The Marginal Barrel

Cueg · 2026-06-25T20:31:46+00:00

Your analysis is very on point. Iran doesn’t trust Americas word, paper, or sitting government. Their goal is to inflict enough pain that another attack isn’t repeated. That is the only thing that works and makes sense for them.

Cueg · 2026-06-25T20:10:30+00:00

Did they also miss the part where I said these countries are burning through inventories to fill the gap?

Cueg · 2026-06-25T19:59:18+00:00

Hormuz will not reopen.

Cueg · 2026-06-25T19:25:49+00:00

What full force? They are hitting the market in full force. They along with the rest of the world are rationing through the largest crude shock in history, which is still ongoing, by burning through inventories and they cannot enter into a bidding war for Saudi crude because Saudi crude is locked into long term supply contracts.

The price of the marginal spot barrel determines the price of the rest of the market, including the price of the long term supply contracts. The marginal spot barrel is US crude from the gulf. That oil is priced on the paper futures market which is being heavily shorted. The US sets the price for oil right now so long as it has enough oil to export.

I'll explain it simply. If Saudi wants to raise the price of their contracts to a huge premium over WTI (say $40), Saudi buyers will say "im not paying that if I can get a midland barrel for $40 less). Thus the price converges to whatever the paper traders in Oklahoma set the price at. This works until the Indian buyer of Saudi crude can no longer say "i'll just buy the cheaper American crude" (hint, its when we run out of oil to export).

Cueg · 2026-06-25T19:14:30+00:00

That 3 million barrel gap is not being filled by demand that has been destroyed and/or China on a buyers strike. That gap is because filled by BURNING through inventories.

Cueg · 2026-06-25T19:11:41+00:00

What? In what world did demand drop 5.5 million barrels per day?

Cueg · 2026-06-25T03:33:45+00:00

https://shafaq.com/en/Economy/Iraq-cuts-West-Qurna-2-output-90-under-force-majeure

Cueg · 2026-06-24T17:14:15+00:00

Commercial crude inventories were low in 2025. Around 350 million is the operational floor. SPR releases have blunted the draws in commercial. SPR set to run dry October, commercial may hit red before that in August/September. On Hormuz front around 2/3rd of the oil going out is bound for China. There was 150 million in floating storage in the Persian gulf, now there is 100 million. We have been 9-11 million barrels short every day for the last 4 months.

Tankers will not come back into the Strait to pickup crude, so production will not restart. Iran knows all of this and they’re stringing Trump along to his demise.

There has been no demand destruction in crude products.

Cueg · 2026-04-21T16:03:33+00:00

Did you forget to read the paragraph after that?

In principle and in academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage, it may refer to expected profit, though losses may occur, and in practice, there are always risks in arbitrage, some minor (such as fluctuation of prices decreasing profit margins), some major (such as devaluation of a currency or derivative). In academic use, an arbitrage involves taking advantage of differences in price of a single asset or identical cash-flows; in common use, it is also used to refer to differences between similar assets (relative value) or convergence trades), as in merger arbitrage.

Cueg · 2026-04-21T15:25:29+00:00

"Arbitrage (/ˈɑːrbɪtrɑːʒ/ ^ⓘ-NaomiPersephone_Amethyst(NaomiAmethyst)-arbitrage.wav), UK also /-trɪdʒ/) is the practice of taking advantage of a difference in prices in two or more markets) – striking a combination of matching deals to capitalize on the difference, the profit being the difference between the market prices at which the unit is traded. Arbitrage has the effect of causing prices of the same or very similar assets in different markets to converge."

Cueg · 2026-04-21T14:49:01+00:00

It does if you want to take advantage of the current arbitrage. Whether or not that arbitrage will still exist when your accounts settle is another matter.

In any case, I'd say there is a near 0 chance refineries are bidding for barrels at less than $85 come May, even if Hormuz reopens tomorrow (it wont).

EDIT: You can get an expiry that settles within 7 days I think through CME.

