In this episode of The Week Ahead, Tony Nash hosts a discussion with Tony Greer, Albert Marko, and Tracy Shuchart, covering various market events and trends.
Tony Greer explains the concept of a bear steepener, which is causing a necessary rotation in the market, with tech stocks and the AI bubble deflating while natural resources and energy hold their ground.
The panel discusses the current market pullback, viewing it as orderly and temporary. They mention the spike in the VIX, indicating increased fear, but not impending doom. Tony Greer expresses bullishness in the oil market, citing tightening gasoline spreads and the strength of the physical oil market.
Tracy Shuchart agrees with Tony Greer’s assessment of the oil market, emphasizing extreme backwardation and market tightness. Tony Greer expects a continuation of the rotation out of tech stocks and a potential further pullback before finding a comfortable bottom for the S&P 500.
Tony Greer discusses his bullish view on the equity market, expecting a pullback in the tech sector due to bubble sentiment. Albert agrees and believes China will act decisively to address the current situation. They mention China’s potential sale of treasuries and discuss various developments in China, including domestic weakness, deflation, and Evergrande’s bankruptcy filing.
The episode also touches on the potential impact of selling Chinese treasuries and the belief that other countries, including the US, would buy them. They discuss China’s potential sale of overseas assets and domestic political dynamics. The conversation briefly mentions the depreciated Japanese yen and its impact on China’s export competitiveness.
The discussion then shifts to crack spreads and refinery capacity, with Tracy explaining their significance and the underlying issues caused by underinvestment. Tony Greer expresses bullishness on energy due to strong gas demand and potential disruptions in refining capacity. Tracy mentions the potential impact of companies requiring employees to return to the office on gasoline demand. Albert adds that a potential slowdown in China could temporarily bring oil prices down.
Key themes:
1. Bear Steepener
2. China death spiral
3. Your crack(spread) is showing
This is the 76th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Tony Greer: https://twitter.com/TgMacro
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl
Transcript
Tony Nash
Hi everyone, and welcome to The Week Ahead. I’m Tony Nash. Today, we’re joined by Tony Greer, Albert Marko, and Tracy Shuchart. We’re going to talk through a bunch. There’s been so much happening in markets this week with China, with US markets, with bonds, all sorts of things. We’re going to talk through the Bear Steepener with Tony Greer. He’s going to take us through that. Then we’re going to talk about the China death spiral with Albert, which sounds really bad. Then we’re going to talk about refining and crack spreads with Tracy Shuchart.
Tony Nash
Before we get started, I’d like to cover a couple of items regarding CI Markets, our forecasting platform for stocks, ETFs, commodities, currencies, and economics. On September first, we’re raising our prices from $25 a month to $50 a month. Subscribe to that product before the end of August before we have to raise those prices. The second announcement is we have released portfolios for CI Markets. This allows you to see your stocks and ETFs and commodities and other things in a portfolio configuration where you can see the forecast for all of those assets on an individual and combined basis together over a 12-month horizon. You can see the return by month, the expected return by month, the expected total value, the individual stock and ETF and commodity price in each month. It’s really, really interesting. I hope you guys can check it out. If you subscribe before the end of August, you get that with your CI Market subscription. Thanks very much.
Tony Nash
Guys, thank you so much for joining us. It’s been a pretty crazy week, and I can’t wait to sort through this stuff and really understand what this means for really next week and the week after. Tony, when I was talking to you about this earlier this week, you started talking about a bear steepener. We’ve seen equities fall 5% since their peak on July 31.
Tony Nash
Two weeks ago, all the bears were hiding. The last bear said, “Oh, no, we’re not going to see a recession anymore” or whatever. Today, the bulls are slightly less vocal. Things have changed just a little bit in terms of, I think, the sentiment. Earnings this quarter were okay, I mean, depending on the sector, but they weren’t stellar. We’ve seen margins collapse a little bit. We’ve seen our compress a little bit. We’ve seen earnings a little bit harder to get. Rates are rising, of course. CPI is slowing, but it’s not really where the Fed wants it. Employment is still tight. Atlanta GDP now says we’re going to go at 6% this quarter, which I don’t know of a single person who believes that, but everyone likes to point to that number. You’re telling me that we have a bear stepener. Can you walk us through that? What exactly is a bear stepener and why are we here?
