“This Is The End of The Oil Market As We Know It” | Rory Johnston on How $300 Oil Could Trigger Depression If De-Escalation Does Not Occur In Iran War

We have a special episode of Monetary Matters today with one of the best independent oil and energy analysts, Rory Johnson of commodity context. I've been utilizing his research to help navigate oil and energy markets, especially now during the Iran oil shock. Today, we have a special offer for Monetary Matters listeners. You can get a 20% discount on annual subscriptions to commodity context by clicking the link in the description. One key point Rory emphasizes today is how even if there's geopolitical de-escalation, this is likely to be a protracted crisis. If you're an energy tourist like me, I think this analysis is a must-have in 2026. So go check out the discounted offer using my link. And remember that on Substack, if you aren't already subscribed, you must first enter your email to access the discounted checkout page. Let's get into it. I am joined today by Rory Johnson of commodity context. Rory is one of the best barrel counters in the oil business, and we need barrel counters right now. There's so much disruption and confusion in the oil market. Rory, great to have you on Monetary Matters. Welcome. You write fundamentally the normal flow of traffic through the straight of her moves. Must resume or the oil market will break the global economy. You wrote that one week ago. Where do we stand right now in the middle of March? We're beginning to break. And I think it's very clear that as of yet, the straight of her moves is not normalized. In fact, the situation in the Middle East seems to be getting worse, not better. We've expanded yesterday to facility attacks. You saw very severe attacks against cutters, LNG facilities in the north, coming off the north field, following Israel's attack on the Iranian South Paras field, which is the part of the same gas structure in the Gulf. And yeah, and we're seeing attack spread. As we'll talk about one of the main rerouting outlets for Gulf crude, particularly for Saudi crude, is the massive east-west line that shuttles barrels to the Red Sea. And we saw attacks overnight that were confirmed on the port and on the refinery at Yandbo. So we're seeing this situation continue to devolve. And it doesn't look like things are going to get better anytime soon, but as I will hopefully describe to you, they have to. Otherwise, things are going to get truly, truly awful. And so awful and so politically untenable that my bias here remains, that something has to move, which in my mind is Trump, because he's the most movable of the three participants in the war by market means. And I think that's where this has to end. And I'm shocked. We are this deep into it already. So you think that the price of oil is bound to go so much higher that someone must relent and that is looking like to be the United States and President Trump? Yeah. And just to kind of contextualize why I'm saying that. So let's just say, roughly 20 million barrels a day of oil flows through the strait. We have some offsets, this east-west pipeline, for instance, that could maybe in an optimistic world, shave that from 20 to 15 million barrels a day of loss. We also have the SPR releases, we have Russian oil. And while we have all these things that can float us temporarily, but just to put in context, if the strait does not open, and we even have that 15 to 20 million barrels a day of loss, that will need to be physically shed from demand if we cannot get supply reestablished, because no source of supply, even USShare, which is the fastest responding sources apply in the market, it acts too slow. We're talking probably six months at a minimum to see the major production response. And even that will be, you know, insignificant relative to the need. So we're going to need to destroy demand. And 15 to 20 million barrels a day of demand, just to put in that perspective. That was the peak of COVID demand loss in March, April of 2020, when you and I were stuck at home, when there wasn't a plane, when there wasn't a plane in the sky, we would need to recreate that level of demand destruction, but without a pandemic and without lockdowns, just through price mechanisms alone. And I have an extremely low price sensitivity to gasoline prices. I'm getting my kids to school regardless. But that just means that we're going to need to ratchet higher and higher and higher until we shed it somewhere. And that's likely going to mean in poorer countries in the global south, which is going to manifest for them as outright and likely deadly shortages of these fuels, these, you know, critical fuels for these economies and these people. And in the global north and advanced economies, it's going to manifest as a all-time high debilitating price shock that will cause all the normal recessionary concerns and sapping of disposable income. And if this goes on any longer, I mean, recession is the best case scenario. We're talking depressionary conditions because it's just such a big shock. And it's just hard. And I, it's one of these things like, I, I try to think of myself as not an alarmist. If anything, I usually get a reputation. It's like a bear in the oil market. Like I'm like, the oil market will solve this. The oil market's extremely flexible. We've seen this repeatedly over the past half-decade. The market is shockingly good at absorbing and rerouting flows. This shock is too large for the system to handle. And it will begin to creak and break the longer this goes on. So 20 million barrels go through the street of Hormuz or used to go through the barrel. Yes, it's free of Hormuz. How big of a disruption is that has there ever been a disruption as big, you know, the the Yom Kapoor War, the 1979 Iran-Iraq War in the 1980s, just how many barrels per day were those disruptions, you know, the squeeze of 2008. And how big is this in comparison? It's bigger than anything in history, even proportionally. I mean, maybe you could go back to like the early early days of Rockefeller, or maybe there could have been a specific advantage that was proportionally larger, but it was still such a nascent industry at the time. So, base effects were playing a lot there. But just in terms of context, like the last greatest shock in the oil market in terms of supply shock we dealt with was following Russia's invasion of Ukraine in 2022. When at the peak of that fear, the IA published its April oil market report. And the fear at the time was that it was already a tight market. We were already kind of grinding higher. Opek wasn't keeping up, etc. And the IA said that Russian supply could fall by 3 million barrels a day, which at the time, I was like, oh my god. Like, oh my god. That's insane. Like, how are we going to come out of this whole? That is, this is seven times larger. I mean, at least five times larger, even taking account for, let's say, the East West diversion out of Saudi. So, it's just massive. When we look back at even the 70 shocks, I think a lot of people remember them as a supply crisis. And they were to a degree. But a lot of it was not an absolute loss of supply. But rather, kind of a selective re-reading. The Arab Opek nations, blockaded or didn't ship oil to Western nations that were alive with Israel. But they were still shipping oil. And as we've talked about through all these other crises, Beryl's have a really, really good way of solving themselves and figuring out flow and filling holes. Traders are going to arb and close these arbitrage opportunities. Same in '79. You saw a loss of oil briefly, but it was more logistical flow. And most of the research looked back at it. It was more of a precautionary demand shock where everyone panicked, but tried to scramble for barrels. And the supply loss wasn't actually as great as people were fearing. This is multiples of any of those events already. And we're beginning to see the precautionary shock in addition to this, basically Asian refiner scrambling for barrels. But shockingly, I mean, we're sitting at $114 for Brent right now. I think this morning we peaked at just over 118, which is higher than even two Mondays ago when we busted higher coming out of the weekend. That's high. But it's not high enough. And I think it will continue to grind higher the longer this goes on. The way I've been describing this is essentially, if you think about some kind of massive detonation in the oil market supply chain in the Middle East, and there's this shock wave that's kind of moving out, the people are like, why is right now, for instance, physical cash Dubai barrels off the coast of Amman are trading at over $150 a barrel. They're like, well Brents at a high or sorry WTI is like 100. Why aren't people buying WTI? Well, WTI contacts are for delivery next month. That takes another month or so to get them to where they're going. So the issue is it's a acute scarcity issue in the Gulf right now for crude. There's a time issue that we can't get any barrels to fill that whole quick enough. But as we saw kind of yesterday, I believe we started getting reporting that Asian refineries that had been avoiding trying to go for these further filled barrels. We're like, surely this is going to end. Surely we won't need to do this. They're finally coming to the conclusion that, oh my gosh, maybe this won't end. And they've started buying the Brent basket and we're going to see them start buying in WTI because they're going to need to start filling not the current hole, but the hole in one, two, three months. And that's how we know that this is going to start spreading to everything else. And so in 2022, the fear from the International Energy Agency was a 3 million barrel disruption from Russia. You've got a great chart. We can show it that actually the disruption from Russia was very, very small. So that didn't even happen. And what it's looking at now, the disruption from the straight up hormones with Iran. Is could be seven times bigger than what the fear was in 2022 that didn't even happen. And of course, in 2022, the price of oil spikes and went well above $120. Correct. And what we're talking about right now is just the supply loss. So this is the loss of flow through hormones. But on top of that, we also now have confirmed massive production shuttons across the region. So basically the rationale here is that because