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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.

 

Follow Tony on Twitter: https://twitter.com/TonyNashNerd

Follow Sam on Twitter: https://twitter.com/Samir_Madani

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.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

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.

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QuickHit Visual (Videos)

QuickHit: China is not going to stop being China

Panama Canal Authority’s Silvia Fernandez de Marucci joins us for this week’s QuickHit, where explains why China is not going to stop being China. She also shares first-hand observation on the global trade trends — is it declining and by how much, what’s happening in cruises and cargo vessels, where do gas and oil shipments are redirecting, why June was worse than May, and what about July? She also shares the “star” in this pandemic and whether there’s a noticeable regionalization changes from Asia to Europe, and when can we see it happening? Also, what does Panama Canal do to be up-to-date with technology and to adapt the new normal?

 

Silvia is the Canal’s manager of market analysis and customer relations. She has 20 years of experience studying all the markets for them and is responsible for their pricing strategy, their forecasting of traffic and customer relations.

 

Panama Canal opened in 1914 with annual traffic of 14,702 vessels in 2008. By 2012, more than 815,000 vessels had passed through the canal. It takes 11.38 hours to pass through it. The American Society of Civil Engineers has ranked the Panama Canal one of the seven wonders of the modern world.

 

***This video was recorded on July 30, 2020 CDT.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

 

TN: Recently, the CPB of the Netherlands came out and said that world trade was down by double digits for the first five months of the year. Obviously that’s related to COVID. Can you tell us a little bit about what you’ve seen at the Canal and really what you guys have been doing? Everyone’s been in reactionary mode. So what have you seen happening in the market?

 

SM: There are some trends that had been present before COVID like the movement of production from China to Eastern Asia and we think this is going to be accelerated by this pandemia. But I don’t think that China is going to stop being China. It will keep the relevance and the importance in global trade as they have today.

 

We think that probably, yes, we will see more regionalization. We saw the signing of the renewal of the NAFTA trade between Canada, the US, and Mexico. So we think that there may be something happening in that area. However, we don’t see that trade is going to stop. I mean trade is going to continue growing after this pandemic.

 

This is something that I would say very different from anything that we have experienced before because once it is solved, I don’t know if the vaccine appears and people start going back to the new normal, there will be changes probably to the way we do things and the consumer is going to be very careful and probably will change his habits in order to prevent contagion. But I think trade is going to continue.

 

We see some of these trends becoming more and more important or at a faster pace. It is not an economic crisis per se. Once the people are going back to work, the industry will restart their operations, people are going to be rehired. The economy should start recovering faster. We are not sure because there is no certainty with this situation.

 

We first heard about it early in the year with the cases in China. But then, it looked so far away. It was happening to China. It was happening to Italy. We didn’t think about it as something that was so important or so relevant. The first casualty was the passenger vessels. The whole season for cruise ships at the Canal was cut short in March and Panama went to a total lockdown on March 25.

 

It really started for us when we received the news of a cruise ship arriving in Panama with influenza-like disease on board that wanted to cross, which was the Zaandam, and the first one that we had with the COVID patients on board.

 

TN: And how much of your traffic is cruise ships?

 

SM: It’s very small, to be honest. It’s less than two percent of our traffic. But still, we see it as an important segment, not only because of the traffic through the Canal, but also because of what it does to the local economy. We have a lot of visitors, a lot of tourism, and that is a good injection of cash coming to Panama. It was the probably the end of the season but it was shorter than what we would have wanted.

 

TN: When we saw the first wave of COVID go through Asia, did you see a a sharp decline in vessel traffic in say Feb, March? Or was it pretty even? Did we not see that much? Because I’ve spoken to people in air freight and they said it was dramatic, the fall off they saw. I would imagine in sea freight, it’s not as dramatic but did you see a fall off?

 

SM: It started in January, which is the very low season for containers, which is the most important market segments in terms of contribution to tolls. When we saw that there was this COVID happening in Chinese New Year, everything was closed. We were in a slow season. So we didn’t see much of an impact.

 

And for the Canal, there is a lagging effect because we are 23 days away in voyage terms. So whatever happens in China, we feel it probably one month later. We expected January and February to be slow because of the normal seasonality of the trade. But then after March, I would say that April was probably the worst month for us. We were hit April then May was worse than April and then June that was even worse than than May.

 

TN: June was worse than May? Okay.