Tony Greer
Yeah. Now, I’m not an expert on the bond market tone, but I’m just saying- That’s okay. Yeah, this is what I see as affecting the equity market. The bear stepener in bonds is very simply the fact treasuries are trading off, that’s the bear part. Rates are going up, treasuries are going down. Steepener is the fact that the curve is steepening. The two’s tens curve has traded from about -85, 90 basis points back to about -65 or so basis points. That’s a sharp increase. Remember, we had it buried at -100 basis points for a lot of the year. This steepener is what woke up the VIX. The volatility picked up as the curve steepened and rates rose. In my opinion, that was direct response to the Fitch downgrade, which every analyst out there is saying, No, the downgrade doesn’t mean anything. I can point to markets that are moving in direct response to the ratings downgrade. I feel like we are experiencing an extremely violent rotation. I shouldn’t say that. A fairly violent rotation in equity is not as much a curl-over-sell-off. What the Bear-steepener is doing is just adjusting to what the markets are looking at inflation now, the way the markets are looking at inflation now and looking at the economy.
Tony Greer
While I’m not an economist, I think it’s fair to say that the recession fears have been put off for another day, and inflation, like you said, is not exactly going back in the bottle, certainly. We just got the first uptick in CPI in several months. This is the stuff that’s shaken up the bond market. When the bond market gets shaken up, especially in the long end, portfolio managers are going to react. That’s what I see as going on now. It makes total sense to me that some of the air should come out of the AI bubble that we’ve just blown and tech should back off. It makes perfect sense to me that some of the natural resources, names, and energy are actually holding ground during the sell-off, not backing off much. It makes sense to me that home builders finally backed off their highs with rates in the long end, rallying sharply. To me, this is a necessary rotation. Maybe the market was off sides in a couple of different places, but I think that that’s what the market is reacting to. I think that we probably have a little bit more to go before we find a comfortable bottom, again, the S&P that we can trade off of.
Tony Nash
You’re not a bonds expert and you’re not an economics expert, but you sure sound like it.
Tony Greer
I have a strong opinion on some of it, though.
Tony Nash
Yeah, you do. That’s good. In this pullback, would you say this pullback is fairly orderly in the way it’s happening?
Tony Greer
Yeah, I would, Tony. Until this week, we didn’t get any large downside extremes in the Tick Index, or at least they were scattered. That usually means agnostic selling when we are hitting bids across the board in the stock market. The last four days, we’ve finally seen some downside extremes wider than -1500 in the Tick Index. We finally got the VIX to wake up and approach 20. I think it got to a high of around 19 today.
Tony Nash
That’s crazy.
Tony Greer
Yeah, exactly. Vix at 19 isn’t generally an end-of-the-world trade. That’s why I’m looking at it as a fairly orderly pullback. It feels and looks and feels like it’s backing off at the same pace that it was going up, which is really odd in equities because we know them very well to take the stairs up and the elevator down. Now we could be in the middle of a little bit of a steeper sell-off. I just get a little bit more comfortable with the pulling into moving average support. We’re seeing a little bit of panic finally. Today we finally have a chance at a red to green day today, which often marks the bottom of tradable pullbacks. That’s how I’m approaching it. It’s not Armageddon, it’s not Doomsday. It’s just market dynamics adjusting to some interest rate changes and that’s it.
Tony Nash
Go ahead. Sorry.
Albert
It seems oddly similar to the bank crisis that we had last time around. It’s very order to sell off and then get set to relaunch back up to the stratosphere.
