Yep, There’s A New ‘V’ In Town And The Locals…Don’t Seem To Much Care For It

Therefore, “they” now salivate (reported to be salivating) for more where no more should be necessary: government aid, government spending, and whatever it is the Fed pretends to do.

The “V” has changed – and markets are, believe it or not, changing with it. Not in a good way, though not yet necessarily in a bad way. Surefire recovery gave way months ago to more determined doubts which have led, in recent weeks, to another sort of obvious downshifting. “Who knows?” still represents a significant change to sentiment; and that’s not in a good way.

Being just what the Fed really does, the desire, at least, for a sentiment boost grows loud. Why anyone is cheering it speaks to the upside-down world of a Greenspan put that just won’t die (the more the Fed feels it has to intervene, the worse off we must be, so the happier we are supposed to be for it?)

Used because of the robust demand for it, the healthy economic conditions where supply, demand, and dollars are more in harmony.

While contango is already one warning, how in the world can the curve still be this way after 20 maybe 25% of supply has been taken offline domestically?

In this case, some supply was shuttered as Hurricane Delta went barreling into the same general coastal area as Laura had.

The WTI curve barely moved – for either one. With Laura, oil prices dropped. Even as crude production was curtailed to a level of -24% during Delta’s week from the March peak, contango hasn’t really budged, either.

To the first part, the physical state of domestic energy, oh boy. There’s really no mystery about WTI’s clinging to contango. Using US EIA’s estimates, crude stocks right now have never been higher. Again, that’s with somewhere around 20%, one-fifth, of domestic production offline as an intermediate-term (rather than short run) baseline.

Not for nothing, we’re getting to that period in the calendar when the usual seasonal accumulation starts back up. In other words, having not used nearly as much accumulated stock from prior production during the gigantic positives of mid-2020, oil inventories remain at record highs with low production and now someone’s going to be paying for storage as autumn sets in.

Contango.

Like a lot of markets in this first set of reopening weeks, there was a ton of in-your-face unbridled optimism – that first “V” narrative about how shutting everything down was easy so it must be just as easy to turn everything right back on.

That’s just how it got priced in oil, too, but only up to June 5. Then, like the bond market, “something” changed thereafter.

What had been easy “V” up to then instead couldn’t answer for lingering questions therefore leading to growing doubts (unemployment claims the big one).

Between June and August 26, WTI’s rise became more muted. Still up, still less contango, but very different from how that first post-GFC2 rebound had gone.

This suggests, as contango and inventory confirm, doubts about the first “V” had been surpassed such that the first “V” narrative has been put out of its misery entirely. In its place, a new “V” narrative has emerged, one premised on “stimulus” which in the media is spun as some awesome thing where instead in markets it represents a serious change over an outcome far more in doubt.

The crude curve shows just this evolution – as does the stock market. Seriously.