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!!!!!!!
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.
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.
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.
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).
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
US: 20mb plus crude swaps
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
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.
2. 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.
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.
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 #OOTT
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
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. #OOTT
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.
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.
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).
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.
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 #OOTT
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.
Many stories are coming out about the reduction in Jet demand will lead to a glut of kerosene. It is very unlikely to happen as refiners will be able to reduce the amount of kerosene production and be able to balance the market
2. How will refiners do this. They will run the gasoline cut and diesel cut differently. Before COVID-19 kerosene was the highest margin product. Refiners had incentives to produce as much as they could. Therefore they did this at the expense of gasoline and diesel.
3. What refiners will do is they will
A) increase the cut temperature of gasoline therefore absorbing the lightest part of the kerosene cut. This could absorb around 10-15% of the kerosene production.
2. What have we seen so far from China. 5mb of crude up for resale or 166kbpd over a month. And that is crude that won’t be processed until May or even June.
3. Cargoes arriving now in Chinese ports have been on the water for 4-6 weeks. They were loaded before the Coronavirus panic even had started. They were bought even earlier than that in October. Ship tracking now won’t tell you anything about crude demand.
The crude export numbers from the US last week were pretty amazing. 4.46mbpd, was much bigger than it had ever been. But was it really that surprising to see it the last week of the year? Answer probably not. Why?
2. Because at the end of the year liquids in Tanks are taxed by certain states due to their change in value, I.e. the appreciation of an asset. This tax is determined on a LIFO (last in first out), therefore it is compared to the price at the end of last year effectively.
3. In years where prices have appreciated you typically see an end of year draw down and years where the price has fallen you will see inventory builds.
2. In the latest EIA weekly, crude throughput was 1.2mbpd less than last year while gross throughput was over 0.9mbpd less than last year. That indicates that US refiners are using more other feedstocks than last year, mainly straight run fuel oil.
3. But utilization has been poor in 2019 compared to 2018 Suggests a number of possibilities
- Unintended shutdowns due to fires etc.
- The crude slate has lightened too much
-Potentially bigger autumn maintenance season than normal to take advantage of IMO
The maximum capacity: 12mbpd
Other Fields: 5.75mbpd
That means that the spare capacity from the other fields are 1.15mbpd.
3. So if Reuters are correct and Khurais and Abqaiq have recovered 75% to 80% or 4.3mbpd. That means if Saudis can increase the spare capacity of the other fields then Saudi can produce up to 10.05mbpd (5.75mbpd other field spare capacity and 4.3mbpd through Khurais and Abqaiq).
2. The second: most similar crude from other producers will already have been allocated making it difficult to cover any short fall in Saudi crude until the November programs.
3. Third Literally if you look at a map Saudi Arabia is right in the centre of oil logistics. The US is not. it is at the extreme. For a importing country it is not a big problem but as a producer it is a problem being at the extreme.