Peace, Quotas and Tariffs
Oil going into the final stretch of a tumultuous year.
In a week marked by the U.S. holiday, where we didn’t expect major events—but we couldn’t have been more wrong. On Monday, rumors of a ceasefire between Israel and Hezbollah provided a sufficient excuse to ease some of the gains from last week. The market interpreted this as a scale back in geopolitical risk and the possibility of further tensions between Iran and Israel.
However, on the surface, there hasn’t been any material change, as in recent weeks the market had already been discounting the likelihood of Iran intensifying the conflict after Trump’s victory. This last point triggered a series of events that had a greater impact on flows than the ceasefire itself: China’s early reaction to distancing itself slightly from Iran. Coincidentally, on Monday, China issued additional import quotas for independent refineries (aka “Teapots”) amounting to extra 100kbd and encouraging to source crude before the year end. Consequently, these refiners were seen increasing purchases in West Africa (WAF) and the Middle East at the expense of Iranian barrels, a 10% drawdown—maybe is a tactic to bring something to the table during tariff negotiations with Trump, but the reality might be those Iranian barrels aren’t cheap enough..
Related to this, remember the frenzy around TotalEnergies buying up any available barrel? Rumor has it that this was on behalf of Hengli, a Chinese independent refiner. Beyond the ceasefire in the Mediterranean, the focal point of conflict—or where the greatest frictions in oil trade lie—remains in the Red Sea. So far, there’s no indication that this will be resolved. If anything, charging tolls for safe passage has become a billion-dollar business for the Houthis ($250k per ship, depending on market conditions). There’s also little pressure to reopen the route, except from Egypt, which has suffered the most, and Europe, which has limited leverage. But the truth is, this situation benefits everyone: artificially tightening supply in both regions, making it more expensive to move barrels across basins. It’s a win-win for OPEC, the U.S., and, to a certain extent, China. The loser, as always, is Europe.
Midweek, OPEC decided to postpone its meeting to postpone the reintroduction of barrels they voluntarily removed from the market. With so many delays and backroom meetings, some market observers are starting to question the group’s cohesion. Doubts are also emerging about the authenticity of these commitments, especially since everyone knows no one is fully complying—not even Saudi Arabia.
The market’s resilience in recent months, avoiding breaking below $70, isn’t due to confidence that these barrels won’t return. Instead, the first phase of 200kbd is likely already in the market, and so far, the market has been able to absorb them. Evidence of this lies in the weakness of medium and heavy crudes, which should be priced closer to lighter grades. Where is all this excess supply coming from? Iraq, UAE, and Kuwait are exporting as much or more than their original quotas ex “voluntary” cuts.
The question now is whether the market will continue operating on narratives or start counting the barrels in circulation. Is time to come clean, narratives from all corners of the world have been wrong all year long.
Speaking of narratives, this week we got a preview from the newly elected President Trump, threatening to impose tariffs even on Canadian and Mexican crude entering the U.S. I find it hard to believe this is anything more than another of his negotiation tactics.
But hypothetically, if this were to happen, Canada would be hit the hardest at first, as it would have no choice but to lower its flat price to compete with Mars. Mexican crudes, which don’t rely on pipelines, could find a home in any tank in the Caribbean, where they could be blended and rebranded as Vasconia or another Latin American grade. (Not going to lie—I’ve been making some phone calls for Panama’s tank capacity.) However, the chances of this actually happening are slim, and in any case, the only real beneficiary would be China through lower differentials from Canadian TMX.
Meanwhile, in the real world, oil prices remain trapped in the $72–$76 range. I genuinely thought we’d test the upper limit of $76 Brent this week, but we’re missing a significant catalyst to breach that resistance. The $70–$72 range remains a solid floor, supported by refining margins that continue to show strength, now across all regions. Interregional product flows are at extremely low levels, with nothing arriving in Europe. Stocks at export hubs like ARA, Fujairah, and PADD3 are declining while refineries are running harder.
Last week, we were hopeful for China’s return, but looking beyond December—based on this week’s purchasing patterns and the setup for January—it seems November was just a mirage, driven only by early purchases using Q1 2025 quotas. All signs point to China taking an isolationist stance in preparation for Trump. This supports products but isn’t great for crude.
Europe continues to show very discouraging macroeconomic numbers, although we must note that demand remains robust. A bit of cold weather and natural gas volatility are keeping hopes alive for a reversal. But remember: hope is not a trading strategy.
Another trend we observed this week that could change is the strength of the dollar. With the nomination of Scott Bessent for Treasury Secretary, if the dollar and interest rates ease, there’s some room for maneuver. Sentiment remains tilted to the upside
Oil Physical
