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Rory Johnston: $60 Oil Is Possible in 2027 | with Mikkel Rosenvold — Transcript

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0:07Hello all there. Welcome to Real Vision.
0:10Welcome to another show on oil, war,
0:12geopolitics, and everything in between.
0:14My name is Miguel Wema. I'm joined today
0:16by oil market researcher and founder of
0:18commoditycontext.com, Rory Johnston.
0:20Welcome to the show, Rory.
0:23>> Thanks for having me back.
0:24>> I want to put you on the spot right away
0:26here.
0:27The number everyone wants to hear.
0:30Where does Brent close out the year,
0:31Rory?
0:33>> Close out the year? I mean, at this
0:34stage we're we're we're getting really
0:36close. I think my initial bias would
0:39have been that we would have ended the
0:40year lower given that we are seeing more
0:43flow to Hormuz and everything else. But,
0:45I think at this stage, given the chaos
0:47in the Middle East, given the mounting
0:49kind of strikes, and I think given
0:51China's seemingly resurgent import
0:53appetite, I think I think we're probably
0:55going to end the year above $100 a
0:57barrel on Brent at least.
0:59>> Very interesting. We'll dive much more
1:00into that, both the situation in
1:02Ukraine, the Middle East, Hormuz,
1:03everything
1:05in this show.
1:06We are taking questions live on
1:08realvision.com. We are posting this to
1:10our audience there first, and then
1:12subsequently on on YouTube. So, if
1:14you're on realvision.com, please post
1:15your questions for for me or Rory, and
1:17we will get around to as many of them as
1:19possible.
1:20Before we dive more into it, I just
1:22wanted to remind people that we are
1:23running a great campaign at Real Vision
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1:43right now, and you can still get in on
1:45the ground floor for that. So, Rory,
1:47great to have you on today.
1:49We
1:50We had you on the on the show back in
1:52March with the start of the US Iran war.
1:56Plenty of water under the bridge since
1:57then.
1:58How's this been year How's
2:01How's this year been for you overall?
2:04>> It's been crazy. Definitely the busiest
2:05year of my life. It's been great for
2:08business, bad for sleep.
2:10And but I would generally say again, I
2:11think you know, we've learned so much
2:14about a kind of our core assumptions
2:17about the oil market, these
2:19theories that have really never been
2:20tested until now. And for instance, you
2:23know, when we first spoke in March, I
2:25was quite sure that oil was headed to
2:28$200 a barrel for for a barrel of Brent.
2:31And we barely broke above kind of 120
2:34briefly on dated Brent we got to you
2:36know, 144
2:38physical even higher than that. But in
2:40terms of the actual kind of prompt
2:41futures benchmark that everyone watches,
2:43that capped out well below $200 a
2:45barrel.
2:46The thing I will say is that the reason
2:49I initially expected crude oil to rise
2:52to $200 a barrel was because that was at
2:54that stage where we expected we would
2:57need to generate the the degree of
3:00demand destruction that we would need to
3:01balance that market. You know, if people
3:03like, oh, did you not expect the
3:05reroutes or the SPRs? No, no, all that
3:07stuff was expected. That 20 million
3:09barrels we lost out of Hormuz, we
3:11expected reroutes out of East West and
3:13and through the Adcup pipeline to the
3:14Gulf of Oman. We expected the world's
3:17you know, history's largest SPR release.
3:19This was the big show. This was the
3:21point that we had built them all up for
3:22in the first place. What I didn't expect
3:25and what ended up proving to be by far
3:27the largest swing imbalances that
3:30loosened that market was what I'm
3:32calling the Beijing swing, which was
3:34China's collapse of about 5 and 1/2
3:37million barrels a day, roughly 45% of
3:40their pre-war crude imports just dropped
3:42out of the market entirely and let the
3:44rest of the world, particularly the rest
3:46of Asia, recuperate to pre-war level
3:48imports far quicker and at far lower
3:51prices than I would have expected. So,
3:53we're going to talk a lot about trying
3:54all of this, but that is why I I you
3:56know I I want to be clear that I still
3:59do think that presented with pretty well
4:01the exact same conditions, I would still
4:03have the same call in hindsight because
4:05we still don't fully understand the
4:07rationale of why China's done what it's
4:09done. And happy to talk about all of
4:10that in the meantime.
4:11>> No, and it has great implications for
4:12geopolitics as well. We get back into
4:14that and how Trump acts in various
4:15arenas. So, we'll we'll we'll dive much
4:17more into that. Let's just get the
4:19current picture straight because
4:21uh Onyx, you're one of my favorite
4:23follows on X especially on this topic,
4:24but you get so much noise in there. So
4:26many reports about this and this amount
4:28of ships.
4:29Uh Iran is shooting at ships. Does that
4:31mean a lot of ships are going through
4:33when they're shooting at them? Well,
4:34well, and um
4:36you have a lot of reports that we're
4:37back to pre-war levels almost through
4:38the whole Strait of Hormuz. Then you
4:40have a lot of diverging reports on the
4:42East-West pipeline through Saudi. So, so
4:44maybe where could you just give us a a
4:45breakdown of where are we right now? How
4:48close are we to uh usual levels of of um
4:52maybe just focused on oil through
4:53through through the Strait of Hormuz and
4:55how bad is the situation right now?
4:57>> Yeah, so through First thing I will say,
4:59we have seen a remarkable improvement in
5:02the flow of patrolling and through the
5:03Strait of Hormuz over the past 2 months.
5:05I think at this stage that is
5:06undeniable. There have been lots of
5:07people that will accuse me or these
5:10numbers as being some kind of government
5:12plant. Believe me when I say that the
5:14White House is not a big fan of me. So,
5:15I want to be very very clear about where
5:17kind of where my allies are in this. Um
5:20but to be clear, what we've seen is
5:21right roughly through the second last
5:23week of September, we saw oil flow
5:27through the Strait of Hormuz
5:28specifically. And this is on a 7-day
5:29rolling average basis because this stuff
5:31is pretty volatile and you definitely
5:33need to smooth it to get a clear picture
5:34of what we're talking about. But
5:35overall, that flow relative to the
5:38pre-war norm of say you know nine you
5:41know, sorry uh 20 or 21 million barrels
5:43a day, we got back up to roughly my high
5:45water mark is around 17 million barrels.
5:47That's really, really high. And
5:49excluding Iran, I think for all intents
5:52and purposes, that is fair to say that
5:53at that moment we re-reached pre-war
5:55Hormuz levels. But they were fleeting.
5:57And I think this is the important thing
5:59is that we got to those levels. We are
6:01still high, but we are nowhere near as
6:03high as that. That was right around the
6:05time of the UN General Assembly, and
6:07we'll talk you know, more about exactly
6:09why we think Iran was letting that many
6:11ships go go through. But right after you
6:14hit those really, really high levels in
6:16the end of September,
6:17you saw Iran launch what has become the
6:20largest series of attacks, bombardments
6:23against shipping through the Strait of
6:25Hormuz, since before the beginning of
6:26the war. This is This is actually the
6:28biggest stretch of attacks thus far. At
6:30various points through the beginning of
6:31October, we were seeing an average of
6:33two confirmed ship strikes a day. And I
6:35think at this stage we all assume that
6:37the actual actual number of ship strikes
6:39is higher than that which is confirmed
6:41by UKMTO or the IMO.