countries, I mean oil flows, it has to go somewhere. It's kind of like electricity in that way that you need to put it somewhere. And if you can't put it somewhere, it has to kind of get shut it. Because you can't just like spill it onto the sand in the Arabian desert. I guess. But anyways, because when you run out of the capacity to ship this stuff afield, so tankers are loaded, they can't get out. Then you start filling inventories, then inventories overflow. And when they overflow, you're forced to shut in. We saw that's actually I'm a Canadian oil and we saw this in Western Canada in 2018 when pipeline bottlenecks caused shuttons in Alberta. It's the same functional idea happening right now in the Middle East, but at a much much much more massive scale right now we already have confirmed upwards of 9 million barrels a day of confirmed shuttons. This isn't just supply us. This isn't the hormones stoppage. This is actual barrels that have stopped being produced. And again, going back to that that fear of 2022 in Russia. That was 3 million barrels feared maybe 1 million barrel you realize for a month or two. This is 9 million barrels already confirmed. So we're just like we're in deeply deeply uncharted territory. Yes, you're saying that if it just was the straight of her moves being blocked once this that straight from us is open again, which hopefully is is very soon. All of the oil could could get out of there because it's just being stored, but because there's not enough storage, the actual production of the oil has gone down. You've got a chart showing. Yeah, what 3 million barrels not being produced by Iraq, the Kuwaiti oil, you'll 1 million barrels this talk to you about the scale of it right now. So 9 million barrels not being produced. Do you see the production going to go even even lower a greater disruption than the 9 million barrels. Also, let's say the straight of her moves is opened right now today. How quickly can that production come back online. Great question. So let's talk about the different ways the straight of her moves blockage in this overall situation is affecting different types of supply and production in different ways. I think there's 3 big buckets here. So the way I've been describing the straight of her moves stop is basically like a kinked garden house right to your point you on kink it and flow can start again. I think at this stage it's been kinked for so long. There's I mean now we're going to experience the type of you know supply chain bottle next week's for you to cover all these ships are going to be on top of each other. So they're going to try and unload at the same time. So you take weeks, months to kind of unwind the tanker kind of you know bottle up basically. But fundamentally you can reopen it and start things are flowing again again assuming that people trust Ron and all these things but theoretically it can happen. It's physically possible. Now we have the shuttons that so this is what we were just talking about. This is barrels that have actually been you know we they've capped the wells where they basically you know stop the barrels for coming out of the ground. Producers don't like to do this because it's expensive it's risky you can you can potentially damage the ultimate recoverability of these wells because remember all this is produced by natural pressure. And then you do to muck with that normal flow can cause negative side effects in the longer term but I think even the best case scenario we're talking weeks to months to get these barrels produced again back into kind of full production. So I would say probably months to get back up to full normal middle eastern production again if they can even do that if there's no kind of long term consequences to recoverability. And then finally I think there's this final piece to this is even worse than the other two buckets which is if there are facility tax like we like what we saw overnight in cutter on the gas plants what we've seen in other areas threatened already. That's when if you hit an upstream production facility if you hit for instance back to 2019. So when Iran hit the Saudi massive largest oil processing facility in the world at ab cake and that is actually ab cake is the is the point at which oil begins to flow through the east west pipeline so obviously this is all connected and obviously rush. So that's very tempting if they start hitting those facilities then we're not talking weeks to months I mean I if we go back to the garden hose kinking it's not a garden hose anymore that's like taking the shotgun and blasting off the faucet to which the garden hose is attached. Everything in the oil market is repairable but that is not weeks that's months year you know potentially or more and that's the real nightmare scenario because then then we're kind of that's the tipping point because then there's no real immediate recovery from this and we're going to need to shed massive amounts of demand to cover the cover the gap. So 20 million barrels through the straight of our moves let's say that be generous let's say 10% of it is still flowing through from Iran stuff so 18 million barrels off the market how much can get through other means through this east to west pipeline through Saudi Arabia through I don't know going up through Russia how much what what what else can be can be done to. So this is actually the next piece I'm working on and I've been trying to get it out but it's been chaotic and in the best of times so hopefully the subscribers will see this piece soon but a little preview so yeah so just to be clear so out of that 20 million barrels roughly 50 million barrels is is crude oil and the other 5 million barrels or a fine products and that we'll talk about for fine products too because that's even in some ways a more acute crisis in the immediate term. But overall 20 million barrels of oil proper let's say we have the Gulf revert so this is the east west pipeline I would say yeah yeah for Saudi Arabia so this is also the petroline it was actually a line that was built in the 1980s during the Iran or rock war during the tanker wars specifically as insurance against me especially against this current and exact risk so it's no serving as purpose then the pipeline has a name plate capacity of 5 million barrels a day Saudi or Ramaco said they could push up to 7 through the use of an associate. NGL pipeline or after gas liquids pipeline there's probably only already 2 or 2 and a half million barrels a day flowing through that to the west coast anyways just because there are settlements on the west coast and there are finalies so let's say optimistically you can get 5 more million 5 million more barrels this is where we I went from 20 to 15 in that kind of optimistic scenario. That's one path let's talk about some of the issues with the one path obviously it's a pipeline so it can be bombed it is pumping stations can be bombed it terminates at the red sea which up until very recently was being terrorized by the hoothies which are Iranian allies and last night we actually got confirmation from the Saudi Ministry of Defense that missile that a ballistic missile and a drone were shot at the port and the refinerate yondo so clearly this is now becoming a target and after Israel targeted and hit the south power field yesterday Iran released a list of targets one of which was the refinerate yondo so we knew this was on their radar and now it's also been confirmed so that OK that's the biggest single let's say charity 5 million barrels a day although there's lots of astrox and kind of question marks around the sustainability of that. The next is the pipeline in the UAE which basically links the golf side of the Emirates to the Gulf of the Monside and this terminates which is the good side that currently is not being blocked yeah it's good I like this I've been adopting this terminology as well the kind of good and bad side of the straight so it travels from the good side to the bad side of straight to the good side of straight and it terminates at the major kind of blending and shipping hub of fuzera which if anyone follows this mark. Those are those are the Middle Eastern weekly inventory stats that we get is for is for fuzera that pipeline has theoretically upwards of a 1.7 million barrel at a capacity probably 1 to 1.2 we're already flowing the line so let's say charity we can get 0.5. So now we're at 5.5 and again with this fuzera pipeline the other issue there is that fuzera has been repeatedly hit by drones you've seen the storage tanks on fire you've seen shipping stop and start and stop and start so it's going to be hard for that to be a sustainable and secure offset. Okay so let's say we're at 20 now actually you're right so so Ron is still shipping so let's take out two so that's 18 let's take out 5.5 so now you're at you know 12.5 million barrels by doing that right yeah okay. Now let's okay what can the West do what can the consuming nations do so far we've seen the main response here has been from the IEA's coordinated strategic stock release which is 400 million barrels. We still have yet to get exact specifics on all of the various timelines for those but what we've heard from the United States and from secretary of energy Chris right is that the US portion is going to be conducted is going to be completed over 120 days so four months if that is applied to the full 400 million that gives us a flow rate which is the part that matters here is like the realized supply aspect about 3.3 million barrels a day. Okay so that could last 3.3 million barrels a day for kind of let's say 3.5 let's be generous to make you from a easy to 9 million we're 9 million and again that's time that's only last for 4 months then we have access Russian supply Russian oil and water and again one of the things I've been pressing here is that Russia is the single greatest benefit year of this war in Iran prior I'm I don't say a lot of nice things with the administration but I'm going to say like to their credit they did a very good job at tightening the news around Russian oil trade. Over the past 6 to 8 months following the sanctions on Ross and after Luke oil last October and following the imposition of punitive tariffs on India for Russian oil purchases India more than have its purchases from over 2 million barrels a day to about 1 million barrels a day there was real strain on that and because of that you had Russian discounts on their crude blowing out you had Russian oil and water rising to deeply elevated levels. That's a sign that the sanctions and the tightness was working with that has now also create a little bit of an offset because we can tap those Russian barrels and what we've seen is that basically in 2 weeks all the progress the administration had done over 6 to 8 months has been undone so basically rush brushes everyone's kind of prefer a barrel of choice because it's a major producer it can put it can you can load and ship into the in the city basin and it's not on the wrong side of the street for a minute. So that is likely going to continue happening roughly your let's say 60 million barrels or that was the last. let's say even 100 million barrels of Russian oil. Depends on where you exactly bench for for the normalist. But we're looking at maybe, let's say, over, let's say that draws down in a month. 