The 4th of July
A birthday, a burial, and a barrel that isn't a barrel
Birthdays are days to look forward, and look back.
Today marks the 250th 4th there ever was.
It’s not really the beginning. Not quite an end either. The beginning of the end, maybe, or the end of a beginning…
One end that’s supposed to be clear: a monarch of three decades and change goes into a glass box in Tehran. But some say it’s the end of the regime. Others talk about the long overdue re-emergence of Iran as a regional power. Both an end and a beginning? Or the end to the beginning?
Another that’s supposedly clear is the military prowess of the US of A. Mightily dropping bombs on girl schools because yeah, target selection with Claude was not perfected yet. Do we chalk that up to an end? The end as everyone starts looking past the mirage? Or is it a beginning of a much more localised America?
Again.
What are we actually celebrating this BBQ over beers and burgers?
An empire lights fireworks but can’t quite say whether it’s throwing a birthday or sitting a wake.
A war the memorandum swears is winding down, even as Israel plotted to take out the negotiators - again, and the power buildup that started the whole thing is continuing unabated for one more go.
And oil… Dear oil… Lifeblood of any modern industry… Source of so much “spreading democracy” around the world… Held under by sheer force, is it at the beginning of a resurgence, or at the beginning of the long awaited demand destruction?
End of one, birth of another, and from inside our bubbles, we can’t tell which is which.
The party next door is loud.
Bunting, flyovers, a speech from the President, the whole republic out on the lawn for a quarter-millennium of the American experiment.
So loud it drowns out the other thing.
Two and a half thousand miles east, in Tehran, a different crowd is out. Black instead of red-white-and-blue. Thirty-seven years running Iran, killed four months ago on the first morning of this war. Joined by his family. For eternity.
He lies in state on the fourth of July. The end of the beginning of the resurgence of the Persian Empire? Or the beginning of the end of the war? Where does one begin, and one ends?
And while the country sang to itself, because a party this loud is really a wake for whatever the thing used to be, something quieter went into the ground round the back.
Buried under paper. An avalanche of it.
The screen says calm. Brent near $72, WTI in the high sixties, both back where they belong, right? The war never happened. We have a surplus of oil. Right?
Four months of trying to force Iran to give up its nuclear dust but were actually about control over the Middle East. The one in the casket kept repeating his fatwa: no nuclear weapons. Over his dead body. Literally.
A war Washington itself half-admitted was about oil spreading democracy, and four months and several thousand bodies later there is no dust - except where the US bases used to be - and the crude is cheaper than the morning it started.
Peace in our time. I guess…
Or half-time probably. Because this seems to never end. Nor can anyone remember where it began.
Before all this, about a 130 ships a day went through the Strait of Hormuz. The best day since the war managed seventy-eight.
What moves now, is a thin line on the lane Tehran allows, hugging the Iranian coast, paying whatever toll they feel like. The American corridor down by Oman has been effectively shut down.
Meanwhile Washington is dangling a hundred billion of Iran’s own frozen money to buy the tolls back and get the strait handed over. You can guess once what Tehran’s answer was…
Everyone’s looking at the tankers that got out during the “ceasefire”. No1’s looking at the empty ones returning. And for the most part? They aren’t.
Storage is full all around the Gulf, and oilfields can’t (won’t) be restarted until an empty tanker turns up and takes that crude away. And even then those tankers will be wary to say hi as this war can restart at any given moment.
There are a few brave souls that try to bypass either blockade, but they get turned back. Iran’s hold on the Strait is nearly absolute. Washington’s blockade is slightly more porous.
Kpler, who count this for a living, put the road to normalisation at roughly a year: six months to clear the mines, two or three for the ships to go and come back, and another three to bring the fields up.
So EVEN when giving the - in all probability deceased - ceasefire the benefit of the doubt, those barrels are stuck in the ground, in storage, and in tankers for the next few months to a year.
There are some green shoots of course, so it’s not all that bad.
The Saudis are said to be back at about 90% of before, and the UAE routes around Hormuz through a pipeline that skips the chokepoint. Those 2 capture about 60% of pre-war flows. So not all that bad…
In the US, the Strategic Petroleum Reserve (SPR) has been pumping oil out since March to soften the oil shock. Half of which goes straight onto export tankers.
That part of the reserve has always been about holding the world price down. And it’s obviously doing its job. So much even that there are talks about an “oil glut”.
One way to keep the price down is to increase supply. Which is what the SPR is used for.
