Big_Orrin Profile picture
28 Feb, 14 tweets, 3 min read
1. Thread

Here are reasons I see the physical oil market as nowhere near as tight as people believe it is

A) Tight market is usually equated to supply/demand balance + amount of spare capacity in market. At moment there is a huge amount of spare capacity that can return quickly

B) Also there is a high level of excess inventories. Any loss of spare capacity at moment is such that spare capacity will still be significantly in excess of normal. Therefore, the perception of a shortage of oil is overhyped.

C) just because excess inventories are being drawn does not mean the market is tight

Excess inventories and normal inventories are different

Normal inventories = risk management
Excess inventories = production

Normal inventories are not currently being touched.

Currently supply = production + draw from excess inventories

As excess inventories tend to 0 then production tends to supply.This is what OPEC wanted. With excess inventories remaining and huge spare capacity, the market is not short hence not tight.

D) So where is the evidence? large amounts of cargoes  remain unsold. Differentials are falling with some at their lowest since last April during price war. Currently Refiners are able to choose what crude oil they want. In a tight market you are left with what is available.

E) US choosing to import insufficient crude oil and continuing to exporting large amounts. US refiners can pay more for local crude than anyone else because no freight costs. If US was such a tight market the opposite of this would be happening.

F) OPEC+ intentionally cutting production. Production can be restored at anytime. Saudi voluntarily cut 1mbpd in Feb and March but exports in Feb higher than January by 500kbpd. Therefore, is oil really that scarce?

G) OPEC producers intentionally restricting quantities of crude oil to the US to reduce the most visible inventories. If market tight they would sell to the highest bidder, no matter who it was.

H) Chinese ports with falling delays and lower floating storage, means China is importing less than before as ports able to discharge the backlog. China also buying dark oil from Venezuela and China that is believed to be off the market. So more crude than market perceives.

J) China has 100-120 days of total crude inventories. That is more than the 90 days they initially aimed for with SPR. SPR now includes commercial inventories and have little place to put it. Add in significantly increased products SPR. So Has Chinese SPR purchases stopped?

K) India already showing product demand has fallen in February over a January as high oil prices affect demand. Oil refinery throughput still high and India seen to export rare cargoes of gasoline from some refineries.
12. This does not mean that oil markets will not get tight in the future but the perception they are tight now is really not the case. Once excess inventories removed and production increased to cover, there will still be significant spare capacity available to balance the market
13. Therefore, demand is the critical,factor to a tight market and not supply. But demand unlikely to return to 2019 levels quickly due to remote working, airline demand, high oil price, high unemployment and weakness of economies.
13. This is likely reason OPEC already talking about future investment rather than excess inventories. It provides excuse of not returning 1.5mbpd to the market to hold prices higher as return of demand looks weaker than previously expected. In other words oil market not tight.

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More from @Big_Orrin

4 Feb

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
Read 13 tweets
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

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