'Cause I think this is actually the stuff that's gonna draw down fastest because you've also seen the US Treasury Department issue an explicit sanctions waiver on Russian barrels that were loaded prior to March 12th. So this is explicitly talking about these floating barrels and this kind of oil and water that I think get and also exempted sanctions on any of the shadow fleet. So basically said, if there's a Russian barrel on water, go buy it right now. And we already saw, I think, was yesterday reported that India bought 30 million barrels of Russian oil that was sitting on water. I think that's probably in the ballpark of let's say 60 million barrels over, let's say over a month, let's say 2 million barrels a day. So now we're down from where were we, nine and a half or nine, back down, so now we're at seven. That's still a gigantic hole. And this is where, I mean, there are other offsets here and there, but really that's when this is gonna begin to fall to other oil and water and other commercial inventories. And again, about half of that offset is temporary. This only lasts for so long. So the longer that goes on, the worse this gets in basically every single way. But that's the offset. And I think that the worry I have here is that that again, is an untenable situation. We will see prices skyrocket. Can you just got rock at over $200 a barrel Brent? We already have over $200 a barrel jet fuel in Asia. We have $150 a Dubai cash basis physical crude in the Middle East. This is the way this is heading, the longer this goes. - Tell us about the refineries in Asia and the time lag between when they are gonna start running out of barrels. - Yeah, so I've been describing this essentially. If you think the oil market, the reason we talk about it in millions of barrels a day, rather than like monthly tons or whatever else is, the market works and it's best to think about the entire thing as basically a pipeline connected flow system. It's a stock and flow mark. The world's biggest chemistry set I like to say. And this is, so you need barrels flowing all the time. And as soon as they stop, you basically create these air pockets in the system. And right now, let's say you had again, 20 million barrels a day, I think we're, what are we in the 19th day of this? Let's say 20 because by the time this goes out, let's say that is 400 million barrels of air gap that are air pockets. It's essentially emerged in the X kind of golf trade. So the trade is coming out of the golf, largely heading to Asia. Those barrels typically take, let's say four weeks to get from the Middle East to where they're going in India and China and the rest of their South Asia. So we, it's not gonna be until those barrels hit land that basically this really begins to tighten. 'Cause again, three weeks ago, we still had crude laden tankers leaving the golf. So those likely still haven't landed at their final destination yet. Probably they will next week. And after that is when this is gonna really start tightening. And to your point about Asian refineries, there are the, I mean, refineries at the ultimate consumers of crude oil. We don't consume it, very difficult to consume. But we, sort of these Asian refineries are looking, they were, there were worst case scenarios shutting down. They don't want to run out of crude feed stock. Initially, very frankly, I was like, well, they're just gonna chase these sky high refining margins. And my, you know, very, very wise kind of analysts they know on the refining side. Like actually, very be terrified of shutting down because it's expensive, it's complicated. They could be off for weeks or months and they're gonna get none of these refining margins. And again, especially if you think they're gonna get worse, you actually want to be in this as long as you can to capture the ones on the other side. So they predictively. If they run out of crude oil to put into the refineries, they have to shut it off and that's very expensive. They don't want to do that. So they're turning down their production right now, even though the profit margins of refining crude oil into refined products is already so high. Exactly, exactly. So, and let's say, for instance, that the refineries running at 90% normally. Let's, what we've already likely seen is them reduce that to say 65%. So not all the way because they still have to operate at some base level of operational capacity in order to keep everything flowing, but they're trying to do that so they can extend their runway of how long they have until they actually are forced to shut down production. So what you've seen is that air pocket in, you know, Middle East to Asia trade, that is still taking a while to hit land. But the realized tightness in refined product markets is already slamming Asia 'cause they turned down immediately and that kind of immediately went into the Asian market. We were talking about jet fuel a second ago. Jet fuel in Singapore spiked, I think in the first week, over $200 of barrel equivalent. And that's because a couple of different reasons, jet fuel, you don't keep as much inventory 'cause it's very, very delicate and kind of specific specifications, I guess reasonably so. But you cut out the jet fuel from the supply side. You don't have a lot of inventory cover. And then basically every Asian airline, it was like, oh my gosh, I may have hedged a little bit, but not nearly enough. Now they're all scrambling to secure physical barrels. So there is also this precautionary demand. So basically this really, really liquid market, basically blew up. And that is going to be how this continues to happen because we're talking about the necessary demand destruction that this has to see in order to kind of clear this market. That is not going to be crude oil luck. I think crude oil is one way it's going to manifest, but ultimately, again, we don't consume crude oil, we consume refined products. And that's where this is going to kind of bite the hardest. Jet fuel is one. Middle distillates overall are the tightest part of the market. So jet fuel, diesel, gas oil. We saw going into this crisis, we already saw diesel margins in the United States, really high between $30 and $40 a barrel, which is like, let's say a pre-2022 norm of let's say 15 to 20. They're already up to about 65 to 70. At the peak of 2022, where we last saw a middly list that's really explode, you saw that hit between $80 and $100 a barrel. I think if this continues, it's going to go keeping higher and higher and higher. And part of the reason that in addition to the Asian refinery turn downs, part of the reason this is hitting diesel and middly list so acutely is that the Middle East had become the primary supplier of diesel to the European market after Europe had banned the import of Russian diesel. So in some ways, we're still living with the consequences of distorted supply chains coming out of 2022. And this is just taking those already strange supply chains and kind of crushing them in who live in. Roy, in the United States, we have a lot of refiner refineries. Tell us, how does this impact the United States crude oil market? But the refined products market and specifically gasoline, the price of the pump. Yes. So I think that's the next phase of this is how these countries are going to respond on a domestic policy basis. And the United States, as everyone by now knows, is the world's largest producer of oil. And you've even seen President Trump begin shifting his narrative around lower prices or better or the world's largest oil producer. High prices are great for us, which again, is actually one of my most concerning signs of how long this is going to go, because if he's beginning to convince himself and kind of shift those goal posts, we're not in a great position there. But how does this affect the United States? If everything stays the same, the United States will on a lagged basis feel the exact same thing as everyone else. Because again, that shock wave is moving out. And eventually, the United States still imports crude oil even though it's a net exporter of petroleum now. It still exports crude, which lightsweet from the Permian base. And so imports kind of medium to how it's medium to heavy showers, largely from Canada, but also from other countries internationally. And I think also really importantly in this context is the individual regions in the United States. So what we call pads, which the EIA terminology, petroleum areas for defense districts that hold over from the world or two, they are themselves unbalanced. So they need trade in order to balance their own slits between crude and refined products. For instance, the US East and West Coast in Port Gasoline, the US Gulf Coast is a net exporter of diesel. If you, which I think what I think we could see here is the beginning of trade restrictions in the United States. Obviously, we only a decade ago, it was still illegal to export crude from the United States. The Obama administration repealed that. I think in very, very good fashion, because otherwise the United States' share patch would not have grown to the level we have right now without that export capacity. But it, particularly in a crisis, and particularly using the language of the US's energy independent, the obvious move for the Trump administration here is to begin restricting trade and keeping that from leaking out in the world. Particularly when we're talking major SPR releases, it's just a petroleum