Tony Greer
Yeah, there are pockets that are definitely getting hit. This week, gold miners are off 6 or seven %. A couple of social media is off 5% or so. A couple of sectors of tech are getting put back to where they came from. It was a sharp rally. Yeah, exactly. With rates rising, you would have to think that growth is going to get hit a little bit, right? A little bit. It only makes sense. I’m pretty comfortable with what’s going on here.
Tony Nash
Okay, so, Tony, just a technical point. I want to make sure that we understand some of the technical things you’re talking about. The VIX, there are a lot of preconceptions and a lot of misunderstandings of what the VIX measures. Can you tell us, from a technical perspective, what the VIX actually measures?
Tony Greer
Yeah. It’s obviously a measure of options volatility at some level—I look at it as I read it a little bit as a sentiment gage, as a tactical traitor, like a live fear and greed index type of thing. When the VIX gets buried where it has been in the low teens, you have low volatility in the stock market. It usually means rallying S&P. When you see the VIX volatility index pick up and spike into the 20s and 30s, that’s usually what happens when we see steep sell-offs. Everybody is scrambling to protect their entire S&P portfolio by buying downside protection on it, volatility picks up. What happens at the end of that is it’s always one of those exhaustion trades, right? When the last guy stops himself out, sells his stocks on the low, they buy volatility at the highs, and then the market normalizes again and gets back to its range trade. That’s how I look at the VIX.
Tony Nash
Yeah. It’s volatility and options for the S&P 500 for the next 30 days. That’s all the VIXs. It’s not the next 24 hours, it’s not the next six months. It’s the next 30 days. This is something that I, on a very basic level, I’ll try to drive home with people because there’s this expectation that the VIX is something that measures volatility in this trading session or in tomorrow’s trading session, but it’s the next 30 days. That’s why we don’t see as much spike in the VIX as we think we’ll see sometimes because it’s over the next role. Okay, great. Can you also—and this is bleeding over into Tracy’s territory a little bit, but you talk about oil bullorns. Can you tell us what you mean by that? Then, Tracy, can you jump in and tell us where Tony’s wrong?
Tony Greer
Yeah. I don’t want to steal the oil floor from Tracy at all. I just want to state that I’ve gotten a little bit bullish. Luckily, I was early because I’m sitting here waiting for this oil consolidation to end. There’s a big back and forth going on between the Biden SPR selling and OPEC output cuts. That’s the narrative that’s gone on. What just happened recently, gasoline spreads tightened up the entire physical crude oil calendar, tightened up into backwardation. We got a little rally in price that finally did something meaningful technically for me. We broke above the moving averages. We traded up to the range top. Now the market’s got potential crack spreads. I know Tracy is going to talk about have got the refiners on a run. There’s a lot of signs of strength in the physical oil market, and I’ll leave it at that.
Tony Nash
Great. Tracy, what do you got on that?
Tracy
I cannot disagree with them.
Tony Nash
Of course.
Tracy
Obviously. I mean, if you look at the curve, and I was just talking about this yesterday on Twitter, X, whatever we’re calling it these days, I was just talking about the strength of the curve and the fact that if you look at the curve, it’s still an extreme back gradation, even though we had that dip yesterday or prior to yesterday, to ’78. Usually, we see this hook on the front of the curve as you’re moving into the next month. We are not seeing that at all. To me, that says this market is very tight and this market remains very bullish, even though we saw a few dollars sell-off before options are free.
Tony Nash
Okay. Tony, what do you expect for markets in the near term generally? Just covering equity markets first? I mean, S&P 500 is back to June 27th levels, so ancient history all the way back to six weeks ago. What do you expect to see over the next week or two in equity markets generally? Is it continue the rotation out of tech, potentially lower level, these sorts of things?
