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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: Hello and welcome to another episode of the Odd Lots

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Speaker 2: podcast dime show Why Isn't It All?

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Speaker 3: And I'm Tracy Alloway.

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Speaker 2: Tracy recording this June twenty fourth at noon. Brent crude

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Speaker 2: is below seventy four dollars a barrel.

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Speaker 3: I know, it's crazy to look back when the Iran

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Speaker 3: War started. I don't think we ever got above like

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Speaker 3: one hundred and twenty dollars for a barrel on Brent.

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Speaker 3: Despite this scenario, the closure of the Strait of Horror

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Speaker 3: moves the thing that oil analysts had talked about as

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Speaker 3: a tail risk event for years and years and years

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Speaker 3: actually happening.

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Speaker 2: No, it is really remarkable. We had two peaks. It

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Speaker 2: was one right at the end of March and then

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Speaker 2: one right at the end of April basically, and the

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Speaker 2: closing price right around just a little bit shy of

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Speaker 2: one twenty both of those days. But no, absolutely not

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Speaker 2: like some of the doomsday scenarios. At least for now.

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Speaker 2: You know, their crossings are picking up. I guess the

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Speaker 2: negotiations are ongoing of some sort, But no, they clearly

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Speaker 2: the doomsday scenarios about how this couldn't even stay closed

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Speaker 2: for a few weeks, let alone two or three months,

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Speaker 2: did not pan out.

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Speaker 3: I see a lot of people on Twitter slash x

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Speaker 3: making fun of the barrel counters right now, Yes, which

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Speaker 3: I have a lot of sympathy for barrel counters because

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Speaker 3: I like my analysis to be grounded in facts and numbers.

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Speaker 3: But there is clearly a disconnect here between what happened

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Speaker 3: with the price and some of those predictions.

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Speaker 2: Well, maybe we learned something. Maybe we learned something about

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Speaker 2: the oil market in the last few months. We've gotten

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Speaker 2: a lot of requests for this episode, and so we

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Speaker 2: are going to talk to someone that we talked to

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Speaker 2: right at the very beginning of the war, someone who've

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Speaker 2: talked to a lot, someone whose oil analysis would greatly respect,

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Speaker 2: even if this particular incident did not perhaps pan out

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Speaker 2: the way he and many others, almost all the others expected.

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Speaker 2: We're gonna be speaking with Rory Johnston. He's the founder

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Speaker 2: of the Commodity Context newsletter, and maybe he learned something

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Speaker 2: about the oil market in the last few months. So Rory,

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Speaker 2: thank you so much. By fan request and a request

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Speaker 2: because we want to learn something to by fan request,

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Speaker 2: welcome back to the podcast.

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Speaker 4: Thanks for having me, guys.

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Speaker 2: Let's just start with like what was let's before, Let's

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Speaker 2: start with like, okay, early March. Remind listeners what this

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Speaker 2: sort of your take and the sort of general wisdom was,

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Speaker 2: you know, first couple of weeks of March, about how

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Speaker 2: long this could persist and why this remind me about

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Speaker 2: why the straight up horror moves was seen as sort

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Speaker 2: of the choke point among choke points when it comes

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Speaker 2: to oil.

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Speaker 5: Yeah, so let's transport ourselves back to our last conversation.

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Speaker 3: And we need time travel machine think.

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Speaker 5: So, Yeah, the reason that it was such a massive

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Speaker 5: deal and still remains, I would say, I mean, while

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Speaker 5: we have avoided the doomsday prophecies, it is still by

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Speaker 5: far the largest supply disruption in the market's history. And

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Speaker 5: for the numbers for the barrel counting for Tracy, the

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Speaker 5: total flow through Hormuze prior to the war was roughly

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Speaker 5: twenty million barrels a day. Now, we knew we weren't

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Speaker 5: going to lose all of that, because we knew that

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Speaker 5: we had some offsets, you know, the Saudi East West pipeline,

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Speaker 5: the Mrodi pipeline to Fujera on the Gulf of Vomon,

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Speaker 5: But overall, netting for all of those known rerouting options,

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Speaker 5: which again at the time we didn't know if they

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Speaker 5: would fully work because they'd never be fully tested, but

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Speaker 5: they did work, thankfully. But even netting of those, we

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Speaker 5: were still down roughly thirteen million barrels a day of

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Speaker 5: golf oil production excluding Iran that had been forcibly shut

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Speaker 5: in through the duration of this crisis, and it is

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Speaker 5: only now beginning to pick back up again. That's a

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Speaker 5: lot of oil. That's thirteen plus percent of the global supply.

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Speaker 5: And the reason we thought that prices were going to

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Speaker 5: hit one fifty or even two hundred dollars a barrel

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Speaker 5: was that when you have a supply shock that large,

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Speaker 5: without any mora offsets, you end up at demand destructive

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Speaker 5: pricing really really fast, and to destroy that level the

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Speaker 5: depth of that demand, we had never seen that before,

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Speaker 5: but two hundred dollars a barrel seemed like the reasonable

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Speaker 5: price at which that would happen. Now, thankfully we did

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Speaker 5: not have to destroy that demand. And what we will

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Speaker 5: talk about shortly, I'm sure, is all the ways in

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Speaker 5: which the system adapted and flexed. And I think we

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Speaker 5: saw this most notably above all in China.

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Speaker 3: Yeah, okay, well, why don't we just dive into it.

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Speaker 3: Give us your overview on what happened and why we

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Speaker 3: didn't actually hit two hundred dollars a barrel. Yeah.

