Episode 98: Iran signs, crude breaks $80, but we're now oversold

[Music] Good morning and welcome to another episode of Trade with Conviction. I'm Felipe Elling Sherman and today we have James and Neil Hey guys how are you? Very well face. You have you so obviously big exciting week. I'm a MoU was finally drafted and signed yesterday. I think it was yesterday that it was signed in Versailles. All the French are extremely happy that it was signed in Versailles very proud but we need to evaluate what does it actually mean, what was signed and obviously what comes next and will it hold. So there's a lot of questions so all in all very positive but a lot of still a lot of question marks. Now the market is obviously pricing de-escalation in very I would say very how would you say this convincing kind of way you know it crude is below 80 dollars a barrel now so seems like everyone is convinced that this is it but let's say we need to evaluate that and discuss about the different options. So but before we jump into all of that so as he said both parties agreed and signed an MoU the Iranian foreign ministry spokesman Esmail Bak Hai I don't know if I misspelled his name says that the negotiations team will gather in Geneva on Friday so tomorrow and basically the theory in theory this includes the following no so abroad sanctions relief for Iran a short term sanctions waiver for an Iranian oil which is probably necessary at this stage Iran restoring obviously the traffic through the straits and a financial package a very large financial package of 300 billion dollars to be paid by a group of countries and we don't know yet exactly who those countries are so that's the first unknown. Now can we say this is a victory obviously Trump will say this is a victory to me if we think about where we were before and where we are now it does seem like it's more of a victory for Iran than for the US and definitely not for Israel because let's not forget we'll talk about that later but let's not forget that for Israel this was existential and we're pretty much where we were but with much more havoc and confusion than before the 28th of February. Trump yesterday said that if we don't do this deal then we could have dropped more bombs for another two three four more weeks but you never know if the strait would open again and I think he also mentioned that inventories were running dry and we would run out of oil within the next four weeks I think he mentioned that yesterday of the G7 so yeah I mean I wouldn't call this a massive victory for Trump but you know what's your take on this Neon. Well my take is I think we all know that there's still loads of unknowns and I have not also seen yet that sort of final draft of what the MOU what's actually been signed. On top of that it was super hard to follow through the last couple of days because we got the draft text which I think Bloomberg I got the scoop on let's say and then that looked very very good for a random terrible deal for the US but then in the subsequent 24 hours you had Trump saying things like nothing is fixed which I find kind of bizarre because it felt like he'd finally got his kind of deal and you only start to say the US won't pay a dime in this deal and we can still bomb the hell out of Iran if Iran don't behave. Perhaps part of that is basically to do with the media cycle in the US because it does look really weak in terms of the US side of the deal and I'm sure he's quite sensitive to that kind of headline chatter so maybe you just wanted to look a bit stronger but it's very confusing in terms of okay it feels like we've got a fixed deal but actually it's still fluid what Trump believes will actually end up in the 60 day deal. In the 60 days sort of final deal that they want to negotiate and he also started because you talked about existential things I mean he also started to say things like Iran did have the basic right to enrich uranium for civilian use and he wouldn't make Iran get rid of their ballistic missile systems which is kind of contradictory to the draftings that I read which said that Iran had to basically get rid of everything so I find it I find it very confusing we prefer the honest I don't think anybody else has a lot of clarity about things either. Yeah there were just a lot of vague passages in the text really it speaks about reopening of whole mues with no charge unless only applicable for 60 days I mean what happens after that it says that Iran will work with Iran and other Persian Gulf states to to to to find the future administration in the streets but that we just that we have no certainty at all about how it will be actually administered by the Iranians and they're likely to push for some really kind of high level of control and then we had statements from the Iranian foreign ministry yesterday these will be charged the services provided to ships so it's all a little bit up in the air I think. Yeah no and we need to see this last no I mean let's not forget this is just an MOU it's not a peace deal it's not a final peace deal it's just an MOU in business an MOU generally doesn't meet much but here maybe it does and we need to see if this can last and it can be a sustainable kind of peace going forward and there's there's many different stakeholders you know I've talked in the past about Israel being a wild card we've seen in the polls that Netanyahu was taken a beat because you know he promised things and he's not delivering on those promises as I said before this was existential for them and they are still active in there is the the