Tony Greer
I’m looking for this pull, but I wake up bullish in the equity market, right, Tone? With that view, I’ve been expecting tech to pull back because obviously we’ve got bubble sentiment type of thing. I think that’s the heart of what’s going on, is that we’re letting air out of technology. I have a big tech index that I monitor that’s seven or eight of the largest cap tech stocks. It’s been off over two % for three weeks in a row now. That is what was leading the market in total fairness. We know that. Nobody would probably argue too hard about that. We’re seeing a serious pullback there that directly coincides with the rise in yields. Now, I don’t see it as a thing that’s terminally bearish for the stock market because remember we just said we had to pump the recession fears down the road a little bit, or at least the recession bros on Fin2it have got to be a little disappointed because we’re not there yet.
Tony Nash
Everyone’s disappointed. Bulls, bears, recession bros, everyone.
Tony Greer
Yeah, for sure.
Tony Nash
Everyone’s disappointed.
Tony Greer
Yeah. Because everyone’s disappointed, I still look at it as sentiment to me is fairly balanced in the stock market. I feel like I could find as many bulls as I can bears. I even feel like that I can find more bears than bulls, to be quite honest with you. With that a balanced backdrop, when you have the economy that if it’s not going into a recession, we’re going to say that it’s growing. If you have an economy that’s growing a little bit, the stock market can tolerate higher yields. We’ve seen periods like that in history. We saw it in 2011, 2012. We saw it in 2016, 2017, and we saw it in 2021, 2022. Stocks rallying with higher interest rates. If the economy is not rolling over into a ditch, the stock market can bear it. That’s how I look at it, and I feel like we have a recipe for a slow moving bull market. While tech has to pull back, I certainly am not a fader of the AI craze and the AI investment theme. That is going to be with us for a long time. Thank you. What?
Tony Nash
Thank you. As an AI company, I love what you just said.
Tony Greer
Yeah. I feel like we’re in the first inning of this discussion. That’s why it’s gotten so exciting. Now you see a pullback. While I’m more interested in staying with my natural resources length, I’m getting to points on some of the tech charts where I’m like, Well, this is interesting at this price now. I think that the tech can actually get back to a level where if rates stop rising and stop rising at such quick pace that we just saw, tech can get back on its feet again. As Tracy pointed out, we’ve got a pretty tight energy market. If energy can lift some of the other commodities out of the whole bear market that they’ve been in, I don’t see why the S&P has to curl over. I’m not a double-horn bull in stock market. I’m not too bearish at all, but I don’t see a reason for it to curl over right now. This is a tradable dip to me.
Tony Nash
Albert, what do you think about that, specifically with regard to tech and some of the other transitions to other sectors?
Albert
Tony’s right. It’s definitely a tradable dip. The Fed has talked about soft landing for God knows how long now, and everything points to it. Whether they script the manufactured bank crisis and script this new Chinese crisis, it’s simply to get this market to a level where it’s somewhat normal and go right back up. I mean, it’s just what they’ve talked about it. That’s nothing new.
Tony Nash
Albert, it’s been pretty lazy for the feds to invest in fangs to goose the market whenever it’s convenient. Do you think they move away from that?
Albert
No. Why would you move away from something that works? I’ve been embarrassed since 4300 because it’s just I just saw this market being stupid bubble-like and I knew that it was going to start relaunching inflation. But I was to give myself credit, I had to do tech calls to hedge because that’s just what they keep doing. It’s just silly. It’s silly not to. You have to be insane not to look at tech at certain levels to play at knowing what the Fed does and knowing what the market’s been doing.
Tony Nash
Yeah. Okay, while we’re here on markets generally, before we get to China, can we talk a little bit about TLT, guys? There’s been a lot of talk about TLT, hitting lows. A lot of people saying, Get out of the way, or it’s time to get in, or whatever. Can we talk a little bit about TLT and just see what your general thoughts are there?
Albert
Oh, boy.
Tracy
I’m like, I have nothing to say about TLT.
Albert
It’s TLT. TLT for me is probably a buy 93. You have a bunch of players selling TLT, and you have definitely Yellens putting out a bid to swallow them up to keep things somewhat normal. So there’s obviously, again, soft landing scenario, but there’s definitely a place in the 94, 93 area where TLT is very attractive.
