Paulo Macro — Updated Thoughts on Oil with Charts

Products are the acute problem

• MS's weekly inventory run "continues to shock but not surprise." The bottom line: products — gasoline in the US, jet in Europe, fuel oil and middle distillates in Asia — "continue to be the most acute problems right in front of us," ahead of crude itself.
• Regionally, Fujairah products appear to be at operational minimums.

US gasoline / PADD1 — a price war for product

• Via reader Chris: PADD1 (US East Coast) is 40% of US gas demand, of which 15-20% is imported, mostly from the EU. An early Memorial Day gives no time to build supply, and imports are lower; last week imports jumped to 547kb (from 303kb) on a price spike yet inventories still drew 1.5mmbbls. With seasonal demand rising +500kbpd into summer driving season, "it's going to be a price war to secure product."

Distillates and fuel oil — tight everywhere, ships first

• Middle distillates (diesel, jet, heating oil, kerosene) are tight globally with little room to draw in Asia.
• Fuel oil (including bunker) is a problem — "can't run ships without it, and even if ships start to move in SoH tomorrow, the fuel comes first." (A reopening of the Strait doesn't fix bunker scarcity instantly.)

Cushing cratering — sub-400mm crude "baked in the cake"

• In the US, Cushing (the WTI futures delivery point) is "cratering toward operational minimums of ~20mmbbls." Commercial draws are being masked/supplemented by SPR releases (which also compete for pipeline takeaway vs SPR), but the direction is clear.
• Below 400mm in July is "baked in the cake" — declining imports (tankers ballasting to the US, i.e. arriving empty = taking, not dropping off), refiners ramping into driving season, and no signs of US demand destruction.

The pricing-out math

• The US will have to price out gasoline exports in the coming 2-3 weeks (operational minimums stress at ~200mmbbls). Crude follows 4-6 weeks thereafter (commercial operational minimum ~370mmbbls; SPR minimum ~170mm).
• Sub-$100 crude "is nowhere near what people are calling 'demand destruction' levels" given no consumer demand destruction on a $50+ crack. "So either we price out US crude exports between now and August, or…" — "It's really that simple."

The confounding tape — the "Arabiya plant"

• "It really is hard to believe that we have gotten this stupid, so clearly something else is going on." Everyone in the comments "is in on the joke" — "it's public knowledge that the market is not discovering price." The "Arabiya plant" looked "lifted from a Telegram/Signal group."
• Equities ripped but "we barely mustered a +1500 TICK" (a weak bounce vs past speculation), closing off the highs — and Al Arabiya itself denied the report 7 minutes before the close (a report Iranian media had attributed to it), even as Iranian officials denied negotiations were close.

Positioning — open interest going nowhere, options replacing futures

• Open interest is not progressing since January (roll-lows circled) even as price makes progressively higher lows since mid-April on the ceasefire — "this divergence interests me."
• Speculative futures net long is below 200k contracts, "being replaced by options as futures have become impossible to hold" amid tweet-driven several-dollar daily swings.
• Managed-money net long notional (WTI + Brent) is extended vs the flat December position but "nowhere near record levels" at ~$40bn — the vast majority held in Brent, "likely on fears of an eventual US export ban." And WTI spec net long as a % of OI has fallen from 11% in late March to 8.6% — "really not a lot" vs prior ~$100 oil regimes (2011-14, 2022).

The position and the export-ban tell

• Stays long BNO + calls, and this week layered in shorter-term WTI callspreads given the "significant lack of positioning" — "dangerous, because I still think export restrictions are highly likely (selective export to 'friends'…sorry Europe)."
• Hartnett: "Markets stop panicking when policymakers start panicking." Crude keeps Trump from panicking because crude hasn't panicked; it has to reach levels first that force the export-vs-ration decision. "The biggest tell that export restrictions are coming is a significant compression in the WTI-Brent discount."

Why all the jawboning?

• Parting thought (voiced by several pals too): "If everything was fine, why all the jawboning and oil market management (verbal, and perhaps otherwise)? If we are so close to a real deal, why wave their arms around so much? Surely they could wait a couple days… unless something else is going to happen? Why the desperation?" The "successive media storm suggests all is not well here."