Transcription
The biggest fundamental swing that occurred, more than anything else, was China. And China, Chinese imports just collapsed way more than we thought they would or even could. Um, so Chinese imports fell by roughly 5 million barrels a day relative to the kind of 3-month average prior to the start of the war, from about 11 and a half to barely more than six, um, a million barrels a day. That is staggering. And alone is well more than the IEA strategic reserve, um, or or collective coordinated release really offsets the market.
In terms of the cumulative stock, again, if we assume that all reductions in Chinese, uh, get the accumulated, uh, swing that China managed here relative to those pre-war levels, what we saw through March, April, May, and June so far, we're talking on the ballpark of 4 to 500 million barrels that China alone absorbed, uh, through this crisis.
Now, how did they do this? That's the bajillion-dollar question right now because what we have seen in terms of the inventories we can see, these are the largely commercial, but, you know, some strategic in there as well, but they have, they're the floating roof tanks. Um, what we can see from there, uh, with, you know, satellite-derived data from companies like Kepler, are, um, the inventories are roughly where they stood at the beginning of this war. You haven't seen a big drawdown of those visible inventories. But, that data does not show and cannot show any change in underground inventories. When we have, you know, subterranean SPRs, by definition, they don't have a floating roof tank. So, we can't see what's in them with the same satellite methods.
So, the first assumption is that one, we probably drew down a hefty, hefty dose of Chinese SPR underground, but that we have yet to be able to confirm that. And the other element is that we saw refining runs collapse in China as well by upwards of three, three and a half million barrels a day. This level of contraction in refining, and I think the important thing here to note in the prior is that China does not publish official demand data like we would get in, you know, the United States or or Europe or wherever. Um, most of the normal survey-based data we use, China doesn't publish. So we're left inferring apparent demand, which is essentially netting out the output of refineries of say, diesel or visible trade. And whatever is left in China, you can kind of treat that as a rough proxy for what demand is in China. Because of that, refining runs are a hugely important element of that calculation. Refining runs dropping by three to three and a half million barrels a day indicated or implied the same level of demand destruction or the same level of demand loss that we saw in COVID-0 during 2022. Um, in that's the the kind of peak of the Chinese collapse. That's strange given that all of the mobility indicators we look at, truck transits, intercity congestion, even flights, um, all these things that we learned to track through COVID, um, all of those are indicating that we are not seeing anywhere near that level of demand contraction in China.
So, the what we're left with is, you know, maybe maybe you've had some diversification, some some substitution of refined, um, like of, uh, of petrochemical feedstock rather than using naphtha or LPG, maybe you're using, uh, natural gas derived fuels or even coal, uh, derived fuels. Maybe that happens on the, that helps in the margin a little bit. Uh, but I think more generally what we've likely seen is a big drawdown of Chinese refined product stocks, of which we have virtually no visibility on.
We know they probably, uh, strategic reserves. Probably. And I think, right? It's, it's so what happened is. Someone told me they've also extracted more oil from the South China Sea. They had more capacity there to get their own oil as well. Is that true?
Uh, potentially they got a little bit more, but I, I again, I, it wasn't, it certainly wasn't at the kind of million barrel a day threshold. So, in terms of scale, I, you know, there's China's so big and so capable. It had so many little levers to push. But, the scale of the of the import collapse we're talking about is just really hard to explain with any of the stuff we didn't see. Um, so, then you go back to this idea that it's likely a big drawdown of likely strategic but refined product stocks, stocks of diesel, gasoline, etc. Um, we we suspected that they were building those strategic refined product stocks prior, given there were certain periods where apparent demand seemed way too strong relative to what's ever, whatever else was going on in China. There was a piece called Chinese oil demand doubts back in 2023, site, you know, talking about how this could have been preparation for an invasion of Taiwan, uh, something that we saw at the time that that in 2023 when this was happening, this is kind of at the peak of the kind of increased bellicosity from China, the saber-rattling, the buzzing their airspace, the naval drills. So, that was very much a concern at the time. But, I think in this case what we saw was that they drew them down not for war, but for a different war in the Middle East, cutting them off from, uh, from Hormuz.
