Title:   Oil Review: Positioning, Sentiment, & Fundamentals — "How Do You Say 'Checkmate' in Chinese?"
Source:  PauloMacro (Substack)
Author:  Paulo aka Cloudbear
Date:    2026-JUN-14
URL:     https://paulomacro.substack.com/p/oil-review-positioning-sentiment
Type:    Written Substack post (PAID, no video, no timestamps). Saved for personal study.
Note:    Text saved verbatim from the post; inline chart images omitted (referenced in prose). Written prose — no verbal filler to remove.

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There have been so many developments in the global energy market these past two weeks that it is hard to know where to begin. Between the Fog of War driving relentless propaganda by all sides and conflicting numbers among analysts regarding the oil balance and its outlook (dark transits, Chinese import data, etc), a lot has happened, and yet not much has changed besides the oil price.

I spent much of this week in meetings around the StoneX 4th Annual Natural Resources Conference in NY, where my buddy Vincent Deluard kindly invited me to speak on the opening macro panel with Jon Hilsenrath (previously WSJ editor known as Ben Bernanke's Fed Whisperer) and Josh Linville (StoneX VP of Fertilizer). I had numerous conversations and exchanges with commodity experts of all types, from oil analysts to physical metal traders. I even had the pleasant surprise of sitting down with Rory Johnston of Commodity Context, who helped confirm many of my conclusions and fill in the gaps on some figures I have been debating.

The bottom line: those closest to the energy market continue to see the present situation as the most extreme, convex energy crisis in the history of the oil market in living memory — certainly since WW2. The current market action is not reflecting anywhere near this reality (for reasons I will address below), and while the frustration, exasperation, "just go to the beach" sentiment among those with this view is understandable in light of the price action, the current divergence between price and fundamentals is also understandable but not a situation where narratives around price will dominate fundamentals indefinitely. My recent drawdown notwithstanding, I stand by these notes and recommend reading them if you missed them over the past month:

When Trends Go From Seemingly Linear to Exponential — May 9th

The Most Convex Trade of My Career — May 31st

In the spirit of organizing my current views into something coherent, here is the oil market broken up into the following sections:

Positioning, Sentiment, & Technicals

Fundamental Review and Impressions

Chinese Import Declines

Dark Fleet Transits

The Inventory Picture

What If: Checkmate in Chinese

TL:DR

Positioning, Sentiment, & Technicals

The trading activity this past week has all the hallmarks of an unfolding capitulation. Price can always fall further, but here are some charts to give you a sense of how suddenly a significant amount of speculative length has exited the market.

Positioning

I'll start with retail and non-CFTC institutional money that expresses oil via USO (the flagship WTI crude front month ETF). As noted earlier this week, I am struck by the 9mm shares short interest increase from April 15th to May 29th (latest data available):

Incredibly, USO had only 13.5mm shares outstanding on May 29th, meaning that 145% of the fund is now sold short. No wonder the cost to borrow a measly 100k shares of this $2bln ETF is over 10% annualized! For context, on Feb 27th (the eve of the war), only 7mn of the 14mn shares outstanding were short (~50% short interest).

This begs the question: why don't ETF Authorized Participants create more units? While I don't have a clear explanation for this yet, I wonder if it has something to do with an undisclosed CFTC position limit in the front month future for the fund. Speculators are typically limited to 6000 contracts in the front month, but USO has a federal exemption to the rule and its cap is undisclosed from what I can tell (if anyone has details please feel free to share via reply). The fund currently holds nearly 20,000 August 2026 WTI futures (~8.5% of the total open interest in that active future).

I don't consider USO a strictly retail trading vehicle as some institutions who cannot trade futures do trade it. At this level of short interest, however, I think of this as a significant synthetic retail/RIA short that is not being captured in the Commitment of Traders data. If 145% of USO is short, then what is really happening is that the USO holds 20k Aug long futures but USO investors are actually net short -9k Aug 2026 futures through this vehicle.

