Oil Down, Risk On?

I remain long Bitcoin and hold bearish WTI exposure through defined-risk put spreads.

Crude

I’d like to start with crude since it strongly influences risk assets’ trajectory.

This is not a bearish physical-oil thesis. It is a geopolitical-premium compression thesis being expressed against a truly tight physical market.

The U.S. faces several key constraints in its ongoing operations against Iran and in the Strait of Hormuz. These make me believe that U.S. attempts to rekindle an MOU are credible. The most relevant constraint for my analysis is the broader cost of such a conflict beyond the immediate military expense. I warned at the very early stages of this conflict, when the market was still pricing several rate cuts for this year, that oil would become a pass-through issue. This has since materialized and has, at minimum, accelerated a selloff that has left the Nasdaq 10% below its highs.

I therefore believe that some form of MOU, or at least a tacit—though fragile—ceasefire, is imminent and could come this week.¹

I was long oil at the very bottom of the MOU period ($68)² and am now adding short exposure after a rise of almost 40% from that long setup.

It’s important that this setup is coherent from the broad thesis all the way down to the microstructure expression.

CME CL weekly TPO.

CME CL higher-time-frame structure.

The strongest counterargument is the physical market itself. Cushing inventories sit at roughly the 0.3 percentile of their ten-year range, commercial crude and gasoline near the 4th, and distillates near the 10th. The WTI curve, as of July 24, is correspondingly tight: about $4.16 in backwardation from M1 to M2 and $14.63 from M1 to M8—while managed-money net length is only around the 7th percentile of its ten-year history.³ I therefore cannot credibly claim “loose balances and crowded longs.” This is specifically a thesis based on the expectation that the geopolitical premium compresses faster than physical scarcity can support the prompt contract, which is also why I am expressing it through defined-risk put spreads.

The microstructure picture further supports this thesis.

Bitcoin

Such a de-escalation would, of course, be excellent news for risk assets, but even among them, Bitcoin remains an outlier.

It showed initial signs of a structural shift last week, flipping key levels and even retesting them: the 30-day rolling VWAP, 50-day moving average, 12/25-day EMA trend and, most importantly to me, re-entering and committing to yearly-VWAP value. I remain broadly confident as long as price remains accepted here; invalidation of this higher-time-frame bullish bias should be clear from the chart below.

Bitcoin’s higher-time-frame structure.

The microstructure expression of this shift is also visible on lower time frames. After I shared that I was buying the 64k monthly-VWAP retest,⁴ Bitcoin bounced from there over the weekend.

Bitcoin exerted strength around key levels throughout last week.

Importantly, the move has not required visibly elevated perp funding or expanding Bitcoin open interest. It has respected relevant levels across numerous time frames, from monthly VWAP and value down to weekly VWAP and taker anomalies, alongside very healthy maker flow.

A catalyst such as the one discussed in the first part of this note could well push us beyond 65.5k and turn the current excursion into another healthy higher low.

CME BTC RTH/ETH TPO.

Note that I see this as a short-term catalyst for a stab higher. De-escalation would remove an important marginal oil and inflation shock, but it would not by itself create a clean easing backdrop: the 10-year real yield is still 2.43%, around the 99.5th percentile of the past decade, with the nominal 10-year at 4.69%.⁵

Send any thoughts and questions to desk@confinia.xyz.