So, I think, you know, if we're looking at terms of let's say that 13 million barrels a day of shut-in Middle Eastern production, the cumulative effect of that so far is roughly 1.3 billion barrels. A lot of oil. Of that 1.3 billion barrels, 400-ish million have come from, uh, you know, IEA member state SPRs. That was the coordinated release. 400-ish has come from China, likely, uh, in some way, whether or not that's demand destruction or I think more likely the release of a, a heavy release of strategic supplies. Uh, and then the rest of it has drawn down, you know, Iranian and Russian oil on water that had been built up through the, you know, at the beginning of the crisis. That was what those initial US sanctions waivers were for and meant to do. Um, and we've also drawn down all of our visible commercial stocks at the fastest pace we've ever seen them happen. So, all in all, we have drawn down basically every single buffer available at maximum pace.
And the market during this period, I think, has been very patient despite that. And I think part of that comes down to, frankly, the very successful effort from the Trump administration at jawboning the price lower so repeatedly, so consistently. Uh, it's very hard to have a fundamentally driven position on when, you know, you could have a, you know, Trump can come out on Truth Social on a Monday morning and blow you out to the to the downside by 15 bucks a barrel in 15 minutes. Uh, I think it's very, is a very difficult risk management environment. So, it's something I was just down in New York, uh, last week, two weeks ago, uh, talking with the traders and and they all kind of said the same thing, which is that their models are all ragingly bullish, but their risk management budgets have basically been clobbered. Um, so, they don't have much ability to express these views in the market. So, we will see how much longer that matters, um, and whether or not we can get through this entirely.
But going back to this, I think the market is treating this crisis as done. Um, you know, all you oil guys, go back into your cave somewhere. Uh, go crawl back into your well. Um, but the challenge is is that we still have very, very low inventories commercially. We've gutted all of our strategic stocks. We still have a straight, while normalizing is still far from normalized. And a deeply, deeply precarious MOU in the Middle East, which at any point, it's it's like how much longer are we going to trust that, say, Israel is not going to reengage with Hezbollah in Lebanon and violate this latest ceasefire. By my count, there have been five ceasefires announced between Israel and Lebanon over the past two and a half months. So, how much longer until we need the next ceasefire? And how, how much longer until Iran takes issue with that?
They think at this stage as well, there's this question of like, we're getting 30 to 40 ships across a day now, which is like, which is much better than when we were before. But, it's still only kind of, you know, two times what we were managing through most of the crisis. And, um, the question is like, why is Iran not letting more? They're clearly throttling traffic still. They don't want to completely normalize. They're keeping things higher, but at a lower than normal level. And they want to maintain leverage, right? I think that like they're, they have this whole negotiation to go on, and they know that their main leverage is Hormuz. And they know that if they let that release, like I'm sure they're watching the Brent price and like, "Ah, do we do too much?" Um, you know, they see Brent going into contango like, "Ah, well, maybe we should throttle back some more." Um, but, I think that's the challenge here is it's, it's difficult to pin down everyone's, uh, kind of motivations here because Iran also doesn't want to scuttle the deal because by all indications, it got a really, really good deal from the Trump administration.
I agree. That's an incredible analysis. Uh, and one last quick question. How many ships were going through before the war? You said 30 to 40 now. Is it about 100 or am I off?
Oh, and you're like, you're looking at like 130 a day prior.
About. And that's about 30, you said.
Yeah, 30 to 40. We are getting some days. And again, they're high and, and the composition of the ships matter as well. Um, so, for instance, through the crisis, we were getting very few VLCCs, the big 2 million barrel a day, million barrel tankers through. We've seen a lot more of those since the MOU has been signed. So, that's how we get to some of those days. Like when Trump, when Trump says 19 million barrels in a day, there's a chance we could realize that. That that's that's not impossible in the current pacing we're seeing, but I do not think it is inherently sustainable when we're only still loading tankers in the Gulf at less than a quarter that pace.
Got it. Rory, I love the analysis. You're really good at explaining these things, so I really appreciate you coming on. And hopefully we won't have you back cuz things calm down.
If we have you. Thank you.
If we have you back, it means hit the fan. Even though it's Malacca or Hormuz, but it's an absolute pleasure. I thank you.