Title: Oil & Retail — When Asymmetry Meets Absurdity Show: Paulo Macro (Substack) — paid Guest: Paulo Macro ("Cloudbear") Date: 2026-APR-21 URL: https://paulomacro.substack.com/p/oil-and-retail Length: written post (no timestamps) Note: Back-filled post (processed 2026-JUL-07). First of three same-day Apr-21 notes (see also the follow-up and "Insanity Repeats as Max Stupid Returns"). Paulo games out "Schroedinger's Strait": even if he is wrong about the North Star and a "Big Beautiful Deal" is signed, the only deal Iran accepts hands it control of Hormuz — which Saudi/UAE will not accept, so the GCC keeps ~3mmbpd shut in indefinitely (Saudi: 4mmbpd at $150 = $600mn/day beats 7mmbpd at $80 = $560mn/day) and oil moons anyway; if Iran drags it out, inventories draw and oil rips — "win/win or lose/lose depending on your side." Invoking "Shrub's Razor" (the funniest, most absurd outcome is the likeliest), the tell of weak hands is retail: SCO (ProShares UltraShort Bloomberg Crude Oil, -2x WTI) assets exploded from ~$100mn to over $1bn as retail piled in, yet vol-drag + ~$5/mo negative roll left it going nowhere despite crude's correction — "the dumbest speculative money in the market." Meanwhile USO (long front-month WTI) at $1.8bn is down ~$1bn in assets from its high and is so heavily retail-shorted that borrow costs 7.9% (only 10k shares to borrow) vs SCO at 2.7% (10mn shares) — a lopsided contrarian-bullish oil tell (Kovner: "a consensus the market is not confirming"). Body reproduced for personal study; Substack chrome removed, wording otherwise verbatim.
I know enough ink has been spilled on oil everywhere, but this one felt worth highlighting.
It's… special.
Let's assume for a moment I am wrong about the North Star. The North Star is the Nash equilibrium where Iran's optimal strategy is to constrain Hormuz flows and inflict severe economic pain on the US and its allies to ensure "Never Again" for their version of Pearl Harbor irrespective of whatever decisions the US may take. Let's further assume that there is a Big Beautiful Deal about to be announced in the coming days. The only deal likely to be accepted by Iran is one where Trump hands Iran the grail of controlling the Strait. After all, what adversary willingly relinquishes control of immense economic power? Why would Iran agree to give up the very control which ensures "Never Again" levels of pain?
Iranian control of Hormuz is simply not a world Saudi and UAE will accept. It effectively replaces OPEC (which Saudi controls) with Iran, and subserviates the GCC monarchies to Tehran in the process. The GCC's optimal strategy would be to max out exports via Yanbu and Fujairah indefinitely — and not a drop more.
Saudi crude exports have dropped from a ~7mmbpd baseline to ~4mmbpd in April. UAE has shut in ~1.6mmbpd. As the Architect told Neo at the end of the Matrix Reloaded: "there are levels of survival we are willing to accept." Saudi would slash budgets, Project 2030 would become Project 2050, and the kingdom would simply keep the shut-in 3mmbpd in the ground rather than willingly replace OPEC with Iran as the price setter of the world's most important commodity while paying Iran tribute in the process. Better to send crude skyward if Trump does such a deal, since the US security umbrella is now meaningless and you don't owe Trump a lower oil price anymore. If you're Saudi, exporting 4mmbpd at $150/bbl = $600mn per day. Exporting 7mmbpd at $80/bpd = $560mn per day. Not a hard decision actually...
Now recall my concept of "Shrub's Razor" (first defined at the end of Oil Has Turned A Very Big Corner a month before the war), in honor of my dear friend Le Shrub.
Shrub's Razor is a philosophical trading principle whereby the funniest, most absurd outcome is also the most likely one.
The funniest, most absurd outcome here would be for a peace deal to be signed, and crude oil promptly rips in an epic "news failure" as the market would now have to price in GCC shut-ins indefinitely rather than until, say, July. Needless to say, risk assets would not take this well. The markets can look through a perceived temporary energy disruption. They cannot look through an indefinite mass shut-in precipitating a global recession.