In addition, we have SCO (the $1.2bn 2x short WTI ETF, previously discussed here and here) which is currently short 29k in assorted WTI futures. Six million SCO shares were short out of the 53mm shares outstanding on May 29th, i.e. ~11% short interest in SCO (long WTI), so the SCO fund is technically overall a ~26k short in WTI crude futures. Add that together with the USO synthetic -9k short position, and these largely retail products are net short an equivalent of -35k in WTI futures.

As a side note, for BNO (the Brent future ETF), there is no short position of significance. On Feb 27th, 300k of 6.2m shares were short (5%), vs today's 1.2m short out of 15.2m outstanding (8%).

Now you might say that's no big deal — total open interest in WTI is 2mn futures, so -35k short is barely 2% of open interest. The point is that these retail products are indicative of hot money that is more broadly leaning in this direction and chasing a momentum narrative. A glance at the holders list in March suggests the 55% combined ownership by GS and MS is likely related to commodity index products distributed to HNW/private bank-type clientele, though you do see some macro funds and authorized participants/options market makers with notable holdings:

Among speculators in futures, developments are almost as striking. For starters, note the decline in speculative (non-commercial) net long as a percent of open interest in the context of the past 20 years. Outside the collapse in late 2025 (when I became very bullish oil and wrote about it in January here), large non-commercials are back to net longs in futures + options that defined lows in the oil price back in 2012, late 2015 (a big one when shale was blowing up), 2Q23 (when traders were under funding stress as Credit Suisse imploded and pulled lines), and 2024-25 when oil was trading $65-70:

In Brent futures and options, the managed money net long position has been cut in half over the past few weeks:

This decline in Brent positioning was not just long liquidation, but also saw an addition of ~100k in short contracts. Shorts via futures and options by managed money are now at 2016-17, Covid 2020, and 2024 bear market levels (red line, inverted to overlay with oil price):

Those are on a contract basis. When looking at notional $ exposure, you can see Brent + WTI managed money net long notional exposure (futures + options) has fallen by more than half from $64bln in late March to $29bln now (red line is combined):

Same chart zoomed in:

I have mentioned in recent oil notes how the VaR shock and volatility spike resulted in tradings and multimanager PMs being forced to carry less size. Some I know have even stopped trading altogether and gone to the beach saying "it's just not worth the aggravation of Trump's tweets to make a little money on the small size Risk allows me to trade." To this end, the classic "call replacement" strategy is laid bare, as you can still see in the following chart. As large non-commercial traders cut their net long futures (blue), they have expanded their use of options (yellow):

And this makes sense when you consider how volatility in oil has declined along with the flat price:

But here's the catch: the market makers who have sold calls are increasingly shedding their long futures hedge and bleeding the market as both price and vol decline. In the event the oil price were to rally hard on some sort of negative catalyst (a crazy series of draws, an escalation in Iran, etc), market makers will be chasing the market higher to hedge rising delta and gamma (and as many speculators have started going out farther in expiry and strikes to buy time, hedging vanna as well). The liquidity in prompt futures has become woeful since Trump started tweeting and hollowing out the market, so the setup is becoming dangerous.

Bottom line: retail/non-futures investors are now net short via ETFs. Futures speculators have cut over half their length in the past few months and started shorting significant numbers of contracts. Sentiment among fundamental traders reflects deep frustration and negativity ("markets are broken" — dangerous words I know). And traders have significant upside calls outstanding that could set off a negative gamma upside spiral where marketmakers are forced to chase long hedges in an increasingly illiquid market (similar to a cascading selloff in stocks when investors scramble to buy puts and top-of-book liquidity in S&P futures disappears, but in reverse here — an upside crash).