6:44Um, but we saw that, and basically,
6:46predictably,
6:48you saw both prices begin to firm again,
6:51you know, factoring for that risk, and
6:53the flow through Hormuz dropped from
6:55that kind of 17 million barrel-a-day
6:57level. Again, we're still early days, it
6:59takes time to identify lag transit and
7:01everything else, so these numbers are
7:02tentative, but probably in the ballpark
7:04now of 12 to 14. Still ex- you know,
7:07excluding that high-water mark in
7:08September, basically the long the the
7:11highest sustained pace of transit
7:14through Hormuz thus far. Now, the
7:17bullish interpretation of this news is
7:19Iran has taken control back of the
7:21Strait, you know, there's you know, oil
7:23is going to get crushed again through
7:24the Strait, and we're going to the moon.
7:26The bearish interpretation is that we
7:30have the highest, most sustained pace of
7:33attacks in Hormuz of the war, and yet we
7:35still have 12 to 14 million barrels a
7:37day of oil going through Hormuz, much,
7:39much larger than the virtual zero number
7:43of barrels that we're getting out in
7:44March and April. So, two ways of looking
7:46at the same thing and I think there's
7:47truth in both of them.
7:49>> And the big problem is Rory for macro
7:50guys like us at Real Vision, uh even
7:53though you've had 2 months of more or
7:55less relief uh in oil flows out of the
7:57Hormuz. Um
7:59um
8:00energy inflation is still through the
8:01roof. Um
8:03mainly because of lack of refineries to
8:05diesel. How do you see that entire
8:06diesel supply crisis? What are the
8:08outlooks for that from from from where
8:10you're sitting?
8:11>> Yeah, and I just before going to that I
8:12I should also mention that we we have
8:14also seen you mentioned East-West
8:15pipeline and everything else. So, all of
8:17the reroutes are also pumping. Uh
8:20East-West pipeline has not been able to
8:22regain its full 7 million barrel a day
8:24capacity after these attacks, but it's
8:26been doing a good showing. Probably
8:28between 5 and 6 million barrels a day
8:29flowing on the line. Same with what's
8:31going through with the the Emirati side
8:34at the Gulf of Oman. So, all in all, we
8:36do have a decent amount of oil coming
8:37back into the system, but as you noted,
8:40our big challenge now is not necessarily
8:42crude oil, although looking at my
8:43screen, crude oil looks pretty freaking
8:45tight as well right now. Um but on top
8:47of that, we have this generational
8:49refining capacity crisis that as you
8:52noted for macro people looking at
8:54inflation, consumers and and even
8:56businesses don't typically consume crude
8:58oil, they consume refined products. So,
9:01depending on which one you're looking
9:02at, if you're looking at household,
9:03typically gasoline. Gasoline was pretty
9:06elevated, it started coming back to
9:08normal levels, but diesel. Diesel is
9:11that kind of epicenter of this crisis.
9:13And normally, you know, at the end of
9:15September, we hit New York Harbor
9:17all-time high diesel prices of just shy
9:19of $230 a barrel equivalent. It's it's
9:22quoted in in gallons, but I think and I
9:24think in barrels, so everything's a
9:25conversion. Um and in terms of how we
9:28typically measure these markets, we
9:29don't typically talk about the flat
9:31price or the kind of nominal price of
9:33diesel, we talk about the crack spread.
9:35And And crack spread, my favorite thing
9:37as a as an oil person is that you know,
9:39you talk to uh any generalist that
9:40little smirk on their mouth as soon as
9:42as soon as you see crackspread
9:43mentioned. But, a crackspread
9:45essentially just highlights the fact
9:47that that that the oil system, the oil
9:49market and industry, and specifically
9:50refineries are basically just one big
9:53chemistry set. And when we talk about
9:54cracking, what we're really talking
9:56about is, you know, all oil and
9:58petroleum, it's hydrocarbon chains. The
10:00longer the chains, the heavier or denser
10:02the type of liquid or fuel, you know,
10:05like petroleum coke or heavy sulfur fuel
10:07oil, really really long chains.
10:09Gasoline, LPG, really really short
10:10chains, right? So, what we're talking
10:12about with cracking is we're just adding
10:13heat and chemical catalysts to literally
10:15crack those chains into smaller
10:17portions. So, a crackspread is
10:19effectively the difference between the
10:22value of the barrel of finished refined
10:24product, so let's say in this case
10:25diesel, and the barrel of crude oil that
10:27would go into produce it. Now,
10:28refineries can't just turn a barrel of
10:31crude oil into a barrel of diesel,
10:32unfortunately, given our current our
10:34current prices. It's all turns into
10:36these fractions, this kind of rainbow
10:38spectrum of different products. So,
10:40essentially a refinery margin at the end
10:42of the day is a weighted average of
10:44those crackspreads adjusted for other
10:46costs.
10:48Now, the crackspread for diesel in
10:50normal non-crisis markets typically sits
10:52around, let's say $20 a barrel.
10:55Currently at my screen, it is $99.30
10:59a barrel. Recently hit above $120 a
11:02barrel. So, in many cases over the past
11:05month and a half, we have seen diesel
11:07more than double the price of crude oil.
11:10And people are like, "That's price
11:11gouging, right? Like, how can this
11:12possibly be the case?" And the issue
11:14that everyone has to remember is that
11:15while we talk about oil as one
11:18contiguous thing,
11:20the challenge is that diesel, gasoline,
11:23crude oil, jet fuel, etc., all of these
11:24things are actually technically
11:26different products with different supply
11:28and different demand factors that drive
11:30them, different points of demand
11:31destruction, different industry trends
11:33like obviously during COVID, no one was
11:35flying and gasoline got absolutely sorry
11:37uh jet fuel got completely obliterated.
11:39Well, at the same time diesel, as we all
11:41became obsessed with remodeling our
11:43homes we couldn't leave, that actually
11:45was really really firm because everyone
11:47was shipping stuff everywhere.
11:48In this moment that we have right now,
11:51well, for instance, crude oil flows
11:53through the Strait of Hormuz have
11:54recovered very well, refined products
11:57haven't. So, again, we hit probably
12:00again the the exact numbers are are are
12:02fuzzy, but let's say roughly in mid end
12:04September we hit pre-war crude oil
12:07export levels out of the Middle East
12:08total.
12:09On that same basis, we are still
12:10probably half or less of the total
12:13refined products coming out of the
12:14region. And this is for two main
12:16reasons.