reserve. Yeah, yes, it should be petroleum reserve. Well, one of the scandals we saw in 2022 with the Biden Reserve is that some of the SPR releases end up in China. Because again, these are freely traded barrels. You're gonna release them. They're gonna go to where they're most demanded to fill the best hole they can. And I don't think Trump is gonna like that. I think he's gonna want anything the US does to benefit the US consumer directly. So the only way to prevent that from happening is to restrict trade. Whether or not that's a crude export ban or restrictions or what I actually think is more likely is restrictions on the exports or trade for fine products. We actually saw the Biden administration regrettably mull this over in late 2022. It was a terrible idea then. It's a terrible idea now. For those reasons I was saying that if you do have, let's say you ban exports blanket, which is I think the worst way this could go, you would essentially bottle up diesel in the US Gulf Coast. Normally US Gulf Coast exports one to one and a half million barrels a day of diesel. The immediate effect of that would be very, very good from Trump's perspective. You would glut the local supply. You would force prices down already diesel pricing in the United States at the national average over $5 a gallon. So that would be popular to bring that back down. But without anywhere to put that diesel, the ultimate result will be that you would have run cuts at refineries in the US Gulf Coast. and in no circumstance in this market. should you see any major regions cutting runs, we need every kind of bit of refining capacity we can get particularly in these kind of advanced markets. So they think that's the negative side. And the further consequence there is that if it starts a chain reaction of trade restrictions, the US East Coast imports gasoline from Europe. What happens if Europe begins to restrict trade? The word is the US Gulf Coast, or where is the East Coast that it's gasoline. You can actually have, this is actually another point that I think is leading us towards trade restrictions as you saw Trump this week repeal or waive aspects of the Jones Act to allow more shipping between US ports, which does help actually in this situation. But the only way it really makes a lot of sense is if it's coupled with trade restrictions, which is again, one more point that I'm very concerned with, we're heading down this path. But you can have a situation where the US is actually short gasoline in certain regions and can't get it because there's trade restrictions. And I had said it earlier that if we leave the system alone, we won't see physical shortages in advanced wealthy markets because we can pay for these sky high prices. But as soon as you start mocking with trade, that is where you can introduce the kind of potential for outright shortages, despite the fact that we could pay for those higher prices. - Got a lot more questions for you, Roy. But first I just want to ask you, tell us about the work that you do at commodity context. It's been my guide to this crisis in oil in terms of counting the barrels, looking at the official data, looking at the prices, and then weaving together a picture of what's going on based on that sort of constellation of facts you haven't yet been disposable. - Yeah, so thank you. So at commodity context, I publish typically twice a week. I publish a weekly every Friday called oil context weekly, where I kind of go through everything from flat prices to time spreads, latest inventory data, speculative positioning and kind of market positioning. It's released immediately after that commitments of traders report. So that's kind of my weekly wrap up of everything that happened. And right now it's about 100% about the Iran War. In addition to that, I have three monthly reports, called DataDex, which are essentially my versions of an IEA month-therepore, something along those lines. I have one on global oil balances, North American, kind of detailed oil balances. I do a lot on Canada, US trade, et cetera. And then also an OPEC, kind of compliance in tracking and production and official versus implied production. And then on top of that, I have a thematic research, which a lot of it right now is, again, about the Iran War. And before that, it was all about Venezuela, because KeyOne has already been an absolute gong in the oil market. So I encourage you to check it out and join me and along this path towards greater oil market context. And just to give people a sense of how in-depth and data-driven and visualization driven your work is, like you have a chart of Libyan oil production, the capacity of how much it's producing, how much it's actually producing, and then it's quota because it's an OPEC. So that's just how in the weeds you are. And then also you've got a chart I was looking through, which was interesting to me, of the trade volume of the WCS Houston versus WCI, the West Texas Intermediate. And basically, there's some new player in that market. That's really spiked up a lot. Some people specifically trading the spread between Canadian oil and US oil. And yeah, so the work is really good. And I also think that most oil research is from a bank, which you have to be a hedge fund to join. And some of the research is good. The Bank of America's fixed income work, I think, is very good. But the bank wants you to put in trades. So it's always going to be like, you should do this. You should do that. Rory does not have that. And you know, Rory is not biased to be a permable oil. He happens to be, it sounds like wildly bullish on the price of oil, which is a grave concern for markets and the global economy. But that's just based on his own analysis on the data, not because he's trying to get you to buy Brent calls or sell Brent puts or something like that. So we've actually got a discount for monetary matters listeners. People can get 20% off an annual subscription to commodity context. The offer ends in one week on March 26th, annual subscriptions only. If people are interested, they definitely should take advantage of that. The price of oil has nearly doubled this year, just looking at Brent. And whether or not it doubles again from here, I think very highly of Rory's work. And I think it's crucial analysis and data that's visualized in a very, very helpful and honestly very, you know, good, nice to look at way for professional and individual investors. Rory, getting back to it, I want to ask you, if the Iran war ended today, and the state of Hormuz opened up immediately, and the Iraq, Iraq, Kuwait, UAE, all these countries that have drastically reduced their oil production, boosted it back, and you know, in a couple days, you know, well above your expectations. Yep. What is the best possible scenario? You know, so what's your greatest bear case for the price of oil? And therefore a bull case for the global economy? Yeah, so I think so there's two slightly different ways. I think let's assume, let's assume in the most bearish case, that the United States and the term administration wins the war today, and the regime falls, and we get some kind of emergence of a Delce Rodriguez character like we saw in Venezuela. And not only does traffic the state resume, and not only does all of this kind of sudden capacity come back by like the wish of a genie, but on top of this, you also have this massive reserve base in Venezuela in Iran, which has been chronically uninvested and that could open up to international investment. You could get a resurgence of Iraning and supply. Yeah, there's a scenario that this, and again, if we remember, we were actually in an oversupply, an acutely oversupplied situation going into this war. So if we return to everything is normal, and we had kind of the prospect of a lot more around in the horizon, yeah, I actually think this could become a bearish situation, right? And for the record, I think that's what Trump thinks he's doing. And when you see a lot of the descriptions, I mean, I think there was a post a couple days ago about how this is gonna be better because you didn't realize it, but because of Iran, you were always pairing, quote, a terror premium in the price of oil. So their thought is that after this, the golf is safer, shipping is safer, and that kind of more Iranian production, against the exact same argument as well. I think that is very unlikely. Let's just say deeply unlikely, along that timeline, along those kind of clean lines, I think more likely, let's say it ended today and you ended up in some kind of weird quasi stalemate. That is when, let's, again, even assume that all those good things happen, but we don't get a regime change and we don't get kind of, it just goes back to the status quo, but we've lost 20 days basically of flow through her moves and all the facilities were repaired instantly. At the most bearish, or sorry, like the most optimistic for the global economy, we basically resume where we were, which was a oversupplied market that was continually torqued by Trump's tariffs, sorry, sanctions and various policy. He returns to putting pressure on Russia, but we're 400 million barrels of oil, basically less than inventory. That, I think, so basically, we basically rewind where we were in January or February, but with way less inventory cushion, so we have a higher steady state of oil, a state price of oil, even if things begin declining again from there. I think that's the most important. What was global inventories, global reserves held in commercial reserves as well as government reserves? What was that before? And now that we're 400 million barrels short or will be what is the new number? - So we need to wait for official data to kind of be more certain, but just as an example, we grew last year. Roughly, I think my official balance for the year was an oversupply of like 1.5 million barrels a day. And we saw kind of confirmed inventory estimates between onshore inventories and again, oil and water, which had absorbed a lot of this of roughly 1.4 million barrels a day. So over the course of the year, we're talking, you know, over 400 million barrels that had built up in these systems. That basically brings us back into races, all of the surplus over build last year in basically the span of two, three weeks. And that's where we kind of restart. And I think again, that's the most sanguine view of how this could