To The Moon

Key points summary: Core view on Brent crude remains within a $70-80 range. Geopolitical tensions have escalated, requiring a risk premium to be priced in, with the extent dependent on the intensity and duration of the escalation between the US and Iran.

Last week saw a renewed escalation in US-Iran tensions, with the main disclosed conflict point focusing on control over a key strait, returning to a state of relatively restrained, tit-for-tat attacks. Prior to the escalation, floating storage in the Gulf and onshore tank inventories had been largely depleted. Following the rise in geopolitical risk, traffic through the strait has been significantly impacted. Daily data tracking shows crude oil volumes exiting the strait last week fell below 4 million barrels per day, while the number of empty vessels entering the strait dropped from a 50% recovery rate the prior week to less than 10%. Concurrently, export volumes from alternative channels, Yanbu and Fujairah ports, saw a slight weekly increase. These indicators suggest that, whether due to actual blockades or risk aversion, traffic through the strait has factually decreased.

Going forward, the primary focus will be on strait traffic volumes and the sustainability of the current situation.

Geopolitical Volatility Leads to Reduced Strait Traffic

Floating storage in the Strait of Hormuz has been largely depleted. Within a month of the Memorandum of Understanding being reached, the backlog of oil on water and previously built-up onshore tank inventories within the strait area were essentially drawn down.

However, with the renewed rise in geopolitical risk, traffic through the strait has been noticeably affected. Last week, the US announced the end of the MOU, and both sides resumed limited-scale attack operations. From a daily perspective, the volume of non-Iranian oil tankers exiting the strait has clearly decreased. Simultaneously, market避险 sentiment has intensified, leading to a sharp drop in the number of new empty vessels entering the strait, as shipowners adopt a wait-and-see approach for the situation to clarify.

Alternative Channels See Slight Recovery

Based on weekly data, exports from alternative channels, Yanbu and Fujairah ports, have shown a sequential increase.

The spot market remains in a phase of trading volume for price. For a transition to a phase of rising both price and volume, necessary conditions may include: 1) The current strait blockade duration exceeds expectations, leading to a further drawdown in inventories. 2) Refining margins remain strong, prompting refineries to accelerate their plans to increase throughput.

Since August, there has been a shift of oil from floating storage to onshore tanks.

US Peak Season Performance Underwhelming

US export volumes have declined. The previously massive export levels sustained by Strategic Petroleum Reserve releases have fallen back to a conventional range around 4 million barrels per day, influenced by the tail-end of SPR releases, the reopening of the strait, and US refineries accelerating throughput increases.

Gasoline has not shown outperformance. US gasoline inventories have dropped to a low range of 214 million barrels. Since entering the peak season, apparent demand has remained around 9 million barrels per day, approximately 200,000 barrels per day lower than the same period last year.

Updated Structure and Data

Calendar spreads show slight stabilization. As of July 10th, the WTI front-to-second month spread settled at $0.07, and the second-to-third month at $0.19. The Brent front-to-second month spread settled at -$0.02, and the second-to-third month at $0.23. The Shanghai crude front-to-second month spread settled at -5.1 yuan.

Refineries in Europe and the US face high-temperature challenges during summer, leading to stronger crack spreads.

Fund net long positions have significantly decreased. For the week ending July 7th, Brent基金 net long positions decreased by 9,516 contracts, with longs down 5,466 and shorts up 4,050.

For the same week, WTI基金 net long positions decreased by 17,241 contracts, with longs down 10,488 and shorts up 6,753.