Massive Selloff Today: Start Of Something Bigger? | Ole Hansen

Ole Hansen · Saxo Bank

Brent at $112 understates the real cost of Gulf oil; delivered prices may be about $30 higher.

Gulf crude now moves through costly ship-to-ship transfers: small ships carry oil out of the Strait of Hormuz, it is transferred outside the strait, and then very large crude carriers take it to Asia or elsewhere. Ship owners tied to oil-producing states are willing to take the risk, and the extra handling is very expensive. Because of this, the effective cost of the barrel sits well above the Brent screen price, potentially by about $30. Refiners may get some discount from Middle East sellers, but the final delivered price is still much higher than the quoted Brent level.

“And this whole process is obviously punitively expensive, and that's why we right now Brent crude at 112 is not really the right price, you should probably add potentially another $30 on top.”at 5:54

Ole Hansen · Saxo Bank

Crude flows have recovered, but refined product and LNG supply is far below pre-war levels, keeping markets tight.

Crude oil flows out of the Gulf have returned to around pre-war levels, but the flow of refined fuel products and LNG is still well below where it was before the war. The main reason is lost refinery capacity in the Persian Gulf, and partly in Russia. Products are so expensive to make from high-cost crude that some are loss-making. New York Harbor ultra-low-sulfur diesel and the European distillate contract are still around $200 or more and have not fallen despite talk of Russian diesel. US distillate inventories remain near record seasonal lows. Over the next few months, scheduled refinery maintenance in the US and Asia could slow output further, so tightness is likely to persist unless new supply comes from the Middle East, China or Russia.

“the flow of fuel products, which is really what we need, and LNG are still way below where we had them before the war started, and that's why this tightness continues.”at 7:20

Ole Hansen · Saxo Bank

China's sharp cut in oil imports has been holding global prices down, and its fuel exports have dried up.

Over the last six months China cut its crude imports sharply. Without that, oil prices would be much higher. But China now pays very high prices for its oil, so it focuses on domestic supply. Its refineries have enough capacity to export fuel to the world, but those exports have also fallen because of the cost of crude. So China's import cuts have been a key buffer on the oil balance, and its reduced fuel exports add to global product tightness.

“If it hadn't been for China dramatically cutting back their imports, we would not be looking at these oil prices. They would be a lot higher.”at 7:45

Ole Hansen · Saxo Bank

The diesel crack spread reflects refinery shortages, not refiner profits, since most of it goes to crude cost.

The spread between diesel product prices and crude is around $80, and close to $100 against Brent, which looks like a huge margin. But roughly $30 of that is the extra cost of getting crude to refineries. If refiners were really earning it, refinery equity prices would be much higher. Refinery mix also matters: the US is gasoline-heavy and the Middle East more distillate-heavy. Some other products now have much lower margins, so refiners may be making diesel at a profit while producing gasoline at a loss. The spread shows that oil is available but refining capacity is not.

“And also, what we also need to understand from that chart is that these $100 is not the refineries making those money, otherwise you'll see some of the refinery equity shares prices, they would be a lot higher.”at 16:03

Ole Hansen · Saxo Bank

The G7's 100 million barrel stock release was old news and has done little to ease diesel prices.

The 100 million barrel release touted by the G7 was really already agreed earlier, so it is old wine in new bottles. Several national releases are local: France released diesel into its domestic market, while Japan and the US hold commercial stockpiles with government reserves that are released locally, not globally. European diesel prices have barely moved as a result. The release has not been a meaningful source of relief, though it may have kept prices from rising further.

“the 100,000,000 barrels that was touted a few weeks back from the G7 was really just old wine on new bottles, basically meaning that it was part of what has been agreed already.”at 18:03

Ole Hansen · Saxo Bank

Russian diesel export gains are doubtful; Russia and the Middle East together account for lost diesel exports.

Russia produces excess diesel because it needs a lot of gasoline, and it has exported diesel for years. Of the total loss of exports from Russia and the Middle East, roughly one third comes from Russia and two thirds from the Middle East. The recent exports being touted have had an impact on prices, but Hansen questions how much diesel Russia can actually produce and export. He is also unclear what the US got from its deal with Russia, since it has not had a significant effect on pump prices.

“it's probably roughly one third from Russia and two thirds from The Middle East. ... I still very much put a big question mark to how much they actually have, how much they are able to produce and export.”at 24:26

Ole Hansen · Saxo Bank

Hyperscalers have moved from spending their own cash to borrowing for the AI arms race, which will hit limits.