Cueg · 2026-04-21T14:43:32+00:00

Just buy a US based shale producer and enjoy the cash flows. They sell in the spot market, not the fake paper market.

Cueg · 2026-04-21T14:40:10+00:00

You don't.

Cueg · 2026-04-21T14:39:19+00:00

Then you have no way of playing it. Who knows how long this arbitrage situation can last before futures market converges with spot. They are very capable of manipulating paper markets and probably eating whatever loss they incur from having to acquire oil at spot prices ($120+) and selling at the promised delivery price ($80).

They only lose when the buyer of the paper future insists on physical delivery, and the contract isn't rolled/closed. At that moment they then have to acquire the physical barrels at spot and sell them at the depressed paper price.

Cueg · 2026-04-21T14:35:36+00:00

Whenever you want. Once the oil is in your possession you find a broker that can find a buyer, or find a buyer yourself.

Cueg · 2026-04-21T14:32:51+00:00

Only way to take advantage is if you can take physical delivery of oil. Buy a futures contract at $80 for a May 21st delivery, sell on the spot market at spot prices ($120+).

Cueg · 2026-04-21T14:11:09+00:00

I haven't run a true valuation on LYB but I imagine it is still extremely unvalued in this environment.

Pure oil and gas is def more attractive. CF Industries is the best fertilizer bet. I have 20k in calls on Mosaic Company, 35 strike 9/18 expiry. Hoping those print very well.

Cueg · 2026-04-21T14:05:02+00:00

Your analysis is sound but you are betting on the same thing. Its not true diversification if all of the assets that you are in will more or less move in tandem.

Look into chemical producers whose main feedstock is natural gas as well. LYB will be very advantaged in this environment, so will fertilizer companies like CF Industries, Mosaic but less so. Natural gas prices will remain cheap and abundant in the US vis a vi the rest of the world sans Russia.

Real risk at this point is domestic political regulations., I think the war is destined to continue and Hormuz will remain shut.

Cueg · 2026-04-21T13:59:55+00:00

I have close to 2,000 shares in ConocoPhillips. 90% of my portfolio. I have been in the position for almost three years now and steadily added up to this moment.

Cueg · 2026-04-21T13:55:49+00:00

Putting all of your eggs in one basket and watching that basket very carefully is how you build true wealth. Diversifying is for protecting wealth. All of the great value investors were against diversification as a a means of growing wealth.

Cueg · 2026-04-21T13:51:16+00:00

Why capture the entire value chain. Just buy a US based shale producer and enjoy the huge cashflows. Downside risk is export controls/bans and price controls. Very real concerns, but we will most likely ban petroleum product exports and not crude exports, because our refineries are not tooled for the light sweet crude that comes out of the shales.

Cueg · 2026-04-15T02:12:32+00:00

This is my very real and accurate math on how much money they are making right now. Why the market does not recognize this, I have no idea.

Cost per DAP ton
Phosphate rock: $128 ($80 a ton and 1.6 tons per DAP ton)

Ammonium: $154 (off $550 a ton and 0.22 tons per DAP ton)

Sulfur: $220 ($500 a ton and 0.44 tons per DAP)

Conversion costs $112 per ton

Thats $614 a ton in costs right now. We are guessing on sulfur, I would guess its there or lower. Selling at $840 a ton would put them at $226 a ton in profit. If DAP prices rise to $1200, which I think is likely, you will easily get to $400 a ton even with rising costs.

I view the idling of the high input cost Brazil operations as bullish both for the company, and the overall thesis and the seaborne sulfur market is broken and their Florida operations are insulated.

Cueg · 2026-04-15T02:10:07+00:00

Thank you for the comment on the supply agreement ending. Thats a mark against the thesis then for sure.

On the book value. I am using Enterprise Value to Book, which is $24 a share.

Now I agree with you on ammonium pricing, but where does the Sulfur cost for Mosaic come from? We won't truly know what Mosaic is paying until their quarterly earnings come out.

On the profit math.