Back to School

Are you still reading headlines? The market moved past that stage already… oil came off because above 105/110 there simply was not much room left to go higher... it is not going to rally while China is importing just 7Mnbpd, especially now that the whole oil analyst community is starting to jump onto this narrative. Good, about time we start to question apparent demand figures, inventories, refining runs… those numbers stopped making sense a long time ago, and now the curtain was simply pulled back. Never let a crisis go to waste they say, maybe now they finally clean up the numbers.

In this new scenario we have to assume China can live with just 8Mnbpd of seaborne imports, not too far from what we are seeing in May, June and July, unless they are counting barrels that we are not…

more details here: Shiptracker

Over the last few days we saw a substantial flow of ships leaving the Strait, a tiny fraction of what it was pre war, but during the last week no fewer than 10 ships departed, 80% heading to China… yeah yeah, just peanuts but one VLCC per day is 2Mnbpd... and in this market that is far from negligible.

What if China stopped buying in the spot market because it already knew these ships were going to sail? There are still at least 30Mb inside that should leave over the coming days, regardless of what Axios tweets.

At this point the mechanism is obvious, this gets negotiated state to state, China, India, Pakistan, Iraq... those ships are going through and there is no toll booth no bitcoin, no nothing...Iran “has” to let them go.

So, It is time to bury the fantasy that Iran controls or will control the Strait of Hormuz, Trump said no, China said no, the GCC countries said no, the shipowners say no… even Iran knows the answer is no. Fine, they used it as a negotiating card at the beginning, but the more they insist on this non starter, the more they erode the little patience or sympathy the international community still has for Iran… they better start using something else because this story is getting old.

Proof of that were this week’s attacks (preventive?) against facilities in the Iran coast… did you hear anyone complain? Oil did not even move… I am starting to think now it is not just the GCC countries asking “to finish the job”.. even EU is getting on board.

If we look at the nonsense both sides keep publishing regarding a potential agreement, I think it is becoming clear that neither side actually plans to reach one and what we suspected from the very beginning is slowly emerging, another forever war, which if you think about it is probably the most elegant exit for both sides, neither will claim victory but neither will admit defeat. The only condition for this to continue is replacing the 2.5Mnbpd we are pulling from inventories with flows coming from inside the Gulf... and with China buying only 8Mnbpd... oh and something else...

-“Did you say thank you ever once?” Comrade Zelensky is making sure China and India have a reliable oil supply. There is too much Russian oil in the system, to the point where today half of what India imports are Russian molecules, the other half is Yanbu… just a few weeks ago India said they were going to diversify supply… today they depend on only two sources... some people simply never learn.

Either way, this took pressure off the spot market, India, which was one of the creators of the April panic, is now roughly 90% in the term market... even Yanbu reduced export pace, now comfortably around 3Mnbpd… we thought it was a bottleneck issue in the pipelines or the terminal, but no… it is demand. Which is not entirely bad because Saudi is now exporting more products from the Red Sea refineries, which is actually the balance that suits Saudi best, let’s say they start loading the occasional cargo out of Ras Tanura and suddenly they have quite a bit of optionality.

Let’s continue with the assumption that this is never really going to be solved, and in that case we need to start looking a bit further out on the curve.

You can play around with this modeler and see if you can find something: curve Modeler

The curve, as it stands today, is still pricing a quick resolution, and this is where some of the few opportunities left in this market can still be found.

While the front spreads compressed significantly, there may still be room on the longer dated part, Dec26, Jun27 and wherever you can find liquidity. Just by looking at the shape of the curve I can tell there is probably an algorithmic function behind it, it is too neat, there is almost certainly something mispriced.

With the drop we saw over the last few days in flat price, the structure gave up quite a lot, maybe not fully in line with the physical market, but even diesel traded at surprisingly weak levels since a few weeks ago… it may actually be a better trade to buythis spread against Brent...

It is true there is diesel in the world but once again inventories are starting to fall after the relief of previous weeks… the arb into Europe reopened, TC14 (the Gulf to Rotterdam diesel route) started reacting again… and we know there will not be Russian diesel around for some time, so…

Now, I have my own theory as to why all physical differentials are settling back into more earthly levels, both crude and products, and it has to do with what I call tanker anxiety. Now that freight is normalizing, and any idiot can get a ship anywhere in the world, it removes the element of energy insecurity. Paying an extra $1/bbl when freight was $20/bbl was almost acceptable, now that freight is $8 or $9/bbl it no longer makes sense.

Arbs are slowly pricing parity (on landed values) meaning the whole pricing mechanism is starting to come back, long gone are the days where nobody knew where the market was at. Yet, we cannot yet say oil is flowing but at least we can go back to the spreadsheets. When we have some anchors, usually is followed by POV positioning.

With increased positions, we should see more traded volumes, more barrels floating and who knows, maybe one day China comes back to the market…