Hyperscalers initially funded their AI data-centre investment with their own cash. Now they are borrowing to keep up the spending in what Hansen calls an arms race. Because nothing comes for free, this debt-funded buildout will eventually hit a limit, creating winners and losers. The market is only starting to ask whether this spending should be funded this way.

“there's been this free spending from the hyperscalers, a lot of investments going in, but in the beginning they spent their own money, now they're borrowing money to continue this arms race”at 3:04

Ole Hansen · Saxo Bank

An AI data-center slowdown would cut electricity and copper demand, so AI weakness could weigh on copper.

The speaker's conditional mechanism runs as follows. If the AI bubble starts to burst and data center capacity needs are revised down, demand for electricity falls, and so does demand for copper, which is the conductor of electricity. He says this creates a link to the AI story, so continued weakness in the Nasdaq could potentially weigh on copper. The view is conditional and is not presented as a forecast.

“if there's suddenly some downward revisions to how much data center capacity we're actually going to need, that will obviously have an impact on demand for electricity and for the conductor of electricity, which is copper.”at 37:44

Ole Hansen · Saxo Bank

European gas will stay tight this winter as Qatari LNG falls and Europe competes with Asia; weather decides.

Qatari LNG shipments are running at around 20% of pre-war levels. Europe, which since losing Russian pipeline gas has relied on Norway and the US, is now competing with Asia for the LNG that is still available. European gas storage is at its lowest level in at least 15 years, partly because summer-to-winter arbitrage has not worked, with backwardated forward curves. Storage covers only about 25% of winter demand, so supply still matters a lot. Milder weather so far is helping, but a cold winter would mean higher prices. Lower renewable-era gas demand offers some offset.

“supplies from Qatar being cut to the extent that it has, that has basically tightened the global market... But now that Qatar is shipping less LNG, normally goes to Asia, we're basically in a global competition with Asia for gas supplies.”at 20:36

Ole Hansen · Saxo Bank

US gas is a strong export arbitrage, since European gas trades at about 10 times US prices.

European gas is trading at about 90 euros per megawatt-hour, roughly $30 per therm, which is about ten times the US price. That gap makes it very profitable to produce gas in the US, liquefy it and ship it to high-cost markets in Europe and Asia. The price spread is the main reason US gas exports are attractive.

“...so basically we are paying 10 times higher prices for our gas than you are in The US... That obviously also means that if you have a spare gas in The US, it's a fantastic trade to buy it, to produce it and to ship it to these high cost areas in Europe and Asia.”at 22:35

Ole Hansen · Saxo Bank

Tech earnings got lukewarm reactions as investors demand proof of returns on AI spending; the rally looks one-sided.

This week's US tech earnings drew only a lukewarm response. Investors are now asking to see returns on the very large AI investments being made. Hansen argues the rally has become unhealthy and one-sided, with buyers rushing in on every dip without asking hard questions. These questions are now starting to be asked, which is why the market has become wobbly. He sees the sell-off as the start of more scrutiny of AI spending.

“we had a bit of a lukewarm response to some of these results. Basically, increasingly, the market is, our investors are asking the question, show me the money, basically show me the returns on all these massive investments that are currently being made”at 1:24

Ole Hansen · Saxo Bank

Rising funding costs, not just oil, are driving the sell-off; stocks are not responding to falling yields.

Higher oil prices hurt sentiment, but the bigger driver is funding costs: central bank rates and bond yields have risen sharply over the last six months, making financing more expensive for the equity rally. Recent dips have shown shallow bounces, suggesting the market's mechanics have changed from buying every dip. Normally falling bond yields support stocks, but on recent days yields fell before equities did, and stocks are struggling to respond. The technicals have not broken down yet, but sentiment is clearly weakening.

“the engine behind it really should be the funding cost, the fact that bond yields are rising... normally for lower bond yields should be supportive for the stock market, but right now it's struggling on that front.”at 3:43

Ole Hansen · Saxo Bank

Strait of Hormuz shipping risk will keep a double risk premium in oil, even if the war eases.

Shipping insurance and crew risk premiums will not disappear soon. They will fall only slowly, because without a complete regime change in Iran, traffic has proven easy to disrupt over the last six or seven months. Even with a ceasefire or deal, the risk of a flare-up remains, so a double risk premium will stay in oil prices. Reports of possible US and Israeli strike plans, potentially before the midterms, make a sudden deterioration a real possibility. Shipping flows only normalise for LNG and fuel products once security is restored.

