The Gist: The growth in global M2 money supply (GM2) translated to U.S. dollars influences oil prices via the credit cycle. China serves as the major catalyst for GM2. China appears to have a deflation problem on its hands and appears to be responding with increased stimulus which could strengthen domestic M2, and provide liquidity for oil. I explain in this post.
Media reports attribute the recent bounce in oil to heightened tensions in the Middle East such as the targeting of shipping lanes by the Houthis as well as the conflict surrounding Israel, Hamas, Lebanon, and Iran.
However, I think there is something else afoot.
If you have been following the content for a while, you know that I don’t track supply/demand/inventory balances, rather I try to keep my eye on the global credit cycle.
As shown in the chart below, I have found it is a good leading indicator as to which way the future momentum of oil is headed.
The biggest driver of global credit and thus the money supply is China, as evidenced in the charts below.
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