The other side of the coin is demand, and this is a strange one…
China’s cut its crude buying by something like forty percent. 4-5 million barrels a day, *poof*. Is there a memorandum with China too to support the US’ war effort by reducing oil purchases? Are there “hidden caverns filled with oil” like I keep reading (personally I doubt it)? Is there a huge demand destruction happening in China? Did China have an electricity glut and decided now is the time to go all-in on electricity?
It’s strange. Because Chinese imports fell off a cliff, but the refineries never slowed. They ran flat out the whole time.
It just feels coordinated, but I can’t find my alu-head, so I’ll stick with two giants that don’t want to upset the applecart - too much. Just for a little while longer…
So the price sits on the floor, and two reserves are draining to hold it there. Which leads me to the only question worth asking: how much is there actually left to drain?
A barrel is not a barrel.
Forty percent is sweet, low sulphur, easy, near enough any refinery can run it.
The other sixty is sour, high sulphur, and you need a complex refinery to touch it. Both of them are medium grade, which matters a lot, because the oil that America has an abundance of, is light sweet shale.
It’s the wrong barrel for the job. (see my April article, linked above)
The grade the refineries in the Gulf (of Mexico this time) need is the sour one. It might sound like the worse oil, but medium sour is what they require to cook into diesel and jet. Which supports every truck and train and ship and plane in the country.
The current reserve clocks in at around 326 million barrels. The Pentagon has a strict floor of 243 after which the country can’t fight a war any more. I’d argue that even without this floor they can’t, but I digress…
So the Pentagon has a 243 limit. Tanks and planes and ships run on sour because they need diesel. So the real floor is however much sour is left.
The whole release’s job was to replace the medium sour that stopped coming out of the Gulf (of Persia).
I’ve read estimates between “end of June” and “somewhere in November”. And yes, I realise we’re past the former point already. I guess the release of the tankers during the MoU steered ceasefire bought a bit of time. I read about 20 days.
We can argue all we want about when they’ll run out, but the direction is pretty clear.
A straightforward calculation to deplete the leftover 326 to 0 would take about 74 days at maximum drawdown capability (4.4/day). However, this is not realistic because those caverns have an operational floor of about 100-140 million barrels. Go below that and the caverns collapse and pumps lose efficiency.
The screens keep flashing mainly 2 types of oil: WTI & Brent. Like it’s one big total… Like it’s all the same.
It isn’t.
Most people think about the SPR as a bank account. But it isn’t! It’s more like a pressure valve. Most of this SPR storage are four lumps of salt on the Gulf coast, sixty-odd caverns hollowed a kilometre down.
To empty each, you have to push water in at the bottom to float the oil up and out. Some caverns are already near their floor, all but spent. Some are half-drained, the water rising under the oil right now. And some are near the line where you have to stop, because past it the water breaks through and what comes up is brine with a rainbow on it.
Leach it too hard, and the cavern becomes useless as salt creeps in, the walls fail, and the whole thing collapses as the video explains. A giant sinkhole.
Then there’s the question of how and when it’ll be filled again. My calculations point to 50 to 74 days till the operational floor based on current drawdown rates. So give or take 3 months, and fill it up… 🦗🦗🦗
To summarize:
we have the grade floor, where you would need either sweet or sour
we have the integrity floor, where the potential sinkholes live
we have the rate floor, which determines how fast it can be emptied
and we have the legal one, where the Pentagon decides when to stop
As far as I know Iran still decides which ships pass and which don’t. And the stuff that everyone needs - the sour one, is the one that Iran has the most of. And that is heading to China, NOT the west.
So the SPR bleeds to hold a price, the peace got signed to take stock, but the ships sail to Shanghai anyway.
On the trading screen, oil looks like a market finding its floor after a small hiccup. But in the real world, it’s so much dirtier and everything to me is pointing at a huge manipulation to keep the gas at the pump relatively low, especially in a mid-terms year.
I’m looking at the trickle that passes the Strait.
I’m looking at the SPR releases.
I’m looking at the exports from those releases.
I’m looking at the banning of diesel exports from Russia.
And I’m looking at my trading screen.
And I can’t help but shake my head.
May the Fourth be with us.
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Top tier analysis. Philosophical depth. Relatable and enjoyable voice. Nobody doing it better in this space. Appreciate you No1
I just posted this to Simplicius' site:
Iran's proposed transit fee of $2M per tanker breaks down like this:
1 VLCC tanker carries 2M barrels of oil, so $1 per barrel transit fee. A barrel of oil produces on average about 32 US gallons of gasoline and diesel. So, if the entire transit fee was passed through just to the buyers of motor fuel, the amount per gallon added at the pump would be just over 3 cents, or approx. 45 cents to fill-up a mid-sized car.
I'm fine with that, in fact I consider it more than reasonable considering all the harm and misery we've caused them.