It is close to impossible to write any in-depth piece when the information flow is overwhelmingly volatile. Following our write-up titled, “The Consensus Is Wrong About The Oil Market.” Iran fired at more ships that were trying to transit the Oman lane under US protection. And after the stock market closed, of course, the US responded by attacking Iranian targets along the Strait of Hormuz.
The latest news flow is that Trump and the Iranians are saying that the MOU is dead. Whether that’s true or not is yet to be seen, but what’s abundantly clear from all of this is that there is no diplomatic resolution to the Strait of Hormuz issue.
Since the start, I have assessed the geopolitical situation as all-or-nothing. Either Iran controls the Strait of Hormuz or it doesn’t.
But what’s more interesting for the global oil market isn’t the tit-for-tat in the Strait of Hormuz; it’s that China just lifted its product export ban.
Why is this meaningful?
In a write-up I published on June 25 titled, “We Are ‘Still’ Going Full Speed Into The Wall.” I said:
Funnily enough, China can now rescue the world again, but in reverse.
First, China saved the whole world by not buying crude (starting mid-April). The lack of crude buying allowed other Asian countries to access the barrels they needed during the pivotal summer demand months. But remember that the Persian Gulf also sent a lot of products out to Asia and Europe, so China can only help on the crude front, and not the product front since it banned petroleum product exports for the sake of national emergency.
Now that the world is running low on product inventories ahead of peak demand season, a big reason why cracks keep outperforming, China can rescue the world again by lifting the product export ban.
With teapot refineries operating at 50% utilization, China is the only country in the world with excess refining capacity right now. Teapots, in particular, can help resolve a chunk of the upcoming refined product shortages.
And since China has been willing to rescue the world so far from the crude shortage, it may very well rescue it again with its excess refining capacity.
Now does this mean that refining margins will collapse?
Unlikely given how low inventories are right now. This is especially true if the US starts to keep products at home due to the low storage.
But the only way China can actually help resolve the issues in products will be to buy crude again. So the current crude surplus is very temporary, given that inbound tankers into the Strait of Hormuz remain a trickle and the production shut-in has no timeline for restarting.
For those of you who have followed the oil math from the start, it’s very straightforward: