The Only Way Out Is Through | Weekly Roundup

Quinn Thompson · Lekker Capital

Backwardated Brent curve offers a positive roll yield to long futures holders with a built-in cushion.

Front-month Brent trades around $112-113, but the March 2027 contract is only about $101, a $12-13 per barrel gap. A long futures position therefore earns positive roll yield as it sells expensive front months and buys cheaper back months. Quinn says the back end of the curve was 'way too cheap' when it rerated in mid-September, and he expects further appreciation along it. If oil stays flat until March the position still earns the roll, and if it falls to about $101 the position is flat, so the trade has a built-in cushion.

“That's where you get this positive roll yield by being long as a futures investor where you're consistently selling the front month more expensive, buying the back month, and then it rerates higher”at 11:59

Quinn Thompson · Lekker Capital

US crude's $13-14 discount to Brent may reflect speculation that export bans extend from products to crude.

The Brent-WTI spread has widened to near its wartime highs, with US crude trading at a $13-14 per barrel discount to the global benchmark while other countries pay a 10-15% premium. Supply chains explain part of this, but Quinn suspects front-running of a possible export ban. The government has already floated restricting diesel exports, and the SPR has been drained to its lowest level in more than twenty years. He therefore sees a real risk that export restrictions expand from refined products into crude, and he argues oil exposure should be held offshore.

“But I would not be surprised if there's also kind of front running or some level of market speculation here that an export ban could expand from refined products into crude because we just drained our SPR.”at 15:08

Quinn Thompson · Lekker Capital

Record refining margins will create a structural long-term floor under crude prices.

Quinn points to very high crack spreads. In some cases the margin to refine crude into jet fuel exceeds the cost of the crude barrel itself, in about 20 of the last 24 years. Refiners are running at full capacity and skipping routine fall and spring maintenance to keep printing cash, which risks future outages. Because refiners can profit so much by continuing to buy crude, he argues high crack spreads create a more persistent bid and floor under crude than an immediate spike would, and that this floor lasts until crack spreads normalise. Russia and Ukraine energy infrastructure damage and export bans on refined products from several countries add to the bottleneck.

“there's gonna be a very structural long term bid under the floor of oil because these guys can make so much money if they just continue buying oil, refining it.”at 19:20

Quinn Thompson · Lekker Capital

Oil keeps rising structurally because inventories and buffers are depleted; prices must surge via escalation or demand destruction.

Quinn runs supply-demand numbers and concludes oil keeps moving higher. Global inventories and reserves have been depleted, which removes the buffers that used to cap prices through the year, so oil is no longer just a Strait of Hormuz story. The US SPR has about 70 days of demand left, the lowest in over twenty years, and he says there is no price-suppression valve left for when re-escalation comes, beyond tweets and jawboning. Fiscal stimulus such as diesel and gas tax cuts or consumer checks keeps demand hot, which is a net positive for price. He concludes the path to lower oil and commodity prices runs through much higher prices, either via new fighting or via demand destruction at a much larger scale.

“the only way out is through. You effectively have to see much higher prices via new escalation, new fighting, further conflict and war, or prices get high enough that there's demand destruction”at 20:40

Quinn Thompson · Lekker Capital

Prohibitive shipping costs are capping how high oil prices can go; logistics is curbing the upside.

Quinn argues high freight and shipping costs reduce what end demand can pay for a barrel or refined product. Because the all-in cost includes shipping, he says this caps how far the oil price can rise. He adds that the cap is a logistics constraint as well as an oil-supply one. He presents the argument as a debated, wonky point, and notes the reverse logic: if shipping costs fall as demand weakens, there is more room for the crude price itself to rise. He also says there are few very large crude carriers (VLCCs), so removing even a small share of shipping capacity matters.

“I do think that such prohibitive shipping prices has also sort of capped a little bit of how high oil prices can go because it's not just oil coming out of the ground supply story. It's a logistics story that's also curbing it.”at 41:49

Quinn Thompson · Lekker Capital

Markets will front-run any Iran escalation before midterms, so sell-the-news is unlikely.

Quinn's strongest view is that markets price events ahead of time, so it does not matter whether any Iran strike comes the day before, the week before, or the week after the midterms. Traders will not wait until after the vote to bid oil and sell stocks. He allows that historical conflicts sometimes saw sell-the-news after rumour-driven buying, but argues that is unlikely here because positioning is light, with little built-up length in oil futures and low volatility.