Israeli forces are still continuing on military operations in Lebanon which was part of the the the MOU the any kind of ceasefire in in that region hezbollah at the same time is claiming this deal as a victory I don't know how that you know how the Israelis will interpret that so and and we haven't really talked about the GCC countries no but are they going to be the ones paying the bill or you know they ran it's very simple it's like you attack us you know so you need to rebuild the whole country and this is going to cost you three hundred billion dollars and you either give us the money or we will charge you you know through the straight and so again for me this is a worst deal that we were before you know it's simple it's just a simple really look at where you were and where you are now you now need to pay three hundred billion dollars who's going to pay that what is Israel going to do are we or the next 60 days are we not going to get more tensions seems likely to meet it we will so we'll talk about the scenarios but there's this sort of likelihood that you will have ups and downs and vessels will be able to clear the straight but then sometimes you will have some scares and worries and you know that seems to be the logical path of the next weeks until we have something a bit more formal I would say yeah I think I totally agree with that I think the if you look at price and I think you mentioned it already but you have some astounding things right you have device whoops in contango and that is like the classic the prompt the prompt the part of the curves that's totally sold off you got this cascade in in sort of price effects when you know the longs get absolutely washed out in classic oversold territory just now and I think most of that has now happened and now we're in a position where we have to actually start to count the barrels that are leaving and start to monitor what all sides of this deal are actually doing and say right so we've basically had to I presume we've had the weakest point of the market for the next month already happened and now we actually start to price the reality to some degree and it's also going to be loads of apart from counting barrels is going to be loads of back and forth and the headlines spending a lot of Trump says so it's all ahead of us I would say a couple of things about general the optics of the next couple of weeks what I think will happen is and you already saw it in June you have more vessels leaving the straight and that will make things look really optimistic right you know because you have all these tankers queued up basically but as we said all along it's also important to understand how many vessels are entering because that tells you what's really happening to this large flow right and so I think the market will get overly optimistic about the barrels that are leaving the straight even if it looks optimistic I mean that's not guaranteed yet either and then we need to think about okay can actually the total reach and start to restart all its supply and revineries in a sustainable way if there aren't enough vessels sustainably going in kind of a lot of vessel owners I mean we've spoken to a lot of vessel owners are understandably still very cagey about this whole situation because there's so little certainty right so however and there's something I want to come back to I think there is a growing chance that you get a much looser crude balance over the next six weeks than many people expect and the basic premise of that is let's say most of the solvers that we had stay in place so the SPR releases continue as they should China stays out of the market you remember China was this five million barrel per day solver and you get let's say two to four million barrels per day more oil leaving the straight you know how we've all got these little excels spreadsheet on the go basically starting with 20 million barrels a problem and then trying to get down to zero you can get down to zero quite quickly in the next month if you get a bit more flow out of AG and China stays out the market and I think I'm hearing from content also Europe looks quite long it's getting a lot of oil there's a bit more AG cargo is coming to Europe Asia sorted itself out with SPR with WTI with Mars and Mexican and stuff like that and then you add on top all these eight a bit more AG flow and you end up with like a wheat market like even though we're not in a sustainable kind of balanced global system you end up with a little miniature glut and I think there's a still a growing but small chance that this actually will happen which would explain any of this going to be something like that. in a single language you're discussing in AG. You know, it's, you know, I don't know, I haven't seen the structure yet, but you would imagine a sort of like, I can call it tango now and then, and then the curve, you know, sort of goes back into back relation. I don't know, I haven't seen it yet, but you have this mini-glot, but then the reality kicks in for later on. - Okay, yeah, I think the, as I just tried to describe a bit, I think there's something like, I'm gonna put a number to it, like a 10% chance that hormones opens quickly. And in that sort of scenario, I still think there's a bit more downside to price because in that case, everything is working well, in terms of the politics, and in terms of cargo's leaving, leaving the straight-of-formals. But the main problem still is I've just been describing it is the shipping delays are still likely. You know, and you're not gonna get enough ships in