go. But I think that now we try, let's talk scenarios, let's talk how this could go because I've been kind of going back and forth with every analyst I can talk to, basically be like, okay, how can we, like how could this even work? Because for me, the reason I come to this point of the Trump taco is my base case. I almost work to it backwards that the consequences of leaving the straight closed are so, so untenable that something has to budge. And if we only, if we have three major participants in this war between the United States, Israel and Iran, Israel's gonna wanna continue pressing its case. It's wanted to do this for decades. It's not gonna let up unless it's forced to let up. Iran is not gonna let up on its attacks against regional infrastructure and it's fresh on the straight unless it stops getting bombed. So those two are kind of already in this and there's no kind of moving them in isolation. Trump is the only one of these three that can still decide to back out really at any point. There's political consequences that no doubt, but there's also political consequences and I would argue more extreme ones to keeping this going. So I kind of come to this in reverse of like, okay, it can't happen, it can't last, it has to end. So how do we, you know, who is most likely to move? Trump is the only one who really can move so it has to be Trump in this. That's kind of how I come to this. But obviously, even in this scenario of a Trump taco, the situation is deeply unstable [BLANK_AUDIO] he's this war has destabilized this situation kind of almost permanently now, that even if this ends, the Iranian regime is still there. It has now bombed and attacked all of its neighbors, everyone's pissed, everyone's scared. The Dubai, a bunch of the Dubai markets are in freefall. It's popped this kind of dreamy bubble in the Gulf that these countries had built up for decades and it popped them in two weeks. So I think that is durably challenging and problematic. And from the oil level, specifically, we still have probably weeks to months to get this production back up and running. We have the supply chain bottlenecks of all these tankers sitting on top of each other and trying to get to the same place at the same time. And there's no guarantee that we get back to, even in this kind of quasi world, that we get back to a full resumption of 100 to 120 ships through the strait every day. That I think is the challenge that, you know, it seems like Iran has said they want, they want reparations, they want an explicit recognition. - Yeah, security guarantees, yeah. - Security guarantees, they want all of these demands. I think personally that if Trump just unilaterally stopped attacking and pull and basically said, "Israel, you need stop attacking "or we're gonna stop providing the same level of, "you know, missile defense or whatever else." There are levers to pull here. I think in that scenario, I think Iran might press this point for a little bit longer. Like, remember this, who'd never do this again, even without a nuke, where an existential threat to the global economy? But I think fundamentally, they also want to stop being bombed. For them, the survival of the regime is the only thing that really matters. As long as they survive, they win in their minds. That was the same line they had back in June of last year. So in that scenario, I mean, we've already seen them talking about some kind of tolling arrangement through the strait. We've, they think that now, and we've been speaking of the Iranian have said, like, even after this war ends, the strait does not return to normal, which is going to be an intolerable situation with the global oil market, a deeply intolerable situation for the Gulf monarchies and the regional oil exporters. And I think that situation is that, I think there is an argument that we're too deep into this now and that if this keeps going, and basically if Trump pulled out, like, there's still too much inertia. I think that's the risk here. I'm staying relatively polyannaish here that I think he can talk to, and I think that's the only way that's going to end. But I think there are legitimate counterarguments that this has already kind of pushed past a point of no return, at least in terms of durable oil market impacts. And if in that optimistic polyanna scenario, what is the price of oil returning to pre-war levels of 60, 70? No, I think, I think even in that polyannaish scenario, I think we're biased, you know, there's a floor at 90. I think probably we're kind of, you know, 10, 20 bucks structurally higher. And then again, I think we could begin to work our way back down. Again, if markets return to surplus, but again, I think that is the super, the super polyanna situation. I don't think we're going to return the exact same amount of supply we had prior. So in that scenario, things are structurally higher, and they're going to kind of stay higher for a while longer. Now I have the opposite question for you. What's your most pessimistic scenario? Your case for oil. Clearly, $200 is not that. Clearly it's higher. It is. I've been going with 200 because it was a nice round kind of scary number because again, I think people, the oil market, oil market analysts have a little bit of bad rep. And I think it's earned a bit of the boy who cried wolf. There's a lot of permabiles in the commodity sector generally. And I think generalist and kind of market observers like, okay, I've heard this before. It's the end of the world, whatever. But like this is legitimately different. This is legitimately the end of the, the end of the current oil market. We know it if this doesn't fix itself. So what would happen that scenario? We would need to again, even in the most optimistic scenario, because again, the SPR releases and the Russian oil are that's not sustainable. That can only go on for a couple of months at the best case. So let's say we just again, 15 million barrels. Let's say the East West pipeline is maxed. There's no issues at Yanboo, the Hoothies don't get involved, et cetera, et cetera. In that scenario with the straight remaining closed, we still need to shed 15 million barrels a day of global demand. And that just means prices, yeah, $250, $300 a barrel of Brent, like, well, we will hit all time highs in that scenario on an inflation-adjusted basis, almost guaranteed, almost by necessity. Now, again, some of that might be manifested in refining margins rather than Crudal specifically. I think that's going to be a hard thing to figure out the exact balance of. Because again, we've never seen this type of shock manifest. But I think ultimately it will end up on Crudal, most because refining capacity isn't the main bottleneck here. It is the availability of upstream supply from the Middle East. So I do think in that scenario, again, recession is too light a term. We're talking depressionary. We're talking, you know, a grinding of a halt of the global economy, all that stuff that we heard, again, all these scares that we heard back in like 2008, but the world's about to get a whole lot smaller. And, you know, air travel is going to become this weird luxury good that no one can afford. Like, that's the world we're talking about. Which again, seems like a disaster. And again, we're talking all of these, all this is happening. And this is much more in your kind of general area, Jack, on the general macro market and equity markets. This is all riding the entire global economy is riding high. On the most energy intensive technology we've ever developed. And now all of a sudden, we have the largest energy supply shock in history. That can't coexist for long. And that will eventually begin to unwind as well. And then we have cascading financial crises on top of the physical shortage, we have physical shortage, we would see. Which is again, why I think like, I hope I'm wrong. Every analyst I speak, every analyst I speak with, people again, that are, I respect people that are not alarmists, people that make fun of the alarmists. They're all terrified. And they're all like, I don't understand how this continues. So that's why I come back to, I think it has to end. I think Trump has to end it. But how? And I think that's an open question right now. You're referring to AI, which is very energy intensive. Mostly natural gas, as well as solar and nuclear. I believe actual crude oil is not used very often. No, no, for sure. Energy production, but you know, LNG, certainly, sorry, sorry, natural gas and you know, LNG is, and LNG is its own issue that is being blocked by the closure of the straight of her moves. OK, so yeah, you said, you'll real, all time high in real, in inflation adjusted prices. So that, you know, the nominal high in Brent and WTI was $147 in 2008. So you think on an inflation adjusted basis, we get to even higher than that. Yeah, I haven't shut the latest adjustment, but I think that the inflation adjusted that was like $230, $220 a barrel in 2008. I think we, I think we sail past that. If this, again, if it's a month and this has an open, I think we're back up, we're back up above $100. And that is a very, very, sorry, $200. Thank you. Thank you. That is a very brutal process by which the market forces consumers to stop consuming crude oil by literally causing it to go so high that people can't afford it. Exactly. And I think one of the things we've seen so far, and I think there's a legitimate curiosity and question the market. Like, why aren't oil prices already higher? And again, that's what every oil analysis has. Like, how are we not already at $131.4150? How are we not already back at nominal, old time highs? And the answer to that is, again, I think that Trump has to talk about. I think the market. believes Trump has to talk about. I think there's this bet. And we've seen so many episodes. Again, I never thought we'd get this deep into this crisis. We've seen, always seen from Trump historically, is big flashy cinematic kind of kinetic events, whether June of 2020, or last year, in Iran with the nuclear strikes, we saw that in Caracas when they, when they got Maduro, like each of those basically lasted three days. And by Monday, there was some declaration of victory and the markets kind of fell back down. The Monday after the nuclear strikes, we actually saw prices spike up by $5, $6, $7 a barrel, which is again, expected because that was a big deal at the