Tuesday, 31 March 2020 14:30

'Tanker Tantrum' - How Crude's Record Contango Has Created "Greatest Trade In Decades"

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'Tanker Tantrum' - How Crude's Record Contango Has Created "Greatest Trade In Decades"

Authored by Harris Kupperman, CIO and president of Praetorian Capital, via AdventuresInCapitalism.com,

Over the past week, I have taken my bullishness on tankers from level 10 to 11. It started with the Saudis busting out of the cartel formerly known as OPEC+ in order to dump oil and crush US shale, but it has progressed far beyond that as various US cities went into lock-down. Fair warning, I’m going to generalize, I’m going to round some numbers and if you’re an empirical purist, you’ll probably be offended.

In big round numbers, the world produces 100 million barrels of oil per day (bbl/d) and consumes roughly the same. As a result, supply and demand are usually balanced to within a few hundred thousand bbl/d at any given time. In fact, we have extreme price volatility when the balance is off by much more than that. The market was roughly balanced at the start of this year, until COVID-19 arrived in China. When the Chinese went into quarantine, their oil demand collapsed by roughly 25% and stayed suppressed for roughly two months. Even today, two months later, demand is still not back to pre-flu levels. With the rest of the world now experiencing COVID-19, I would expect global oil demand to also decline by a similar 25% in affected regions, offset by the partial recovery in China. Let’s assume that global demand is going to be off by 20% or 20 million bbl/d for the next 50 days (yeah, I’m probably wrong to within a few million bbl/d. Deal with it). In addition, I expect the Saudis along with their former friends in OPEC+ to dump an incremental few million bbl/d, hence...

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