12:17One deals with the logistics of this
12:19dark trade that has emerged. So, again,
12:21at this stage I think everyone's heard
12:22of the dark shuttles or things basically
12:24how you jump back and forth across
12:26Hormuz with these big ships, then you
12:28transship or ship ship transfer to other
12:30ships sitting in the Gulf of Oman that
12:32then go off and and final you know,
12:34deliver the final barrel. Basically,
12:36they're the rust buckets they're jumping
12:37back and forth across Hormuz that no one
12:38cares as much if they get hit and
12:40they'll transfer to the blue chip
12:42tankers that will actually deliver to,
12:44you know, nice cleaner Asian ports. Um
12:47that economics of that trade and it and
12:49depending on the sort of you're looking
12:50at you're looking at between 20 and 35
12:52dollars a barrel to get a barrel of oil
12:55through the Strait of Hormuz
12:56um because of insurance, because of
12:58these war costs and everything else and
13:00obviously just the demand uh you know,
13:02everyone wants to get out not everyone
13:04wants to do that run given the very very
13:06high chances at this moment that you get
13:07hit by a missile or a drone.
13:10Um but it's those costs are much easier
13:12to to spread across a very very large
13:15tanker. So, the largest category of
13:17crude oil tankers, very large crude
13:19carriers, carry 2 million barrels
13:21uh of oil of crude oil.
13:24Um typically product tankers are
13:25smaller, it's less easy to spread that
13:27cost. So generally the economics of
13:30these smuggling operations favor crude
13:33over products. On the other side, I
13:35think even more structurally,
13:37we likely have pretty extensive damage
13:39to refineries across the Gulf. Now,
13:42early in the war we saw many reports of
13:44Saudi refineries hit by drones and
13:46missiles and raw tea and most and most
13:48acutely Kuwaiti refineries that really
13:50got pummeled. Um on top of that,
13:53we've also seen now that the Houthis
13:55have really increased their attacks
13:57against Saudi infrastructure across the
13:58Red Sea. Most Saudi oil refineries on
14:00the Red Sea coast. So they weren't
14:02actually tip they weren't as pummeled by
14:04by Iran early on compared to the other
14:07Gulf kind of exporting states. But now
14:10that the Houthis have really done a
14:11number on those other refineries. So all
14:13together we've lost, you know, a
14:15considerable volume. In terms of diesel
14:17specifically, probably between 700,000
14:21barrels a day and a million barrels a
14:22day of diesel supply across a total
14:25market of diesel, let's say, 25 to 30
14:27million barrels a day. So a considerable
14:30volume given, you know, the comparisons
14:32to crude oil. At the same time we've
14:34had,
14:35you know, you know, Russia's invasion of
14:36Ukraine and increasingly effective
14:40Ukraine's response, its strategic
14:42defense against these attacks by taking
14:45the the war basically home to the
14:46Russian home front
14:48and attacking shipping, ports, fuel
14:51depots and I think most importantly here
14:53refineries. At various points you get
14:55half upwards of half of Russia's total
14:57refinery fleet offline.
14:59And typically Russia is the second
15:01largest exporter of diesel in the world,
15:03shipping just below a million barrels a
15:05day compared to say the US's 1.1 1.2
15:08million barrels a day.
15:09That those exports have fallen to barely
15:11more than 100,000 barrels a day, roughly
15:1380 90% down from their normal levels.
15:16That has unambiguously contributed to
15:19this massive shortage of diesel in the
15:21market. At the same time, so we've lost
15:23all the supply.
15:24And now the the question basically goes,
15:26"Okay, so, you know, I talked about $200
15:28oil at the beginning of the war. We've
15:30got more than $200 diesel right now.
15:32Where is the demand destruction?" We've
15:34seen a little bit of it, but what we're
15:36very quickly learning, and we always
15:38suspected, but again, this is a natural
15:39experiment and many theories are being
15:41tested,
15:42diesel demand is much stickier than say
15:44gasoline or even jet fuel demand.
15:47If
15:48let's say pump prices, you know, I'm
15:49sitting in Toronto normally were between
15:52let's say a buck 50 and $2 a liter. If I
15:54went to the if I went to the gas station
15:56and it was 5, 6, $10 a liter, I'd be
16:00like, "Wow, okay, maybe I'll take the
16:01maybe I'll maybe I won't drive or maybe
16:03I'll take the bus or whatever. Maybe
16:05I'll bike. Maybe not in the winter, but
16:07you know what I mean." And there are
16:08household decisions being made on
16:10budget. With diesel,
16:13um it really comes down to a business
16:15cost. So, as long as your overall
16:18blended business margin remains
16:20positive,
16:21you're going to continue shipping your
16:23products. If you're not shipping your
16:24products, you're not selling anything.
16:25This is groceries, this is Amazon, you
16:27know, packages, this is everything.
16:28Every I like to joke that like
16:30even that EV that you may have purchased
16:34because gasoline prices were high, that
16:36EV would likely be delivered on a diesel
16:38flatbed. And I think all you know,
16:40diesel does everything. So, to your
16:41point about, um you know, inflationary
16:44pressures, I think many consumers, it's
16:47a sneakier inflationary pressure cuz I
16:49think they're Consumers are used to
16:50going to the pump and getting getting
16:52punched in the face by a high, you know,
16:54gas price. Uh and they'll complain about
16:56that, you know, the the the the Biden or
16:59the or the Trump stickers that I did
17:00that. Um but diesel's way more
17:03insidious. It's kind of like an aching,
17:05creeping dread that moves through your
17:07entire body because it just touches
17:09everything and you can't really get away
17:10from it, no matter how hard you try. So,
17:12now that we're stuck in this situation
17:14where the White House is basically
17:16pulling every single lever trying to get
17:19these prices back down ahead of the
17:21midterms in two two and a half weeks
17:23and they are not having very much
17:24success at it.
17:26>> And that's exactly where where where I
17:27wanted to head this Rory because
17:28obviously this is not lost on President
17:31Trump. Hopefully he had as good as
17:33introduction to crack spread and and
17:35diesel
17:37refineries you just delivered Rory. That
17:38was
17:39I can tell you've been doing that a lot
17:40to journalists so over the past year
17:42maybe.
17:44That was wonderful. But this is
17:45obviously not lost on the on the Trump
17:47administration. My my reading of this or
17:50analysis of this has been that
17:52the Iran war and the fallout of the Iran
17:54war in in initially oil prices and then
17:57in diesel prices has essentially forced
17:59Donald Trump's hand. We can get back to
18:01China. I think it played a lot
18:03a huge role in how that summit
18:05played out but it's very very evidently
18:09forcing Trump's hand or influencing his
18:11decision making in the Russia-Ukraine
18:13war as well because it's it's it's it's
18:15overshadowing everything else. It's
18:16pulling the air out of every other US
18:17diplomatic effort. So the result was
18:20obviously the diesel deal with Russia.
18:21We heard reports today that the Russians
18:24aren't really delivering in the diesel
18:25to the US. I'm not even sure if they
18:27have that much diesel to deliver to the
18:28US in the short term. So my thinking
18:32I wanted to get your take on this is
18:33that
18:34initially
18:36at least it puts some of the blame on
18:38Ukraine rather than the Iran war because
18:40I don't think and I'd love your take on
18:42this that that the diesel deal and then
18:44whatever Russia might be able to provide
18:46is not really going to help ahead of the
18:47midterms in terms of that.
