Bob McNally on Hormuz, Oil Prices, and the End of Energy Security Assumptions

[MUSIC] Welcome back to another episode of the Oil Groundup podcast. I'm your host, Rory Johnson. A reminder to hit subscribe and leave us a review. And if you have any questions of us or any feedback on the show, please drop us a line at [email protected]. Oil Groundup is distributed in partnership with the Clear Commodity Network at clearcomodity.net and also the Oil and Gas Global Network, the leading podcast network for oil and gas. Our guest today is Bob McNally, founder and president of Rapidand Energy Group, former White House Energy Advisor to President George W. Bush, and the author of Crude Volatility, the history and the future of boom bust oil prices. Bob has also for years now been worrying clients with the risks posed by Iran and the straight-of-hormos in the global oil market, publishing a report on the subject in 2019 titled "Battle Space and Barrel Flow." Our conversation focused on the history of the market's view of the Hormuz risk, the latest status of negotiations between Washington and Tehran, and the longer-term consequences to the geopolitics of the oil market. Bob McNally, welcome to the Oil Groundup podcast. We're so thrilled to have you. Very, it is great to be with you. Thank you very much for inviting me. So, Bob, I have been following your work for ever since I was like a brand new oil analyst. And here I've actually got my copy of Crude of your book, "Cruude Volatility," which I believe is actually one of those early prints that had a couple typos that still haunt you. But you were kind enough to sign my relic here. And I just wanted to have you on because I think you, more than anyone, have talked about the straight-of-hormos. The risk it poses to global supply. And I just want to have you on to talk about all of it in the middle of this kind of unknowable situation. We find ourselves in. So before we get on to current events, let's peer back very briefly through history. And could you explain and describe to our audience who you are, where you come from, and your long lineage of oil-watching? Well, long lineage. I'm feeling very old. But it went by quickly. So no, look, so my journey into energy was one of drift, not mastery. After living what they now call a zero carbon footprint as a Peace Corps volunteer and a MedHut in San Agawa West Africa, I was on my way to becoming a military history professor. My passion is history. Didn't get rich in the Peace Corps, and needed a job. And I was fortunate to be hired by an energy consulting firm, led by Sarah Emerson, the SAI in DC. So I counted barrels. I counted gasoline barrels on the side. And then, you know, worry how it is. You're a father and a husband. I'm graduating, and I look at the pay scales for entry-level teachers, the pay scales for an oil analyst job, my pregnant wife, and my career went into energy. Now, I'm glad I did, and this is something it gups right down to today. What I grew to love about energy is how it is so imbued with policy and politics and geopolitics and history, the things I really love. Never really was a math guy or an economist, commodity kind of guy if you knew me when I was younger. That all came later, but it was through the prism of, you know, the first Gulf War is when I started. So, went afterwards, went to join a hedge fund. Paul Tutor Jones, a legendary hedge fund trader, had an office in DC. That office was supposed to keep the traders from being surprised by anything that governments did that moved stock bond currency commodity markets. So, I was a macro watcher, a central bank watcher, studied in Europe, did a lot of BCB stuff in the 90s, as well as oil. Got to know Dr. Larry Lindsay through the Tutor connection. And Larry Lindsay was president George W. Bush's first National Economic Council director. So, I'm introduced to President Bush on the first day, Monday morning, 9 a.m. first meeting, as the guy who's gonna fix the California electricity crisis, me being a barrel counter. Anyway, that started two and a half years serving President Bush on both the National Economic Council and the National Security Council. And you, that was a busy time. I'm not sure what you were doing then, 01 to 03, but N-RON to Iraq, 9/11. There's a lot going on both domestically and internationally in energy. I was very fortunate to serve at that time. So, after two and a half years, I was the last one of everyone who was there on the National Economic Council on day one, could have stayed with the president or could have stayed with my wife and children. That fork on the road had come. And so, I went back to my wife and children, went back to Tutor for four and a half years, didn't do any more macro, did all energy, all the time, looked at carbon markets as well, made partner and at Tutor. But then got to 2009, looked around, saw people, I know you admire, I admire Gary Ross, Dan Jurgen, Robin West, Faradon Fescherocki, these great firms, these towering figures in the generation ahead of me. And some of my friends and I've learned from them. And then I looked kind of behind me and saw a lot of millennials, not too interested in oil and gas, more climate change. And then I looked around my generation, generation X, and didn't see a lot of folks who had that kind of, were blessed and I feel very fortunate, to have had both that market analyst experience, but also behind the scenes on the policy and geopolitics. So, with Tutor's support, they remain a great client. Rory, I decided to hang out my own shingle and go on to the cell site, if you will. And offer not only hedge funds, but oil companies, long-term investors, 'cause so many issues that we're gonna probably talk about are long-term, they're not just short-term. And offer that one-stop shop, what I call MPG, but not Miles Prigallon, it's markets, policy, and geopolitics. Some people think, they're not used to that, they're like, wait a minute, I know barrel counters and data shops and I know there's Washington Watchers and I know there's geopolitical firms, but we've kinda got that all under one roof. And so now we're 25 people, Clustered in DC in Houston, my CEO is a former CIA field officer, a farcey speaking Iran expert, you can imagine how busy he is these days, Scott Modell is a great guy, but I got a great team of lawyers, barrel counters, former CIA officials, former Chinese energy policy officials, and we just try and call balls and strikes. And I wanna say in return the compliment, I've been a huge fan of your work. I wish I could say I was watching as if I was a young man, but that wouldn't be true. But I admire you, Roy, not only for your astute analysis, but especially in this era of social media, the civility that you bring to it too. I particularly admire that. That's also as rare as the astuteness of the data analysis and trend analysis that you do. So thank you for that. - Well, it's extremely kind. - You're a big fan, you're also well loved among my colleagues that are repaid into it. - Oh, well, thanks so much. It's very kind. The rule with social media is just be more nice. I always tell people, be nicer than you are in real life online. And it never causes any problems long-term. And I think that the toxicity comes back at you. - Right. - But let's focus on, so before we get to the current day, before we get to discussing what's actually happening in the straight of hormones and Tehran today, talk to me a little bit about your reporting and your coverage and your highlighting of the risk in hormones over the past decade at least, and probably two decades before that as well. So like, talking about how you viewed hormones prior to this crisis, as I've described it, the ever present boogie man for every oil analyst when they first start is hormones. But it's always a thought experiment. So talk to me about how you discussed it with clients as an actual risk to try and get their arms around. - Right, right. So, I came of age during the