In 30 seconds: Despite a partial recovery in crude oil flows through the Strait of Hormuz, refined product exports remain severely disrupted at around 50% of pre-war levels, driving diesel prices to all-time highs and forcing Iraq to offer record $37 per barrel discounts to attract buyers. US Treasury yields have surged to their highest levels since 2007, with the 10-year hitting 5.30% and the 30-year at levels not seen since 2002, extending the bond market's historic multi-year drawdown and sparking debate about whether a bottom is near.
The Strait of Hormuz is open, technically. Crude oil shipments through the chokepoint are running at 17.5 million barrels per day, or about 98% of normal volumes. Crude flows from Gulf nations excluding Iran represent roughly 80% of global flows through Hormuz. So far so good. The problem is everything that isn't crude. Refined product exports — diesel, gasoline, and jet fuel — from Persian Gulf nations represent around 50% of global flows. Flows of products such as diesel and gasoline through the strait are pegged at just 3 million barrels per day. Prompt spreads near $8 a barrel signal an acute physical deficit even with those crude flows partially restored. The downstream consequences are spectacular. US diesel has hit $224 per barrel, an all-time high. The diesel crack spread against Brent reached $122 per barrel. In Europe, front-month gasoil futures averaged €1270 per tonne in September, the highest monthly average since June 2022, and one of the highest levels on record even after adjusting for inflation. On Sep 30, Saudi Arabia was loading 6 oil tankers at Ras Tanura and Ju'aymah while Iraq was loading another 6 tankers. The discount is large enough that some traders find it irresistible. On the supply side, US total oil liquids production hit 21.93 million barrels per day in July, an all-time high, revised up by approximately 350,000 barrels per day from earlier weekly estimates. US demand came in at 20.61 million barrels per day, itself revised up by approximately 170,000 barrels per day.
US 10-year government bond yield: 5.30%. The US Bond Market drawdown has now persisted for over 74 months, by far the longest on record. The long end has been particularly brutal. TLT quarterly declines of at least 10%: sixth. The asymmetry is remarkable. In 2019, central banks were begging governments to spend more because they couldn't hit their 2% inflation targets — and that, one economist argued, was the signal that a secular bear market in bonds was arriving. 10-year yield: 50 bps. Options markets reflect the stress. The TLT UST bond ETF IV Rank has reached 100, its theoretical maximum, as yields spike into key economic data. TLT (20+yr US Treasury ETF): 55%. When the crisis is in the base rate (USTs), the crisis is everywhere. Whether this capitulation marks a bottom or merely a pause in the bleeding is the question that, at 5.30% on the ten-year, now costs real money to answer wrong.
Here is what your portfolio did this session.
S&P 500: 7,651.54, down 0.25% on the day
10-Year Treasury yield: 5.29%, up 4 bp on the day
30-Year Treasury yield: 5.64%, up 4 bp on the day
13-Week T-Bill yield: 4.03%, down 4 bp on the day
Gold: $4,188.50, up 0.21% on the day
Fed funds rate: 4.00, flat 0.00% on the day
Long bonds (TLT): $77.78, down 0.58% on the day