Fast & Furious? – Diesel Inventories Surged, Profits Purged

I love cars.

However, it is an interest that came much later in life for me. As a touring musician, I spent the bulk of my 20’s seeing the country from behind the wheel of a 16-passenger van, and not so much a 16-cylinder Bugatti Veyron.

So when the Fast & Furious movie franchise was initially released in 2001, I had practically zero interest in seeing it – despite a love of classic car movies (Bullitt, Vanishing Point, Dirty Mary, Crazy Larry) and a consistent semi-annual prodding from my college best friend.

That interest began to perk up a little when I bought my first truly fun car – the ’04 BMW 330 convertible pictured below. Not long thereafter, I switched my commodity focus from coal to iron ore/steel, and as I developed those products, my company started to take on a few major car manufacturers as clients.

Source: Your Nostalgic Narrator

I was hooked… but I was also busy learning a new industry and trying to balance all that work while starting a family. That’s a tall order in and of itself.

So when I finally broke down one night and pulled up the original Fast and Furious movie on Netflix, the first option that popped up on my search was the fifth sequel, I just turned the TV off…

… because my Vin Diesel inventory had surged.

US Diesel Inventories About to Surpass All-Time Highs

I’m not the only one awash in diesel, though.

The US is currently sitting at all-time high storage levels as reopening continues to progress slowly and refiners continue to dump jet fuel (for which demand is still down roughly 80%)  into their diesel cuts.

Yesterday’s release of EIA data showed total diesel inventories sitting at around 176 million barrels, more than 13% above historical norms for this time of year, and matching the all-time highs set in August 2010.

Source: EIA, Bloomberg

Diesel is primarily consumed by the transport sector – think trains, trucks, barges, and boats – which are of course used to ship products to consumers. And while retail traffic is recovering as reopening progresses  – measured here by the PRODCO North America Retail Traffic Index – there is still clearly a long way to go.

Source: PRODCO, Bloomberg

And despite lifting stay-at-home orders and a clear reluctance to resume using public transportation, people still aren’t driving anywhere near as much as they were a year ago. Miami, which showed one of the biggest rebounds in traffic through Memorial Day, has now reverted to previous levels (-60%+ year-on-year) just a couple weeks later.

Source: TOMTOM Traffic Data

Because of that, gasoline inventories have continued to gradually creep up. And although we’re not yet back to the April peak – not to mention it is driving season – it’s hard to project a big enough demand increase at current unemployment levels that would result in a significant drawdown.

Source: EIA, Bloomberg

This dynamic – plus oil prices pushing up toward US$40/barrel – have just crushed US refinery margins, which now sit at 15-year lows.

Source: EIA, Bloomberg

And although the crude oil market got super excited by China’s “return to pre-COVID buying levels” when you look at Asian floating storage data, it’s pretty clear they aren’t using it.

Source: Vortexa, Bloomberg

So, between this bearish backdrop in crude oil and at refiners,  yesterday’s gloomy economic outlook from the Federal Reserve, and a potential second wave of COVID-19 infections picking up, there are some old friends we should revisit.

First, with WTI prices starting to show some cracks in the armor this morning, another ¼ tranche of ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO) is absolutely appropriate.

Second, all this refined product is going to have to go somewhere, and that is likely to wind up being tankers. With Scorpio Tankers (NYSE: STNG) now falling pre-market, this is too good an opportunity to pass up another ¼ tranche there.

I am also keeping an eye on DHT Holdings (NYSE: DHT) since we’re likely to see an uptick in VLCC rates as refiners cut runs and more crude gets pushed into floating storage. Interestingly, Fidelity took a 10% stake in the company yesterday, so perhaps they’re thinking the same thing.

But other than that, there hasn’t been much interest in the crude tanker market of late, so I think there’s time to evaluate options.

And besides, I have a movie to watch…

All the best,

Matt Warder