Primary Vision Blog

By Mark Rossano

A follow-up on the Middle East ongoing Conflicts

• Protests have escalated in both Iran and Iraq- both against the Iranian government and the IRGC (Islamic Revolutionary Guard Corps.)
  • In Iran- protestors are demanding a change in leadership due to squandered funds on proxy wars, poor employment, and a lack of overarching civil liberties.
  • In Iraq- Iraqi Shia’s (predominantly in the southern part of the country) are protesting against the influence of Iran in the Iraq government- as well as many similar social issues.
  • There are many similarities between the two protests, and they all focus on the lack of opportunity due to high unemployment and corruption squandering oil money
• I mentioned previously: “The key overarching theme is a rise in Middle East tensions, and while the current situations aren’t enough to lead to a broader conflict—the groundwork is being laid.” The issues have been building over the following course with some key escalation points below:
  • Iran used mines to attack a tanker
  • Gibraltar seizes an Iranian oil tanker
  • Iran seizes a British oil tanker
  • Iran shoots down Global Hawk US Drone
  • Iran has infiltrated the Iraqi government blocking operations from within, and is a key reason for Iraqi Shia protests- Iran involvement and corruption
  • Iran targets the Abqaiq-Khurais facility in Saudi Arabi
  • K1 military base in Kirkuk, Iraq comes under rocket fire killing a US Military Contractor and wounding other US Soldiers reportedly carried out by the PMU (Popular Mobilization Units.)
    • There have been other rocket attacks, but until K1 were carried out without loss of life or injury
• Each of the attacks on US and Iraqi Military Assets were supposed to be investigated by the Iraq government, but has been slowed down by politicians tied to Iran. There was a growing view that Soleimani (and general Iran) assets have important seats in parliament, and have effectively stonewalled investigations.
• In response to the K1 attack, the US carries out an attack in Iraq and Syria killing about 27 and destroying facilities all believed to be a part of an Iranian proxy called Kata’ib Hezbollah (Kataib Hezbollah).
• Following this attack, the PMU and Iranian proxies attack the U.S. Embassy in Baghdad requiring the deployment of the Marine Rapid Response Team.
• The U.S. took the attack on their sovereignty, and escalated it further by targeting a convoy near the Baghdad airport killing:
  •  Qasem Soleimani- Commander (General) of IRGC Qud Forces
  • PMU’s head of PR
  • Senior Hezbollah/ PMU leaders
    • Mohammed Redha al-Jabri, head of protocol of Iraq’s state-sponsored Popular Mobilization Forces
    • deputy head of Al-Hashed, Haj Abu Mahdi al-Muhandis
    • General Hussein Jaafari Naya
    • Colonel Shahroud Muzaffari Niya
    • Major Hadi Tarmi
    • Captain Waheed Zamanian
• There are also unconfirmed rumors that US Special Forces have raided several buildings of Iraqi PMUs capturing Qais Khazali, leader of Asa’ib Ahl al-Haq & Hadi al-Amiri, former head of IRGC’s Badr Organization in Jadriyah, Baghdad
• Germany has come out and placed the blame at the feet of Iran (which is a break from previous views held between the US and Iran.)
• Response from the Cleric Muqtada al-Sadr was a bit different calling on Iran to avoid escalating and continue to criticize the pro-Iran Militia. Al-Sadr has also started talking about resurrecting his Mahdi Army.
• Information remains fluid, and there is increasing intelligence being reported that Iran’s Soleimani was planning a bigger attack on the U.S. Based on his flight from Lebanon, the people he was traveling with, and actions at the US Embassy- there is reason to believe these were credible.
• The U.S. has increase the Rapid Response Team in Kuwait with the deployment of 3500 troops as asset movements remain fluid across the area.
• Impact to oil will be minimal and will fade as headwinds persist across the supply chain- especially in the refined products area.
  • This move will fade as refined product builds continue to rise globally and force economic run cuts.

Iran has been provocative in the region with consistent activity around rocket attacks and mobilizing assets in and around Syria and Iraq. Tensions have been on the rise as protests rip through Iran and Iraq all against the Iranian government, and their involvement in proxy wars spanning across the “Shia Crescent”. The U.S. has shown restraint while dealing with Iran given the fear of galvanizing the local populace against the West. The Iranian people are reaching a tipping point, and the inability of Ali Khamenei to put down the uprising is a telling sign. The IRGC and government have used violent tactics as well as turning off the internet in order to disperse the protestors. They have also taken more aggressive actions against international actors in order to project power and help isolate protestors.

The U.S. killing of so many high-level Shia assets was a calculated risk as many of them have been responsible for deaths throughout Iran, Iraq, and Syria (including US soldiers). There has been talk of “acts-of-war”, but this all took place on Iraqi soil and begs the question why such a high-level Iranian was in Iraq. A key talking point has been Soleimani’s involvement with training counter-terrorism, but the growing concern was his involvement with attacks against U.S. assets (including the embassy) and a potential bigger motive in a coup. The U.S. has tolerated a significant amount of provocation as the focus has shifted into Asia and away from the Middle East. After trillions of dollars spend in Iraq, the U.S. (as outlined below) has been pulling out assets which began in Syria and Kurdistan. As the Iranian’s attacked the KSA facility, it started to adjust the flow of US military back into the region, but with a bigger focus in Saudi Arabia, Kuwait, and Bahrain. As protests raged in Iraq, Iran sent in assets to help “control” the situation which resulted in more deaths and instead enraged people further.

As Peter Zeihan highlights, Qassem Soleimani has been the “fixer” for many of Iranians problems on the battlefield as well in politically sensitive situations. He has put down protests with an iron fist and used his skills as a military leader to carry out highly effective guerrilla attacks and battlefield logistics. The problem was- Iran overplayed its hand with an outright attack on a US Embassy… just look at the Iran Hostage Crisis where US personnel were held hostage for over a year and Benghazi. The attack in Baghadad called in the Rapid Response Team that helped deter things from getting worse, but a message was sent through a very carefully orchestrated attack. The U.S. has clearly been keeping eyes on MANY of Iranian and Iraqi high level personal. The fact so many very senior people were traveling together- highlights the U.S. caught them in a lapse of judgement as they assumed the U.S. would continue its passive nature in the region. The targeted attack means the US (and allies) has some deep intelligence penetration around Iran’s leaders, and is a wake-up call to many of those in the region. The U.S. named the IRCG a foreign terrorist organization in April, which provides legal cover to carry out attacks when provoked. This was a small cover that was widely forgotten about, and is a key reason having that many high level people in one convoy was a very risky endeavor. The only net increase in personnel into the region came after the attacks on KSA, as current troop movements are adjusting balance of man-power across the GCC (Gulf Cooperation Council). [1]

Rym Momtaz in this great thread[2] highlights that Soleimani has been a recruiting tool as his designation as “Iran’s most important military leader.” There was a growing belief that he was untouchable and could move about with ease and carry out Iran’s operations domestically and abroad. Khamenei has now vowed a response, which is possible but will need to be highly calculated because the U.S. has now shown restraint but green-lit the use of deadly force. The U.S. strikes have killed about 27 militia in 5 different locations and a convoy of high value targets. The threat will put all U.S. assets in the region at risk and on high alert, but the reach of Iran is limited given the years of sanctions, low oil prices, and extensive proxy wars.