Technicals

Many of you know I like to say "Everything is a Flush"… well have a look at the Brent front month future — perfect Flush of the mid-April low:

Interestingly, we did not take out the mid-April low in WTI crude, and instead see a hidden bullish divergence (lower price, slightly higher RSI):

I like seeing divergences across different crude products and technicals. It is the sort of thing I frequently see ahead of turns.

Of course, this is just the flat price. When you factor in the roll yield in vehicles like BNO which rolls the front month Brent contract, the internal divergence is striking. The vehicle is as oversold on RSI (relative strength) since the December 16th low when Brent was trading at $60, and yet the BNO price is higher than it was when its relative strength peaked in early March (yellow):

Looking at USO which owns the front month WTI contract, we see a hidden bullish divergence and a nice small flush of last week's low:

One final technical. I always say "watch products: that is where the problem will start." As we see below, refinery crack spreads have led the crude price a few times since the start of the war (white arrows):

I find it very telling that cracks bottomed a week ago and turned higher while oil continued to flush lower… we will discuss this further down.

Fundamental Review and Impressions

Chinese Import Declines

The biggest takeaway from the past week's discussions was around China. Even though I was aware by late April that Asian refiners were out of the market on the expectation of a TACO and rapid resolution with Iran, the Chinese buyer's strike of 4-5mmbbl in declining imports gave the market significant breathing room.

China's steep decline in imports was conflated as "demand destruction" by many houses (visibly so by JPM a few weeks ago), with some analysts even suggesting the change will be structural because of increased EV adoption and a "flights to electric trains" shift in domestic transport mix. The Covid experience taught us the importance of mobility data, and none of it shows anything approaching the near-10% demand destruction implied by some a few weeks ago. Actual fuel consumption is pretty much impossible to measure in China given a lack of comprehensive refined product inventory data, so ultimately any conclusions rely heavily on inference using mobility proxies. Still, China's manufacturing PMI peaked in March, and slowing growth is affecting Chinese stocks and bonds, but to suggest anything beyond a very modest demand destruction is simply not supported in the data we can see and well within seasonal norms.

Nevertheless, China's 5mmbpd hiatus from the crude market went a long way to freeing up cargos for other regions. In conjunction with the IEA SPR release of ~2.5mmpd and the ~5mmbpd draw we have seen in global stocks, the math pretty much squares out with the 12mmbpd shut-ins we have seen in the Gulf.

Dark Fleet Transits

Dark transits have caught much attention in the bearish narrative of the past week. Ever since Trump's admission of 100mmbbls in military escorts, a veritable hornets' nest of commentary and debate has ensued on just how much is getting out. My view has been ~2mmbpd, and ironically despite all the chest thumping by Trump and oil market bears, nothing has actually changed much with these revelations. For starters, the barrel counters didn't miss much here. Kpler already confirmed they had 96mmbbls in the oil balance for leakage. These research shops have huge budgets for staffing hundreds of analysts to scrub AIS GPS data which is now heavily spoofed. When I read suggestions of dozens of daily crossings, I smile thinking if some Twitter commentators are right (and they really seem sure of themselves), then Vortexa and Kpler basically have no reason to exist anymore — this is literally the single most important moment in a barrel counter's career, and is exactly what they get paid huge money for. Also worth keeping in mind that the US blockade has been effective in largely eliminating 2mmbpd of Iranian exports, so even with 2mmbpd of dark transits running along the Omani coast and then reverse lightering in ship-to-ship transfers, the egress on balance is simply shifting from Iranian crudes to Kuwait/Iraq, while the overall picture is not changing much.

"But how do you explain Wright's comments of 7mmbpd?"

Simple: he said "from the Persian Gulf," not "via Hormuz." And once again, the math generally squares out. 3-4mm additional egress via Yanbu vs pre-war (the East-West Saudi pipeline) + 1 additional via Fujairah pipeline bypass + 2mm dark transits (previously Iranian, now GCC), and the total equals? Yep… seven.

