Dude, where's my barrel?

We have seen several cease fire attempts in recent times, and none has appeared as fragile as this latest one. While talks continue, the only thing that truly interests us is the number of ships transiting the strait, and on this front, nothing has changed.

Only a few Iranian vessels and the occasional MR have crossed, but guarantees are still missing, and herein lies the problem… guarantees from whom? One day Iran claims the strait is open; the next, they say it is closed, or it is mined, or that a toll must be paid. On the other side, Trump has an aircraft carrier 300 nautical miles away that even they don’t dare move closer. No one can guarantee anything.

Let’s talk about the “Iranian Toll Booth”: Many versions have been circulating for a while mentioning a lumpsum of 2 million dollars in “transit fees,” which is far from the truth. First, one must understand that, in the heat of war, entrepreneurial spirits always emerge; surely someone approached a vessel claiming to represent the Iranian regime and demanded 2 million dollars... that is what began circulating in the media and the figure that stuck in the public imagination. Did someone pay 2M for transit? Of course not!

In practice, it doesn’t work like that. Bribes in the maritime world (yes, you’ll be shocked to learn there are bribes) are paid in cash—no Bitcoin or Yuan—physical hard dollars that are kept in the ship’s safe specifically for occasions like these, and there is nowhere near 2 million dollars in there (just in case you’re thinking of hijacking a ship).

Obviously, the Iranian regime also saw this as another tool to exert coercion, but even if they wanted to collect, they have no way to organize it. There are 20 different coastal regional commands with zero coordination... they have no way of knowing who paid and who didn’t, or if the Bitcoins were credited.

We saw some ships diverting toward Larak Island for “inspection” and then transiting outward; there was likely a little financial contribution ($10k/$20k) to the Navy for the inconveniences, and that’s it. We also saw ships with AIS off crossing without passing through the “toll booth,” which makes me doubt this is truly enforceable or that they have total control of the strait... but the narrative works for them.

Regarding institutionalizing a mechanism for war reparations, that is also far-fetched. Freedom of navigation is a fundamental principle of international law, primarily codified in the 1982 United Nations Convention on the Law of the Sea (UNCLOS), which guarantees ships of all nations the right to travel through high seas, Exclusive Economic Zones (EEZ), and straits. No Gulf state is going to join this madness, just as no shipowner is going to pay for something where they have the right to transit freely.

What I believe is that this whole toll business is a ruse to force a lifting of sanctions, because if Iran keeps insisting on this, their own ships won’t even be able to get nowhere near the Malacca Strait, or any international waters for that matter… that is Asia’s leverage.

Returning to what matters, the focus must be placed not on the ships leaving, but on those entering, because those are the indicator of future supply in the next 5/10/15 days. The ships that are trapped and loaded already have a price and a destination, only will have an effect if they are released all at once.

The problem with this controversial cease-fire is that for two weeks, no one is going to send a ship toward the Persian Gulf if there is no certainty it will be able to leave, putting everything on pause for at least 15 more days, which is unbearable.

Meanwhile, the clock is ticking:

A ship that doesn’t load is a barrel that isn’t produced, and a barrel that isn’t produced is a barrel that isn’t refined. Regarding the 2025 baseline, we have already lost nearly 7Mbpd of global refining, if this is settled today, this could be the peak loss, and with the 170 million free barrels, we can start scaling up quickly until those run out. If this is delayed a few more weeks or we have a gradual trickle of transits, then run cuts will be unavoidable in Europe where margins are already quite tight, even with gasoil at ~$200/bbl. Unfortunately, then we will have to let the price do what it must: destroy demand. Beware of the word “Destroy’.

But surely what drew the most attention this week were the movements in the futures markets reacting disproportionately, as they have been doing with every news headline. However, in the physical market, madness has taken hold of us.

It was inevitable that this would happen; the market realized that barrels are now missing in the West. The most transparent view we have in the physical market is the Platts windows, where a handful of traders buy and sell physical cargoes. This week they began bidding for all North Sea grades, WTI, and anything they could get their hands on. It is funny to a certain point to see the dynamics, because they are bidding for barrels that don’t exist: well, these European barrels do exist, but oil is fungible. What do not exist are the Middle Eastern barrels from 35 days ago. These North Sea barrels are already allocated to refineries, and no one is going to let them go because they are irreplaceable. Unless they are offered more for their crude barrel than they would earn refining it—something the Chinese in Shandong actually did last month…

If we look at the futures curve or Dated Brent (barrels to be loaded within the next 10 to 30 days), the price tells us that the stress is immediate; we need the barrels now, which is why we are willing to pay more today than for next month. But tomorrow we will be in the same situation, and so on for the next 45 days.

There are two options: either the market thinks the 170 million trapped barrels will all come out in a week, creating a temporary supply of 25Mbpd before June, or this curve is a product of the illiquidity in futures and swaps where no one wants to trade against inside information.

I’m partisan of the latest, but in any case this curve structure can’t hold any longer. ...