Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Crude on track, at least for now, for its steepest
Speaker 2: month of the client since twenty twenty. Optimism building for
Speaker 2: a resumption of traffic through the straight upformers as anergy
Speaker 2: producers are highlighting the risk of an extended closure. Chefron's
Speaker 2: been warning quote we will start to see physical shortages.
Speaker 2: The CEO, Mike Worth, I'm very pleased to say joins
Speaker 2: Center Studio. Mike's going to see you. Good to see you, John,
Speaker 2: Welcome back to the program Sir. I get this question
Speaker 2: a lot. You're the expert. Help me answer it. Why
Speaker 2: is crude at one hundred at ninety and not close
Speaker 2: to the two hundred given this straight it's been shut
Speaker 2: for three months.
Speaker 1: You know, it's a little hard to explain.
Speaker 3: We really are seeing markets, Titan inventories draw demand for
Speaker 3: products around the world still very strong.
Speaker 1: I think there's this belief.
Speaker 3: And we you know, we're experiencing it again the last
Speaker 3: few days that the end is near. The conflict is
Speaker 3: nearly resolved, and flow through the straight will resume very quickly,
Speaker 3: and that has kept the back end of the curve
Speaker 3: lower than it might otherwise. Have been, and I think
Speaker 3: the psychology the market has been this is closer to
Speaker 3: the end rather than the beginning.
Speaker 4: But what about the physical world? When will inventories be
Speaker 4: at the very bottom?
Speaker 1: Before long?
Speaker 3: We are steadily drawing inventories down on products on crude
Speaker 3: in locations around the world. I think June and July
Speaker 3: are going to be critical months, and you can see
Speaker 3: the trajectory of these inventories in the data.
Speaker 1: And it's concerning do you.
Speaker 4: See any physical shortages right now around the world.
Speaker 3: We do see some in some Asian markets, and we've
Speaker 3: seen some rationing. We've seen work weeks adjusted, other demand
Speaker 3: measures imposed in some of the countries in Asia. Markets
Speaker 3: are very efficient at moving products and barrels to where
Speaker 3: they're needed, and we haven't reached a crisis point yet,
Speaker 3: but the inertia in the system is very, very strong
Speaker 3: and turning that is not easy.
Speaker 4: One of the main sticking points the US has when
Speaker 4: it comes to negotiating with Ron is this idea of
Speaker 4: the tolling.
Speaker 5: Would cheveryone consider paying a toll?
Speaker 1: No, we wouldn't.
Speaker 5: Do you know how people are paying a toll?
Speaker 3: I've heard reports of people using cryptocurrency in various countries.
Speaker 3: I think the Treasury has come out this week and
Speaker 3: sanctioned the new authority that has been put in place
Speaker 3: to oversee transit through the Strait. It went from a
Speaker 3: toll to a navigation fee.
Speaker 5: To something a navigation fee, a cop.
Speaker 3: I don't know enough about any of these things to
Speaker 3: say definitively, but look, freedom of navigation through international waterways
Speaker 3: is a very well established principle, and anything like this
Speaker 3: would begin to say that countries adjacent to an international
Speaker 3: waterway can charge some sort of a transit fee. There
Speaker 3: are many other places in the world where that principle
Speaker 3: could be applied, not just to energy products, but to
Speaker 3: all freight moving through the Straits of Malacca, the Bosphorus.
Speaker 3: Pick your choke point, and so that's not a principle
Speaker 3: I think that most countries in the world would find acceptable.
Speaker 6: How far are we away from having pipelines that connect
Speaker 6: some of these countries to the mainland and their production
Speaker 6: without having to traverse the straight at all.
Speaker 3: Well, there's a couple that exists now that you've talked
Speaker 3: about in Saudi and the UAE. The UA sanctioned a
Speaker 3: project last year which is about fifty percent complete to
Speaker 3: get more of their production over to Fujira and outside
Speaker 3: of the Strait.
Speaker 1: So I think you would see more of that, Lisa.
Speaker 3: The one opportunity there is countries like Iraq and Kuwait
Speaker 3: that are deeper up in the Gulf don't have access
Speaker 3: to those pipelines, and for them the route could be
Speaker 3: through the North and ultimately then into the Mediterranean, maybe
Speaker 3: through Turkey, where we see a pipeline comes out of
Speaker 3: Caspian Sea over into the Mediterranean in Turkey. And so
Speaker 3: I do think one of the responses to this will
Speaker 3: be infrastructure investments that will allow these energy flows to
Speaker 3: avoid the strade and horror moves. And that's underway now
Speaker 3: and I think you'll see that in the years that follow.