“They're not fixed permanently, but they will go down slowly because unless we have a complete regime change in Iran, we have now seen throughout the last six, seven months how relatively easy it is to disrupt traffic... there will continue to be some kind of double risk premium into the price”at 13:12

Ole Hansen · Saxo Bank

Energy-driven inflation keeps rate-hike expectations elevated, with about three hikes priced by next summer.

Higher energy prices are feeding through to inflation, which keeps expectations for rate hikes high. He says at least three hikes are priced in by next summer, possibly close to four. This pressures bonds and gold and adds to funding costs for risk assets. The central bank is not named in the excerpt, so this view is most likely about the European context he is speaking from.

“And the higher energy prices are also feeding through to inflation and that's keeping the expectation for rate hikes elevated. Three hikes are priced in by this time.”at 27:28

Ole Hansen · Saxo Bank

Gold is 10-20% higher over the coming years; short term, speculative selling and rates keep it pressured.

Long term, Hansen stays bullish because China, a major buyer from private investors and central banks, faces a bear-market stock market, a five-year property downtrend and large trade surpluses that need a home. Indian Diwali demand also tends to be firm. Short term, he is on the fence. Hedge funds and CTAs have net sold about 4 million COMEX ounces since late August, while total reported holdings rose about 2.3 million ounces, so traders are moving in opposite directions. Gold has not rallied on lower yields because inflation risk from energy prices keeps rate-hike expectations high, with about three hikes priced by next summer, and the dollar is holding up. Speculators are close to short, and a technical recovery needs a close back above the September low near $4,230 and then the 200-day moving average.

“So, yeah, I maintain my long term bullish view for gold 10 to 20% higher in the years from now, but in the short term, clearly challenged by the developments we're seeing on the ground.”at 29:58

Ole Hansen · Saxo Bank

France's fiscal and pension problems are serious; politics may need to get worse before reform happens.

France's retirement age can be as low as 60, and with an aging population, pension costs threaten to become a large fiscal black hole. Hansen says the government has tried to act, but parliament is not supportive, so reform may have to get worse before it gets better. France's 10-year yield is above 5% and its spread over Germany is around 170 basis points, a level he says has never been seen before. He contrasts this with Greece, which took painful austerity after 2010 and is now one of Europe's better performers, and with Denmark, which has a debt-to-GDP ratio of about 25% and is raising its pension age to 70.

“if you have the pension, just gonna be a massive black hole at some point that you will be struggling to fund. So so, yeah, there are concerns about France.”at 32:39

Ole Hansen · Saxo Bank

Grains' 14% fall is a hedge-fund unwind; harvest supply and super El Nino risk keep prices volatile.

The Bloomberg grains index fell 14% in about six weeks, almost fully reversing August's rally. That rally was driven by higher production costs, including diesel and fertilizer, weather worries and heavy speculative buying by hedge funds. Hedge funds are not tied to positions, so they have been exiting. Some speculative long positions may still pressure prices. Harvest selling in the US and winter-crop harvests elsewhere add supply. Looking ahead, a potentially super El Nino could bring hot, dry or flooding weather, so the sector should stay volatile in coming months.

“But unfortunately, what that did as well was it drove a massive amount of speculative interest from hedge funds. And once again, as I said earlier, hedge funds are not married to the position.”at 35:06

Ole Hansen · Saxo Bank

Stays bullish on copper; the uptrend holds, with short-term headwinds possibly offering a better entry.

The uptrend in copper is still intact, though the pace of the rally may moderate until clearer answers arrive on key questions. US copper stockpiles have grown for more than a year in anticipation of US tariffs, but the risk of those tariffs being introduced fades each day. If tariffs do arrive, an arbitrage could pull the stockpiled copper back into the global market, adding supply to a market that has been depleted in recent months. China holds about 50% of refined copper capacity, and scarcity has squeezed refiners' margins because input costs are so high. Some refiners are cutting capacity, which could weigh on supply in the coming months. The speaker still sees short-term headwinds that could give investors a better entry level.

“I stay in the bullish camp on copper, but also just like gold, I acknowledge the fact that there are some headwinds in the short term that potentially could give investors a better entry level.”at 39:42