$200 Oil and Impact on Global Economy | Rory Johnston and Jimmy Connor
Summary
Oil Market Shock: The Strait of Hormuz closure has removed 15–20 mb/d from global supply, creating a massive air pocket in flows and setting the stage for further price spikes.
Investment Stance: The guest explicitly advocates getting long energy—particularly crude oil—arguing near-term upside is not fully priced, while cautioning that deep downturns would hurt energy equities.
Refined Products Tightness: Diesel and jet fuel are the tightest parts of the barrel, with crack spreads surging, likely driving demand destruction and adding to inflationary pressure.
SPR Release Impact: The IEA-coordinated 400 million-barrel release equates to roughly ~3 mb/d of flow, helpful but small relative to the 15–20 mb/d shortfall.
US Shale Response: Elevated prices should revive US shale growth, but with a 4–6 month lag; producers can hedge above incentive levels, delaying immediate relief.
China and Russia Dynamics: China’s large SPR and product export ban focus relief domestically, while Russia emerges as the biggest beneficiary as Asian buyers scramble for supply.
Macro Risks: Elevated fuel costs risk re-anchoring inflation expectations, likely delaying rate cuts and potentially prompting hikes if the crisis persists.
Companies Mentioned: Exxon and Chevron are referenced historically in context of the 1970s pricing regime, but no specific stock picks are endorsed.
Transcript
Rory, thank you very much for joining us today. One of the things I try to do on this podcast is speak to experts like yourself on topics which influence both the economy and also financial markets. And today we're going to do a deep dive on oil. And for those who aren't familiar with you or your firm, Commodity Context, why don't you tell us a little bit about your firm? >> Yeah, thanks for having me on, James. Uh, so Commodity Context is my independent oil market research product. Uh it's hosted on Substack and I have three main types of research. I publish my weekly which is oil context weekly every Friday at close of business after the commitments for traders report comes out. Uh so that you get nice fresh uh views on kind of latest positioning in the market. Uh I have three different monthly reports on global oil balances, North American oil detail and OPEC policy and production. And then finally on I have thematic research that I kind of typically do two to three of those a a month on kind of various topics. The last one as I was just saying before we started filming was on all everything happening in Venezuela and until what what's been happening right now in Iran broke out. I was traveling in Calgary and Ottawa talking all about what Venezuela meant for the Canadian oil patch. So it's been a crazy first quarter. Uh definitely busiest first quarter of my career to date. Uh so let's talk about it. Well, I cannot think of another commodity which has a larger impact on the economy than the price of oil is used in every facet of our lives. Not just gas for cars, but also diesel for tractor trailers and trains and Jeff fuel for planes. 15% of all oil is used to produce prochemicals such as plastics, synthetic fibers, detergents, and even pharmaceuticals. And it's one of the largest markets in the world when it comes to trading physical. The physical market is about $8 billion daily. When you look at the futures market and the derivatives market, it's over $200 billion. So quite huge. And we've seen a massive or some crazy volatility here year to date in the price of oil. And it started the year at $60 a barrel. I can't believe it was that low, but anyways, that's where it started the year and now it's significantly higher. I'm not even going to throw it a price because it changes every five minutes. But one of the reasons why we've seen so much volatility is because of what's happening in the Middle East and this straight of Hormuz. And on February the 27, there was 141 ships that passed through the straight. And then on February the 28th when the war broke out, it's virtually zero. So maybe you can we can just start right here and tell us about the Straight of Hormuz and why it is so important to the transportation of oil. >> Yeah. So the transform moves is often referred to as the world's most important maritime choke point and I think this is showing why that is the case. Uh just for perspective what we're talking about the flow through the straight of four moves is roughly 20 million barrels a day and you know in normal times rounding that's roughly a fifth of total global oil supplies. That is a truly stupendous volume of oil and it's the only way that the vast majority of oil produced in the Middle East by country countries around the Gulf uh Iraq, Kuwait, Saudi Arabia, the Emirates, Iran itself, really it all comes through the straight. So when when that's disrupted and this has kind of been the ultimate risk scenario, the ultimate boogeyman that was kind of taught to every oil analyst when they were kind of born into this industry was by the way there's this thing called the straight of her moose. Iran threatens it a lot. If it ever closed, the entire global economy would melt down. And we're like, "Oh, okay. That's a fun, you know, you know, nasty bedtime story to to kind of almost as a thought experiment to get analysts to figure out, okay, how would this break and what would happen?" I never, honestly, James, I never thought I would actually see it closed in my lifetime. It's just too big a thing. And it's not that I didn't think Iran could do it. Obviously, they can. I didn't think a US administration uh like we're seeing with President Donald Trump would push the Iranians to this stage because frankly this is now coming down to a battle of attrition, a battle of patience and the Iranians have been preparing for this for decades. Uh this is like this validates their the entire regime's ideology of resistance and kind of hunkering down. So even if you know you they'll lose layers and layers of leadership which they already have um they're very happy and content to continue pounding and restricting traffic through the strait until the global economy buckles and the US president is forced to retreat. Um but just again to put that number in perspective 20 million barrels uh a day that is a like it's it's over it's hard to overstate that is the rough volume of demand that we lost during the peak of COVID era demand destruction in March and April of 2020 when every plane was grounded when you and I were locked inside. I was at this stage basically still wiping down my Amazon delivery boxes with Lysol wipes cuz we had no idea what was going on. That was the kind of environment that a 20% reduction in global petroleum demand looks like. But now if the straight remains closed, which again a lot of this conversation, we'll talk about all the ways there could be leakage and whether or not it will remain closed and everything else, but if it remains closed, let's just work on that kind of dire scenario just to kind of game what that would look like. You would need to roughly destroy 20 million barrels of demand to balance the market. And you'd need to do you'd need to basically replicate COVID era mobility conditions without a pandemic. and without global lockdowns just through price incentive alone. So the question is at what price of fuel James would you lock back down like in 2020? The number is astronomically high. >> Well, very good points. So now I'm very surprised. We've seen hostilities in the Middle East going on for many decades and you've implied that you've you never saw this happen before. Uh so is that is that a fact like the straight of Hormuz has never been shut down before? >> Correct. It's never been shut and we've actually had more violence in the strait in the past. Uh for instance uh for those that may be aware of something called the tanker wars which is kind of where all of this fear initially kind of began after the Iranian revolution and during the Iran Iraq war in the 1980s. uh you basically started launching the both sides started launching missiles into the Gulf uh in order to destroy the other shipping activity. Um and during that period between roughly the nagger wars were throughout the entire 80s but the most intense period was kind of through the late 80s kind of 84 to 88. Um during that period you had roughly 450 ships that were attacked. uh you had 250 of them were tankers and of those 250 you actually had like a 20% kill rate basically that you know 55 tankers roughly in the estimates I've seen historically were either sunk outright or scuttled and abandoned by crews that isn't where we're at yet but that could be very quickly where we're going but during that period we never stop flowing tankers through the straight now at that stage particularly coming out of the 1970s oil crisis and the oil shocks I think global economies uh were especially vulnerable and even more sensitive to oil prices back then than they are now. Oil demand in western countries has largely kind of you know dipped down plateaued you know basically plateaued to lower since that period. Uh whereas our economies have gotten much bigger. So as a proportion of our spending oil is far less important today than it was back then. But I think particularly for consumer sentiment for inflationary expectations, uh, it still remains as consequential as was back then because you ask your, you know, your average person at the supermarket, what's the price of wholesale wheat or what's the price of wholesale copper? No one can tell you. But ask what the price of gas is and they're going to be acutely aware because they've driven past a dozen signs on the way down the road. which is why back in 2022 when um you know during the crisis of the inflationary spike and following Russia's invasion of Ukraine the Federal Reserve in particular under Jerome Powell was very very sensitive to oil prices and the risk that they were going to unmore inflation expectations. So, you know, while the Fed, as as you well know, uh, typically looks through, you know, energy and food prices, these volatile components of price uh, movement uh, to kind of get a gauge of that underlying inflationary trend. The worry in 2022 and during that spike was that you could untether the inflation expectations and then you really end up back in the 1970s, then you kind of need a vulker-esque shock in order to reset and re-anchor those expectations. Thankfully, they never ended up getting they never ended up flying away because we didn't lose nearly as much oil as we as we thought we were going to of Russia. We lost we thought we're going to lose three million barrels. We only lost a million for a month or two and that was right back to normal. Um we had the SPR release and eventually we basically had COVID zero policies in China that locked down China and basically saved the world from a price spike. So, we avoided that then. But right now, there's no pandemic. There's no CO zero and this is not a 3 million barrel a day. fear of loss. This is a 15 to 20 million barrel a day realized loss. We're already in it already in the Middle East. We've already confirmed that there are more there's more production shut in, not just even throttled through the straight. There's more production shut in in countries throughout the the Persian and Arab Gulf um than more than double the volume that we feared closing in in Russia. So, this is like it's it breaks every historical parallel. It's it sounds alarmist and I and I really like I am not an alarmist. I am just really really alarmed and this is the kind of scenario that I just never thought we'd see speedrun in real time. You're just stating the facts. So I want to talk about this backlog because I've seen I've read many estimates on how many tankers and LG carriers and also cargo ships that are waiting to get through the straight. Uh I saw one report it said over 200. Another one said the numbers over 500. Do you have any insights on how many ships are waiting to get through? >> I think those sound I I think I think those might be roughly the same estimate that it might be roughly like 22 250 on each side. So like 500 total. And I think what we're looking at here is essentially we have big backlogs on both sides. We have the tankers trying to get out filled with crude and products. And those are the ones that it frankly for the record even the ones that aren't trying to transit the straight. Yesterday we saw that uh the Iranians used two naval drones to blow up two tankers that were parked off the coast of Iraq well away from the straight. So Iran is starting to take pot shots of even st you know static and kind of unmoving tankers. So there might actually be almost a like right now there's a fear of going through the straight because you don't want to get shot. But if you start shooting them on that side they might all try and bail at once anyways to get away from the fire. So we'll see how that goes. But there's also a similar amount on the other side. Unladen, empty, waiting to enter. And because of this big pileup, again, there's there's a lot of parallels to CO because again, that's our most recent reference point for acute kind of debilitating supply chain bottlenecks and kind of these things that take time to unwind. Those 250 ships on either side are all going to be, you know, clamoring to get to the same places to unload and load. So then there's going to be lines. Then there's going to be all of these cues on the other side. So even if tanker traffic resumed today, it would take weeks for tanker traffic and tanker uh movements to normalize and likely months for broader markets to normalize because we've already had again we're in day 13 of this so far. That's roughly at give or take 15 20 million barrels a day coming out of the straight. That's an air pocket that's emerged out of the exports. Basically a gap in the normal flow of crude uh that's larger going to Asia. that gap is roughly a quarter billion barrels sized now. That is a lot of air pocket. And I think while we see right now, and as you've noted, the price has been all over the place. We're we're taping this uh was it Thursday morning on the the 12th of March, uh we're sitting right below 100 bucks a barrel in Brent right now, which by the way, I think is I'll never say this, but like this is firmly too low. The price should be far higher given what we've already seen, let alone the risk we still face. Uh but as that continues, I think that's where we're going to head. >> So that's my next question because I was going to say, you know, let's look at a worst case scenario. Let's say this trade is shut down for another two weeks. Where does the oil price go? >> And I would say that's honestly at this stage, that's almost the base case. That's not even the worst case because it doesn't seem like there's going to talk all about the edges of this of why that is. But if we're close for another two weeks, then that then that basically goes from a half a half a billion barrel air gap to a billion barrel air gap. And while I think sentiment and kind of this handicapping of will he won't he, you know, is he taco goinging, is he not, you know, what's happening in this, you