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This podcast was originally published in https://www.rthk.hk/radio/radio3/programme/money_talk/episode/810164.

Surging energy and food prices in the United States have sent inflation to a 40-year high. Consumer prices rose 8.5% in March, the fastest annual gain since December 1981. The monthly rise was 1.2%, the fastest jump since September 2005 and a sharp acceleration from February’s 0.8% increase. 

Russian President Vladimir Putin says peace talks with Ukraine have reached a “dead-end” and he accused Ukraine of deviating from agreements reached in Turkey. He said Russia’s “military operation” will continue, blaming Ukraine for “inconsistency in key issues” from talks and “fake claims” about war crimes.

The World Trade Organisation said that global trade could be cut almost in half and is expected to grow by 2.4% – 3% in 2022, lower than its previous estimate of 4.7% in October due to the ongoing conflict between Russia and Ukraine. The WTO said the war could lower global GDP growth by 0.7-1.3 percentage points to somewhere between 3.1% and 3.7%. 

Sri Lanka said yesterday it will temporarily default on its foreign debts amid its worst economic crisis in over 70 years. The country was due to pay a US$1bn international sovereign bond in July, part of a total of US$7bn of debt payments due this year. Sri Lanka’s foreign reserves stood at US$1.93bn at the end of March. 

Shanghai saw a drop in new Covid cases on Tuesday after ten straight days of record highs. The financial hub reported 23,342 new local cases for the day, compared with just over 26,000 the day before. However, it was being reported on Tuesday that authorities were backing away from lifting restrictions in several thousand low-risk areas. Residents can move around within their compounds but are still barred from venturing out onto the streets if their surroundings belong to higher-risk areas. Officials ordered another round of mass testing, at least the seventh in 10 days, in the highest lockdown zones. 

On today’s Money Talk we’re joined by Dickie Wong from Kingston Securities, Carlos Casanova of UBP and Tony Nash, Founder & CEO & Chief Economist at Complete Intelligence.

Show Notes

PL: This is Radio Three Money Talk. Good morning. It’s eight in Hong Kong. Welcome to Money Talk on Radio Three. From me, Peter Lewis. Here are the top business and finance headlines for Wednesday, 13 April. Surging energy and food prices in the United States have sent inflation to a 40 year high. Consumer prices rose 8.5% in March, the fastest annual gain since December 1981. The monthly rise was 1.2%, the fastest jump since September 2005 and a sharp acceleration from February’s zero 8% increase. Russian President Vladimir Putin says peace talks with Ukraine have reached a dead end, and he accused Ukraine of deviating from agreements reached in talks in Turkey. He said Russia’s military operation will continue, blaming Ukraine for inconsistency in key issues and fake claims about war crimes. The World Trade Organization said that global trade could be cut almost in half and is expected to grow by 2.4% to 3% in 2022, lower than its previous estimate of 4.7% in October due to the ongoing conflict between Russia and Ukraine. Wto said the war could lower global GDP growth by zero 7% to 1.3 percentage points. Sri Lanka said yesterday will temporarily default on its foreign debts amid its worst economic crisis in over 70 years.

The country was due to pay a $1 billion international sovereign bond in July, part of a total of $7 billion of debt payments due this year. Sri Lanka’s foreign reserves stood at just under 2 billion at the end of March, and Shanghai saw a drop in new covert cases on Thursday after ten straight days of record highs. The financial Hub reported 23,342 new local cases for the day, compared with just over 26,000 the day before. However, it was being reported yesterday that authorities are backing away from lifting restrictions in several thousand low risk areas. On today’s Money Talk, we’re joined by Dicky Wong from Kingston Securities, Carlos Casanova of UBP, and Tony Nash, founder and CEO at Complete Intelligence. The moderation in core CPI initially prompted a rally in stocks on Wall Street and sent US Treasuries higher. But stocks then gave up their gains as the session wore on, with the S Amp P 500 and Nasdaq falling for a third day. The S Amp P 500, which was up 1.3% at the high of the day, closed a third of a percent lower at 4397. The Dow relinquished a gain of over 360 points to close 88 points lower at 34,220, and as the composite index, which was up 2%, declined zero 3%, ending at 13,372.

In Europe, the regional Stock 600 index fell a third of a percent. Deutsche bank and Commerce Bank led losses for the index, with both falling more than 8% after an undisclosed shareholder unloaded roughly 5% stakes in both German banks. London’s footsy 100 dropped null. .6% and it was a volatile day for mainland China and Hong Kong stocks, which opened higher before plunging late morning and then staging a drastic rebound in the afternoon session with reports that the China National team was actively supporting the market. The rebound came amid calls from China’s market regulator that firms buy back shares and ask major shareholders to support stock prices amid a sluggish stock market. The Hangsting index had slipped half a percent by lunchtime to a four week low before rebounding to close 111 points, or half a percent higher at 21,319. Tech index was up two and a half percent in the morning session before dropping zero 8% at lunchtime and then rebounding to close 1.4% higher. The Shanghai Composite recovered from losses of 0.8% to close one and a half percent higher at 3213. $0.10 advanced 3.6% added 4.2% after China approved new online gaming titles for the first time since July.

