Thread by @Big_Orrin

1. 🧵

Let's have a look at how China buys it's crude oil.

First is on Long term contracts. These usually run for one year and start on the 1st of January. Decision to buy these cargoes are made more than 1 year before loading for some.

2. China has the ability to minimise the amount of volume they take but that typically means they have around +/-10% on the amount they load on the ship. The contract also allows them the possibility of asking for more if they so wish

3. This is the baseload volume that the refiners want. This is what they will definitely run no matter what is the situation as refineries need to keep running. Too costly to shut them down.

4. The next type of barrel is spot buying. This can be for baseload but it can be for opportunity as well e.g. running more in the refinery or for SPR.

Buying a spot cargo is not like buying a Big Mac where you pay your money and the cargo appears instantly.

5. Lets look at a trade from West Africa for example.

It is now nearly mid-November. Next week the programs for January loading cargoes come out. That is the cargoes that are available between 1st and 31st of January

6. Cargoes are not every day, they are irregular and depend on the port of loading having around 1mb to load. So you cannot run up and say i want a cargo of Girassol loading on the 20th of January if there is not one. The refiner buys the best date that suits him

7. Now for China this is not about demand now nor in January. This is about the demand much further in the future.

20 Nov - Cargo Bought
31 Jan - Cargo loaded
5 Mar -Cargo arrives China (35 day sailing)
5 Apr - Cargo processed after discharge and waiting in queue of crude oils

8. So China buying today is a decision being made for 4-5 months in the future. So all the boats you are tracking now are decisions that were made months before when Refinery margins were fabulous. Those margins are not so good now.Especially down the forward curves.

9. Therefore, the physical market has weakened because the forward curves are not anywhere near the same as they were when the decision was made to buy. Cargoes bought last June/July and arriving now are much less attractive to process now than they were when they were bought.

10. It means refiners (which they are) will trim runs now meaning less crude demand now but it also means they will need less in the future because they will now be holding more than they want because runs have been trimmed. Decisions last June affect decisions next April.

11. Timing of decisions are crucial to understanding demand in the physical market. You cannot look at boats on the water now and say demand is strong because those decisions were made at a different time and place. Timing is where reality and narrative clash.