While this math is broad round numbers on the back of a napkin, they are not that far away from the various attempts the sellside is trying to take at this (please don't get me started on JPM EM Strategy's Shaun Daly dark transit "prop model" earlier this week). Here's Natasha from JPM, who may have felt a strong need to put more concrete numbers around the dark transit subject after Daly's note caught attention.

Keep in mind that JPM's +8.9mmbpd is for June MTD — basically 10 days — when clearly there was a bump in StS dark transfers based on contacts with shipowners and traders, but is also high as Natasha herself admits on page 2 where she is counting 1.3mm of Zirku loadings as exports even though most of that crude has not transited. So backing out Zirku, we are back to ~7.5mmbpd… again, not moving the needle, but quite effective in Narrative space as speculative futures are liquidated en masse.

As an aside, why would Trump compromise a largescale, covert, dark transit escort operation by tweeting about it, unless it was already mostly past tense? The day before he took a victory lap about it, the Iranians used a $20k Shahed drone to knock down a $40mm Apache helicopter escorting the dark transits. Since Trump's Thursday announcement that the MOU is imminent, the Iranians continue to harass transits with drones. Does it not stand to reason that the Iranians got wind of dark transits over the past ten days and decided to do something about it? What is more likely now that harassment is back on: more dark transits, or fewer? Better hope that MOU is real.

Ultimately the bottom line is: this is all a giant distraction. The North Star for the conflict has been Iran running the clock and playing for time while keeping flows heavily constrained so that the US feels enough economic pain in time for Trump to get killed at the midterms. The North Star for the global oil balance is shut-in production, not transits — and crude shut-ins continue at 12mmbpd. Every barrel not produced now runs down the global balance either through inventory draw or demand destruction. Since price has not been permitted to rise and destroy demand, the result is inventory draw. It's really that simple.

For what it's worth, Iran must see this sort of polling data too — here is the Iranian North Star in a chart:

The Inventory Picture in More Detail

The inventory situation is not headed in the healthy direction.

Regionally, you can see the US is supplying the crude Europe and Asia-ex China needs.

Gasoline should normally build modestly between now and July 4th before the US driving season heats up in earnest while refineries come out of turnaround/maintenance. However I expect the week ended June 12th to show a 1-2mmbbl draw in the US, and it gets worse from there. Fujairah is at operational minimums, and Singapore is not far away.

Fuel oil is turning into an acute crisis. What good is an open Strait if boats can't fuel?

US commercial inventory may look like it is simply tracking 2025, but I expect the US commercial side drew -8mmbbls last week, which would put it just below the blue band in Exhibit 41 and the lowest for this time of year in over a decade. It then gets worse from here as the commercial draws will be compounded by slowing flow from the SPR (this peaked at ~10mmbpw in mid-May, is now -7.9 and on its way to -6mmbpw by month end), while Cushing's approach to 17-20mmbbls of minimum operating inventory by month end will force WTI to price out exports through the Gulf of America to keep crude in Cushing.

Normally with this sort of crisis you would expect that the thing to do is allow commercial inventories to visibly draw first, send a price signal to begin destroying demand, and then apply SPR releases to head off outright shortages as they arise. Instead, policymakers decided to solve for price in the near term instead of inventory in the medium term, hoping to address their political pressures in the interim and wrap things up before the crisis ballooned. This created a feedback loop around expectations and market pricing among both policymakers and physical traders where the crisis will end any day ("oil price bro"). Instead of letting price do some of the heavy lifting first and the SPR bridge the gap later, policymakers inverted the process and have made the eventual crisis bigger. When shortages arrive, the buffers will be gone and price will have to send a much more acute, rapid signal to destroy demand into the teeth of a US economy running hot. This is why a month ago I wrote the note When Trends Go from Seemingly Linear to Exponential. The kernel of truth is that the SPR was designed to address physical shortfalls — not price suppression. The cartoon we are meant to focus on is "but this is what the SPR was created for…we should use it!" There is a big distinction between the Truth and the Cartoon, but the political narratives in our great Upside Down always come first.