hostage crisis. And if you had known me back when I was a small child and into high school and so forth, I've always had a little obsession with Iran for that reason, especially this regime. I think most Americans under the age of, or over the age of say of 50, 60, have a score to settle with this regime for that. But look, when we starting under late President Bush, in his term after I had left the administration, certainly President Obama, when it became clear that Iran, the regime, was developing at least the pathway to a nuclear weapon, I knew we were on a collision course. And this is something I worked on at Tudor, my Tudor colleagues remember, and at Rapidam. And what I wanted to do, and there's an expression, in the among traders, if you're early, you're wrong. So one can excuse me, not that I've been predicting an attack every day for the last 15 years, but I flagged it. But I wanted to bring analysis to it. So while working for President Bush, I'm not a security counsel, before we went into Iraq the second time, we did a kind of a standard kind of a disruption analysis. You go to the military folks and you say, okay, what is about to happen? What threats to disruption? Is it going to pose on land and sea and so forth? Okay, thank you. Then you get your barrel counters together and say, okay, here are the scenarios we're going to be dealing with. Let's talk about what we talk about now every day. Redirects, inventory, spare capacity, et cetera, et cetera, policy options. Okay. And so we did that analysis on the classified side, when we had lost Venezuelan imports, this is December of 2002, and then as we're about to attack Iraq in March of 2003. So while I'm at my own shop, and I could see Iran coming, the first time we did it was, I think 2019, when we had had, there have been a number of shootings in the Gulf and so forth, And it was the the spring of 2019. And I said to my team, "We are gonna do what I did on the classified side, but on the non-class side." So we have a dear friend of mine who's a retired Navy intelligence captain. He was our military guy. We got the barrel counters. And we did it full long deck and everything. And if I may, there was some grumbling at Rapidam because what I forced them to do as part of this, there was a little bit of like, why are we doing this? I enforced them to do it. One of those boxes, a special analysis, embedded in the longer analysis about the Abkake Stabilization Plant. They're like rolling their eyes and the eyes are so important, seven million barrels a day, unreplaceable, what is its function, vulnerability, et cetera. Little box in there. We issued the report, I think it was June of 2019. - Can you, before continuing? 'Cause I know we were going with this. Could you just briefly explain what Abkake is? - So Abkake, the Abkake Stabilization Plant is a Saudi processing plant. And so what it does, it sits there over near the Gawar field. And it takes in the crew. When crude oil comes out of the ground, it's very hot. It's very sulfurous. It's very dangerous. So before you can even put it in pipelines and send it to the ships, the tankers, you've got to depressurize it. You've got to cool it. You've got to stabilize the crew. So Abkake is a series of big balls, spheroids, and stabilization columns, tubes, balls and tubes, huge ones. And the job there is to desulfurize and depressurize the crew. And it's not like a port. You can reroute around a port. It's not like a pumping station. You can repair that. You can work around a pipeline. You can't replace Abkake. And it stabilizes 7 million barrels a day. So 7 million barrels a day, if there's a heart, the closest thing to the representation of a human heart in the global oil system, if we have one, is the Abkake. It's the one key organ, if you will, that controls the most important amount of flow, not just of production, but also sphero capacity, which is so important in this day. So I've always said, you know, and I study this by the way in the White House and ways I can't fully describe, but there would, but I was always very attentive. And I've always educated folks during my career on the importance of Abkake. I did that in the White House. Then after I left, there was an unsuccessful attack. You may recall in 2006, an inside job. Protections had been built up by that time, and I won't go any further. But I've been drawing folks attention to Abkake for a long time. Anyway, we issued a report June of 2019. And in September of 2019, September 14th, I think the Iranians attacked Abkake. And now everyone is talking about Abkake. So that bought me a little bit of cred. Now last June, we saw it coming. We bombed, we in the Israeli bombed, Israeli bombed, Israel, Iranian nuclear sites. And we didn't take out the regime. They're rebuilding, reconstituting. So coming, so we knew there was going to be, I think we're getting closer to that moment. I think in some ways, the Middle East, the Gulf region is just not big enough for a hostile Iran in the United States and Israel and hostile GCC countries. It's too small. The weapons are too powerful. The inner relations, and now the Iran has been so pushed back and degraded since 2003 by the Israelis by the United States. They're back, search of the wall. So you have a cornered, existentially threatened Iranian regime in a small region. And you got the Israelis, the President Trump, who are no kidding determined not to let him have even a pathway to a nuclear weapon. I could see the train wreck. I don't think it's genius to have seen the train wreck. So I revived. We have the same fellow, Navy captain. And we did the full analysis last June. And the big conclusion of that was, 'cause our job, I think your job, what we do, is we try and spot insights, views, directions of travel in our data and analysis, and then where the market may be thinking or heading. And when they diverge, it gets really interesting, 'cause that's when you have a trade or an investible thesis. And the long results of our analysis, our Navy guy said, and I want to be very careful on this, 'cause we'll come back to this. Assuming the US military begins attacking Iran's ability to control Hormuz, to introduce shipping on day one, and continues, it's at least four weeks. That's gonna be a whack-a-mole operation. It's gonna be difficult, costly. And if they are able to mine aggressively, if we are, it could be months. Now, I knew from talking to market folks, 'cause we've been talking with Iran about a long time. They thought I was crazy. And I went to, they said, Bob, there's no way President Trump, or any American President is gonna allow anyone to shut Hormuz for more than a day or two. And last February, it's IE week, all the oil industries in London. By this time, we're drifting towards war. Everybody's talking about Iran and Hormuz. And so I was saying, well, we just did the tabletop analysis. Last June, fully worked it all out, and it's four weeks, at least. And longer, and they looked at me like I was having a last dance with Mary Jane, right? It was like, you're out of your mind. The last two golf horse, the United States won in days. The last time we shot at the Iranians, sank after Navy in an afternoon. And even during the tanker war, we never let anybody shut Hormuz. Can't happen. It's a load-bearing assumption. It's like the dollar gold peg or the federal never let us systemically important bank feel. I just, there was Amy Harder from Axios, did a good article on this recently. It was unthinkable, literally. I'm not aware of any consultancy analysts that did a, I'm sure the military folks were thinking about this, but yeah, I'm not aware of anyone took it seriously. And so, and full disclosure here, I was also quite a doubter, to be honest. I, every year since I joined his oil analyst, someone said it's gonna, they're gonna close Hormuz. Like no, it'll never happen because of all the things that you're talking about, but I just wanna say you were right on that, thank