November 2nd Links

• The preponderance of evidence suggests that inflation is not transitory, the rub is that interest rates may no longer be correlated with inflation. I appreciate how this can be a short-term financial salve; but let’s be clear, it is a long-term public policy blunder. What is indisputable is that Implied Volatility is way too low since the range of outcomes is now much wider. [Convexity Maven]
• We know - not think, know - that Covid vaccines can cause serious heart complications in many young men. The potential for heart inflammation significant enough to lead to hospitalization is probably somewhere between 1 in 3,000 and 1 in 6,000 men under 30. Israeli doctors offered this estimate six months ago, and it has held up nicely. If anything, these estimates may underestimate the risk, because not all cases of side effects are sent to VAERS, the federal Vaccine Adverse Events Reporting System, or similar European databases. We don’t know what percentage are reported, and frankly cannot even make a good guess - maybe as many as 50 percent for unusual and serious problems that are receiving a lot of attention (such as lethal clotting disorders in young women), as few as 10 percent for more routine side effects. So a significant number of healthy young men are suffering serious side effects after being vaccinated - far more than are at serious risk from Covid. [Alex Berenson]
• “We can’t just ask public companies to move forward without the rest of society. It’s going to create the biggest capital market arbitrage. We’re seeing that more hydrocarbons have been sold to private companies in the last few years than almost any time ever. That doesn’t change the world at all. It actually makes it, the world even worse, because it moves from public disclosed companies to opaque private enterprises. So, the mission is failing if that’s all you’re doing,” he stated. [Larry Fink]
• In the letter, dated Sept. 14, the trade associations argued that if the price of tobacco products spikes, buyers would move to the tobacco black market where sellers don’t abide by standard regulations and often prey on young people. “When the price of a product rises too much too fast, illicit purveyors will seize the opportunity to exploit and take advantage of current users and entice new users without discriminating based on age,” the letter read. “This undermines the responsible measures our retailers have taken and creates a problem for society as a whole.” The warning is one of the most public cases of pushback from the tobacco industry as it finds itself once more being targeted by Congress. [Politico]
• “Have you seen the trade parade?” she asked, referring to the bumper-to-bumper construction trucks heading to work on Hamptons houses. “Hell,” she said, “if I had the money, I’d take a plane, too.” [New Yorker]
• If you look at the crude import data versus the storage levels, you will note that China has been purposely buying less crude and draining its own storage. We estimate that the amount the Chinese need to buy in order to keep crude storage flat is ~10 mb/d from the sea. Said in another way, China's lack of presence on the market by a factor of nearly ~1.75 to ~2 mb/d hasn't prevented global oil inventories from declining. In essence, if China had kept pace with the crude buying of the past, we would've already seen $100/bbl oil. Yes, read that part again. If it wasn't for China trying to play games with the oil market, we would've already reached $100/bbl oil. Knowing full well of this fact, we can conclude that China will eventually have to return to the oil market. From May to October of this year, China reduced its crude inventory by ~100 million bbls. In another 6-months, it will have completely eliminated all of the crudes it bought during COVID. [HFI Research]
• But if you look at the rest of our system, in particular, in Texas, if there is demand growth in Texas, which happens to be especially the Dallas Fort Worth area, one of the fastest-growing areas in the country, we have plenty of capacity to accommodate that without -- well speaking about Dallas, without really any capital investment. And when you think about West Texas and access to Mexico and Arizona, markets are further west. We have opportunities there to expand capacity also. So there are upsides around our system. The other thing I mentioned, I've mentioned this before that as we go through an energy transition cycle over the next five or 10-years, it's reasonable to assume that you have more refinery rationalization. And typically speaking for a pipeline company that is a net positive, because it creates incremental transportation opportunities basically to fill the hole that if a refinery closure is creating. And we have a system that's ideally situated for that since we're connected to half the refining capacity in the country. And so, we're not supply constrained in any way. So if we have A refinery close in a certain market, we've got plenty of sufficient supply. And in most cases, sufficient capacity to fill that hole with barrels removed over a longer haul, which is typically a higher tariff. So, I think we do have operating leverage going forward around our refined product system. [Magellan Midstream]
• Our businesses continued to perform extremely well during the third quarter. We reported $2 billion of EBITDA even though we were impacted by $30 million of headwinds due to hurricane Ida. Cash flow from operations was a record $2.4 billion, which more than fully funded both our capital expenditures and our distributions. Year-to-date distributable cash flow is almost $5 billion, which has provided coverage of 1.7x and $2 billion in retained cash year-to-date. As we head into the final quarter of the year, while we don't take anything for granted, it looks like our businesses are going to finish with another strong year in 2021. Our results reflect the ongoing recovery in demand for crude, NGLs, primary petrochemicals and refined products as the global economy continues to recover. For 2022, most experts agree on continued strong demand and economic growth worldwide. We believe that economic backdrop plus the need to restock virtually everything will continue to provide strong demand growth for oil and gas, natural gas liquids and plastics. In addition to the record cash flow from operations, we had record profits from our propylene business, which contributed to the record gross operating income for our petrochemical and refined product service sector. Our PDH and splitters complement one another in our value chain, and we were able to take advantage of strong propylene spreads. Long term, petrochemical fundamentals are very strong and U.S. petrochemicals have multiple competitive advantages compared to almost all of their global peers. And likewise, Enterprise remains strongly positioned to provide the petrochemicals midstream services, including feedstock, storage, distribution and exports. It's a footprint that's not easily copied. Our liquids pipelines have substantially recovered to near pre-pandemic levels at 6.3 million barrels a day with gas processing volumes benefiting from higher prices for NGLs. Enterprise's natural gas pipeline and transportation for the third quarter exceeded pre-pandemic 2019 levels at a record 14.6 Bcf a day. [Enterprise Products Partners]