The futures front month of pricing does not equates to the demand for cargoes in that loading month. It only reflects demand for a very small amount (less than 1% of global production) and that is under a very specific contract that only about 6-8 companies trade
2. That contract is the BFOET and the BFOET Partials contract. You buy one of those or 6 partial contracts (from same seller) and you will be delivered a cargo anytime the seller sees fit in the contract month.
3. The cargo delivered is the cheapest (when taking into account Quality Premium) of either Brent, Forties, Oseberg, Ekofisk or Troll. So you buy an April Brent BFOET contract you are paying April Brent futures+Exchange for Physical(premium/discount). It is a fixed price contract
4. The cargo will then be delivered any time from 1st of April to the the 30th of April. (actual date at time of purchase is unknown). This contract is really only played by the big boys BP, shell, vitol, Trafi etc. and is part of the "Chains" system.
5. So what does the April contract mean for actual cargoes being bought?

Currently April is the front month and its price reflects the price buyers of cargoes are paying for cargoes loading now in February, not in April.
6. The price of crude oil a buyer pays is typically based on the Bill of Lading. The Bill of Lading is when the boat has finished loading and all the paperwork completed. That pricing is typically the average of the Benchmark price over fixed number of days + quality differential
7. Example, WAF typical price a buyer pays is the Average benchmark settlement price for 5 trading days after Bill of lading (5 after B/L). If I have bought a cargo loading 3-4 Feb with a B/L of 4th of Feb, I pay the average of brent settlement on the 5th/8th/9th/10th/11th feb
8. other pricing periods commonly used are average of the month of the Bill of Lading (e.g. Middle East cargoes), 10 after B/L (urals) and 5 around B/L (North sea). 5 around would mean average settlement on 2nd/3rd/4th/5th/8th of Feb for a cargo with B/L 4th of Feb.
9. The above case is if you use Brent futures as your benchmark. It is even more complicated when you use Dated Brent. It is calculated using the second Brent month. therefore the April Contract for Dated Brent related contracts were for cargoes loading in January.
10. Therefore, the idea that trading the April contract has anything to do with April loading cargoes is not really the case. Price paid for most April loading cargoes will be determined by the June or even July Brent contract. Not the April. Demand is determined by those prices.
11. That is what refineries will be assessing not the front month price. Only reason for a refinery to look at front month price is if considering a very prompt cargo because they have a need either due to problems with other cargoes or they have processed more than they forecast
12. With strong backwardation and high inventories there is no reason for a refinery to buy to store. So apart from a few North Sea cargoes (and occasionally some urals), the front month futures contract has little to do with refinery demand in that month.
13. Note the WTI with physical delivery is a different beast. This was just to show Brent which prices around 80% of cargoes and does not have physical delivery. This note was to show how refiners look at things and how the physical market actually works.

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More from @Big_Orrin

20 Oct 20
1. OPEC+ expect a large stock draw into year end. The problem is where is it occuring? OECD Refineries typically hold a specific number of cover days of production. With margins bad, does not matter how cheap crude is they will not increase cover days because of cash flow.
2. Differentials and CFDs remain weak which indicates low demand for crude oil. Floating storage is increasing at points of production but falling at points of discharge. Both indicators of low demand. Refinery runs are not increasing in the OECD with COVID surging.
3. We are already trading December WAF loading barrels which means arrival in China in Jan/Feb and then processed in Feb/Mar at earliest. ME barrels have been bought for November which means arrival Dec/Jan. So all the buying into year end has already been done for China.
Read 13 tweets
24 Sep 20

Had a few comments about me asking whether peak supply may come before peak demand. So I thought i would write in more than one tweet what my theory is. And it is only a theory.

2. Over the last 6-7 years investment has been low and we have not seen its effect yet. Shale growth covered the demand growth but other projects covered the loss of crude oil as fields started to age and degrade.
3. The lack of investment means that at some point he projects needed to cover the degradation and ageing of fields will just not be there to cover these losses. Shale will grow but shale was a very specific period of time due to capital availability.
Read 10 tweets
6 Sep 20
1. Thread

Lot of talk on the floating storage in China but it needs to be looked at more carefully than just the big number that is being posted.

The tweet below shows the problem is mainly in one area. Qingdao

2. When looking at the ships that have arrived there are different kinds
- cargoes waiting to unload
- distressed cargoes that are still looking for a buyer
- floating storage which are cargoes waiting for the price to go up before being sold.
3. Knowing what each cargo is important because many of those cargoes may not be unloaded for months (floating storage) nor belong to Chinese refineries (floating storage, distressed cargoes).
Read 10 tweets
30 Jun 20
1. Thread: the decision of Saudi Arabia to start a price was is probably the worst decision they made because they really did not understand the implications of their actions.

2. First they failed to realise that Trump and The Us had a floor to the price they were willing to accept oil. I believe Saudi thought a price war would please Trump as it brought down the price of gasoline. Huge mistake as can be seen by their back tracking.
3. It showed that Saudi maybe the biggest producer and with the most spare capacity but the swing producer is the USA not because of shale but because they can make Saudi increase and cut their production.
Read 9 tweets
12 May 20
1. lots of graphs showing floating storage/oilonwater have popped on my timeline in last week. Problem is that they underestimate oilonwater and overestimate floating storage

The problem is they do not take into account the intentions of the seller of the crude oil
2. They do not take into account correctly what is a distressed cargo.

A distressed cargo is a cargo that a seller intends to sell immediately but has not been able to. The seller has been forced to load the cargo but continues to try to sell.
3. Floating storage is the intention of loading oil on a boat and holding it for a period of time before selling. The cargo will be sold at some point in the future when the seller decides to put it in the market.
Read 5 tweets
3 May 20
1. Sunday Night Tweet storm

Many stories are coming out about the reduction in Jet demand will lead to a glut of kerosene. It is very unlikely to happen as refiners will be able to reduce the amount of kerosene production and be able to balance the market

2. How will refiners do this. They will run the gasoline cut and diesel cut differently. Before COVID-19 kerosene was the highest margin product. Refiners had incentives to produce as much as they could. Therefore they did this at the expense of gasoline and diesel.
3. What refiners will do is they will
A) increase the cut temperature of gasoline therefore absorbing the lightest part of the kerosene cut. This could absorb around 10-15% of the kerosene production.
Read 10 tweets

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