Speaker 6: We started the conversation talking about why oil prices aren't higher,
Speaker 6: and you're saying that we're getting close to breaking the
Speaker 6: bottoms of some of the inventory bins. And we were
Speaker 6: speaking just a moment ago with Alex Saltman at Barclays
Speaker 6: who said we actually could see a glut of oil
Speaker 6: in six to twelve months time if there is a
Speaker 6: resolution here, based on the production levels of so many
Speaker 6: different oil companies and countries, what's your take on that.
Speaker 6: Do you think that that's a feasible interpretation.
Speaker 3: Well, history says that shortages tend to be followed by gluts,
Speaker 3: and high prices send a signal and markets work, Consumers
Speaker 3: consume less, producers produce more in response to a price signal,
Speaker 3: and there's a time lag in the way both of
Speaker 3: those manifest themselves in the market. And what has happened
Speaker 3: historically is at the time that the new supplies reach
Speaker 3: the market, demand may have turned down through conservation measures,
Speaker 3: economic slowdown, maybe a recession, and you can see those
Speaker 3: lines crossover and the price cycles down. It's why commodity
Speaker 3: markets are cyclical, is they tend to overshoot. And history
Speaker 3: says when we get into one of these situations that
Speaker 3: is somewhere out in the future.
Speaker 2: What signal do you take from the futures curve? I'd
Speaker 2: lovely reaction to that, because so many people have pointed
Speaker 2: to the back end of the futures curve as a
Speaker 2: prediction of markets, of where they think CREUD will be.
Speaker 2: How does an energy boss like yourself look at the
Speaker 2: futures curve?
Speaker 3: Not very frequently. It's not something we use for planning purposes.
Speaker 3: We do a certain amount of hedging in our business
Speaker 3: on commercial activity where you will use futures, but we
Speaker 3: don't look at futures curve as a prediction of future price.
Speaker 3: We do our own fundamental analysis on demand, supply, technology, policy,
Speaker 3: economic growth and arrive at our own scenarios, and we
Speaker 3: don't use a point fourcast or a curve. We use
Speaker 3: a range of scenarios. Prices are hard to predict in
Speaker 3: these markets, and so we don't anchor on a single price.
Speaker 1: We use a range of prices.
Speaker 6: What's fascinating is you were talking about how typically commodity
Speaker 6: markets tend to overshoot and then you get the glut
Speaker 6: just as demand falls off. Are we overshooting because what
Speaker 6: I keep hearing is that we're not overshooting.
Speaker 5: The actually oil prices and the.
Speaker 6: Future's curve is remarkably low, and that people keep consuming.
Speaker 6: And frankly, people like yourself are not investing in more
Speaker 6: production right now. You're not increasing production traumatically to offset
Speaker 6: some of what's going on. So is this time different
Speaker 6: in terms of the commodity cycle.
Speaker 3: Well, first of all, we are increasing production. Our production
Speaker 3: growth seven to ten percent this year, which is a
Speaker 3: lot in a world where demand is growing one percent
Speaker 3: on average, and so there is investment in growth. Is
Speaker 3: this time different? You know, people say that every time
Speaker 3: and often find themselves regretting having said that this time
Speaker 3: is this is the circumstances. Here are things we haven't
Speaker 3: seen before. The twenty percent of the world's energy production
Speaker 3: cut off for now nearly one hundred days. A billion
Speaker 3: barrels that is not in the market that otherwise would
Speaker 3: have been in the market is not something that we've
Speaker 3: seen before. So that part of it is different. How
Speaker 3: commodity markets respond have a pattern that has been proven
Speaker 3: through different types of shocks to the system that is
Speaker 3: remarkably repeatable. Maybe not perfectly predictable, but it is something
Speaker 3: that you have to bear in mind when you're in
Speaker 3: this business, as you allocate capital and as you plan
Speaker 3: for your business.
Speaker 1: Is these patterns exist for a reason when.
Speaker 4: You allocate capital. I want to ask you about Venezuela.
Speaker 4: When will you put fresh dollars into the country.
Speaker 3: Yeah, we're currently operating under a system that's been approved
Speaker 3: by the US treasure and the Venezuelan government to recover
Speaker 3: debt that we're owed. We made some loans to their
Speaker 3: state owned company many years ago and they weren't repaid,
Speaker 3: and so we set up a mechanism to ensure repayment
Speaker 3: oil flows to the US, which is important for us
Speaker 3: for fine. We're working our way through that and we'll
Speaker 3: recover the debt over the next year or so, the
Speaker 3: final portion of it, and then we need a new
Speaker 3: set of fiscal terms under which we would invest in
Speaker 3: the country. Right now, the amount of tax and royalty
Speaker 3: that's paid doesn't leave enough for an investor to get
Speaker 3: a return on their investments.
Speaker 1: The country has changed.
