Gale Warnings for Every Sea Area That Sells You Diesel

Here is the forecast for Wednesday the fourteenth, issued while an S&P 500 at 7,805 and a VIX near 15 insist the barometer reads fair.

Brent. $106 to $107, rising slowly. December Brent gained about 1.2% to $107.02 at one point this morning, WTI sits near $94.7 to $95. The gap between the two runs close to twelve dollars, which is how a market says the trouble lives east of Suez while the barrels live in Texas. Visibility poor. Occasional shocks from the Gulf.

Riyadh. Houthi missiles and drones, easing at times, returning by evening. The Houthis hit King Khalid International Airport on Saturday, a ballistic missile aimed at the capital was intercepted on Monday, and the Saudi-led coalition is reported to have answered by striking Houthi energy terminals and fuel reserves in Yemen. A forecaster's note: once both sides start shooting at each other's fuel storage, the fuel being shot at belongs to the same global market that fills your tank. Prospects of a quiet week: remote.

Hormuz. Iran says the strait is under Tehran's control and that approaching US warships will be sunk. US Central Command says no. Tanker attacks continue. Saudi Arabia has its East-West pipeline to route barrels around the problem, and that line ends on the Red Sea, a body of water with its own history of tenants who took up shipping as a hobby. Sea state: rough, becoming very rough. The word "risk" has quietly dropped out of "risk premium" on most desks.

Black Sea and Baltic. Russian diesel, good. President Trump's deal sends 300,000 tonnes immediately, 500,000 in November and a million after, around 13 million barrels in total, roughly one week of American diesel exports. ICE gasoil fell 3% to $1,436 a tonne when it broke, and I would like it noted for the record that the move was larger than the cargo. Hopes of an energy ceasefire between Moscow and Kyiv have cooled this week. Refineries on both sides remain targets. Outlook: improving, with a chance of immediate deterioration.

Notice to mariners. Paul Tudor Jones told CNBC's Squawk Box that oil can rally another $20 or $25 from here. Add it to Brent and the range runs from roughly $127 to $132. This is the opinion of someone who trades the consequences, so weight it accordingly, and note that a bull on the record is also a long on the book.

Local conditions

The chart you will be handed at 8:30 Eastern shows September. Gasoline rose 7.1% last month according to the EIA, consensus for the CPI is +0.6% on the month and 3.6% on the year, core +0.2% and 2.5%. I am writing ahead of the number, and by the time this reaches you it is a fact and you know it. My argument survives either side.

The reason is arithmetic. September's energy shock lands in today's report. The diesel record at $6.53 on September 22 sits inside that window. The G7 reserve release and the Russian cargoes belong to October's CPI, published in mid-November, which is after the midterms on November 3. A calm core today buys the Fed an October pause at the meeting on the 27th and 28th. Brent at $107 buys the next hike a seat at the table anyway.

The Fed funds rate is 3.75 to 4.00 after September's hike. The 2-year yields 4.77%, the 10-year about 5.2%, the 30-year 5.55%. Those numbers say the bond market has already formed a view on how long this lasts, and it is a longer view than the equity market's.

Equities, meanwhile, hold a record within spitting distance. Tuesday's session gave up 0.02% on the S&P, 0.15% on the Nasdaq and 0.35% on the Dow, in the midst of a third-quarter earnings season growing close to 30%. That is the posture of a market that has read the forecast, nodded, and decided to go sailing.

The forecast problem

Weather services issue gale warnings because ships are out there. Markets issue risk premia because positions are out there. The difference is that a skipper who ignores a warning gets wet, while a portfolio that ignores one gets a marked-to-market surprise delivered by people who were never close to the water.

Everyone knows what the Gulf looks like. Everyone has seen Brent above $100. Most of the people who own risk assets now own them against a Brent they have gotten used to, which is the dangerous phase: the stage after the shock where it becomes the baseline. A $20 spike on a baseline you have stopped noticing arrives with a nastier surprise than the original move.

The central bank has to read this forecast too. Headline inflation of 3.6% against a policy rate under 4% does not settle anything for a committee that hiked less than a month ago. A tame core lets it wait. Another spike in energy hands it a story it did not choose and cannot change.

Outlook

Worse. Then priced. Then worse again, in whichever corner of the market nobody was watching because the weather there had always been fine.

Next bulletin after the CPI.