you. And now we'll get to the consequences. Right. Where we were wrong. Here's, let me tell you where I'm wearing. You and I have talked about this, one of them, so I'm asking where, I was wrong. I couldn't imagine our military advisor couldn't imagine that we wouldn't begin to contest Iran's ability to interdict to our Mous traffic on day one. Yeah. And continually, that it would be an after, an afterthought, that we wouldn't start until day, weeks after and then suspend during a ceasefire, never occurred to me. Now, according to press reports and my understanding is the president was confident that Iran would collapse. The leadership was gonna collapse in a day or two. There was no need to go and contest Hormuz, even though we had been planning to do so. Our military was on the ball. This was not a military issue. President said, no, they're gonna collapse. Well, my view is okay, after day three or four, there was no collapse. Why didn't we go in? So what we have is a much longer disruption than even we at Rapidan had modeled. And the second thing, and you and I've talked a lot about this a big topic is, you know, it gets to this question of the role of expectations and physical and futures curves and, you know, the old question, why haven't we seen catastrophically high crude oil prices yet if it's the world's biggest disruption? And we can talk about that maybe we probably will. The barrel counting on that, the role of China is a big question. But in my view, the ground view is, it's this optimism bias in the market. And I think we have to go into psychology here because again, we have a phenomenon that no one expected. It wasn't like, I mean, something you'd expect to be about an OPEC plus breakup or a recession or one of the middle golf war, the things you could, attackers being hit, things we've seen, this was something completely unexpected. And then in sort of equal measure to that shock, there was this confidence that it would be over soon. That doesn't, we had assumed at Rapidan, the initial spike would wear off because the US military would be sent in. But then we said it's gonna respite because the military is gonna take four weeks. Okay, that didn't happen. The military didn't go in, but the market sold off on the view that President Trump created this problem. He can solve it by just signing a taco MOU or something and Hormuz rolls again. And so in my view, there was this deep and widespread confidence and this goes to Asian refiners and the Chinese authorities. Everybody treated this thing after they were shocked by it. As something like a typhoon, had no idea where that came from. It's extremely destructive and I'm gonna go into the basement while it's over my house. However, it's gonna move on. I'll come back out and live another day. I'm not gonna act as if we have a plague or a prolonged problem here. And I think this confidence that President Trump and the White House have been very successful at stoking and nurturing, talking down the market is something I didn't expect. Yeah, so bringing it into today and the potential for potentially a taco, a adjacent MOU or some kind of resolution to this crisis, we are now on the, I always get a timestamp these things. We are at St. King right now around 2 p.m. Eastern on May 27th on a Wednesday. That is three months to the day into the Iran War. From the day this all started, basically for, you know, Hormuz has been closed for three months now. Before we get to some of that kind of what comes next and how this could go, talk to me a little bit about how you and your colleagues at Rapidand are viewing the state of play today. So this morning we've seen yet more optimism that some kind of deal could be progressing. We've seen positive signs in Tehran, they're turning back on the interest. internet, you've seen the emeralds talking about deescalating, like there's all of the signs are good. But once again, then, you know, the Iranian state TV comes out and says, "Here's our kind of, you know, interim MOU, and the White House in Trump comes out and says, "This is hogwash. This is all nonsense." And time and time again, as I've been saying to people that like, we've come close to a deal multiple times. And every single time it kind of runs up upon the rocks of competing or different interpretations of the details, that it seems like in each one of these episodes, both sides are reading off of their own kind of call sheet, and that there's not a lot of work being done in the negotiation phase to make sure they're talking about the same things. Talk to me about how you guys are seeing this. I know you guys do a lot of work, have a whole geopolitical kind of work practice. Talk to me about how you guys are viewing this and the framework you're using to approach that. Yeah. Question that seems unanswerable right now. Yeah, no, you're right. We've been thinking about every single day since February 28th. And again, my colleague, Scott Modeller, CEO, our geopolitical risk service director, Fernanda Ferreira, we're channeling Iran and, you know, Scott ran spies for living. So you can imagine what we do. We have folks helping us and we kind of try to channel Washington and channel Tehran as best we can. And here's the dynamic that keeps us in this. And I know I date myself with this Lucy and Charlie Brown on the football thing where we keep on running up to a deal, a deal, a deal, a deal, and then no deal. So I know on that just to get aging myself. And I will say in 2001, 2003, when you were mentioning I was in high school. Okay. So, but, but I am old enough to understand the Lucy and the football events I posted. Very good. I post these memes repeatedly. Someone was like, I'm too young to understand why is this, why is this girl holding a football and what does that do with Trump? So anyways, just want to interject. I don't know if there's a millennial version. I don't know. I don't know if you can find out, but so look, both sides think they're winning. Yeah. Number one, number two, they're really far apart, especially on the nuke stuff. Okay. And number three, where they agree. I think there's agreement is they prefer not to see military escalation. Yeah. Okay. For not to go because the next step on escalation is mutually assured destruction, desalination plants, energy plants, it's not just an environmental disaster. Someone said, could be humanitarian disaster. You can't live in that region without electricity and desal. They just can't support the population. So I think there they are. So if you think about those three considerations where you have is, they're willing to kind of weight each other out a little bit. I think the US is expecting this regime is eventually going to soften the economy is really terrible. Yes, the population is cowed right now and the regime has the guns and it's fractured, but functioning, et cetera. However, month after month of 250% inflation and all this, if they just keep the squeeze on as much as possible, eventually that regime is going to fall. And or be weak enough where it's going to make a deal. It's acceptable on nuke. And the Iranians think Trump had no idea. We seized hormones. It's more valuable than the nuke. I suspect they probably share the view that you and I, and I think many other barrel counters have that, you know, just wait till the late summer. They know what's coming. And as that oil price goes high, the cost of President Trump's miscalculation will become apparent to him and Trump will have to back off. And it's not just that we won't have to give up as much on nuke, but they want to change the reality in the region. I'm not saying they're going to be the toll keeper of Hormuz, but they're not going back to status quo ante. They want to teach a lesson. They want to teach the countries in the regional lesson. They want to teach the US a lesson. You mess with us and we grab the artery and we impart a massive devastating spike on you. So both sides are kind of, I think, okay, with