Structural Deadlock
after a week of whip lash news flow
In this report: Wild market dislocations are masking the real physical pricing of oil.
Week: BRENT -5.9% (-$5.79). Open $98.45 High $98.98 Low $86.09 Close $92.42
Articles
Iran closes Strait of Hormuz once again, fires on tankers
Top Brussels official urges Europeans to work from home and drive less
Europe-led coalition prepares mission to reopen Strait of Hormuz
The Islamabad talks were doomed to failure
$133 vs. $99. What Is the Real Price for a Barrel of Oil?
$100 Realities: Why the Middle East Now Sets the Floor for Oil Prices
US probes suspicious oil trades made before Trump Iran pivots, source says
Warren Statement on CFTC Probe Into Suspicious Oil Trades
Bibi torched U.S. support for Israel for a generation
Here is a taste of the wild Friday news flow thanks to Newsquawk. And the blow-by-blow commentary from Iran and Trump. Welcome to trading news flow.
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A quick summary of the week.
I’m normally not interested in rehashing the enormous news flow on the week gone, unless there is significant price impact. This week was that exception. We started off the week with failing talks in Islamabad, where Vance took the lead with Iran. Indirect talks (both parties in separate rooms) really only found they are at a Structural deadlock on their sets of goals. Trump deployed a US blockade of the blockade on the outside of The Straits to all traffic completely. This served a purpose to spread the pain to China and India, who were still receiving Hormuz exports. The Iranians instantly countered with ‘The Yemini’ option. That the Houthis would subsequently attack ships entering the Bab el-Mandeb straits, destined for loading at Yanbu port. This directly puts another 5mbpd of supply at risk. It is rumour currently, not fact, that The Houthis are yet attacking in this area. There is no scheduled or accepted 2nd round of talks.
Friday- 13% day
Friday, about 13:30 BST, it was announced that Trump was about to do a deal to unlock $20bln of Iranian funds in exchange for Uranium. The market instantly reacted to this. The selling kicked off on oil, buying on equities, rally in metals and Bonds. About 60mins later, Trump announced that The Straits were now 100% open, confirmed also by Iranian officials. Oil pushed -10% on the session. The market took this as all great, done deal. However, the details then started to trickle through over the next 90 mins. Oil started to steady its descent a little.
The Iranians said that ships would have to stick to a prescribed route and that it was conditional on Israel abiding by the ceasefire with Lebanon. Oil was now -13% from electronic open. Then Trump dropped the detail that no Iranian ships would be allowed to travel through until the peace AND uranium deal were signed and fully agreed. 4hrs later, Israel bombed Beirut, Iran then closed The Straits again and the ships that were by then already travelling, had to do an about-turn. So as it stands now, the monster rally we had on equities and selling we had on oil Friday, MUST be rewound.
NET-NET = The Straits is still very much closed.
ONE STEP FROM CRITICAL
We are now at 509 Mbbl shut in on production.
The last ships to have left Hormuz (Asia excluded) arrived last weekend at their destinations in Europe and around the world. Hormuz-Rotterdam is about a 21 days transit. Add 15 days if you have to go around the Horn of Africa. Countries are now going directly to reserves for the blends they were getting out of Hormuz and will continue to do so until 21 days after the straits are truly open.
We need to consider the second round effects of the blockade, which the world and front month pricing seems not to care about.
No more oil out, means that Iran are approaching capacity of their on-shore storage. They have about 35mb of space left until they have to shut in production. If this is the case, it will mean the path back to normal will last even longer. The third round effects therefore will be potentially well into 2027 if not 2028 before production globally normalises. Doomberg recently talked about $30 dollar coming soon after war is over. Well, if that’s the case, I’m selling the house and buying as much as I can on the next major dip. Stay tuned here as I will be tracking it.
Jet fuel emergency
Read my jet fuel report ‘Grounded-The Jet Fuel Crisis’ here.
There is an imminent threat to European air travel as we move our thoughts towards summer. European airlines are already grounding planes. SAS has cancelled at least 1,000 flights in April alone. KLM is cutting 160 flights next month, roughly 1% of its European routes, citing kerosene costs that make certain services "no longer financially viable to operate." Lufthansa has shut down its City Line feeder airline immediately, a closure originally planned for 2027, and pulled 27 older, less fuel-efficient aircraft from service. Irish airline Aer Lingus is cutting 500 flights as of today-Sunday.
Ryanair CEO Michael O'Leary has warned of further summer cancellations if fuel shortages persist. EasyJet is projecting a first-half pretax loss of £540-560 million. In Asia, the disruption is already worse: IATA Director General Willie Walsh
(a good local Irishman) confirmed flight cancellations due to physical fuel shortages are "already happening in parts of Asia," and estimates European cancellations could begin by the end of May. In total, the IEA estimates that air traffic across Gulf hubs has collapsed to 40% of pre-crisis levels in the UAE, 25% in Qatar, and near zero in Iran, Iraq and Kuwait.
Manipulation
The retail trading crowd loves a good old manipulation story. The Hunt Brothers cornering Silver in 1979, Sumitomo copper affair in 1996. Barron Trump is the latest focus, supposedly front-running crypto markets and oil markets. The new senate investigation is into market about information asymmetry rather than price manipulation. Two different things. I thought it might be interesting to think about the numbers at play if you were to think about manipulating the oil market.
Normal market conditions
ICE Brent + NYMEX WTI combined open interest is typically 3-4 million contracts
Each contract = 1,000 barrels at $95 = ~$95K notional per contract
Total notional open interest: roughly $285-380 billion
Normal daily volume: 1-2 million contracts = $95-190 billion in daily turnover
The manipulator with $950M = roughly 10,000 contracts, or 0.5% of a normal day’s volume.
Dislocation.
What we can point to with better evidence is the market dislocation. Physical crude is different to ‘paper’ or what is often called ‘virtual’ crude. For those interested in getting into the weeds and finer detail, have a watch of Ilia Bouchouevs series on youtube to accompany his book ‘Virtual Barrels’. There is little Ilia does not know about trading oil. He is a frequent consultant to OPEC and a fellow at Oxford Research, having retired from energy quant trading.
Okay, back to Physical v paper barrels. You can see from the chart below, that oil delivered at spot ie. right now, deliverable trades as per last Monday was trading at a $33 premium to where front month futures May deliver was trading. This is not normal to have such a spread. Normally, there is a tight spread between the two, as such the front month future daily settlement is taken as the spot rate, with minimal difference. Also account for different grades etc.
Reasons for the dislocation
Below: why the front month has stopped functioning as a spot market, what the VaR roll means for the next two weeks, and the COT signal that says where this breaks next.