place over the next four to six weeks to get the sustainable kinds of restarts that we're all expecting. So I still think even in the most optimistic scenario, the main bottleneck is to get enough ships into the Gulf, and that will still disappoint people in a certain way. It might not spike flat prices, but I think it will still disappoint the market in terms of, you know, it's, everything is particularly rosy on the politics side, but we're still a little bit short of oil for a bit longer than we anticipated. And the other problem is this supply gap is not kind of linear in the AG, so you're gonna get, I mean, lots of kind of the head of ad-knock, CEO of ad-knock, and all that kind of stuff. They also do the same thing. You're gonna get a chunk of field supply that's able to return relatively quickly if enough vessels are in place. And then the rest of the gap from the AG is gonna come back more slowly, because it's different kind of wells, they're more mature, they probably seen some damage. And so the rest of that gap is slower to come back. And there's also, if you remember, some damage to take account of. So for example, the SATOB refinery in Saudi Arabia, half a million barrels per day, capacity, and it's operating at 60%, 70% at the moment. And it was one of the ones that had a drone strike in early April, and you had Patrick Puyane, the totals CEO talking about how that's not gonna restart for the until next year. So there's a few of these things still to work themselves out. I think it would be sort of like assuming enough vessels have come into place, you've got like a decent chunk that returns quickly, and then the rest takes ages to come back. And I think the price is also not reflective of that at the moment, either. So I think that's the most likely scenario, even if all the politics goes well. Let's put it like that. And the flip side to that scenario, I guess, is that the deal proves difficult to finalize or even fails. Or just general age recovery is even slower than we think. I guess I'm personally less sure of that happening week over week than I probably was four weeks ago, for example, but I still think there's a higher than 50% chance that will be the, that's what's gonna happen. So as Neil's kind of been kind of to speak about, I'm not incentivised to balance the AG nearly as much. They're still gonna be wary for longer. I think AG looks likely or could be slower to normalize in terms of supplies it cannot clear tank tops, essentially. More negotiating about Iran's role in the home use, the tolls essentially, rise in risk premiums, more Trump just to and fro to try and keep prices low, et cetera. The possibility for a rapid repricing higher to, once we realize invocates are just still a problem. I mean, looking at US crude stocks, but also refined products stocks as well. And then we need to start talking about other solvers again. If we do have another two months of war or no deal, US oil exports need to decline pretty quickly. And at some point delayed end user demand needs to come back. For example, heating all demand in Europe, US, that was delayed by higher prices in April, when does that come back? Oh, I agree. And we cannot underestimate, I mean, one of the things that I think that the market has, that we underestimated during the crisis was the market's ability to be efficient and to get the right oil in the right place. So, you know, I'm particularly thinking about the shipping delays or ships not being incentivized and things like that. My experience tell me that, you know, there's always going to be an incentive and it's going to, you know, we need to reprise certain aspects of the curve or freight or whatever. But the market has been extremely efficient in these very dire circumstances. And also, I agree with the demand. I think that we underestimated the impact of demand. As we discussed, I think two, three weeks ago, you know, all of these sort of tanks that you're not measuring like individual cars, how much are they filling up or not and all these elements here or heating all the demand in Europe. Those are elements that we need to see if the market comes back quickly. And it could, you know, if you have, you know, if you're now at 70 and there is a potential of re-escalation or things like that, you know, people might take this opportunity to buy back, et cetera, and you just see this across the board whether it's refiners, individuals, and things like that. So indeed, this sort of scenario where it's still up in the air, you might have some spikes in demand and all that. You will see a market that is going to be quite volatile over the next weeks or months, I would say. And let's not forget that you need to replenish at some point all of these SPRs, but that's probably more later on in the year, you know, but that will provide some support as well to the market. So again, this is, you know, when you go back to, and you look at 77 crude and, you know, cracks in general pretty much at historical averages, spreads at historical averages. I was looking at gasoline and diesel. It's pretty much, no, particularly gasoline is pretty much on the average of the last five, six years. It's one of the scenarios where you're, I still think there's more upside than downside here, you know, in not on flat price necessarily, but on spreads, on cracks, et cetera. But James, let's go into the individual product. What can you tell us about this, this particularly? Yeah, I was interested in what you were saying there about gasoline cracks actually. I guess we haven't quite seen the