1. Thread- The current narrative is crude Supply i.e. production is less than Demand therefore market is tight. This is the narrative put out by the IEA, OPEC etc. But it is wrong Supply is not equal to production and demand is not equal to consumption.
Supply= production + change in crude inventories

Demand= consumption + change in product inventories

In between is refiners trying to balance these equations

Currently product inventory are building while crude inventory draw

Therefore production roughly equals consumption
3. In the case of crude oil a production is being augmented by inventories to equal supply while inventories are being used to store excess barrels of product.

It means the oil market is always in a supply and demand balance while inventories exist.
4. Part of the problem is understanding inventories. The current method uses a too simplified method for categorizing inventories: commercial and strategic.

Why? Because neither describe what the oil system actually needs with regard to inventories to operate correctly.
5. To better understand system needs, both types of inventories should be further broken into baseload and excess.

The baseload is the inventories CONTROLLED by end users e.g. refiners to prevent operational disruption. They are effectively mini-SPRs. When used they are replaced
6. Excess inventories are everything else. They are barrels that don’t need replaced and which end users effectively has no control over them during a disruption. They include barrels held for speculation and by Trading Houses and can be sold outside of the country they are held.
7. They include producer inventories (unlike a refiner if producer runs out of inventories production does not stop), pipeline/external tank farm (think colonial pipeline for refiners. oil stuck in pipe, refiner has no control so cannot use. Also for excess strategic inventories
8. The US system is good for highlighting this. US commercial crude inventories Before the financial crisis held less than 20 days of cover. Currently it holds 30 days. This was despite US and Canadian production increasing during this period.
9. Increased local production means the refining system can hold less inventories (days of cover) because shipping time is reduced compared to buying crude from the Middle East. This can be seen in the fact crude storage capacity at US refineries has fallen over the period.
10. A refinery is designed to hold a fixed amount of inventory in case of disruptions and shipping times. The amount is typically increased if throughput is increased and tanks are mothballed if days of cover can be reduced.
10. Therefore not only have commercial crude inventories increased significantly but also the amount the system needs to operate has fallen. In other words excess inventories have significantly increased over the period which has not been alleviated by exporting crude oil.
11. The same has happened in US product inventories. In 2007 days of cover was 32 days and currently it is 40 days. Even though total product demand in the US has remained roughly the same.
12. The US SPR is massively oversized. The only requirement it has to fulfill is 90 days of net crude and product imports under the IEA agreement. In 2019, that net imports was 670kbpd, which requires an SPR of just 60 million barrels.
13. If you take into account the difference in crude quality then the SPR would need to hold around 330mb of sour <35 api crude and could sell all the >35 sweet crude. Even Congress sees this and will reduce the SPR to 440mb by 2027.
14. In 2006, the GAO looked at 6 separate scenarios where the US SPR would be required. A Venezuelan strike, an Iranian embargo, hurricanes, a Terrorist attack on Saudi infrastructure, closing of the stars its of hormuz and all Saudi production lost
15. Three of those factors happened at the same time Venezuelans, Iranian sanctions and Abqaiq attack and the SPR was not needed. Further the closing of the Starit of Hormuz is now less likely with China as the biggest buyer and not the US.
16. If we look at the biggest problem from the GAO which would be a loss of Saudi production for a long period, the OECD alone holds 4.5billion barrels which would cover the Saudi loss for 450 days.
17. In the OECD as a whole since 2000 inventories in commercial and strategic have increased significantly even though refinery throughput has fallen. While in Non-OECD inventories have also grown significantly more than refinery throughput.
18. If we look at the biggest problem from the GAO which would be a loss of Saudi production for a long period, the OECD alone holds 4.5 billions barrels of crude and product which would cover the Saudi loss for 450 days, nearly 1.5 years.
19. This whole tweet thread has not even considered the waterborne crude oil and products or the Non- OECD inventories including OPEC producers. And the market is currently concerned about 2mbpd of inventory draws, a fifth of Saudi loss.
20. So Why have we got here? First Because of the fear energy security which stops any discussion with regard to inventory levels. The mentality can be seen in the continued explanation for inventory levels because we use 100mbpd of crude.
21. We are never going to lose 100mbpd of production at the same time and if we did oil really would not be a priority. The oil market is now global and cargoes are mainly traded on spot and not contract, meaning any shortage in one region is easily covered from others.
22. Actually holding so much inventory has become irrational. It is actually better to reduce excess inventories now instead of using production as reduced production will put less strain on the fields reducing decline rates.
23. Second we use such poor metrics to assess inventories. Cover days and 5 year averages are just weak and useless. 5 year in particular allows creep to happen just as the way normality is now the 2015-19 average rather than the 2010-14 pre covid. The difference is about 250mb
24. The oil system has become obese without it noticing but it still thinks it can fit in its prom dress. Currently it thinks that by eating 9 Big Macs and not 10 it is going to become slim again.

Sorry for the long thread but it was because of a boring Sunday afternoon.

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More from @Big_Orrin

28 Feb
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.
Read 14 tweets
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

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