letting things roll for a few more months. The equity market just made it all time high. Gasoline is unpleasant. Those polls are very low, yes. But I think there's this confidence that we're going to have a deal in a month or two and everything is going to go back to normal. So in some ways, both sides are okay with sort of where we are, but they aren't negotiating this MOU. I think they realize that to really remove the risk of escalation, they have to, let's say, ease the dual blockade. So both where Iran is preventing those ballasted ships from leaving the Gulf and where the US now is preventing ships from leaving Iranian ports. They haven't shut it in right away, but eventually, both sides don't like the trend lines for those things. So I think in a way where there's kind of agreement is, why don't we dial back on the block Cades and agree not to escalate to where it's mutually assured destruction and then see who's right on this and we'll continue the conversation. And that's what we're headed towards. I don't think there's going to be much on nukes if we do this deal. We think it's very close. It's a very close call as to whether we'll get an MOU this week. If we do, I think it's going to be mainly about Hormuz lifting the blockade on Iran, Iran allowing ships to roll through and it's going to be light. It's going to be kicked the can on the nuclear stuff. That will debate later. And I think that's what's on the table. But I'd say, as you and I know, the question is, does that really change things with regard to the loss of 450 million barrels every month and demand season and inventory is getting low and what's headed our way in June and July and August in terms of the need for demand reduction or curtailment through price increases? We'll be right back after this short break. In mining, the difference between a good project and a great investment often comes down to one thing. Visibility. Terra Hutton is a Sweden-based mining investor platform built to make the invisible investible. Even the strongest project can be overlooked. Geology is inherently complex and data heavy and when it's reduced to raw numbers like drill results and technical reports, investors can miss the story and companies can miss out on investments. Terra Hutton brings mining projects into the digital spotlight, combining data, narrative and context in one place. So investors can see not just what a project is but why it matters. Whether you're evaluating early stage exploration or more advanced development assets, Terra Hutton helps turn complexity into clarity and information into insight. The kind of transparency that builds loyalty over time. Visit Terra Hutton.io to learn more. I'm Rory Johnson, Post-Avoiall Groundup and founder of Camarady Context. If you enjoy how we're all about digging in and providing more context here on the podcast, you'll love my newsletter research service, Camarady Context. Subscribers can expect a mix of real-time event analysis, data reviews and deeper thematic research as well as the oil context weekly marker report every Friday. If that sounds like your kind of edge, head to www.camaradycontext.com or find us on substech to join for free or go deeper with paid. We're offering oil ground up listeners an exclusive 20% discount off their first full-year subscription by going to Camaradycontext.com/groundup. That's CamaradyContext.com/groundup for 20% off your first full-year. Now back to my conversation with Bob McNally. Before we go on to the next stage of what this could look like on the other side and how long we'll take to even get that going, let's talk about some of the disputes, some of the kind of bottlenecks to these negotiations. There are a bunch, but let's focus on the main ones. One of them is a cessation of war in all fronts. The big spoiler there being Israel's continued insistence that it continued its campaign against Hezbollah and Lebanon. That was something that Iran seemed to be very adamant about early on. The last week or so, I haven't heard as much about Lebanon from the Iran side, so there might be some slippage there on the status of the nuclear negotiations. Trump from the beginning always wanted this to be something that we all, one grand deal. One signed, one done nothing happens until the news are in there. Trump had always been pushing for some kind of skinned deal that you end the war, begin making at least hand gestures towards normalizing activity in the straight. Then we'll get to Nukes later. The latest comments around that are 30 to 60 days after the MOU would be signed. You would begin to discuss Nukes. Finally, there's the status of Hormuz itself, which is this question of Iran now has a claim or claims some kind of recognition of its sovereignty over Hormuz. Whether or not that's a, that involves a toll or some kind of relationship and dynamic with Oman, which today Trump said, if Oman's trouble, we're going to blow them up too. So we'll add Oman to the firing line apparently. And I think all of this is this question. And if it's not a toll, maybe it's an environmental fee or a service fee or whatever, but the Iran season itself having more of an active presence in Hormuz going forward than it had going into the war. How do you see kind of resolution on those three particular files? Yeah. So let's go first. I think Lebanon is the easiest. I think the Iranians are willing to let that go. Yeah. They know that the dynamic between Hezbollah and Lebanon and the Israelis is not something they really have or the US for that matter has much control over. If Hezbollah attacks Israel or is accused of attacking Israel, Israel is going to hit back. So I don't think, I think the Iranians in the US know that they're not going to allow that to be a deal breaker. Yeah. Now, the second one was the MOU, the. The status of the nuclear negotiations, the skinny deal and pushing off the news. There, there, there's two key areas. There's what to do with the highly enriched uranium, the dust, the dust, and the US wants to repeat the Libya experience when it goes to Tennessee. We come in, we take it out, it goes to Tennessee, they don't have it anymore. So we do with Qaddafi. The Iranians don't like the Qaddafi analog, right? So they don't want that to. Reason of light. And then we listen to the Welfare. So the Iranians, I think, are willing to downblend it and or ship some of it to a third country, like Russia or China. President was just asked today, earlier today, on a cabinet meeting, he said he wouldn't be comfortable with shipping it out to other countries. But on the other hand, he's issued a true social post saying that it would be preferable to destroy the dust in country. So is that a solvable problem? Probably. Some downblending, outshipping, burying, there's probably a solution here. The other one, in a way, is a little bit tougher. It's not an immediate issue, is the status of enrichment. Should Iran be allowed to retain equipment that centrifuges that so that it can enrich? And should at some point in the future be allowed to enrich? And that gets to the whole right of Iranians to enrich and so forth. And that one's going to be tougher, although looks like we're debating numbers of years, right? President Trump said never. And then it was 20. It was the news reported. I think it's credible that we're suggesting 20. Iranians want five years. So one can imagine there's a number in there. So that's probably solvable as well. In some ways, in some ways, I think the nuclear problems are almost a little easier to solve. Then the Hormuz one, which no one thought about, at least in the US, before this all started. Because as you said, getting to the third one, wasn't even an issue that the Iranians brought up. They did it before the Hormuz card before. I was actually surprised it took him so long. I was internally a tutor. I was always like, why don't they play the oil card? I don't understand it. Anyway, they finally did. And now they enjoy it. They're