Israel has been targeting Iranian convoys around Syria to limit the movement of equipment into key Lebanon strong holds where Iran has significant influence. Israel actions will help limit the scope of an attack on U.S. assets in Lebanon and Jordan, but by no means makes it impossible given the embedded nature of Hezbollah on a global level. The new IRGC Quds Force Commander Ismail Qani has now come out to double down on attacking Americans all over the Middle East. While these threats have to be taken seriously, the U.S. human and signal intel is very strong and any movements by Iran will be watched closely for a counterattack.

The drawdown of U.S. assets from the Middle East has adjusted to a relatively stable level with redeployment and adjustments of equipment and manpower around the area. C-17s and ship movements have been active as the pieces of the puzzle are adjusted to provide support to the Rapid Response Teams, counter terrorism Special Forces, and anti-missile defenses. Iran’s ability to close the Strait of Hormuz is now near impossible given the U.S’s willingness to use live fire and not tolerate provocation. If Iran attempts to take action in international waters or shipping lanes- they will be met with decisive action.

In terms of actions, crude should normalize lower as headwinds persist across the space with Russia posting oil production above OPEC+ levels as well as Nigeria. The bigger issue remains the growing glut of refined products on a global level, and this is not something an Iranian action will adjust. Iran has been exporting limited oil, and at the moment, there hasn’t been any real disruption to oil production and exports. The “softest” target for oil disruption would be out of Iraq’s Basrah port. This has a very specific caveat as Iran utilizes shared fields to export into the market (under the Iraq flag) through this area. This means that other areas- specifically in the GCC would be ideal locations, but have seen a heavy increase in defenses since the KSA attack. This limits the scope of a response, but by no means makes one impossible.

As the EIA data confirmed, oil barrels manage to avoid Texas when the tax man comes along to count. This pushes refiners to reduce imports, pull more crude from storage, and make more refined products. The U.S. remains with all time high gasoline in storage, which has pushed product back into Europe by shutting down flow into the US. Builds in Europe have also grown as more product enters from Asia and other markets with limited export markets. China has created short term tightness in the oil market with new imports and a rise in their quota by 10% year over year. The little talked about (but bigger issue on pricing) is the increase in refined product export quotas by 53%. There is an ever increasing amount of refined product looking for a home with very few places able to handle the new flow. Russia is raising its condensate production, and will send more into the market over the coming months just as new facilities become operational- specifically in Guyana. Saudi Arabia has strategically cut light crude pricing into Asia and Europe to try to compete against US exports, so the flow of oil isn’t abating- but as refinery run cuts accelerate demand for oil will fall precipitously as crack spreads are indicating.

The geopolitical situation will remain very fluid, but the U.S. has put itself in a position of strength in the escalation process by playing their hand very well on the geo-political front. Iran has already tried spinning this as an attack on their sovereignty, but it has been rightfully rejected by the locals. These are the same people facing 35% unemployment, social persecution, and a deteriorating quality of life. The Iraq parliament has called a special meeting where they will most likely condemn the violence and say this was an infringement of their nation. While we can play devil’s advocate, it is the host nations responsibility to secure embassies and bases at which international and local soldiers and personnel are stationed. Instead, the government (which has been wildly ineffective- more on that below) has failed to deploy troops or investigate the underlying cause of the rocket attacks. This is due to Iran’s involvement in the government, and how embedded the PMU is within the Iraq military ranks. The PMUs became embedded in the Iraqi military after fighting alongside each other to expel ISIS from the region, and instead of returning to Iran have remained in the country increasing their influence and proliferation. This may seem “frightening” but the Iraqi military (and many locals) aren’t all that happy with the presence of these entities, but lack the ability to expel them from the ranks.

Iran could also respond by increasing their uranium enrichment and going against the JCPOA on missile development and heavy-water reactor. This could be a way of retaliation in a way of saving face, while limiting the escalation process as a direct altercation with the U.S. is out of the question. Iran can also increase their missile deliveries to Palestine, Lebanon, and Yemen to increase attacks on US, Israel, and GCC nations. The overarching problem (highlighted below) is the poor economic condition that Iran finds itself, which really limits its options. Russia is happy to keep Iran involved in Syria, but wants to be sure to limit the reach and scope- so Russia is agnostic to the current situation. Turkey welcomes any weakness from Iran, so they find themselves isolated between Russia, Turkey, the US, and GCC nations. Their only help could come from China, but China has limited ability to step in and delivery any form of aid outside of continuing to purchase crude. China doesn’t have the assets to enforce or project any real strength in the region, and Russia will also look to maintain the upper hand with any of the proxy’s relationships. This leaves Iran isolated as they no longer carry favor in large parts of Iraq, have lost a “war hero” and “marketing tool” hailed as the “most valiant warrior and effective US Challenger, facing major security breaches on their inner most level, economic struggles from sanctions and low oil prices, and protests throughout the country. All of these points will keep the issue regional, with limited contagion in the area until at least the funerals have passed. Iran is very calculating and precise and don’t often make missteps, so there will be some form of saber rattling and retaliation- but the U.S. has taken the upper hand.

