David Hay — Haymaker Daily: You've Been Watching the Wrong Energy Price
"For much of this year, being a bull on oil prices has been a surprisingly lonely stance," even though the supply shock of the last seven months "has been the most severe in history." Since late June oil "has mounted a furious rally… beginning to look a lot like a classic short squeeze" — the short position in oil futures "was larger than during Covid, and one of the most extreme of the last 15 years," and futures volumes run "30 times the trading of physical oil… the tail wagging the dog." The Bloomberg COT panel shows record-bearish positioning late last year and early this summer, with RSI at "a low rarely touched." That "implies that the upcoming direction of oil prices should continue to be higher," though "corrections are to be expected after a 50% price eruption in less than three months." Meanwhile, as crude sat near its lowest inflation-adjusted price in 20 years, "diesel was selling 50% above last year's prices. Now, they are double that level." "Because end-users consume refined products, not crude oil," this was "an energy shock of considerable proportions" — and with attacks on refining and production in the Middle East and Russia, "likely to get worse before it inevitably normalizes. The stock market may soon take note."
One-line take: a
macro-only Daily —
no security is named — that makes two measurement points about the oil shock. First,
positioning explains the lag and the lurch: speculators were more short WTI than during Covid, so a genuine supply shock went unpriced until late June and is now being repriced as a squeeze (WTI ~$102 on the chart; longs 0.332M vs shorts 0.203M contracts; RSI 77). Hay reads that as further upside, while flagging that pullbacks after a 50% move are normal. Second,
crude was the wrong gauge: NY Harbor diesel never confirmed the crude sell-off. It was 50% above the prior year even in June and is now ~$192/bbl, double last year. This is the Daily that sets up the
Sep-14 Portfolio Update ("diesel… essentially double the price of crude") and its call to raise cash.
Nothing rowed: WTI futures, diesel and "energy equities" are discussed generically; no ticker is named and none is inferred.
1. Key points
The lonely oil bull
- "Being a bull on oil prices has been a surprisingly lonely stance," despite "the supply shock over the last seven months" being "the most severe in history."
The squeeze — record shorts meet a real shortage
- "Since late June, oil has mounted a furious rally… beginning to look a lot like a classic short squeeze."
- The short position "was larger than during Covid, and one of the most extreme of the last 15 years"; futures volumes "are often 30 times the trading of physical oil… the tail wagging the dog."
- COT chart (Evergreen via Bloomberg): positioning "hit exceptionally bearish levels" late last year and early this summer; the RSI panel "also hit a low rarely touched." Latest: WTI 101.64, longs 0.332M, shorts −0.203M, long/short 1.64, RSI 77.3.
The call — higher, with corrections
- "One of the strangest divergences that has ever occurred. It also implies that the upcoming direction of oil prices should continue to be higher."
- "Of course, corrections are to be expected after a 50% price eruption in less than three months. (We sincerely hope Haymaker readers caught this wave, at least with energy equities.)"
The wrong gauge — diesel never confirmed the crude sell-off
- While crude sat near "the lowest inflation-adjusted prices of the last 20 years, excluding the pandemic," products "were behaving in a much different fashion."
- "Even at the depths of the oil sell-off back in June, diesel was selling 50% above last year's prices. Now, they are double that level" — NY Harbor ULSD at $191.97/bbl on the 5-year chart, near the 2022 highs.
Why it matters — the shock is in the products
- "Because end-users consume refined products, not crude oil, it is these prices upon which they should be much more focused… this was an energy shock of considerable proportions."
- With "attacks on refining and production facilities in both the Middle East and Russia, this is likely to get worse before it inevitably normalizes. The stock market may soon take note."
Housekeeping
- Two charts (Bloomberg WTI non-commercial COT panel; NY Harbor ULSD 5-year) described in brackets in the saved text.
- No security is named; no ticker is inferred. No portfolio tables. Signed "The Haymaker Team."
2. In plain English
Oil prices are set mostly by traders in the futures market, not by the people who physically buy and burn oil — futures trading is about 30 times bigger than physical trading. Earlier this year those traders bet heavily that oil would fall. They were more bearish than even during Covid. So even though wars and attacks had knocked out a huge amount of supply, the crude price stayed low. When prices started rising in late June, the traders who had bet on a fall had to buy back their bets, which pushed prices up even faster. That is a "short squeeze," and oil rose about 50% in under three months. Hay expects prices to keep rising, with pullbacks along the way.
His bigger point is that people watched the wrong price. Nobody fills their truck with crude oil — they buy diesel and gasoline, which come out of refineries. Diesel never followed crude down. Even in June it cost 50% more than a year earlier, and it is now double last year's price, close to its 2022 peak. So the real cost of energy to the economy was already a big shock while the headline crude price made things look calm. With refineries and oil facilities being attacked in the Middle East and Russia, he thinks it gets worse before it improves, and that the stock market hasn't priced it in yet.
Macro viewpoint — no security named (WTI futures, diesel and energy equities are discussed generically; no ticker is inferred). Summary derived from the paid Haymaker Daily (text in transcript.txt) for personal study. Not investment advice. © Haymaker / David Hay for source material.