Speaker 3: It's a hydrocarbon law has indicated a new range of
Speaker 3: taxes and royalties that would be applied to the energy sector,
Speaker 3: but they've not been specific about wearing the range those
Speaker 3: would land.
Speaker 1: So there are.
Speaker 3: Negotiations underway, discussions Even this week, we had a team
Speaker 3: in Venezuela that had some discussions on this issue. I
Speaker 3: expect over the next short period of time we may
Speaker 3: see some clarity from them on specific values on corporate
Speaker 3: income tax, on a range of things on royalties and
Speaker 3: how that might be applied. So there's progress being made
Speaker 3: to clarify the things that would be needed in order
Speaker 3: to make those investments, but we don't have enough clarity
Speaker 3: right now, understand what the regime would look like, and
Speaker 3: so it's unlikely we would put capital to work until
Speaker 3: those things are clarified.
Speaker 2: Inquiring minds want to know. I'm getting the feedback right now.
Speaker 2: So December is trying to get eighty four. What is
Speaker 2: the Microworth chef Ron price this year? What's the range
Speaker 2: in your scenario?
Speaker 3: Planet, Well, the range on the low end would probably
Speaker 3: get to that number, and on the high end if
Speaker 3: we were to see an extended constraint on transit out
Speaker 3: of the straight and horror moves. The question is how
Speaker 3: high is high?
Speaker 2: You get to very high numbers, so your low is
Speaker 2: actually where December is priced right now.
Speaker 3: Assumptions right, we don't tip into a recession, we don't
Speaker 3: have some other exogenous event. But yeah, it's going to
Speaker 3: take months john two to clear ships out of the strait,
Speaker 3: to make sure that the mines have been cleared, to
Speaker 3: establish to get two thousand ships out, they don't all
Speaker 3: go out at once. You need weeks and weeks. Somebody's
Speaker 3: got to prioritize to bulk traders go out first, to
Speaker 3: container ships go out first, to us, Allied ships go
Speaker 3: out first or last. Arranged two thousand ships. Decisions unclear
Speaker 3: at this point.
Speaker 5: Wouldn't it be the fifth fleet.
Speaker 3: It's unclear at this point. So there needs to be
Speaker 3: assystem to prioritized traffic. Shipowners have to be convinced that
Speaker 3: it's safe to transit through the strait. There need to
Speaker 3: be some sort of security measures, and then that's just
Speaker 3: to get ships out. You have to get ships in
Speaker 3: as well. And the tanks inside the gulf are full.
Speaker 3: That's why production is being slowed or stopped is because
Speaker 3: there's no place to put it. The ships are full,
Speaker 3: of the tanks are full, so you need new ships
Speaker 3: to come back in. Shipowners have to be comfortable sending
Speaker 3: ships back in after having ships trapped for months and
Speaker 3: crews trapped for months. They may or may not be
Speaker 3: willing to move all of their vessels back in. There's
Speaker 3: other routes now that are trading US to Asia is
Speaker 3: a very heavily traded route. There's a lot of ships
Speaker 3: in that service, so it will take months and then
Speaker 3: you then you start to clear out the inventories that
Speaker 3: are in tanks, which allows fields to restart, damage to
Speaker 3: be repaired.
Speaker 1: This doesn't happen overnight and so this is going to
Speaker 1: be with us for some time.
Speaker 2: I got to ask you, do you just sit here
Speaker 2: and say you first, how do you think about it?
Speaker 1: Well, we'd like to get our ships out. It's not
Speaker 1: a decision that ship.
Speaker 3: We have six ships inside the straight right now with
Speaker 3: our cargoes. All of them are chartered, so they're owned
Speaker 3: by a third party, and we don't ultimately make the call.
Speaker 3: The ship moowner decides whether or not he wants to
Speaker 3: put his vessel and his crew through the strait, and
Speaker 3: so that's a decision. We provide advice on input too,
Speaker 3: but we can't make that decision. So it's a very
Speaker 3: complex set of decisions that need to be made to
Speaker 3: begin to get things moving again, and it will happen slowly.
Speaker 3: I would expect there will be some stop and start
Speaker 3: to it. There still has been kinetic activity this week,
Speaker 3: someone which has been reported to the media, someone which
Speaker 3: has not, and so we see risks very real still
Speaker 3: in that.
Speaker 2: Generally you can't say things that hasn't been reported. What's
Speaker 2: not been reported? What are you hearing?
Speaker 3: Well, there's there have been There have been vessels that
Speaker 3: have been in transit that have suffered attacks.
Speaker 2: That's more than what we've heard of in the press.
Speaker 1: Yes, our reports would indicate that what do.
Speaker 2: They suggest how frequent of those attacks been.
Speaker 3: Maybe not every day, but there have been multiple incidents
Speaker 3: that have occurred, Mike.
