In this report: What Washington’s diesel toolkit can and cannot do, China’s buying, thin US stocks and refiners, Commitment of traders report and trade section.
Last week. Brent +6.24% (+$6.86) O $109.65 H $111.45 L $105.95 C $116.72
Markets to be mindful of USO 0.00%↑ BNO 0.00%↑ XLE 0.00%↑ CRAK 0.00%↑
Articles
Houthis say they attacked Saudi oil sites, strikes reported on Yemen’s Aden
TOR guidance on $RIG.
EIA Weekly inventory report
US authorizes emergency release of up to 400,000 oil barrels from strategic reserve
US aims to loan about a third of heating oil reserve in bid to tame prices
US to Tap National Diesel Reserve as Prices Soar Before Election
Trump Invokes Defense Production Act to Boost Oil Production
IRGC official says “today we not only possess power but also the will to use power”; “if the enemy wants to commit the slightest folly again, we will deliver an unprecedented blow”, Al Mayadeen reports
Israeli Defense Minister Katz says the army is prepared to carry out preemptive strikes against Iran”, Al Araby TV reports
Chinese refiners step up Middle East crude buying amid record stock drawdowns
Exclusive: New image shows Russian approach of U.S. satellite
Big Tech Is Making The Mistakes That Big Oil Did 20 Years Ago” – Rob Connors, The Crude Chronicles
Video': AfD co-leader Alice Weidel on Ukraine, migration and Germany’s future.
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I used to live in a sleepy little coastal village along the Dublin coastline. On weekends and some weekdays, I would venture down to the local swim spot, year round, and dunk myself into the cold ocean and heaving swells. A life-affirming ordeal which I highly recommend. If you just keep moving for 2 minutes, you get comfortable with it, you relax, and there is a small chance you will enjoy it.
The first few times I went, there was a kind and enthusiastic, retired older guy called Dermot. Dermot was in his 70’s, yet looked only about 55. He would swim there all day, getting out for lengthy breaks, where he would chat to everyone and anyone, clutching his cup of homemade ginger tea. It was strong stuff and just the right drop to bring your body back from the cold. Dermot was a permanent fixture at this particular rocky outcrop. The spot was ‘The Vico’. Think Amalfi Coast, but with Irish weather.
‘‘Ah sure, it’s great when you get out, isn’t it’’ he would say ‘‘Just like, it’s fantastic when you stop banging your head against the wall’’.
Dermot has since gone on to the big water, but I think on his words every now and then. We bash and wrangle against the narratives as traders and risk managers, the waves of conflicting information and the cold price action. But at the end of the day, if we just step back and step out of the ocean, we get a great clarity, a great perspective on the sheer trauma that we were putting ourselves through. And more importantly, we learn to accept everything as it is. What has this got to do with trading oil? Plenty.
The past 8 months have indeed been that brooding ocean, that trauma, that cold shock. The wave upon wave of tier one risk events. Hormuz closed, Qatar LNG out, petroline hit, product and SPR draws, looming tank thresholds, refiner after of refiner hit. You could even go back to June last year and the 12 day war- mere starter for what came after. What I am getting at now, is that we have to accept higher prices and what comes with that. Managed reality is over!
Government intervention
Washington has moved to the supply side. Brent settled at $116.72 on Friday, $2.02 above its April high of $114.70 (front-month, not back-adjusted). It was down $1.04 on the week at Wednesday’s settle, then rose $4.35 on Thursday and $3.55 on Friday. The move came on escalation headlines: the NYT and ABC reporting that the US and Israel have drawn up plans for renewed strikes on Iran (the NYT says after the 3 Nov midterms). The IRGC Navy also hit four vessels transferring oil cargoes, that were then struck in the Gulf, and Treasury Secretary Bessant saying Washington is ending the Iranian threat, not managing it (Newsquawk)). All this on the backdrop of whipsaw tracked satellite Hormuz flows- read The Net Net section for the data.
Thursday’s memorandum finds petroleum production and refining essential to national defence under Section 303 of the Defence Production Act, which lets the President buy, finance and expand production, and the emergency waiver removes the usual congressional notice and approval steps (Time, 23 Oct). The law dates from September 1950, months after the Korean War began, and Covid saw at least 73 uses of its priority powers between March 2020 and September 2021 (GAO, via CRS). The memo names no projects. Vance named one, more capacity at a Delek refinery in Texas, and the money is $1 billion of DPA funding, after April’s $42 million for the Constitution pipeline and $50 million for transmission (Time). For scale, the 315,000 barrels the Energy Department is lending from the Northeast Home Heating Oil Reserve are about two hours of US distillate demand, at the 3.91 mbd four-week average (EIA, to 16 Oct).
China is on a supermarket sweep
Chinese buyers reportedly took about half of the 40 mb of November-loading Saudi crude Aramco offered. At least 80 mb of Saudi crude for September to November delivery has been secured on the spot market since mid-September. Saudi imports ran at about 20 mb a month in Q3. China’s own crude stocks, the oil held in tanks on Chinese soil, drew 1.6 mbd in September. That is a record; the old one was 950 kbd in October 2017. They still stand at 1,124 mb, 80 days of refinery requirements (Kpler, 14 Oct). Imports are back to 10.5 mbd on a 7-day average in October, against 11.4 mbd before the war (Barclays, 23 Oct). This is on the back of the steep Middle Eastern discounts I covered in last week’s report: Aramco cut its November Arab Light price for Asia by $3-5 a barrel below the Oman/Dubai average, the widest discount since 2020 (Rystad).
The cushion is gone
Barclays counts a cumulative fall of more than 500 mb in its global oil inventory indicator, and had cargoes loading next week last priced at a $13 premium to the month-one forward, against under $4 on 6 March (Argus, via Barclays). In the US, distillate stocks were 104.3 mb on 16 Oct, 9% under the five-year average for the week and below the five-year low for 12 straight weeks (EIA WPSR). Refiners cannot make up the difference. Utilisation hit 98.0% in the week to 28 Aug, stepped back to 92.5% by 25 Sep and is 93.4% now, above the five-year high for the week for 10 straight weeks. In the weeks when maintenance normally pulls the five-year average down 5.5 points, from 93.0% to 87.5%, refiners have given up 4.0 points. At $6.32 a gallon for diesel (AAA), nobody wants to take a plant down. You don’t stop the combine harvester when the sun is shining, so there is little idle capacity left to bring back.
The other side is a deal
Trump said on Friday “we could end the Iran war very quickly” (Newsquawk). The market has made this trip before: Brent went from April’s $114.70 high to the low $70s in early July, before the escalation of 8 July, and is back above that high now. But the catalyst then was an IEA release of 400mb. Read EIA inventories report here with the picture on this release.
The size of the gap now is massive, and what a deal in Iran or Russia would change, both come down to how much crude is leaving the Gulf.
The Net Net
Before the war, Gulf producers loaded about 15 million barrels a day (mbd) of crude for export through the Strait of Hormuz. Satellite tracking put the seven days to