China-US in the Age of Hormuz

追加: 2026-05-16

[00:00:00]Hi everyone. Greetings from Morelia, Mexico. And I hope we'll get a hummingbird will join us. We'll see. Uh there was a lot of noise last week. Uh if you recall, it seems a lifetime ago in these tapes that basically there was a lot of talk about um agreements between the US or not, uh ceasefire proposals or not. Uh, one of the interesting things is the hottest the the conversation got about a potential deal almost immediately triggered Israel to u to bomb Lebanon again, which is one of those uh third rail, you know, hotwire issues where the Iranians clearly want Israel to back off Hezbollah in um in Lebanon. And every time they reattack Hezbollah and Lebanon, uh you're, you know, another another step backwards against the straits opening, uh you've got the whole issue of whether or not there would be some sort of nuclear agreement, which didn't happen. And you know, generally the idea that Iran wants to control the straits and nobody else wants them to control the straits, but they've got the drones and the missiles to control the straits. So we're here and we're now in day what 76 77 and uh the straight is still basically shut. So that's a disaster. But of course the big deal this week has been uh President Trump in in China and whether or not there would be any resolution there. Um and you know it seemed that the Chinese number one issue was to talk about Taiwan. And I think clearly what they want is some sort of uh movement on American commitment to Taiwan, China or recognition. And you know that in itself is a tough one to agree to. But it's also really interesting that the number one issue would be Taiwan and not uh Iran. Now, of course, that's probably, you know, negotiating, right? You know, it's like if you'll give us a bid on Taiwan, we'll give you a bid on Iran.

[00:01:50]And I've always said since the beginning of this crisis that the US should have immediately gone to China and tried to work out a solution with the Chinese because I think they're the best shot of a solution by far. I've just put out a big theme note overnight on China and China energy balances. And the way it all calculates out basically is that China needs really two and a half million barrels a day of Iranian oil to balance their oil market because they're by far the world's bigger biggest oil importer and heavily heavily dependent on the strait. And in fact, China really is losing the most in terms of uh just absolute barrels in terms of what they were previously getting from Iran and the straight of four moves and what they're now getting. But of course they equally have by far way away the highest inventories and most organized energy sector because when you're a totalitarian regime with one strong leader you can basically design the optimal energy strategy and that's pretty much what China's done. They're still you know heavily dependent on coal and high users of electricity relative to other countries. For example, China final energy use is over 30% electricity now because of their energy policies, because of their pursuits of electric vehicles. That same number of final energy use in the US for example is 20% similar to actually to uh to Europe. So what you have is a country that can meet a lot of its demand through its domestic coal. China basically uses, you know, 75% of the world's coal, believe it or not. And so they have that domestic ability to meet their needs. But at the same time, the sheer scale of the economy, the fact that you have things like jet fuel that can't be substituted, the fact that even though 50% of their electric their vehicle sales are electric, still leaves them with a huge gasoline car fleet, etc., etc., makes them very very dependent on the straight and on Iran. And that that that call that they have on Iran, I think, should have been much more strongly used in this negotiations. And today with the trip over the Trump team returning to the US, uh basically the market doesn't like it. Uh the the key thing that we're watching today is US government bond yields are absolutely ripping and the 10ear has gone through 5%. Which tells you that the market's worried that the whole situation is absolutely unresolved. And the reason the market's worried about that is because it is absolutely unresolved.

[00:04:11]And one of our concerns that we've repeated to you is that with the NASDAQ being at almost a record very just at a record high basically there's a sense and the US being a net energy exporter beating all energy export records in terms of historical never seen more oil and gas exports from the US and obviously therefore more than meeting its own domestic needs. If you combine the fact that the US is arguably a beneficiary of the hormone situation or at least not massively damaged by it and on top of that the market at a record high on the AI boom, you don't have a resolution coming. But when we looked at the China note, the most striking thing in many ways wasn't the original concern we had which was jet fuel. It's the Asian petrochemical industry which of course is led by China but also huge for Korea and others. And that industry is basically in collapse. And the cutting edge story at the moment is this famous Malaysian milk company that can't get plastic bottles uh because of the entire pet petrochemical chain being just really upset by the lack of NAFTA which is the key Asian uh petrochemical input coming out of the straight and you know if crude oil doesn't solve that you need the NAFTA almost directly from the strait in order to run the Asian petrochemical business and right across the entire complex basically ally petrochem chemical plants are shutting down units utilization heading towards 60% and below and it's not a a tipping point for many of these facilities like refining you can go down and and turn down the dials to 60% but the next stop after that tends to be to have to go to zero it's not a linear progression and so we're very worried that there's going to be an increasing issue with um you know the entire petrochemical chain which comes to you in the shape of things like Nike shoes sheen products. Sara is a huge uh dependent on the whole chain. So, it's going to be a consumer issue over the coming months as the petrochemical chain breaks down. And of course, when you're looking at plastic packaging, it becomes extremely serious because what I'm talking about here is literally delivery of milk to consumers.