18:49Not at all. You probably need six months
18:51for that. But it puts some of the blame
18:52on Ukraine. Is that fair because you
18:54talked about various sources of this
18:57refinery
18:59crisis? How much of that is Ukraine? How
19:01much of that is the Iran war? I know
19:03it's hard to put percentages on but but
19:05you get what I mean.
19:06>> [snorts]
19:06>> Yeah and I'll try and put some
19:07percentages on it because I think there
19:09has been you know Trump has undeniably
19:11and I want to just say up front, I
19:12completely agree with your
19:13characterization. This is entirely both
19:16all of these things that we'll talk
19:17about that Trump is trying to do.
19:19Basically, none of them are going to
19:20move the needle on diesel prices.
19:22Pretty well all of them are intended to
19:25create political
19:27uh kind of scaffolding
19:28for both Trump and congressional
19:31Republican candidates to either shift
19:34blame or point to a thing that isn't
19:36working and say, "Look, we're doing
19:37that." So, that's the framework of I
19:40think what's going on. Well, let's talk
19:41specifically about you know, how much
19:43Ukraine has contributed and the
19:45Ukraine's specific strategy of targeting
19:48Russian refineries isn't
19:50By my numbers, you're looking at
19:52again, it it it it varies seasonally a
19:54little bit, but I think in total, I
19:55would say between a third and a half of
19:59the total diesel crisis is the Ukrainian
20:03attack specifically, which leaves
20:04between half and 2/3 for the Iran war. I
20:08want to be clear that both are
20:09contributors. I think anyone that is
20:11defending like any people that are
20:13defending Ukraine in this, and which I
20:15think is a very reasonable thing to do
20:17because it's a very reasonable strategy
20:18for a country being invaded that really
20:20has no other external choices here.
20:22I don't want to say that that it is
20:23wrong for them to do that, but I think
20:24it is correct to say that it is
20:25contributing. Um and I think people that
20:28try and deny that, I think are doing
20:30themselves a disservice in just how to
20:32have this conversation. Um in terms of
20:35what we're totally seeing, um yeah, so I
20:37would say, you know, let's let's say for
20:39for these purposes, 2/3 Iran.
20:42That I think is the part that's really
20:44structural. I think the world
20:46potentially could have handled uh
20:49Ukraine's attacks on Russian refineries.
20:51It could have absorbed or buffered that
20:53shock without the Iran war. And that's
20:55the difficulty in talking about
20:57contributions here because I think any
20:58one shock or strain, the market can tend
21:01to adapt to.
21:03What causes problems is when they start
21:05layering on top of each other. So, now
21:07we're talking about this deal. This It
21:09was a two Fridays ago, President Trump
21:11announced just in the final like hour
21:13and a half of me writing my weekly, so
21:15thanks for that.
21:17Um [laughter]
21:17love writing up something rapidly at
21:19last second. But so, Trump announced
21:21that basically after a phone call with
21:23President Putin,
21:24he would there would be some kind of
21:26deal
21:27whereby Russia increased its its uh its
21:31diesel exports, and in exchange,
21:34uh the US Treasury has issued a uh
21:36general license waving sanctions on
21:39Russian diesel for for 6 months,
21:40basically through next April. Um
21:43what are you know, what volumes are you
21:44talking about? So, again, we're talking
21:45let's say normally Russia exports
21:47900,000 barrels a day. Let's for say for
21:49easy math, a million barrels a day.
21:51Right now, they're exporting just more
21:53than 100,000 barrels a day.
21:55Way way way way way down. Most of that
21:58has been driven by Ukraine's attacks on
22:00Russian refineries. They you have not
22:02had enough domestic diesel to satiate
22:05the Russian market. Um particularly
22:07during kind of the diesel-heavy
22:09industrial use through farming and
22:11harvest season.
22:13Now, what we've seen in in President
22:15Trump's Truth Social post, which is our
22:17basic way of now interpreting all
22:19information in the world, so that's fun.
22:21Um
22:22Putin apparently pledged 500,000 tons of
22:25diesel in November. Now, that sounds
22:28like a lot of oil and a lot of diesel.
22:30The challenge is that it's roughly only
22:32125,000 barrels a day. Which is again,
22:35every little bit helps. I'm not going to
22:37you know, let let's not let's not throw
22:39away diesel here. Like we need
22:40everything we can get, but that's a very
22:42very very small drop in the bucket of
22:44the current crisis we face.
22:46And to your point, none of this diesel
22:49is going to be going to the United
22:50States, or very very unlikely any
22:52material volume of it will go into the
22:53United States.
22:54Yeah, Russia does not normally supply
22:56diesel to the to the US even outside of
22:58a sanctioned environment. Um what this
23:00is about is increasing global seaborne
23:03supplies so that other countries won't
23:06have there won't be as much competition
23:07and overall price will come down.
23:08Remember, the United States is now the
23:10largest diesel exporter in the world.
23:11Why is everyone so focused on it
23:13importing Russian diesel? Clearly not
23:15the thing that it actually needs right
23:17now volumetrically. So, I think overall,
23:20this I think the most charitable
23:22interpretation is that maybe we will see
23:24a doubling of current Russian diesel and
23:27gas oil exports from let's say October
23:29to November levels.
23:31In I but there's also a chance that
23:33Putin has just recommitted to the
23:34current volume of exports, which is not
23:37it which is literally nothing and he got
23:38this massive sanctions relief out of it.
23:41And even at the same time, even if none
23:42of this happened, we would have just
23:44generally seasonally expected Russian
23:46diesel exports to rise a little bit in
23:48November and December as that harvest
23:50season ends as and as domestic use
23:52declines.
23:53So, I think probably we're going to see
23:54a little bit more Russian diesel, but I
23:56would say virtually none of that is
23:58because of Trump's deal or because of
24:01even the sanctions relief. I think that
24:02would have happened regardless.
24:05Um,
24:06Yeah, so let's And then the final thing
24:08I will say is that all of this supposes
24:11that again, Russia wasn't voluntarily
24:13throttling back 90% of its diesel
24:16exports, it was doing so because Ukraine
24:18had
24:19demolished huge, you know, volumes of
24:22Russian refining capacity.
24:24So, in order to actually achieve any
24:25more Russian diesel supply, you need you
24:28need Ukraine to stop these attacks.
24:30So, as part of this, the day after this
24:32deal was announced, then Trump randomly
24:35unilaterally announced a energy truce,
24:38which
24:39apparently neither side had even
24:41actually heard of and I think one of the
24:42journalists was like, "No one said they
24:44heard of this. Why is there a deal?" And
24:45he's like, "Because I said there is,
24:46okay?" Okay, so again, this is just how
24:48the world works now.
24:49But, Zelensky said, "Sure, if Moscow
24:53wants to stop attacking
24:55Ukrainian power plants ahead of winter,
24:57Obviously, no one wants an energy crisis
25:01during winter, even countries at war.
25:03So, I think he was open to the idea.
25:05But, then that night, Russia bombed a
25:07major power plant outside of Kyiv. Kyiv
25:10was blacked out for a large chunk of the
25:11night. You know, this is obviously not
25:14happening. And I think very reasonably,
25:16uh Zelenskyy was like, "Well, this kind
25:17of proves that Putin is not interested
25:20in energy as he is far." I think, again,
25:21rightfully so. Um
25:24at the same time, there was an Axios
25:25report like the next day after that.