Speaker 2: For the people of California, people waking up early this morning,
Speaker 2: perhaps on the West coast and tuning into this program,
Speaker 2: what's your message to them about why gas prices are
Speaker 2: so much higher in their state compared to everybody else.
Speaker 3: Well, this is politicians gas lighting about gas prices. The
Speaker 3: fact is California's policies for two decades have been driving
Speaker 3: prices higher. California has six refineries operating.
Speaker 1: Today, a little bit more than a year ago. We
Speaker 1: had nine.
Speaker 3: Refining capacities, down seventeen percent in just the last year.
Speaker 3: California has the highest taxes and fees in the nation.
Speaker 3: Californ On imports sixty percent of its crude oil, twenty
Speaker 3: five percent of its diesel, twenty percent of its gasoline,
Speaker 3: similar amounts of jet fuel. And we're in a situation
Speaker 3: where world energy markets are tight and so prices are
Speaker 3: going up everywhere. California has long been the highest price
Speaker 3: state in the country because the policies have constrained supply
Speaker 3: and demand is continuing to be very robust in a
Speaker 3: state where supply has been consciously constrained by policy.
Speaker 4: But how do some gasoline companies stations like Costco keep
Speaker 4: actually lower prices though he's.
Speaker 1: Got a different business model. I think.
Speaker 3: A hypermarketer like a Costco has things they use as
Speaker 3: almost a loss leader to bring traffic in and can
Speaker 3: operate on a very small margin because you go to
Speaker 3: the big box and that's where the revenue is, and
Speaker 3: the real P and L comes through the subscriptions and
Speaker 3: the memberships. A small service station owner doesn't have the
Speaker 3: benefit of that. They have to make a margin on
Speaker 3: the fuel that they sell and maybe some ancillary goods.
Speaker 3: So retailers all have different business models and you see
Speaker 3: that in the marketplace, and they meet different customer needs,
Speaker 3: so used to arrange of those prices.
Speaker 4: I'm sure Chevron is going to be on the mind
Speaker 4: of Gavin Newsom as he looks for twenty twenty eight
Speaker 4: presidential run. But it's also been I mean, you've been
Speaker 4: front and center when it comes to this administration as well.
Speaker 4: Do you spend more time in Washington or the Permian lately?
Speaker 1: Probably in Washington. I like being in the Permian.
Speaker 3: But my job requires some interaction with elected officials in
Speaker 3: the Senate and the House, the administration, and during a
Speaker 3: time of extreme distress in energy markets, there's a lot
Speaker 3: of dialogue that goes on in Washington, d C.
Speaker 1: So hopefully I'll get to the Permian on the second
Speaker 1: half of the year.
Speaker 6: Yeah, which would require a gasoline price is going down,
Speaker 6: and recently they've been remaining at this relatively high level,
Speaker 6: though they have diff just a bit. You talk about
Speaker 6: how he could to end up seeing shortages in the
Speaker 6: next few weeks even in the United States. Looking right
Speaker 6: now at distillate fuel inventories the lowest levels here since
Speaker 6: two thousand and three, a pretty shocking number. How much
Speaker 6: could you foresee gasoline prices in the United States rising
Speaker 6: outside of California because of just simply shortages that you're
Speaker 6: seeing on the ground.
Speaker 3: Yeah, well, right now, the US has come to the
Speaker 3: rescue of some of our allies around the world. We're
Speaker 3: exporting crude at record levels. We're exporting products to Europe
Speaker 3: in particular, and so what that means is products that
Speaker 3: might otherwise be used in the US are being highly
Speaker 3: valued elsewhere, and so we're seeing flows in that direction.
Speaker 1: Inventories are low for.
Speaker 3: Diesel for gasoline in the US, and we're moving into
Speaker 3: a period of time which seasonally says demand is likely
Speaker 3: to rise.
Speaker 1: The refineries in the country are running.
Speaker 3: As hard as they possibly can. They're all near maximum.
Speaker 1: Utilization, and so the market is tight.
Speaker 3: And this is the reason why I've talked about concerns
Speaker 3: about upward pressure on prices, because you can get away
Speaker 3: from the crude forward curve and get to diesel inventories,
Speaker 3: gasoline inventories, and the prices of those products, which are
Speaker 3: really the products that are consumed. And we're in a
Speaker 3: period where inventories are tight, demand and remain strong, prices
Speaker 3: are elevated, and there's risks they go higher and shortages
Speaker 3: that have now only really appeared in Asia could begin
Speaker 3: to show up in other parts of the world.
Speaker 2: Mike, you one of the very best a clinic has
Speaker 2: always We appreciate your time. Thank you, sir, Thank you.
Speaker 2: My worth as a Chevron CEO