Tony Nash
Okay. Tony, any thoughts on that?
Tony Greer
Yeah. I don’t trade. I don’t have any risk on in the bond market, so I want to preface this conversation with that. I don’t have any money where my mouth is, but I have to say that I’m trading from the bias that I’m accepting rates can go higher. I feel like we’re at the point in headline inflation where we went from 2%-9%, to a 50% pullback now to four % or so or three and a half, four, and I feel like it’s going to hold here and rally. If I’m expecting inflation to creep back into the picture, I can expect rates to go a little higher. While I’m not on the… I think yields can go higher while I’m a bond bear. I’m not like a terminal bond bear. I’m just on guard for downside dislocations because that’s the risk to my equity bull scenario, is that the bond market really has a big downside move, rates jacked higher in a super fast move or something like that. That is something that would derail the S&P. That’s how I’m looking at that. Perfect, guys.
Tony Nash
This is perfect. Thank you for that. Thanks very much.
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Tony Nash
Let’s move on to China. Albert, we saw a lot happening in North Asia this week from Japan’s GDP print that broke out on an export boom and an import collapse. The China macro prints that showed domestic weakness and deflation, rapidly valuing CNY, property developers like Country Garden stating they won’t be able to service some domestic bonds and the US bankruptcy filing that chapter 15, I think, bankruptcy filing in the US of Evergrande, there’s a lot going on. We saw CNY fall to 7.3, and we saw CNH, the offshore currency, fall a little bit further. Just for a little bit of context, this is boring on the weakest point since 2007, which is a big deal.
From a CNY as national strength projector really makes the Chinese leadership look messy. The only slightly weaker value was in November 2022, but they defended that very aggressively. In response, of course, the central government is supposedly planning all sorts of stimulus. The PBOC, the central bank there says they’ll be precise and forceful in their response.
I guess first, Albert, do we believe that? Do we believe they’ll be precise and forceful? Will they do it anytime soon?
Tony Nash
That’s my first starting question. But also I want to understand the Chinese government told their banks to defend the currency aggressively over the past couple of days. I’m curious how much you think they’ve spent defending a 7.3 CNY over the past couple of days?
Albert
For your first part, do I think they’re going to act decisive and forceful? I do. I think they’re absolutely coordinating with Yellen on the issue. China is a big inflationary player, so having China play ball is paramount to whatever Yellen and the Fed have in mind. I think they’re absolutely coordinating and they will be decisive. To how much have they spent? Defending the Juan, probably about 400 billion at the moment. I know that they just hit from… People I’ve talked to, I know that they just hit the treasury market for about 100 billion a few days ago, maybe a week ago. They are the…
Tony Nash
What? The Chinese are buying treasuries?
Albert
No, they’re selling.
Tony Nash
Oh, they’re selling.
Albert
Okay. Yeah, they’re selling. I think they’re using Kman entities, whatever proxy. It doesn’t look off, but they’re arguing. They’ve been defending the one here for the CNY for months. We’ve been talking about it for months doing this. They’ve been staggering their way down. They’re really keen on not collapsing the currency. G can’t look like an idiot, can’t lose power or face. That’s just the way Chinese work. They don’t really have to devalue. As much as people want to say, as much as we’ve even said that they’re probably going to have to, they don’t really have to as long as they’re staggering and playing ball with the feds. But they have maybe 600 billion left in treasuries that they can use to defend the CNY. That’ll probably get them through the next three months if they want to unload it.
Tony Nash
I’m going to ask a really somewhat cynical question here. If the Chinese sell their treasuries, does that mean the end of the dollar? I’m going to try to say that without laughing.
Albert
I mean, end of the dollar thing is just silly and just click-baity stuff. Yeah.
Tony Nash
Chinese sell their treasuries. Who’s going to buy them?
Albert
The reality is-
Tony Nash
Everyone?
