(Public) Memo - I Can't Believe We Are Doing This

The most VISIBLE oil inventories are about to plummet.

By: Wilson

There’s a scene from Top Gun where Tom Cruise goes head-to-head against Viper. Goose says, “Holy shit, we are going head-to-head. I can’t believe we are doing this.”

This was what PauloMacro said to me when I described to him the incoming US crude inventory draws I was compiling.

Yes, I guess we are really doing this.

As I sit here compiling the tanker flow data I’m seeing in the US Gulf, the thing that should be duly noted is the following:

• We are still offloading some of the tankers inbound laden with crude. These are temporarily keeping US crude imports elevated. The same VLCCs discharging crude turn into export volumes in 1-2 weeks.

• We have an armada of empty VLCCs headed for the US, which will drain US commercial crude inventories dry.

• All the while, we will continue to drain product inventories in the US. Petroleum product exports are expected to remain near all-time highs.

The snapshot above is our preliminary US crude storage estimate for next week, which includes 7.1 million bbls from the SPR. The final SPR release figure could be higher next Monday, so we will have finalized estimates out by then.

What’s not shown above is what happens to US commercial crude storage when 1) US refinery throughput ramps up to 16.8 to 17 million b/d and 2) US crude imports fall to 5.5 million b/d due to lower inbound crude flows.

As I was explaining to Paulo, the net impact on US commercial crude inventories by the middle of May is as high as 12 million bbls.

Yes, 12 million bbls.

In essence, there could be EIA oil storage reports showing -10 to -12 million bbls of crude WITH a SPR release of 10 million bbls. This would put the cumulative crude draw at 20 to 22 million bbls.

And since I’m a numbers guy, let’s just say this. Since EIA started publishing the weekly oil data in 1982, there have been 41 weekly crude draws of over 10 million bbls. The largest ever recorded crude draw (commercial + SPR) was on the week of July 28, 2023, and this week’s EIA oil storage report (-13.355 million bbls) already ranks as the 6th largest crude draw in history.

So yes, we are on pace to break records. I wasn’t kidding when I said Big Ass Crude Draws are coming. BACD is coming, and I don’t think the market is even aware of this. (The estimate for next week’s report ranks as the 8th largest crude inventory draw in history.)

Note: I think physical oil traders are very aware of this. But the algo trading funds that buy and sell oil based on the EIA data? No, not at all.

Here we are...

I guess we are really doing this. We are really going to just watch the Strait of Hormuz stay closed, and onshore oil inventories plummet. US product storage is already approaching seasonal lows for this time of year, and the next few weeks will push us into brand-new territory.

I still see commentary about comparisons to 2022. The absurdity of those comments fails to recognize that this is not even remotely similar.

But here we are nonetheless. The endless comparisons to historical analogs that have no relevance to anything we are seeing today. It is what it is. It would take me days to write and debunk all of the bad information out there, or I can just wait and let the market slap some sense into them. I think I will choose the latter and just position myself accordingly. When the market gives you a gift, you take it and give thanks (as Shrub always says).

So yeah... I really can’t believe we are doing this.

The draws are coming.

It is what it is.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of USO, UCO, BNO either through stock ownership, options, or other derivatives.