QuickHit: There are a quarter billion barrels of oil headed to China right now
Co-Founder of TankerTrackers.com Samir Madani joins us for this week’s QuickHit episode where he talked about where the oil is coming and going, explained the volatility around oil and VLCCs, and if China has the capacity to store the quarter billion barrels of oil that they are buying on the cheap.
TankerTrackers.com is a service that Sam started with a couple of friends from four years ago. They track tankers that carry crude oil and gas condensates, to give the moms and pops of this world a heads up on what’s happening in the oil flow situation. The company aims to deviate from the black-and-white narrative in mass media to show the world the grey area that oil is not always the cause of war.
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Check out the CI Futures platform to forecast currencies, commodities, and equity indices: https://www.completeintel.com/ci-futures/
***This QuickHit episode was recorded on September 2, 2020.
Last week’s QuickHit was with political economic consultant Albert Marko where he explained about this “perceived recovery” and the artificial market.
TN: Crude oil and trade have a lot to do with economic health globally. We’ve just gone through COVID. We’ve gone through a lot of government-mandated closures and there’s been quite a lot of discussion about the rate at which economies are coming back. You see this every day, right? You see the crude trade, you see international trade. How do things look from your perspective?
SM: What we’ve noticed is that since January to now, exports have (except the USA) fell from 19 million barrels a day in exports to around 14 million barrels a day. 4.5 million barrels a day in drop between January and now. That’s a lot. That’s 120 million barrels a month, which is not shipped out now.
We see immense amount of barrels heading over to China because they are buying on the cheap. We saw around a quarter billion barrels of oil headed towards China right now. And of that quarter billion, half of it is already in their Anchorage area. They have over 100 million barrels that are just floating and waiting to get on to shore.
The reason for this is because of the flooding in China, which slows down consumption of gasoline. But it picks up consumption of diesel for the heavy machines that are going to move on the land and so on.
Refinery runs worldwide right now are much lower than the year on year because of the fact that gasoline consumption is down.
What I’m waiting for in the EIA report is not how much inventory has been removed or added, but the refinery runs. How much gasoline is being created out of the food processing? So I’m waiting for a moving average because you shouldn’t rely on the weekly numbers. You should look for the moving average. Wait for that number to cross 15 million barrels per day. That’s my threshold to say that the U.S. economy and the whole thing is coming back roaring again. So because there’s only a small window between 15 and 18 and around 17.5, 18 when it was actually at peak. So I’m very positive that we’ll come across 15 probably in the new year for sure.
TN: In the new year. So Q1, you think things are coming back?
SM: Definitely. Definitely.
TN: Brent is in the mid 40s now. We see both Brent and WTI climbing slowly through the end of the year. Our view is that pricing will tick up in Q1 and then we see it trailing off a little bit later in the year. But we really do see a build through Q1. So it’s good. Thank you for confirming what we’re seeing.
You’re saying China’s got a quarter billion barrels in Anchorage and in transit, right? What’s their storage capacity? Is their storage capacity in excess of that, or will this stuff stay in floating storage?
SM: We did an actual manual survey. We went to storage farm of the storage farm with satellite imagery. And as compared to 2 years ago, you will actually see on Google Earth around 250 to 300 million barrels more than what it had. We have day-fresh images from Planet Labs and we were able to go in and see that year on year, China has the ability to add around a quarter billion barrels of free space. This is a drag and drop method with the standard size storage tanks of 100,000 cubic meters, which is 620,000 barrels. They just drop farms and you see just a whole new farm will pop up.
Since the consumption is down, there’s no pressure for them to do more. But we saw around 1.4 billion barrels of space and 1.1 billion barrels of occupancy. That was two years ago.
TN: Two years ago. It just seems like there’s so much supply and burning off that supply is still a challenge. We spoke with somebody from the Panama Canal about a month ago when she was talking about how LNG was redirected from the US to China to Europe or something. Are you still seeing redirection of shipments? Or are we back to almost normal trade patterns?
SM: In crude oil, we actually see a dog-eat-dog situation going on right now. For instance, Venezuela’s exports are down. It’s a toilet flush. It went down to a quarter million barrels a day now in our latest report. We’re using visual confirmation and I’ve never seen the number that low out of Venezuela. But here we are, we’re under 300 thousand for sure. For the average this year, it was around over half a million barrels a day.