In the commodities markets, brewing crude oil rose almost 6% to $104.87 a bowel. Gold is up close to 1% at $1,966 an ounce. The yield on the benchmark ten year treasury notes fell five basis points to two point 73% after hitting two point 83% early in the session. And in the currency markets, the US dollar is stronger this morning. The Euro is trading at $1.08 and a quarter cents. The Bucks at 125.5 Japanese yen Sterling is worth one point $0.30 and Hk$10.19, and the Chinese yuan is at six point 38, versus the dollar in offshore markets. Bitcoin this morning is about 1% firmer at $40,100. Around Asian stock markets this morning. In Australia, the SX 200 up about zero. 1%. Stocks in Japan have now opened the nicate 225, about three quarters of a percent higher. The Cosby in South Korea is half a percent higher, but futures markets pointing to a loss of about 70 points for the Hang Sein at the open this morning. Fine. Let’s welcome our guests. We have with us Dicky Wong, head of research at Kingston Security this morning, Dickie

DW: Good morning, Peter. How are you?

PL: I’m well, thank you. And also with us, Carlos Cassanova, senior Asia economist at UBP. Morning to you, Carlos.

CC: Good morning, Peter.

PL: And over in Texas, in the USA, we have Tony Nash, founder and CEO and chief economist at Complete Intelligence. Thanks for joining us again, Tony.

TN: Thank you, Peter.

PL: Let’s start in the US with those inflation numbers. Surging energy and food prices in the United States have sent inflation to 40 year high. Consumer prices rose eight and a half percent last month. That’s the fastest annual gain since December 1 981. The monthly rise was 1.2%, the fastest gain since September 2005. Excluding food and energy, core CPI increased 6.5% on an annualized basis in line with expectations, core inflation rose zero. 3% for the month energy prices, they were up 32% year on year food prices, they jumped 8.8%. And shelter costs, which make up about a third of the CPI, rose by 5%. Tony, you’re over there in the US, so let’s start with you. It’s hard to find very much good news in this data. But who do workers blame for this?

TN: I think a lot of Americans really do see inflation rising as Joe Biden has been in office. It’s accelerated during his tenure. So whether it’s his fault or not, he’s sitting in the seat while it’s happening. There is a lot of resource from the White House going into saying that this is Putin’s inflation responsibility, claiming that inflation didn’t really accelerate until the war started. But again, if we look back to the rapid acceleration of inflation, it really started, I guess you could say maybe October. But we’ve been at this for a year or so. I think Americans working level, Americans, whether they’re working class, blue collarly workers, they’re obviously the hardest hit by this. And for workers at those levels, it’s really looking at the political issues, not something that’s happening on the other side of the world.

PL: So what can Joe Biden do to try and bring inflation under control? What are people expecting to do?

TN: Well, I think one of the really easy things that he could do, which I’m in Texas. So this is a very biased view, but since Joe Biden has come to office, he’s put a lot of restriction on the drilling and transport of oil and gas. And so there could be a lot of alleviation of energy prices if the White House would remove the regulations that they put in place on the drilling and transport of oil and gas. The White House also killed a pipeline of Canadian crew or a pipeline from Canada that would transport heavy crude to American refineries, which is what’s needed for petrol or gasoline here. And Americans actually don’t necessarily use the light sweet crude that’s refined or drilled, say in Texas. They use the heavy sour crew that say from Canada and from Venezuela. So the pipeline from Canada would have been very helpful to keep prices stable in the US, energy prices stable in the US, but that was killed literally on the first day of the Biden administration.

PL: Vicki, what is the impact for markets and particularly out here, US markets? They rallied initially because they took some optimism for the fact that the core CPI had declined slightly from last month, but they lost those gains. How do you think markets are going to respond to this?

DW: Well, in terms of inflation, I guess it’s an overall problem not only in US but basically everywhere else, also in China. And you may say, like Russia invasion of Ukraine intensified the situation of inflation in US, but inflation is already there. It’s already a problem in US. So in terms of the market expectation, I would expect first of all will probably have another rate cut for even 50 basis points in May and continue to high interest rate until the year end. At the year end, maybe the sets and target rates will be like two point 75 even at this really high level compared to one year ago. So in terms of the year car still going on, keep going up there’s no question ask but already probably the market already digest this kind of situation like you asked me have to continue to high interest rate. But in terms of in mainland China is another thing. Even though China official CPI rose by 1.5% in March, still below US CPI or everywhere else in Europe. So expecting that PVoC may have some kind of room to have an outer round of rate card or triple archives.

But in terms of the situation now in mainland China it’s pretty dilemma because if they really want to have another round of fresh cut of interest rate or even triple R may intensify the situation now because the ten year value of the US Treasury is slightly higher than the same period treasury in mainland China. Now it may be some kind of money outflow from mainland.

PL: Is the window of opportunity for the PPO to go and cut rates? Is it closing the worst this inflation data gets? It doesn’t leave them much opportunity, does it?

DW: Exactly. So I don’t really expect a rate cut in the near term but maybe I expect Arrr cut instead of a rate cut because rate cut create a high pressure of capital outflow. We have already seen in March no matter in the bond market, also in the Asia market from the stock connect. So people actually getting money out from mainland China. So this is also another reason why recently the Asian market underperformed even the US market because the capital outflow. So it’s not a good timing for China but then you still have to think about it, what they can do because capital outflow and intensified the situation in Russia and Ukraine. So also create another round serious pressure. The CPI future growth is mainland June.

PL: Let me bring Carlos in. Carlos, this is not an easy situation for central banks to deal with, is it’s? Because this is not demand led, this is a supply shock, correct?