[00:06:19]So, we haven't resolved it. And that's a major problem. Um I the analogy I used in the uh in the note on China was for oil analysts it's like having a bomb with a very long fuse and watching the fuse just burning away and just nobody really stamping on the fuse. There's going to be some more smuggling from the straight. I don't think there's any doubt that you know some more barrels will dribble out but the reality of the situation is I'm just looking at the hummingbird up there. The reality of the situation is the level of tanker out outlet that we need from the straight is just not happening and the crisis is deepening. You haven't seen it come through too much in uh in prices. I mean we're at 110 or whatever we are brand which obviously is a high price but we're still not quite at the point where it becomes just a complete and utter blinding crisis in terms of the effect on final consumers. You had a couple of things a big print in the Indian inflation number. I told you about the me the Malaysian milk company not being able to buy plastic bottles but broadly speaking we're still in the phase where we're running through three effects that are mitigating the situation. The first is we came in with high inventory of oil. The market was over supplied. So we've worked through that. The second is the tankers were all running as of you know early March. it takes them uh you know whatever it is 40 to 50 to 60 days to work through that available inventory at sea and we're doing that the final cargo out of the straight pretty much finally arrived in California uh last week so that's finished you then have the emergency draw down of government inventories which we're working through right now and all the inventory numbers are basically working out the way you would anticipate perhaps not quite as quickly as you might have thought but definitely drawing down aggressively and as you know oil inventories are never high and we have a pretty significant level of inventory required for operational purposes similar to what I just said about refining and pet chems not being able to just dial down there's a cliff point where when you get to 60% utilization you have to shut down completely and we're getting through that level of emergency inventory to the point where we're at the operational minimums and charts there's one from JP Morgan showing that basically we're going to be at operational minimums by pretty much the end of June into July.

[00:08:39]So that's that's scary given the situation's not resolving.

[00:08:43]The second thing is that US exports were boosted massively and so that's mitigated the market impact. You've had an all-time record export of oil and gas from the US which has helped defer the problem. And the final thing is that the Chinese, which is the feature of the note that I put out, have uh have also, you know, aggressively acted with the highest inventories of any country by far in order to mitigate their issues.

[00:09:07]And when you combine those three things, the actual physical outage has been has been mitigated quite successfully so far. But given we're heading towards day 80 and day 90 as the critical point at which uh the IEA guided countries to match their import levels for emergency mitigation. You're getting very very close now to the tipping point of really a full-scale shortage crisis. And so I'm very concerned about that. We shall see.

[00:09:36]Uh those are the three mitigations.

[00:09:37]We're running through all of them.

[00:09:38]They're all basically pertain to a limited inventory and you're not resupplying. There will be some increased oil supply from country uh from countries that can produce more.

[00:09:47]You've seen big exports of Brazilian oil to China. You've seen uh Case Van Hoff who's the CEO of Diamondback here in the Perian on his results call last week saying they're going to ramp up activity a bit. There's bits and pieces around the place. Generally speaking, uh, outside the straight, global oil supply has been rising, which was one of the reasons for being very bearish before the crisis on oil this year. But the bottom line is we're still way too short on supply and the crisis keeps unfolding at all at the same time. As I mentioned, the NASDAQ's hit record highs on the AI boom. But when you look at the Treasury bill and the way the market in the debt government debt markets is reacting to this China deal, you can see that the Treasury bill going through 5% is a market that's now beginning to wake up to the crisis and you can see the NASDAQ trading off which is what we would have anticipated. So I would say to you ultimately that this situation is playing out as oil analysts predicted and it's not good and um you know we're very worried and we're very worried about the lack of urgency that you're seeing to solve this problem and I think that the the the rhetoric is only going to continue ramping up over the coming uh weeks as the situation continues to deteriorate. On reflection, you know, the jet fuel problem wasn't the big one just in so far as ultimately jet fuel is highly discretionary. it's about people going on vacation, everything else. I think the concern really has to be that petrochemical issue and the fact that you know the entire petrochemical chain in Asia is breaking down and um that's going to be you know something to watch very closely and that's why we're also looking very closely at China. The conclusion of the China note was that they need pretty much Iranian oil. uh their balances don't work out without it and that's what we go through in the note and every barrel they don't get from Iran is basically going to have to be a draw down of their inventory. Their inventories are huge. Um so they can last a year or two but ultimately with the way that China looks at the world and the level of security of supply they want, they're going to be very concerned. So they've allowed their controlled gasoline and domestic fuel prices to rise. They are drawing down inventory. They've backed off their refining. They've stopped exporting products. They're taking actions to mitigate the crisis, but ultimately they're very concerned. They must be.

[00:12:06]And ultimately, they need that Iranian oil. And that's why I'm worried that this big opportunity to get China and the US in a room to work together to solve the Iranian problem started with Donald Trump on the tarmac heading off to Iran uh to China saying he didn't need Chinese help on Iran and ended with no real commitment from China to do anything to help on Iran specifically just some vague comments about the strait should be open. So unfortunately that opportunity that I had thought would be the most important uh major geopolitical potential to solve the problem which would be an agreement with China and the US to work around the Iranian problem uh doesn't seem to be getting resolved possibly because the Chinese want something from Taiwan or some other you know deal that they're more interested by in terms of really wanting a quid proquo. We can help you with Iran if you help us with Taiwan and clearly that deal wasn't made. All right, good luck out there.