(MEMO) Memo - Insane Asylum
The Strait of Hormuz is not back to normal, so why is everyone assuming the oil market is going back to the way it was?
By: Wilson
I might need to be admitted to the insane asylum soon. I went through 6 sell-side reports today, all assuming some type of return to normality within 60 days. Goldman is assuming the end of July; Morgan is assuming the end of August; HSBC is assuming sometime in August; JPM is assuming sometime in Q3; and so on.
Perhaps I’ve been reading too many OSINT accounts or following the tanker vessel counts a bit too closely. But can someone please help me understand how we are going back to normal anytime soon?
Here are some charts from Morgan Stanley:
Crude Oil Exports
Transits out of MEG
Transits into MEG
And here are some charts from Goldman:
Flows out of SOH
Production shut-in
Imbalance
So let me understand this correctly. Since June 17, we have released the floating storage that had been stuck due to the closure of the Strait of Hormuz.
Energy Aspects estimated that ~150 million bbls exited since June 17, which equates to ~8 million b/d. Most of that is due to the stranded barrels leaving, which still leaves production shut-in (optimistically) at ~6 million b/d.
Even Goldman’s own analysis assumes there’s still a ~6.6 million b/d flow difference despite the recent pickup. But the oil market is in a glut because of ~150 million bbls exiting?
What?
Every sell-side analysis I’ve read so far rhymes with something along the lines of this:
We estimate the Strait of Hormuz flow to normalize by ___. We project that the global oil market will be in a steep surplus going into 2027, which should help build global oil inventory buffers. We expect UAE to increase production higher than previous years because it has exited OPEC and will ramp production. Non-OPEC supplies have also increased versus pre-war expectations, and we expect some type of structural demand destruction that came from this conflict.
I must be insane. I just can’t believe the analysis I’m reading these days. Either I am the dumbest human being on the planet, which I am open to admitting at any time, or everyone has completely lost their minds.
There is no evidence happening in the Strait of Hormuz that leads me to believe that any semblance of normality is coming anytime soon. The US and Iran are actively bombing each other, the US is forced to escort ships through the Oman lane with AIS turned off, and sell-side analysts are assuming normality to return by the end of the month.
This is not an analysis anymore. This is wishful thinking.
In COVID, I remember sitting in my office in April and reading about how:
Oil inventories are going to hit tanktop everywhere. Tanker rates are going to skyrocket due to floating storage demand.
Permanent demand destruction is coming. Global oil demand will never surpass 2019 levels again.
Oil markets will take years to recover from the inventory build-up, and we may not see $50 to $60/bbl crude for at least 3-5 years.
And as I was reading through these reports, I was simultaneously attending board meetings for Gear Energy about how we needed to drastically shut-in production because crude oil was trading below our operating breakeven. Where was the analysis about the production shut-in? Where was that analysis?
I remember thinking in 2020, I must be insane. There is no way the investment community doesn’t realize that when oil falls below operating cost per barrel, producers are forced to shut-in production. This is an inevitable outcome for producers worldwide. Even if OPEC+ producers didn’t want to shut-in barrels, they had no choice. Prices are too low, so production cuts were an inevitable outcome.
And a month later, production shut-in was all anyone talked about. I just sat there in complete disbelief. Something that was so insanely obvious was overlooked by the whole market.