CC: I think what we saw in the market this week was some investors pricing in the probability that inflation was peaking within the next few months. We think it’s a little bit early to say we are expecting around eight to 9% inflation in the US in the coming months and of course then a gradual descent, but it will nonetheless remain significantly higher than expected in 2022. And as Tony was mentioning, this will be front and center with Biden facing elections in the fall. So I do think that central banks around the world are going to be very focused in trying to address the demand side factors or drivers of inflation even as they have very little control over the supply side factors. And on that note, just keep in mind that we have this conflict in Ukraine that’s leading to supply chain disruptions. But we are already seeing disruptions to global shipments through the Port of Shanghai following from the lockdown there. So it is likely that these supply factors will continue to exert pressures in the coming months. So in my opinion, I think central banks will unfortunately remain in this very hawkish trajectory even though they don’t have 100% control.

PL: And what does the PPOC do? That’s probably the one major central bank in the world that would like to ease monetary policy to cope with the slowdown there on the mainland. It’s in a difficult position as well, isn’t it?

CC: Ppoc is in a very difficult position because we’ve seen authorities voice their concerns about the lack of easing quite a few times since the middle of March, and yet PPOC has an east the risk of outflows is real. We saw that China’s premium over the US in terms of its ten year yield is completely gone. So any form of eating will exacerbate potential capital risks. But you have inflation creeping up potentially above the 3% target set by the beginning of the year. So the conditions could turn less accommodative very quickly. So PPO has a narrow window of opportunity in my opinion to deliver stimulus and a triple our card won’t be enough given what is happening in Shanghai, given that we have -40% sales in the housing sector and that accounts for a third of the economy is not going to be enough to get us from where we are now to 5.5% growth by the end of the year. So unfortunately, they should be doing a rate cut even if that exacerbates capital outflows and even if the impact of a rate cut might be more muted as most people remain in some form of lockdown.

So it’s less easy to go out and spend money. I think that is something that PVC has been discussing, but it doesn’t matter. They need all hands on deck in order to reach the fact growth target by the end of the year and really running out of time given that inflation is rising.

PL: Tony, you mentioned energy prices, but of course, food prices are also jumping as well. They were up 8.8% over the period. We’re seeing global trade slow quite dramatically now. And the UN saying that the war in Ukraine is causing a huge leap in food prices. The UN food prices index is at a record high. It was up 13% in March are on consumers feeling that as well. Over in the United States, this rise in food prices?

TN: Yeah, for sure. Americans are feeling the rise in food prices. I think, however, the most acute food price rises will be in places like Lebanon and Egypt and other places that are more directly affected by the Ukraine and Russia war. Here in the US, we do have pressure on wheat and corn prices, corn prices or maize prices. There’s upward pressure on those prices partly because the White House just said they want to add corn to fuel here to in their minds, reduce fuel prices. So there’s pressure on corn both to feed people and for fuel now and of course, with proteins, those prices are up as well double digits. So Americans are feeling it really all around, but not as acutely as some of the people in Europe and the Middle East will as the pressures from, say, Ukrainian and Russian exports hit those markets.

PL: We’ve already had an energy shock in many parts of the world. Do you think we’re heading for a food crisis that we’re going to see shortages, we’re going to see prices soaring, and maybe, as unfortunately always happens in this case, it affects the poorest parts of the world the most?

TN: Yes, it does. And sadly, I think that is the case because places like Ukraine and Russia do provide so much mostly Ukraine provide so much weed and maize and cooking oil to some of these markets. So, yes, I definitely think that that is.

PL: Our Americans questioning President Biden’s support for Ukraine. When you start to see the costs of this mounting. They’ve banned American. They banned Russian oil and gas imports. That’s helping fuel price rises. They’re seeing the price rises in food. Are they starting to question whether or not the US is on the right track supporting Ukraine?

TN: I don’t know. I know that a number of Americans have questioned it from the start, not that they don’t support Ukraine, but Americans are worried about being directly involved, meaning sending troops to Ukraine. I think Americans generally are comfortable sending weapons and supporting with that aid, but not necessarily with the troops.

PL: Okay, Dickie, let’s talk about the lockdowns up on the mainland. There was a slight decrease in COVID cases yesterday, but we’ve had ten days now of record cases in Shanghai. Guangdong, Guangzhou has gone into a partial lockdown as well. Now, what sort of impact is this having on the economy?

DW: Well, that’s so obvious. The big lockdown in Shanghai may give some kind of pressure to not only the first quarter GDP, but indeed the 5.5% annual gain of the GDP. It’s probably not that easy to achieve. So I do see some kind of civil linings because China’s government recently added some of the approval of the online and cellphone gaming. And also when we talk about the first quarter lending also hits record to 1.3 trillion before PVC take any action in the first quarter because last year PPOC cut LPR rate triple R, but not this quarter. So I would expect definitely I do agree that PPOC has to take some kind of action like seriously to treat the problem, especially the lockdown in Shanghai. And 5.5% is not something easy. So they have to no matter fiscal policy, monetary policy, and et cetera regulations has to be used, especially some of the tech companies.

PL: Let me ask you also because I want to ask you about the markets as well. We’re seeing a lot of calls now from Premier Leakage, the State Council to take steps to support the economy and also from the regulators now to support the market the China Securities Regulatory Commission wants shareholders to buy back stock. It wants Social Security funds, pension funds, trusts, insurance companies to increase their investment in the markets. What are your thoughts on this? Isn’t this the regulator going way over their skis here? It’s not the job of the regulator, is it to tell companies to buy back more shares and to put public money into the stock market? Surely this is way, way beyond what the regulator should be doing.

DW: Well but in terms of the mainland market, the HR market, this is probably the regulator will regularly do I know they do it but it’s wrong isn’t it wrong that the regulator should do that?

PL: It’s sort of almost an outrageous abuse, isn’t it? The regulator should be there to make sure the market operates fairly and efficiently to crack down on abuses but not do this?