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Speaker 5: So, I would say the two biggest things, one on

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Speaker 5: the fundamentally on the barrel counting side, was China. We

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Speaker 5: always knew that China had huge stockpiles of oil, but

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Speaker 5: we didn't know how they were going to react to

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Speaker 5: this crisis. And what we've seen through this crisis is

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Speaker 5: that Chinese oil imports. Crude oil imports into China, the

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Speaker 5: world's largest crudal importer, fell by upwards of five million

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Speaker 5: barrels a day between there the three month average prior

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Speaker 5: to the war through to June. Now we're not quite

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Speaker 5: done this month, but that's roughly where we're trending for

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Speaker 5: June so far. That five million barrels a day was

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Speaker 5: upwards of half of the total spot market supply hit

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Speaker 5: to Asia, and that allowed a lot of those other

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Speaker 5: Asian importers to basically not have the competition that they

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Speaker 5: would have had for the barrels they were importing. So

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Speaker 5: the countries that were hit hardest by this crisis in

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Speaker 5: the governments that were most panicked, governments in South Korea, Australia, Japan, Taiwan,

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Speaker 5: et cetera. There was a period where like the Prime

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Speaker 5: Minister of Australia was coming out daily and announcing the

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Speaker 5: Australian government's successful acquisition of a cargo of diesel like

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Speaker 5: it felt very covidy.

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Speaker 4: Now, those importers.

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Speaker 5: Saw imports collapse through March and April, but through May

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Speaker 5: and into June they actually.

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Speaker 4: Recovered basically to pre war levels.

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Speaker 5: And the largest facilitator of that was the fact that

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Speaker 5: China was not competing for any of the other barrels

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Speaker 5: and it had absorbed so much of the shock.

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Speaker 3: Itself just on China specifically. I have so many questions already,

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Speaker 3: but do you have any sense of how much of

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Speaker 3: this was genuine demand destruction or substitution in China versus

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Speaker 3: just releasing from stockpiles.

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Speaker 5: It's a good question, and the form answers we do

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Speaker 5: not have one hundred percent certainty as to what the

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Speaker 5: exact composition of that swing was. We know the oil

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Speaker 5: going in felt by five to six million barrels a

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Speaker 5: day given products as well, but in terms of the

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Speaker 5: actual demand destruction. The thing that we have seen across

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Speaker 5: China is that all of the mobility indicarees, and you

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Speaker 5: guys are actually in China very recently, all the mobilia

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Speaker 5: indicators showed no notable decline the level of implied demand

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Speaker 5: destruction that we see. And importantly here, China does not

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Speaker 5: publish official demand data. It also doesn't very importantly publish

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Speaker 5: official inventory data. So we're left kind of feeling around

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Speaker 5: the shadows. The implied demand destruction we saw to this

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Speaker 5: crisis was on par was the steepest demand destruction implied

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Speaker 5: in history, and on par on the volume with the

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Speaker 5: COVID zero demand shock in twenty twenty two. But you

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Speaker 5: guys were in China, I have not seen any reporting

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Speaker 5: that indicates that level of lockdowns. So we start asking questions, Okay,

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Speaker 5: what's going on in the middle. Also, when you look

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Speaker 5: at typically, you'd assume that that level of demand destruction

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Speaker 5: without COVID zero lockdowns would have had to be driven

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Speaker 5: by massive price increases. But part of what also happened

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Speaker 5: to this crisis is that China had basically throttled the

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Speaker 5: ability of domestic retail prices through their normal regulatory procedures.

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Speaker 5: Prices of petrol in Beijing only rose maybe thirty percent,

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Speaker 5: versus the doubling we saw globally, So again it just

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Speaker 5: doesn't track for me that all of that, or even

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Speaker 5: most of that, was demand destruction. So then we go

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Speaker 5: to this point about substitution or outright releases of strategic

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Speaker 5: petroleum reserves. Now, the one thing we can say is

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Speaker 5: that the inventories we can see these are the floating

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Speaker 5: roof storage tanks for crude oil. Those are still very,

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Speaker 5: very high and roughly where they stood at the beginning

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Speaker 5: of this crisis. So as far as we can they're

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Speaker 5: not drawing down aggressively on those stocks, at least not yet.

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Speaker 5: The caveat there is that we can't see through those

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Speaker 5: satellite analyzes. We can't see underground storage tank, underground storage caverns,

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Speaker 5: and their proper spr They have six storage caverns at

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Speaker 5: least that we know of, about one hundred and thirty

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Speaker 5: one million barrels. The likelihood is that they have been

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Speaker 5: drawing down those because the following crude oil imports fell

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Speaker 5: far faster than the decline in refining run rates, so

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Speaker 5: again had to be made up somewhere. So we're just

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Speaker 5: kind of feeling around the shadows. For the Oakham's raser

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Speaker 5: here is that they have been releasing silently additional crude inventories.

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Speaker 5: But above and beyond that, we know that crude refining

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Speaker 5: run rates also fell dramatically by three to three and

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Speaker 5: a half million barrels a day. So where's the implied

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Speaker 5: demand destruction? Now, this is where we either get one

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Speaker 5: of two things. We either get a very large release

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Speaker 5: of refined product stocks. Now we know that China has

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Speaker 5: large stocks of refined products like gasoline, diesel, jet fuel,

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Speaker 5: et cetera. We have virtually no firm information on those

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Speaker 5: stock levels or can track them very closely day to

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Speaker 5: day or week to week, because unlike crude, they don't

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Speaker 5: have flat they don't have floating roofs, So we have

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Speaker 5: to kind of again infer those stockpiles upwards of a

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Speaker 5: billion barrels, but the implications that they're drawing them down

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Speaker 5: very very very rapidly. The other thing we could have

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Speaker 5: seen is, and your colleague cave Blast was on this

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Speaker 5: very early, was on the potential to switch some of

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Speaker 5: the petrochemical feedstocks from oil derived products like NAFA and

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Speaker 5: LPG towards more gas based products, natural gas or even

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Speaker 5: the extreme coal based chemical products that could again have

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Speaker 5: a switch on the margin. And then the other thing

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Speaker 5: you hear is that like, well, China has massive penetration

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Speaker 5: of electric vehicles, so maybe that was making part of

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Speaker 5: it as well. The challenge is that it's not the

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Speaker 5: sales penetration the sales composition that drives fuel demand, it's

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Speaker 5: the fleet composition. And while new energy vehicles in China

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Speaker 5: are like sixty plus percent of new vehicles sales, the

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Speaker 5: overall stock of vehicles since China is still ten to

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Speaker 5: one internal combustion engines to the evs. So the implication

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Speaker 5: would have to be that baging out this massive fleet

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Speaker 5: of evs, they're like waiting to roll off the line,

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Speaker 5: and that just doesn't seem plausible on the timeline we're

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Speaker 5: talking about.