“My biggest opinion has... Or strongest opinion has been for the last couple weeks and months that the market would front run whenever it is. So it doesn't really matter if it's the day after the week after the week before because the market's not gonna sit till the day of midterms”at 33:26

Quinn Thompson · Lekker Capital

Gulf states paying Iran safe-passage tolls partly offset Iran's lost oil revenue.

Quinn says reports show payments being made to the Iranian regime for safe passage of oil, which he describes as affecting Gulf Coast countries. Because oil prices have roughly doubled, he argues these tolling fees offset a large part of the revenue Iran has lost from reduced oil volumes. He says it is not the same as the lost oil, but Iran still has money coming in. He sees this as a reason the conflict can last, since Iran is not facing a full economic squeeze.

“there's a world where the tolling fees, costs, expenses that they're receiving, because oil prices are so high, they're double what they have been, that those revenues are offsetting a large part of... the lost oil.”at 38:26

Quinn Thompson · Lekker Capital

The Iran conflict will not be resolved in weeks; Russia and China keep aiding Iran.

Quinn argues the conflict is much bigger than US versus Iran, and that it will be hard to end quickly. He cites reports that Iran is still getting help from Russia and China, including reported aid that makes Iranian targeting and missile accuracy less of a constraint. He says the conflict is therefore not likely to be solved in a week, two weeks or three weeks, and that the oil curve was only starting to price in a longer-lasting disruption.

“we think this is gonna be solved a week, two weeks, three weeks? Like, absolutely not.”at 39:45

Quinn Thompson · Lekker Capital

Early polling points to an uphill midterm battle for Republicans.

Quinn says he has seen speculation that early polling and voting data look unfavourable for Republicans. His own analysis suggests the midterms will be an uphill battle for them. He also notes that the president has been talking up recession risks on the campaign trail, which he reads as a deliberate pitch rather than a real forecast.

“my analysis suggests it's gonna be a [uphill] battle for them”at 32:15

Quinn Thompson · Lekker Capital

Midterms skew to regulatory downside for crypto; Republicans' Senate upside is small, blue sweep risk is large.

Quinn says the Senate map favours Republicans, so they could keep control despite weak approval ratings. But the likely upside is a one- or two-seat lead, which he says does little for crypto. The downside is losing the Senate and a full Democratic sweep of Senate and Congress, which he sees as a clear regulatory risk. Crypto has been the asset class most associated with Republicans and Trump, so he thinks this risk is hard to price. He points to 2024, when Bitcoin doubled after Trump's win despite odds the market had not priced in.

“the upside is, like, they get the senate lead by, like, one or two seats. And the downside is they lose it, and it's a full blue sweep, blue senate, blue blue congress.”at 54:55

Quinn Thompson · Lekker Capital

Gold's current selloff is reserve-selling to defend currencies; fiat debasement will eventually drive gold higher.

Gold keeps getting hit because countries are dipping into reserves to defend their currencies against the dollar while everyone is short energy. Quinn sees no excess reason to buy new gold right now. He expects the current 'madness' of oil-driven inflation and rising yields to eventually be met with fiat debasement and debt monetisation, which would support gold. He acknowledges that margin calls and VaR shocks have to be survived first. The timing of that eventual move is not specified.

“So it makes sense. There's not excess reason to be acquiring new gold here. But at some point, I would imagine, like how many people out there think this madness is not going to be met with fiat debasement and debt monetization?”at 8:13

Quinn Thompson · Lekker Capital

Bonds are unattractive: falling real rates from oil-driven inflation mean they'll be unattractive again.

Quinn says bonds rallied this week, but the rally is partly short covering and growth worries. Yields fell while oil rose, so real rates dropped sharply because inflation expectations are climbing. He argues this is why bonds are unattractive: the inflation pressure that pushed real rates down still has to be dealt with. He says he is 'always allergic to bonds' and avoids them, and expects bonds to become unattractive again.

“at some point, just as much as bonds were not attractive, like today, real rates fell tremendously because you have inflation... Oil going up and yields down. So at some point, bonds go back to being, like, really not attractive.”at 8:34

Quinn Thompson · Lekker Capital

Small caps falling nine straight weeks signals real trouble, not a buying opportunity.

Quinn says the nine-week losing streak in small caps was an early warning that was dismissed as a buying opportunity. A few weeks of underperformance can be brushed off, but a record nine-week streak means something is clearly wrong. He reads the small-cap weakness as an early sign of the tightening financial conditions that have since spread to AI stocks.