I have been vocal on chat and with contacts that the market simply refuses to consider SPR draws part of the overall inventory picture. As long as 1) Chinese physical traders are out of the market, and 2) Trump's tweets generate downside volatility that hollow out positioning and oil market liquidity, trading firms are simply unable to look even a few weeks forward and price the imminent commercial declines until they materialize and force physical buyers to pay up. From my friend HFI Research, this is baked in the cake (the blue band is MOI, Minimum Operating Inventory):

This is what happens when policymakers try to solve for near-term price rather than medium-term inventory. Of course there is always the chance I could be completely wrong about all the data above.

I can do one of two things with this knowledge, and they are mutually exclusive:

I can be a momentum trader and say "price is always right bro," and thereby assume that the laws of supply/demand, physics, and simple math no longer hold — in which case every math teacher in America should quit their jobs because the entire education system around basic arithmetic has failed us all; or

I can recognize that there is a resolution involving a significant amount of demand destruction in the coming weeks/months that will ultimately be delivered by either A) a much higher market price signal or B) forcible government intervention (export restrictions, Covid-style restrictions, supply directives, etc). I am betting on the former, and openminded on the latter.

What If: Checkmate in Chinese

There is an additional nuance to the Chinese import decline discussed earlier. When the war first broke out, China's National Development & Reform Commission (NDRC), which regulates diesel and gasoline prices at the pump, refused refiners' requests to pass through the full crude price spike. Retail gasoline and diesel prices were raised $27 and $30/bbl respectively in the March 23rd and April 7th pricing cycles, but this was only half the increase implied by the pricing formula the NRDC typically uses to set retail prices. This probably feels familiar to Brazilians who track import parity prices at the refinery gate in Brazil as products are set by SOE Petrobras through a "formula."

In the meantime, China also severely curtailed product exports (recall the Tom Hanks Has Covid Moment when China banned exports). The problem was obvious: diesel cracks flipped from $12/bbl in February to -$12/bbl in April, while gasoline cracks fell from +$11/bbl in February to -$23/bbl in April, according to a Morgan Stanley report this past week. So Chinese refiners stopped buying expensive crude, cut runs, and waited for their January-February barrels to arrive while running down stocks. Cracks have eased back up since then, but are still negative for gasoline and barely positive for diesel:

Consequently, refinery crude throughput fell from ~15.4mmbpd in February to 14.6mmbpd in March and 13.4mmbpd in April. Refinery run rates dropped from 82% in late February to 69% in late April. Several SOE refineries also took advantage of the chaos to intensify their typical seasonal maintenance. While SOEs cut runs, independent "teapot" refineries actually increased utilization from 50% in February to 55% at the end of April (the highest since May 2024). The teapots ran crude despite refining margins turning negative as they were warned by the government not to cut rates below 2025 levels and that failure to maintain runs could lead to cuts in future quotas. While refining margins are now negative for SOEs and independent teapots, only teapots have been mandated to maintain runs. The industry is under stress, and so the government has recently eased requirements allowing teapots to cut output to no less than 80% of 2025's average. Sure enough, teapot utilization rates are dropping in June (all charts MS):

Ironically crude stocks built in March-April as pre-war barrels continued to arrive but refineries aggressively cut runs:

The situation for Chinese refineries (both SOEs and teapots) is beginning to look unsustainable. Domestic prices are suppressed at negative cracks, and foreign markets at high cracks are not accessible due to export restrictions. State requirements are forcing refiners to run at a loss and effectively subsidize the Chinese consumer.