Previous updates on the Middle East Conflicts

The Ever-Changing Middle East Landscape:

• The events in the Middle East won’t push lasting price increases to crude pricing
  • Outside current geo-political impacts —Heavy-light spread will tighten with heavy/sours getting a bid in the market due to both structural and cyclical changes in the market
• Current Iraq protests will be localized with minimal impact to crude pricing.
• Contagion of Iraq protests to other regions is unlikely.
• Iran and the U.S. will remain at odds with little or no chance of an agreement for the foreseeable future (or at least not before elections).
• An attack on Iran in response to the strike on the Saudi facility will be limited in scope to coastal assets and radar stations to avoid civilian casualties and turning populace views against the West.
• The U.S. pulling out of Syria will lead to an increase in destabilizing the region as the YPG are extended and won’t be able to effectively stop an expansion of Turkish forces into Northeast Syria. It is unlikely Turkey will make it all the way to Euphrates, but will build a “buffer” zone. If Turkey gets too aggressive, it will unify the Kurds across Syria, Iraq, and potentially, Iran.
  • The Syrian situation (as it stands) will have little to no impact on crude pricing as they aren’t a key player, and the only Turkish asset is the Ceyhan pipeline originating from Kirkurk.
• The key overarching theme is a rise in Middle East tensions, and while the current situations aren’t enough to lead to a broader conflict—the groundwork is being laid.[3]
• The events in the Middle East won’t push lasting price increases to crude pricing
  • Outside current geo-political impacts —Heavy-light spread will tighten with heavy/sours getting a bid in the market due to both structural and cyclical changes in the market
• Current Iraq protests will be localized with minimal impact to crude pricing.
• Contagion of Iraq protests to other regions is unlikely.
• Iran and the U.S. will remain at odds with little or no chance of an agreement for the foreseeable future (or at least not before elections).
• An attack on Iran in response to the strike on the Saudi facility will be limited in scope to coastal assets and radar stations to avoid civilian casualties and turning populace views against the West.
• The U.S. pulling out of Syria will lead to an increase in destabilizing the region as the YPG are extended and won’t be able to effectively stop an expansion of Turkish forces into Northeast Syria. It is unlikely Turkey will make it all the way to Euphrates, but will build a “buffer” zone. If Turkey gets too aggressive, it will unify the Kurds across Syria, Iraq, and potentially, Iran.
  • The Syrian situation (as it stands) will have little to no impact on crude pricing as they aren’t a key player, and the only Turkish asset is the Ceyhan pipeline originating from Kirkurk.
• The key overarching theme is a rise in Middle East tensions, and while the current situations aren’t enough to lead to a broader conflict—the groundwork is being laid.

U.S. Company Impact Based on Current Events

The current Middle East situation won’t impact U.S. companies at the moment given the limited scope and minimal impact on supply. The demand problem on a global level is an increasing problem, which is now made worse by sanctions placed on Cosco- China Ocean Shipping Company Limited. The blacklisting of about 100 oil carrying vessels was in retaliation for transporting Iranian crude. By limiting the availability of ships, the cost to transport oil has nearly tripled across the globe- with the most recent news: “OC and HPCL book VLCCs from West Africa to India at costs of $9.5m or more, nearly triple the rate a month ago, amid widespread gains in crude shipping rates. Vitol offers Forcados on Platts window.” The fact that U.S. crude has to travel further to Asia will inherently lead to a higher cost given available vessels, which will put pressure on realized prices and spreads. In fact, rates to move crude is so high refined product tankers (clean tankers) are moving crude. This will persist as the market capitalizes on the shortage created by the Office of Foreign Assets Control’s (OFAC).

The IOCs and majors will be able to offset some of these costs by leveraging supply chain economics and reducing expenses throughout the process, but the smaller E&Ps are selling crude into a market that is experiencing rising costs (shipping) and reduced demand (crude quality, economic heads, seasonality). Some spreads are stronger in the physical market driven by location and quality of available shipments, which will persist in the market. This opens up opportunity for majors that have a broad exposure to various locations and crude qualities-especially the ones that control their own shipping fleet. The fact companies are shifting refined product tankers to move crude will also lead to tightness in the movement of products. This helps to drive home the fact—even though the U.S. is shifting around military assets, there remains a laser focus on economic impacts through sanctions on hydrocarbons and ships hitting both Iran and China.

Outside of the shipping impact, the Middle East situation won’t drive up U.S. prices as any supply disruptions will be short-lived and small in scale. While the shifts at the moment are relatively small, the area is become less stable with rising tension between Sunni and Shia factions, which is being expressed between countries and within borders. This risk helps to support U.S. flows over the long-term given the inherent stability of the U.S. infrastructure and business operations. The winners will remain the companies that are vertically integrated, while SMID cap companies will struggle to compete against larger entities with balance sheets and international cash flow. The ability for companies like- Exxon, Noble, Chevron, and BP, to extract value from abroad and funnel into operations within the U.S. and manage the process from the well-head to the dock/refiner provides valuable upside. The limited scope of Iraq disruption won’t materially impact U.S. E&P and oilfield service companies doing business in the region. The need for expertise, equipment, and continuity will also protect assets from sabotage at the moment, but these situations will consistently be monitored. The political situation will remain fluid globally driven by economic impacts, seasonality, and shifting geo-politics- so stay tuned and more below on the current Middle East problems (just naming a few).

The U.S. is in the process of shifting assets within the Kurdish (YPG: People’s Protection Unit) held locations, which make up the largest contingent of the SDF (Syrian Democratic Forces). This comes at a precarious time as tensions are rising throughout the Middle East. Turkish President Erdogan has been pushing for a safe zone that runs 20 miles deep and 300 miles along the Turkish-Syrian border east of the Euphrates.[4] Erdogan wants to place 3 million Syrian refugees back into northern Syria, which is about 75% of the current refugees believed to be in Turkey. There have been tension at the border between Turkey and Syria, with Turkish border police firing warning shots as the border remains closed and guarded by about 500 miles of fence. The area where Turkey and Free Syrian Army forces reside in Afrin has been inundated with refugees that are stretching the economic limit of the area.

I have said for several years that as ISIS falls, loose allies would turn weapons on each other as the battle for land and resources push armed groups to battle each other. President Erdogan has always had the desire to acquire land to re-establish pieces of the Ottoman Empire. This comes at a time where Russia, Iran, and al-Assad (Syrian Forces) continue to launch questionable attacks on civilians. The lack of civilian protection has driven refugees to the Turkish border incentivizing or supporting a potential need for a “safe zone”. The Kurds have done a lot to maintain control of the area, while maintaining and securing ISIS detention facilities throughout their controlled areas. The ability to properly guard these areas has already been strained, and the removal of U.S. assets could complicate the situation, especially if the Kurds (People’s Protection Units) are forced to defend against Turkey without support. Turkey has already launched initial strikes against ammunition depots targeting anti-aircraft equipment, and the Kurds currently have little help from the outside world limiting their ability to strike back. The question remains open—would Turkey and Russia join forces to carry out strikes against Kurdish held regions? Could this re-ignite a broader Syrian Civil War? The short answer is: Turkey will go at it alone in the near term, and this won’t re-ignite the Civil war at the outset.