“this is what small caps being down nine weeks in a row was saying... at nine weeks, like, setting records of there's clearly something wrong.”at 25:37

Quinn Thompson · Lekker Capital

Financial conditions are tightening across the board, and AI stocks, the last holdout, are now joining.

Quinn argues that every aspect of financial conditions is tightening. AI stocks had kept the wealth effect high, but they are now falling too. Rate-sensitive sectors such as housing rallied on the day, but he says a rally in housing and rate-sensitive names does not fix the economy. He cites mortgage rates back near 7.5% and expects the Fed to remain restrictive because inflation is still rising.

“across the board, every aspect of financial conditions is tightening. It's really just been the AI stocks that have kept this wealth effect high that were the last holdout, and now those are joining.”at 26:12

Quinn Thompson · Lekker Capital

Mortgage rates near 7.5% won't revive housing; a much bigger policy response is needed.

Mortgage rates have risen to about 7.5%. Quinn doubts that even a fall to 7-7.25% would be enough to revive the economy, since inflationary pressure is still there. He says the housing and economic revival would need something more drastic, and that a policy response of decent size is typically required for these things to work.

“So like mortgage rates went all the way up to like seven and a half or so... Is that enough to revive the economy? ... you need something more drastic.”at 26:40

Quinn Thompson · Lekker Capital

Next month's US inflation report will show continued acceleration.

Quinn expects the next inflation report to show acceleration. He links this to oil, which is still rising. He notes that the inflationary pressure is still there, which makes it hard for mortgage rates or the broader economy to recover without a much bigger policy response.

“By the way, I think next month's inflation report continues to show acceleration.”at 27:05

Quinn Thompson · Lekker Capital

Rate-hike pricing has only trimmed to 3.5-4 hikes, with no cut path in sight.

Quinn describes the rates market moving from about five hikes to four or three and a half, not from two hikes to a cut. SOFR volatility is at a high and roughly a full hike was priced out in one day. He takes this as evidence that the market is still a long way from pricing easier policy, given the inflation pressure from oil.

“we're talking a rates market that just went from, like, five to four hikes or or three and a half hikes now. We're not talking one that went from two hikes to one cut or anything remotely close.”at 27:20

Quinn Thompson · Lekker Capital

Commodity boom-bust cycles are usually triggered by geopolitics, with demand outrunning supply fixes.

Quinn looks at historical cycles and says commodity boom-bust periods usually have geopolitics at their centre. A conflict or catalyst sets off a chain of events that nobody foresaw months earlier. When he breaks the situation down, he finds there is far more demand than supply fixes can address. He frames the current oil market as one example of this pattern, and says history rhymes.

“boom bust commodity cycles, where usually there's geopolitics at the center of it, there's conflict, there's some catalyst that triggers this chain of events that no one could have foreseen”at 42:55

Quinn Thompson · Lekker Capital

Crypto's bottoming process will take many months; a proper bull market is not yet here.

Quinn says green shoots in crypto usually show up well before they appear in prices, and that a bottoming process can take many months. He argues that sentiment and activity peaked around two years earlier, when Trump was elected. He cites 2022, when the market bottomed but the bull market did not really start until late 2023, and 2020, when prices stayed flat for many months after the COVID emergency before taking off in 2021. He says that for a real crypto run, liquidity has to return, and that he is interested again but not yet deployed.

“that could take six to twelve months. I mean, if 2022 we bottomed and the bull market kind of really didn't start till late twenty twenty three, similar similar deal”at 48:15

Quinn Thompson · Lekker Capital

Liquidity is badly drained by IPOs, AI capex and widening spreads; it won't reverse without injections.

Quinn calls the liquidity story atrocious. He cites multi-trillion-dollar IPOs drawing liquidity out of the system, AI capex running into the trillions annually, and credit spreads that are rising sharply with no end in sight. He says this does not reverse on its own without added liquidity. He notes the Fed is currently priced for a hike in December, and Felix adds there are no reserve management purchases coming soon. Quinn argues that a real crypto run needs liquidity, so these conditions keep the market from recovering.

“the liquidity story is atrocious. We're talking about multi trillion dollar IPOs sucking liquidity out of the system... We're talking about credit spreads that are literally going vertical with no end in sight. Yeah. That just doesn't reverse on its own without adding liquidity.”at 48:57