I am no China expert, but I have always thought of the independent teapots as a large industry that Xi might like to have under increased state control. They serve a "product buffer" purpose and are useful in their ability to access dark/sanctioned barrels, but they are still independent and "outside the fold." As I hear of growing financial distress among the teapots, I can't help but wonder if this is an opportunity for Xi akin to how he put the screws to big Chinese tech five years ago. Chinese consumers are currently somewhat shielded from rising domestic gasoline/diesel prices, while SOEs and especially independent refiners pay the cost. Rumors are growing that some teapots may even go to the wall in the coming weeks. Which got me to thinking: what are Xi's moves here to take advantage of this huge mess in the Middle East?

I think a big near-term catalyst is that Xi decides to lift the product export ban, and the more I think about it, the more it looks like a win for Xi all around.

It would be great economic diplomacy with neighboring countries, some of which were granted special quotas as "friendly" countries in May (e.g. Vietnam, Sri Lanka, Bangladesh, Myanmar, and the Maldives).

Xi gets to tighten state control over a huge private sector player in the teapots, possibly merging some distressed independents into SOEs while keeping them open for business, which means people keep their jobs and refineries don't shut down.

It immediately incentivizes Chinese refineries to run hard because Asian cracks outside China are very high, and likely going even higher in light of the inventory picture in Singapore and Japan. This export business would offset the margin damage from domestic price controls. This might send crude to $150 as Chinese refiners start buying again, but they won't care about the crude price because they get to sell the Asian crack.

Local consumers would still protected by domestic price controls, so instead of refiners subsidizing Chinese consumers at the pump, now the foreign product buyer subsidizes the Chinese consumer while Xi gets to appear magnanimous to all involved.

In the next two months, the West will have drawn down inventory dramatically, and would then be paying $150+ for crude just as the SPR is tapping out and commercial stocks are nearing tank bottoms.

It's checkmate all around.

TL:DR

Demand for crude and fuel products is seasonal. It bottoms in the spring, and then ramps hard into 4Q. This is why northern hemisphere refineries conduct a heavy maintenance schedule in the spring. Despite healthy cracks and elevated product prices relative to recent history, global fuel demand should cycle higher in the coming months, particularly with oil below $90. Crude and product supply is in deficit and being met through inventory draws. Shut-ins have not changed: that oil is gone until it can be made up after wells restart and production ramped up. The boats leaking out through Hormuz are already in the balance; floating storage becomes oil-in-transit, so they are part of the overall global draw. Chinese refineries are under growing stress and will eventually require a shift in policy; a loosening of the product export ban would serve as a win all around for Xi while sending the oil price materially higher and hurting Western consumers in the process. Through all this, price is not destroying demand. Meanwhile, market technicals and positioning are much cleaner now with retail net short, large institutional speculators notably less long, and significant call exposures exist as kindling for a potential chase by marketmakers in oil futures at a time when market liquidity has been hollowed out.

I guess you could say I was wrong in my first paragraph — a lot has changed recently besides just the oil price. And most investors are focused on the -30% drawdown in flat price (-20% adjusted for roll yield) as confirmation of Truth.

People like to say "the market is always right…" They leave out the second part though: "…even when it's wrong." There's a risk management lesson in there for everyone, myself included. Chalk up the current setup as a failure of imagination. I honestly could not imagine a world where we would witness the largest crude and product draws in history under a clear price suppression scheme (jawboning or otherwise), and investors would struggle to commit capital, manage risk, and "time arbitrage" the near-inevitability of near-term shortages.

My position remains long. I think the stars are aligned for the next several months and we are about to see some fire on the upside in the energy complex.

Notice once again that I barely mentioned the war. At this point I would almost welcome an "MOU" promise to normalize things in 30 days. We are past the event horizon of an inventory crisis anyway, so at least that would get the tweets out of the scene. What if there is no MOU? As one trader put it to me: "I don't know what happens if they don't sign. I have no idea. It would be bad." Sounded like code for sh*tshow.

As always, none of this is financial advice — just the view of an anonymous Cloudbear. I wouldn't listen to me. And you should really, really do your own work on this.

Good luck out there, and stay frosty…

Paulo aka Cloudbear