Albert
Everyone will. Absolutely everyone will. I think Yellen prepared to buy back 1.5 trillion in the treasury. He has to. They certainly have the account for it. I mean, the Chinese, they killed animal spirits on a 400% leveraged economy, where unaffordable real estate was the core asset. What do people think was going to happen with Evergrand? It’s just been in trouble for years.
Tony Nash
Right. Right.
Albert
Again, this is a staggered way down. It helps the inflation fight. They probably scripted it out a while back. The bank crisis, now China crisis, and God knows what the next crisis is going to be in the spring to bring back the market to some normal level so they can launch it again. I’m a big believer in systemic protection. Whenever there’s a system, whether it be the US or Europe or Asia, that they’re at critical levels where the system could break down, they’re absolutely going to jump in and the world works together in that respect.
Tony Nash
Will this result in China selling off any overseas assets? Maybe some of the infrastructure they built overseas that they own, not really, but they own that thing?
Albert
I’m thinking they’re going to have to. You don’t want to get to critical levels on their dollar reserves or their gold reserves or whatever else they’re leveraging to keep the CNY up. You don’t want to get that far down. Yeah, I’m pretty sure they’ll probably let go of something. I don’t know. I can sit there, speculate they’ll let go a third or fourth of what they have overseas, but probably they will.
Tony Nash
Yeah. Like, Chinese data and entities that own, say, power generators in Portugal and ports in Greece and all this stuff.
Tony Nash
They really need that? Is that a way for them to get cash? Can they sell that to some Middle Eastern entity and that’ll be fine and it’ll build those relationships for crude sale, all that stuff, right?
Albert
Yeah, of course. Qatar or Dubai or one of the Saudi’s or someone will jump in and buy something in Turkey or God knows where else, just to give them some cash.
Tony Nash
Okay. There was some news out, I think, Thursday or Friday talk about how Xi Jinping will not take responsibility for the current economic difficulties. He’s going to pawn that off on Lee Chang, his deputy. Nobody overseas believes that, but do you think that will sell in a domestic audience?
Albert
Yeah, when you control the media and you rule by fear, of course, whatever the ruler says is going to go whether people believe it or not privately. That’s what the narrative is going to be. When do national leaders take responsibility for things that go wrong? You find scapegoat. Just like the US, the Europeans, the Chinese, they’re just going to find scapegoat.
Tony Nash
Is the clock ticking for denunciation of Lee-Chong? We have two years. Set the Timer in two years, he’s going to be found guilty of some corruption or something?
Albert
I could definitely see it. Internal Chinese politics within the PLA and the CCP are so muddy.
Tony Nash
It’s tediously predictable, right? I mean, these things are tediously predictable. I want to also talk a little bit about the Japanese, Chinese dynamic in terms of the depreciated JPY and the currency dynamics with CNY is that a factor? Japan just reported stellar GDP numbers on an export boom with a very cheap JPY. China is having difficulties with the exports and with imports on a not as depreciated on a relative basis, CNY. I know you say that China doesn’t have to depreciate CNY, but are those regional dynamics not forcing the PBOC to look at the CNY value and maybe push it for export competitiveness or something? Especially in light of the regionalization and the FDI numbers, the terrible FDI numbers that China has seen so far in 2023?
Albert
Normally, I would say yes, but the problem that Japan has at the moment is they actually have inflation creeping up higher and higher. They’ve really done probably better than anybody else in the world up until now. But wage inflation is taking hold there. Their currency, they’ve devalued it as much as they possibly can without causing issues. But I don’t think… Well, Japan is getting a lot of help from the treasure and the Fed in that respect to push China to cooperate. But I don’t think that it’s as vital for the Chinese to look at the Japanese Yen at the moment. Not yet. I wouldn’t say yet. Give it 3-6 months to see where we’re at to see if Japan can actually tame inflation, then we’ll probably have to readdress that question.
Tony Nash
Okay. I just want everyone to know we’re not even talking about the European GDP number that came out this week that was horrific, except for Ireland, all that stuff.
Albert
They’re back from vacation yet? What’s the date.