DW: You may say so but the regulator to mainland because you can see intensifying the tension between China and US never gone and also like recently no recently just yesterday the holding foreign companies accountable action called Hscaa a fresh round of addiction of a lot of Chinese companies like more than twelve companies this is the fourth round already it gives some kind of pressure to the ADR market yesterday in US and definitely some of the ADR may open slightly lower today although the pressure may not be as high as the previous one or the first round of the addiction of the Hscaa but because of the tension of these two countries China may have to do their own thing so in terms of like Green Valley always comment about the stock market and try to interfere with the stock market I will not say good or bad but at least it would be some kind of support to the local Hong Kong stock market so I believe we find support at 21,000 because investors may expect or they will expect like PPOC will take action very soon so it may help to stabilize the overall sentiment in Hong Kong as well as in Asia Carlos.

PL: We’Ve heard Premier Leakage now has issued his third warning about economic growth in under a week what can they do?

CC: Well, we do expect to see weaker growth in March, April and May so those will be the three weakest months I think that in addition to doing more monetary policy and fiscal policy support the big question Mark is will they announce some easing of restrictions or at least provide some degree of regulatory clarity for global investors? On the housing and also tech front there’s a whole debate around this. Recent regulations surrounding dual circulation in China points to some additional regulatory headwinds for some of these companies but I think that the issue is not so much regulation it’s more the lack of visibility so they are likely going to at least provide that in the coming weeks. And of course, if this contraction is bigger than expected in the first half, and I did use the word contraction because I do think that GDP has a chance of actually declining in Q two, then the measure of last resort in order to achieve that growth target would be to effectively inflate the housing sector again in Q four. But we should be back to square one. So I think they will try as much as possible to use more Australian and other channels to try to prop up the economy so that growth doesn’t follow the cliff.

But they are running out of time and we do hope that they will announce something big in April.

PL: Okay, Tony, final word to you. I know all sorts of things go on on the mainland that perhaps wouldn’t go on elsewhere, but when you see the regulator trying to arm twist companies into buying back their own stock and get public funds to get the market back up, what do you make of that, Peter?

TN: It reminds me of June of 2015, if you remember, when markets on the mainland really fell pretty hard. There is pressure domestically in China for people to buy shares for a patriotic reason. Even within the Chinese bureaucracy. There was pressure for Chinese bureaucrats to buy shares. So I think they’re just doing it out loud now and they’re doing it for the companies themselves. But to me, when I first saw this news, it really was an Echo of June of 2015 when markets fell and there was real pressure on Chinese retail investors to buy the dips and to support the market. And a lot of them lost. I knew people there who lost 2030, 40% of their wealth because they were buying patriotically.

PL: Yeah. Okay. Well, that’s a fair warning. Thanks very much. That’s Tony Nash, founder and CEO and chief economist at Complete Intelligence. Dickie Wong, head of research at Kingston Securities, Carlos Casanova, senior Asia economist at UBP. You’re listening to Money Talk on RTHK Radio Three. Let’s take a final look at the markets for today. In Australia, the SX 200 up zero 2%, the Nico two five in Japan rallying as well, up zero 8%. The Cosby is up. A third of the cent in South Korea does look like, though the hangsting is going to fall slightly, about 50 points or so at the Open later on this morning. Thank you very much for listening this morning. Please join me again for the final time this week in a holiday shortened week at 08:00 tomorrow. Stay tuned for covered updates after the news with Jim Gold and Anna Fenton. The weather forecast, mainly cloudy, few showers going to be hot with sunny intervals during the day. Maximum temperature of 29 degrees, mainly fine and hot during the day tomorrow. And on Friday, the temperature right now 25 degrees, 82%. Relative humidity 32 here’s Andy Shawski with the half hour news.

AS: Thank you, Peter. The head of the Government’s policy innovation and coordination office says the authorities have expanded it’s $10,000 subsidy for people who have recently lost their jobs Due to covet. Officials say they have received 470,000 applications for the subsidy. In February. They expected only 300,000 Would apply. Doris Hoe said that’s because more people have lost their jobs.

DH: This is partly because more people were out of employment in March When the unemployment situation was in February and partly because we expanded our scheme subsequently to cover employees working in closed app premises such as affinity centers and beauty salons and who were forced out of work about their employers.

AS: Medical Association President Choi keen says the government initiative giving private doctors access to oralcobid drugs will definitely be effective in preventing severe cobalt infections. Authorities on Monday said that private doctors could request antivirals through a dedicated electronic platform. Doctor choice said this is a sensible arrangement.

DH: The patients usually see the GP first before they go to the emergency Department before they get very ill, so it’s the first stage that the antivirus are infected. So if they are seen at the first stage and given the medication, they will not proceed to a very ill stage so it is effective and useful.

AS: Police in New York are searching for a man who shot ten people at a Brooklyn subway station during the morning rush hour. Six others were also hurt, Mostly through smoke inhalation. None of the injuries are life threatening. The New York city police Commissioner, Ketchen Sewell, gave details of the incident just before 824 this morning.

KS: As a Manhattan bound and train waited to enter the 36th street station, an individual on that train donned what appeared to be a gas mask. He then took a canister out of his bag and opened it. The train at that time began to fill with smoke. He then opened fire, Striking multiple people on the subway and in the platform. He is being reported as a male black, approximately 5ft five inches tall with a heavy build.

AS: The city of Guangzhou has reported 13 new COVID cases. Health officials in the city say the new infections were linked to previous cases, but they warned that transmissions might have been taking place for some time before the new cases were found. And the next few days will be critical. To contain the outbreak, local authorities have been conducting mass testing to screen out patients primary and secondary schools of suspended face to face class.

