Commodity Watch: Illusions of independence

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/061c994a-a452-418f-bfa0-f2cf3cf5c577/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.png?language=en" alt="Ahmad Al Sati - insights" title="Ahmad Al Sati - insights" style="width: 180px" class="fr-fic fr-dii"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI</strong><br><br>PRESIDENT OF GEMCORP CAPITAL ADVISORS LLC, PORTFOLIO MANAGER<br><br>Ahmad Al-Sati is Portfolio Manager of the Gemcorp Commodities Alternative Products strategy (GCAP) and President of Gemcorp Capital Advisors LLC, based in New York. He is responsible for leading Gemcorp’s commodities-focused investment strategy and overseeing the firm’s US advisory platform.</div></span></div><hr><p data-pasted="true">A man is trapped in a vault filled with gold. He tells himself I now have enough gold to buy all the food I need. But he can’t, he is stuck in a vault.</p><p>Similarly, the US is swimming in crude that it cannot consume because it requires (like everybody else) a set of refined petroleum products critical for everyday life. Oil imports are needed because the existing US refining system requires heavy oil which is not produced by shale. Replacing the existing system will not be quick or cheap. As a result, the US imported 6.6 million barrels per day (mbd) of oil in 2024 (40% of its refining needs) as well as a variety of refined products including jet fuel (see my previous post about refining <a href="/insight/commodity-watch-the-cost-of-concentration" data-channel-guid="bf0f72af-7483-48d9-90ec-b2f04a7cd593">The Cost of Concentration</a>), 17% of California’s jet fuel comes from South Korea, which, in turn, imports its crude from the Gulf.</p><p>Thus, despite being the largest crude oil producer globally, the US is not an island isolated from global markets. Granted the percentage of US disposable income used for gasoline purchases has declined since the 1970s and this direct impact on US consumers may be limited. But the second and third derivative effects have not been felt yet as supply disruptions move through global supply chains.&nbsp;</p><p>Naphtha, a byproduct of crude, provides an illustration (17% of global Naphtha comes from the Gulf). The word itself came into Latin from middle Persian through Greek circa 2000 BC (yes, these connections are old and deep). Naphtha is a precursor of many plastic products used every day and everywhere. Chemical companies are already passing the higher feedstock costs to consumers (Naphtha prices were up 50% in one week during March), They are also slowing factory throughput, cancelling orders and idling facilities. Shortage of urea and helium, leading to higher food prices and chip disruptions, have been discussed widely such as in <a href="/insight/commodity-watch-the-cost-of-concentration" data-channel-guid="bf0f72af-7483-48d9-90ec-b2f04a7cd593">The Cost of Concentration</a>.&nbsp;</p><p>Durable goods may be next.</p><p>These production slowdowns mean fewer products downstream and higher prices. As an example, a refined barrel of oil is a base for 25 sneakers and 500 toothbrushes and a variety of food packaging and plastic products. In addition, the Gulf's hydrocarbons power factories that produce much of what US consumers buy. Consumption is 70% of the US economy. If makeup and fast fashion are simply less available, how will that ripple through the US economy? Garbage bag hoarding in South Korea is already news. Could the US be next? Could garbage bags be the toilet paper of this supply chain disruption?</p><p>Longer term, Naphtha disruptions (as a proxy) reinforce trends towards building more resilient supply chains (even if more expensive). Thus, supply chains will increasingly have multiple sources of feedstock, higher inventory and redundancies. That in turn will require increased commodity production, more infrastructure, new trade routes and most importantly, more capital.</p>