Transcription
Hi, it's Eric Nuttle, the 9point Energy Strategies with the weekly update. We're going to keep this a little more brief than uh last week's 19 minutes uh version. We just wanted to give our thoughts in terms of where things stand now that there have been renewed um strikes by the United States uh on Iran after Iran hit at least three different vessels, one of which was a fully laden LNG Qatari uh tanker.
So, where do things stand? Uh traffic is for now has come to a halt. Uh normally you have 50 ships going in, 50 ships coming out. Last night, one entered. There was a really good data point uh reported by Bloomberg that said that before um the straight open, there were 109 non-Iranian oil vessels stuck in the straight. As of now, that number is down to one. And so the exodus, that surge so-called of production, the the glut as some people are calling it, those ships are headed for safe harbor. Clearly they're going to be offloaded. We think a lot of that oil is going to end up in China. But that's really that last uh spurt of incremental supply.
The much more important number, we've talked about this in the past, is tracking inbound vessels. Why do we look at inbound vessels? It's because that is the only remedy to curtailed Middle Eastern production, which we peg at roughly 8.6 6 million barrels per day. There's a little bit of, you know, bookuns on either end of that number. Unless you get a normalized number of vessels heading into uh the strait that allow to empty full storage levels, you cannot get Middle Eastern production back up to normalized levels. And so that's really important data point that we're looking at.
Given the renewed strikes on vessels, given that the existence of 80 mines in the middle of the lane, given the intent and this is a kind of a base assumption that we're working with, we get to meet with a variety of thought leaders from uh oil producing countries from current government, exgovernment, etc. on our base belief is that Iran has figured out that control of the straight of our moves gives them more negotiating power than actually possessing a nuclear weapon. And that's the consensus amongst the people whom we speak to. We see that in their actions of trying to ensure that the you know the US corridor to the south is not used and that vessels come through the north paying a security fee, an environmental fee, a bribe, whatever you want to call it. From discussions with uh primary sources in the Middle East, we do not think that is a palatable solution. We do not think that Middle Eastern producers will pay a ransom especially to a country that has been bombing them as recently as last night. And so we do think there will be a long-term impact on of on volumes exiting the street. If you look at even with the workarounds of Fujara uh the through the Red Sea etc. we still have Middle Eastern exports down roughly 4.6 4.7 million barrels per day and that number is likely to get a little bit uh worse.
Now we also have the SPR having been now drawn down to 319 million barrels. We talked about previously we were in Washington about a month ago getting to meet with Amos Hawkin. He was the former energy adviser to President Biden. He was I think involved um intimately with the largest or the formerly largest release in history from the SPR around the time of Russia invading Ukraine. and he in public commentary mentioned that nobody within the White House thought that you could go below 300 million. So that's kind of like a minimum operating level. We drew 8 million barrels last week. We've got 19 million left before we approach that that number. And I'm sure there's a bit of flex in what exactly the number is. But we the punchline is the world has a lot less safety buffers today than it had four months ago. And so if and few people know the actual answer answer to this, but if this is the beginning of a renewed conflict which will lead to the number of inbound vessels entering into the straight approaching last night's number which was one, there's a lot less safety buffers in the system. The US SPR has been drawn down. Global SPRs have been drawn down. We have onshore inventories near their lowest levels in recorded history.
When we look at product stock piles, we've talked about in the past how China, the reason why we did not get the spike in oil. We've seen a spike in something else which I'll touch on, but we didn't see the spike in oil that we were expecting because of China. They massively dropped their imports by about 320 million barrels of forfeited imports between April and June. June alone, they were their imports were down about 4.9 million barrels per day from on a year-over-year basis. And so those barrels given that domestic demand remained strong when you look at mobility trends. Where did the barrels come from? Well, they came from invisible stockpiles and it came from refined product stocks. And so as we speak, the margin for refineries right now, the crack spreads for different products sits at near or at alltime highs, literally the highest profitability levels in history. What that speaks to is there is an enormous tightness in not oil but refined product. And so as demand remains strong for refined product as the profitability is is enormous and now very very importantly as China eased um import export rate restrictions on their teapot refineries we do think that Chinese imports are starting to inflict and that is a massively bullish uh event. And so now you have the um intersection of the China emerging out of their hibernation, an inflection in demand. We have strategic stockpiles being drawn down to minimum operating levels and we have renewed conflict.
I just want to also speak to some commentary coming out of of Stampede. Uh we had family commitments keeping us here in Toronto. Our partner has been on the ground uh in the tents etc during Stampede. And the key message coming out is just a massive amount of optimism from oil CEOs about the change in tone and now actions on the part of the federal government. Uh the Cardi government uh I think really does deserve credit for backstopping the million the new million barrel per day pipeline that is proposed that has been now put forth to the major projects office. We think it will go ahead uh construction beginning in a few years time fully on stream something like 2033 2034. or we'll see what the actual number is. But why this is important is you're effectively neutral. You have now officially neutralized. The biggest concern that foreign investors had around Canada. Uh it's no secret the prior government, we were highly critical of the prior government was not the biggest champion of this sector. There's been not just a massive tone change but now a an actual change in actions on the part of the Liberals. The the talk is uh obviously the pathways project has been tied to champ uh to advancing this 1 million barrel per pipeline. The talk is potentially uh the timeline and scale of said project may be reduced and deferred making a lot more uh palatable for uh oil companies to go ahead and champion.
And so when I think about okay where do we want to be exposed we we do not own oil companies for a spike. You know, I still think it's possible. I still think it's likely, frankly, if things continue. But that's never been the investment thesis. The investment thesis is we think the the long-term oil price is far too low. We think the marginal cost of supply is at least $70 uh per barrel. We do think there should be some semblance of a political risk premium. Whether we're going to get or not is kind of an open question. And as we look at after the selloff from the highs over the past month, we have oil stocks discounting an oil price of roughly $60. And we think the long-term price is going to be at least uh 70. And so we remain optimistic not just in oil companies but especially in Canada. U again why have foreign investors avoided us? It's when one politics and two pipelines. The politics I believe has been changed and the most skeptical of us I think are now becoming a lot more encouraged even just in the past couple of weeks. And in terms of pipelines, when we think about we have existing expansions on near-term projects that could add up to about 350 to 400,000 barrels per day. We have South Bose's uh prayer connector/Bridger pipeline, which would be a 504,000 barrel per day pipeline expandable to 900 on stream in roughly 2029. We think that has a high likelihood of going ahead. And now we've got a million barrel per day plus new pipeline coming on stream just as we were about to get tight in the early 2030s. And given the impact of the Iran uh conflict, I think there is a renewed focus on security of supply. We have thought that there are supply challenges within nonopac producers. Effectively you have Canada, Brazil, Gana and the UAE having the possibility of growing production. most other countries are plateauing or declining at a time where we think oil demand is grow going to grow for many decades to come. And so there very clearly is a call on more Canadian growth. I think there's a been a change in terms of mindset amongst investors. I can speak for myself at least where it used to be when when valuations were just so unbelievably depressed. It was don't grow, maximize free cash flow, buy back every single stock that you can retire them, make the remaining valuable. I now think that there's probably a a call on a bit of a balance. You know, not going back to the heyday of of 10% growth, but you know, slow uh to mids singledigit growth combined with still meaningful share buybacks.
And so we'll leave that um with you. We're 10 minutes in. Um trying to keep this as tight as possible. Thank you for your time and we look forward to future updates.