September 23…)
“The spice must flow” is a quote from the screenplay for the Sci Fi blockbester Dune, written by Frank Herbert and published in 1969. It encapsulates a spiritual narrative from the Bene Gesserit, a powerful super human female order dependent on “the spice planet” Arrakis for its power. The plot of the book is an ingeneous parody of oil (spice) and the Saudis (House Atreides) with arabic references woven into a tale of interplanetary intrigue.
The quote is often used by writers to sum up the indispensable nature of oil to life on earth. Bene Gesserit literally translated means “while he behaves properly”. Having read Caesar in 8th grade and enjoyed it, I wasn’t satisfied with that. Latin translations to English never convey context accurately. So, I a dug a bit deeper and discovered it is the participial future perfect continuous (or active indicative) tense of “he shall have done well.”
Last week PAAD2 (the upper Midwest) crude inventories dipped under 100 mm barrels and the gush of shrill posts and commentary insisting oil shorts are about to get ripped could have filled Yankee stadium. That can always happen for any number of reasons, but inventories are rarely standalone indicators of price trends.
In fact, PAAD 2 inventories (next chart) have been within spitting distance of 100 mm barrels 6 times in the last 10 years. It is the shoulder of seasonal weather now. People are home and back to school. Soon turnarounds will be limiting demand as well. Runs are sharply lower vs last June, a seasonally normal decline.
PAAD3 inventories, double the runs of PAAD2, are comfortably above average. I read the BBG piece about 400k bpd missing in favor of the Trans-Canada pipe which seems reasonable, but there are many ways get oil into the PAAD2 refineries. If margins were higher, storage would match downstream demand forthwith, imo. Unfortunally margins are terrible.
The front spread is .88 back (chart below) which is the natural shape for the crude curve. With runs at the low for the year, the shortage narrative just doesn’t hunt. I think it’s bad management to hold extra barrels you don’t need. You’d have to roll them at an .88 cent loss because you’re stuck with them. If I had to do that, I’d buy products in the market to hold my market share and minimize runs. Some of that may be happening.
Pundits and oil analysts have been catastrophically wrong calling for a bull market in oil for nearly 5 years. Pierre Andurand has opened and closed his fund many times with stunning swings (losses) in alpha and AUM. Jeff Currie as recently as the spring of 2024 made his debut at Carlyle with a bullish call in crude. It flopped miserably. Will the influencers on X be right this time? Let’s check under the hood and see.
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