realizing how powerful it is. And with fairly cheap weaponry, you can bring the whole world economy to a standstill or whatever. And that hasn't done that yet, but you can certainly risk that. So yeah, I don't think Iran will easily go back to the status quo anti-freedom and navigation, international waterway. I don't think so. I think they're going to want some demonstrable measure of their sovereignty or control or management. And that'll be a lasting physical manifestation of this signal they want to send. They were on a remind all those other countries and the United States. You attack us again and we're going to close this straight and we're going to go hit you back hard. And that's a lot of us were surprised, too, that they hit. I was. The president was. He said he was. If the Iranians retaliate by hitting their GCC, their Gulf Cooperation Council members, Saudi Arabia, UAE, Kuwait, Bahrain, Qatar. And so Iran wanted to send a signal. This is what happens when you mess with us. It's all about deterrence. Part of that is their role over hormones. Now, I think President Trump really wants to get those barrels flowing. I think he and everybody else has been wondering why having oil price going high. They think they're expecting higher oil prices. On the other hand, I think, you know, when you look down the road this summer, I don't think there's a lot of folks saying, no, don't worry. We can lose hormones indefinitely and oils capped at a hundred bucks. I don't think anyone's saying that either. So, so I think he wants to remove the risk. And so he's focused squarely on getting those barrels flowing. The cost will be lifting the blockade. Probably Iran gets some cash. That's an important thing. Iran wants some cash, either the money that's held up in Doha or somewhere. I'll bet they want to get the sanctions easing and so forth. So that's kind of really what's on the table right now. Again, going back to that, where can they agree? The nuke stuff they're getting there, the hormone stuff, I think, is actually harder. But what they can agree on like now is let's not have mutual escalation into mutual destruction, military escalation. Let's agree to ease the blockades on each other. And then let's keep talking about these other issues. And you the United States, meanwhile, have to restrain the Israelis. I think that's what's kind of on the table right now. So rolling forward now, let's say over the next 30 to 60 days. Let's assume that we find some kind of like that we reach this MOU. This MOU is side, maybe not this week, maybe next week. But that in early June, we are beginning the process of reopening hormones, whatever that looks like. Talk me through how you see that looking. Ron has said that they're aiming, as part of the MOU, they would aim to re-reach pre-war hormones flow levels within 30 days of the MOU being signed. This is the version of the MOU I've seen. Who knows what the real one is. But that's the version I saw last. So we'll see if that, but like if that's the way that they're approaching this, talk me through how you see that process normalization, looking both ships exiting hormones, obviously three months stranded there, humanitarian issue, as well as the comfort of other ships cheering this kind of quasi uncertain period in the middle, being comfortable and they're insurers, being comfortable allowing their ships to re-enter. Because as you well know, the crisis is not going to end and not it's not the exits that matter at this stage. That's essentially, I've also been like hitting the floating storage or the oil and water in the Gulf. It's effectively a strategic reserve at this stage. Exits don't restart upstream production. You need unlearten tankers coming in, the kind of empty, onshore storage and begin refilling. So how does that process look? And over this period, again, 30 to 60 days, they're so sweet and negotiating. No clear. As the beginning, after the start of this skin-edial rolls through, what's the prospect there for backsliding? And I think, and if you're a ship owner or a captain of a ship, you're like, should I go in? Well, they're going to negotiate nuclear next week. Is there any chance that Iran's going to clamp back closed to Ghana and he stuck there for months? Because my friend, he's been stuck there for three months. They didn't sound really great. Yeah. No, exactly right. So, well, Rabinand's base case, gotta have a base case forecast. And we have been assuming that in the month of July, we would have, begin the gradual process of free flow of Hormuz traffic in the context of a ceasefire. Again, we've been assuming the way this ends is both sides get to the apex of that cost-benefit curve of continuing and decide now's the time to cut the deal. We begin, again, the US would begin to atrit Iran's ability to interdictor moves. We'd impose more costs. The blockade would hit. They would get those oil prices up and both sides would say, "I think we're ready to call it off here." Okay. That's not what's happening right now. Right now, I think there's just a preliminary deal to avoid escalation and keep talking. So that's different than our base case, but I just want to give you a comparison. Yeah. So, even if we had like La La Land, everything's wonderful. July, everything's the war's over. Things are flowing. You know, it's four months. And like you said, to restore production, get those flows going. And that's assuming folks are okay coming back in. We're assuming that ships will be willing to come in to reload empty ships, not just the ones that are going to leave and so forth. And we're assuming at that point that the Saudis and the Emirates and the Kuwaitis, the Iraqis are confident enough in the ending of the war that they begin to start to increase their production. All of these things, I would call very optimistic for the month of July. And even then we have Brent roofing again to we have 115, 120, I think quarterly averages, Prince, and the 130 daily Prince even higher because we have to register these inventory draws that are coming. We think even if it was to open today to free flow for the other reasons you described, even as clean reopening right now, we are still going to be able to register this deficit in the terms of big inventory draws with our exports increasing, the refinery runs coming back to demand increasing and so forth. So we think this is a market that needs to see the inventory draws to rise in price and we think they're going to see them. But then we have a crest in the third quarter and then we maybe start to get into surpluses next year. That's assuming no incremental damage to infrastructure, all the fields come back up, etc. So that's kind of our, we skirt closed, we flirt with disaster, but we avoid a sort of repeat of 2008. Now before getting into how I think it's how it seems to be going, we have an alternative scenario where you said, wait a minute, Rapid and this whole back in July, everything's beautiful and flowing, no damage. There's certainty about the reopening. All those things is optimistic. Let's postpone it by a month. And when we do that, Roy, I don't know how you count the barrels. We get inventory draws that we don't think are consistent with stable oil prices. We get, you know, always see these stocks getting down to 2.2 or below and nobody knows with those operational minima are and where's the, you know, heal oil and the amount you need to keep the pipeline pressurized and for logistics and so forth. No one knows what it is. It's not one number. It's about -- but we know where we've been before. We all do the correlations and we think that if we were to lose hormones for just another month, it's entirely possible still. So the month of August, in addition to the July, we think at that point we're in a 2008 scenario where the crude price will have to reflect now almost entirely demand reduction. We use the word "advisally not destruction," but reduction, curtailment. Inventory draws will