know, in the US willingness to continue this this morning, I mean, just literally as we were getting on this on the getting on to film this podcast, um, President Trump basically said, "We need to do what we need to do in Iran. uh you know the oil that's much more important than any impact of the oil price. That doesn't sound like he's willing that he's ready to wrap this up. So in 2 weeks that half a billion or say a quarter billion half a billion and that roughly in 2 weeks you know two weeks ago roughly we still had laden tankers leaving the Gulf. Those tankers probably take a month month and a half to get where they're going in Asia. So the physical pain hasn't started yet. It's coming and everyone knows it's coming but it hasn't hit shore. that half quarter trillion barrel air gap that could become half a trill h half a billion in um in uh two weeks I should say billion not trillion that was a that was a that was a freudian slip in the context um but if this continues that air gap is going to hit land in Asia when that happens that is when you're going to begin drawing 10 plus million barrels a day of crude from regional stocks there's no way that you can begin to kind of massage the narrative you can't jawbone that kind of physical loss. The physical premiums will bid up well past paper markets and will drag the entire market with it. >> Every $10 move in the price of oil is approximately 25 cents at the pumps in the US. And according to u the CAA, the price, the average price across the US right now is $3.50 a gallon. That's up from $2.80 in January. And of course, that depends on what region and state you're into. And in the state of California, it's well over five bucks a gallon. But it's just not the price of gas, it's also the price of diesel which is used by truckers, farmers, railroads. Can you just speak to what's happening with the price of diesel? >> Yeah. And I think so what we've seen coming out even going into this and I think what we saw this most acutely start around 2020 with the refining sorry uh 2022 when the refining crisis and kind of everything kind of co ever since that crisis middle distance markets by which we mean diesel, gas, oil and jet fuel they're all very similar molecules in the kind of refining process. um they have been the tightest part of the of the global refined product market ever since. Um just because we've actually had relatively like historically it's always been gasoline has been kind of the point that you know everyone's focused on but that is gasoline markets are generally pretty well supplied. It's that middle dish slip that's been under supplied. So what we saw back then was you hit you know 80 you know normally crack spreads or refining margins are about $20 a barrel for diesel. In 2022 they hit $80 or more. Um, coming into this crisis, we we were already tight in that market. We were already about $40 crack spreads in anticipation of this and that spiked by 50% after it actually started. So, we're at, you know, $50 $60 a barrel crack spreads for diesel. So, that means even if you're seeing $100 a barrel uh, you know, on crude, you're paying the effective equivalent of $150 $160 a barrel already for diesel. And this crisis is only getting started. your oh your crude's going to continue ratcheting up and those those those middle discs are going to continue ratcheting up and that whole refining complex is getting tighter even faster than the crude oil market I mentioned that kind of air pocket that emerged in that trade to Asia um because of that though for if you're an Asian refiner you're wast your worst case scenario is shutting down and actually continuing to turn everything off because these are massive flowing kind of polymer and chemistry sets you don't want to turn these things off it's very very ownorous to do so and it's a lot of work to get them started back up after it happens. So for them they are trying to extend the runway that they can remain operating at all you know with the loss of this uh this crude feed stock. So let's say they were operating at 90% capacity before they're down to 65% capacity now. So they've already throttled considerably. So that air that air pocket while it's moving and it's taking a while to get to Asia for crude the products has front run have front run that. So that's why you've already seen jet fuel in Asia last week spiked over $200 a barrel equivalent. um this is the kind of situation and that's what's going to make this process even even harder. So the demand destruction we talk about all these things that the market's going to have to reckon with if this continues and again it can't continue yet it seems to be continuing uh if that continues it's going to be the product prices not the crude price that's actually going to drive that demand destruction. So you mentioned you know if you if you drive a like a diesel hemi or if you got a diesel vehicle it's going to be especially painful for you. I joked back in 2020 I late 2021 I traded a uh like a uh a diesel BMW kind of station wagon for a gasoline SUV and I was like it's the best physical trade I've ever made in the market and I still believe that because anyone that has diesel personal diesel exposure right now is going to feel this exceptionally more painfully and obviously diesel is the industrial fuel the kind of the fuel that powers the locomotion of industry so even if you have a gasoline car the truck that gets your produce to the grocery market, uh, that's on diesel. Everything else runs on diesel. And that's going to be the thing. You know, gasoline has the most acute kind of consumer pressure and inflation expectations effect, but the actual structural impact to inflation more structurally is on the diesel side of the equation. >> You mentioned that jet fuel was $200 a barrel in Asia. That's up from how much? >> That would have been, you know, prior to that, that would have been like less than 100. uh like like you you had you had you had jet fuel prices in Asia more than double. Uh if we were talking about let's say $30 $40 crack spreads before this with $60 crude. Yeah, you're sitting at 100 bucks. Now both sides of that have exploded and we're kind of over 200. It's come back down now. And I think part of this is that there was this immediate massive kind of scramble coming out of this past weekend. So part of the issue with jet fuel specifically and why each of these products is going to be different is the consumption and the stock holdings is different than you'd see in diesel or gasoline um or crude for that matter. In jet fuel you typically have smaller overall inventories which means you have less cover should there be a disruption and a lot of these uh airlines won't have entirely hedged their their demand or their consumption of this fuel. And given that this is if they can't get fuel they're going to ground their own planes they all scrap. So basically you had refiners pulling back, not enough stocks on on a margin and all of the consumer base clamoring to try and get into secure supplies in the spot market immediately. That's what pushes up. I think that has eased a little bit. But I think we're going to kind of move in this kind of jerky stepwise pattern why where every week we go through this, we're going to pop higher, drift lower, but it's going to be high. You know, that drift lower is going to be higher than the last step. And I think this is going to be a pattern that repeats every time we have a weekend where this doesn't end. Cuz again, what we've seen time and time again with the Trump administration is they do big, you know, cinematic flashy things and then they wrap it really quickly. We saw this with the attack on Sulammani when when the US killed IRGC commander Sulammani in the beginning of 2020. Big thing. And then quickly back to the drawing board or back to the negotiating table. Then you had uh Venezuela uh when Nicholas Maduro was was kidnapped on a Saturday and by Monday they're like ah we we've got Deli Rodriguez in the government. She's going she's the president. She's our person now and it's fine. And then even last last June during the 12-day war between Israel and Iran. You know the US actually did it first big massive flashy thing with Iran when it dropped 14 bunker busters on three nuclear sites between Fordau, Isvahan and Natans. these uh that was a massive escalation at the time and prices spiked immediately on Monday when when they opened and by the end of the day we ended up Trump basically was like and we have a ceasefire and prices ended down by $10 by the end of that day. That was my mental model going into this because Trump had shown he's entirely fine breaking every kind of normal kind of you know standard of behavior and how the president would normally act in these such situations. But he has shown consistently a lack of appetite for prolonged distracting kind of messy activities that kind of bind his own mobility. He likes to do big things, smack, and then move on to something else. I thought he was going to smack Iran, maybe kill a bunch of the leadership like we saw in the opening salvo when he killed the supreme commander and then I thought he was going to say, you know, victory, victory is ours. Go back and then we're going to now we're going to roll over on Cuba. Now, that was my expectation. And I and it just seems that I think the White House also expected that. They expected some kind of Iranian Deli Rodriguez character to emerge and they grievously misjudged the cultural differences between the ruling kind of Chavista parties in Venezuela and the kind of Islamic Republic of Iran of decades and decades of resistance politics and an entrenchment basically building for this exact moment. So I think the White House did not plan to to for this to kind of be such a quagmire and they clearly have no plan on how to manage the oil impacts now that they're in and they don't really have a plan on how to get out. >> So I always like to look at things from an economic point of view or from a consumer point of view and it sounds to me like it's just a matter of time before the consumer starts getting hit with a lot of fuel sir charges from airlines, from Amazon, anybody else. What are your thoughts on that? >> 100%. So, we're going to see this in the we're going to see this in the the pump price. We're going to see this in search charges. If you can if you can lock in a flight right now, probably a good time to do so. Um, these types of things, this will this will continue happening. But one thing I've been really stressing just in terms of when we think about because again, if the straight remains closed and we need to lose 20 million barrels a day, where is it going to come from? It's likely not going to come from advanced economies. We're going to experience this as kind of acute debilitating, you know, pump price spikes that will sap consumer spending power that will be, you know, the the point of single complaint of every consumer on the street. But fundamentally, we're going to pay it. It's I am extremely price insensitive when it comes to getting my kids to school in the morning. It doesn't matter if it doesn't matter if the price at the pump was $5 a liter. I'm paying it to get the kids to school. Um, much of the world doesn't have that luxury. Um and if you're in a poorer country in the global south, uh developing economies and emerging markets, um even if there are individuals in those economies that can afford those prices and aren't sensitive, the overall average or kind of you know marginal consumer is very very price sensitive at these levels. So they will not be able to afford those prices at the pump and because of that they will not be able to incentivize and attract the necessary imports into their economies in order to make that balancing work. So we will feel acute pump pump price. We will feel kind of that loss of spending power, but we will still fundamentally have fuel. Very likely. There will likely be mixed mixed shortages in different products and whatever, but fundamentally we'll get the product we need cuz we can pay for it. In emerging markets, it's going to manifest as outright physical shortages, which for many economies are going to be like literally a human catastrophe and a deadly proposition. I think the one telling and kind of infamous example from 2022 when the crisis occurred in 2022 was the status of an LG tanker that was contracted for delivery to Pakistan. Um and basically the spot prices in Europe skyrocketed to such insane levels that the contractor the the shipper was basically able to break that fixed contract with Pakistan pay the fee and still make off like with a king's ransom arbing that difference in shipping that Pakistani kind of destined LG cargo to Europe. So again that's the way this market's going to work. That's how this is going to clear in a capitalist kind of open traded system. But that means that for that month you had a you had planned to receive an LG tanker into Pakistan for power generation or fuel or whatever heating and you didn't get it. So again, they can't get to the prices that will be debilitating because they're already debilitated and they're going to have the physical shortages. And I think that's what we're going to see across a whole slew of product markets. >> Let's talk about the SPR. Now the International Energy Agency or the IEA has 32 member nations. It holds 1.8 8 billion barrels of oil in reserves. They just announced the release of 400 million barrels, which is the single largest release ever. Is this significant? Is it going to have any impact on the price of oil? >> It's definitely significant. I think it's to put in context, this is, you know, 400 million barrels. It's twice the size of the second largest release in history, which was in uh which is roughly about 100 million bar 180 million barrels, give or take. uh and that was in 2022 uh during the Russia price spike. This is substantial. Uh what we've seen while the details are still a little spotty as to exactly what to expect and when to expect it. Um energy secretary Chris Wright in the United States has stated that their 172 million barrel a day 172 million barrel release is going to happen over roughly 120 days which would works out to roughly a flow rate of 1.4 million barrels a day. And for context, that's the important part is the flow rate, not the overall volume because the flow rate is essentially what manifests in the market as supply. So if we take that and expand that flow rate to the entire uh kind of release, we're probably talking about somewhere in the ballpark of threeish million barrels a day of supply. That's a lot of supply. We've never seen a strategic release of that size. But again, as the uh IEA executive executive director put it, um this is an unprecedented supply crisis and it warranted an unprecedentedly large SPR release. So it helps. It's the only thing that the uh Western nations can really do in this moment. Um and I think important and and what's shocking to me is that we're we're two weeks into this and this is only being this is only decided yesterday. If back to the point that that that the Trump administration did not have a plan going into Iran for a prolonged period of time if they