same in Distill at Cracks. They still look very, very elevated. They have come off over the last, what would you say, fortnights, but I think only really beaten by 2022, currently. We've seen a big sell off though in spreads, particularly ice gas oil. I think I didn't check this monitor for this, but I think it's somewhere trading or between $10 and $15 per ton. Singapore diesel spreads have also followed it down, actually as well, as well as heating all cracks. As cracks across the barrel, across the Distill at Barrel, have come down over the last two weeks as well. Interestingly though, I'm kind of speaking for what we're talking about, US stock positions. The perilous position of diesel stocks in pads one, two, and five has actually led heating all spreads to the buck with trend. They've actually gained over the last period of time. And in this downturn, there's kind of fueled real strength in the Hogo, which looks very strong. And kind of speaks to those points we kind of alluded to earlier about making the sense for the US to start thinking about slowing down exports of diesel pretty quickly. Interestingly, the, and kind of, you treat me when you spoke about gasoline in a little bit actually, because we've seen the Widowmaker, RBHO, that's moved from minus 70 to minus 30 cents big gallon over the last two weeks where it sits now. So the product shortage in the US is not just diesel, it's not just diesel, it's also gasoline. European jet pricing has kind of followed diesel down. It's continued to decline despite low stocks in ARA. I think that's, I last saw was that AFC in ARA for jet are something like 35% lower than the five year minimum. Really low. And mostly closed arms into Europe, currently for jet. James, do you have any idea why there's this divergence between the sort of European regret under ARA picture? I think it speaks to a little bit about the efficiency gains that Felipe alluded to. Kago's perhaps not going into ARA, maybe going into other ports. Also, I think refinery product runs and production of jet in Europe has been very, very strong. So perhaps it's a bit of a dislocation between ARA and, for example, the rest of North-West Europe. Although you can't see that really in the pricing ARA barge breads, North-West-Rupian Kago spreads have come off, but still sits very, very close to their historical maximums. But anyway, there probably is more dissilient supply ahead if the aging normalization happens quickly or moves in that direction anyway. Both from the A.G. refinery product exports perspective, but also from the kind of heavier global sales perspective as A.G. crude gets out into the market as well. Yeah, I was hearing also, or I was reading also that over in Asia, so there's a few South Korean refiners who were offering a bit more diesel than normal. And I was wondering about the sort of refiner or psychology of this. Like if you see lots more mid-least and distilled supply ahead, maybe you want to push out some more diesel export Kago's and then you find the prices before all that are, before all that happens, which only adds to the glut in the end, in a way. And I guess there's a little bit of a sort of damage he's hanging over all of it, but all of this could be flipped on its head by like a piece still failing. In terms of supply picture, but just so that nothing's really been fixed now. It's all still pretty perilous, so yeah, thanks. No, just coming back to you guys from, we'll talk about gasoline now. But indeed, you did have, in the US, has bounce back, you know, with over the last week. Essentially, nothing has really happened in terms of spreads. In Europe, cracks have been pretty much stable. There was a bounce back last week on cracks, but this week has been a bunch, been a non-event. But the story has been mostly on the US. The US, you know, July, August spreads have moved from basically four to now, seven, 50 in the U.S. Arbok spreads for July, August. So there is that sort of momentum happening in the US. I agree. Look at historicals. I was mainly talking about European historicals that are very much in line with the at the mean of the last five, six years, you know, whether you're looking at cracks or spreads. But so on the current picture is we see Europe now, people blending values completely negative. So there's no downward pressure there. The TARB has rallied quite significantly over the last days. That's been, you know, on the back of the strength in the US and European market in a standing moment. TC freight have been quite low, very limited downside there, I would say, on the freight, although there's quite a lot of open vessels. So, you know, when I say limited downside is more based on, you know, the drop that already has happened, but there's still a lot of vessels out there. So that, you know, we might continue seeing some pressure there. But the reality is that we're seeing now the ARBs open for refiners in to New York, and that ARB has been opening. So maybe we start seeing now also the ARB opening for blenders in ARA. That's on the, and also ARA being slightly cheaper than Houston into key destinations like Canada or Mexico over the last week, you know, based on this rally in the US or rally, you know, bounce back, let's just call it. So those are the positive signs, and it's basically telling the story that the US will most probably be able to normalize this inventory, but it will need the help from Europe to do that, and particularly as we are now fully entering the driving season. So those are the positives, if you want, on the market. The