25:26There was like, "Oh, wait, wait, wait.
25:27It wasn't an energy truce. It was a
25:29{quote} refinery-for-refinery
25:31proposal." OKAY. WHAT DOES THAT MEAN?
25:34SO, first of [clears throat] all,
25:36>> Ukraine has one refinery as far as I
25:37know.
25:38>> Yes, Ukraine has one badly damaged,
25:40semi-functional refinery, which is,
25:43let's just say, not integral to the
25:46Ukrainian war effort. Whereas, Russia
25:48has between 32 and 36 refineries, the
25:50third largest refining fleet on the
25:53Earth. Uh it is a core, you know,
25:56strategic asset of Moscow. This is not
25:58symmetric. And I would absolutely not
26:00expect Kyiv to recognize this as part of
26:03this deal. And and very clearly,
26:05after a couple days of waiting, Ukraine
26:08resumed its its bombardment of various
26:10refineries. I think there have been
26:11three or four hits since then. So, this
26:13is clearly not happening. So, I do not
26:14expect any huge, massive windfall of uh
26:18you know, diesel from Russia. The one
26:19final thing I'll mention here is that,
26:21on top of just the blatant threats
26:23against Ukraine,
26:25Trump and the and and the, you know,
26:26various, you know, elements of the US
26:28government have been beginning to
26:30tighten the screws on Ukraine to try and
26:32press this point.
26:33Withholding intelligence, uh you know, a
26:36you know, a very very well-reported this
26:38stage, you know, slowing access to
26:40Starlink and, you know, Starshield or
26:42whatever we're calling all these things.
26:43And again, there's so much,
26:45you know, bloviating and kind of
26:47misinformation out there. But, I think
26:48at this stage, it's pretty clear.
26:50You know, and and I think it was it
26:51yesterday there there was also an NFT
26:53report that uh that Washington was
26:55holding up
26:57in delivery of US weapons. They were
26:59actually already paid for by European
27:00allies. Not even this wasn't even US
27:02funds. This is just using the control of
27:04US weapons manufacturers. So, all of
27:06this very clearly appears that they're
27:08trying to press Ukraine to stop this.
27:10But again, even if they were successful,
27:12let's say they are.
27:14None of it's going to matter for the
27:15midterms because midterms are like two,
27:18you know, two plus weeks away.
27:20You As soon as you stop attacking
27:22refineries, you don't just pop up to
27:23normal. Now you need to spend months
27:25repairing them.
27:27And it doesn't seem like any of this is
27:28going to happen. So, all again, at the
27:29end of the day, we can talk about all
27:30the other things that have happened that
27:31they've tried to pull, but you know, at
27:33the end of the day, this is all noise
27:36meant to provide Republican candidates
27:38to say, "Look, we're doing that." We
27:39will see if it works, but I would say
27:41it's a pretty pretty tight balancing act
27:44to hope that US voters in a fraught, you
27:48know, midterm election are not going to
27:50blame the incumbent party that started a
27:52war in the Middle East for an energy
27:54price spike. Like I think that's
27:55actually the most routine reflexive US
27:58electoral response, period, end of
28:00sentence.
28:02>> I usually say when when when looking at
28:04statecraft and and governments, two
28:06things bring down governments routinely,
28:07corruption and inflation. And it is very
28:10very hard to look at this current
28:11inflation and not not expect
28:14a change in government. But we'll have
28:16to see, Rory. It's very interesting.
28:17>> yeah. Well, well, thankfully there's no
28:19corruption, right?
28:21>> [laughter]
28:21>> Sorry.
28:22>> Well, it's not a big issue, it seems. It
28:24it doesn't seem to be a big voters'
28:25issue. So, so I mean, it it's only the
28:28>> [clears throat]
28:28>> beholder here. But but but but I agree
28:30with you completely. It's yeah, yeah.
28:32It's a crazy situation.
28:34>> So, a quick break in your regular
28:35programming. If you're serious about
28:37your future, grab my free report called
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28:51>> I also put just posted a video on the
28:53I'll be posting a video later this week
28:54on some of the other
28:57effects of this break between the
28:59Ukraine and US. Also, how Ukraine might
29:01actually be the path of least resistance
29:03towards a peace
29:04towards a peace there in
29:06a very very cynical analysis. But but
29:09let let's circle back a little bit Rory
29:11to your point about the
29:13um
29:15what happened because we we
29:17the closure of the Hormuz Strait was
29:19always sort of the ultimate risk
29:21scenario, the worst-case scenario both
29:23in geopolitics and probably also in your
29:25your field.
29:26It was
29:27almost almost like in geopolitics it's
29:29like if we attack Iran, the Strait of
29:31Hormuz shut off and and then who nobody
29:33knows. It's it's it's like the almost
29:36like a nuclear war scenario. Nobody
29:37knows what happens then. Now we know
29:40kind of and it was it's been bad. It's
29:43probably going to topple a few
29:44governments around the world. Um
29:47but it didn't end the world yet. So,
29:50talk us about how China saved the world
29:52as you as you
29:54I'm rephrasing the word a little words a
29:55little bit here.
29:56>> No, I I I think I've literally I think
29:58there's literally a quote of me saying
29:59China saved the world. And I want to be
30:00clear at the outset. This is not an
30:02altruistic act. This is not good guy
30:05China saving us all because it's being
30:08nice about it. I want to be very very
30:09clear up front because I think a lot of
30:10people have interpreted my comments that
30:12way. I think Beijing has even tried to
30:13kind of
30:14amplify that particular slant
30:17interpretation. I want to be clear.
30:19That's not what happened. But what we
30:21know for sure is that China cut roughly
30:235 and 1/2 million barrels a day of crude
30:26oil imports between the the average
30:28quarter preceding the war so December to
30:30February and the bottom in June and
30:32July.
30:33That is
30:34gargantuan. Again, that is in terms of
30:36the total volume of oil kind of demand
30:41that has been shifted. And I want to be
30:42clear, this is not necessarily domestic
30:45Chinese
30:46consumption,
30:47but this is seaborne import demand. But,
30:50in terms of the way we all interact with
30:52the oil market, seaborne import demand
30:53is really the thing that matters for
30:54price formation. So, for the purposes
30:56here, that was a larger reduction in
30:59seaborne import demand in China than the
31:02collective total release of SPRs from
31:05all of the IEA members combined. So, in
31:07terms of the contribution, China was far
31:09and away larger.
31:11Now,
31:12how do we explain this?
31:14So, roughly half or just more than half
31:17of that was refining cuts. The largest
31:19cuts to refining runs we've ever seen in
31:21China's history. We're going to return
31:23there, cuz that doesn't explain it. It
31:24just kind of pushes the problem
31:26downstream.
31:27But, leaving the rest of that, say, you
31:29know, half of that, you know, let's say
31:302.7 million barrels a day,
31:33where did that go? [clears throat] How
31:34did that How How did they shoulder that
31:36reduction?