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Speaker 2: That is a very important stet to keep in mind.

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Speaker 2: And I didn't know the exact numbers, but I do

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Speaker 2: think that's important because we all, yeah, we talk about

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Speaker 2: the declining like oil and intensitivity of the Chinese economy

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Speaker 2: due to growing EV sales. You know, it's gonna take

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Speaker 2: a while before it really swings and enough to make

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Speaker 2: a difference.

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Speaker 3: I think, you know, you don't think they have a

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Speaker 3: secret stockpile of EV they have.

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Speaker 2: A strategic They just swap out everyone's cars, like everyone

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Speaker 2: gets a free EV a few.

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Speaker 3: And you get an Apollo, and you get an Apollo.

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Speaker 2: You know, it's really cool about the Chinese EV's or sorry,

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Speaker 2: the Chinese automatic driving vehicles. All cars, whether they're the

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Speaker 2: official like robotaxis or when you're in a car that

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Speaker 2: you push on self driving mode, they have this blue

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Speaker 2: light that shows up, so it's not like the typical

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Speaker 2: red light, and so you could see every single car

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Speaker 2: on the road in China that is currently operating in

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Speaker 2: an autonomous manner and know if there's a Yeah, it's

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Speaker 2: pretty nice.

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Speaker 1: You know.

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Speaker 2: You mentioned Tracy at the beginning of the episode Barrel Counting.

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Speaker 2: I think one of the reasons I like we like

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Speaker 2: talking to Rory is that I do consider you to

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Speaker 2: be a humble barrel counter because it's so easy in

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Speaker 2: oil conversation to get tempted by grand threads about geopolitics,

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Speaker 2: right because it's sort of intertwined. So I really do

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Speaker 2: appreciate the humble barrel counter. But when we talk about

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Speaker 2: this sort of like China's willingness to either draw down stocks,

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Speaker 2: et cetera. There's two sort of related questions that I have.

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Speaker 2: It's like, one is, could China just be like have

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Speaker 2: done its neighbors as solid in the sense that it's like,

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Speaker 2: you know what, we really do have quite a big buffer,

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Speaker 2: and we know that Singapore and Taiwan and Korea are

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Speaker 2: really going to be Japan are going to really be understrained.

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Speaker 2: So from like a sort of soft power goodwill thing, like,

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Speaker 2: we don't really need to be adding and be given

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Speaker 2: that we know and be given the ev penetration, even

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Speaker 2: if it's small now, it's going to grow. Is the

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Speaker 2: consensus and oil world that the massive stockpiles in China

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Speaker 2: do they exist in the event of like preparation for

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Speaker 2: a theoretical war, which would be a very oil intensive process.

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Speaker 4: Yeah, so let's work in reverse there, and I think so.

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Speaker 5: Back in twenty twenty three, I wrote a piece called

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Speaker 5: Chinese Oil demandats, which was about how in twenty twenty three,

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Speaker 5: with this massive growth in Chinese imparent demand. Again, remember

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Speaker 5: China's an official doesn't publish official demand stats. It was

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Speaker 5: so big, and China was still pretty weak coming out

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Speaker 5: of COVID zero. At that point, it didn't seem plausible,

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Speaker 5: and I kind of speculated that maybe they were building

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Speaker 5: refined product stocks, which we can't see because of the

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Speaker 5: way we calculate this stuff. And at the time, the

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Speaker 5: worry was that it was an anticipation of a war

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Speaker 5: or an invasion of Taiwan. At that stage you had

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Speaker 5: and increased belicosity of Beijing, a lot of saber rattling them,

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Speaker 5: buzzing air space, naval drills, et cetera. So I think

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Speaker 5: that was definitely part of it. That was the thought

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Speaker 5: at the time. Now what we've seen is that obviously

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Speaker 5: came in very, very handy now for much the same reason,

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Speaker 5: although not getting blockaded through Malacca, but just the lack

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Speaker 5: of horor moves itself, which again was always part of

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Speaker 5: China's kind of strategic or perception of strategic procarity of

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Speaker 5: it of its stockpiles. But I think to this point

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Speaker 5: of like why this is the question that like continues

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Speaker 5: I can you to obsess about because it also kind

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Speaker 5: of tells you, like when they're going to re enter

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Speaker 5: the market, because as we will talk right now, not

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Speaker 5: only are crudal prices collapsing, but we've actually seen prompt

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Speaker 5: Brent time spreads, the difference between the first and the

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Speaker 5: second contract actually flip into outright canentango today.

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Speaker 4: So I think it's a pridiculous thing.

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Speaker 5: We're swimming in oil, at least relative to demand, and

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Speaker 5: I think part of that is that China just still

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Speaker 5: hasn't stepped back in as a competitive importer. So to

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Speaker 5: your point, Joe, this idea that like maybe Beijing was

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Speaker 5: playing the altruistic neighbor, which I think is I think

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Speaker 5: one of the theories I'm holding as well, which is,

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Speaker 5: not only do they want to kind of be seen

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Speaker 5: as the good neighbor, not only do they want to

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Speaker 5: be seen as kind of standing up and defending its

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Speaker 5: neighbors when very clearly and they're telling Washington has abandoned

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Speaker 5: you and kind of stuck you with this massive energy crisis.

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Speaker 5: The challenge I think with that, oh, I think also

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Speaker 5: if China is trying to pivot away from the US market,

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Speaker 5: it's only other market options are Asia or Europe really

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Speaker 5: in terms of like a sizable sources of demand, So

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Speaker 5: it's not its interest to see those economies kind of collapse.