negatives, of course, is as you were mentioning, Neil, there's just a lot of crew in North West Europe. Refining margins have been very positive. Everyone is producing at max capacity, not just in ARA and Europe, but also in Django, currently running, I think, at 700,000 barrels a day, so, and with the RFCC running full blast. So again, you're going to have a lot of pressure there from Dango to exporting gasoline. So that's the negative, so that we could potentially see ARA spreads come off a bit more on the back of this additional supply side from North West Europe, and Dango. So the key picture here, the key question is very much around US, you know, is this bounce back that we're seeing sustained? Do we really need to provide this, Europe need to provide supply to the US, and that's going to be the main driving force over the next weeks, when you look at stocks, in pad 1, they do seem quite low. So there is momentum there, and, you know, if we are putting this into an narrative of there is a de-escalation, and, you know, buyers might come back, you know, let's not forget that everyone was just buying what they actually needed, and they make come back now saying, okay, this is the right time, I feel more comfortable, and we start replenishing those stocks slowly, slowly, or at least you're not putting the brakes on whenever you want to talk to the market, you know, and you're feeling a bit more comfortable. So we might see that, you know, over the next coming weeks. In Asia, I mean, the main question remains the Chinese supply. On the East West has it bounce back in early June, in the May and early June, and then collapsed again to an hour sort of a minus 670, it touched briefly minus 7. To me, this is sort of standard at this time of the year. Normally, you wouldn't need any kind of supply from ARA into East of Swiss, and if we're now going to be opening AG, AG should take over most of the supply in East Africa, in South Africa, etc. Although we still see that Singapore is a cheaper source of supply into places like Pakistan. So most probably we will see AG now taking over their turf. So the question around Singapore is very much around Chinese exports, and what's going to happen there? But, you know, I wouldn't be able to comment too much on that. On NAFTA, what we are seeing is that there will be less NAFTA to be supplied in the East from pure refining perspective, where light slates pushed up yields, while crackers should look at to restart. Now that's what we're seeing. Brone up in the East has cooled a lot. I think it's now at minus 90 from a near positive territory one week ago. What are you seeing on crude? Yeah, on crude. As you might have picked up the AG, the Merb and Diff, let's say they're plummeting. That's basically no surprise. It's also to do with the Bicewops, right? They're also extremely weak. The European market has enough crude. Those Diffs are still very weak, and the only place that looks tight, and that's the thing we've been talking about for weeks and weeks and weeks, is the US, because it's been doing its job as a big exporter. And that effect looks to have almost peaked already, I would say. I mean, it depends. It doesn't even depend that much on a deal anymore, because the US stock situation is already so low. So, you know, remember, we talked about cushing 20 million mark being bottom. Well, it hit 20 last week, then dropped again. And already before that data was released, you saw the MEH spread, was the spread between the Gulf Coast, essentially, and cushing, dropping into negative territory. Haven't seen that in quite a long time. And basically that is a signal to say we need to drastically reduce the amount of crude that's going from cushing into the Gulf Coast. So cushing is trying to solve itself. It will solve itself. It always does. And part of what it's going to do is try and push some of the inventory tightness now towards the Gulf Coast. And the net effect of this is that we're going to try to reduce US exports. And we already did start to do that. So you can see it in the weekly YA data, the US crude export, the picture has dropped off quite a lot. I think that's going to continue. So that's one of the solvers that is dropping out of the market. And technically, we have the TI Afra-Arb open to Europe at the moment. It's sort of ticked open again towards the beginning of the week. But the big driver of that was freight. So I think that is also a reflection of the lack of exports that are likely heading towards Europe because you have a ton of Afra's in the US Gulf Coast. And you had weak export economics in May. So I think that's, you know, going to have this cyclical thing where it leaks open. You might get a few more cargoes. But then you start to solve the bit of INFRADE. And if you look at TI Brent paper, it was a good call. I mean, I know there's various things happening. The Brent curve is weakened a lot as well. But we were at minus nine dollars per barrel one month ago. And now we're at minus three fifty for August. So that had to happen. And I didn't always get the time running out. It was too early at first. But generally speaking, the market went the way we thought, you know, the US has tightened up. There's two other things to say. So I think as I was kind of alluding to going forward, there's the possibility of kind of distressed AG cargoes happening. And it depends a bit on China. But the problem is we don't necessarily have room for this crude right now. The way the market set up. The Asian guys made sure that they covered their crude requirements