31:37Then the debate basically becomes how
31:39much was China preemptively storing
31:41beforehand. Everyone knew that China was
31:43building up its SPR. It was importing
31:45excess crude oil to do so, largely from
31:48Iran and Venezuela and all these other
31:50cheap cheap kind of sanctioned
31:51jurisdictions.
31:54If you assume that was a really really
31:55large volume of kind of pre-building,
31:58that is bearish, because it means that
32:00we do not are bearish for crude oil,
32:01because we do not need to go back to
32:03those levels. But, I think at most,
32:05we're talking maybe a million barrels a
32:07day of that was this SPR pre-building,
32:10as I'll call it. Whereas the other
32:12balance, say, almost two-thirds, seems
32:14to still be some kind of likely
32:17strategic drawdown that has been
32:18undisclosed. Now, I want to be very very
32:20clear.
32:21There is no evidence of it.
32:23The evidence is is in the kind of
32:26dislocation of the normal data we
32:28follow. So, there has been no
32:29acknowledgement by Beijing that there
32:31has been a large release
32:34of SPR crude. In fact, the only
32:37government official on earth, to my
32:38knowledge, that has actually said
32:41China has released its SPR or released
32:43its reserves was US Energy Secretary,
32:45right? So, that's the only person that's
32:47actually actually said anything.
32:49But, I think that the the data seems to
32:52paint a picture that this has likely
32:53happened. But, I want to be clear that
32:55that is still an argument and very
32:57highly debated by analysts.
33:00Then, we'll move downstream to the
33:01refining space because saying that
33:03they've cut upwards of 3 million barrels
33:05today of refining runs, that's fine, but
33:07that doesn't really answer the question
33:08of how they did that because China
33:11refines oil because it consumes a lot of
33:14oil products, right? It's the second
33:15largest consumer in the world. So, you
33:17can't just say, "Okay, well, they're
33:18doing without." Well, that's a massive
33:20question right there, right? How are
33:22they doing this?
33:24I wrote a piece and I I encourage
33:25everyone to come check out some of these
33:26pieces I've written on this topic at at
33:28commoditycontext.com and there's this
33:30Beijing swing thesis I've worked on
33:32mostly over the summer.
33:34And essentially, I worked down to every
33:36single major product category in China
33:38and said, "Okay, which ones can we
33:39explain? Which ones can't we?" As an
33:41example, we can probably explain most of
33:44jet fuel.
33:45Jet fuel, China was actually exporting a
33:47decent chunk of it before the war.
33:50We did see some flight cancellations
33:52back at the stage when everyone thought
33:53we were literally going to run out of
33:55jet fuel in the world. A bunch of
33:56carriers canceled long-haul trips
33:58because they weren't sure they were
33:59going to be able to they were going to
33:59be able to get back, right? Like, this
34:01is a very kind of almost the equivalent
34:03of like work-from-home mandates in terms
34:05of demand destruction. That we can
34:07explain roughly the decline in in
34:10apparent jet fuel demand. Now, this
34:11apparent word is a is important here
34:13because
34:15China doesn't publish official monthly
34:17demand data like we'd find in most other
34:18countries. So, essentially, what we need
34:20to do is apparent calculations, which is
34:23out you know you know net production of
34:26various products netted for visible
34:28trade.
34:29So, it's essentially a supply-driven
34:31demand estimate of demand, which is
34:34understandably flawed in the current
34:36situation. But I think that's where we
34:37can kind of go from here.
34:38So, apparent demand for jet fuel makes
34:41sense.
34:42But diesel is the one that really stands
34:44out as this like gaping hole in the
34:46data, which is 70% of Chinese diesel
34:50consumption is used in road freight,
34:53long-haul trucking, etc. Like basically
34:55the same kind of balances you see in the
34:56United States.
34:58Um
35:00that apparent consumption was down
35:02between 18 and 20% year-over-year in
35:04June and July.
35:05Big, huge collapse, larger than we saw
35:07during COVID zero when you actually had
35:09everyone locked down across cities
35:11across China. Well, at the same time,
35:13despite this nearly 1/5 contraction in
35:15apparent demand, you see road freight
35:17activity up 3 and 1/2% year-over-year in
35:20both June and July. So, what the heck is
35:22going on? For me, the only viable
35:24explanation here is that there has been,
35:26in addition to strategic releases of
35:29crude oil, we have likely seen strategic
35:31releases of diesel as well. Now, an
35:33important caveat and implication here,
35:35which is if we think they're drawing
35:38down strategic stockpiles of diesel,
35:41the implication is that they had to be
35:42building them in prior states. So, some
35:45of our historical estimates
35:47of Chinese diesel demand were too high.
35:50And there are two periods, particularly
35:52in 2021 and 2023, where the apparent
35:55demand of diesel in China raced way
35:58ahead of where we saw the actual economy
36:00performing. And back in 2023, I actually
36:02wrote a piece called Chinese oil demand
36:04out, specifically flagging that I
36:05thought that China was likely building
36:08diesel and other refined product
36:09stockpiles strategically. At that stage,
36:12the worry was that it was about
36:13fortifying energy security ahead of a
36:15potential incursion in Taiwan. It's
36:18feels like a million years ago at this
36:19stage, but that was when Beijing was
36:20really beginning to buzz Taiwanese
36:22airspace and test kind of naval limits
36:25and all of these things. So, there was a
36:26lot of concern there then. But, at the
36:28same time, as we've seen, they seem to
36:30have pulled all of those energy security
36:32levers
36:33in the response to this to the closure
36:34of the Strait of Hormuz.
36:36So, I think the final thing I'll mention
36:37on Chinese demand here is EVs, because I
36:40think everyone's like, "Rory,
36:42you've got to you've got to be kidding
36:43me. Everyone knows that China doesn't
36:45need oil anymore. Look at the EVs,
36:47right?" And it's true. Roughly 2/3 of
36:50Chinese
36:51total vehicle sales now have a plug
36:54attached to them, with the bulk of those
36:56actually being pure battery electric
36:57vehicles. And I was just in Hong Kong,
36:59and aside from like the old taxis,
37:02basically every other vehicle on the
37:03road is an EV now. So, like this is
37:05happening. It's very, very clearly
37:06happening. Now, that's primarily a
37:09gasoline story.
37:10Um so, what we have seen is likely
37:12indications that, you know, that helped
37:15balance gasoline specifically. But, the
37:17important thing here is that 2/3 that
37:202/3 number is not of total vehicles,
37:22it's of the total new vehicle sales.
37:24In terms of actual China's vehicle
37:27fleet, new energy vehicles are only
37:29still between 10 and 15%.
37:31So, the predominant share is undoubtedly
37:34still, you know, internal combustion
37:36engine driven. But, the one thing I'll
37:37note here is that I did this analysis 2
37:41years ago, and kind of found that
37:43apparent charging kind of basically
37:46fossil fuel or road fuel demand
37:48displacement from EV charging in China
37:50was only probably around 200, you know,
37:52250,000 barrels a day. It was going to
37:54be annoying for oil bulls, but it wasn't
37:56going to be this existential drag on the
37:58system. I ran those numbers this year
38:01for this piece. We're talking about
38:02upwards of 6 plus 100,000 barrels a day
38:05of demand displacement this year, and
38:07it's still accelerating. So, even if I
38:09do not I still firmly do not believe
38:11that China can do without this volume of
38:13oil through this crisis,
38:15but give it 3, 4 years, and this will
38:18actually become a permanent component of
38:20Chinese reduction in oil demand, which I
38:22think in terms of the long term is a
38:25really, really heavy kind of bearish
38:27burden on the barrel that's going to be
38:29very, very difficult to over- overcome.