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Speaker 5: While North America remains relatively insulated given domestic supplies. I

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Speaker 5: think the only challenge with this theory is that if

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Speaker 5: that was true, I would have expected China to say

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Speaker 5: something about it.

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Speaker 4: And the fact is.

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Speaker 5: That so far we have seen we've heard virtually nothing

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Speaker 5: from Beijing or any of the regulatory authorities that this

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Speaker 5: is happening, why it's happening, or the scale of what

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Speaker 5: talking about. The other I think more nefarious option, and

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Speaker 5: you were just talking about how I'm a humble barrel counter.

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Speaker 5: I don't like to go grand strategy, but I think

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Speaker 5: there is like the put my tinfoil hat on for

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Speaker 5: a second, Why would China do this and not talk

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Speaker 5: about it?

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Speaker 4: The other option.

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Speaker 5: I still think this is less likely because it seems

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Speaker 5: very nefarious. But we had the Trump administration visiting Beijing

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Speaker 5: a couple months ago. At the time, it seemed like

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Speaker 5: nothing much came out of those meetings. It seemed pretty

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Speaker 5: lukewarm at best. But I think there's a chance that

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Speaker 5: you saw some kind of discussion between the Trump administration

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Speaker 5: and Beijing over like help us out with this and

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Speaker 5: we will do something for you in the future.

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Speaker 4: Now, what could that.

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Speaker 5: Be One of the things that was happening at the

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Speaker 5: time was with all of the military comment destroyed in

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Speaker 5: the Middle East from the Iranian attacks, lots of advanced

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Speaker 5: radar systems, anti anti ship, anti aircraft missiles, et cetera,

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Speaker 5: et cetera, Washington began migrating all of its kit that

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Speaker 5: had been in Asia back over to the Middle least.

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Speaker 5: So maybe this is part of this broader kind of

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Speaker 5: don Row doctrine that Trump sees himself as pulling out

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Speaker 5: of Asia, and maybe someone somewhere made that point and said, like,

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Speaker 5: if you help us, we'll keep this going. That said,

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Speaker 5: I again, I don't think any of this perfectly fits,

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Speaker 5: and I think the easy answer is that it remains.

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Speaker 4: A mystery as to why China is doing this.

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Speaker 5: The only problem is is that given that we still

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Speaker 5: don't understand why China did this, or even to that degree,

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Speaker 5: how exactly they managed to pull it off, it makes

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Speaker 5: it difficult to handicap when they're going to enter back

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Speaker 5: into the market, because obviously a five million barrel a

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Speaker 5: day swing is massive in this context and right now,

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Speaker 5: I think part of the reason that that crude prices

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Speaker 5: and time spreads are back into canentango today is that

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Speaker 5: we have this rising surge of exiting transits out of

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Speaker 5: hormos that are running up against a still relatively weak

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Speaker 5: import market, driven first and foremost by China.

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Speaker 3: So China isn't the only one that's been releasing from stockpiles.

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Speaker 3: So the US also has a strategic petroleum reserve. And

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Speaker 3: I think we were getting pretty close to the operational

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Speaker 3: minimum on that thing. And Jeff Curry, who's been on

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Speaker 3: the podcast a number of times, he had a really

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Speaker 3: good line basically saying, this is not supply responding to price,

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Speaker 3: it's inventory responding to price, and inventory, unlike production, has

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Speaker 3: a floor. So Devil's advocate question, But like if this

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Speaker 3: kept going, if the Horror Movez shuts again, or if

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Speaker 3: it hadn't been opened in recent days, and I guess

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Speaker 3: I should mention we're recording this on June twenty fourth,

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Speaker 3: could that inventory response have gone away? And could we

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Speaker 3: see prices shoot up?

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Speaker 4: Absolutely?

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Speaker 5: You know, when we started this crisis, we had been

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Speaker 5: in a surplus in the oil market for upwards of

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Speaker 5: a year. We had built substantial stockpiles, both commercial and strategic. Obviously,

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Speaker 5: in the case of China, strategic, we were as buffered

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Speaker 5: as humanly possible to weather this shock. I still didn't

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Speaker 5: think it was enough at the time, and that proved

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Speaker 5: it to be thankfully incorrect. But now we have drawn

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Speaker 5: down massive volumes of oil. To put in perspective that

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Speaker 5: thirteen million barrels a day of Middle Eastern productions and

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Speaker 5: shut in. The cumulative volume of that to date's roughly

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Speaker 5: one point three billion barrels.

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Speaker 4: Like we're talking massive, massive gobs of oil.

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Speaker 5: The Collective IA spr release at its upper end as

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Speaker 5: pegged at about four hundred million barrels. The cumulative reduction

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Speaker 5: in Chinese imports over this period, again relative to three

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Speaker 5: months prior to the war, is between four and five

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Speaker 5: hundred million. So at least on that basis alone, China

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Speaker 5: swung as much and likely more than the Collective IA

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Speaker 5: member states. And what I will say about sprs in

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Speaker 5: my modeling. In my mental model, I think about sprs

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Speaker 5: not as inventory per se, but as discretionary supply and demand.

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Speaker 5: That when you think about the effect of inventories on prices,

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Speaker 5: and I think they are the primary thing that drives

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Speaker 5: prices and perceptions of scarcity. It's mainly the commercial kind

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Speaker 5: of merchant inventories that catch the residual the remaining surplus

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Speaker 5: or deficit after all said and done, that drives that

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Speaker 5: kind of marginal pricing influence. But an spr release, as

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Speaker 5: an example, manifests in the market as new supply, not

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Speaker 5: new production, but new supply that wasn't available before. And

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Speaker 5: we're actually seeing another stock or strategic stock release of

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Speaker 5: that kind in a way right now. In Hormus itself,

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Speaker 5: we've had for this whole period, we've had well over

381
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Speaker 5: one hundred million barrels of oil trapped in Hormuz. These

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Speaker 5: are the ships that have been trapped unable to escape.