did any firstear intern at the National Economic Council and National Security Council, they're like we're planning on bombing the crap out of Iran. Um anything you could think on the risks like well probably oil in the straight of Hormuz. Um like oh interesting yeah we should probably plan for that clearly. Like that's like the number one easiest lowhanging fruit to any kind of risk management here. and they didn't do any of it. You hadn't seen a pre-planning on the SPR. You hadn't seen kind of liazing with the IEA or the IEA allied kind of member countries. You hadn't there's so many things that this um this last minute um insurance or reinsurance facility that Treasury launched all this stuff. They're they're you know they're on their back foot. They're they're they're doing this on the fly and that's not how good that's not how good effective policym is is made. Uh and we're seeing the consequences of that right now. So it it overall I would say it's a it's a great step in the right direction. Um it's a band-aid and it's a small beta that 3 million barrels a day versus 15 to 20 million barrels lost a day in hormuz but it's the right thing to do and we should have done it a week or two ago not right now. Earlier you touched on the 1970s and I just want to go through this and provide a little more context for the viewers. But in October of 1973 we had the Yan Kapore war that led to the Arab oil embargo where the price of oil went from $3 a barrel to over $12 a barrel in a matter of months and also inflation exploded. And then in 1979 we had another price shock with the Iranian revolution and the price of oil went from $14 a barrel to $38 a barrel. And over the that 10-year period, the price of oil went from $3 at its lowest to 38 bucks. And during the same time, the p the inflation price went from 3% to 13.5%. Do you see this same sort of scenario unfolding like if things progressively get worse here? >> I think in in rough strokes, yes. I think I think the the magnitude of those kind of proportional gains probably won't be seen because you know going into that the oil market wasn't the same oil market that we experience now. It wasn't a freely traded kind of commodity market. It was largely an internally kind of secured supply chain market and the price was largely a tax balancing factor for companies like Exxon and Chevron, what were called at the time the seven sisters, the seven major integrated oil companies. They essentially produced oil in you know the Persian Gulf or wherever else and they basically traded it to their own refineries and that price was largely a balancing factor for their own books and the price used to pay the producing countries like Saudi Arabia as an example for royalties for their for their production. So they actually had an incentive to keep that price kind of artificially low and they did. So they paid they charged far higher prices for products than you would have assumed all else equal than the price of crude going in. So all of this happened and part of what what happened during both the formation of OPEC in the late60s and then the then the Arab OPEC oil embargo in ' 73 and then Iran in 79 you know forward um this was all kind of that system beginning to unravel in rapid fashion and the other thing I should note here is that while you know the current crisis in many ways is already worse than the 70s that in the 70s a large part of it was that you know Arabopek nations said we're going to have an embar cargo on shipping oil to basically the United States and the UK and anyone associated with Israel. Um, similar in some ways to now with Iran, but that was kind of the it was more about a block a certain directional blockage rather than overall physical laws. And what we've seen actually over the past, let's say 5 years, is that when you have those types of physical dislocations, but the barrels are still in the market somewhere, the market's really really good at solving and kind of arbing those those volumes and those barrels to where they need to go. What we're seeing in the current situation is not a directional kind of strategic withholding. It's a complete dead weight loss in the market. And that's much harder it to to kind of balance. We do have lots of stocks. We do have strategic stocks. We have lots of things that we can do around the margins, but I think this is going to basically take every every ounce of flex the oil market has. And the risk is that you do that too much and it just snaps. And then it's going to take a long time to kind of rebuild and unwind everything in the middle. Which is why again like I can't believe we're already two weeks into this, James. Like I like I never in my in my life would I have expected us to come this far. And now it just feels like how do we get out? How does Trump declare victory without looking like he lost? Um, I don't think Trump at this stage is going to want to look like Carter, right? This is this is his risk. Um, a deeply unpopular war in the Middle East that you lose really quickly. There can be like no greater kind of harm fowl for a US president, particularly that came alongside massive pump prices and spikes at the pump. And I think that's the calculus Trump's trying to make is like how can I how far can I go? How quickly can I get to any stage where I can declare even a modicum of like TV victory speech? Um, and how long is it going to take? Because people are talking about like there are, you know, Sentcom's talking about like preparations and additional advisors to continue through September. Um, that is a really long time for this crisis to continue and I don't think it can. Uh, I my fundamental bias is that this is going to unwind at some point. Uh, and it's going to be Trump that declares it so. But then the question becomes there are three parties in this war, not just Trump. So even if Trump says I'm done, is Netanyahu done? I think Israel has a far longer kind of existential vested interest in doing as much damage to the Iranian Republic as possible. And from the Iranian side, what's their incentive? Well, they're going to keep bombing and basically putting that finger, that thumb on this very sensitive pressure point in the global economy. They're going to do that for as long as they are getting bombed and then potentially even longer because what they're going to do is you know even if we don't have a nuke we can take down the global economy through the straight of formulas and they want to remind people of that and reestablish that deterrence and I think that's the worry is that I think that the most movable kind of discretionary actor in this is Trump because he can decide at any time to stop and prices will probably drive him to do so. But then if he stops, can he convince Israel to stop? And if he can convince Israel to stop, can he when can he convince Iran to actually open the street? And what would he have to give them to induce that behavior? And no one knows the answer to that. >> That's a very good point. What What's the bargaining chip here, right? Like there's always quit proquo. So the all-time high for WTI was $147 in 2008. And when adjusted for inflation, that's $228 in today's dollars. But do you see the price of oil going there? >> I do >> sometime this year. >> I do. I Here's the thing. I think we're going to get there pretty quickly if this remains like if if we're closed for two, three, four weeks, I think we could be there by the end of April. Um that's just how large. And again, once that air pocket hits Asian markets and those inventories start drawing at that kind of rate, the market's going to have to bid this up. It's going to have to destroy demand. Otherwise, those inventories are just going to like it's like a literal like a you've pulled the plug out of the tub. Um, you are getting some offsets like there is some flow coming out of the East West pipeline in Saudi Arabia. We've seen at least thus far normal flows out of the out of the port the industrial port of Yanbu, which is the Saudi port in the Red Sea. That was normally at like let's say two million barrels a day of flow. That's looking more like four million barrels a day. Now it could get up at to five. So that's some offset. But let's say that reduces the hit from 20 million barrels to again optimistically 15. That is still something that is a a hole too large in the global oil market to actually close through any normal mechanisms which is where we're going to end up in this point where if if prices right now cannot if prices are unwilling if futures prices are unwilling to bring us to the level that will either incentivize some supply out of somewhere again we could like US supply is going to have to grow here but it's going to take four to six months to do so and we need the price signals now to induce and incentivize that behavior for the future and so far we just aren't seeing those prices in any real way. So, the longer this goes on, the more that in congruence between kind of this hope and this kind of again, if I was a betting person, I think like I think this is going to end at some point very soon because the president has to end it, but we're not there yet. >> So, we've seen two major price shocks this year. First in Venezuela and now the closure of the straight. What does China do? Because a lot of the oil coming out of Iran and also Venezuela was going to China. What do they do now? >> Yeah. Yeah. So I think there's two different elements here. I think there's the question of the sanctioned oil that was going to China. So this is Russia, Iran and Venezuela. And then there's the question of the kind of broader loss of the straight of the straight for Arab oil flow. Oh, let's start with the sanction side because I think one thing, one talking point I've been trying to push back on, uh, when I've seen the kind of, you know, there's always this tendency because Trump does so many historic, arguably crazy things that there's always this attempt to kind of ascribe some kind of other grand strategy. Surely he's doing this because surely it, you know, he can't not have had a plan going into an Iran war. Surely, like we just, this is how conspiracy theories are born, right? because like you know it's easier to accept kind of a malevolent plan than the lack of a plan at all and I think that's what some people have a tendency to do with this China and this uh sanctioned oil stuff but the thing I want to remind people is that because yes China was largely the sole importer of Iranian crude and Venezuelan crude and the and the largest single offtaker of total Russian crude as well very clearly Russia or China did not care about violating US sanctions um and that's probably a problem for Washington. But when Trump is saying this is all about kind of removing China's cheap oil supply, the important thing to remember is that the oil supply was only cheap for China because of Trump in the first place. He imposed those sanctions on Iran and Venezuela and Russia that basically forced China into that final kind of consumer of last resort for their barrels and got rid of all their competition. So if Trump didn't reimpose sanctions on Iran and and scuttle the JCPOA in 2019, if Trump didn't impose uh heavy sanctions uh and kind of design sanction designations on Pavvesa uh um Venezuela's natural oil producer in 2019, those barrels would have kept going to US ports to other other ports. And again, I'm not saying that sanctions are wrong because they are a tool states craft and I think in isolation they could be very useful uh in in various things. But then you can't say like, oh, we're taking away China's cheap oil. It's like you gave them the oil in the first place that was cheap. So it's kind of this like sure yes, but there was a reason that it was there in the first place. But I will say to this question of and then China is always able to get alternative supplies if they're available. There was just it was happy to pay really really cheap prices if it could get away with it. But now we go to this kind of closure of the straight of Hormuz and the overall loss of flow to the Middle East. That's an existential crisis for China because the barrels that China would have bought to offset Venezuela loss or Iran loss or whatever that would have come from the Middle East and those are the barrels that are actually currently trapped. One final point here that I'm going to say is that the irony of this kind of point around you know again people have said like this is about Trump clamping down on Iran's oil trade or Trump's going to take you know Iran's oil like they took Venezuela's oil. The only major exporter in the region that continues to flow barrels of the straight of Hormuz is Iran itself. In in certain weeks you've actually seen increases in the flow of Iranian oil out of Car Island in plain view of everyone in the region, but they're like some of the only barrels are getting out. So again, there's this inongruence, this inconsistency between all the talking points coming out of Washington and what's actually physically happening on the ground. And remind me again, Iran produces is it 4 to 5 million barrels a day. >> So that's it maximum kind of historic capacity right now. It's producing more like two something uh and it exports between 1 and a half and 2 million barrels a day typically. >> And if the US is allowing Iran to move oil out of the straight, why would they allow that? >> It's a great question because it doesn't seem to make a lot of sense. Um I there's a couple reasons. one um Trump is acutely concerned with the price of oil um and any loss of any like further contributing to tighter oil flows out of the Hormuz kind of goes against that. So yes, it's still feeding the Iranian regime with funds to continue the war, but it is at least on the margin keeping keeping markets slightly looser than they would otherwise be. The other thing is yesterday the IRGC put out a note based or uh at a a proclamation let's say and we're all just doing proclamations these days. Um so they put out a proclamation saying if Trump or Israel or whomever was to take out or otherwise kind of capture Car Island and Car Island for those that aren't aware is the island that serves as the primary staging point for the vast like 85 90% of of Iranian exports comes through this one island called Car Island. Um, and that island was occupied many, many times by the way during the tanker wars. But so in this episode, uh, the IRGC said if US, Israel, whomever takes out or occupies the island, then Iran is going to start targeting other port infrastructure in the region. So I was saying earlier so far they haven't been targeting, at least to the degree they could, some of the kind of more durable uh, kind of facilities in the region. If Iran does that, that's when this goes from my my current framework for this is that we grind kind of $2 to $3 a barrel higher every day. Um the every day this goes on, we're going to get choppy, but structurally we get $2 to $3 a barrel tighter every day. That's going to go through step changes. If we get a big attack on a facility, on a major port, on a major oil field, that can go, you know, that goes jump in one, you know, 10 bucks in a day and then we continue that $2 to $3 a barrel grind higher from those levels. So that I think is is the remaining kind of point of concern and I think why Trump hasn't attempted to go after those uh those Iranian exports at least yet. >> President Trump and President Xi meet on March 31st in Beijing for a 3-day summit. Do you think the actions in Venezuela and also Iran are strategic moves ahead of this meeting? Do you think the US is trying to show China that hey, we're in we're in control here? >> Maybe. Maybe. Um but I think in some ways Beijing has been preparing for this as well. Um one of the big storylines over the past couple years has been how how voraciously Beijing has been building up its own strategic stocks. So while the US stocks have been generally declining and both both because of the Biden releases but even before that you had congressionally mandated sell-offs of the SPR to basically paper over budget uh deficits in various points. So that was going to decline with or without Biden and basically we're back to roughly where we would be today with even if we didn't have the 2022 price shock because again those mandated sales during that period China was going the exact oppos opposite direction. In the latter half of last year, you had uh more than a million barrels a day going into or sorry, in the first half of last year, more than a million barrels a day going into Chinese strategic stocks. Now, obviously is the moment where those are going to get tapped. Now, that is going to help the Chinese market, but we're already seeing a way in which Beijing has basically blocked off any of the way that could help the global market because like in 2022, Beijing and and Chinese independent refineries, the so-called teapotss uh were largely a major source of relief particularly in that middle dish that diesel market spike in 2022. They ramped up aggressively their exports in the winter of that year and helped kind of over and helped kind of ease that crisis. Already Beijing has banned the export of refined products uh in this crisis. So even if they did release SPR stocks, it would be for domestic domestic markets uh and you wouldn't see the same relief externally, which is going to be a problem given that we're staring at a very similar crisis in Middle East. >> Do we have any idea how large their SPR is? It's >> over a billion barrels. um we don't know exactly and I think again the the exact definition of Chinese strategic stocks is also a little wonky cuz some of them are explicit stateowned stocks and some of them are you know commercial stocks held by stateown or or mandated stocks that are held by stateowned enterprises so it's kind of like a quasi strategic stock they had a a um last year they had a a policy change that required what they called commercial strategic stocks so again I would say overall I basically treat any stock any crude stock in China that doesn't behave like the rest of global stocks. It's kind of more a it's not so much what it is and who owns it as to the character of how that flow behaves. When you look at coastal stocks by like the major refineries that we can see, they basically look exactly like US stocks. They're low right now. They kind of rise and fall with everything else. But inland stocks very very high over a billion barrels. >> And so China has a billion barrels. How does that compare to the US? >> US is about 400 something right now. um across the entire OECD and the IEA members, we're looking at roughly 1.2 billion barrels of stateowned, mandated, held crude and product stocks. Um that'll help, but we're talking basically China has basically the same amount as the and that's just crude on China's side. We actually don't know their product stocks uh very well because they don't publish data on them and you can't you can't see the the tanks in the same way you can see crude because they don't have the floating tanks. So we're a little bit blinder on the product stocks, but they have as much crude stocks as almost the entire IEA member states have entirely across crude and products. >> Russia is the I believe the second or third largest producer of oil in the world, producing somewhere between 9 to 10 million barrels a day. Are they the big winner in all of this? >> They are absolutely the big winner. And I've been really stressing this point that Moscow has far and away taken more and gotten more benefit out of this war than any other single participant or other single producer. And the reason is to the White House's credit, I think I've been pretty critical of the White House and Trump administration thus far. To their credit, they were doing a very very good job at tightening uh the noose around the Russian oil trade over the past year. They had between again I had mentioned like India is the largest importer of Seabor crude uh out of Russia. They used to import nothing. You war in Ukraine. All of a sudden the price cap and the EU ban on imports and Russia in India emerged as this major buyer of discounted Russian crude. You know as of mid last year they were importing more than 2 million barrels a day of Russian crude. Again largest seaborn importer. In October of last year the Trump administration uh imposed blocking sanctions on Ros and Luca which are the two largest exporters of Russian crude. So that took a big chunk out. And then the Trump administration imposed punitive tariffs on India due to the import of this of this Russian oil and basically said like get off the oil or you're going to have this this 25% US tariff on you. Um that combined action reduced Indian imports of Russian crude from around 2 million barrels a day say beginning of October to around 1 million barrels a day in January. That's a huge change. And you saw discounts born by Russian crude explode upwards of 30 plus dollars a barrel under Brent. And you saw Russian crude on water rise really quickly because those barrels had nowhere to go and they were kind of lingering around waiting for a discounted sanctioned buyer. Um now after this war started, every single Asian buyer is clamoring for those Russian barrels. Uh you've even had Eastern European countries trying to pressure the EU to reduce sanctions on Russia to allow them to import oil and products through the Dusba pipeline which is the major pipeline that connects Russia to the European market particularly through Eastern Europe. Um and I and you've even seen the White House and the Treasury issue a sanctions an explicit sanctions waiver for India to import what was previously banned and sanctioned Russian imports. So Russia is far and away the the biggest beneficiary of this and any of the pain that we saw imposed them over the last year has basically already been unwound in the past two weeks. >> Rory, everything I do on this channel is focused on investing and I guess I want to look at it from my point of view. Um I'm always thinking about how how can I make money or how can I minimize my losses? And if I hear you right, the message you're you're telling me is you got to get long energy. You got to be long oil, you got to be belong gas. Is that correct? >> Yeah, I think so. I I I tend to on my side, I tend to try and stick to the commodity market, not go too much into the equity side or anything else. But I think what we have seen is that so far equities have generally underresponded to this on the producer side. You've seen some uplift, but in some Canadian names have actually been kind of down through parts of the crisis. Uh I think that's obviously one way to play this. Um but I do think that there is also a risk here. I think while it's exceptionally I think I've never been more bullish in my entire career on the immediate spot market impacts there are bigger questions down the line again if this keeps going recessionary would be optimistic we're talking depressionary conditions energy stocks don't do well during those during those crises right so I think that's a risk on the downside you need to watch for also again back in I mentioned 1970s you saw demand destruction during that period that we had never seen in in in history before this is again I think all else equal before and after this crisis. Asian markets in particular are going to be consuming less oil in 10 years than they would have going into this crisis. Now you're going to have major even both consumer backlash but also government strategic backlash to this level of dependence. And they're like well we always knew this was a risk but we never like myself I never thought it would actually happen. Now that it has, they're going to begin trying to ensure against that risk in the future, which is largely about diversifying away from that dependence and the demand on fossil fuels and oil in particular. So I think there's a lot there's a mixed element here, but I would say in the immediate term, if you can get exposure to, you know, higher crude prices over the next 6 months, I still don't think the current market price and the current curve is incorporating even the damage that has already been done to the system, let alone the risk that we face to the upside. So, I I see the the the risks to oil prices definitively tilted to the upside over the next month at least. >> Yeah, it's going to be interesting to see these economic numbers that come out here in the next few months because inflation has been very resilient even before oil ripped to call it 90 or 100 bucks a barrel. It was hanging around 3% and it's definitely going to have a big impact especially when the consumer starts bearing more of the brunt of these higher prices. That's exactly right. And I think and again I think like to your to your point you mentioned kind of you know inflation and and central banking um if there was if there was a hope that central banks were going to be cutting I think you know that's that's off the table now at least for at least for a while. So if you're in the position of having to reorgge your home uh that's going to be an issue for you and I think that's best case scenario of not you know of slowing the pace of of cuts. And I think we could be in a situation if this continues that we're going to have to go back to a point of hiking in order to kind of try and contain some of that pricing pressure and again back to that unmuring of inflation expectations at the consumer level. Um that's obviously a major problem and I think again supply shocks are a central banker's worst sniper and this is like the mother of all supply shocks because it it particularly if you're a dualmandate central bank like the Fed, it's going to push both of your your indicators, both of your targets in very different directions. So then you have to choose which one do you prioritize and unfortunately as we learned even in 2022 there's no easy answer because there's no stipulated legislated priority of those targets it's both of them are important so then how do you kind of balance that and at the time the Fed chose prices I think that was probably the right right call but if this is longerlasting and and we and let's say last in 2022 we didn't get the rollover of co zero in China or wherever else there's no telling of how how that would have gone if that kind of policy structure would have continued. I want to ask you one more question before we wrap it up. The US is the world's largest oil producer. They produce 13 to 14 million barrels a day. 60% of that comes from shale. When does shale production start dropping off? So actually I think so prior to this one of the really interesting trends was that we actually in both my forecasts and a kind of official forecast from the the energy information administration the kind of statistical arm of the of the department of energy in the United States. Everyone started seeing that US shale was plateauing this year that we basically had um that it was going to flatline this year and begin to decline outright next year. that is likely on hold now because these prices are going to provide a major lifeline to those producers to begin lifting. So the Dallas Federal Reserve typically puts your kind of like average incremental point of kind of your incentive price for new production call it low to mid60s on a WTI basis. We're well above that now and you can hedge for the next six months well above that. So I think at that level you're going to begin to see growth again. The qu the issue is that it's going to take four to six months for that price signal to turn into realized production again. And again, if we're six months into this, we're in a very very different global market and that's going to be deeply deeply kind of um volatile. Um I think the other thing you're going to see is that you are also seeing because again Trump has heard the US's largest oil exporter and that's just crude oil. you say the 13 14 million you actually have 6 7 8 million barrels a day of natural gas liquids like propane everything else and refined products overall the US is actually pretty on a apples apples basis pretty secure on that basis the problem is regionally you have all of these dislocations you know more exports of the US GF coast imports into the east and west coast the Gulf Coast can't service those imports because of the Jones Act um so you have all this necessary trading and one of the things that Trump has been reportedly musing and the B administration used in late 2022 was a ban on the export of refined products from the United States. If that happened, we end up in a deeply kind of confusing and dislocated market. I mentioned earlier that in this even in this worst scenario, we all pay awfully high prices. But things continue more or less as they are. If you begin banning exports or go full Nixon and cap prices at the pump, that's how you get shortages in advance markets. That would be a policy choice. we would be able to bear that economic cost. But I think it begins like shortages are harder to show in a chart on Fox News business and I do worry that there's a little bit of a prioritization of what can be shown easily in kind of a media hit. >> Well, Rory, this has been a great discussion. I want to thank you very much for spending time with us today. We got to do it again in a few months. Okay. To uh get >> Yeah. No, I'll come I'll come into the studio then. >> So, uh now if somebody wants to follow you online and check out some of your research, where can they go? >> Yeah. So I uh you can follow all of my work at commodityontext.com which is where I publish uh you know typically two reports a week. Um obviously right now it's a bit crazier. Um and then additionally to that you have uh all of my work. I kind of tweet in real time on on Twitter or X now rory_jston. And I encourage you to follow along and and kind of uh join me on this deep deep chaotic journey that I never thought I'd be on. >> And you also have a podcast. >> I do have a podcast as well. It's called the Oil Groundup podcast. It's uh through the Clear Commodity Resource Network. So, you can follow them as well and the Clear and the Oil Groundup podcast. Uh and yeah, follow us and uh and follow along. I should have a I'm filming a podcast for my own podcast immediately after this, James. So, it's back to back to back on our end. >> Once again, thank you. >> Thanks for having me, James.
