Be Careful What You Wish For...

The Gist (1) GM2 vs. oil is an unconventional way of looking at oil prices, but it led me to believe that oil was due for a correction. It has been pointing to the neighborhood of $55-$60/bbl. (2) The largest end market for oil is U.S. gasoline, and consensus is increasingly leaning toward the opinion that the consumer is weakening. (3) Non-consensus views: OPEC is once again withholding barrels as PMIs weaken. U.S. supply will NOT grow into 2025. Saudi is defending price because domestic real rates are too high.

---

Welcome back, everyone!

As the saying goes, "Be careful what you wish for; you just might get it."

Back on April 2, 2024, three days before oil hit a year-to-date high, I published a post (HERE) expressing some bearish vibes for oil this year.

But rather than offer valueless boasting about past calls, the question now is: what comes next?

I want to highlight this chart that long-time followers have seen countless times, and one that I have always relied on.

I like to say that if credit doesn’t grow, oil won’t flow. The observation at the time was that GM2, or global money supply translated to U.S. dollars (blue line), started to roll over earlier this year, so readers should be on the lookout!

Since 2018, GM2 has led oil price declines, and it appears to have done so once again.

If GM2 stays within this 1%-2% growth rate environment, you're looking at oil being down about 30% year-over-year, which would place it somewhere in the $55-$60/bbl range.

I usually don't like to throw out price targets because it tends to lead to anchoring, and oil markets can change rapidly. But that’s where my head is at—please do your own due diligence.

Another interesting observation is that the global credit cycle of GM2 is starting to "bunch."

"Bunching" isn’t a term you’ll learn in an MBA, CFA, or CPA program, but as a chartist, it's something you begin to notice on a rate-of-change basis before a turning point occurs.

If the dollar starts to weaken and the credit cycle takes off again, I believe oil will once again pick up in a lagged effect.

I don’t think that’s happening right now, but I’ll let you know when I start to see a turn.

Coming off the COVID lows, M2 in local currency terms was expanding across all the major economies around the world, as shown below. But over the last 18 months, we’ve seen a desynchronization of global growth, which explains the $70 to $90 trading range over the same period.

So, we need to see global growth sync back up.

China is grappling with deflation, and Europe is trying to come back to life. What has kept the global growth lights on is the U.S. consumer, aided somewhat by government spending programs—but that's a rant for another day.

However, I believe real wages are slowing below the critical 2% threshold, which is necessary for U.S. oil demand to grow.