Paulo Macro — The Most Convex Trade of My Career
"Oh no, not another energy note..." The most convex opportunity of a 25-year career: crude set up for a dramatic upside move as historic, visible-yet-ignored inventory draws turn into outright US shortages.
One-line take: An oil thesis (pre-dating the Iran drama) that historic US inventory draws are inevitable AND now imminent — US gasoline shortage risk in PADD1 by end-June, Cushing tank-bottoms ~June 30, commercial crude below 400mmbbls even if Hormuz opens — with "a +15-20% day in oil not far off." Expressed via Brent calls: his largest position by a wide margin is now BNO (Jul-26→Jan-27 strikes, for roll yield in backwardation). The setup is sharpened by positioning: degrossed physical traders flipping futures into options leaves market makers short calls (delta/vanna squeeze risk in an illiquid market), speculative net-long near 2023-24 lows, and a crowded retail short via SCO (2× inverse WTI) — contrarian fuel.
1. Stocks & names mentioned
| Ticker | Name | Research | View | What's said | Source |
|---|
| BNO | United States Brent Oil Fund | QT · SA · STK | Positive | His largest position by a wide margin, primarily via calls across Jul-26→Jan-27 strikes (bought aggressively as recently as Friday) to collect roll yield in Brent's backwardation. +78% YTD; the cleanest expression of the inventory-draw thesis. | post ↗ |
| USO | United States Oil Fund (WTI) | QT · SA · STK | Positive | The WTI bull vehicle, +87% YTD (-15% from its May-19 high). Assets $1.7bn, down from $2.8bn on Mar 12 (-40%, ~$900mn of it outflows since Mar 31) — capitulation flows into a bullish setup. | post ↗ |
| SCO | ProShares UltraShort Bloomberg Crude Oil (-2× WTI) | QT · SA · STK | Negative | The "broken" 2× inverse-WTI product retail keeps crowding into: assets exploded from $100mn at the war's onset to ~$1.5bn (~$1.6bn of inflows since the Mar-1 start) while -65% YTD / -53% since the war — a contrarian bullish-oil tell, not something to own. | post ↗ |
| XOM | Exxon Mobil | QT · SA · STK · FA | Neutral | Cited as evidence, not a stance: a producer/merchant "commercial" — Exxon's Bernstein-conference comments are offered as proof that physical players are buying what Wall Street "synthetics" sell, mirroring the CoT shift to commercials net long. | post ↗ |
| CVX | Chevron | QT · SA · STK · FA | Neutral | Cited as evidence, not a stance: the Chevron CEO's Bloomberg comments are offered alongside Exxon's as the producer/merchant "commercials buying like crazy" tell behind the CoT shift. | post ↗ |
This is an oil macro thesis expressed via ETFs/futures. BNO (Brent) is the headline trade — his largest position, via calls. USO (WTI) is the long vehicle; SCO (-2× WTI) is the crowded retail short he reads as contrarian-bullish. XOM / CVX are referenced only as producer/merchant "commercials" buying what synthetics sell (Neutral). Futures (RBOB, HO, WTI, Brent) and research/data shops (HFI Research, Energy Aspects, Sparta, Kayrros, Morgan Stanley) and people (Le Shrub, June Goh) are discussed in the talking points, not tabled.
2. Talking points
The most convex trade of a 25-year career
- Crude is set up for a dramatic upside move from a confluence of fundamentals, positioning, and sentiment — "the most convex opportunity I have seen in my 25yr+ career."
- Market complacency rests on a temporary, unsustainable condition: historic supply/demand deficits bridged by visible and shadow inventory draws that should turn into outright shortages — "a +15-20% day in oil not far off." The thesis pre-dated the Iran drama (formed in January) and has nothing to do with Iran.
Inventory draws are visible yet ignored
- US commercial inventories bottom ~370mmbbls on linefill (pipelines can't be empty), minimum refinery stocks and tank deadstock (June Goh at Sparta). SPR discharge eases from May's ~1.4mmbpd peak to ~1.0-1.2 (Jun-Jul) to ~0.8 (Aug) — the DOE's own T4 RFP warns terminal rates "degrade" as the salt caverns deplete.