$200 Oil and Impact on Global Economy | Rory Johnston and Jimmy Connor
Summary
Transcript
Rory, thank you very much for joining us today. One of the things I try to do on this podcast is speak to experts like yourself on topics which influence both the economy and also financial markets. And today we're going to do a deep dive on oil. And for those who aren't familiar with you or your firm, Commodity Context, why don't you tell us a little bit about your firm? >> Yeah, thanks for having me on, James. Uh, so Commodity Context is my independent oil market research product. Uh it's hosted on Substack and I have three main types of research. I publish my weekly which is oil context weekly every Friday at close of business after the commitments for traders report comes out. Uh so that you get nice fresh uh views on kind of latest positioning in the market. Uh I have three different monthly reports on global oil balances, North American oil detail and OPEC policy and production. And then finally on I have thematic research that I kind of typically do two to three of those a a month on kind of various topics. The last one as I was just saying before we started filming was on all everything happening in Venezuela and until what what's been happening right now in Iran broke out. I was traveling in Calgary and Ottawa talking all about what Venezuela meant for the Canadian oil patch. So it's been a crazy first quarter. Uh definitely busiest first quarter of my career to date. Uh so let's talk about it. Well, I cannot think of another commodity which has a larger impact on the economy than the price of oil is used in every facet of our lives. Not just gas for cars, but also diesel for tractor trailers and trains and Jeff fuel for planes. 15% of all oil is used to produce prochemicals such as plastics, synthetic fibers, detergents, and even pharmaceuticals. And it's one of the largest markets in the world when it comes to trading physical. The physical market is about $8 billion daily. When you look at the futures market and the derivatives market, it's over $200 billion. So quite huge. And we've seen a massive or some crazy volatility here year to date in the price of oil. And it started the year at $60 a barrel. I can't believe it was that low, but anyways, that's where it started the year and now it's significantly higher. I'm not even going to throw it a price because it changes every five minutes. But one of the reasons why we've seen so much volatility is because of what's happening in the Middle East and this straight of Hormuz. And on February the 27, there was 141 ships that passed through the straight. And then on February the 28th when the war broke out, it's virtually zero. So maybe you can we can just start right here and tell us about the Straight of Hormuz and why it is so important to the transportation of oil. >> Yeah. So the transform moves is often referred to as the world's most important maritime choke point and I think this is showing why that is the case. Uh just for perspective what we're talking about the flow through the straight of four moves is roughly 20 million barrels a day and you know in normal times rounding that's roughly a fifth of total global oil supplies. That is a truly stupendous volume of oil and it's the only way that the vast majority of oil produced in the Middle East by country countries around the Gulf uh Iraq, Kuwait, Saudi Arabia, the Emirates, Iran itself, really it all comes through the straight. So when when that's disrupted and this has kind of been the ultimate risk scenario, the ultimate boogeyman that was kind of taught to every oil analyst when they were kind of born into this industry was by the way there's this thing called the straight of her moose. Iran threatens it a lot. If it ever closed, the entire global economy would melt down. And we're like, "Oh, okay. That's a fun, you know, you know, nasty bedtime story to to kind of almost as a thought experiment to get analysts to figure out, okay, how would this break and what would happen?" I never, honestly, James, I never thought I would actually see it closed in my lifetime. It's just too big a thing. And it's not that I didn't think Iran could do it. Obviously, they can. I didn't think a US administration uh like we're seeing with President Donald Trump would push the Iranians to this stage because frankly this is now coming down to a battle of attrition, a battle of patience and the Iranians have been preparing for this for decades. Uh this is like this validates their the entire regime's ideology of resistance and kind of hunkering down. So even if you know you they'll lose layers and layers of leadership which they already have um they're very happy and content to continue pounding and restricting traffic through the strait until the global economy buckles and the US president is forced to retreat. Um but just again to put that number in perspective 20 million barrels uh a day that is a like it's it's over it's hard to overstate that is the rough volume of demand that we lost during the peak of COVID era demand destruction in March and April of 2020 when every plane was grounded when you and I were locked inside. I was at this stage basically still wiping down my Amazon delivery boxes with Lysol wipes cuz we had no idea what was going on. That was the kind of environment that a 20% reduction in global petroleum demand looks like. But now if the straight remains closed, which again a lot of this conversation, we'll talk about all the ways there could be leakage and whether or not it will remain closed and everything else, but if it remains closed, let's just work on that kind of dire scenario just to kind of game what that would look like. You would need to roughly destroy 20 million barrels of demand to balance the market. And you'd need to do you'd need to basically replicate COVID era mobility conditions without a pandemic. and without global lockdowns just through price incentive alone. So the question is at what price of fuel James would you lock back down like in 2020? The number is astronomically high. >> Well, very good points. So now I'm very surprised. We've seen hostilities in the Middle East going on for many decades and you've implied that you've you never saw this happen before. Uh so is that is that a fact like the straight of Hormuz has never been shut down before? >> Correct. It's never been shut and we've actually had more violence in the strait in the past. Uh for instance uh for those that may be aware of something called the tanker wars which is kind of where all of this fear initially kind of began after the Iranian revolution and during the Iran Iraq war in the 1980s. uh you basically started launching the both sides started launching missiles into the Gulf uh in order to destroy the other shipping activity. Um and during that period between roughly the nagger wars were throughout the entire 80s but the most intense period was kind of through the late 80s kind of 84 to 88. Um during that period you had roughly 450 ships that were attacked. uh you had 250 of them were tankers and of those 250 you actually had like a 20% kill rate basically that you know 55 tankers roughly in the estimates I've seen historically were either sunk outright or scuttled and abandoned by crews that isn't where we're at yet but that could be very quickly where we're going but during that period we never stop flowing tankers through the straight now at that stage particularly coming out of the 1970s oil crisis and the oil shocks I think global economies uh were especially vulnerable and even more sensitive to oil prices back then than they are now. Oil demand in western countries has largely kind of you know dipped down plateaued you know basically plateaued to lower since that period. Uh whereas our economies have gotten much bigger. So as a proportion of our spending oil is far less important today than it was back then. But I think particularly for consumer sentiment for inflationary expectations, uh, it still remains as consequential as was back then because you ask your, you know, your average person at the supermarket, what's the price of wholesale wheat or what's the price of wholesale copper? No one can tell you. But ask what the price of gas is and they're going to be acutely aware because they've driven past a dozen signs on the way down the road. which is why back in 2022 when um you know during the crisis of the inflationary spike and following Russia's invasion of Ukraine the Federal Reserve in particular under Jerome Powell was very very sensitive to oil prices and the risk that they were going to unmore inflation expectations. So, you know, while the Fed, as as you well know, uh, typically looks through, you know, energy and food prices, these volatile components of price uh, movement uh, to kind of get a gauge of that underlying inflationary trend. The worry in 2022 and during that spike was that you could untether the inflation expectations and then you really end up back in the 1970s, then you kind of need a vulker-esque shock in order to reset and re-anchor those expectations. Thankfully, they never ended up getting they never ended up flying away because we didn't lose nearly as much oil as we as we thought we were going to of Russia. We lost we thought we're going to lose three million barrels. We only lost a million for a month or two and that was right back to normal. Um we had the SPR release and eventually we basically had COVID zero policies in China that locked down China and basically saved the world from a price spike. So, we avoided that then. But right now, there's no pandemic. There's no CO zero and this is not a 3 million barrel a day. fear of loss. This is a 15 to 20 million barrel a day realized loss. We're already in it already in the Middle East. We've already confirmed that there are more there's more production shut in, not just even throttled through the straight. There's more production shut in in countries throughout the the Persian and Arab Gulf um than more than double the volume that we feared closing in in Russia. So, this is like it's it breaks every historical parallel. It's it sounds alarmist and I and I really like I am not an alarmist. I am just really really alarmed and this is the kind of scenario that I just never thought we'd see speedrun in real time. You're just stating the facts. So I want to talk about this backlog because I've seen I've read many estimates on how many tankers and LG carriers and also cargo ships that are waiting to get through the straight. Uh I saw one report it said over 200. Another one said the numbers over 500. Do you have any insights on how many ships are waiting to get through? >> I think those sound I I think I think those might be roughly the same estimate that it might be roughly like 22 250 on each side. So like 500 total. And I think what we're looking at here is essentially we have big backlogs on both sides. We have the tankers trying to get out filled with crude and products. And those are the ones that it frankly for the record even the ones that aren't trying to transit the straight. Yesterday we saw that uh the Iranians used two naval drones to blow up two tankers that were parked off the coast of Iraq well away from the straight. So Iran is starting to take pot shots of even st you know static and kind of unmoving tankers. So there might actually be almost a like right now there's a fear of going through the straight because you don't want to get shot. But if you start shooting them on that side they might all try and bail at once anyways to get away from the fire. So we'll see how that goes. But there's also a similar amount on the other side. Unladen, empty, waiting to enter. And because of this big pileup, again, there's there's a lot of parallels to CO because again, that's our most recent reference point for acute kind of debilitating supply chain bottlenecks and kind of these things that take time to unwind. Those 250 ships on either side are all going to be, you know, clamoring to get to the same places to unload and load. So then there's going to be lines. Then there's going to be all of these cues on the other side. So even if tanker traffic resumed today, it would take weeks for tanker traffic and tanker uh movements to normalize and likely months for broader markets to normalize because we've already had again we're in day 13 of this so far. That's roughly at give or take 15 20 million barrels a day coming out of the straight. That's an air pocket that's emerged out of the exports. Basically a gap in the normal flow of crude uh that's larger going to Asia. that gap is roughly a quarter billion barrels sized now. That is a lot of air pocket. And I think while we see right now, and as you've noted, the price has been all over the place. We're we're taping this uh was it Thursday morning on the the 12th of March, uh we're sitting right below 100 bucks a barrel in Brent right now, which by the way, I think is I'll never say this, but like this is firmly too low. The price should be far higher given what we've already seen, let alone the risk we still face. Uh but as that continues, I think that's where we're going to head. >> So that's my next question because I was going to say, you know, let's look at a worst case scenario. Let's say this trade is shut down for another two weeks. Where does the oil price go? >> And I would say that's honestly at this stage, that's almost the base case. That's not even the worst case because it doesn't seem like there's going to talk all about the edges of this of why that is. But if we're close for another two weeks, then that then that basically goes from a half a half a billion barrel air gap to a billion barrel air gap. And while I think sentiment and kind of this handicapping of will he won't he, you know, is he taco goinging, is he not, you know, what's happening in this, you know, in the US willingness to continue this this morning, I mean, just literally as we were getting on this on the getting on to film this podcast, um, President Trump basically said, "We need to do what we need to do in Iran. uh you know the oil that's much more important than any impact of the oil price. That doesn't sound like he's willing that he's ready to wrap this up. So in 2 weeks that half a billion or say a quarter billion half a billion and that roughly in 2 weeks you know two weeks ago roughly we still had laden tankers leaving the Gulf. Those tankers probably take a month month and a half to get where they're going in Asia. So the physical pain hasn't started yet. It's coming and everyone knows it's coming but it hasn't hit shore. that half quarter trillion barrel air gap that could become half a trill h half a billion in um in uh two weeks I should say billion not trillion that was a that was a that was a freudian slip in the context um but if this continues that air gap is going to hit land in Asia when