TACO Trade

Trading Along Cranky OPEC

We were chugging along until a lady decided to call Trump a “Chicken” in the Oval Office, and by Friday, the fragile calm we had from tariffs ended with a tweet, as it should.

This was enough to drag down everything including oil, but we have more pressing issues, tomorrow is OPEC+ day and someone must have said the word chicken in Ryad because “according to sources” OPEC was evaluating hiking even more than the foreshadowed 411kbd.

Here is where we are, the incremental 411kbd is a given at this point, and the market seemed fine with that, we all can count barrels and we know that only the additional barrels that hit the water are the ones that matter. On Wednesday the broader OPEC got together to define the next steps on baseline figures for setting the Quotas, which will be untouched till 2026. A good gesture to the market but we are focusing on the next 3 months, and the cuts unwind is all that matters now.

So, from the 2.2mnbpd cuts only 830kbd would remain, two more 411kbd upgrades and we are done with this farce, but focusing back into the July cycle, the name of the game is to asses how many barrels would be left for the export markets, which judging from last months, the quota increase didn’t translate into more exports (for the compliant members) and we could expect the same this time, since Middle East enters the infamous “direct burn season”, in which they burn more crude oil and fuel oil to run power generation and keep the palaces cool during summer. This year though it could be more “direct” than ever, since Fuel Oil, a waste product, is actually worth more than crude oil, no one expects a bump in Saudi exports this July, which is the only member who will get an actual boost to production.

The OPEC might have found courage when looking the demand side, as April showed an increase in exports, partly explained by tariff fears and frontloading by China, after a slow start of the year.

In May though, that rush to cover faded in China, but at least it was offset by other Asian nations and Europe, as pretty much the whole refining complex is back online and running.

The China import figures might look worrisome at first glance, but they have been playing the storage game with Iran, using the Iranian floating storage as a “bonded warehouse”, meaning they are there, ready to be imported when the price is right, and now they are playing that game with Russia, as there is a VLCC filled with ESPO waiting on the shores of south China, for more than a week now.

Since we are on the topic of Iran, out of the 3 open fronts (Gaza, Ukraine, Iran) this latest seems the easiest path to a victory lap for Trump, who desperately needs one by now, and the Iranians, despite the back and forth, are the most willing to engage. Now, the timing of a deal won’t have much impact as any outcome is wearing off in terms of pricing. The only “menace” I see for oil is that any deal with Iran must come with the complete and full restoration of transit in the Red Sea, and that would bring a whole new chapter, where Middle East oil is no longer artificially insulated from flows from the Meds and NEW.

With all these events, what is keeping oil above $60 then? I can only identify a few positive catalysts for oil, the sweetest word in oil trading: SANCTIONS. There is a vibe about stringent actions against Putin if he doesn’t back down quickly, and we are not talking about putting a tanker on a blacklist, there could be more.

The other preferred words, “Force Majeure,” resurfaced this week as Libya is back at it, and we don’t know for how long the installations will hold without ports closing down. Last time we had a brawl there, it was enough to upset the entire light sweet complex.

Elsewhere, we are waiting to see how chips fall in terms of summer demand, how marginal producers are coping with low prices, and Trump’s mood changes. But underneath, something was moving.