Iran would face recourse within its own borders if they launched an offensive attack against the Kurdish populace, but the current issues will bleed over into Iraq, who is currently facing its own upheaval. The vote for Kurdistan was cut short as Iraq (and some Iran assets) moved into Northern Iraq (where most Kurds reside in Iraq) to squash the movement of freedom. The U.S. did nothing to stop these proceedings, and the same is being carried out in Northern Syria with the U.S. offering limited to no support. The Kurds have been the most effective fighting force against ISIS, and were key allies to the U.S. in its destruction—and now with a claim of “mission accomplished,” the U.S. is leaving a power vacuum that will be filled with warfare along tribal lines influenced by the whims of Russia. It is unlikely Turkey would look to fight all the way down to the Euphrates, but they will look to establish a buffer zone along their border—under the guise of creating a cushion zone. The interesting component will be if there is any movement from Iraqi Kurds into Syria, or will it be deemed a lost cause since the Kurdistan vote was split based on specific Kurdish party affiliation.

The Syrian announcement comes on the back of rising protests and violence throughout Iraq, driven by the poor economic conditions for large parts of the populace. The main grievance of protestors surrounds rampant corruption and nepotism with a failure of the government to increase economic and social services to allow jobs and oil revenue to reach all citizens of Iraq. There doesn’t appear to be one distinct leader in the protests as they continue to rip through multiple cities: Baghdad, as well as other areas in the center and south. Iraqi security forces have so far killed about 40 protesters (as of Oct 4^th) with numbers expected to be closer to 100, with hundreds injured. Iraq’s parliament has tried to slow the spread of protests by promising reform. Iraqi Prime Minister Adel Abdul-Madi promised a new stipend program to poor families as well as the firing of about a thousand government employees accused of corruption. This has done little to quell the protests, as these comments and promises have been common and fleeting over the last several years.

The Shia cleric Grand Ayatollah Ali al-Sistani has condemn the use of violence, with the Shia leader Muqtada al-Sadr’s Sairoon taking it a step further and proposing his bloc will stop participating in parliament until the current government leadership resigns. The situation could spiral quickly as the split of Sunni and Shia in Iraq is about 42% to 51% respectively, with some putting the spread a bit wider. The failure of a Shia government without a quick adjustment could spring up in-fighting along religious lines making things worse. On the other hand (and more likely), this could provide an opportunity to replace Adil Abdul Mahdi in Iraq by taking advantage of the upheaval. There is always concern that Saudi Arabia is planting discontent to stir up the Sunni populace and put pressure on the Shia dominated government. Based on current reports, there hasn’t been a great deal of outside influence to the protests that appear to be more “grassroot” oriented. As I mentioned earlier, protests aren’t new to Iraq, but these are different given size and scale. The Shia Popular Mobilization Units could gain political favor as they have abstained from putting down protests and kept relatively close ties to Iran. At the moment, Iraq protests remain localized with limited wide-scale impact.

The current impact to oil will be minimal throughout Iraq as any party understands that oil revenue is paramount to maintaining peace/unity in the region. There may be disruptions as some protests take place near oil fields or, more importantly, export hubs (such as Basrah). The current protests won’t be enough to keep a premium in the oil markets as demand remains the core concern. The broad economic slow-down will be further impacted by seasonality as refiners enter their fall maintenance season. Protests will continue throughout the southern region, and the below map highlights the country’s oil regions and pipeline networks that could be impacted.

Even if ISIS or other terrorist groups look to take advantage of the situation in Iraq, it is unlikely anyone would destroy equipment, as ISIS appreciated the importance of oil infrastructure as a means of revenue. In an attempt to create more chaos, there could be some damage to infrastructure, but most would be small in scale and quickly fixed by each faction jockeying for control. The lack of formality and leadership in the protests will (at least for now) keep them from spreading or becoming more than just a disruption and display of broader displeasure. In the near term, this doesn’t seem to be the beginning of broader civil unrest turning into a civil war, but rather a move to highlight the poor economic condition of many regions. It should be of no surprise that as oil prices remain depressed, oil-based economies will see a rise in unemployment and cuts to social funding driving further unrest. Iraq won’t be the only spot to see a rise in tensions.

Iran is a perfect example of a place that has seen growing animosity as the populace failed to see the benefits of the Iran Nuclear Deal. This has led to a rise in tensions internally as the additional revenue didn’t translate into local jobs and economic uplift. There is no near-term solution to the Iran deal as the U.S. looks to put pressure on the government and The Iranian Revolutionary Guard to drive a regime change. The problem is, the 15% (or so) that support the government are also the individuals that control large parts of the military and local funding. This will limit any effective protests or civil unrest while the U.S. looks to pressure Iran. At the same time, this will restrict the U.S. military’s ability to strike targets within Iran as to limit civilian casualties and avoid turning popular opinion against the U.S. and the West in general. The populace (for the most part) has shifted their anger away from the West and focused it more on the current regime, so the goal is to apply maximum pain while limiting shifting local demand. The frequency of protests has risen in Iran, but the inability to create a cohesive unit— based on crackdowns and limited resources —will keep protests from really creating a regime adjustment.

The only thing that will allow for a new deal (outside of regime change) would be the limit and discontinued use of ballistic missiles by Iran. This was a key issue with the previous agreement, as it failed to limit the development, use, and delivery systems of ballistic missiles. The current Iran government is unwilling to even consider this as an option, which will keep sanctions in place. The limit of heavy crude in the market will keep the trade for Iran crude flowing at volumes ranging from 500k to 1M barrels per day, which the U.S. has (for the most part) turned a blind eye to. The U.S. ignores some of these barrels, as they fulfill a need for heavy sour crudes in key allied interests across South East Asia and limits some of the price premium in the open market that would impact U.S. purchases. Iran has also effectively moved crude through Iraq pipes from shared fields, with kickbacks flowing to Iran. This is a well known (but mostly ignored) part of the increase in Iraqi exports, but the shortage of heavy crude in the market has kept exports flowing. The below chart highlights the spread in Basrah vs Brent, where a large part of Iran crude finds its way to the market:

The spread of protests from Iraq to Iran will be tough as the Iranian government has much more control across the populace (though this will rapidly change as generational cycles hit Iran). As those in charge are aging and will struggle to hold on to control, the Iranian Revolutionary Guard allegiance can be bought to the highest bidder. We are still several years away from having meaningful change, but with many of those still currently in power from 1979, the generational cycle will provide a shake-up. The hope (or so it seems) by President Trump was to accelerate the adjustment, but that is highly unlikely. Iran will have to tread lightly with Syria (as they have their own Kurdish population that is already unhappy with the Iranian government), as well as Iraqi unrest in areas such as Basrah spreading. Given the lack of leadership of the Iraq protests, the spread in Iran is unlikely and anything that pops up would be fleeting.