that happens that is when you're going to begin drawing 10 plus million barrels a day of crude from regional stocks there's no way that you can begin to kind of massage the narrative you can't jawbone that kind of physical loss. The physical premiums will bid up well past paper markets and will drag the entire market with it. >> Every $10 move in the price of oil is approximately 25 cents at the pumps in the US. And according to u the CAA, the price, the average price across the US right now is $3.50 a gallon. That's up from $2.80 in January. And of course, that depends on what region and state you're into. And in the state of California, it's well over five bucks a gallon. But it's just not the price of gas, it's also the price of diesel which is used by truckers, farmers, railroads. Can you just speak to what's happening with the price of diesel? >> Yeah. And I think so what we've seen coming out even going into this and I think what we saw this most acutely start around 2020 with the refining sorry uh 2022 when the refining crisis and kind of everything kind of co ever since that crisis middle distance markets by which we mean diesel, gas, oil and jet fuel they're all very similar molecules in the kind of refining process. um they have been the tightest part of the of the global refined product market ever since. Um just because we've actually had relatively like historically it's always been gasoline has been kind of the point that you know everyone's focused on but that is gasoline markets are generally pretty well supplied. It's that middle dish slip that's been under supplied. So what we saw back then was you hit you know 80 you know normally crack spreads or refining margins are about $20 a barrel for diesel. In 2022 they hit $80 or more. Um, coming into this crisis, we we were already tight in that market. We were already about $40 crack spreads in anticipation of this and that spiked by 50% after it actually started. So, we're at, you know, $50 $60 a barrel crack spreads for diesel. So, that means even if you're seeing $100 a barrel uh, you know, on crude, you're paying the effective equivalent of $150 $160 a barrel already for diesel. And this crisis is only getting started. your oh your crude's going to continue ratcheting up and those those those middle discs are going to continue ratcheting up and that whole refining complex is getting tighter even faster than the crude oil market I mentioned that kind of air pocket that emerged in that trade to Asia um because of that though for if you're an Asian refiner you're wast your worst case scenario is shutting down and actually continuing to turn everything off because these are massive flowing kind of polymer and chemistry sets you don't want to turn these things off it's very very ownorous to do so and it's a lot of work to get them started back up after it happens. So for them they are trying to extend the runway that they can remain operating at all you know with the loss of this uh this crude feed stock. So let's say they were operating at 90% capacity before they're down to 65% capacity now. So they've already throttled considerably. So that air that air pocket while it's moving and it's taking a while to get to Asia for crude the products has front run have front run that. So that's why you've already seen jet fuel in Asia last week spiked over $200 a barrel equivalent. um this is the kind of situation and that's what's going to make this process even even harder. So the demand destruction we talk about all these things that the market's going to have to reckon with if this continues and again it can't continue yet it seems to be continuing uh if that continues it's going to be the product prices not the crude price that's actually going to drive that demand destruction. So you mentioned you know if you if you drive a like a diesel hemi or if you got a diesel vehicle it's going to be especially painful for you. I joked back in 2020 I late 2021 I traded a uh like a uh a diesel BMW kind of station wagon for a gasoline SUV and I was like it's the best physical trade I've ever made in the market and I still believe that because anyone that has diesel personal diesel exposure right now is going to feel this exceptionally more painfully and obviously diesel is the industrial fuel the kind of the fuel that powers the locomotion of industry so even if you have a gasoline car the truck that gets your produce to the grocery market, uh, that's on diesel. Everything else runs on diesel. And that's going to be the thing. You know, gasoline has the most acute kind of consumer pressure and inflation expectations effect, but the actual structural impact to inflation more structurally is on the diesel side of the equation. >> You mentioned that jet fuel was $200 a barrel in Asia. That's up from how much? >> That would have been, you know, prior to that, that would have been like less than 100. uh like like you you had you had you had jet fuel prices in Asia more than double. Uh if we were talking about let's say $30 $40 crack spreads before this with $60 crude. Yeah, you're sitting at 100 bucks. Now both sides of that have exploded and we're kind of over 200. It's come back down now. And I think part of this is that there was this immediate massive kind of scramble coming out of this past weekend. So part of the issue with jet fuel specifically and why each of these products is going to be different is the consumption and the stock holdings is different than you'd see in diesel or gasoline um or crude for that matter. In jet fuel you typically have smaller overall inventories which means you have less cover should there be a disruption and a lot of these uh airlines won't have entirely hedged their their demand or their consumption of this fuel. And given that this is if they can't get fuel they're going to ground their own planes they all scrap. So basically you had refiners pulling back, not enough stocks on on a margin and all of the consumer base clamoring to try and get into secure supplies in the spot market immediately. That's what pushes up. I think that has eased a little bit. But I think we're going to kind of move in this kind of jerky stepwise pattern why where every week we go through this, we're going to pop higher, drift lower, but it's going to be high. You know, that drift lower is going to be higher than the last step. And I think this is going to be a pattern that repeats every time we have a weekend where this doesn't end. Cuz again, what we've seen time and time again with the Trump administration is they do big, you know, cinematic flashy things and then they wrap it really quickly. We saw this with the attack on Sulammani when when the US killed IRGC commander Sulammani in the beginning of 2020. Big thing. And then quickly back to the drawing board or back to the negotiating table. Then you had uh Venezuela uh when Nicholas Maduro was was kidnapped on a Saturday and by Monday they're like ah we we've got Deli Rodriguez in the government. She's going she's the president. She's our person now and it's fine. And then even last last June during the 12-day war between Israel and Iran. You know the US actually did it first big massive flashy thing with Iran when it dropped 14 bunker busters on three nuclear sites between Fordau, Isvahan and Natans. these uh that was a massive escalation at the time and prices spiked immediately on Monday when when they opened and by the end of the day we ended up Trump basically was like and we have a ceasefire and prices ended down by $10 by the end of that day. That was my mental model going into this because Trump had shown he's entirely fine breaking every kind of normal kind of you know standard of behavior and how the president would normally act in these such situations. But he has shown consistently a lack of appetite for prolonged distracting kind of messy activities that kind of bind his own mobility. He likes to do big things, smack, and then move on to something else. I thought he was going to smack Iran, maybe kill a bunch of the leadership like we saw in the opening salvo when he killed the supreme commander and then I thought he was going to say, you know, victory, victory is ours. Go back and then we're going to now we're going to roll over on Cuba. Now, that was my expectation. And I and it just seems that I think the White House also expected that. They expected some kind of Iranian Deli Rodriguez character to emerge and they grievously misjudged the cultural differences between the ruling kind of Chavista parties in Venezuela and the kind of Islamic Republic of Iran of decades and decades of resistance politics and an entrenchment basically building for this exact moment. So I think the White House did not plan to to for this to kind of be such a quagmire and they clearly have no plan on how to manage the oil impacts now that they're in and they don't really have a plan on how to get out. >> So I always like to look at things from an economic point of view or from a consumer point of view and it sounds to me like it's just a matter of time before the consumer starts getting hit with a lot of fuel sir charges from airlines, from Amazon, anybody else. What are your thoughts on that? >> 100%. So, we're going to see this in the we're going to see this in the the pump price. We're going to see this in search charges. If you can if you can lock in a flight right now, probably a good time to do so. Um, these types of things, this will this will continue happening. But one thing I've been really stressing just in terms of when we think about because again, if the straight remains closed and we need to lose 20 million barrels a day, where is it going to come from? It's likely not going to come from advanced economies. We're going to experience this as kind of acute debilitating, you know, pump price spikes that will sap consumer spending power that will be, you know, the the point of single complaint of every consumer on the street. But fundamentally, we're going to pay it. It's I am extremely price insensitive when it comes to getting my kids to school in the morning. It doesn't matter if it doesn't matter if the price at the pump was $5 a liter. I'm paying it to get the kids to school. Um, much of the world doesn't have that luxury. Um and if you're in a poorer country in the global south, uh developing economies and emerging markets, um even if there are individuals in those economies that can afford those prices and aren't sensitive, the overall average or kind of you know marginal consumer is very very price sensitive at these levels. So they will not be able to afford those prices at the pump and because of that they will not be able to incentivize and attract the necessary imports into their economies in order to make that balancing work. So we will feel acute pump pump price. We will feel kind of that loss of spending power, but we will still fundamentally have fuel. Very likely. There will likely be mixed mixed shortages in different products and whatever, but fundamentally we'll get the product we need cuz we can pay for it. In emerging markets, it's going to manifest as outright physical shortages, which for many economies are going to be like literally a human catastrophe and a deadly proposition. I think the one telling and kind of infamous example from 2022 when the crisis occurred in 2022 was the status of an LG tanker that was contracted for delivery to Pakistan. Um and basically the spot prices in Europe skyrocketed to such insane levels that the contractor the the shipper was basically able to break that fixed contract with Pakistan pay the fee and still make off like with a king's ransom arbing that difference in shipping that Pakistani kind of destined LG cargo to Europe. So again that's the way this market's going to work. That's how this is going to clear in a capitalist kind of open traded system. But that means that for that month you had a you had planned to receive an LG tanker into Pakistan for power generation or fuel or whatever heating and you didn't get it. So again, they can't get to the prices that will be debilitating because they're already debilitated and they're going to have the physical shortages. And I think that's what we're going to see across a whole slew of product markets. >> Let's talk about the SPR. Now the International Energy Agency or the IEA has 32 member nations. It holds 1.8 8 billion barrels of oil in reserves. They just announced the release of 400 million barrels, which is the single largest release ever. Is this significant? Is it going to have any impact on the price of oil? >> It's definitely significant. I think it's to put in context, this is, you know, 400 million barrels. It's twice the size of the second largest release in history, which was in uh which is roughly about 100 million bar 180 million barrels, give or take. uh and that was in 2022 uh during the Russia price spike. This is substantial. Uh what we've seen while the details are still a little spotty as to exactly what to expect and when to expect it. Um energy secretary Chris Wright in the United States has stated that their 172 million barrel a day 172 million barrel release is going to happen over roughly 120 days which would works out to roughly a flow rate of 1.4 million barrels a day. And for context, that's the important part is the flow rate, not the overall volume because the flow rate is essentially what manifests in the market as supply. So if we take that and expand that flow rate to the entire uh kind of release, we're probably talking about somewhere in the ballpark of threeish million barrels a day of supply. That's a lot of supply. We've never seen a strategic release of that size. But again, as the uh IEA executive executive director put it, um this is an unprecedented supply crisis and it warranted an unprecedentedly large SPR release. So it helps. It's the only thing that the uh Western nations can really do in this moment. Um and I think important and and what's shocking to me is that we're we're two weeks into this and this is only being this is only decided yesterday. If back to the point that that that the Trump administration did not have a plan going into Iran for a prolonged period of time if they did any firstear intern at the National Economic Council and National Security Council, they're like we're planning on bombing the crap out of Iran. Um anything you could think on the risks like well probably oil in the straight of Hormuz. Um like oh interesting yeah we should probably plan for that clearly. Like that's like the number one easiest lowhanging fruit to any kind of risk management here. and they didn't do any of it. You hadn't seen a pre-planning on the SPR. You hadn't seen kind of liazing with the IEA or the IEA allied kind of member countries. You hadn't there's so many things that this um this last minute um insurance or reinsurance facility that Treasury launched