view with Diego Parrilla.
And today, we have Tony with a new trade idea playing on oil volatility.
With that, please enjoy our interview with Tony.
So, today we're going to be talking about oil.
That's actually the theme of the month at Real Vision.
But before we get into that, could you give us a little bit
of your overview of the macro environment right now?
We've had a big pop in volatility.
And I know that's something you've been focused on. So, what do you see going on here?
TONY GREER: Yeah, what we're seeing I think is we've entered in a higher volatility regime
in the equity markets, and that's starting to play out finally this year after four months
of a retracement rally in the stock market, right?
We started with a Mnuchin rescue at Christmas and we basically run lockstep into a rally
with crude oil, the S&P, Bitcoin, a lot of the risk on parameters rallying now.
We've reached a point where we're seeing some pressure on China now.
The world, the media wants to blame it all on Trump tweets, right?
They want to say that the President erased this much of the stock markets value
because of a Trump tweet.
And what they're alluding to is the President this week saying that he wanted to raise
tariffs on $200 billion of the Chinese goods being traded from 10% to 25%.
Now, a 15% increase on $200 billion of goods is $30 billion.
And to me, that's impossible that it could be wagging trillion-dollar markets around it.
So, I'm trying to weed out the mainstream media and focus on what's really going on.
What's really going on is the yuan is weakening
because they're seeing a series of defaults in China.
The PBOC has been very liberal lending money out.
And what we're seeing is an explosion in default rates.
In 2018, I believe there are 120 billion yuan in China defaults.
This year, we've already seen about 44 billion yuan in defaults
in the first third of the year.
So, we're on a record pace once again after 2018 being a record year.
So, these defaults are starting to pan out into the currency and the currency is weakening
and flows are moving once again out of China.
And it's wobbling the whole risk complex, right?
The S&P has backed off of its highs.
That's gotten a little bit of help from an earnings miss from Google, right?
The Fang complex has been soaring along and that probably still
it can be considered soaring along.
Google just relocated a little bit lower after earnings.
And the semiconductor space which was leaving tech higher
reached a pinnacle and has backed off a little bit.
I think what we're seeing is natural market dynamics starting to take over
and we saw a little bit too much complacency in the stock market, right?
We saw Larry Fink make a comment about a melt up.
There have been all kinds of hyperbole about how the stock market
is free to rally from here.
The cover of barons was is the bull unstoppable?
And when you see things like that,
you know that sentiment is really tilted to the positive side.
So, in my opinion, that's why the risk parameter,
the risk complex is getting hit a little bit here from Chinese stock market.
US stocks are backing off, tech is backing off and the oil market is backing off.
JUSTINE UNDERHILL: So, what do you see this doing to the energy sector overall?
We can start out with oil prices, where do you see that going?
TONY GREER: Yeah. Well, this is a really interesting time of the year for me
because I'm a perpetual oil bull, right?
And I did a trade idea back in November of 2018.
And I was bullish oil from back then and we were plummeting toward
the cost of production around below $50 at the time.
So, for me, that's an easiest posture to maintain down there.
What developed in the oil market is that we've reached the objective on my chart, right?
And as Raoul says, everything starts with a chart. And I think very similarly, right?
So, I was able to get onto the oil bull run at the beginning of this year.
And there were a lot of fits and starts with that, if you remember.
I don't know if you recall, right, early in the year,
it was really bubbling around in the mid-50s and couldn't make any headway.
But what it did was form an inverted head and shoulders pattern.
Now, that's something for a technician like me to lean on.
We can draw a nice long neckline there at 55 and see where it can go from there. Right?
What wound up happening after all was said and done, oil rallied through that neckline of
the inverted head and shoulders and rallied up to a peak of $66.
Now, if you measure the move on head and shoulders pattern, you expect the rally to extend
the same distance from the neckline that it broke down from the neckline.
So, what we did was we got a 20% down move from the neckline at 55.
And then we got a 20% rally from the neckline of 55.
To me, that's where I go flat crude oil after playing it from the long side
for the first four months of this year. And that's what I've done.
But what I think is really interesting right now is that while I'm like I call it
aggressively flat, I don't have a directional view from here,
but I think that oil could really move from here. I'm not sure which way, okay?
What I think it lends itself to is being long oil options, okay,
being long volatility in the oil market, just like I've been suggesting that we play
equity volatility from the long side in the bottom of this low vol regime range, right?
Now, since oil and the S&P have been moving lockstep since the beginning of the year,
if the stock market is going to take a breath here after four months then I should be
telling myself that oil can take a breath here after the same four-month rally, right?
So, being long equity vol is forcing me into saying you know what,
I think I want to be long oil vol too, even though I haven't picked a direction yet.
So, I'm going to buy some puts, buy some calls, buy a strangle,
something like that where I can get exposure to long volatility.
Now, the reason I think we're set up for a big move is I've got a list as long as my arm
of bullish factors for crude oil and another list as long as my arm
of bearish factors for crude oil.
The way it plays out for me is we just ran gasoline to an interim high.
There was a little bit of a squeeze going into the end of April.
Refiners are into their RVP change over season, okay? What that is Reid vapor pressure.
And what that does is the refiners change over to a lower RVP, Reid in gasoline
for the summer months, which means that it will not evaporate as fast.
What's worth knowing is that a lot of people will get short gas ahead of that,
short the winter month gas into the end of the winter,
which are these months right now, right?
April and May are technically the end of the winter for energy traders.
So, there's been a little bit of squeezing gasoline that literally
took crude oil to my objective at about $66.
So, when I look at it and I get flat the energy space, I see the squeeze that gasoline put
on the markets and I say, okay, that was my out.