Crude pricing will fade as refined product movements continue to fall below 5-year averages as demand wanes and refiners hit their maintenance season. The Iraq protests will remain localized given their lack of cohesive leadership, and may cause disruptions in crude exports, but not long-term outages. This will be something to watch, but nothing to be concerned about in the near term. The Iran sanctions will remain in place, with little movement between both sides—U.S./ Iran—given entrenched positions and the limit for U.S. to give ground in trade negations. The spread between heavy and light sweet crude will continue to collapse with heavy crude experiencing growing tightness. As Fernando Valle from Bloomberg has highlighted, Mexico and Venezuela are in terminal decline, with Mexico’s fields deteriorating exponentially due to age and underinvestment, while Venezuela is impacted by sanctions and mis-appropriation of funds driving the production decline. Venezuela could see production rise with proper investment and management, while Mexico has a long-term issue on source rock. Iran could bring production online relatively quickly if a U.S. deal is finalized, but there is global apprehension of investing within Iran as the global economy worsens. This means Iran could get back to 3.7M barrels from its current 500k-1M. Growth past 3.7M will be hard to achieve within 2-3 years of lifting sanctions based on the hesitancy of investment. For example, China has reportedly pulled a $5B investment in Iran due to sanctions, and the U.S. sent a message by sanctioning Cosco—a Chinese shipping company that shipped sanctioned crude—sending dayrates to 15 month highs and rising.

The Syrian situation between Turkey and the Kurds will remain fluid, but has little impact on crude given the location. If the Iraqi Kurdish population gets involved, it could cause some disruption, but the Iraqis need the cash flow through the Ceyhan pipeline that flows through Turkey. The U.S. has already said they wouldn’t stand in the way of Turkish military actions, and current reports say the Turkish airforce has destroyed a military depot with anti-aircraft weapons. The issues will be localized to Syria with limited impact to oil production and exports. The bigger problems will be actions taken against Iran for the Saudi Arabia attack. The loss and recovery of Saudi Arabia flow highlights the resilience of their underlying system, but also the glut of light crude that sits in the market.

The bigger impact could come from further loss of heavy crude in the market, which will be made worse by policy changes, such as IMO 2020. The International Maritime Organization adjustment to bunker fuel burned in ships will have impacts across diesel (ULSD/HSD), gasoline, and octane. Crude pricing remains capped to the upside due to worsening economic data, U.S./China trade deal (that won’t happen for a long time), and seasonality. This will keep a lid on Brent and WTI prices, but the changing blends and needs in the broader market will keep a persistent spread between Brent and WTI and tightness in heavy vs light. The spread between Brent and WTI will widen as shipping costs continue to move higher, as about 100 vessels were sanctioned by the U.S. The political situation across the Middle East is always fluid, but their remains growing tension across the region with any one specific move enough to create a broader conflict. Several years of weak oil prices has eaten away at cash reserves, and tempers (both internally and externally) are beginning to flare in response. A quick removal of U.S. forces could be disastrous as local assets are already stressed in Syria leaving the area vulnerable, and the lack of U.S. commentary/control in Iraq could destabilize the entire region. While all of these components impact supply, crude flows continue to rise from non-OPEC regions as the global slow-down intensifies. Cyclical pricing mixed with a structurally changing world won’t end peacefully.

Previous comments on the Saudi Attack

What the Abqaiq impact will be to the market?- Crude Quality Matters!