all this stuff. They're they're you know they're on their back foot. They're they're they're doing this on the fly and that's not how good that's not how good effective policym is is made. Uh and we're seeing the consequences of that right now. So it it overall I would say it's a it's a great step in the right direction. Um it's a band-aid and it's a small beta that 3 million barrels a day versus 15 to 20 million barrels lost a day in hormuz but it's the right thing to do and we should have done it a week or two ago not right now. Earlier you touched on the 1970s and I just want to go through this and provide a little more context for the viewers. But in October of 1973 we had the Yan Kapore war that led to the Arab oil embargo where the price of oil went from $3 a barrel to over $12 a barrel in a matter of months and also inflation exploded. And then in 1979 we had another price shock with the Iranian revolution and the price of oil went from $14 a barrel to $38 a barrel. And over the that 10-year period, the price of oil went from $3 at its lowest to 38 bucks. And during the same time, the p the inflation price went from 3% to 13.5%. Do you see this same sort of scenario unfolding like if things progressively get worse here? >> I think in in rough strokes, yes. I think I think the the magnitude of those kind of proportional gains probably won't be seen because you know going into that the oil market wasn't the same oil market that we experience now. It wasn't a freely traded kind of commodity market. It was largely an internally kind of secured supply chain market and the price was largely a tax balancing factor for companies like Exxon and Chevron, what were called at the time the seven sisters, the seven major integrated oil companies. They essentially produced oil in you know the Persian Gulf or wherever else and they basically traded it to their own refineries and that price was largely a balancing factor for their own books and the price used to pay the producing countries like Saudi Arabia as an example for royalties for their for their production. So they actually had an incentive to keep that price kind of artificially low and they did. So they paid they charged far higher prices for products than you would have assumed all else equal than the price of crude going in. So all of this happened and part of what what happened during both the formation of OPEC in the late60s and then the then the Arab OPEC oil embargo in ' 73 and then Iran in 79 you know forward um this was all kind of that system beginning to unravel in rapid fashion and the other thing I should note here is that while you know the current crisis in many ways is already worse than the 70s that in the 70s a large part of it was that you know Arabopek nations said we're going to have an embar cargo on shipping oil to basically the United States and the UK and anyone associated with Israel. Um, similar in some ways to now with Iran, but that was kind of the it was more about a block a certain directional blockage rather than overall physical laws. And what we've seen actually over the past, let's say 5 years, is that when you have those types of physical dislocations, but the barrels are still in the market somewhere, the market's really really good at solving and kind of arbing those those volumes and those barrels to where they need to go. What we're seeing in the current situation is not a directional kind of strategic withholding. It's a complete dead weight loss in the market. And that's much harder it to to kind of balance. We do have lots of stocks. We do have strategic stocks. We have lots of things that we can do around the margins, but I think this is going to basically take every every ounce of flex the oil market has. And the risk is that you do that too much and it just snaps. And then it's going to take a long time to kind of rebuild and unwind everything in the middle. Which is why again like I can't believe we're already two weeks into this, James. Like I like I never in my in my life would I have expected us to come this far. And now it just feels like how do we get out? How does Trump declare victory without looking like he lost? Um, I don't think Trump at this stage is going to want to look like Carter, right? This is this is his risk. Um, a deeply unpopular war in the Middle East that you lose really quickly. There can be like no greater kind of harm fowl for a US president, particularly that came alongside massive pump prices and spikes at the pump. And I think that's the calculus Trump's trying to make is like how can I how far can I go? How quickly can I get to any stage where I can declare even a modicum of like TV victory speech? Um, and how long is it going to take? Because people are talking about like there are, you know, Sentcom's talking about like preparations and additional advisors to continue through September. Um, that is a really long time for this crisis to continue and I don't think it can. Uh, I my fundamental bias is that this is going to unwind at some point. Uh, and it's going to be Trump that declares it so. But then the question becomes there are three parties in this war, not just Trump. So even if Trump says I'm done, is Netanyahu done? I think Israel has a far longer kind of existential vested interest in doing as much damage to the Iranian Republic as possible. And from the Iranian side, what's their incentive? Well, they're going to keep bombing and basically putting that finger, that thumb on this very sensitive pressure point in the global economy. They're going to do that for as long as they are getting bombed and then potentially even longer because what they're going to do is you know even if we don't have a nuke we can take down the global economy through the straight of formulas and they want to remind people of that and reestablish that deterrence and I think that's the worry is that I think that the most movable kind of discretionary actor in this is Trump because he can decide at any time to stop and prices will probably drive him to do so. But then if he stops, can he convince Israel to stop? And if he can convince Israel to stop, can he when can he convince Iran to actually open the street? And what would he have to give them to induce that behavior? And no one knows the answer to that. >> That's a very good point. What What's the bargaining chip here, right? Like there's always quit proquo. So the all-time high for WTI was $147 in 2008. And when adjusted for inflation, that's $228 in today's dollars. But do you see the price of oil going there? >> I do >> sometime this year. >> I do. I Here's the thing. I think we're going to get there pretty quickly if this remains like if if we're closed for two, three, four weeks, I think we could be there by the end of April. Um that's just how large. And again, once that air pocket hits Asian markets and those inventories start drawing at that kind of rate, the market's going to have to bid this up. It's going to have to destroy demand. Otherwise, those inventories are just going to like it's like a literal like a you've pulled the plug out of the tub. Um, you are getting some offsets like there is some flow coming out of the East West pipeline in Saudi Arabia. We've seen at least thus far normal flows out of the out of the port the industrial port of Yanbu, which is the Saudi port in the Red Sea. That was normally at like let's say two million barrels a day of flow. That's looking more like four million barrels a day. Now it could get up at to five. So that's some offset. But let's say that reduces the hit from 20 million barrels to again optimistically 15. That is still something that is a a hole too large in the global oil market to actually close through any normal mechanisms which is where we're going to end up in this point where if if prices right now cannot if prices are unwilling if futures prices are unwilling to bring us to the level that will either incentivize some supply out of somewhere again we could like US supply is going to have to grow here but it's going to take four to six months to do so and we need the price signals now to induce and incentivize that behavior for the future and so far we just aren't seeing those prices in any real way. So, the longer this goes on, the more that in congruence between kind of this hope and this kind of again, if I was a betting person, I think like I think this is going to end at some point very soon because the president has to end it, but we're not there yet. >> So, we've seen two major price shocks this year. First in Venezuela and now the closure of the straight. What does China do? Because a lot of the oil coming out of Iran and also Venezuela was going to China. What do they do now? >> Yeah. Yeah. So I think there's two different elements here. I think there's the question of the sanctioned oil that was going to China. So this is Russia, Iran and Venezuela. And then there's the question of the kind of broader loss of the straight of the straight for Arab oil flow. Oh, let's start with the sanction side because I think one thing, one talking point I've been trying to push back on, uh, when I've seen the kind of, you know, there's always this tendency because Trump does so many historic, arguably crazy things that there's always this attempt to kind of ascribe some kind of other grand strategy. Surely he's doing this because surely it, you know, he can't not have had a plan going into an Iran war. Surely, like we just, this is how conspiracy theories are born, right? because like you know it's easier to accept kind of a malevolent plan than the lack of a plan at all and I think that's what some people have a tendency to do with this China and this uh sanctioned oil stuff but the thing I want to remind people is that because yes China was largely the sole importer of Iranian crude and Venezuelan crude and the and the largest single offtaker of total Russian crude as well very clearly Russia or China did not care about violating US sanctions um and that's probably a problem for Washington. But when Trump is saying this is all about kind of removing China's cheap oil supply, the important thing to remember is that the oil supply was only cheap for China because of Trump in the first place. He imposed those sanctions on Iran and Venezuela and Russia that basically forced China into that final kind of consumer of last resort for their barrels and got rid of all their competition. So if Trump didn't reimpose sanctions on Iran and and scuttle the JCPOA in 2019, if Trump didn't impose uh heavy sanctions uh and kind of design sanction designations on Pavvesa uh um Venezuela's natural oil producer in 2019, those barrels would have kept going to US ports to other other ports. And again, I'm not saying that sanctions are wrong because they are a tool states craft and I think in isolation they could be very useful uh in in various things. But then you can't say like, oh, we're taking away China's cheap oil. It's like you gave them the oil in the first place that was cheap. So it's kind of this like sure yes, but there was a reason that it was there in the first place. But I will say to this question of and then China is always able to get alternative supplies if they're available. There was just it was happy to pay really really cheap prices if it could get away with it. But now we go to this kind of closure of the straight of Hormuz and the overall loss of flow to the Middle East. That's an existential crisis for China because the barrels that China would have bought to offset Venezuela loss or Iran loss or whatever that would have come from the Middle East and those are the barrels that are actually currently trapped. One final point here that I'm going to say is that the irony of this kind of point around you know again people have said like this is about Trump clamping down on Iran's oil trade or Trump's going to take you know Iran's oil like they took Venezuela's oil. The only major exporter in the region that continues to flow barrels of the straight of Hormuz is Iran itself. In in certain weeks you've actually seen increases in the flow of Iranian oil out of Car Island in plain view of everyone in the region, but they're like some of the only barrels are getting out. So again, there's this inongruence, this inconsistency between all the talking points coming out of Washington and what's actually physically happening on the ground. And remind me again, Iran produces is it 4 to 5 million barrels a day. >> So that's it maximum kind of historic capacity right now. It's producing more like two something uh and it exports between 1 and a half and 2 million barrels a day typically. >> And if the US is allowing Iran to move oil out of the straight, why would they allow that? >> It's a great question because it doesn't seem to make a lot of sense. Um I there's a couple reasons. one um Trump is acutely concerned with the price of oil um and any loss of any like further contributing to tighter oil flows out of the Hormuz kind of goes against that. So yes, it's still feeding the Iranian regime with funds to continue the war, but it is at least on the margin keeping keeping markets slightly looser than they would otherwise be. The other thing is yesterday the IRGC put out a note based or uh at a a proclamation let's say and we're all just doing proclamations these days. Um so they put out a proclamation saying if Trump or Israel or whomever was to take out or otherwise kind of capture Car Island and Car Island for those that aren't aware is the island that serves as the primary staging point for the vast like 85 90% of of Iranian exports comes through this one island called Car Island. Um, and that island was occupied many, many times by the way during the tanker wars. But so in this episode, uh, the IRGC said if US, Israel, whomever takes out or occupies the island, then Iran is going to start targeting other port infrastructure in the region. So I was saying earlier so far they haven't been targeting, at least to the degree they could, some of the kind of more durable uh, kind of facilities in the region. If Iran does that, that's when this goes from my my current framework for this is that we grind kind of $2 to $3 a barrel higher every day. Um the every day this goes on, we're going to get choppy, but structurally we get $2 to $3 a barrel tighter every day. That's going to go through step changes. If we get a big attack on a facility, on a major port, on a major oil field, that can go, you know, that goes jump in one, you know, 10 bucks in a day and then we continue that $2 to $3 a barrel grind higher from those levels. So that I think is is the remaining kind of point of concern and I think why Trump hasn't attempted to go after those uh those Iranian exports at least yet. >> President Trump and President Xi meet on March 31st in Beijing for a 3-day summit. Do you think the actions in Venezuela and also Iran are