 

SM: June was worse than May. We‘ve seen four percent, ten percent, fourteen or sixteen percent decline each month. It was like, “Oh wow! This is really thick. This is really getting worse.” We had reviewed our forecast in April. And I think so far, it is behaving as we expected back then. But there’s nothing written about COVID. We are learning as we go.

 

I would say that container vessels were also affected these three months of the year. We have LNG vessels that were supposed to deliver natural gas to Japan, Korea, and China. And LNG had been behaving very badly all year. That is kind of a peak season for LNG and LNG has been having a hard time because the market were supplied and the prices were very low, so many shipments that were supposed to end up in Asia, ended up in Europe or other destinations that were more profitable for the owners. But when the price of oil collapsed and went negative, the prices of LNG were affected in the Middle East and became more competitive than the US prices.

 

We saw a harsher decline in LNG shipments. We see, for example, 30 percent less than we expected to see and by COVID in April, it was probably 50 percent below what we were expecting. It was major and Iguess it’s a matter of demand because since the whole Asia was locked down, there was no demand.

 

TN: When industry stops, you don’t need energy. It’s terrible.

SM: Exactly. It’s really terrible. It was terrible. But we had some stars in our trade that supported the situation like LPG, the cooking gas and obviously people were cooking more at home so the demand was high and we saw an increase in trade for LPG. It’s a good market for us, for the neopanamax locks, so in a way we are grateful that our trade has not suffered as much as we have seen in other areas.

 

TN: You said you declined into June. How have things been in in July, so far?

 

SM: July seems promising. We came from a from a very bad June that was closed probably 16 percent below what we expected to have. But July is about maybe seven percent below our expectation. But we are very concerned about a potential W-shape recovery because of the new cases that we have seen in the US.

 

TN: When we saw factories close across Asia in the first quarter and in some cases stay until the second quarter, did you see some of the folks who were shipping through the Canal start to pivot their production to North America?

 

SM: It’s probably too early to say. We will see the effects of COVID probably in terms of near shoring maybe in two years. I don’t think that the companies or the factories are so quick as to move the production especially during this period in which everybody is still trying to cope with the situation.

 

TN: And manage their risks, right?

 

SM: Yes. So I don’t see that happening anytime soon. But it’s probably something that the factories and the companies are going to start speeding up and diversifying their production.

 

TN: And as you said earlier, China’s still going to be there. China’s not going to disappear as an origin, right? What I’ve been saying to people is it’s incremental manufacturing that may move. It’s not the mainstay of Chinese manufacturing that’s going to move or regionalize. They’re still going to do much of the commoditized manufacturing there because the infrastructure is there.The sunk cost is there, and they need to earn out the value of those factories. I like your timeline of two years before you really start to see an impact because we may see some incremental movement and maybe some very high value, high tech stuff or something like that move first but the volume of things probably won’t happen for at least two years. Is that fair to say?

 

SM: I would say so and I would add that we have seen these shifts to Vietnam and Malaysia and other countries in Asia, but we still see containerized cargo shipping from China. The volumes are still not high enough to be shipping directly from those countries. The container may come from Vietnam and or from Malaysia and they come to Shanghai or to another port in China. They consolidate the vessel there and the vessel departs from those ports. So in terms of Canal, for us that is good news. And I would say that probably Korea is trying to attract that tradition as well. So the long voyage will start in China or in Korea or in Japan instead of these other countries that are further away from our area of relevance.

 

TN: That makes a lot of sense. Just one last question. How do you see transit changing over the next five to ten years? What are you seeing from the Canal perspective in the way your operations will change?

 

SM: We are still adjusting to what is happening. We have always been very regulated in the best way. What I mean is that we have always had our protocols and codes for attending every situation. We have our protocol for infectious diseases that was the basis to start working with COVID. We think that at the canal probably, what we will see in the future is more technology to improve the operation. I’m not sure exactly how, but definitely there are machine learning and artificial intelligence that may help us be more accurate in our forecasts and probably organize our traffic in a way that is faster or we make better use of the assets. The canal is 106 years old. We have been adjusting every time to the new ways of the world, and we’ll continue to do so as a trade enabler.

 

TN: That’s right. Silvia, thank you so much for your time. This has been very insightful. I really do hope that we can connect again in some time and and just see how trade recovers and what we look like maybe going into 2021 or something like that. Okay. Thank you so much.

 

SM: Thanks to you.