In the near term, crude pricing will jump in response to a shortfall in the market ($3-$4 will stay in the price after the dust settles). The $3-$4 represents the new political risk that will linger even after operations come to a normalized level globally. The spike in pricing could rise to as much as $10 depending on longevity of the downtime- but that move would be short lived. Saudi Arabia will be able to take some actions to keep oil flowing into the market: 1) Draw down from reserves to fill sold volumes; 2) reduce refinery runs (import refined products) while selling into the market; 3) cut petchem facilities utilization rates. The loss of natural gas production from the facility will require an increase of refined product burn in the power generation market, which can be found in the floating market. KSA can sell from near term storage of 50M -60M barrels, so near term disruption to supply is unlikely- but it will drive prices higher immediately due to political risk and potential extended supply risk. The country and Saudi Aramco has global storage of about 175M barrels with “quick” access to about 50M. The complex (containing 3 separate facilities within it), Abqaiq, has the capacity to process 7M barrels of oil per day of Arabian Light (32.8 API and 1.97% Sulfur) and Arabian Extra Light (API 39.4 and 1.09% Sulfur). “The Abqaiq Plants facility handles crude pumped from the Ghawar field. It is linked to the Shaybah oil field through a 395-mile pipeline and to the export terminal in Yanbu through a natural gas liquid pipeline.” The facility can also produce Arab Super Light (51 API and .09 Sulfur). The crude in the region, while sweet, has a lot of sulfur that requires processing through hydro-desulfurization units. If any of these units are lost (there are 18 in the complex)- it would cause a bigger issue in terms of crude quality. This could result in prolonged downtime if enough of the assets were damaged/destroyed but the complex has many of these assets on the premise. The lost production can be replaced by U.S., West African (Nigeria and Angola), ESPO/Urals (Russian), and Brazilian grades. There are others- but these are the most widely available flow, and many of them have spare capacity. As early as 10 days ago- Angola had 13 October shipments and Nigeria has had about 3 deferred shipments. Russia has doubled ESPO production to about 700k barrels a day as Brazil has ramped production from the coast. The below chart highlights some grades that can find additional demand in the near term- or whatever KSA can’t cover through their storage network. The problem will be logistics in the near term as many replacement barrels are in places further from the end users and will get tighter as volume is quickly purchased to make up the difference. In the near term, Nigeria, Angola, U.S., and Russia have spare cargoes to put into the market, but a prolonged disruption (over 30 days) will cause tightness in the market. As we enter shoulder season, the demand for oil always wanes as refiners enter maintenance season- which means that the loss of KSA supply technically won’t be as impactful as the call on oil producing nations always shifts lower in the shoulder months (fall and spring). “The Abqaiq Plants facility comprises three primary processing units – an oil processing unit, an NGL facility and a utilities unit. The oil processing unit consists of multiple spheroids and 18 stabilizer columns where hydrogen sulphide and light hydrocarbons are removed from the crude oil. The NGL facility contains eight compression trains, stripper columns and de-ethaniser column. The utilities unit supplies power, steam, treated water and instrument air to the oil and NGL facilities. The power needed by the facility is generated by six power generators – three steam turbines and three combustion gas turbine generators. Steam generated by 14 boilers is supplied to the oil processing unit, NGL facility, turbines and compressors. 1” The timing of the reactivation will depend on the type of equipment impacted, and some key assets were struck extending total downtime. The complex is built with triple redundancies with assets both above and below ground. The precision of the attack points to a coordinated effort with an understanding of refining/processing and the facility. The strike took out several of the desulfurization towers and spheroid storage tanks. The facility has many desulfurization units so that impact won’t be as widely impacted. The problem is- the storage tanks are required to stabilize/ process the crude (remove the light ends and impurities.) This means that even though the stabilizers were left relatively untouched- they will struggle to operate with no place to put the removed products (resulting in an extended downtime). KSA has redundancies to shift flow into unaffected storage tanks, other facilities, or by flaring some products. This will prolong downtime as the tanks are replaced, and due to the nature of their contents it will be an arduous process. By extending the repair time, this will keep a minimum of 1M barrels out of the market for an extended period. The fire will always look worse as when a facility is struck with that kind of attack (fire) protocol will shut down many of the valves (automatically to contain the fire) and to initiate flaring (burn anything being processed) to keep equipment from exploding from improper pressure/ cracking. This creates an “all-stop” in order to allow personnel to assess all the damage and begin making repairs. The equipment and redundancies will be turned on in a ramp up fashion to ensure the integrity of the equipment- for example- a high pressure line that is cracked and leaking fluid near an ignition source would be problematic to say the least. This is why many of the reports say “by Monday” because it will take several days to assess damages and adjust the flow of product to avoid damaged assets. There is a high likelihood there will be lost production of 2m barrels (including NGLs) and not the full 5.8M that is currently offline. The 3.8M or so barrels will be processed through their redundancies while the rest of the facility is fixed (which could take months) Depending on severity- I would assume the full 75% is operational within 30 days. In the meantime, Kuwait/UAE will bring on a spare 1M barrels while KSA activates idled capacity or parts of their oil complex that consists of their spare capacity. The bigger issue is what does this do to crude pricing. Based on the reports regarding the severity of the damage, about half of the production will be out of the market for an extended period of time. This will put the floor of crude pricing at a minimum of $3 uplift across the curve even after other areas, such as Kuwait/ UAE bring on spare capacity of about 1M barrels. The crude market will respond with a quick $3-$4 move based on geo-political/ military escalation risk. This will stay in the market as the damage is processed, and next steps are evaluated in retaliation. The impact to supply (if more severe) will peak at about $10- if we assume the whole facility is offline for 30 days (highly unlikely). The market is very long NGLs- so that can easily be replaced given current volumes and pricing, and the light/sweet market is also well supplied. The problem will be the loss (if any) desulfurization units as the world prepares for IMO2020. There is also a plethora of light crude available in the market- so this event will help absorb some of these spare cargoes (from Angola, Nigeria, and U.S. specifically). The U.S. has also seen their crude purchase slow as the flow stuck off the coast of China has been moved into India and South Korea- keeping them well supplied in light/sweet through the end of Oct. The extent of the facilities damage will keep about 25% of its volume out of the market. The attack on the facility most likely originated in Iraq, Basrah based on location and early reports (still the most reliable versus the Houthi nonsense). The ability to go about 1,000Km over Saudi Arabia to strike the facility with 10 drones (cruise missiles/drones) seems highly unlikely. The Abqaiq facility is close to the Persian Gulf, and would be more susceptible to an attack launched from the Gulf vs over land. The Yemen originated missiles have proven to be unsophisticated and haven’t had the ability to reach 1) that deep into KSA territory 2) deliver the kind of precision impact. The bigger question is- how did Iran (or some other entity) find the ability to strike the lifeblood to Saudi  https://www.hydrocarbons-technology.com/projects/abqaiq-aramco/ Arabia’s crude flow. If we assume KSA has the ability to pump 12.4M barrels at peak- the complex handles 7M barrels of it. This means the facility (given the location) would have multiple lines of defense regarding anti-missile/ aircraft and personnel implementations. This facility should have multiple levels of defenses especially since it was targeted in 2006 in a failed terrorist attack. I have attempted to highlight the escalating tensions throughout the world, and as the global economy slowscertain countries/regions will be worse off than others. This will lead to rising tensions and conflicts that will flare up. The bigger question will be- is this event big enough to pull everyone into a bigger conflict. Throughout history, many major wars were caused by a series of events that culminated in a broadening military action. This action also comes at a time when global GDP is struggling and a crude price shock would be detrimental for emerging markets. The US Dollar strength has already impacted countries, and now a price spike would cause more pain as additional foreign reserves are needed to keep oil and refined products flowing. On a global level, a weak economy, elevated crude pricing, and strong dollar is going to stress emerging countries and struggling markets. This is going to intensify the need to act in a way to stabilize the slide of economic growth, and given the failures of QE and Central Bank Easing- escalation of tensions will only continue to rise. The fact the attack happened now and not in July is crucial as we are currently entering refinery maintenance season, which will reduce the call on the global oil market. This will limit the upside of crude pricing, but an extensive downtime that enters into winter will drive up prices further. The focus should be further down the curve- 3 to 5 month contracts as the extent of the damage will prolong cargos. I think we are the precipice of a broadening conflict timing remains uncertain- but at the moment: buy crude and U.S. integrated/ high quality E&Ps/ and Petrobras.

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[1] https://us11.campaign-archive.com/?u=de2bc41f8324e6955ef65e0c9&id=a8d843ea82

[2] https://twitter.com/RymMomtaz/status/1213045609281789952

[3] https://www.aljazeera.com/indepth/interactive/2015/05/syria-country-divided-150529144229467.html

[4] https://www.nytimes.com/2019/10/07/us/politics/trump-turkey-syria.html

By Mark Rossano

Domestic

The frac spread count resumed its downward trend with the national forecast coming in at 335 vs 340 last week. The trend remains on a lower path led by the Permian with the only sustained increase being the Mid-Con. Most regions have remained relatively flat with small gains over the last few weeks in the Utica, Mid-Con, and Eagle Ford while the Permian has declined each week. The OPEC+ decision (more on that below) will do little to stem the slide into year-end. Proppant loadings currently sit at 5 year lows, with little indication these will rise into year end. The WTI curve helps to highlight the OPEC+ comments on production have done little to adjust the back months, which also comes under pressure as any price increase is being used to hedge U.S. production. OPEC+ delivered a gift by allowing for better placed hedges, but the issues remain consistent with a slowing global economy and struggling crack spreads.

