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The Catch-22 of OPEC’s Unexpected Cuts

Freedom Financial Archive | Originally posted April 21, 2023
  • Inside the massive slowdown in oil refining demand
  • The Volatility Index (VIX) plummeted. Am I living in an alternate universe?
  • The real reason freight rates declined in March

Dear Reader,

Since the unexpected OPEC cuts, there’s been a massive slowdown in refining demand. This is where it gets fun, because it becomes a catch 22. Think about it… did OPEC really have the foresight to cut production? Or did cutting production create the pressure on margin, which then reduced demand?

It’s probably a mixture of both, but it’s really interesting to think about, especially when it comes to pricing. An oil refiner doesn’t care if crude is $15 or $100. It’s irrelevant to them. What is the product selling for, and what are they buying the product for? That’s the important question.

If they’re buying crude for $15, and they’re selling the product for $30, they’re making a ton of money. If they’re buying oil for $100 and selling it for $115, they’re still making money. But if they’re buying crude at $100 and it only sells for $97, they’re losing money. It’s all in the margins.

Asian Refiners Are Going to Get Annihilated

The way it’s looking now. Asian refiners are going to get absolutely annihilated. According to Clyde Russel from Reuters, “The profit from turning a barrel of Dubai crude into refined products at a typical Singapore refinery dropped to $2.53 a barrel this past Monday.

This was the lowest since October and it’s down 82% from the peak so far in 2023, which was $14.33 a barrel on January 25th.” You can read his entire article here on Asia’s collapsing refinery margins.

Combine that with the fact that floating storage of oil is still through the roof, and it’ll be interesting to see what happens over the next few months.

The Volatility Index (VIX) Plummeted

The VIX is through the floor right now. As of Wednesday morning, it was at 16.39, which is a 52-week low. If you missed some of our previous emails, the VIX is the Cboe Volatility Index. It’s a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market. Volatility, or how fast prices change, is often seen as a way to gauge the degree of fear in the market.

With it being at 16.39, it’s essentially saying that everything is stable and fine. I might be missing something, but look around at what’s happening in the world. Do you feel safe? I certainly don’t. Did I miss something, did food prices suddenly go down? Are we not on the verge of a recession anymore?

Volatility is one of the biggest factors for pricing options. That means, if you’re buying the VIX, you’re saying that volatility is too low at 16.38 and it’s going to bounce back up. If you look at the past 52 weeks, the average price for the VIX has been 24. And we’re at 16.38 as of this writing. It’s hard to believe.

Freight Rates Declined Month Over Month in March

Here’s a chart that shows how freight rates declined month over month in March for trucking (blue), deep sea water transportation (orange), air transportation (white) and rail transportation (purple).


Trucking, which is the blue line, has been dropping for a while now. However, if you go back through 2009, trucking and rail are usually pretty close together. And now trucking is falling off a cliff, which we’ve talked about over the past couple of weeks.

Now, when it comes to the climb of trucking in 2020, it was all because of the pandemic. If you remember going to stores, many had empty shelves. Especially grocery stores and retailers that sold toilet paper, paper towels, and cleaning supplies. People were hoarding those products and buying whatever was available on the shelves.

Those stores couldn’t wait for a train to bring in new inventory, it would take too long. Instead, they paid a premium for trucking to get the products there faster. That’s what spurred the growth of the trucking industry, however we’re not in the pandemic anymore, and that premium for truckers simply isn’t there.

Combine that with the fact that a truck is moving one, maybe two cargoes at a time. Whereas a train is moving 115. Unless you need something overnight or within a day or two, the trucking boom isn’t likely to come back anytime soon.

Thanks for reading,

Freedom Financial News