be over with and we would get those sort of nonlinear prices that then as they so often happen to pass, would cross over into other sectors of the economy. We would not be looking at record highs of equities. Bonyls are already heading up. Central banks are already seeing having to shift from loosening to tightening. All that gets much worse and you have, you know, detonation, if you will, of fragilities in other parts of the financial system. And you get the way we often have had to slow balance the oil market and enforce the rule of economics, the iron rule. You can't consume what you don't produce and that is by slowing economic growth because we know how inelastic demand is to price but very elastic to GDP. And when you have to slow demand because you simply can't produce or draw from inventory, the energy you need to fuel it, you must slow growth and that is an awful process. So this is all to say before we get into what's happening, you know, we think July, August is the tipping point between we can just skate by and if everything works out really well, maybe get by with just a nasty little final price top and then the system, you know, kind of recovers, but we go much later than that and it's, quote unquote, you know, tank bottoms or it's demand destruction and won't be pretty. So where are we now really? I mean, even if we got this MOU saying 30 days and at the end of 30 days, Iran's promise to get to pre-war flows. What does that really mean? That's Iran saying, well, we'd be happy with pre-war flows as long as those pre-war flows are through our TSS channels and comply with our management. We are going to wave the fees for 30 days. You're welcome, okay? What if there's uncertainty about that? What if a ship tries to go through a mon? What if a US ship gets a little too close and said, uh, you know, so to have US and we have a little repeat of what we had the other night? That was in the case that Iranians laying mine. So you know, if that goes perfectly, we think it'll take and the Iranians will have to demine first. And again, they apparently were just mining a couple days ago. So 30 days, we think it's a slow and uncertain process, but let's say we get there and let's say after 30 days, so now we're kind of at the end of June, which is aligning with our base case and, you know, things are looking pretty good. I think, you know, you will see if there's a green light, that 80, 90 million barrels of crude, I don't know much of product is still in there will bolt for the door. Wouldn't you, if you're those 20,000 mariners, you want out, you may not come back in, but you want out. I think, um, I don't think you'll have a ship lot of ships coming back in though. I don't think the Saudis will be increasing their, uh, their production and the Emirates increasing their production. I don't think many ships are going to be willing to come back in and take out of storage. If you have already, uh, bows, it ships in the Gulf before they get out, they could take storage and get out, but I think it's like our SPR release, like you said, whether it's 200 million barrels total between, uh, balacid oil and, uh, you know, and draw down from storage, um, uh, I don't know, but you, you get, you get a, a slug of oil that comes out and, uh, but then I'm not sure the system continues to recover because of this parallel nuclear negotiation because all they will have done is have his tenuous sort of easing of the bottleneck that sort of implicitly says Iran has a role in war moves and the Saudis like until that's clear, we're going to hold off. We'll let the ships go. And meanwhile, you're going to have the talks on the H.E.U. and everything else and the reparations, which again, I think they're solvable, but it doesn't mean it's going to be easy to solve. And Iran thinks it's winning. And as that oil price goes up this summer, it thinks its terms are going to get better. So the dynamic here is not toward a quick resolution. And so as long as there's uncertainty on that underlying negotiation, that hormones opening will be seen as tenuous and fragile. It's not what rapid end has been expecting just for our balances, which is a clean, we're good July, where it's done. It's over. You're free to go. That's arguably very optimistic. So sorry to go on and on, but that's kind of what we're dealing with, but you're right. The sequence has to be get the latent ships out, get ballasted ships in and destocking. Do it in an environment where the Saudis, the Emirates, the Quaidis are confident enough in the stickiness of the conflict being over and control of hormones being solidified, so that they say, okay, and they bring back the oil. And then we all start analyzing how much can Iraq do, can Rumeilia really come back to where it was before, how quickly is Iran? We're all going to be doing the restoration analysis. But we're, we're a waste from their worry. We're a waste from their, the equity markets that are all time highs and Brent's down now over $5 as we've been talking. Yeah, we're sitting at, it just shy a 95 bucks on Brent right now on again Wednesday, afternoon, the 27th of May. The other thing I think here that's interesting is we were mentioning that, you know, the IRGC would, would re-allow ship transit levels to return to pre-war levels. Again, 30 days after we end up signing the MOU, which could be this week, next week, the week after or never, who knows. But I think there's also a question of like what pre-war levels really mean? Because obviously, I think we are saying it in one way. But one thing that's been very interesting over the past week or two is that the IRGC have been coming out with like really, really high ship transit numbers. Were there saying like, oh yeah, we let 35 ships pass today. And I go to all my ship tracking software. And I'm like, I don't see 35 ships. Where are these ships? And increasingly, it's like a fishing troller. Or it's like, you know, the joke on Twitter has become like guys and kayaks. And I think that yeah, like these are not the same thing. And I'm curious if like one thing we saw repeatedly was that even, you know, even after the ceasefire, there are multiple points where Iran's foreign minister has said, "Promises totally open. Go for it." And in there, according to them, according to Iran, Hormuz has never actually been closed. I mean, I guess intermittently over this period has been closed. But like, overwhelmingly, they claim it's been open as long as you follow their rules and go through their things. And again, they have a strong incentive to throttle traffic and only let a trickle through. By my count, relative to 30 to 40 number that I keep seeing quite by the IRGC, I'm seeing tankers, one to two a day max over the past six days, total ships, including cargo ships and everything else, you know, two to nine ships of consequence. These are not durable levels. So if like, if we're talking, if they're going to get us back to say, you know, pre-war levels, yeah, it's like 150 kayaks. Very different thing that, you know, be like, "Oh, wow, you know, if we're getting 10, if you're like, oh, yeah, Rory, you don't understand, we get only, we'll always use 10 tankers, 10 VLCCs, this 20 million barrels a day." Like, that's not how it's going to work. Right. Like, how do you, how do you think about even that level? Like, there's going to be very weird incentives to claim that they're playing ball, but also at the same time, not release their only real point of kind of leverage in this. And I'm very curious to see if that's actually going to look. No, you're right. You're absolutely right to be. And, you know, think about it, all wars end, and they end one of two ways. You either have a negotiated, kind of a ceasefire but a settlement, you negotiate a settlement, or one side capitulates to the other, and it accepts terms dictated by the other. That's just going to, how we do it. I don't think either side is getting ready to capitulate to the other. And I don't