- Cushing (the WTI delivery point) tank minimums ~17-20mmbbls; HFI Research + refiner checks point to tank bottoms by June 30th — "shocking this isn't in the market." Gasoline operational minimum ~200mmbbls; distillates ~100-110mmbbls.
- MS Exhibit 41: bears note commercial (ex-SPR) stocks at last year's level — but prices are too low with zero US demand destruction, and draws accelerate from rising refinery runs, lower imports, rising exports. Largest weekly aggregate crude draw in history two weeks ago; more historic draws in June.
Destocking masquerading as demand destruction
- Claims of several mbpd of global demand destruction are "modest at best" (some Asia WFH, some flight cancellations). Observers see declining imports and assume demand is falling — but that's inventory destocking; global imports bottomed in May and are rebounding, and China's import declines are backward-looking.
- Kayrros connected-vehicle data (via Energy Aspects) shows limited US demand response to higher prices; the "-3% y/y gasoline" claim comes from credit-card spending that must be deflated by price (buyers seek cheaper stations / lower grades, overstating the drop), while petrol-station transaction counts stayed firm. More buyers paying cash inside to dodge the >3% card fee shows up as a card-spend decline, not real demand loss.
The sequence matters — gasoline first, then crude
- US gasoline is the most immediate problem — "~two weeks from a pricing problem." This week's DOE may show a small seasonal build (Memorial Day timing), but from the June 10th report draws rise again; approaching operational minimums with no demand destruction, outright fueling lines/shortages in PADD1 (East Coast) by end-June are very possible.
- Normally he'd buy July RBOB $3.50/$4 call spreads (late-June expiry) for 3c, but the problem may manifest fast enough to elicit a Trump political response. Crude becomes an obvious US inventory problem only weeks behind gasoline; by mid-July US exports must be priced out.
Shrub's Razor + expected Trump gasoline export controls
- Per "Shrub's Razor" (the funniest / most absurd outcome is the most likely), he expects "the most business-friendly administration in history" to reenact gasoline export controls (removed by Obama), à la Nixon's 1970s price controls — starting with gasoline, probably partial ("just the tip"), and politically aligned (allies Argentina/Japan get fuel; Europe/NATO don't).
- Such controls damage the whole futures complex (RBOB, HO, even WTI), so he might not get paid on gasoline trades even if right. "Oil traders are the new vigilantes of the 2020s."
Bringing it home — inevitable AND imminent
- Historic draws in US crude and products are baked in — the largest in the history of the data over the next 6-8 weeks. Almost nobody does this work (energy a 3-4% index backwater for 15 years; follow HFI Research). Method: triangulate forward inventories via producer data, announced refinery runs, ships signaling to the Gulf of America.
- "Inevitable" and "imminent" aren't always the same — the frustration window (the Big Short analogy: Vinny/Porter marked against them before being right). But the Event Horizon is crossed regardless of whether the Iran war ends tomorrow; some "Tom Hanks has Covid" moment touches off non-linear "oh sh*t" awareness — now weeks/months has become days/weeks.
Positioning — futures→options leaves dealers short calls
- A VaR shock and degrossing by physical traders (blew through limits in the Mar/Apr vol) means they trade smaller or flip futures into options (Trump-tweet stop-outs) → prompt futures increasingly illiquid. That futures→options substitution leaves market makers short calls; with vol now lower they could be forced to chase prices and buy futures into an illiquid market to hedge rising delta and vanna — a semiconductor-style delta/vanna squeeze.
- Speculative length is largely wrung out — large+small speculators' net-long WTI is barely above the 2023-24 lows; it's the options exposure keeping net long elevated (dangerous if oil pops on dealer hedging). The Reddit retail crowd is short via SCO.
The ETF flows — capitulation long, crowded short
- USO (WTI): $1.7bn assets, down from $2.8bn on Mar 12 (-40%; ~$900mn outflows since Mar 31), +87% YTD, -15% from its May-19 high. BNO (Brent): -16% since its May-4 high, assets $1bn→$765mn (-25%), +78% YTD.