That was my opportunity. We are now on the other side of May.
All the refiners have switched over and oil should go back to trading on its own now.
But what's happening is that it's being affected
by tremendous geopolitical forces right all over the place.
First, the US is sanctioning Iran to zero.
And you can tell that that is choking them out economically because of their reaction.
Iran turned to the EU and said you've got 60 days to honor Iraqi oil contracts
and banking contracts, or we're going to go right ahead and start enriching uranium.
So, they've gone nuclear option officially, right? And now, it's just the threat.
And it's something that talking about 60 days out,
so they're giving Europe a chance to comply.
But what they're trying to do is get their economy off of the deathbed at the moment.
I really believe that.
So, they're trying to open up their pipelines.
And that to me, lends you to believe that we may have some
saber-rattling upside spike in oil right?
If the EU doesn't want to comply and the US continues to sanction,
and Iran wants to make a little bit more noise,
you can see how they could do something like cut off the Strait of Hormuz,
which is a typical price spiker, right?
If oil is not going to flow freely in the Middle East,
then the price is going to go up as people scramble to get oil from different locations.
So, that's a bullish factor in my mind.
I remain bullish because Khalid Al-Falih of Saudi Arabia has maintained unbelievable control
of the bullish narrative, right?
They are adhering to their elevated production cuts in OPEC,
Russia is adhering to production cuts.
And even though Saudi Arabia said that they would supply Asia with some of their extra oil,
the prices remain firm because spreads have remained firm.
That to me is the is the most serious argument for an upside from here even in WTI or Brent.
So, if you look at the Brent six months' time spread,
that has gone from basically 50 cents or $1 contango to $3 backwardated.
That happened because of the tightness in the oil market, right? Less Iranian supply.
China continues to import,
but they're going around the US to different areas to try to get oil.
They're going to Europe. And that's tightening up Europe's market.
So, now, we see this Brent curve tightening.
And what it does is it draws more speculators on the long side into the energy market,
because now, they've got positive carry.
They could be long oil. And when they want to roll it into the next month,
they buy it at a cheaper price and start from there.
Oil rallies, they buy the next month at a cheaper price.
And they keep going and stay in that position as long as they can.
So, now, we're seeing the speculative length start to build in the oil market.
And it's almost getting to the size where it was
which was basically as big as I've ever seen it at about 600,000 long contracts
when Mohammed bin Salman decided to do away with Jamal Khashoggi in October of last year
that sent the whole entire risk complex and do a tumble.
Speculators are starting to get longer again
because the structure of the oil market is favorable.
And as you see, we're looking around the world.
And while there has been a slow economic pullback off of the full force economy,
things haven't come apart. So, oil is holding its bid.
As this geopolitical world turns, and the complex stays tight,
we've obviously got that potential for an upside spike from here right into the 66-75 range,
where we spent all of last year at the highs.
And if the speculator gets long, excessively long again, 600,000-700,000 contracts
like they did in October, and the US runs into a little bit of the recessionary slowdown
that the yield curve is predicting, then maybe we have a pullback in oil demand
and oil breaks to the downside and all the speculators get flushed again.
So, either way I look at it, Justine, I feel like the next oil move
is not going to be a two or four or $5 move. It's going to be a $10 move from here.
JUSTINE UNDERHILL: Gotcha. But do you see it being limited to the $10 area,
especially because you do have a lot of US producers that could come online,
the frackers, and start producing more if it does go 75 or above?
TONY GREER: Totally, there's always that additional production
that's going to come online, right?
And oil price goes up another $10,
we're going to see rig count going up by fives and 10s every week,
we're going to see US shale production, probably take US production
north of 12 million barrels a day or 11 million barrels a day, whatever record we're at now.
And so, what that leads is for people to be interested in playing it.
What goes on when US production gets to setting records,
everybody turns off everything else and says oh my God, they're fracking all this oil now
and there's all this oil coming online, but they ignore the demand side.
And just in April, China set another oil import record, right?
They were up another 11% to like 44 metric tons of oil
and the number just continues to go up into the right.
So, as long as China's still probably the biggest or second biggest global customer of oil,
and they're maintaining this pace, it's hard to get bearish the complex, right?
We've seen their PMI slow down. We've seen their GDP go from eight to 6%.
And they're still buying consecutively more oil.
So, there's growth in China going on somewhere.
And I try not to take my eye off of that as a key barometer for what's going on.
And so, just the way I see it now, I'm thrilled to have let out all of my length.
And I still see opportunity, though, in volatility in the space.
So, like I said, I'm still looking at when the market rallies, I'm trying to bid for calls.
And when the market sells off, I'm trying to bid for puts
and I'm trying to play the volatility game and just so that I've got a balance vol book
because in case this thing explodes in either direction, I should make out either way.
JUSTINE UNDERHILL: All right. Can you summarize your oil outlook in 30 seconds?
TONY GREER: I think it starts with the chart where we've reached my objective technically,
which was the 22% rally from breaking the neckline of the head and shoulders at $55.
So, we got to my objective at $66.
That makes me decide, when we fail at that resistance level from last year's lows,
that's when I let out my length.
Now that I'm sitting here and calculating which way the probability of oil going
in either direction, I've got a long list of pros and cons.
And that lends me to want to be long oil volatility.
JUSTINE UNDERHILL: Great. Tony, thank you so much.
TONY GREER: You're very welcome, Justine.
JUSTINE UNDERHILL: So, that was Tony's current take on oil volatility.
Make sure to tune in later this month to watch our upcoming oil theme videos
on specific stocks and energy companies.
For Real Vision, I'm Justine Underhill.