think we have, we're close to a true settlement of all the issues, the nukes, hormones, the posture of the US and the region. Reparations Iran is owed. We're not there. As I said earlier, we're sides are far apart, not amazing on all issues, but on, on, on, on enough issues, far apart, each side thinks it's winning. All they want to do is avoid escalation. So in that scenario, all we're talking about here is extending a ceasefire and allowing some easing in hormones. And for Iran is very clear, they want to load carg tankers and resume selling oil to China and get paid for that. Period, very simple, very visible, very measurable, very clear, and they will get that. As you say, as terms what they give, we argue, I saw it doesn't go through. We didn't see it doesn't go through. There were big sayers, ones of trial are whether we didn't see any oil, LPG, that didn't go out. Well, you know, they didn't, you know, you have to come back to Iraq and wave three times. Oh, yeah, you're not the baby. You have to do things our way. And so they have every incentive to slow walk, to not fully comply with getting certainly at oil flowing because then they lose their leverage on President Trump for that ongoing larger negotiation, which runs in parallel. So they have plenty, their experts say they have plenty of games they can play. They're already playing them. So you're right. That's why, you know, we just from a deficit improving standpoint. And again, with all due respect to the enormous optimism that continues to be shown in the trading markets, I just don't see the end of this. We haven't even peaked. Things haven't stopped getting worse, much less getting better in my view. To your point. To your point on the Iranian negotiating strategy. I've seen this aphorism go across a couple of times that you know, the Iranians talk about a win-win deal is a deal. in which the Iranians win twice. - Wow. - And it definitely feels like again, they can drag this out if they really want. Before I let you go, with the one last thing I wanna dwell on for a second, it's okay. All right, let's assume it's over. Bob, it's over, okay. Thank goodness we can all have a weekend again. We can go back to like seeing our families. Okay, so let's say it's done. We're past even the month or two of kind of all of this uncertainty. We're back at a stage where let's say 80% of pre-war transit levels, like real transit levels are resumed. I actually very frankly don't think we're gonna add 100% because like it's fundamentally changed. But I think we don't need to hit 100%. We have East, I don't think the Saudis are gonna pull all of their volumes back to the Gulf. I think they're gonna leave them operating the Red Sea for a while. Same with the M-Rodis pumping as much cruise they can out at Fujiara and now with this other pipeline. They're about 50% constructed on as well. So let's assume that the situation has generally normalized. The global oil market is tighter than that otherwise would have been, we're down a billion plus barrels of global stocks of the system. We were maxing out all of those non-Hormuz offsets and rerunings even with the resumption of near normal traffic. But there's just this like lingering lurking dread in the region and of a question of like, 'cause again, I as a law often say, like as I said at the beginning, I was a big seller of the theory of the claim that Hormuz was going to be closed for over a decade. In any given year, if you would even ask me in January, I would have said maybe like sub one percent, honestly. And now going forward, it's never sub one percent ever again. Now in any given year, it's like a resting 10% tailress. Talk to me about those long term geopolitics. What does that world look like? As the rest of the Gulf attempts to kind of harden these facilities as you noted, they've been doing that since, you know, for over a decade now. That will obviously kick into higher gear. You've seen a lot of, you know, various installations starting to put up like drone netting. I've seen the Gulf states have basically entered into partnerships to basically build their own versions of the Shahed drone, to counter the kind of Iranian asymmetric warfare here. But like across the board, it just feels like it's fundamentally changed. In the oil market and the status of the Middle East as kind of the anchor supplier of the global oil market. Talk to me about what that world looks like. In a year. That's a world, no, I think you really touched on it. That even unless this ends with a democratic regime that becomes a friend of the West, unless this ends in the most perfect, beautiful scenario, which is extremely unlikely. So better than Venezuela. Better than Venezuela. And authentic, I mean, a US embassy, Darren Woods arriving in Tehran, I mean, everything's just gorgeous, okay? No one's even taught that that's not gonna happen. Your term, your term, but okay. Unless what we will find after this is over is that a load bearing assumption in global energy and economics will have toppled like a old Roman column crashed, something that no one ever thought would ever fall. And that was foundational to understanding of how the energy market worked, flows, trade, and even pricing and so forth. And that was the Carter doctrine really the Reagan Coral Area, which is more, this Carter doctrine was about an external flow. So that Union Reagan Coral Area said, we won't even allow the Persian Gulf to be dominated by a regional hostile power. That's where they run. But that, that the United States has allowed an adversary to choke the world for 85 days and counting is nothing less than a toppling of that US guarantee of free flow of energy. And that will not go back up again, Humpty Numpty will not be put back together again. And there will be something going forward that never existed before and that won't go away until we have the Persian Gulf region looks like Western Europe, okay? We will have a permanent security risk attached. You'll never look at Rosalafan, those oil facilities again. And you can add pipelines and you can twin this and new build that but with the drones, the missiles, everything's in reach there. And so that's one dot that there will be a permanent risk attached to investment in hydrocarbons and dependence on the flow of hydrocarbons, oil and LNG from that region permanently. And the second, and that's one dot. Now the second thing though is I'm gonna end on a, not a happy story, but one at least for our continent is maybe a silver lining. You know, just before we went into this, Venezuela and Iran, what were we talking about? I think a lot of people were talking about this sort of crumbling peak demand narrative, right? I think this idea that because of very aggressive climate change policies, EV mandates, especially in subsidies, always see the transportation field demand was about to collapse and decouple from GDP and collapse so that global oil demand and gas demand was gonna peak by 2030. And then the only question was would it plateau or fall sharply, okay? And I think that was fading, yay, back off of that. And so just before we went into this, I think the consensus was sort of shaking off this idea that was firmly held for not too long, five or six years, that were in this peak demand world. And if you don't believe in peak demand, I mean, we can all agree we're not investing enough, upstream and downstream to supply consumption in a world where demand continues to grow after 2030. So if you were realizing, whoa, we're structurally short and not in 2027, but many of us had soft balances this year and next. But 2030s are looking tight if demand's not gonna peak. Okay, so that's the second dot. So we got two dots as we emerge from this and shake off all this, one, wow, the Middle East, we'll never look at it again in the same way, huge security risk. What does security even look like there? What is the risk of interruption, risk of destruction in a world in where the United States is