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Speaker 5: Those are the ships that we're seeing rise very quickly

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Speaker 5: in terms of their exit pace out of Hormuz. Again,

385
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Speaker 5: but because that is the stockpile, the floating oil ofvailable

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Speaker 5: and hormones is drawing down faster than it is being

387
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Speaker 5: replenished with new loadings, the pace that we're seeing come

388
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Speaker 5: out of Hormones right now also is inherently unsustainable and

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Speaker 5: it self represents some kind of stockpile release from a

390
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Speaker 5: stockpile that was not accessible to the market in the

391
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Speaker 5: Gulf to now a stockpile that is accessible to the

392
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Speaker 5: market in the broader market, in the broader world. But

393
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Speaker 5: that's right now what's running up against the lack of

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Speaker 5: Chinese import demand.

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Speaker 2: First of all, I have a very short question. The

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Speaker 2: start of the year, brent was around sixty and on

397
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Speaker 2: the eve of the wars seventy just real quickly, would

398
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Speaker 2: you say a non trivial amount of that ten dollars

399
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Speaker 2: barrel increase was I mean, people were talking about the

400
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Speaker 2: risk of war all year. Would you say at least

401
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Speaker 2: some of that was driven by war premium already rising

402
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Speaker 2: before the initial strikes.

403
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Speaker 5: Yes, okay, And I think part of that too. Again,

404
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Speaker 5: remember that the oil mark was exceptionally weak prior to this.

405
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Speaker 5: Going now flat price is rising because as you noted,

406
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Speaker 5: I think there was this kind of precautionary kind of

407
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Speaker 5: geopolitical premium being built in. But on the eve of

408
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Speaker 5: the war, the last week before the war, we saw

409
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Speaker 5: prompt rent also dipping into Cantanga. That was your sign

410
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Speaker 5: that we had too much supply. So I think that

411
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Speaker 5: that was exactly what happened.

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Speaker 2: So right now oil is it like again just below

413
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Speaker 2: seventy four, and like seventy on the eve of the war.

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Speaker 2: Not necessarily a reason to think that that's a floor.

415
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Speaker 2: Given what we know about the world swimming in oil,

416
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Speaker 2: so maybe it could even go lower. All right, I'm

417
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Speaker 2: going to try and do something that's like a very

418
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Speaker 2: like we're all doing like self criticism here theme of

419
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Speaker 2: the day. So we're going to do like a sort

420
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Speaker 2: of double counterfactual question. So if I had been a

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Speaker 2: smarter interviewer in March of twenty twenty six, which feels

422
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Speaker 2: like a long time ago, you know, I think I

423
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Speaker 2: probably asked you. You know, it's like, okay, it's like, well,

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Speaker 2: what about that pipeline that Saudi Arabia has gone on?

425
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Speaker 2: And I might have said, well what about the role

426
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Speaker 2: of sprs, or maybe even I might have asked something

427
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Speaker 2: like what about lowering sanctions on Russian oil? Et cetera.

428
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Speaker 2: I did not ask Rory. China is importing so much

429
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Speaker 2: more oil than it needs to operate its economy day

430
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Speaker 2: to day. So if I had asked you, so this

431
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Speaker 2: is going to force you to put yourself in early March. Mind.

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Speaker 2: So let's imagine it's early March and I say, Rory,

433
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Speaker 2: but can't trying to just massively reduce its imports? They

434
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Speaker 2: don't use that much oil. It's a bunch of evs.

435
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Speaker 2: What would Rory in March tenth or whatever, twenty twenty six.

436
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Speaker 2: How would you have thought then if I had proposed

437
00:22:24,440 --> 00:22:26,320
Speaker 2: that as a possible way out of this crisis.

438
00:22:27,240 --> 00:22:29,960
Speaker 5: I like this game, so I think that what I

439
00:22:30,000 --> 00:22:32,800
Speaker 5: would have said at the time is we knew we

440
00:22:32,840 --> 00:22:35,680
Speaker 5: were going to get I, you know, Iemmber State strategic releases.

441
00:22:36,320 --> 00:22:38,800
Speaker 5: We probably were also going to get some kind of

442
00:22:38,880 --> 00:22:40,280
Speaker 5: or at least at the time, the thought would have

443
00:22:40,280 --> 00:22:42,280
Speaker 5: that we might have get some kind of Chinese release,

444
00:22:42,359 --> 00:22:42,640
Speaker 5: or at.

445
00:22:42,560 --> 00:22:44,800
Speaker 4: Least they would have stalked stopped stockpiling.

446
00:22:45,359 --> 00:22:47,600
Speaker 5: But I still at the time I would have found

447
00:22:47,640 --> 00:22:52,320
Speaker 5: it very implausible that they reduced imports by five million

448
00:22:52,359 --> 00:22:53,000
Speaker 5: barrels a day.

449
00:22:53,280 --> 00:22:54,920
Speaker 4: I think it's in terms of the scale.

450
00:22:54,960 --> 00:22:56,920
Speaker 5: I think that yes, there could have been a little

451
00:22:56,920 --> 00:23:00,560
Speaker 5: bit of reduction there, but even in eindsight, it's it's very,

452
00:23:00,680 --> 00:23:04,440
Speaker 5: very surprising the scale of reduction we saw. The other

453
00:23:04,480 --> 00:23:07,600
Speaker 5: thing I think is that the other question that you know,

454
00:23:07,640 --> 00:23:09,520
Speaker 5: if I was to go back and kind of challenge

455
00:23:09,520 --> 00:23:12,280
Speaker 5: my own challenge myself, I'll do the meta meta here, Yeah,

456
00:23:12,359 --> 00:23:15,080
Speaker 5: I would say that, Okay, we had this big surplus. Beforehand,

457
00:23:15,520 --> 00:23:17,920
Speaker 5: everything looked very very bearish. This was thought to be

458
00:23:18,160 --> 00:23:22,080
Speaker 5: a temporary shock at the time, and it's inherently temporary

459
00:23:22,080 --> 00:23:24,199
Speaker 5: because we all thought it wasn't going to be sustainable.

