WEFC | Oilswell in Love & War [PDF Download]

💡The US-China trade truce has been extended by two months, moving its expiry from November 10 to January 10, 2027. This extension was shorter than the six-plus months the market expected, and observers like Bessent are uncertain if a larger deal is achievable, suggesting a potential further rollover of existing terms.

💡The only new deliverable named during the US-China summit regarding AI is the establishment of an AI incident channel. Other significant issues such as the $30 billion tariff cut list, Boeing purchases, rare-earth breakthroughs, and chip agreements remain unresolved, consistent with a pre-meeting view of stability before the midterm elections and potential changes thereafter.

💡Core CPI in the US recently held at 2.5% YoY, while headline CPI edged up to 3.4% from a prior 3.3%. Core momentum firmed to 0.3% MoM, slightly above expectations, leading to a September hike, primarily due to the widening gap between headline and core inflation driven by oil prices.

💡US inflation stickiness is primarily oil-related because the headline-core CPI gap widened to 0.9 points from 0.8, indicating that inflation outside of oil remains subdued. Core goods eased to 0.1% MoM, core services are at 0.3% (not an extreme high), and sticky CPI YoY sits at a new low since 2021, suggesting a small preventive hike is sufficient to manage inflation.

💡Preventive hikes fit a strong US economy because equities can continue to rise when interest rate increases are accompanied by strong earnings momentum. Key indicators to track are oil prices and sticky CPI YoY, as these factors will determine the necessity and impact of future preventive rate adjustments in a robust economic environment.

💡Structural increases in global government deficits are largely driven by defense and social subsidy spending being integrated into regular annual budgets. Examples include higher eurozone defense spending, the US One Big Beautiful Bill Act, and Japan's Honebuto guidelines, pushing 10-year yields above 5.2% in the US, 3.5% in Germany, and 3% in Japan.

💡France and the UK are the major economies that show government bond yields exceeding their GDP growth rates (r-g). Despite this, the analysis indicates no immediate default risk among major economies, though it suggests that long bonds remain unsuitable, with a preference for US short maturities due to less rate volatility.

💡Visible and Cushing crude oil inventories currently sit at multi-year lows. This critically thin buffer makes sharp price swings more frequent and raises the likelihood of non-linear risks, with future scenarios heavily dependent on geopolitical events such as a US-Iran ceasefire or an extended war into 2027.

💡Middle East oil exports have been constrained recently by the US naval blockade since July 12, which cut Iranian exports to near zero, and a drone attack on Saudi Arabia's east-west pipeline. Consequently, Saudi Red Sea loadings halved to about 2 million barrels in August, and Saudi output of 6.24 million b/d was its lowest since 1990.

💡Ukrainian strikes have idled over 30% of Russian refining capacity, significantly tightening diesel supply. This resulted in Q3 diesel exports of 4.5–5 million barrels, a five-year seasonal low, causing cracks to exceed $90–$100 and pushing US diesel prices above $6 per gallon due to reduced availability.