WEBVTT - Merrill Lynch Head of Global Commodities Francisco Blanch Talks Oil Market Issues

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Traffic through these straightiformos remaining at a standstill following the

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<v Speaker 2>US seizure of an Iranan cargo ship, the escalation casting

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<v Speaker 2>doubt on whether the two nations will meet for peace

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<v Speaker 2>talks tomorrow. Elsewhere, the President renewing attacks threats to attacks

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<v Speaker 2>civilian infrastructure in Iran in a three social post, the

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<v Speaker 2>President vowing to quote knock out every single power plant

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<v Speaker 2>and every single bridge if Tehran does not accept the

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<v Speaker 2>US deal. And finally, US Energy Secretary Chris Rights saying

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<v Speaker 2>gas prices may not dip below three dollars until next year.

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<v Speaker 3>I don't know that could happen later this year. That

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<v Speaker 3>might not happen till next year. But prices have likely

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<v Speaker 3>peaked and they'll start going down. Certainly, with a resolution

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<v Speaker 3>of this conflict, you'll see prices go down. Prices across

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<v Speaker 3>the board, on energy, prices will go down.

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<v Speaker 2>The national average for a gallon of gasoline remaining above

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<v Speaker 2>four bucks, the highest price since August twenty two.

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<v Speaker 4>Yeah, and people pointed the fact that Treasure Secretary Scott

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<v Speaker 4>Besen had said previously that the price of gasoline was

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<v Speaker 4>likely to go down to that three percent level or

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<v Speaker 4>even below by the summer. This is a political issue,

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<v Speaker 4>and this is an issue of a calendar going into

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<v Speaker 4>the midterm elections, and how much can this administration really

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<v Speaker 4>fortify some of the some of the support that they've

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<v Speaker 4>seen in polls recently based in the ceasefire? Can they

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<v Speaker 4>get oil prices down to three percent? We ask every

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<v Speaker 4>single commodity strategist who comes on, and they just either

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<v Speaker 4>say no comment or they just say no. And that

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<v Speaker 4>ultimately is what a lot of people, at least in Marcus,

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<v Speaker 4>seem to believe.

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<v Speaker 5>Three dollars a gallon is going to be really tough

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<v Speaker 5>for this administration. It's not just what's going on in

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<v Speaker 5>the Middle East and the strait of her moves, but

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<v Speaker 5>also it's peak driving season, where naturally and normally, with

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<v Speaker 5>the cyclical cycle of energy prices, you do see prices

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<v Speaker 5>rise in the summer. So this is going to be

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<v Speaker 5>a really hard time that they're trying to go to

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<v Speaker 5>before the midterm elections. And once again I mentioned this

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<v Speaker 5>poll over the weekend, two thirds of Americans are saying

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<v Speaker 5>gasoline prices themselves are putting a lot of pressure on

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<v Speaker 5>them families Right now.

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<v Speaker 2>It is certainly a problem for confidence creagizing once again

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<v Speaker 2>this morning, following a weekend of tension in the Middle

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<v Speaker 2>East culminating with the US ceasing and around it ship

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<v Speaker 2>Francisco Blanche Bank for America writing the paper oil market

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<v Speaker 2>is priced to perfection that ignores post conflict energy economy realities.

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<v Speaker 2>Francisco joins us now for more. Francisco, thanks for making

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<v Speaker 2>time for us this morning. That line at the end,

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<v Speaker 2>the post conflict energy economic realities, What are they that

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<v Speaker 2>you don't think we quite appreciate?

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<v Speaker 6>Hey, John, agreed to see you again.

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<v Speaker 1>Look, I think there is number one potentially a per

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<v Speaker 1>amount of refinery damage. Remember, about a third of the

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<v Speaker 1>traffic in oil market through hormuz is roughly a petroleum product.

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<v Speaker 1>So we're going to have a hard time restoring petroleum

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<v Speaker 1>product flows, which means I mean you were talking about

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<v Speaker 1>gasoline Eardier, and I do think that. I mean, gasoline

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<v Speaker 1>is probably the least important product out of those being

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<v Speaker 1>exported through hormones. Only five percent end of seaborne gasoline

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<v Speaker 1>globally flows through hormones. But there is other problems like

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<v Speaker 1>jet fuel or diesel NAPP that are are much more

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<v Speaker 1>reliant on that straight for supplies. Number two, there's also

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<v Speaker 1>oil fields. There's many old oil fields in the Middle

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<v Speaker 1>East that have had to be shut down in order

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<v Speaker 1>to essentially contain the storage overflow, and that could be

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<v Speaker 1>also a problem as we restart those. There's potentially pipeline damage.

