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