time. But by the end of the day, prices were down, end of the day down more than $10 a barrel, because Trump announced a ceasefire. That was what I and many others in the market have continued to expect. And we even, we didn't see this from the physical market participants, that the reason that Asian buyers, Asian refineries weren't bidding for further afield crudes is because they thought this surely has to end. And I probably won't need crudes. I won't need that crude two, three months from now. I just need the barrel today. But I think again, over time and as that air pocket hits Asia as this begins to manifest in physical data, as we see it to see inventory data, basically like the looney tunes plug out the bottom of these tanks. That's when I think the physical market is going to drag the futures market, you know, by the nose higher. I think historically what we talk about is we talk about financial markets and and futures contracts, leading physical markets. Again, markets are forward looking. But what we've seen is that again, two Mondays ago, and we hit that, we had that massively volatile Monday after open, it was the second weekend of the war, Brent hit, and then go over, it was like $1,167 a barrel. And then at one point was down $35 a barrel in the day. That of, that volatility blew a lot of people out of positions. A lot of people lost their jobs. A lot of people were very wary of trying to get too long too quickly. Because again, I think that that level of price increase was likely justified as I got a forward looking kind of panic of this. But then the job owning, Trump came in job owned, we've seen right job owned, we've seen best-entered job owned repeatedly. And every one of those times, we see prices fall by $5,670 a barrel in the span of 15 minutes. And that's a very difficult position to kind of get too far out on a ledge. of anticipatory kind of panic. And that's why I think that we're going to need to wait for the physical market to kind of drag paper players by the nose higher. And yeah, I generally agree with the claim that financial markets are leading particularly the stock market, the bond market and credit markets too. So the stock market bottomed on March 23rd, 2020. And the economy didn't start getting better until the summer, but we had a ferocious rally in stocks and that pre-sage and was pricing in the future economic recovery that we thankfully had. Do you find that commodity markets generally and oil specifically are forward-looking mechanisms that price things in or no? But I want to answer that in two different ways. So I think what you're kind of, I think, a little bit hinting at is this question of what does the curve mean? Because I think this is everyone's talking about you has all has it kind of talking about, oh, well, oil is going to be back down at 50 bucks. Look at the curve. So Kevin Haser, he was in the White House working for President Trump. He said, look at the futures curve. And what you're saying is, oh, in December 27th, December 20th, 20th, 28th, the market implied price of oil is far, far lower than the current spot price or the current front month futures price. Because that's a back-rated market where future prices, forward prices are lower than near near-dated prices. Yeah. And I think for a lot of people, they look at that and say, that's bearish, right? Because they assume the market is forecasting that prices are going to fall. The first thing I want to cover is that it's not how the futures curve works, at least not in physical markets. I think there could be an element of this and say, rate-sutures where there's no cost of carry, where there is kind of almost a frictionless element of this. But with physical commodities, the primary purpose of the curve, particularly the front of the curve, is spot market clearance. You're back-rated in your type because you're basically incentivizing prompt or spot barrels to flee inventory. You're basically creating an opportunity cost. Because let's say there's, I mean, at the peak on that Monday, Brent prompt backwardation hit its all-time high. So this is the difference between the first and the second month contract. It's an all-time high of more than $9 a barrel. That means that if you had an inventory, if you had a crude barrel in inventory, like any, you could sell that barrel into the market today, instantly, immediately, rebind the barrel a month down the road, and you could basically rent that barrel to the market for $9 a barrel. That's an insane return. Anyone that didn't need those barrels was basically doing that trade because it was too, there was too much of a financial incentive not to. In the opposite, if you're in contango and the curve is upward sloping, what that basically means is the market is oversupplied and there's a discount or kind of barrels right now are less valuable because we have too many of them. And what that that slope basically pays for is inventory storage. So when we hit, you know, the deepest points of a week market and say the bottom of 2020, in February of 2016, or the bottom of March and April of 2020 when WTI hit negative prices, these were what you call like super-contangled markets where you basically, there's such a spread. This is where you can get these floating storage trades where hedge fund will like literally rent a tanker, charter a tanker, fill it with crude, and just like sit it off the coast for a month or two and then basically dump it back in the market. That's how that market clears. So what we're seeing right now is that the market is extraordinarily backwardated, which means it's extremely, extremely tight. But I do not think to like the the has a quote, that's not what it means. It does not mean the market's pricing into the future. It means that it's charging such an exorbitant premium today because people are so short and so panicked. But to your chin at what I was saying about like markets being forward looking, I do think at the front of the curve, I think that there is this tendency and we even saw this in 2022 that the futures curve jumped ahead, prices jumped ahead of where physical markets were trading. And that's because there was this widespread anticipation of this demand going on. And what we saw in that moment is typically when you see backwardation, you see inventories falling because again, that's what's incentivizing it. One of the things we saw in 2022, it was evidence that this was a anticipatory demand and concern. What I call precautionary demand is speculation. You can call it speculation. But about physical market speculation, right? Not not what we typically think of as speculators as like the managed money component of the committance trade report. You saw inventories rising at the same time that backwardation was rising. So that for me is that there's like this precautionary stock building. They're like, oh my gosh, we're going to lose Russian oil. Let's build stocks. So we have some stocks available. That I think is another way this manifests. And I think what I would have expected to see in this situation. But I think that futures markets have gotten shaken out so repeatedly. But now they're like, you know, we're done. Let the physical market take us the rest of the way. Because eventually, I think the future market will get back into this. But I think they've been so shaken. So repeatedly, I'm kind of rug pulled repeatedly by the Trump administration that it's too, it's too risky to kind of get too far ahead of the physical market. So in 2022, Mark was getting backwardated front dated prices, spot prices were exploding higher. But inventory was actually rising. Yeah. You were tracking that work. Now inventories are falling. How much are they falling falling by the full 20 million barrels per day? And also, where did we where was global inventories and global stockpiles before? And you know, how low can it go? Like could could stockpiles go down to literally zero if, you know, all the China, all the US, Australia, were just like, we're releasing the markets, you know, what, you know, the movie, the Titan or something released the crack it, you know, released it. Yeah. Yeah. Yeah. So I think that, okay, so let's talk in the two phases. So our inventory is already drawn. Not yet. And I think this is this element of I think the physical market has to see that first. And the markets need to see that real kind of raw fundamental data. And this goes back to this air pocket I was talking about that that screwed scarcity hasn't landed in Asia. I think we likely will begin to see and I expect to start to see inventory drawdowns of refined products in Singapore where we get the weekly data this Friday. I think that is something we will see. But I think we haven't seen the worst of it hit yet because that air gap still hasn't landed once the air gap lands. That's where I get I the loony tunes kind of plug it the bottom of the tank. And then you're like drawing 10, 15 million barrels a day of oil, at least in Asia and kind of been spreading more globally. That I think is probably what's going to happen. I think it's probably going to happen over the next week or two as the as that kind of, you know, the connection of the air pocket hits land. How larger oil stocks? It's a great question. They're huge. Like just to be clear, the actual total volume of again, when we talk about the oil market as a stock and flow model, the stock is basically oil that is basically it has been produced. It has not yet been consumed. That's the kind of the general portion of stocks. That is probably around ballpark on a crude basis alone or kind of recruiting products is about 8 billion barrels. So that is huge. Just to be clear, but a lot of that is operating kind of, you know, buffer, which is why we typically look at inventories on kind of your seasonal chart, which is anyone that follows an oil analyst will have seen these seasonal charts because there's a normal seasonal pattern and normal level of operational sufficiency to cover disruptions to kind of keep everyone feeling safe and there's no tightness and no kind of logistical, you know, you know, snafus. So I do think that if we do 400 million barrels from global stocks, that might only be 5% of 8 billion kind of barrels, but it is obviously, you know, that is a massive drawdown of what we're considering like the operational surplus of that again. We probably immediately