460
00:23:24,520 --> 00:23:26,880
Speaker 5: The challenge is that when we think about fair value

461
00:23:26,920 --> 00:23:29,560
Speaker 5: in the market, we think about the relationship between inventories

462
00:23:29,640 --> 00:23:33,480
Speaker 5: and prices. Part of what we've historically seen is that

463
00:23:33,480 --> 00:23:36,000
Speaker 5: when inventories get really low and prices get really high,

464
00:23:36,560 --> 00:23:41,080
Speaker 5: the outlook for future balances is also pretty precarious. But

465
00:23:41,119 --> 00:23:43,200
Speaker 5: what we see in this crisis is that going in

466
00:23:43,600 --> 00:23:44,720
Speaker 5: we were oversupplied.

467
00:23:44,800 --> 00:23:45,480
Speaker 4: The future was.

468
00:23:45,400 --> 00:23:50,720
Speaker 5: Looking even more oversupplied. So when you saw inventories drawing

469
00:23:50,760 --> 00:23:53,360
Speaker 5: down towards tank bottoms, yes, if we hit tank bottoms

470
00:23:53,359 --> 00:23:56,800
Speaker 5: and we actually like hit that acute reckoning where you

471
00:23:56,880 --> 00:23:58,840
Speaker 5: had to destroy a man because there's literally nothing left,

472
00:23:58,840 --> 00:24:01,720
Speaker 5: then yeah, you could have gotten this massive spike. But

473
00:24:01,840 --> 00:24:05,960
Speaker 5: in terms of the market's wariness or concern about those

474
00:24:06,000 --> 00:24:10,040
Speaker 5: lower levels, you could make an argument that, well, it

475
00:24:10,080 --> 00:24:11,800
Speaker 5: doesn't really matter if they go low, because we know

476
00:24:11,840 --> 00:24:14,080
Speaker 5: they're going to get swollen again next year as soon

477
00:24:14,119 --> 00:24:15,880
Speaker 5: as this is open. And I think that that's one

478
00:24:15,920 --> 00:24:18,399
Speaker 5: thing that I may have misappreciated the time. Even if

479
00:24:18,440 --> 00:24:20,520
Speaker 5: I went into this, if I went into this crisis

480
00:24:20,520 --> 00:24:25,439
Speaker 5: bearish before flipping bullish during after Hormones was closed. I

481
00:24:25,480 --> 00:24:28,840
Speaker 5: still thought that Hormons was such a larger kind of

482
00:24:28,920 --> 00:24:31,359
Speaker 5: shock to the system that even going in with a

483
00:24:31,400 --> 00:24:34,960
Speaker 5: three million barrel a day surplus, a thirteen million barrel

484
00:24:34,960 --> 00:24:37,120
Speaker 5: a day loss of production was still going to put

485
00:24:37,119 --> 00:24:40,320
Speaker 5: you in an extraordinarily type position. But again, I think

486
00:24:40,359 --> 00:24:42,639
Speaker 5: that that's part of what I may have misconsidered. I

487
00:24:42,680 --> 00:24:44,359
Speaker 5: think the one final thing I'll say, and the one

488
00:24:44,359 --> 00:24:45,639
Speaker 5: thing I haven't mentioned so far and I think we

489
00:24:45,680 --> 00:24:49,040
Speaker 5: should is the job owning is the fact that when

490
00:24:49,080 --> 00:24:51,720
Speaker 5: I talk to traders, the one thing I heard time

491
00:24:51,840 --> 00:24:53,800
Speaker 5: and time and time again is that and these are

492
00:24:53,800 --> 00:24:57,160
Speaker 5: like these are prop kind of oil and products. Traders,

493
00:24:57,280 --> 00:24:59,480
Speaker 5: they have their own models that show them fair value.

494
00:24:59,560 --> 00:25:01,399
Speaker 5: They keeps saying, like all their models say this is

495
00:25:01,400 --> 00:25:05,360
Speaker 5: a raging buy. But they got so blown out repeatedly

496
00:25:05,720 --> 00:25:07,719
Speaker 5: in that kind of march in April period, all their

497
00:25:07,800 --> 00:25:10,600
Speaker 5: risk management kind of limits have been throttled down by

498
00:25:10,680 --> 00:25:13,919
Speaker 5: ninety percent, that there was this general the quote was

499
00:25:14,000 --> 00:25:15,200
Speaker 5: everyone's bullish.

500
00:25:14,840 --> 00:25:16,119
Speaker 4: But no one's buying.

501
00:25:16,280 --> 00:25:19,640
Speaker 5: And I think one thing I also deeply misappreciated going

502
00:25:19,640 --> 00:25:24,000
Speaker 5: into this crisis was the potential power of Trump himself

503
00:25:24,200 --> 00:25:28,880
Speaker 5: more broadly Trump administration to inject so much downside volatility

504
00:25:29,280 --> 00:25:32,960
Speaker 5: that it kind of arrested the normal melt up process.

505
00:25:33,119 --> 00:25:36,280
Speaker 5: And I think that if we had just had job owning,

506
00:25:36,720 --> 00:25:38,240
Speaker 5: I don't think it would have been enough. If we

507
00:25:38,560 --> 00:25:41,880
Speaker 5: just had China import contraction, I don't think it would

508
00:25:41,880 --> 00:25:44,040
Speaker 5: have been enough to arrest that melt up that we

509
00:25:44,080 --> 00:25:46,880
Speaker 5: saw through March and April. But I think the combination

510
00:25:47,040 --> 00:25:49,760
Speaker 5: of them proved to be especially potent. That you had

511
00:25:50,160 --> 00:25:53,520
Speaker 5: you kept resetting the clock, and all the while markets

512
00:25:53,640 --> 00:25:57,800
Speaker 5: kept loosening because of China's kind of pullback on imports.