Categories
Week Ahead

The Week Ahead – 14 Mar 2022

This week, we saw commodities skyrocket then drop off. We saw crude oil hit levels not seen since 2008, with gasoline and home heating prices on everyone’s minds. The nickel market broke the LME. Chinese tech and real estate bloodbath. And – despite all of this – Janet Yellen assured us there will be no recession in the US. Quite a week.

As we said last week:

– Tracy called for commodity price volatility – across sectors

– Downside bias in equities with high volatility. Albert predicted 4200-4250 and pretty much nailed it.

– Sam said a Fed rate rise would become boring and talk of QT would disappear.

This episode we talked about mostly the energy commodities with the continuing Russia-Ukraine conflict. Can the US use other alternatives like the West African oil to replace Russian oil? What are the politics around Venezuelan oil and why is it the same as getting Russian oil?How about uranium — and can the US produce it and will the conflict affect rare earths? Is this war the reason for the US’s inflation? How will inflation actually play with voters in this year’s US election? Lastly, what’s happening in Chinese tech and real estate and why there’s a bloodbath and for how long will this continue?

This is the tenth episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.

For those who want to listen on Spotify:

https://open.spotify.com/episode/35aHRd7oVfj7zPvgZjyQXg?si=d74bba8f8d094e29

Follow The Week Ahead experts on Twitter:

Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Albert: https://twitter.com/amlivemon
Tracy: https://twitter.com/chigrl

Transcript

TN: Hi, everyone, and welcome to The Week Ahead. My name is Tony Nash. I’m joined by Tracy Shuchart, Albert Marko, and Sam Rines. Before we get started, I appreciate if you could like and subscribe to our YouTube channel. And also please know that we have a special offer for Week Ahead viewers for CI Futures, which is our market data and forecast platform. CI Futures has about 800 assets across commodities, currencies and equity indices and a couple thousand economic variables. We track our error. We have very low error rates. So we’re offering CI Futures to Week Ahead viewers at a $50 a month promotion. You can see the URL right now. It’s completeintel.com/weekaheadpromo. That’s a 90% off of our usual price. So thanks for that.

So these week, guys, we saw commodities skyrocket and then drop off. We saw crude oil hit levels not seen since 2008. With gasoline and home heating prices really on everyone’s minds. The nickel market broke the LME, Chinese tech and real estate. We saw a blood bath there. And despite all of this, Janet yelling assured of us that there will be no recession in the US. So it was quite a week.

So let’s look at last week. Tracy called for commodity price volatility across sectors. So it wasn’t just an oil call, it was across sectors. And we saw that in spades. We talked about a downside bias in equities and high volatility. Albert predicted a 4242 50 range, and he pretty much nailed that. And then Sam said that a Fed rate rise would become pretty boring and talk of QT would kind of disappear. And we’ve really seen that happen over the past week. So, well done, guys. I think we need to really focus on inflation this week. Inflation and quantity prices are on everyone’s mind. Energy is the first kind of priority, but it’s really come across, like we said, nickel and other things.

So, Tracy, let’s start there. We have a viewer question from At Anton Fernandez, Russian oil, if you don’t mind helping us understand the environment for Russian oil and what’s happening there and some of the alternatives, which we’ve covered a little bit before, but also West Africa. Is West Africa viable within that? So if you don’t mind talking to us a little bit about what’s happening in the crude market and also help us with a little bit of understanding of the context of West Africa.

TS: Yeah. So if we look at the crude market in general, what we have been seeing, we’ve seen sanctions from Canada, which is basically political. They haven’t bought anything since 2019. We also saw Australia sanctioned oil, but they had only bought a million barrels over the last year. It’s nothing. The US only 600,000 bpd. That is nothing. And UK is going to take a year to get off oil because it’s 11% of their imports as opposed to 2% of our imports. That said, what we are seeing in this market is a lot of self sanctioning. Right.

So we’re saying we have nine Afromax Russian oil tankers basically sitting aisle because they can’t get insurance and nobody wants to pick up oil right from them. Actually, what is most surprising right now, I have to say, is that looking at Asian buyers, everybody thought that Asian buyers because it would be offered at such a discount, they would be buying this stuff up like crazy. But there was just an auction for SoKo, which is a very popular grade with South Korea, China, Singapore and Hawaii, and there was literally zero bids.

TN: Really? Wow.

TS: The next auction that we need to be looking for is ESPO, which is the most popular grade for China refiners. But if we see a zero bid there, that would be indicative of saying that we’re taking a lot of brush and barrels.

TN: Chinese we’re not seeing any interest there, at least so far.

TS: Right. Which is quite incredible because the Chinese have always decided to be apolitical. Right. And they don’t recognize Unilateral sanctions and they have stressed that. So whatever sanctions that the west has, China says we don’t care about that. We saw that with Iran as well.

TN: Right.

TS: But it’s pretty incredible to see this particular auction go at zero bid. Right. In regards to looking at West Africa, I’ve been talking about this since 2020. Niama is a very interesting place. There’s been a lot of offshore activity there. And so I think that is a place to be looking for. The problem is that looking at offshore projects, they take it’s a seven to ten year timeline, as opposed to something like Shell, which is six months to 18 months. But yes, there’s definitely opportunity.

TN: So is West African crew substitutional with Russian crude?

TS: No, it is not.

TN: Okay. So is it lighter, that sort of thing?

TS: It’s lighter. It’s lighter crude oil, what we’re looking at right now. And this is exactly why the US went to Venezuela and said, we’ll be willing to lift sanctions with you as long as you only sell us oil.

