1. Seen a lot of paper traders telling Physical traders what they should do with regard to the SPR release and how much money they could make. $5/bbl seems to be the consensus level. On 1mb that is a cool $5m profit.
But sadly reality is not like paper trading.
But sadly reality is not like paper trading.
2. Paper traders suggest you sell the prompt month you where you receive the crude oil and then buy back the month you need to return the crude oil to the SPR. Simple!!!!!!!
Not quite.
Not quite.
3. Lets take the costs on the physical transaction part.
First the easy bit. the cost charged by the SPR
For one year it is 3.9% to be repaid in extra barrels.
So 1mb received requires payment of 1,039,000bbls
Cost: $300k
First the easy bit. the cost charged by the SPR
For one year it is 3.9% to be repaid in extra barrels.
So 1mb received requires payment of 1,039,000bbls
Cost: $300k
4. there is the cost in freight of returning the crude oil to the SPR
Lets say it is $1 but could be much more.
Cost $1million
Lets say it is $1 but could be much more.
Cost $1million
5. Losses in transit.
You dont get 1mb at the end, you may lose 1kb in pipeline, intermediate tanks, boats etc. That happens on the SPR crude leg and the replacement leg.
Cost: $200k
You dont get 1mb at the end, you may lose 1kb in pipeline, intermediate tanks, boats etc. That happens on the SPR crude leg and the replacement leg.
Cost: $200k
6. So we have already seen that $5m profit reduced to $3.5m. Still a good return but that is not where the biggest cost is.
The crude in the SPR tanks is not of export quality, i.e. its origin is unknown as the contents of the tanks are unknown to the buyer.
The crude in the SPR tanks is not of export quality, i.e. its origin is unknown as the contents of the tanks are unknown to the buyer.
7. The SPR people provide an assay but refiners never trust an assay until they do one of their own at the loadport or at the discharge port. So they will undervalue the crude because of the risk
Typically, with new crudes, refiners trial them before adding them to their slate
Typically, with new crudes, refiners trial them before adding them to their slate
8. Now the Sour crude in the SPR has an API of 30-31 API. But it is a blend made from Maya and other heavy crudes. Therefore, wax, metals, etc will be a factor that lighter 30-31 crudes usually lack. It is also likely more of a dumbell crude than typical 30-31 api crudes.
9. Also the hugely long storage period in the caverns also means salt content is an issue that refiners must consider. All in all this means the SPR crude will need to be significantly cheaper than a similar export quality crude of a similar quality.
10. These issues will be seen in the quality differential.
Posiedon crude a 30 API crude is currently trading at WTI-$3.85
The SPR crude 30-31 API sour would trade much lower quality differential of around -$7 to -$8
Posiedon crude a 30 API crude is currently trading at WTI-$3.85
The SPR crude 30-31 API sour would trade much lower quality differential of around -$7 to -$8
11. Now the SPR places restrictions on the quality that is returned. It must be over 30 API. Poseidon is about the cheapest with regard to the SPR quality requirements.
Therefore Loss on quality differential: $3.25m to $4.25m
Therefore Loss on quality differential: $3.25m to $4.25m
12. These differential differences would also be likely seen in the sweet crude as well because it is heavier than most light crude (not a bad thing) but the impurities will make it much less appealing especially to simple refineries that cannot remove them.
13. Therefore as you can see
The physical trading position now sees a cost of between $4.75m and $5.75m
The paper profit has been wiped out.😢
The physical trading position now sees a cost of between $4.75m and $5.75m
The paper profit has been wiped out.😢
14. Buying and trading from the legislative releases makes sense as there is no payback.
But exchanges dont. They were designed to be costly. There is no money changing hands. they are designed to stop refineries from shutting down not trading them.
But exchanges dont. They were designed to be costly. There is no money changing hands. they are designed to stop refineries from shutting down not trading them.
15. The cost to the refiner of the exchange is far less than running out of oil and shutting his refinery down.
This release is being made where there is no risk to refineries of running out of crude. They may purchase it if their margin curves indicate it is optimum.
This release is being made where there is no risk to refineries of running out of crude. They may purchase it if their margin curves indicate it is optimum.
16. But as a trading position the risk reward is not great. A trading house may be able to push the qulaity premium up but refiners are not stupid. Look at the discounts that they pay to accept Iranaian and Venezuelan crude.
17. the only way this becomes an attractive trade is if the backwardation blows out again. But the SPR release by Biden was design to squash the backwardation in the front without jeopardising the rear. It is down from $1.88 on 1st Nov to $0.60 now.
18. The 18mb legislative releases will all find buyers as they are cheap crude but with a risk.
The 32mb exhanges due to the cost of replacement may find it more difficult especially with lower backwardation
The 32mb exhanges due to the cost of replacement may find it more difficult especially with lower backwardation
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