- SCO ("2× short oil"): assets exploded from $100mn at war onset to ~$1.5bn (almost as big as USO!), ~$1.6bn of inflows since the Mar-1 war start — yet -65% YTD / -53% since the war. Retail keeps plowing into a structurally broken short.
The CoT shift — commercials buy what synthetics sell
- CFTC Commitment of Traders: producer/merchant (commercials) much more net long since the war (refiners buying / producers reducing hedges); managed money mostly flat; "other reportable" (prop shops, Chinese traders, family offices, "Cloudbears") cut net long >30% since early April; swap dealers imploded from ~350k to 660k net short (desks hedging long OTC exposure for unknown clients).
- Bottom line: producer/merchant commercials are buying like crazy while Wall Street synthetics sell to them — corroborated by Exxon's Bernstein-conference comments and the Chevron CEO on Bloomberg. Sentiment is poor; many have thrown in the towel after ill-timed call trades since March.
Iran doesn't actually matter
- No Iran in the thesis (as in January). No grand bargain likely — Iran found economic leverage and won't relinquish it; constraining the oil trade is their optimal strategy regardless of others' moves (a democratic leader facing midterms amid $8+ gasoline is in crisis).
- US commercial inventories head below 400mmbbls even if the Strait opens tomorrow; then US exports must be priced out; refiners build stocks to capture $50 cracks rather than cut runs. Every physical trader (esp. Asia) is waiting for a peace-deal/TACO dip to buy — "when everyone is waiting for something, the market won't let them in."
The trade — BNO calls
- His largest position by a wide margin is now BNO (Brent ETF, for roll yield in backwardation), primarily calls across Jul-26→Jan-27 strikes, bought aggressively as recently as Friday. "Please do your own work."
3. In plain English
A jargon-free summary of why each name appears — what it is and why that view. (Plain-language companion to the table above; renders on each ticker's consolidated page.)
BNO — United States Brent Oil Fund Positive
BNO is an ETF that tracks the price of Brent crude (the global oil benchmark) through oil futures. It is Paulo's single biggest bet — and he's making it mostly with call options, contracts that pay off if oil rises above a set price by a set date (here, expiries running from July 2026 out to January 2027). Calls give convexity: limited money at risk for an outsized payoff if oil spikes the way he expects.
Two extra tailwinds. First, roll yield in backwardation: when near-dated oil futures cost more than far-dated ones (a "backwardated" market, typical when supply is tight), a fund like BNO that keeps selling expiring contracts and buying cheaper later ones earns a small positive carry each month — the structure pays you to wait. Second, the squeeze setup: because nervous traders have moved from futures into options, the dealers on the other side are short calls in a thin market; if oil climbs they may be forced to buy futures to hedge, pushing it higher still — exactly the kind of self-reinforcing move calls are built to capture.
USO — United States Oil Fund (WTI) Positive
USO is the best-known ETF for betting on the US oil price (WTI). Paulo's bullish case is the same as for Brent — he expects US oil inventories to fall to outright-shortage levels within weeks. The interesting tell is the money leaving USO even as it's up sharply this year: assets fell roughly 40% from their March peak, much of it investors cashing out. When a crowd sells the very thing that's working, it usually means people have given up too early — the kind of capitulation that often precedes the next leg up rather than a top.
SCO — ProShares UltraShort Crude Oil (-2× WTI) Negative
SCO is built to move twice as much as oil but in the opposite direction — so it's how you bet that oil falls, with leverage. Two problems. First, "2× daily inverse" funds decay over time because of how they reset each day, so they're structurally poor holds — SCO is down about 65% this year. Second, and the real point: retail traders keep pouring money in anyway — assets ballooned from ~$100mn to ~$1.5bn, roughly $1.6bn of inflows since the war started.
Paulo reads that as a contrarian bullish-oil signal. When the crowd piles into a broken product to short something, it tells you sentiment is one-sided and over-positioned the wrong way — exactly the fuel for a violent reversal higher. He doesn't own SCO; he's pointing at it as evidence the market is leaning hard against the move he expects.
Key points extracted from the paid PauloMacro Substack post (saved in transcript.txt) for personal study. Not investment advice. © PauloMacro for source material.