TN: Right.

TS: And the funny thing is that they have a very good relationship with Russia. The problem with this sort of relationship is that we could inadvertently be buying from Venezuela that is actually Russian oil.

TN: Sure. Exactly. So it’s an interesting point on Venezuela. Albert, what are the politics around that we just pick up the phone. Does Lincoln just have a conversation with Venezuela? We send a deputy sect down there, do a deal. How does that work? And is that palatable?

AM: No, it’s not palatable. It’s an absolute joke. Like Tracy said, the Russians have their tentacles all over Venezuelan oil, that you would be self sanctioning yourself from Russian oil globally, but then buying from Venezuela, which is going to be mixed because everybody in the industry knows that if you want to mix oil, you do it in the Caribbean, especially from sanctioned oil from overseas. So it’s not palatable. It’s a joke. I don’t understand what they’re trying to do. It’s just a Wally world at this point.

TN: I guess the thing that I’m continually astounded by is the diplomatic actions of the US administration from Anchorage through this week with Venezuela. They just seem to be tripping all over themselves. What am I missing? Like they just seem to be eroding credibility by the day. Is that fair to say?

AM: It’s more than fair. They’re throwing spaghetti at the wall and seeing what sticks based only upon their little echo chamber of ideology. And it’s extremely naive ideology when it comes to geopolitics or what they’re doing right now.

You can try to erase Russia and go play and then think that you can go to Iran and cut a deal with Iran, not understanding that Russia is going to sabotage that deal. Right. Like they did just today.

TN: Tight diplomatically. While we’re on this this week, the headline said that the UAE and Saudi declined having talks with Joe Biden this week. Is that true? Is the headline the reality of it? And from the time Biden came into office, he was not friendly to Saudi Arabia. So is this payback from that?

TS: No, I don’t think so. Sorry.

AM: Actually, I think it is that it is payback because you have the Saudis and the UAE that have security concerns with the Houthis and the Iranians. And if you’re sitting there approaching the Iranians playing all nice with them, what do you think MBS is going to do?

TS: I agree with Albert on that respect. I just want to interject that the OPEC + Alliance has mainly tried to stay apolitical. Right. So just because the United States says OPEC produce this much more, Saudi Arabia and UAE, which are both the producers that can produce more than the rest, had come out this week and said no, we’re in this alliance and this is how it is, which is totally understandable.

AM: Yeah, but Tracy, but the problem is OPEC saying that is one thing but not taking his call.

TS: No, I agree with you. I agree with you that we have burned bridges. I’m not disagreeing with you here whatsoever. I’m just taking a different kind of look at this.

TN: Sam, what’s your view on that? I’m not hearing you.

SR: Can you hear me now?

TN: Yes, sir.

SR: I would say the naivety of believing that you’re going to have a JCPOA deal or you’re going to be able to have some sort of comeback in terms of Venezuela. So you add the two of those together and who cares relative to what you need to replace Richmond Oil? I mean, it would be great and fine, whatever, but it’s nowhere near enough simply. Right. But it’s also a political naivety to believe that you’re going to have that type of dialogue and you’re going to have it quickly.

TN: Right.

SR: On the front of Saudi and UAE, I would say it is both an OPEC Plus. We’re not going to blow this up before it blows up on its own from the call it the allies of OPEC. Plus.

It’s also the UAE and Saudi is saying, remember, you want to be friends with us, US.

TN: Yeah.

SR: Don’t pretend you don’t want to be.

TN: Right.

SR: So I would say it’s politics in the best possible way on that front. And on Iran, JCPOA, and Venezuela, it was wishful thinking to think that the Russians were going to say no on both fronts.

TN: Well, and the Chinese. Right. I think there are a number of Venezuela has relationships with both Russia and China.

TS: That’s all I was saying is that OPEC is not going to give up that plus alliance. They’re going to try to stay apolitical. Right. Whatsoever. Do I think that the United States is pushing OPEC to Russia and China? Absolutely. Do you see the huge deal that Saudi Arabia made today? Absolutely. Right.

So they’re looking at investing further into China because they are being pushed away from the United States. So agree on that aspect. But I’m just trying to say that they do try to stay apolitical. If you look at the history of OPEC, Iran and Saudi Arabia have been able to subsist cohesively in the OPEC alliance, regardless of the years of them being enemies and having proxy wars against each other. That’s all I’m saying.

TN: Okay. Let’s move on to the next thing. There are a couple of questions about commodities, Tracy, and let’s just cover these really quickly. We have a question about uranium from @JSchwarz91. Will the US ban or will Russia restrict its uranium and could the US actually start producing uranium on its own? Is that a possibility?

TS: The US won’t restrict uranium. It hasn’t restricted uranium because we actually buy a significant amount of uranium from them. It’s easy to say we can skip 600 barrels per day of oil, but not as easy to do with uranium. We’ve stayed away from that.

Will Russia decide to not sell to us? Again, it’s about money, so probably not unless we really push a button in there. Can we produce that amount of uranium in the United States? Absolutely not.

TN: Interesting. Okay. Let’s also move on to rare Earth. So we have a question from @snyderkr0822. He’s asking about the impact of Russia and Ukraine on the availability of rare earths. Is that a factor or is rare Earth more of a China thing?

TS: That’s more of a China thing. We all have to watch to see if China sides with Russia and see how that market ends up. But really, they’re the largest producer in the world, and that’s who we are largely dependent on for rare earths.

TN: Okay, great. Thanks for that.

Now let’s move on to kind of this war driven inflation narrative that we’ve seen over the past a couple of weeks. We had February inflation come out today, and I feel almost as if we’re being tested as a trial balloon for an inflation narrative that inflation is kind of Russia’s fault.

