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.
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.
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
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
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
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.
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
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
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
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.😢
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.
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.
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

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More from @Big_Orrin

23 Nov
1. Thread

Now seen what Biden is doing, I have been hearing it is not enough, it is worse than expected, etc. But putting potentially 50 million prompt barrels in market is not nothing. It is 1/9th of total US commercial crude inventories and 3 days of US refinery throughput
2. It is 50 WAF cargoes, or 83 North Sea cargoes. In WAF terms that is equivalent to 1.5 Angolan programs and 1 Nigerian. These two programs are already finding it difficult to sell.

So to stuff that amount into a market in as little as 15 days is huge.
3. Now the argument that I have seen most this last week is about OPEC+ retaliation as if it was some level of equivalence. That by suspending their increases OPEC+ would put it to Biden. So let’s do the numbers.
Read 9 tweets
23 Oct
1. In Europe data showed that 19% of new cars are of Electric in nature. What is interesting is how that number is occurring.

In Spain, EV prices are not falling even with subsidies. What is happening is gasoline and diesel car prices are going up.
2. A Volkswagen Golf could be found for around €18k brand new before COVID, now lowers price is €23k. Dacia Sandero was €7k now is €8k.

It is happening across the board that new gasoline/diesel prices have risen while EV prices have remained static.
3. So what we are seeing is lower income people being forced out the new car market while those on higher incomes benefit from subsidies. So emissions are not going down, because the market is limited on who can pay the price for an EV.
Read 4 tweets
23 Sep
1. This is a good listen but the most important factor for the energy transition was barely mentioned which was the backup Energy system. This is the factor that will make or break the energy transition. A reliable back up system.
2. In a push towards renewables, it’s intermittency means a back up system is needed much more and also needs to be much bigger in size. The U.K. saw prices over $3000/ MWh and a significant factor was the loss of its wind generation system.
3. The U.K. has. a 20GW metered system but during the last 3 weeks it was producing less than 3GW. That means the back up system needed to be 17 to 20GW. This is far bigger than if the U.K. lost a nuclear power plant (biggest is 3.2GW) or a Gas Plant (biggest is 1.9GW).
Read 11 tweets
13 Sep
1. Thread: thought I would put all tweets in one place

Platts and Physical market analysts indicated today that they expect China to release much more from their strategic reserve than previously thought

The believe between 5 and 10 million tonnes (36 and 73mb)
will be released
2. That means before the end of 2021 100mbpd or more could be released from global strategic reserves into commercial inventories for refiners to use

China: 36-73mb
US: 20mb plus crude swaps
India: 4.3mb
3. Why is this significant? because strategic inventories are seen as off market unless an emergency. For China to release from their SPR to affect price suggests that Chinese strategic inventories have more in common with commercial inventories than traditional strategic ones
Read 12 tweets
6 Jun
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.
Read 25 tweets
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

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