US crude run
3-2-1 Crack spread
Inside the barrel, SFOT made a very simple back of the envelope calculation on the economics of storage. It is profitable to store low sulfur fuel oil if you have storage tanks. It is even more profitable to store middle distillates with the contango and floating storage is now in high fashion. The profit could be anything between 2-4 mio usd for 1 vessel worth of storage(average storing capacity of 8-10 cargos). More interestingly, it is even more profitable to store Jet fuel as the contango has been and is still raking in a fortune for those who has storage and has managed to secure long range vessels cheaply. That there has been good demand in Jet fuel or gasoil this past week is not surprising to SFOT as he would also be buying as much material as he could in Jet fuel if his storage space is coming to an end and lock it in for 6 months or so. Once this buying spree is over though, he is not sure where to find the next wave of buying from.
Jet prices and diff to gasoil Europe
p.s - if there is any physical trading related reader, please feel free to correct anything here.
Posts
Hey SFOT..
ReplyDeleteToday's report seems to be in line with API.. higher than expected oil inventories, lesser gasoline/distillate.
The question is why do you think this is bearish? The argument can be put out this way:
Since distillates/gasoline is being drawn on, the refiners will increase runs. This will lead to higher draw of crude into coming weeks which can lead to higher spike in crude prices (on the basis that inventories are falling).
When you say flat price, does that mean the front month? I am an equity options trader, so a bit out of touch with your terminology :)
thanks.
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Ram
@ Ram: I agree the economics is not a straight forward one in this case. However, i believe we are still in declining demand mode. Products are being drawn down because of run cuts, not because of stronger demand. With stocks full to the brim everywhere, if demand were to recover, there are plenty of supply to meet it. Even if refiners were to use this uptick in margins to pump more products out, it won't last as they will be flooding the markets with more of the readily available products. This is just my view but there are probably more things at work now that i do not know about. However, this is the first step towards longer term price recovery though and we could go through a few of these cycles for products to finally get drawn down, but we do need demand to recover first ultimately.
ReplyDeleteI agree with you on demand is no where near "coming back". I have no clue why it would either given the type of mess we are in.
ReplyDeleteAnother interesting note is look at other commodities like Corn, Wheat, Soy which have all had rallied similar to crude in recent weeks, but have sold off considerably since yesterday. Yet no significant move to the downside on crude. I have a neutral theta position (puts + short calls), and have been playing with gamma, but would ideally like to just have crude fall.
I am enjoying reading your blog. A lot of intersting stuff I have no time to follow. Keep up the good work.
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Ram
Ram,
ReplyDeleteyes, 'flat price' is used for the front futures contract (CLo1). Supply/demand fundamentals seem not the drivers at this moment in the crude mrkt. It's more the equity/currency/inflation hedge story that seems to drive it (and keep it for now) over $50.