So, Sam, can you talk us through some of the economics of this? Is inflation a new thing like did it just happened two weeks ago?

SR: No. So the inflation narrative going forward, there’s some validity to Russia being the reasoning behind an increase over a base case. Whatever you want to decide that base case is. But in February, January. December and November, those are not in any way related to Russia generally.

What’s interesting to me is how many people are kind of forgetting that, we kind of had a little bit of a log jam breakup in supply chains beginning to occur. It looks like we were going to get a little bit of respite from that narrative. But now if you looked at what’s going on in the neon market, if you look kind of six to twelve to 18 months down the road, it looks a lot less like we’re going to have that log jam broken up and a lot more like we’re going to have somewhat persistent inflation that there is no way for the Fed to solve. There’s no way for the ECB to solve BOJ, et cetera. You’re just going to have to continue to have this hawkish language to try to tamp down those longer term expectations.

TN: Demand destruction.

SR: Demand destruction. But it’s really hard to destroy demand for semiconductors when they’re in everything from my daughter’s doll to my laptop. It is very difficult to destroy that much demand and create an inflationary environment that is less toxic to the Fed or to the ECB without breaking something.

So if the Fed isn’t willing to break something in the next call it six months. They’re not going to break inflation. And if you print out six months from now, you’re breaking something into a midterm election.

TN: Right.

SR: So I’m so much skeptical on the Fed’s ability to do anything at this point.

TN: Right. That’s a great transition to Albert. So how is inflation playing with voters?

AM: Oh, it’s absolutely nuclear football. Allowing inflation to go this high is just going to be devastating to the Democratic Party and Joe Biden. But I want to go back because I have a couple of contentious things to say. Right.

TN: Please do.

SR: Oh, God! Right.

AM: So everyone is pricing in five, six, seven hikes at the moment. Right. But inflation at the moment has probably taken three of them out of the equation because the money’s gone. It’s erasing money left and right at the moment, from the federal point of view, it’s like, why really get rid of it all? That why really attack it when it’s doing our job for us where we only now have to hike three times. Right.

And on top of that, something even more contentious is everyone knows that once the VIX gets to a certain price, somebody sells it off. Right. Somebody industry. Right. But everybody knows that. And when everyone knows that, the house casino usually moves to a different area. What about oil? What if somebody with a big account has bought oil futures and every time it gets to the 120s or 130s, they just crush it for $1015 and the market rallies again.

So this artificial inflation that obviously we have real inflation just because of wage inflation and supply chain. But there’s a little bit of artificial, artificial aspect to it that I think the Fed has been using. Politically, it’s going to be extremely damaging. But for their point of view is if they can get over it and then get the rate hikes out of the way and then maybe probably start QE later in the summer, They could suck their voters at the beginning of the economy back on track again. I don’t think it’s going to work.

TN: Let’s say a month or so ago there was suspicion that we would be doing QT in say June, July. That’s off the table now because of the money that inflation is taken out of the market, right?

AM: Absolutely.

TN: But we’ll do rate hikes and have QE potentially?

AM: That’s right. That’s my point.

TN: You’re in an insane phase of economic history.

AM: It’s just look around, Tony. What’s not insane at the moment?

TN: Undoing this.

TS: That’s 100% fact.

TN: Undoing this is going to be insane. Okay, speaking of undoing crazy stuff, the Chinese techs and real estate stocks really have some problems this week.

So Albert, Sam, can you guys talk a little bit about that? And we have a tweet showing some stocks from Tencent, Alibaba, JD, other ones down 50, 60, 80%. So what’s happening with the tech blood bath in China?

SR: I’ll just do a quick start. Did you see the numbers coming out of JD? They were horrible. I mean, they were absolutely atrocious. So, yeah, you’re going to get a sell off in tech broadly across the board in China. When your numbers are horrible, then you’re going to have additional pressure put on the potential for delisting in the US and the general call it risk off move in markets. So you’ve got the trifecta of horrible for Chinese tech in a nutshell.

But the JD numbers were absolutely atrocious on a revenue growth line. And there’s no way to save Chinese tech if you’re going to have numbers like that. If you continue to have numbers like that, guess what? Look out, because the bottom is not in.

On the Chinese real estate front, I think Albert has a much better view on this than I do. But I would say if you’re going to have a risk off in tech, good luck having a risk on in real estate.

TN: Sorry. Let me stop you before I move on to real estate. So the tech story, what I’m pulling away from there is that it’s potentially disposable income story at the retail level, at the consumer level, and tells me that China is way overdue with its stimulus. Is that fair to say?

SR: That’s harder to say.

TN: Okay.

SR: I would be very careful in saying that the Chinese consumer is not there. China is coming with stimulus. If you’re trying to hit 5.5 by the end of this year and you’re going into a plum, guess what? You got to hit the pedal.

TN: Well, they better hurry up.

SR: They’ve got time, but they’re going to hit the pedal. And the question is how do they hit the pedal? And it’s got to be the consumer because they’re not going to hit it on real estate.

TN: No, they’re not. Going through some of the real estate.

AM: Yeah, well, I have a couple of points to make on. I have a couple of points about the tech. China tech. What was interesting is Sam is right. JD numbers were horrible. Right. This SEC Delisting thing pointed out five companies. Right. Just five. And the big ones. Gamble is a big one. And whatnot. But why only five? It happened to be the only five that actually did their accounting and submitted their accounting numbers. Right. And would that actually let a snowball effect out to say, Holy crap, they will take down every single Chinese number, Chinese company in the market. That’s why a lot of this actually sold off harder than you think it would sell off.