for July, August, even September to degree with SPR, with WTI, with Mars, with Mexican, with Canadian out of TMIX. And they are basically saying they're covered for crude. So this AG stuff basically needs to go to Europe or China. And Europe already has a lot of crude. And the big uncertainty then is what this China did. And if it stays out the market and waits for, I don't know, a very sustainable deal or waits for even lower prices, then the AG crude has nowhere to go. And I think that will continue to pressure firstly the AG Dave. So it will probably also pressure Europe because you'll end up sending cargoes to Europe as well. And I think that's part of the comparing from contacts that is already more AG crude in Europe than people expected. So I think that's the big uncertainty. The US is tightening up. Probably TI exports to Europe are going to look low for June, July. But that might be fine for Europe if it gets incremental AG cargoes. And the biggest unknown is China. So I think if you want physical to look really strong, we need to have disappointing rate of exports out of the AG or obviously it's a piece deal falls through then. That's obviously turns it on its head or the Chinese come back into the market. And that's when that's the sort of uncertain bit because no one really understands what the strategy is here. Is it top-down driven and as soon as the price dips below 80, which we have now, they tell the state one guys to start to start buying up more crude? Are the state one guys more autonomous than that and they make their own decisions? And if that's true, then I guess they'll start to buy more crude. And we also saw, for example, the independent refineries apparently, they're already looking to buy more crude, albeit a lot of it is now floating stuff off of China just now. But it's more interesting. It's the balance between China and AG flow. And I can't give you an answer because it's probably going to be wrong. It's very uncertain. No, but the picture you're describing here is obviously different than the product picture, but there's just a lot of oil now. And so it's not a surprise, then you start seeing crude at below 80. I mean, especially if everyone has already bought their cargos and if I understand correctly, these cargos are bought like two and a half months in advance. And so now you suddenly have all this oil on the water that needs to be placed somewhere. It seems like China is the only sort of place to go or it's my understanding that also Russian crude exports have been really, really high currently as well because of their fine ear attacks. Yeah, yeah, yeah. And it's been going to India, India maxed out. I think I don't know if it's a max, but it's been raising its imports of Russian and that reduces the need for Indians to buy West African and stuff like that, definitely. Yeah. So just to finish off, what's the story on Fuloy learning? Yeah, let's talk about because Fuloy learning is pretty cool. I'm sure Fuloy learning is a good idea. So what happened is 0.5 is almost the most interesting one here. And the reopening deal did send 0.5 East-West back below 40 dollars a ton, which is basically pre-war levels. And of course lots of things are at pre-war levels now even flat-browns. Perhaps the think 0.5 July August spread as well into the low teens. What I basically think this is probably overdone. I think a lot of us think that a lot of these moves have been a bit overdone now, but also from the art perspective it looks overdone. So all on-spec West-East 0.5 arms are now very closed. East-West, if you look at the kind of fair value, is now about $15 the cost. It would take physical freight and cost to get rotted down barrels into sink. Though the arm doesn't work from the supply angle, the dangotty barely breaks even into the sing blending pool in the front and it's out of the money for the rest of the summer. It just doesn't work in terms of getting Danko to supply to the east. So a lot of this is based on the overly optimistic assumption that you get.5 coming back from places like Alzur refinery which is the biggest supplier of.5 and there's also probably limited perspective just now on the slate so we're probably going to heavy slits up in the future, assuming August as well and that reduces your.5 supply as well. So there's no big call but it just leaks from the.5 few last side of things but it's over, it's oversold and I think that applies to a lot of things as well at the moment. That's it. That's it. Okay. Well thank you very much guys. I think that covers it all. I think the summer is on crude. It's a bit more, it's a bit heavy, clearly and it's it's shown on the flat price on the spreads and it's the question is how would it clear what would be the influence of China in its clearing if you want but you know we need to monitor the situation over the next 60 days. I think it's still going to be choppy. There's I would say there's a little bit of optimism in gasoline but mildly or very you know I wouldn't be too cautiously bullish as James would say and yeah it's something to monitor. I think that I think that a lot of the market is risk off right now and it makes a lot of sense to be risk off. I also I think the market is firmly looking forward to the summer holidays after like three or four months of weeks. Extremely intense trading and there's a lot of logistics still to sort out and that's going to be you know I think the name of the game or the next of the next weeks. That's great. Great. Thank you guys. Thanks for being great. We'll catch up next week.