go back to we unwind the entire surplus buildup of the past year and that is just over the first two, three weeks. The longer this goes on, then you start rewinding, you know, all the previous ones and we get back down to, you know, very quickly inventory levels we saw in 2021, 2022 when prices were really high and then we keep going lower, the longer this, the longer this goes on. And the other thing I want to separate here is there's a couple different types of stocks, right? I think people all think that, you know, not all stocks are the same and, you know, some stocks are in water, some stocks are strategic, but then you know like commercial inventories commercial inventories are like the purest stock measure because they are essentially an economically incentivized residual of balances in the market oil and water as we've seen over the past year is if oil water is rising that is an in there's a stock that can be drawn down later, but that actually pulls from global supply as it's building up. So that is more of a kind of a loss as long as let's say Russian oil and water is exploding those barrels aren't being supplied to the market because they can't clear. And then there's also strategic stocks, obviously the IA inventories, we've been talking about there's a this 400 million barrel release out of roughly 1.2 billion barrels of strategic and commercially mandated stocks across the 32 IA member countries China as well as about a billion barrels of strategic stocks in crude or let's call them inland non pure commercial because again part of the more explicitly strategic part of the more what we call I think they would call them commercial strategic inventories which again these are state-owned enterprises through all SPR stocks at the end of the day. That is I think we we will start to see that drawn down but the longer this goes on again these are all finite stocks and it can only go so far until we do run out of time. And so I hope those you we need to draw down oil and water first then we need to draw down strategic stocks and only then are we going to start drawing down commercial stocks because that's basically where the real evidence of the kind of realized market hole is going to be seen. And these commercial stocks what are they are they oil companies that just haven't sold yet are they refiners that haven't used it yet? It's a bit of both so you have both kind of refineries that will hold stocks of crude onsite basically to maintain operations as well as products onsite to kind of maintain stable X to say Lex for it's again just to kind of evening out any operational dislocations. And then you also have like large trading firms. So you've got your major, your Glencores, your Trafigura's, your kind of major trade houses, VTOL, et cetera. They all have their own stocks as well that they use to essentially arbitrage these time spreads in the market. They're typically held in like the major hubs. So in Cushing around ARA, Amsterdam, Rotterdam, Antwerp in ports in Europe, in the North Sea, as well as, you know, Hardesty in Alberta and Canada. These what we would call like merchant tanks, those would be the ones that would probably do this first. I think by this stage, those are likely mostly already empty because with back radiation of insane levels, these are the participants that are only holding these stocks for economic speculative reasons. So they're the first to shed. And then you basically get down to the actual commercial operators. And that's when, for them, for instance, I was saying like if you had a barrel inventory when that time spreads, time spreads were Brent where nine bucks a barrel, you were selling that barrel. If you weren't selling that barrel and renting it to the market for nine bucks over a month, you were in a much, much worse situation because you actually needed that barrel. And you were buying everyone else's barrel that was trying to lend it to you. So that is if you're in that situation, you need to maintain those flows and going back to the example of the Asian refineries that are preemptively turning down operations in order to not shut down permanently. Those are the, you know, that's the example. Like they're gonna, they're gonna keep doing that. But after they run out of crude, like it's end game. You know, those refineries are off until you can refill those storage tanks. And then even then, then we have weeks to month to get that refinery back on back in operation. And can these strategic petroleum reserves, can they get the oil out of the reserve into the market quickly enough? 'Cause, you know, so let's say China has a billion barrels in reserve. - Yeah. - It can't release that in one day, right? - Oh, it would be quite spectacular if it could. But you're right. I think, so as an example of the 400 million barrel a day released from the IEA, I've been treating that as roughly a 3.3 million barrel a day supply addition. So that's 120 days to get through 400 million barrels. If we use the similar, let's say we just use the similar kind of reference point for Chinese SPR. Then we're going back to like, we're at like seven or nine million barrels a day of gap from Hormuz, that I think, let's say, we get another three plus million barrels a day from China alone. The challenge with China is that China has already banned oil exports. So what we saw in 2022 was that China actually stepped in in the winter between of 2022, 2023, when crack spreads and diesel margins were exploding, you actually saw the independent teapot refineries in China swing into action as this kind of swing supply in global distillate markets. We've already seen Beijing short circuit that escape valve here because they banned the export of refined fuels. I imagine they would also not allow the export of crude oil given the situation. So that could they banned the export of crude oil from the Chinese SPR? They haven't done that yet or no? No, I haven't seen it explicitly, but I would say if they're banning SPR sales in, you know, sorry, they're banning refined product sales, I would expect them to do the same with the SPR and even if it wasn't even it wasn't explicit, they're only going to sell to domestic refineries who then can't export their product. So it would be a miracle if the Chinese SPR was able to help fill the gap globally, but I don't know if Beijing is going to feel like in a particularly charitable mood given that, I mean, one of the big conspiracy theories of this is that, oh, this isn't a foreign policy mistake. This is Trump triggering purposefully a historic energy supply crisis to screw China, which I don't think I think that's a little bit of sanity washing of this current adventure in the Middle East, but if there's any chance that China believes that in China is obviously paranoid about its energy insecurity, which is why it built up the SDR in the first place, I would say that there's a chance that that's going to feed into Beijing's thinking and reciprocating. I worry that the fact that Beijing is already banned exports makes Trump much more likely to also ban exports to kind of say, well, China did it. So we talked about time spreads, the fact that the price of oil now and in the next few months is so much higher than the price of oil in, you know, 27, 28. Talk to me about geographic spreads, the spread between Brent and WTI, I know that their composite Brent is like European WTIs and is in Texas, as well as the price of oil in the good part of the straight-up hormones versus the price of oil in the bad part in the straight-up hormones. Okay, so let's work out from the bad part, let's start in the bad part. Crude oil prices in the bad part of the straight-up hormones are now deeply, deeply negative. Like we're probably like no one's assessing the price, but negative $50 a barrel. Like when we saw the negative prices in 2020, we're seeing that right now on the bad side of the straight because otherwise you wouldn't be shutting in nine million barrels a day of production. So that's our evidence day. So there's a huge arb value right now in literally just getting a single barrel across the straight because if you're going from, let's say, again, theoretically negative $50 a barrel on the bad side to physical crude the next stage on the good side of the straight, currently trading it over $150 a barrel. You're basically talking about like a $200 a barrel arb on a two million barrel tanker, basically for going like literally like a couple hours of journey across the straight. That arbitrage value was enormous. So that's your kind of initial thing, which is why again, I think that the other side, well, we could see, we're going to see some demand destruction. The other thing here is that these price arbitrage are going to hopefully eventually incentivize more risk-taking from tankers that they're going to jump across and say like, look, we're going to make, we can you we can pay a $5 million kind of war insurance premium, which is the latest, you were talking about 5% war insurance premiums up from 0.25% prior to the war in the region. And I think, so I think, and you could pay each of your crew because obviously they're worried about dying because this is a very actually like a life or death situation in the Gulf. You could pay them $200,000 premiums to make the journey. And that was, it's multiple years of earnings for many of these seafarers. That I think is another way this could clear. But again, it hasn't managed to incentivize enough flow yet. That's oil in the bad part of the straight. You're saying it's negative $50 around there. Oil would be good part of the straight, which is trading in a massive premium and then Brent WTI. Yeah, so then Brent WTI, basically, are global benchmarks and they're in the West. Brent is in the North Sea in Europe and then WTI initially is priced in in Cushing, Oklahoma. And then the main Brent that's exported is more Brent, sorry WTI Midland, exported to the US Gulf Coast. I think the challenge here is basically that all of those barrels take longer and longer to get it, which is why I've been thinking this is like literally a geographic shock wave that you're going to hit Brent first because Asian refiners can get those barrels faster than they can get barrels out of the US Gulf Coast. But eventually, as this continues spreading, it will hit everything because eventually, the market is fungible to a large