Of course, if a Big Beautiful Deal is not happening, then we still have the North Star to guide us with a lurking Tom Hanks Has Covid realization moment where molecules and paper assets collide.
It almost seems like we are approaching a "win win" resolution (or "lose lose" depending on what side of the trades in oil, equities, and credit you are on) to the current suspended animation of Schroedinger's Strait which is both open and closed simultaneously. If the Strait opens with Iran in control, Saudi/UAE keep several million barrels per day in the ground indefinitely, oil moons, and markets crater. If Iran drags things out, we lose another several hundred million barrels of production, the US begins to aggressively draw inventories for export in the next few weeks, oil rips, and markets crater. The odds of a rapid resolution and Iran giving up power over the Strait are both very low and also priced in.
With this in mind, is there a clue to the existence of weak hands on one side of the oil trade and creating 1) odds tilted to the other side's favor and 2) convexity as weak hands get run over?
For this, I refer to my trusted copy of The Retail Trader's Guide to Mass Suicide (i.e. my own personal diary that tracks Max Stupid retail trading behavior). Today the almanac has added another chapter, and it is truly… special.
Until my pal Kevin Muir mentioned it to me on Monday, I had never heard of this absurdity SCO, which is the ProShares UltraShort Bloomberg Crude Oil ETF. SCO seeks to deliver 2x the inverse daily performance of its benchmark — the Bloomberg Commodity Balanced WTI Crude Oil Excess Return Index. What does SCO hold exactly? Besides a wad of cash collateral, it's short a large slug of the WTI crude oil June26, Dec26, and Jun27 futures:
I'm assuming SCO stands for "Short Crude Oil," but it wasn't lost on me that 'CO' is the ticker for Brent futures and yet this vehicle is short WTI crude futures on 2x exposure, making it twice as stupid and therefore absurdly hilarious. If you think you see where this is going — it gets better.
Amazingly, SCO's assets have exploded from ~US$100mn at the outbreak of the war to over $1bln today:
As you can see by fund flows, retail has been leaning into this product hard since the war broke out:
But here's the craziest part: just like those horrendous 2x MSTR levered long and short ETFs that were all the rage in 2024-25…
…the "volatility drag" (the compounding chop of enormous daily moves in alternating directions) has resulted in:
In other words, retail has "invested" almost $1 billion in a 2x short oil position which — thanks to vol drag along with the extreme negative carry of ~$5 monthly roll yield — has literally gone nowhere despite a significant correction in the flat price. You are looking at quite literally the dumbest speculative money in the market thinking they are buying the lows, to the tune of a billion dollars.
"What I am really looking for is a consensus the market is not confirming. I like to know that there are a lot of people who are going to be wrong." — Bruce Kovner
So in case you have been tempted to think that black belt oil professionals across the board are freaking out in some cry for attention, that "the market is always right," and the oil price is down recently so the pros must be pretty stupid doomers — just keep in mind that the other side of their view is leveraged retail making zero money while pressing a billion dollars into broken oil short products.
If that isn't enough, the fund everyone knows in retail oil trading — the US Oil Fund (USO) which is simply long the front month WTI future — currently has assets of $1.8bn (less than twice this insane SCO 2x short oil fund), and is now down -$1bln in assets from its high last month:
One more thing. If you want to short either of these vehicles, there are a whopping 10 million shares of SCO available to borrow at 2.7% annualized on Interactive Brokers, yet 10k little shares of USO available at 7.9% borrow.
In other words: retail traders are short the USO oil ETF to such an extent that unit redemptions in a futures ETF are having trouble keeping up with short demand that has to pay 8% to borrow a mere $1.2mn worth of an $1.8bn ETF (as of Mar 31st, short interest in USO was 10.7mn shares, i.e. $1.4bn in notional). This is happening at a time when the oil market is experiencing the most severe backwardation and extreme carry cost in history. At the same time, retail is so committed to buying a 2x short oil futures fund that despite epic vol drag and historic roll costs, you can borrow $80mm for under 3% annualized.
What can I say other than:
Stay frosty…
Paulo aka Cloudbear