513
00:25:58,119 --> 00:26:00,040
Speaker 5: So I think the combination of them proved to be

514
00:26:00,240 --> 00:26:03,119
Speaker 5: way more powerful than I've ever expected. And I think

515
00:26:03,640 --> 00:26:07,080
Speaker 5: going forward has really shown the degree to which the market,

516
00:26:07,640 --> 00:26:10,800
Speaker 5: the oil market is much more resilient, at least in

517
00:26:10,840 --> 00:26:13,920
Speaker 5: this kind of condition to a big shock like that,

518
00:26:14,080 --> 00:26:16,040
Speaker 5: in a way that I just hadn't appreciated the time.

519
00:26:16,680 --> 00:26:20,359
Speaker 3: Can I just ask on the inventories and strategic reserves.

520
00:26:20,359 --> 00:26:23,520
Speaker 3: So one of the bullish arguments I've seen, and there

521
00:26:23,560 --> 00:26:27,400
Speaker 3: are still some oil bowls out there, but they say, well,

522
00:26:27,520 --> 00:26:30,680
Speaker 3: stockpiles are low now, so people are going to have

523
00:26:30,720 --> 00:26:32,560
Speaker 3: to fill them up right, and you're going to get

524
00:26:32,600 --> 00:26:38,000
Speaker 3: like maybe structural, structurally higher demand for oil for the

525
00:26:38,040 --> 00:26:40,480
Speaker 3: next couple of years or so. Is that a theory

526
00:26:40,520 --> 00:26:43,479
Speaker 3: that you buy into people need to refill their oil tanks.

527
00:26:44,880 --> 00:26:45,560
Speaker 4: Yes and no.

528
00:26:45,680 --> 00:26:48,000
Speaker 5: And I think again it goes to that split between

529
00:26:48,400 --> 00:26:51,879
Speaker 5: how I think about strategic and commercial inventories differently, or

530
00:26:52,240 --> 00:26:55,920
Speaker 5: strategic stocks and commercial inventories differently. I think that yes,

531
00:26:55,960 --> 00:26:58,080
Speaker 5: there will be an impetus to, let's say, refill the

532
00:26:58,160 --> 00:27:01,119
Speaker 5: SPR in the United States, fill the SPR in Japan.

533
00:27:01,520 --> 00:27:04,359
Speaker 5: Countries that didn't have sprs going into this that all

534
00:27:04,400 --> 00:27:08,040
Speaker 5: of a sudden wish they had them, like India. You've

535
00:27:08,040 --> 00:27:10,960
Speaker 5: seen a lot of examples of countries building adnoc. The

536
00:27:11,080 --> 00:27:13,800
Speaker 5: Mrodi natural oil producer has now made plans for a

537
00:27:13,840 --> 00:27:18,200
Speaker 5: fifty million barrel strategic commercial strategic stock in India coming

538
00:27:18,200 --> 00:27:22,280
Speaker 5: out of this. So I think that will structurally undergird

539
00:27:22,400 --> 00:27:26,440
Speaker 5: demand for the next year or two or maybe even three.

540
00:27:26,960 --> 00:27:28,840
Speaker 5: But I don't think that that demand is going to

541
00:27:28,880 --> 00:27:31,280
Speaker 5: manifest as long as the market is tight. So you

542
00:27:31,320 --> 00:27:32,800
Speaker 5: need to get back to a stage where the market

543
00:27:32,840 --> 00:27:36,080
Speaker 5: is looser, otherwise you're just kind of retightened the market

544
00:27:36,320 --> 00:27:40,639
Speaker 5: through spr rebuilds. I think on the commercial stock I

545
00:27:40,680 --> 00:27:43,440
Speaker 5: think that is a situation where you kind of need

546
00:27:43,480 --> 00:27:46,639
Speaker 5: a surplus in order to rebuild those stockpiles in the

547
00:27:46,680 --> 00:27:49,159
Speaker 5: first place. So I do think that right now we

548
00:27:49,200 --> 00:27:54,040
Speaker 5: are deeply underwater on most global kind of trackable commercial stockpiles,

549
00:27:54,560 --> 00:27:56,800
Speaker 5: and I think we need a period of surplus in

550
00:27:56,840 --> 00:27:57,920
Speaker 5: order to get us back up.

551
00:27:57,840 --> 00:28:00,000
Speaker 4: To normal levels.

552
00:28:00,400 --> 00:28:01,840
Speaker 5: But we probably don't need to get back to where

553
00:28:01,840 --> 00:28:03,320
Speaker 5: we were, say at the beginning of the crisis, where

554
00:28:03,359 --> 00:28:05,879
Speaker 5: we had abnormally high levels of inventories.

555
00:28:06,440 --> 00:28:09,119
Speaker 2: That was fantastic. By the way, this reminds me, you

556
00:28:09,119 --> 00:28:11,360
Speaker 2: know what an episode I really want to do, and

557
00:28:11,400 --> 00:28:14,199
Speaker 2: it's been requested actually by a listener. We should do

558
00:28:14,240 --> 00:28:17,600
Speaker 2: an episode about the twenty billion dollars ding Gote petroleum

559
00:28:17,680 --> 00:28:22,160
Speaker 2: refinery that opened recently in Logos, Nigeria. To this incredible

560
00:28:22,280 --> 00:28:24,919
Speaker 2: engineering feat, one of the most important refineries in the

561
00:28:24,920 --> 00:28:28,000
Speaker 2: world right now hasn't been opened very long. Anyway. I

562
00:28:28,040 --> 00:28:30,280
Speaker 2: was only reminded by that because of your point about

563
00:28:30,320 --> 00:28:33,000
Speaker 2: maybe more countries are going to think about having sprs

564
00:28:33,000 --> 00:28:35,200
Speaker 2: in the first place. Rory Johnson, thank you so much

565
00:28:35,240 --> 00:28:38,600
Speaker 2: for coming on. Really appreciate you, uh, you know, we'd

566
00:28:38,680 --> 00:28:41,960
Speaker 2: like to talk about a you know, an incorrect call.