But now lately, what happened is it just completely plummeted. A lot of the exports are going just to other countries so that they can bring in gasoline in exchange. It’s a barter.
What happens is, because they are shipping heavy sour crude oil, somebody else is going to eat their lunch. China wants to import that. India wants to import that. A lot of other countries in the Far East, they have heavy sour because they need the asphalt, they need the diesel. Why? Because they’re expanding their infrastructure.
What happened is that Iran started sending off a lot of the heavy sour lately. I noticed a lot of barrels heading out over that way. They’re getting assistance from other fleets from outside the country. The Chinese refiners and so on, they are dispatching vessels to pick up the oil. It’s not just the national running tanker company that’s delivering the oil.
TN: I’m really interested in that Iran-China trade lane. And you covered that a lot. With the circumvention of different agreements and embargoes, I see a lot of coverage of that. Do you see a growing dependence on Iranian oil out of China or does that seem to be declining? Do you see a diversity of suppliers? Of course, China has never had a single supplier. But do you see a growing number of suppliers and a growing dependence, say on Iranian crude? Or is it the other way around? Is Iran becoming increasingly dependent on China as an export market?
SM: Iran is growing more dependent on China because they’ve had four decades to prepare the whole Plan B for sanctions and so on. So they’ve really polished it up. They’ve smoothened out all the rough edges when it comes to sanctions so they know what they’re doing. But now, when I see how many barrels are leaving the country, and they look at the ratios of where it’s being sent, yes, they do send a lot to Syria, but it’s no more than usually around 100,000 barrels a day.
Once in March, a saw over a quarter million barrels a day. That’s because they have so much production going on in Iran and so little storage space. They have to get rid of it. And they are shipping a lot. So the current media narrative is that they’re exporting about somewhere between 70,000 and 200,000 barrels a day. That’s because those factories are only using AIS data, which is automatically picked up by systems. But what we do is the visual confirmation with satellite imagery, and we see around three to five times that. Somewhere between 600 and a million. And 600,000 barrels a day, that’s a lot. That’s 30 million barrels a month.
And so they have to get rid of these barrels because if they don’t, their production will have to drop even more to a point where they can’t revive those mature oil wells. It’s very costly to kick them back into action once sanctions do get listed.
And with the virus, what they do is they consume a lot domestically. They make it very cheap. And, because they’ve got to get rid of it, they store as much as they can. If they ran out of storage space on land, they put it on the vessel and they put on many vessels.
But now I’ve seen that the floating storage has dropped and shipped out a lot. China is the big buyer and there’s so many ways to deliver it to China. You can either go straight or you can meet another vessel halfway in the Strait of Malacca and so it’s a ship to ship transfer.
So, yes, Iran is more dependent on China than vice versa. And China does report their barrels is coming in from whoever the last port call was. So it’ll be Malaysia, it’ll be Indonesia, or someplace in between. It’s not coming in as Iranian anymore. Although in the latest monthly report, they had to show something, because this was obviously direct.
TN: You mentioned floating storage and VLCC market and it’s gone from a quarter million dollars a day back in April to like 6,000 dollars a day now. What happened there and why is that price just collapsed?
SM: It just deflated so rapidly. That thing was so much more volatile than Bitcoin back in 2017, 2016. The first thing you heard was the sanctions scare, the volume type of fleets back when, it’s almost a year ago or so. And so the Dalian Tanker Fleet was a large fleet or VLCC supertankers. 2 million dollars a piece and about 40 of them. So that created a scare hype in the market that there’ll be a shortage of vessels which were allowed to go to certain ports or most ports.
What happened was that the US, they used that as a means to improve the negotiation when it comes to the Phase 1 Trade Deal. And so they loosened up on those waivers, and eventually that was the main issue.
Then came the floating storage situation as a result of COVID and then that spike the price again. After that, it has come down quite a lot. So that’s moving a lot of oil back in Q2. And then it just quickly plummeted because Saudi just went from over 9 million barrels a day down to 6. That killed off the demand.
We saw occupancy of the VLCCs go from more than 50% down to early 40s. And these are 802 operating VLCCs worldwide, 600 something Suezmas and 1,053 Aframax. It’s a lot of barrel space out there available still today. So obviously, the prices have dropped.