no longer seen as the guarantor of free flow of energy? Wow, since 1980, I've been there. Okay. The second dot, oh yeah, demand's not gonna peak and we're under invested, we're short hydrocarbons. If you connect the line between those dots and put an arrow on one end of the line, it points right to our continent, Canada, the United States, South America. What the world is gonna look for is access to hydrocarbons in our continent, especially Asia. And that means I think interest in investing in infrastructure and fields and production and refining in our, because we are the last base in standing, I think we are seen as relatively safe and secure. The world's gonna need those hydrocarbons. So in some ways, I think it's a structural tailwind for energy investment in the Americas. Well, Bob, thank you so much for being on the podcast. And before I let you go, just two things. So first of all, tell our audience how they can find more of your fantastic research and your colleagues at Rapidae. And then second, give us a sense of the kind of top two or three things that you're watching over the next couple weeks as we're trying to handicap the more tactical element of this, like when is actually going to happen. Yeah. So www.rapidaeanenergy.com for more information. Thank you, Rory, about my awesome team and our work and our research and our five practice areas, global oil, global gas, geopolitical risk, energy policy, and China, we actually just launched a power policy service to data centers selling like hotcakes. So a lot of interest, I'm going back to where I was a president, Bush, I never particularly enjoyed electricity, but I'm enjoying it now because there's a lot of interest so the whole data center thing is really interesting. And we're also on Twitter and LinkedIn and so forth. And what I'm watching for, so I'm watching for signs of demand curtailment on a massive scale. And I'll let you in a little secret. And I know you only have 100,000 subscribers and things. You're very popular and you're going like this and it's awesome to see that and no one deserves it more than you by the way. So I wake up every day thinking, we know the data are going to be lagged. Look at 2008 is really interesting. You go back and look at the monthly mods and other data. I mean, we're not going to see when the economy buckles, see, I'm afraid we're really not going to get through this without unfortunately a widespread economic problem. I'm just afraid we're trending that way. I hope not. But and it's not our base case. But and so I asked myself, as I did in 2008, what leading indicators, what signs, what whistles, what what what caps have to blow off the top of a little spigot to say there's something going on. And if you look back at 2008, the first half of 2008, as crude was arcing up from 147 there from like 130 or 120. And ask yourself, is there anything in the prevailing data or pricing or spreads that suggest that presage that early July peak? My favorite was front month gas oil spreads in Rotterdam, QS1 minus two. Gas oil, diesel is the really economically embedded fuel. And so and if you look back then, they were they're quite backwardated and then they flipped like in April, like 55 days or something like that before the peak, they flipped to a deep contango. No one really knew. I wish I'd seen it at the time. I wish I can't claim that. I looked afterwards, so I did this forensics. So I'm keeping my eye on the gas oil market and gas oil spreads and and the other kind of leading into cracks. Yes, the weekly EIA implied demand numbers. But then, you know, not that I enjoyed that much, but you have to put your macro hat on. I'm looking at 10-year rates. I'm looking at other signs that the economy is starting to buckle under this. And they're not flashing red right now. And the equities are certainly not. The confidence, again, I'll go about the thing that shocked me and continues to shock me is just how deeply embedded and widespread the confidence is that the world can withstand this and so forth. But that's kind of what I'm looking for these demand curtailment, you know, kind of indicators. How about you? What are you watching for these days? That's a good question. I actually, so I'm normally someone who doesn't put a lot of stock in the EIA weeklies. But I would say that the biggest sign for me that I think would be required for the O market to go dirtily higher from right now is to see those US weekly crude stocks specifically. And the reason for that is that while we are seeing record drawdowns of stocks across every indicator globally, and to the point of lag data, I actually, this morning, I published my March balances. So yeah, we're all heavy hindsight lookers over here. Right. Because the data's all lagged. But I think the one thing that's, that's enduring truth and weirdness of this market is that the simplest, as you know, regression between prices and inventories is weekly prices versus weekly US crude stocks. And if you use that model right now, it basically says we're not only fair value, we might actually be overpriced right now on the barrel. So I think that if that drops, and I think that, because I think most of that build up in US crude was is staging for massive burgeoning exports, which we've seen. And that's why we've seen the largest crude draws in US history. I think that continues. And I think only after that drops below that kind of five year trailing low, I think that's when all the macro folks will all of a sudden perk up like I was and my little toy model says that all of a sudden WTI's worth $1.50, right? No, you're right. So that's what I'm watching. Well, how about another one? Now you've written about this. I want to, I want to interview you at the end here, but you just, someone should. You're great. So China and Asia, will they come back into West Africa and start buying? I mean, that's one thing. You know, you look at even, it seems like physical players. Again, they treated this like, oh my God. Yeah. Or Moses going, I'm just going to hold my breath until it's over. It's got to be Donald Trump's going to fix this in a few weeks. And you acted that way. It's going on 85 days and plus, whatever. And we all ask ourselves, you know, whether it's, they drop runs and they're just starving their domestic economy, whether they're drawing down inventories and others that debate by the hidden inventories, but let's assume one of two unsustainable trends is happening, maybe a little bit above. They're dropping runs. They're holding back and they are maybe drawing down inventories too, but you can't, you don't want to do this forever. And I get another sign I would look for in terms of another upleg here on prices would be, you know, you start to see real buying activity in the Atlantic base and I don't know about you. And that's hard to get. You have to watch traders and things like that, but I'm certainly watching that for you. Yeah, I think, I think if we do rip higher here, I think China is part of it. And I think the fact that they're down 5 million barrels a day of crude imports, obviously helping things for everyone else. So they're doing without, so that everyone else doesn't have to crash. So we can all thank Beijing. I'm a tail end of this for saving our bacon and our moves, but we will leave that for the true post mortem. Hopefully we could do that in a couple of weeks, right, Bob? Right. Absolutely. Well, thank you so much for joining us, Bob. It was a pleasure to have you. Well, Rory, thank you so much for having. Congratulations on this great podcast series and thank you. Thanks for being a friend. Thank you. [MUSIC] The information presented should not be considered investment advice. The ClearComer network and its affiliates are not responsible for any loss arising from any investment decision in connection with material presented herein. Please do your own research and speak with a licensed financial representative before making any investment decisions.