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<v Speaker 6>And then of course there is there is just.

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<v Speaker 1>A notting the web of vessels which are tied up

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<v Speaker 1>on both sides of the strait and need to be

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<v Speaker 1>essentially reshuffled in a very meaningful way to restore flows.

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<v Speaker 1>So I do think those are probably the biggest constraints

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<v Speaker 1>on the oil side, and then on gas there is

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<v Speaker 1>there's a few others, as we know because we strike

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<v Speaker 1>the r strike.

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<v Speaker 6>In rasta Ura Russell about about three weeks.

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<v Speaker 2>Ago, Francisco, Can we just set on one product then,

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<v Speaker 2>jet field, and can we talk about cushions that are

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<v Speaker 2>available to some regions. How big is the cushion of

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<v Speaker 2>available jet field in a place like Europe. I imagine

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<v Speaker 2>it differs across from one country and one nation to

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<v Speaker 2>the next, But in your opinion for the region as

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<v Speaker 2>a whole right now, how big is the cushion that they've.

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<v Speaker 6>Gone Well, we heard it from from fatib role.

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<v Speaker 1>Last week it was six weeks, so I guess now

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<v Speaker 1>it's five weeks, which is why time is of the

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<v Speaker 1>essence to restore flows and to restore refinery operations across

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<v Speaker 1>the entire Middle East, which frankly.

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<v Speaker 6>I mean counts on two countries. Iran and Saudi Arabia have.

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<v Speaker 1>Two of the of the largest global refining toolkits, so

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<v Speaker 1>we need to see all those flows being restored. But yeah,

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<v Speaker 1>I would say Europe probably are five weeks at this point,

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<v Speaker 1>and John, we are already seeing cancellations of flights. It's

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<v Speaker 1>relatively small at the moment, but it's going to start

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<v Speaker 1>growing into the summer because one of the challenges here

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<v Speaker 1>is that we are going to to peak demand season

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<v Speaker 1>in the next five or six weeks, and once we

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<v Speaker 1>get into June, it's going to be complicated. So it's

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<v Speaker 1>not just about looking in your fair looking in your flight.

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<v Speaker 6>Is that that flight just might be canceled?

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<v Speaker 4>Francisco, is this just a European issue? Or when you

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<v Speaker 4>have certain regions that no longer have availability of jet fuel,

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<v Speaker 4>does that torpedo a lot of international travel travel more.

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<v Speaker 1>Broadly, Well, it does, because remember the only product globally

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<v Speaker 1>that has the same specifications across the oil complex is

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<v Speaker 1>actually JEFF Fuel for the obvious reasons that the buyings

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<v Speaker 1>and air bulses that fly around the world have to

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<v Speaker 1>be filled with the exact same specification.

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<v Speaker 6>So there is that there is that challenge.

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<v Speaker 1>You might be able to fly out of North America

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<v Speaker 1>which is sitting long product generally on long creol oil.

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<v Speaker 6>But can you get back I don't know.

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<v Speaker 1>And I think the other issue that's important to think

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<v Speaker 1>about here in when it comes to when it comes

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<v Speaker 1>to the petroleum product complexes that perhaps you were talking

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<v Speaker 1>all about gasoline. The gasoline there's some flexibility there. We

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<v Speaker 1>could see more but tain blending into summer gasoline, which

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<v Speaker 1>would shave off some of the prices. You could see

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<v Speaker 1>the relaxation of other fuel specifications into the summer. And

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<v Speaker 1>then also again gasoline it's a lot harder to make

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<v Speaker 1>under summer spec but then winter spec is generally easier

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<v Speaker 1>to meet and demand tends to be lower. So I

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<v Speaker 1>am perhaps a little more bearish on gasoline retive to

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<v Speaker 1>older products once we pass the summer. I do think

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<v Speaker 1>it's easier to get gasoline lower retive to older petroleum

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<v Speaker 1>products Francisco.

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<v Speaker 4>A lot of people have commented that they take some

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<v Speaker 4>comfort in the back end of the curve for oil prices.