Tony Nash
Of the year? Exactly. They’ve been on vacation since April, right?
Albert
2020.
Tony Nash
Right, exactly. Okay, Albert, that’s great. Thank you very much. Tracy, let’s talk about crack spreads. Crude prices are rising. I mean, given the day over the past month or so, they’ve been rising. Gasoline prices are on the rise. Crack spreads are rising. We’re seeing record oil demand and I believe record refinery throughput. Can you talk us through some of those numbers about refinery, throughput, and crack spreads? First of all, just for a definition, what is a crack spread for people who aren’t really sure what that is, is. What are the factors that are contributing to that?
Tracy
Crack spread is basically, the easiest way to explain it is, what can you refine a barrel of crude oil into? There are many different ratios for crack spreads that trade, but it’s really what can you refine from a barrel of crude oil, depending on whether that’s going to be gasoline or heavier visco. But the ratio is very different. There’s many different ratios. Three to one crack spread is the most popular. But anyway, it’s really what can you refine in a barrel through the oil?
Tony Nash
Okay, so on the screen, we’ve got the RBOB, gasoline, crack spread, and CL price.
Why are these important? Is it important to look at these together?
Tracy
Yeah, well, it is important to look at these together, depending on how you would look at it, really. If you see, say, oil prices getting softer, but you have product demand still higher, obviously, that’s very good news for refiners. That’s where you see a divergence, sometimes where you see lower oil prices, but higher refining prices or crack spread prices. However, I think that’s just looking at one portion of the big picture. I think we need to look at the macro view of this because I think the underlying issue in refining that remains still unresolved is lack of capacity. We’ve had a lot of capacity come off over the last seven years. There’s a lot of underinvestment with the onslaught of this EV narrative, many refiners aren’t really interested in expanding capacity at this point. We’ve also had significant disruptions due to not COVID and due to the fact that we’re running our refineries at a very high utilization rate, which leads me into another section of this.
Tony Nash
But Let’s talk about that. What’s the utilization rate around if-ish?
Tracy
Well, last week EIA was 94.7%. Now, the problem comes is that if we’re looking at the US, for example, we have a lot of older refineries and we haven’t had a significant greenfield project in decades. Greenfield project meaning that we’re starting a whole new refinery. We’ve had a lot of brownfield projects, which means we’re expanding existing refinery capabilities, but no new green book in decades, literally decades. What happens is that these refineries are older. When you start running them over 90%, they consistently, which we have had to do, things tended to break, thus causing more disruptions, which we have more breakdowns, which we have seen this summer.
Tony Nash
Okay. I’m sitting in Houston, Texas, and I’m hearing that by Wednesday we could have a tropical storm in the Gulf and that there are potentially two hurricanes out in the Atlantic that could come toward us. So given the almost 95% capacity utilization of refineries, if we start seeing that in some of these ancient refineries, when they get hit in Louisiana or on the Texas Coast or whatever, and they get shut down for say, four or five days, and then it takes them how long to get them back up? Ten days or something? If they shut down for five days. They’re out for like 15, right? Minimum, yes. General. Let’s say some refinery in Baytown or Louisiana gets put out. That marginal refinery on average, would that increase margins for the other refiners pretty dramatically pretty quickly?
Tracy
Absolutely. Because you’re taking capacity from offline in general, and that’s going to be better for other refiners. The problem is you also have to factor in is how much production is being taken offline. Now, generally, production is easier, especially if you’re talking about a hurricane in the Gulf or something like that and offshore. Usually, that production comes back very quickly. We generally see production come back much more quickly than we would see the mining capacity come back online. But in general, if we’re just talking about a tropical storm or something like that, that’s probably not going to affect actual production capability. You have to keep an eye out for both.
Tony Nash
Right. But in terms of refineries, this hurricane season so far has been equivalent to the warm winter in Europe for natgas.
Tracy
It’s the knock on wood.