38:31If it's difficult right now for the
38:32world to get more than a million barrels
38:34a day of of overall oil demand growth,
38:37back when in the 2010s we were talking
38:40like the norm was 1.5 to two. Um now
38:43we're struggling to get one. It's going
38:44to be even harder to hit that one number
38:46or any positive growth when you're
38:47seeing that kind of demand destruction
38:49in China specifically from EVs.
38:51Let alone the fact that now they are
38:53pushing these EVs all over the world and
38:56they're going to be exporting that
38:57demand destruction as well. So I think
38:59again, I'm not saying I think it's like
39:01going to destroy oil markets, but it
39:03will be a very, very heavy weight around
39:05the neck of the barrel to overcome.
39:08>> My neighbor here, just north of
39:09Copenhagen, he sold his Tesla and bought
39:11a Zeekr, Chinese EV. So there's
39:12something to it from a purely nautical
39:14>> [laughter]
39:14>> It's They're all over the place in in
39:16northern Europe at the the moment, the
39:18Chinese EVs. They're taking over
39:19everything. Is it Is it also trucks? And
39:21just dialing in on this because I would
39:23expect a large part of the the the
39:25diesel consumption to be the road
39:27freight. Is that also being taken over
39:28by electric because we don't see that at
39:30all in Europe or almost none at all.
39:32>> No, and I would say that you're starting
39:34to see a bit more of the electrified
39:36truck sales penetration in China.
39:39Um
39:40what you saw previously was not
39:41electrification, but actually
39:43displacement of diesel with natural gas.
39:47>> Mhm.
39:47>> So LNG and CN- uh liquefied and
39:49compressed natural gas in these trucks
39:51were actually a major point. Uh
39:53particularly back, you know, a year or
39:55two ago, this is actually something I
39:56was covering pretty extensively that we
39:57saw diesel weakness in China and it
39:59appeared that you were seeing increased
40:01competition from natural gas in the
40:03trucking fleet. Now it is
40:05electrification as well. I think at this
40:06stage it's pretty clear that China is
40:08working extremely hard to displace this
40:12this uh kind of requirement for external
40:15fuels. Um or at least at the very least
40:18trying to broaden and diversify that
40:20dependence across different fuels,
40:22different suppliers, different
40:23geographic routes, etc. Um, and that I
40:26think again goes back to this that
40:28gasoline will be the first one to fall
40:29in China. But I think at this stage
40:31diesel's going to come behind it. Now,
40:33what happens to China's refining at that
40:35stage? You're like, well, what happens
40:35if you don't have gasoline, you know,
40:38demand? Well, the nice thing is that
40:40gasoline is not that far from It's
40:43basically really fancy naphtha. And
40:45naphtha is like a light hydrocarbon, one
40:48of the ones that comes at the top of the
40:49distillation tower, that is typically
40:52put into uh steam crackers and other
40:54things to produce petrochemical uh
40:56products, you know, ethylene,
40:57polyethylene, etc. Um, that is likely
41:02what we're going to see with gasoline,
41:03as well. And if if we go back all the
41:05way back to, you know, you know, uh you
41:07know, John D. Rockefeller and the kind
41:08of emergence of the oil market,
41:11it started as an illumination market. It
41:12was all about kerosene. Gasoline was too
41:14volatile. They tried tried gasoline
41:15lamps and then this nasty habit of
41:17exploding and burning the house down,
41:19cuz gasoline's really volatile stuff.
41:21Um, but what they would often do with
41:23gasoline is they would just like pour it
41:24onto a lake and set it on fire. Um, so
41:27I'm not saying that China's going to
41:28pour it on a lake and set it on fire,
41:30but I do think that you're going to see
41:31a a
41:32a a rerouting of those molecules towards
41:35petrochemical uses gradually, even as it
41:38as the kind of primary road use is
41:40displaced.
41:41>> I just wanted to just one final
41:44point before we look at the the head at
41:45the at the outlook for oil. This is
41:47where things get get tricky for you, I
41:48know, but you you just one question
41:49ahead of that. Uh
41:51I've been my feed has been bombarded
41:52with uh with images from Indonesia and
41:55other
41:56Southeast Asia countries
41:58um
41:59with where where we're seeing huge um
42:02huge lines at gas stations where there's
42:04talk about
42:05uh a a complete lack of fuel there.
42:08Um
42:09that tells me that the price is not high
42:11enough for demand destruction. There's
42:12still demand, but there's probably no
42:13supply. What are you seeing down there?
42:15Is it all anecdotal? Are we seeing
42:17anything Is that or and how's that
42:19related to the to the diesel crisis
42:21here?
42:22>> I would I would actually count that as a
42:23form of demand destruction. I think
42:24there's it's important to kind of break
42:26demand destruction in a couple of
42:27different chunks. So, we we typically
42:28have about, you know, the you go to the
42:30you go to the gas station, you see the
42:31high price, you're like, "Ah, not
42:32today." That's like price elastic demand
42:35destruction. There's also income elastic
42:37demand destruction, which is say high
42:38oil prices in 2008 crashed the economy,
42:41I lost my job, and then because of that
42:44I don't need to drive to work anymore,
42:46so I don't need to consume the fuel. In
42:48this case, there's another type, which
42:50is this almost physical lack of supply,
42:53these shortages emerge. Now, when we
42:55spoke in March, this is what I had
42:57expected to happen. Essentially, that we
42:59were going to need to see demand
43:00destruction,
43:01but it would not be born in our
43:03countries, in wealthy economies. We,
43:06again, while everyone's going to
43:07complain about, you know, $5 a gallon
43:11gasoline or $6 a gallon diesel in the
43:13US, no one's really going to stop using
43:15it because it's still such a small
43:17portion of our overall household budget.
43:20But for many economies around the world,
43:21particularly in Asia, particularly in in
43:23in emerging and and kind of poorer
43:25countries,
43:26even if you personally have enough
43:28money,
43:29the overall economy may not. And because
43:31of that, the actual importers of fuel
43:34can't justify the extremely high prices.
43:36And the thing we the other thing we
43:37haven't talked about and we could talk
43:38for hours at this stage. But the other
43:40thing we haven't talked about is the
43:41extraordinarily explosive shipping rates
43:43that add, you know, 20, 30 dollars a
43:46barrel to every delivered shipment
43:47you're getting.