567
00:28:42,080 --> 00:28:44,920
Speaker 2: Appreciate your candor and coming back on outline.

568
00:28:45,520 --> 00:28:46,600
Speaker 4: Thanks for shoving you guys.

569
00:28:46,720 --> 00:28:46,920
Speaker 1: Thanks.

570
00:28:47,360 --> 00:28:47,560
Speaker 2: Thanks.

571
00:28:47,800 --> 00:28:48,880
Speaker 3: That was learned something.

572
00:28:48,920 --> 00:29:05,400
Speaker 2: Yeah, we all learned something, me most of all. Tracy.

573
00:29:05,440 --> 00:29:07,000
Speaker 2: I think I thought there were a lot of interesting

574
00:29:07,080 --> 00:29:09,480
Speaker 2: movement parts. I liked his point about the sort of

575
00:29:09,600 --> 00:29:16,160
Speaker 2: intersection between the Chinese import reduction and the jaw boning,

576
00:29:16,400 --> 00:29:18,760
Speaker 2: which at the time I didn't put a ton of

577
00:29:18,800 --> 00:29:20,520
Speaker 2: weight on it because I was like, the barrel math

578
00:29:20,640 --> 00:29:21,360
Speaker 2: is the barrel math?

579
00:29:21,480 --> 00:29:23,480
Speaker 4: Yeah, but if it did, is he put it.

580
00:29:23,440 --> 00:29:26,800
Speaker 2: Like change the behavior of traders who might have that

581
00:29:26,880 --> 00:29:28,960
Speaker 2: point about their risk limits. But that's interesting.

582
00:29:29,080 --> 00:29:32,000
Speaker 3: That was really interesting. And also if you remember back

583
00:29:32,040 --> 00:29:33,680
Speaker 3: in March sort of April, there was a lot of

584
00:29:33,720 --> 00:29:36,920
Speaker 3: discussion of the disconnect between the physical markets where like

585
00:29:37,160 --> 00:29:41,480
Speaker 3: you couldn't get barrels versus the actual financial market, which

586
00:29:41,600 --> 00:29:43,960
Speaker 3: like wasn't showing that big price increase.

587
00:29:44,120 --> 00:29:46,200
Speaker 2: A lot of threads that I didn't totally understand, but

588
00:29:46,280 --> 00:29:49,560
Speaker 2: there was. It was a really weird time in the markets,

589
00:29:49,600 --> 00:29:52,880
Speaker 2: and it was absolutely true the at least for several weeks,

590
00:29:53,080 --> 00:29:55,080
Speaker 2: there were all those headlines about like, oh, in the

591
00:29:55,080 --> 00:29:58,640
Speaker 2: Philippines you can only drive to work two days a

592
00:29:58,680 --> 00:30:02,680
Speaker 2: week or whatever. So it was like a real crisis.

593
00:30:02,880 --> 00:30:06,719
Speaker 2: It was not the headline crude barrel price never got

594
00:30:06,800 --> 00:30:09,640
Speaker 2: to two hundred or even one fifty, but it was

595
00:30:09,680 --> 00:30:10,800
Speaker 2: like deep, deep stress.

596
00:30:10,960 --> 00:30:13,959
Speaker 3: Yeah, that's the thing, right, It's like the tension between

597
00:30:14,000 --> 00:30:16,160
Speaker 3: people not being able to get oil and the price

598
00:30:16,240 --> 00:30:19,720
Speaker 3: is actually not shooting up that much. But also I

599
00:30:19,760 --> 00:30:22,320
Speaker 3: think the big question that we're all left with is

600
00:30:23,400 --> 00:30:25,800
Speaker 3: China thing. Yeah, why they do it right?

601
00:30:25,920 --> 00:30:26,080
Speaker 1: Right?

602
00:30:26,120 --> 00:30:28,560
Speaker 2: We don't really know. And then just in terms of

603
00:30:28,600 --> 00:30:32,400
Speaker 2: I guess the short to medium trader question, will and

604
00:30:32,480 --> 00:30:35,680
Speaker 2: when will they re enter the market in the same

605
00:30:35,760 --> 00:30:38,680
Speaker 2: levels that they were pre war is like a really

606
00:30:39,080 --> 00:30:41,400
Speaker 2: interesting question for people to watch currently.

607
00:30:41,520 --> 00:30:45,600
Speaker 3: I would love to see one of China's like oil caverns.

608
00:30:45,880 --> 00:30:46,800
Speaker 4: Oh, that would be good.

609
00:30:46,840 --> 00:30:47,920
Speaker 3: Well, that would be good.

610
00:30:48,000 --> 00:30:48,400
Speaker 2: Let's do it.

611
00:30:48,440 --> 00:30:51,200
Speaker 3: Let's do a road all right, shall we leave it there,

612
00:30:51,320 --> 00:30:53,600
Speaker 3: Let's save it there. This has been another episode of

613
00:30:53,600 --> 00:30:56,160
Speaker 3: the All Thoughts podcast. I'm Tracy Alloway. You can follow

614
00:30:56,200 --> 00:30:57,680
Speaker 3: me at Tracy Alloway and.

615
00:30:57,720 --> 00:30:59,920
Speaker 2: I'm Jill Wisenthal. You can follow me at the Star.

616
00:31:00,400 --> 00:31:04,360
Speaker 2: Follow our guest Rory Johnston at Rory Underscore Johnston, follow

617
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Speaker 2: our producers Kerman Rodriguez at Kerman armand Dashil Bennett at Dashbock,

618
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619
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Speaker 2: Lloyd Lizan Though and for more Oddlaves content, go to

620
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623
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631
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