The below chart helps to drive home the very methodical move lower beginning in June of this year. Activity will keep following a similar trend, but will see some uplift in 2020 as budgets are renewed and hedges help protect some completions. The DUC count remains on a downward path as rigs continue to roll-off with little to stop the decline in the near term.

National Frac Spread Seasonally Adjusted

The proppant data shift in the Permian supports the decline in completion crews, and shows the extent of the slow-down. The fact that completion crews in the area continue to be released means the proppant loadings will shift lower into year-end. This will keep pressure on pricing and remain a headwind well into the middle of next year.

Permian Proppant Seasonally Adjusted

The WTI crude curve helps to highlight that supply increases and soft demand remain a problem across the next several years. The curve is far from predictive, but helps U.S. E&P companies hedge production- and after the OPEC meeting- they were able to lock in slightly better pricing.

These are the kind of activities that will keep U.S. production sticky at 13M barrels a day with exports rising driven by new infrastructure and limited U.S. demand. U.S. refiners can only handle a so much light sweet crude, which means a large portion of the oil is sent into the global market. The fact that Russia (and Nigeria) has now excluded condensate from the new OPEC+ “cuts” will allow more light-oil to enter the market and compete directly with U.S. exports. This is complicated further as chemical and refining assets facing terrible margins begin to roll-out economic run cuts.

WTI Crude Curve

As crude prices rise, it puts more pressure on refining and chemical margins unless they can pass along price increases to cover the increase in feedstock costs. Based on the declining demand in the global market, there will be little chance of an adjustment in the downstream market. Instead, margins will come under more pressure, which will put additional downside risk on oil demand as economic run cuts reduce the oil throughput. Gasoline margins have been negative for close to six month, which means that distillate has been carrying the crack but as economies struggle it has put pressure on the distillate crack. It has been balancing on razor thin margins, which have started to fall into negative territory.

Pressure is mounting on chemical plants as well for similar reasons, but new facilities continue to be brought online and many are now coming back from maintenance. So while the price spike on paper looks good, it will speed up the downstream nightmare while market share is lost and alternatives are adopted.

The most recent data on China helps to highlight the shift in their market, and the current accounts problem developing in their system as imports rise and exports decline limiting their access to U.S. dollars. Many of the margin issues across Asia all began as the two major Chinese refiners became operational as more product was pushed into the market.

The construction of world scale refining and chemical assets has flipped trading lanes as more refined products are exported. China used to be the buyer of last resort, but as the construction of advanced industrial assets are completed products are being pushed back into the open market. This is reducing margins and creating oversupply across many products in different parts of the world. China’s reasons to maintain production is two-fold:

1. Become self-sufficient in products with a higher margin in the hydro-carbon chain
2. Export products with elevated global pricing
3. Employee large groups of highly trained individuals.

The last point is key, because in an oversupplied market many facilities will initiate “economic run cuts” which just means a facility will operate below their normal seasonal utilization rate. This helps to reduce the oversupply in the market and product margin. The view in China is “others” can cut, and they have already been operating at negative margins in order to force competitors to lower rates. The fact Chinese industries historically operate outside of normal economic theory will put increasing pressure on the refining and chemical space. “I think globally it’s increasingly a competitive environment for road fuels. China is already a net exporter of over 1mn b/d combined of gasoline, diesel, and jet. It’s the fastest-growing exporter of those fuels in the world. But over-supply is also percolating through into the seaborne market: Indian diesel exports are rising; everyone is trying to desperately seek out net short regions and they’re having to ship product further and further overseas. And we’re seeing a situation emerge now in China where these refineries are importing crude perhaps from Latin America and they’re exporting finished products to those same markets from which they took the crude. It’s a tricky arbitrage, one would imagine.”[1]

The OPEC Cut That Never Happened

So as this all plays out- it will be interesting to see if OPEC+ remains steady in their projections.

OPEC has “officially” highlighted what we have known all along… the slow down in demand. The bigger picture will be outlined in a coming write-up of Asia oversupply and declining demand. The “new” cuts are set off the baseline of Oct 31^st, 2018. So lets clarify- what was OPEC and Russia doing on Oct 2018. In order to keep things consistent, I will use the self-reported numbers from OPEC nations. In 2018, OPEC was producing 33.1M barrels a day (and other sources like Energy Intelligence has it at 32.2M). The initial cut of 1.2M was supposed to reduce production within OPEC by 800k barrels with Russia cutting by 280k barrels. This means OPEC was set to reduce production to 32.3M barrels a day, and if we are kind and say no one cheated it brings us closer to 31.9M barrels even. So now we are ADDING 500k barrels a day in cuts, which takes OPEC (assuming they take all the cuts) down to 31.4M barrels a day. As of Nov 2019, OPEC is producing 29.7M barrels a day- so the “new” cut actually locks in something that is ABOVE current production levels. In order to offset it further, Saudi Arabia has pledged to keep the voluntary cuts of 400k barrels per day. This brings the total from 31.4M down to 31M, while OPEC is pumping at 29.7M barrels a day. The issue remains cheating because Saudi has said they will only maintain the additional 400k barrels a day as long as everyone stops cheating.

The biggest cheaters have been Iraq and Nigeria, which have pledged to adjust their production to meet the new targets. The below chart puts into context what the difference was between all the countries. Something I have highlighted in the past, the only reason the OPEC+ “cuts” had any semblance of a benefit was driven by sanctions on Venezuela and Iran. The “new cuts” haven’t even gone into effect yet and Russia/Nigeria are discussing why the numbers were “wrong,” and how adjustments to condensate will keep them in compliance while still pumping at higher levels. OPEC normally excludes the production of condensate, which is something Nigeria is looking to capitalize on by claiming Egina is not oil. Nigeria is producing about 2.2M barrels a day, with about 1.8M being considered oil. Condensate is typically an API level ranging from 45 to 70, which makes this next quote very interesting: “Country is testing Egina production in the market until end of the year; testing includes classification of Egina output as crude or condensate; “our partners are optimistic that Egina oil will fall into the condensate category”. NOTE: Egina has API gravity of 27.3 degrees, low sulfur content of 0.165%, according to Total.”