43:48This makes it very, very difficult. So,
43:50if the median kind of consumer cannot
43:53afford it, then the then the pump
43:55station is not actually going to get
43:56enough fuel in to actually get the job
43:58done. And this is I think what we're
44:00going to see increasingly as this crisis
44:02continues to percolate, is that most of
44:04us will be watching for signs of demand
44:06destruction in advanced economies cuz
44:07that's where we live and that's where
44:08the data is best. But if we see this
44:11continue to emerge as a demand
44:12destructive event, it will be primarily
44:15exactly what we're seeing in Indonesia,
44:17which is
44:18a lack of of barrels actually entering
44:21the economy and people can't buy them no
44:23matter how much they want to pay.
44:25>> No.
44:26Let's look a little bit ahead, Rory,
44:27here to round off the show, because uh
44:29all of this is a lot of this this is
44:30driven by the Iran war and uh none of us
44:32know when this is going to end.
44:34Uh we can have our analysis. I have a
44:36feeling that uh
44:38I did some calculations a few months ago
44:40that predicted that the Iranians were
44:41going to run out of money on October
44:438th, very specifically. Uh that that's
44:45always the case when you do these
44:46models, they always point to a specific
44:48date. Uh
44:49and and and obviously they haven't
44:50completely run out of money. I have uh
44:53I I do still feel that we have seen over
44:54the past few weeks
44:56a lot of increasing reports of Iranian
44:58willingness to compromise and negotiate
45:00and that that was the point of them
45:01running out of money. That that the that
45:03the that that the country would
45:05collapse. So, we're seeing that. On the
45:06other hand, it seems to be like the
45:08Trump administration or or just waiting
45:10waiting for the midterms to end, maybe
45:12do one or two more bombing runs and
45:13they're hoping for much much better
45:15terms than the memorandum of
45:16understanding. So, the way I view it, uh
45:19we don't have a solution uh to this war
45:21over the next weeks months, maybe. Uh
45:24but they
45:25not in the coming weeks.
45:27How do you see the outlook of outlook
45:28for oil? We we we touched upon in the
45:30very beginning and what what the
45:32and both for for for oil prices, but
45:35also the energy inflation if you look
45:37towards the end of the year and and into
45:382027.
45:40>> Yeah, so I think let's say we end the
45:42Iran war. Let's say we end it November
45:441st.
45:45We can all sleep again for a hot second
45:47and then we can kind of survey the
45:48damage in the wreckage. I think at that
45:50stage I still again I went into this
45:52year a structural a structurally
45:55bearish. I thought we were going to have
45:56way too much oil in the market, largely
45:58because OPEC was really rapidly
46:00unwinding it what were huge production
46:02cuts that were supporting the market at
46:03that stage.
46:04That has that still same structural
46:07phenomenon still exists on other side of
46:09this. So, and actually arguably it's
46:11gotten worse because we've had
46:15high prices which have depressed demand.
46:17I'm not I don't think that we've seen
46:18demand crater this year, but it's
46:20certainly not growing super quickly
46:22either given the high prices, right? At
46:24the same time, we had expected US shale
46:27production to begin to cap out this year
46:29because of those low prices and that
46:31would begin kind of healing that
46:33oversupplied market. Now, we actually
46:35have seen that US crude oil production
46:37did not peak, has not peaked this year
46:39and likely will not peak because of
46:40these high prices. So, that is you know,
46:42any deficit we any surplus we said at
46:44this year is likely now all else equal
46:46going to be larger next year. Now, the
46:47one offset is that we have drawn down a
46:50truly stupendous volume of oil from
46:53global stockpiles, both commercial and
46:55strategic.
46:57That will inevitably soften the effects
47:00of that surplus. So, let's say if I had
47:03expected this year prices to fall to $50
47:07a barrel Brent or even lower. That was
47:09kind of where I thought things were
47:10going by the end of this year. You ask
47:11me where I thought oil was going to end
47:13this year now. If you would ask me that
47:16in January, I probably would have said
47:18$45 barrel Brent. Um now, we're no
47:21longer in that world.
47:23changes a lot. Um but I do think that
47:26next year even if we do see that
47:28re-emerge the oversupply, we likely
47:30won't as quickly go to that $45 barrel.
47:33I think that we will likely drift back
47:35down to say
47:3660s by the end of next year should the
47:40war end. But I think there's a scenario
47:42where you do where you see crude oil
47:45fall back, but we haven't repaired the
47:48situation in Russia and Ukraine. And the
47:50Houthis are still harassing, you know,
47:53Red Sea refineries. You could end up in
47:55a scenario where you still have, let's
47:57say a $60 Brent, but you still have a
47:59$100 a barrel diesel crack. So, you're
48:01still at this kind of, you know, like a
48:03150, 160 barrel diesel. Like that is a
48:06scenario that I think is very plausible.
48:08And that's because well, very clearly, I
48:11think, we have too much upstream crude
48:13oil production capacity structure in the
48:15world. What's very clear is that we
48:17increasingly do not have enough refining
48:19capacity to transform it reliably into
48:21what we need. And given those shipping
48:23rate blows, more and more of those
48:25refineries are not conveniently located
48:28next to either consuming regions or to
48:30the sources of oil. So, you're often,
48:31for instance, you know,
48:33India would often import crude from the
48:36Middle East and then re-export diesel to
48:38Europe. That's an extraordinarily
48:40expensive trade now given how expensive
48:42shipping is. So, up until recently, we
48:44never really thought about this because
48:46essentially time and distance was nearly
48:49free in the oil market. Shipping on
48:52tankers was so cheap that it was really,
48:54really easy to arbitrage various
48:56markets, you know, from surplus to
48:58deficit, etc. But now, you've
49:00essentially this this explosion of
49:02shipping rates has essentially fractured
49:03that global oil market into a balkanized
49:05oil market that's increasingly difficult
49:07to effectively arbitrage between those
49:09pools. And I think that's the reality
49:10we're now going to deal with uh until we
49:12can sort that out.
49:14>> Very interesting, Rory. This has been a
49:16fantastic conversation. Great to to get
49:18a lot of detail insights also to
49:20uh the year that you've had here in
49:222026.
49:23Uh I think we're we're looking at it as
49:25very, very bullish for refiners, very,
49:27very bullish for all the market
49:28researchers such as yourself, hopefully,
49:30also leading into to to 2027. So, uh
49:33always a pleasure, Rory.
49:35Um
49:36thanks a lot for joining us. I suspect
49:37we'll be talking again in a few a few
49:39months' time. Maybe new wars, maybe
49:41ongoing wars. We'll we'll we'll have to
49:42see. But uh but a great great pleasure.
49:45Thanks to everyone for chipping in with
49:47your questions. We we covered a lot of
49:48them during the show, and we We be
49:50covering them in uh in the future also
49:52here on uh on Real Vision. If you're
49:54watching this on YouTube, please
49:56remember to
49:57subscribe to the channel both Real
49:59Vision and my geopolitical edge channel.
50:01We're doing this as a collab on on
50:02YouTube. We're trying to build that. So,
50:04do that. Do check out Roy Johnston on X
50:06and his Substack Commodity Context. It's
50:08a great follow. So,
50:10nothing left to say but thanks a lot,
50:12Roy. It's been a great great pleasure to
50:13have you.
50:14>> Thanks for having me, guys.
50:16>> See you around.
50:17>> So, you obviously liked this video
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