Going to the real estate market. I mean, 75% of China’s fault is real estate. So unless Xi wants pitchforks and torches coming after him, he’s going to have to stimulate the economy, something to support the real estate market.

TN: Yeah. It seems like it’s going to have to come hard and fast. I could be wrong. But, you know, with.

AM: I think by June. I think by June he’s got to do something. He has to.

SR: Hit through the middle.

AM: Absolutely.

TN: Good. And do you guys have any ideas on what exact forms that’s going to take? I mean, of course they’re new triple R, of course, taking a new infrastructure spending. They do the stuff. They announce it every other year. Are there other forms that you have in mind that will take that?

AM: I don’t, to be honest with you, that is $64 million question. To be honest. That’s a big question. That’s very complex.

SR: Yeah. And if I had the answer to that question, I probably wouldn’t be on this call.

TN: Come on, Sam. We know you would.

SR: I would be on a yacht somewhere.

TN: Yeah, that’s right.

TS: It’s interesting about that. If you look at the energy perspective, they just had a meeting and they totally decided that they’re going back to coal other than anything else. So that to me that signifies we have stress in other markets. Right. We cannot spend the money in other places. So we’re going to go back to what we do best, what we know best. And they also offered, if you look at internal documents that are offering huge discounts for going back into the coal industry or whatever. I just like to.

TN: So there’s still 73% coal for their power generation, something like that?

TS: Yes. So for them, they backtracked on COP. They need the money right now, in other words.

TN: Right. So the whole Paris agreement is a convenient agreement, is that what you’re saying?

TS: Correct.

TN: Okay, very good. It’s good to know that we’re all committed to the future. Okay. So guys, speaking of the future, finally, what do you view for the week ahead? Albert, let’s start with you. Maybe with China. Do you think there’s more to come with the blood bath in China?

AM: I think there’s another week or two to come with China blood bath. And I think that’s going to obviously lean on our equities going into Fed week.

TN: Right.

AM: So yeah, I think we’ll be another down week.

TN: Okay. And guys, what about US equities? Are we on a steady decline down to some number 4300 whatever it is, or are we kind of about there? What do you feel is going to happen over the next week?

AM: I think we’ll be sub 4000 by the end of the week at some point.

TN: Okay.

SR: Yeah. I wouldn’t be anything other than market neutral until immediately following the Fed meeting and then you just rip it to the upside.

TN: Okay.

AM: Yeah. The only thing that I have a concern about is we still have this Ukraine war going on which is giving outrageous headlines and then if the Fed hikes 25 basis points and then extremely hawkish tones while Putin is shelling Kiev.

TN: Right.

AM: It’s hard to rip until after that’s all settled.

TN: So sorry, Sam, in your scenario, are you saying the first half up until say Wednesday we have a pretty quiet market, then Thursday and Friday, things are pretty active to the?

SR: Oh no, I am not saying that you have a quiet market until the Fed. I’m saying you don’t want to take a position period until the Fed and then you either want to grip it or rip it one or the other.

AM: I agree with that one wholeheartedly.

TS: These markets will continue to be volatile until we have some resolution with this Ukraine Russia situation just because of all every day we’re seeing new sanctions against Russia and against commodities within Russia, at least for the commodity sector. I think we’ll continue to see volatility, but over the long term I’m still very bullish commodity.

TN: Okay. So Tracy, Sunday night, futures open, crude traded very high. Do you think there’s a possibility of us seeing another dramatic spike like that in the next week or two?

TS: I think that mostly been priced out of the market. I think that was priced in right. We saw a lot of that risk premium come out of the market, which I was very glad to see. I would personally be happy if we saw it traded in the 90s again before going into high demand season because I do think that we will trade higher on fundamentals. But it scares me when we have these big kick ups due to headlines and geopolitical risk.

So for me right now I would like to see this market come down a little bit. I’d like to see it pull back some and hopefully things will resolve quicker than sooner with this situation. But still going forward, I’m still very bullish this market.

TN: Okay. We didn’t talk at all about nickel and metal’s markets, but we saw the LME close today because of a nickel trade supposedly. Will we see those markets reopen and will we see nickel trade? Is it scheduled to trade again on Monday and is there the potential for commodity specific disruption and markets closing over the next week or two because of the volatility.

TS: There’s been a very high contention discussion right now, especially within the commodities industry. I would just say that it was kind of unprecedented what we saw there and the fact that they canceled all the trades. I would say that hedge funds are kind of backing away from that market right now because they’re skeptical of that market right now. But again, it’s not like I don’t want to say this is going to be the norm or anything like that.

TN: Okay.

TS: I think this was a one off crazy thing. It happened in the aluminum market years ago and you can even look it up on Wikipedia, right.

TN: Okay. Last thing week ahead with bonds. Sam, what are you thinking about bonds? We’ve seen the ten year go back up to about two. Are we going to see that continue to take up?

SR: I don’t know. I think the ten year is a little less interesting than the five year and the seven year.

TN: Okay.

SR: The five year and the seven year are really what you want to watch because if the fed goes 25 and goes really hawkish, it’s the five and the seven that you’re going to get the juice from and the ten and the 30 you’re going to get a little less so watch the five and seven. I think the five and seven are really interesting here. If you want to take a bet on a really hawkish Fed.

TN: Fantastic. Okay, guys. Thanks very much. Really appreciated. Have a great week ahead. Thank you very much.

AM: Okay. Bye.

SR: Thank you. Bye.

Categories
QuickHit Visual (Videos)

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.