Egina started production last year, and produces about 200k barrels a day- which would be taken away from their “oil” quota and would put them in compliance with the cuts while not reducing anything. By Russia excluding condensate, the ESPO pipeline increase from 1.2M to 1.6M can be excluded from their calculation as it is being classified differently. With East Siberia ramping and gas fields increasing to fill the Power of Siberia, the amount of condensate from Russia is expected to grow by about 1M barrels a day.

OPEC Production 2019 vs 2018

Now lets shift to Russia, which was pumping 11.5M barrels a day in Oct 2018. They were supposed to reduce by 280k barrels down to 11.22M barrels a day. This total was only hit ONE TIME in 2019, and it was caused by production halts from a pipeline with the wrong specified crude shutting in 1.1M barrels a day. Even if Russia is required to take 100k barrels of the “New” 500K cut- it would just put them right back where they should be.

Russia Oil Production

Iraq is an interesting situation as protests escalate across the country, and led to the resignation of the Prime Minister and a shake-up within the government. The issue remains unemployment, lack of social welfare programs, and an end to Iranian influence. The fact that the protestors in Iraq are protesting Shia’s (and not Sunni’s) against the involvement of Iran in the local government. The protests have resulted in hundreds of deaths, the burning down of Iran consulates, and unrest throughout Southern Iraq. The shortage of cash in the country has been helped by pumping over their allotment, which has brought additional cash into the government. Iran also uses the shared fields as a way to get oil in the market under the Iraqi flag and receive kickbacks. The Iraq Oil Minister, Jabbar Alluaibi stated that Kurdistan has reduced production to come into compliance with production targets. The issue remains the shortfall of cash in Iraq, and if they are willing to remain compliant in the hopes of displacing the lost volume with additional revenue per barrel. The new restrictions will also put pressure on Iran getting paid from oil removed from shared fields, and could very well be a backhand way of tightening the screws on Iranian financials.

The country has been facing mounting pressure along the same lines as Iraq in regards to political pressure driven by unemployment and anger over corruption. These problems remain localized, but the aggressive handling of protestors is only spurring more resentment and calls for addressing rampant corruption in both countries.

The new numbers are just laughable because it also requires “no more cheating” in order for it to work. The one thing we can all agree on- cheaters are going to cheat. Iraq and Nigeria have consistently been over their allotment from 150k to 250k barrels every single month. The same can be said about Russia, leaving Saudi Arabia stuck carrying the lion share of the cuts. Saudi Arabia has also been producing BELOW their allotment, and in the “new” cuts they still have the ability to produce 10M barrels a day. The bigger issue remains demand of refined products, and as I have been stressing- it is all down across the board. Lets look at just U.S. crack spreads in order to drive home the issues.

The new structure of allowing condensate to be excluded in the production cuts brings a new twist to the “cut” as it provides Russia the ability to produce an additional 400k barrels, Nigeria 300k from Abo and Akpo, as well as from Oman, Kazakhstan, and GCC nations. The freedom to pump and classify things as condensate will help countries skirt production cuts.  Some other key developments from the recent news cycle:

1. It is dependent on countries NO LONGER cheating and we know- “cheaters gonna cheat.” Saudi Arabia has leveled a threat that if people keep cheating they will pump at levels to crush competitors.
2. Saudi Arabia has now priced their IPO at $8.53 at the top of the range: “The shares have been priced at 32 riyals ($8.53), with a formal announcement expected later on Thursday, according to the news agency. This means it is set to raise $25.6 billion and will likely beat Alibaba to be the world’s largest ever stock market flotation.”
3. Brazil has formally declined to join OPEC allowing them to grow without any limitation to cuts.
4. Russia is bringing on new gas fields, and is focused on exporting the new flow of condensate which will put pressure on prices and drive North American ethylene margins even lower.

The issues remain global as the “deal” leaves crude flowing unchanged with growth rising across Non-OPEC entities, and more condensate getting pushed into the market from OPEC+ nations. Russia has brought on new fields to supply gas as well as new oil fields in East Siberia. The growth can be seen in total as Russia has gained about 1.5M barrels a day of production (even with the cuts) while Saudi Arabia has lost anywhere from 250k-500k.

Here is an article for the refresher: https://www.spglobal.com/platts/en/market-insights/latest-news/oil/030618-russia-to-target-fading-urals-crude-oil-quality-in-2018

A Proxy for HollyFrontier’s Margin

A Proxy for Valero’s Margin on the Gulf Coast

A Proxy for Valero’s Margin on the West Coast

Refiner margins will remain under significant pressure as issues persist in the market of falling demand and slowing exports from the U.S. Crack spreads across the world remain depressed, and it is leaving more oil in the market that will remain based on this “new” deal of a cut. The issues are reverberating through the system and remain at the chemical level as well.

The rampant production of condensate (naphtha), which is now excluded from the OPEC cut calculation, means there will be growing availability of feedstock. Pressure is rising across the chemical supply chain as it hits across Asia- specifically in South Korea a core bellwether. The below chart highlights the pressure on HDPE, which is supposed to be a higher value product. As new facilities come online and chemical capacity that was down for maintenance ramps back up, pressure on prices/margin will rise. The issue also remains new facilities in China ramping up that is pumping out refined products and chemicals at a rapid pace.

China has been the buyer of last resort for the last 20 years, but as their construction of assets has shifted under Made in China 2025 and the Belt and Road Initiative- demand for products has dwindled. The pressure will remain across the board as the economy weakens, and their inability to stimulate the local market is exacerbated.

India is facing a similar problem with a slowing economy reducing domestic demand for refined and petchem products putting more on the water. The other issue (facing both countries) is an issue with current account balances as exports slow (the intake of USD) and imports rise (and outflow of USD). The limited access to foreign reserves keeps a lid on the type of stimulus and loans that can be generated to keep GDP supported. The above chart highlights just how bad the margins are regarding a high value petchem of high-density polyethylene. The stimulus China used in end of 2016 to the beginning of 2018 helped spur the market as a whole, but the chart above (and the others on refinery margins) demonstrates just how much worse things are vs 2016. This is driven by the new assets China has brought online, and they have indicated an unwillingness to cut runs as the state owned companies believe others should reduce operations in Asia and Europe. The problem is- South Korea has also responded with something similar, which will exacerbate an already difficult situation. The issues provided above will only get worse as the global economy continues to slow as demonstrated with recent economic indicators out of Germany, South Korea, Japan, and China- while the U.S. remains on a slowing trend but still the best looking house on a bad block.

[1] www.argusmedia.com/en/blog/2019/december/3/the-china-connection-new-petrochemical-refineries-impactful-or-disruptive