an important correction

market vibes

Good morning all,

On Friday morning a market vibes reader questioned my data related to the “opearational floor” for global petroleum reserves in my morning note: “simple arithmetic.” The nice thing about having community of highly curious, well informed and confident readers is they are never shy about calling out my not infrequent errors! He said:

I replied with this:

However I was unhappy with my reply. And I started digging. Here are the facts: I was correct in my orriginal statement (from memory) but my point was poorly made. Proplerly restated, my corrections highlight how esteemed analysts make careless mistakes, and by extension X posters eager to write hyperbolic bullshit, put out bad information intended to influence investors.

Once a high level and critical report containing bad data is accepted as true, it goes viral and it’s impact on prices changes the the entire supply/demand narrative. This has happened with JPM’s “operational floor” thesis first published several weeks ago. Furthermore this is only one of the broadly repeated examples of misinformation about the global supply of oil related to the war and the Strait of Hormuz.

tank bottom and line-fill

In my morning note I wrote:

There is a rising “operational floor” narrative that has just emerged among the hair pullers (late April) that says of the 8 billion total global reserves of crude and products, 7.5 billion of are unusable because the system needs it to function: line-fill, minimum pressure levels, tank-bottoms etc.

*This was incorrect: Post covid in 2022 total global reserves were considered high at 5 billion. Even so after rising total reserves over 3 billion barrels. analysts like Jeff Currie are saying 7.5 billion is the floor. These data are facts. These opinions are pro-bullish.

China is a notorious importer of crude oil, so great is their appetite their current hoard has been recently estimated as high as 1.8 billion barrels (Kobeissi) and mysteriously… even though they cut net imports by 3.5 mm barrels in April (China’s May 10 data multiple sources) their aggregate reserves have not gone down.

I should have written this

tank bottom and line-fill

There is a rising “operational floor” narrative that has just emerged among the hair pullers (late April) that says of the 8 billion total global reserves of crude and products, 7.5 billion of are unusable because the system needs it to function: line-fill, minimum pressure levels, tank-bottoms etc.

*corrected text: [The operational floor for crude oil and fuels and refined products are simply not the same. Global crude inventories total around 5.5 billion barrels. SPR crude oil is sequestered in primary storage vault-like “break the glass” conditions that require senior approvals and transparent legal processes to deploy but about 80% of them or 4 to 4.5 billion barrels readily exist if needed.

The operational floor… the minimum volume required to maintain tank-bottom functionality is approximately 1 billion barrels perhaps even lower. For instance we know tank bottom in Cushing is below 18 mm barrels touched in 2014…. approximately 15% of max fill capacity.

In contrast, fuels and refined products have a much higher operational floor of up to 80% of max fill capacity or 2 to 2.5 billion barrels (out of 2.8–3 billion total strategic total) because they are held in secondary storage and co-mingled with commercial storage across terminals, pipelines, and distribution networks. These downstream inventories demand larger minimum “heel” volumes for line-pressure pumpability making them way less flexible than 5.5 billion barrels of SPR crude. This distinction between where and how primary crude reserves and secondary storage of products underscores why analysts like JPM and Currie have understated usable supply by as much as 4.5 billion barrels.]

I continued: China is a notorious importer of crude oil, so great is their appetite their current hoard has been recently estimated as high as 1.8 billion barrels (Kobeissi) and mysteriously… even though they cut net imports by 3.5 mm barrels in April (China’s May 10 data multiple sources) their aggregate reserves have not gone down.

I wrote a detailed collection of Tier 1 sources in my May 12 evening wrap that got me a slew of disgruntled replies disputing “my facts” which are simply the EIA, IEA, Reuters, JPM, Kpler, and Bloomberg. My conclusion on May 12 fits nicely into the mysterious 3.5 mm bpd drop in Chinese May import data:

“I will say it again: Stable GCC flows, higher new incremental bpd and demand destruction (!) are actually pushing global inventories higher for an impressive net surplus of 3.5 to 4 mbpd above pre-war SOH flows… according to sources noted below.”

…“in the markets” and “my vibe” followed….

My thanks and appreciation to AdmiralJames for pointing this out. I think the fact that global available strategic crude oil supply is actually 4.5 to 5 billion barrels is important enough to share with all subscribers.

Have a great weekend!

JJ

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