Tony Nash
It’s almost been perfect, right? We’ve had no refinery outages due to storms, due to hurricanes, all that stuff so far. We have almost a zero risk environment for refining. Any of this stuff comes, for a refiner utilization that’s at 95%, it could potentially be a real shock for refiners, right?
Tracy
Well, absolutely. If we look at the actual EIA numbers, and we’ve been at 92%-94.7% for the last few weeks, and we’re still seeing product draws. We’re still seeing gas lead draws throughout excessive utilization rates. That’s something that I think about as well, is that we’re consuming as much as they can put out.
Tony Nash
Yeah. Does this conversation make you even more bullish on energy?
Tony Greer
Yeah. Tracy makes a lot of really good points about refinery capacity, etc, when you consider that gas demand globally has been record-strong, regardless of what the economy has done. That’s one thing you got to keep in mind. Even when people were expecting the recession, the economy didn’t look so good, we were still setting records for gas demand locally and globally. If the consumer has got to get their gas from somewhere, God forbid there’s an outage, what will happen is the crack spreads will widen out even further. Refiners will rally even further until that’s buttoned up because the same thing is going to happen. There’s only so much capacity. If there’s only so much capacity and one less refiner, the spreads are probably going to widen out. We’re in a situation now where last year we had a lot of diesel tightness. This year we’ve got a lot of gasoline tightness. As Tracy said, that has propped up the prices of the products more towards the price of crude oil. Now that’s why the crack spreads are so wide and the refiners are doing so well. Yeah, it is a pretty sensitive cocktail right now in oil where disruption should be bullish in price.
Tony Nash
I’m also hearing, and maybe this is a minor consideration, but I know of a handful of publicly traded companies that are starting to require their employees to be back in office four days a week as of September first. We’re already at record demand, but as we start having larger companies require their employees to be back in office, that pulls the demand along even further, right?
Tracy
Well, absolutely. You’re talking about this going into refinery, maintenance season, where you’re going to have capacity even down the floor because the fall is refinery, maintenance season. If we see these companies asking people to come back for more and say they’re not in a city that has public transportation to get them there, then we’ll probably see increased demand going into refinery, maintenance season could make for a vicious cocktail then.
Albert
The only thing I see that’s I don’t want to use the word bearish for oil at the moment, but a little bit of a dip is China slowing down. I think they’re hinting at it at the moment, but I think it’s another week or so until September WTI closes and then you’ll really see what the market is doing in terms of Chinese demand. But I think a slowdown in China would hopefully bring it down to the mid-70s so I can buy.
Tracy
What’s really interesting is that for November delivery into Asia, and I think we had that week, but we have 40 million barrels for November delivery to Asia. Now that is not all by any stretch of the imagination and in fact, less from China. But it’s very interesting that we’re seeing increased demand for other PAC-Asian nations where we haven’t seen before. That’s almost at an all-time high.
Albert
What about Canada, Tracy? Should they be like a litmus test of what’s going on with demand and production?
Tracy
And they’re doing really well, too. It’s hard to use Canada only because they don’t were their main import. They don’t really export anywhere else but the United States. But we’re pretty much gobbling up everything that they have to give us at this point in the day. Okay.
Tony Nash
One thing since you mentioned China, Albert, they do have mid-autumn festival and National Day Festival coming up in China, which means the last week of September, first week of October is dead. Not fully dead, but dead. They will have a little bit of a respite there in terms of, say, crew demand. Well, at least they’ll have jet fuel and that thing. But in terms of normal activity, they’ll have a little bit of a respite there.
Albert
Okay. Great. Yeah, just curious.
Tony Nash
Guys, thank you so much. This is really interesting. I love weeks like this where we can talk to guys like you, Tony, who just have this massively broad view on things, and you boil it down to precise views. And that’s really, really amazing. So we’re really grateful to have you here. Albert, Tracy, as always, you guys are invaluable. Thank you so much. So have a great weekend, and have a great weekend. Thank you.
Tony Greer
Thanks for having us, Tony. Thank you. Great job.