The indefatigable US investor was rather teed up another swing at equities this morning by the US CPI report produced on Friday. Both the headline and core US inflation numbers came in at 3 percent, being under the predicted 3.1 percent for the pair. Given the pricing of the CME FedWatch tool all but guaranteeing a rate cut from the US FOMC decision this week, speculative noises once again surround a future where a succession of 25-basis point cuts will be witnessed going into 2026.

Therefore, after a side meeting with Chinese counterparts at the Association of Southeast Asian Nations (ASEAN) summit in Malaysia, the announcement by Treasury Secretary Scott Bessent that a “framework” in which Presidents Trump and Xi might avert tariffs including the threatened 100% tariff on Chinese goods, the leap in US bourse futures was almost a given. Bringing weight to Bessent’s interview with CBS was how this included a "final deal" on TikTok's US operations and that Beijing would be prepared to stay its hand in tightening the supply of rare earths.

Such is the influence of the trade relationship between the two largest economies of the world, any cooling in animosity is greeted with global approval. The DOW taking a look at 48,000 is impressive enough but is outdone by the Nasdaq punching through 25,000 only to pipped to the pole position by the Nikkei and its surge through 50,000. Gold and the US Dollar dip as investors have no need for their protection at present and as for oil it has little choice in hitching a ride made easier by its own corrective upward momentum.

And parse the sanctions too

We, along with others, are begging the question on whether President Donald Trump is willing to keep the current sanctions applied to Russia for any longer time than just getting Vladimir Putin’s attention. If the latter is the case, it has proved to work with the defiant President of Russia describing the action as “unfriendly” but stubbornly laid out his position that “no self-respecting country ever does anything under pressure.” Admitting that the moves from the US, EU and UK would have some debilitating consequences, he challenged the combined actions and that they “will not significantly impact our economic wellbeing.” Bravado maybe, but the success Russia has gleaned from circumventing sanctions, particularly on its ‘dark fleet’ feels as if the canny ex-KGB operative is always one step ahead of the game. We read with curiosity the furore in the world of chess and accusations of cheating and cannot help but feel we are witnessing a grand master at work with all the stereotyping of Russia’s history or prowess at the game forgiven. 

It is then tempting to take a view on how the new measure of sanction will have no material harm in Russia getting Kpler’s estimated 3.5mbpd of oil to water, unless they are backed up by the promised direct or secondary tariffs on the financial companies that facilitate Russian oil business coming under the jurisdiction of American influence. “Follow the money” is the advice given in Hollywood films when spies and sleuths target nefarious activity, but the amount of income garnered from oil is not easily disguised. According to the Centre for Research into Energy and Clean Air (CREA), while income has fallen from the heights of over a $1 billion/day, it has stayed on average over $600 million/day since 2023. To labour the point, without stringent enforcement of the financial side of sanctions, it will only be India, under severe tariff pressure from Washington, changing behaviour in Russian oil buying. 

While China has temporarily suspended Russian imports as it works out any implications the new sanctions might hold, there has already been precedence this year when China, after scrutinising US sanctions and paying barely enough dues in politeness, resumed gobbling Russian oil offerings. Just before relinquishing office in January, President Joe Biden imposed sanctions on Gazprom, Surgutneftegaz and over 180 vessels of shadow shipping, this led to a hiatus in the landing of Russian cargoes into refinery-rich areas such as Shandong while authorities worked out the implications of exposure to US rule makers. Having seen there were few or none, the import practice resumed. The current halt of inflows might just end up with the same repetition of outcome which will keep the oil franchise on tenterhooks. 

Nevertheless, the change of stance from Washington witnessed quite the reaction from all the major oil futures contracts. The week-on-week changes listed as follows; WTI +$3.96/barrel (+6.88%), Brent +$4.65/barrel (+7.59%), Heating Oil +22.31c/gallon (+10.23%), RBOB +8.50c/gallon and Gasoil +$85.75/tonne (+13.55%).  Having laboured at month-to-date lows, and RBOB at year-to-date, the sanctions news converged with a slightly complex-wide oversold scenario as well as crude contracts being unable to make good on coaxing all the calendar spreads into contango. Making the conclusion that everything in the rally that started late on Wednesday was, and is, all to do with short covering is logical. However, and using Brent as example because of its status as the marker, some of the metrics in the rally offer decent curios. 

Over the years, we have argued that Open Interest is something of art rather than science and we hold true to the view. One problem with tracking O.I. is how ICE produce it at ~11.00am the following day and is never in fact ‘live’. Here is one bothersome observation. Wednesday’s total Brent O.I. was published at a value of 3,083,847 lots, with Thursday’s being 3,009,958. Again, and today’s published figure aside, such differential is not indicative of position flight. Muddying the waters is how M1 Brent approaches expiry and the ‘limit’ period but trading activity in structure is well worth a consideration. The respective volumes in lots for Thursday and Friday in M1/M2 Brent were 215k and 113k, in M2/M3 255k and 131k and in M3/M4 145k and 61k. The Thursday volumes were huge; is it then an utterly outrageous observation on how some of the spread volume was actually ‘switching’, where positions were moved forward? If this proves to be the case, then some activity has been about buying time and the full reaction to this news has not yet been realised. Whether or not this is the inflection point in the master-level game of Ukraine-chess is in the power of the fellow behind the Resolute desk, he might be well advised to spark sparingly at this tinder box of oil price influence.

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