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<v Speaker 6>You do have this.

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<v Speaker 4>Unprecedented backwardation that the front end, that current price is

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<v Speaker 4>incredibly high, and you see at the long end, or

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<v Speaker 4>just in December, you see about eighty dollars a barrel.

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<v Speaker 4>When you look at Brent crude, you think it's the opposite.

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<v Speaker 4>You think that's a warning sign.

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<v Speaker 1>Why, well, we do think that the well, the conflict,

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<v Speaker 1>first of all, is still far from still far from

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<v Speaker 1>over us. We've seen over the weekend only about twenty

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<v Speaker 1>vessels passed through on Saturday. And you know, frankly, we

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<v Speaker 1>need to see what the final negotiations yield. We know

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<v Speaker 1>it took about it took about twenty months.

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<v Speaker 6>To negotiate the jcpo A.

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<v Speaker 1>This this negotiations can be complex and I realized that

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<v Speaker 1>all parties want.

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<v Speaker 6>To get to a quick resolution here.

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<v Speaker 1>But this this takes time, and we need to see

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<v Speaker 1>the flows occurring in the meantime. If they're not the

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<v Speaker 1>flows are not moving, that that's a big problem for

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<v Speaker 1>the market. But also importantly, we do think that, as

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<v Speaker 1>a pointed out earlier, there's a lot of potential facilities

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<v Speaker 1>that may not be able to come back in full force.

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<v Speaker 1>Even if we get back to eighty eighty five percent

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<v Speaker 1>in the next two three months, we're still going to

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<v Speaker 1>another six plus months to get to the last ten

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<v Speaker 1>to fifteen percent of oil.

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<v Speaker 6>Flowing through or moose.

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<v Speaker 1>That's two to three million barrels a day that the

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<v Speaker 1>market will be short into the end of the year. So,

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<v Speaker 1>you know, while we are you know, we're hoping that

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<v Speaker 1>there's a resolution soon, we will still likely miss a

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<v Speaker 1>fair amount of energy for the foreseeable future in global

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<v Speaker 1>oil markets, and that will keep prices high into the

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<v Speaker 1>year end.

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<v Speaker 7>In our Francisco this week we saw our last week,

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<v Speaker 7>we saw the US Treasury Department basically flip flop. On Onnesday,

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<v Speaker 7>the Treasury Secretary said he will not renew the general

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<v Speaker 7>license on Russian crude, and then Friday, very late at night,

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<v Speaker 7>they decided to extend that waiver. How much is that

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<v Speaker 7>cushion in the market right now.

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<v Speaker 1>Well, there's definitely a little bit of cushion. I mean,

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<v Speaker 1>the Russian crude and product markets are pretty large. Russia

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<v Speaker 1>is the world's, depending on the day, second or third

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<v Speaker 1>largest crude oil user, and the second largest.

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<v Speaker 6>Petroleum product exporter, so that is a fair amount of cushion.

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<v Speaker 1>But then again, remember there's been reports of strikes in

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<v Speaker 1>different Russian ports, both in the Baltic as well as

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<v Speaker 1>more importantly in the in the in the Black Sea,

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<v Speaker 1>we've seen impacts on on top C and novor.

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<v Speaker 6>Sisk and so.

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<v Speaker 1>It's it's not easy for Russia to export oil either

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<v Speaker 1>because obviously we've seen news of Ukraine trying to attack

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<v Speaker 1>those facilities. So, I mean, energy assets are just generally

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<v Speaker 1>generally have become UH targets in military conflict and and

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<v Speaker 1>and that's one of the most difficult parts about forecasting

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<v Speaker 1>we're supplying the demand are going to be particularly supply

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<v Speaker 1>given that has become very much right from center of

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<v Speaker 1>of both policy actions to your point on the US

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<v Speaker 1>Rusure decision, but also military action, and and so I

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<v Speaker 1>do think it's it's I mean, Russian flows are very

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<v Speaker 1>important to keep the market in retive order, and that's

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<v Speaker 1>why I think that decision was made at the end

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<v Speaker 1>of last week.

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<v Speaker 2>Francisco enjoyed the night. Thanks for coming absent time for

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<v Speaker 2>us this morning. I appreciate it, Sir Francisco Blanche of

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<v Speaker 2>Bank of America,