strategic moves ahead of this meeting? Do you think the US is trying to show China that hey, we're in we're in control here? >> Maybe. Maybe. Um but I think in some ways Beijing has been preparing for this as well. Um one of the big storylines over the past couple years has been how how voraciously Beijing has been building up its own strategic stocks. So while the US stocks have been generally declining and both both because of the Biden releases but even before that you had congressionally mandated sell-offs of the SPR to basically paper over budget uh deficits in various points. So that was going to decline with or without Biden and basically we're back to roughly where we would be today with even if we didn't have the 2022 price shock because again those mandated sales during that period China was going the exact oppos opposite direction. In the latter half of last year, you had uh more than a million barrels a day going into or sorry, in the first half of last year, more than a million barrels a day going into Chinese strategic stocks. Now, obviously is the moment where those are going to get tapped. Now, that is going to help the Chinese market, but we're already seeing a way in which Beijing has basically blocked off any of the way that could help the global market because like in 2022, Beijing and and Chinese independent refineries, the so-called teapotss uh were largely a major source of relief particularly in that middle dish that diesel market spike in 2022. They ramped up aggressively their exports in the winter of that year and helped kind of over and helped kind of ease that crisis. Already Beijing has banned the export of refined products uh in this crisis. So even if they did release SPR stocks, it would be for domestic domestic markets uh and you wouldn't see the same relief externally, which is going to be a problem given that we're staring at a very similar crisis in Middle East. >> Do we have any idea how large their SPR is? It's >> over a billion barrels. um we don't know exactly and I think again the the exact definition of Chinese strategic stocks is also a little wonky cuz some of them are explicit stateowned stocks and some of them are you know commercial stocks held by stateown or or mandated stocks that are held by stateowned enterprises so it's kind of like a quasi strategic stock they had a a um last year they had a a policy change that required what they called commercial strategic stocks so again I would say overall I basically treat any stock any crude stock in China that doesn't behave like the rest of global stocks. It's kind of more a it's not so much what it is and who owns it as to the character of how that flow behaves. When you look at coastal stocks by like the major refineries that we can see, they basically look exactly like US stocks. They're low right now. They kind of rise and fall with everything else. But inland stocks very very high over a billion barrels. >> And so China has a billion barrels. How does that compare to the US? >> US is about 400 something right now. um across the entire OECD and the IEA members, we're looking at roughly 1.2 billion barrels of stateowned, mandated, held crude and product stocks. Um that'll help, but we're talking basically China has basically the same amount as the and that's just crude on China's side. We actually don't know their product stocks uh very well because they don't publish data on them and you can't you can't see the the tanks in the same way you can see crude because they don't have the floating tanks. So we're a little bit blinder on the product stocks, but they have as much crude stocks as almost the entire IEA member states have entirely across crude and products. >> Russia is the I believe the second or third largest producer of oil in the world, producing somewhere between 9 to 10 million barrels a day. Are they the big winner in all of this? >> They are absolutely the big winner. And I've been really stressing this point that Moscow has far and away taken more and gotten more benefit out of this war than any other single participant or other single producer. And the reason is to the White House's credit, I think I've been pretty critical of the White House and Trump administration thus far. To their credit, they were doing a very very good job at tightening uh the noose around the Russian oil trade over the past year. They had between again I had mentioned like India is the largest importer of Seabor crude uh out of Russia. They used to import nothing. You war in Ukraine. All of a sudden the price cap and the EU ban on imports and Russia in India emerged as this major buyer of discounted Russian crude. You know as of mid last year they were importing more than 2 million barrels a day of Russian crude. Again largest seaborn importer. In October of last year the Trump administration uh imposed blocking sanctions on Ros and Luca which are the two largest exporters of Russian crude. So that took a big chunk out. And then the Trump administration imposed punitive tariffs on India due to the import of this of this Russian oil and basically said like get off the oil or you're going to have this this 25% US tariff on you. Um that combined action reduced Indian imports of Russian crude from around 2 million barrels a day say beginning of October to around 1 million barrels a day in January. That's a huge change. And you saw discounts born by Russian crude explode upwards of 30 plus dollars a barrel under Brent. And you saw Russian crude on water rise really quickly because those barrels had nowhere to go and they were kind of lingering around waiting for a discounted sanctioned buyer. Um now after this war started, every single Asian buyer is clamoring for those Russian barrels. Uh you've even had Eastern European countries trying to pressure the EU to reduce sanctions on Russia to allow them to import oil and products through the Dusba pipeline which is the major pipeline that connects Russia to the European market particularly through Eastern Europe. Um and I and you've even seen the White House and the Treasury issue a sanctions an explicit sanctions waiver for India to import what was previously banned and sanctioned Russian imports. So Russia is far and away the the biggest beneficiary of this and any of the pain that we saw imposed them over the last year has basically already been unwound in the past two weeks. >> Rory, everything I do on this channel is focused on investing and I guess I want to look at it from my point of view. Um I'm always thinking about how how can I make money or how can I minimize my losses? And if I hear you right, the message you're you're telling me is you got to get long energy. You got to be long oil, you got to be belong gas. Is that correct? >> Yeah, I think so. I I I tend to on my side, I tend to try and stick to the commodity market, not go too much into the equity side or anything else. But I think what we have seen is that so far equities have generally underresponded to this on the producer side. You've seen some uplift, but in some Canadian names have actually been kind of down through parts of the crisis. Uh I think that's obviously one way to play this. Um but I do think that there is also a risk here. I think while it's exceptionally I think I've never been more bullish in my entire career on the immediate spot market impacts there are bigger questions down the line again if this keeps going recessionary would be optimistic we're talking depressionary conditions energy stocks don't do well during those during those crises right so I think that's a risk on the downside you need to watch for also again back in I mentioned 1970s you saw demand destruction during that period that we had never seen in in in history before this is again I think all else equal before and after this crisis. Asian markets in particular are going to be consuming less oil in 10 years than they would have going into this crisis. Now you're going to have major even both consumer backlash but also government strategic backlash to this level of dependence. And they're like well we always knew this was a risk but we never like myself I never thought it would actually happen. Now that it has, they're going to begin trying to ensure against that risk in the future, which is largely about diversifying away from that dependence and the demand on fossil fuels and oil in particular. So I think there's a lot there's a mixed element here, but I would say in the immediate term, if you can get exposure to, you know, higher crude prices over the next 6 months, I still don't think the current market price and the current curve is incorporating even the damage that has already been done to the system, let alone the risk that we face to the upside. So, I I see the the the risks to oil prices definitively tilted to the upside over the next month at least. >> Yeah, it's going to be interesting to see these economic numbers that come out here in the next few months because inflation has been very resilient even before oil ripped to call it 90 or 100 bucks a barrel. It was hanging around 3% and it's definitely going to have a big impact especially when the consumer starts bearing more of the brunt of these higher prices. That's exactly right. And I think and again I think like to your to your point you mentioned kind of you know inflation and and central banking um if there was if there was a hope that central banks were going to be cutting I think you know that's that's off the table now at least for at least for a while. So if you're in the position of having to reorgge your home uh that's going to be an issue for you and I think that's best case scenario of not you know of slowing the pace of of cuts. And I think we could be in a situation if this continues that we're going to have to go back to a point of hiking in order to kind of try and contain some of that pricing pressure and again back to that unmuring of inflation expectations at the consumer level. Um that's obviously a major problem and I think again supply shocks are a central banker's worst sniper and this is like the mother of all supply shocks because it it particularly if you're a dualmandate central bank like the Fed, it's going to push both of your your indicators, both of your targets in very different directions. So then you have to choose which one do you prioritize and unfortunately as we learned even in 2022 there's no easy answer because there's no stipulated legislated priority of those targets it's both of them are important so then how do you kind of balance that and at the time the Fed chose prices I think that was probably the right right call but if this is longerlasting and and we and let's say last in 2022 we didn't get the rollover of co zero in China or wherever else there's no telling of how how that would have gone if that kind of policy structure would have continued. I want to ask you one more question before we wrap it up. The US is the world's largest oil producer. They produce 13 to 14 million barrels a day. 60% of that comes from shale. When does shale production start dropping off? So actually I think so prior to this one of the really interesting trends was that we actually in both my forecasts and a kind of official forecast from the the energy information administration the kind of statistical arm of the of the department of energy in the United States. Everyone started seeing that US shale was plateauing this year that we basically had um that it was going to flatline this year and begin to decline outright next year. that is likely on hold now because these prices are going to provide a major lifeline to those producers to begin lifting. So the Dallas Federal Reserve typically puts your kind of like average incremental point of kind of your incentive price for new production call it low to mid60s on a WTI basis. We're well above that now and you can hedge for the next six months well above that. So I think at that level you're going to begin to see growth again. The qu the issue is that it's going to take four to six months for that price signal to turn into realized production again. And again, if we're six months into this, we're in a very very different global market and that's going to be deeply deeply kind of um volatile. Um I think the other thing you're going to see is that you are also seeing because again Trump has heard the US's largest oil exporter and that's just crude oil. you say the 13 14 million you actually have 6 7 8 million barrels a day of natural gas liquids like propane everything else and refined products overall the US is actually pretty on a apples apples basis pretty secure on that basis the problem is regionally you have all of these dislocations you know more exports of the US GF coast imports into the east and west coast the Gulf Coast can't service those imports because of the Jones Act um so you have all this necessary trading and one of the things that Trump has been reportedly musing and the B administration used in late 2022 was a ban on the export of refined products from the United States. If that happened, we end up in a deeply kind of confusing and dislocated market. I mentioned earlier that in this even in this worst scenario, we all pay awfully high prices. But things continue more or less as they are. If you begin banning exports or go full Nixon and cap prices at the pump, that's how you get shortages in advance markets. That would be a policy choice. we would be able to bear that economic cost. But I think it begins like shortages are harder to show in a chart on Fox News business and I do worry that there's a little bit of a prioritization of what can be shown easily in kind of a media hit. >> Well, Rory, this has been a great discussion. I want to thank you very much for spending time with us today. We got to do it again in a few months. Okay. To uh get >> Yeah. No, I'll come I'll come into the studio then. >> So, uh now if somebody wants to follow you online and check out some of your research, where can they go? >> Yeah. So I uh you can follow all of my work at commodityontext.com which is where I publish uh you know typically two reports a week. Um obviously right now it's a bit crazier. Um and then additionally to that you have uh all of my work. I kind of tweet in real time on on Twitter or X now rory_jston. And I encourage you to follow along and and kind of uh join me on this deep deep chaotic journey that I never thought I'd be on. >> And you also have a podcast. >> I do have a podcast as well. It's called the Oil Groundup podcast. It's uh through the Clear Commodity Resource Network. So, you can follow them as well and the Clear and the Oil Groundup podcast. Uh and yeah, follow us and uh and follow along. I should have a I'm filming a podcast for my own podcast immediately after this, James. So, it's back to back to back on our end. >> Once again, thank you. >> Thanks for having me, James.