extent. There are additional complications here as well that most of the barrels coming out of the Middle East are medium to heavy showers, Brent and WTI are light-sweet crude, so there's not a perfect substitutability of them for Asian refineries. But I think even with that, people will take a suboptimal crude over no crude. And I think that's the situation we're getting in. So again, not only are we going to see big bids for refining, but because all these refiners are going to be desperately fighting for their lives and then likely processing suboptimal crude for their refineries, we're also going to see even on a per barrel basis, the product efficiencies begin to decline because everyone's going to be working off of subpar slates. So I think that over time, this gets worse and worse and worse and worse. And at the same time, we've also seen freight rates explode through the situation. So if you're further away, it then costs that much more to get to the Middle East or Asia. So I think this geographic aspect is really playing, playing quite acutely now. So the Brent has blown out relative to WTI. Brent, you know, very often is that a modest premium to WTI, but now it's blown out tremendous. Over $10 a barrel, I think right now. $10 a barrel. Do you expect that to maintain its very high level of spread to widen even further or to contract? I think that over time as the if this continues, again, all of this predicate, if this current status quo continues, I think that you will not, I don't think you'd see that stay massively wide in perpetuity. I think eventually you, and again, unless you see trade restrictions, if you see trade restrictions, then it's going to go way wider because you're going to basically bottle up all of this WTI in the US that can't get out. And you're going to see massive disc. Because you could see Brent at 200 and WTI at 70, like pretty easily in this situation, which is why, again, trade restrictions are really, really bad for the global market in this case. But I do think that over time that will normalize as more and more WTI begins being exported. And you kind of, you know, basically Asian refiner, if you can bid for those barrels, and the SPR release itself is finished. Because right now, SPR release is bearing especially heavy on WTI specifically. And there's even talk, a bunch of really good, kind of, more of your oil quant traders that are talking about how, because the US SPR release is being structured as an exchange, rather than a spot sale. Basically, that means that the whoever takes the credit has to basically pay it back volumetrically down the curve. So you need to return it in 2027 or whatever. But for a 20% volumetric premium, so barrel and kind interest basically. So these participants need to basically hedge that at the same time, that exposure, if they're participating, which for them would likely mean selling the front and buying the back of the curve. So they basically secure that back barrel at almost like a flat-nour trade. But I think that's also adding kind of idiosyncratic weight to WTI that, again, is only temporary. So all of this will eventually kind of begin to phase out. One other thing I will just. mention here because it's just, I have to mention it. And again, this is deeply unconfirmed. And I think at the stage, generally, unconfirmed a bull, but every trader, every oil analyst is talking about how it feels like the US government is planning the futures market. And again, I think it's hard to disentangle how much of this is explicit shorting, potentially some kind of balancing hedge from treasury on the SPR sale itself. Or if this is just copium and basically the jaw boning that we were talking about before is enough to basically have the same effect. But I do think that a lot of people are talking about, so I just want to mention is not proven. But I get questions about every single day. And I have yet to see evidence against it beyond bests and saying we didn't do it. But then prior you saw comments from Bergam that kind of made it a little wishy washier about whether or not they did it. So I would say that it's just something that people are talking about and something to keep in mind is again, if that was happening, it would manifest as an idiosync product pressure on WTI, specifically because I doubt treasury would be shorting Brent, they'd be wanting to short WTI. So again, unconfirmedable, but I think one more element for people to watch about whether or not this continues. Yeah, WTI is the oil in Texas. Best in treasure secretary, best in has denied that repeatedly. Yes, I also know that traders are generally of the belief that it seems like something strange is going on. Another point, Rory, is just that to energy secretary rights point and Trump's point that the US is a net exporter of oil and a giant, the world's biggest producer of oil is the point that you said earlier, we, the US produces a lot of light sweet crude, but not enough heavy crude, sour crude. Tell us about that. What are the differences there? And could the US run short on heavy, heavy sour crude? Yeah, so for the record, I'm Canadian, but I also say we, we're talking about the United States all the time. So, yeah, it has a lot of heavy. Exactly. So, yes, the US primarily produces light sweet crude from the premium basin and other kind of light, what it's called, light tight oil from the shell patches and other type formations. That is large, that is increasingly exported because the US refining slate has been designed historically to process more sour, which means more sulfur or heavier barrels. Despite that, you actually have pushed more and more light sweet crude into the US refining slate, particularly in the Gulf Coast. You've seen the average API density, which is a measure of how heavy or light crude is, the higher the number, the lighter it is, lower the number, heavy. The average barrel refined in the US Gulf Coast has jumped over the last 15 years from an API of 30 to an API of 34. So, you have seen a lightning of that crude. And now, yeah, the US basically does not import any light sweet crude all. It imports a little bit of medium, but not much at all compared to where it was. And it really only imports heavy sour crude. That's 75% of the heavy sour crude now comes from Canada. Two thirds of total US oil imports coming from Canada now, raw raw Canada. And on top of that, you also get barrels from heavy barrels from Mexico, increasingly from Venezuela, which was again, what I was doing all in January and February until this started happening with that with Iran, if they begin to mock around with trade, there's two risks here. One is the inability to get rid of barrels you don't need. This is the light sweet barrels that we can't kind of see or that US refinerers don't want to consume. That's why they're currently being exported. And the other risk here is the risk of reciprocal restrictions that if the US starts doing this, then you start this kind of chaos spiral that you would have seen in like prior tariff wars and things in trade wars in the past. Once one country starts restricting trade, other countries are going to feel political pressure to do similar. In that case, then yes, the US would begin to feel the could run out of heavy sour crude on the balance. Probably not Canada, because Canada's landlocked in this case, it's going to have to supply the US market. But other countries might not. Venezuela also feels relatively captive in the situation. So I think it'll probably continue. It's now in some ways, almost a colony of the Trump administration. So I think that what can you go through? I think the bigger issue is not the availability of sour or heavy sour imports. It's the inability to get rid of that light sweet export. That if you can't do that, this is when you're going to drive down the local price of WTI and you would end up kind of pushing domestic producers to eventually cut back production or at the very least not produce as much as they would if they were being able to realize a hundred and fifty or two hundred dollar crude. Sorry, why couldn't US export the light sweet because of the X. So if there's a crude oil export ban, I think I think a refined product export ban is more likely for this reason, because I think that a crude oil export ban actually doesn't even help that much in the interim, at least absent and maybe they could do both. And then they could they could theoretically help briefly before it wrecked everything. But I do think that if you did ban the export of crude oil, the US market itself can't really process that much for that long. And you'd see US inventories spike at a moment where global inventories are plummeting and domestic refined, domestic oil producers in Texas and New Mexico, etc. would basically get a worse and worse price so they're incentive to drill would fall and eventually they'd run a place to put it and you kind of end up at really, really weak prices and that would end up in a worse situation for the United States and a much worse situation for the world. What are you going to be writing about in your in your piece that's going to come out on Friday, March 20th? What are you going to be paying attention to in the next few days? Yeah, so my old context with Clearport, it's always a bit of a it's always a bit of a chaotic sprint to the best of times. But no, we I mean, we're talking about everything from the rising price of maritime war insurance and in the Middle East and the fact that even at those insane prices, the economics still clear. And despite that, we're not seeing passage. So obviously there's something else kind of a legitimate fear of harm or this kind of continual belief that Trump has been to back back at any moment and why spend five million dollars if tomorrow I can go for free, right? There's going to be, you know, there's been accelerated relief on sanctions of Venezuelan oil, of Russian oil. There's even been increasing pressure in Eastern Europe on the EU in Brussels to ease up restrictions on and the ease up the EU import ban on Russian oil and basically refill the Druze with pipeline, which has been running mostly empty since the invasion of Ukraine and the and the the sanctions and they were ban there after. Then you also have things like, you know, the curve weirdness and the fact that you are seeing WTI at such an extreme premium. Basically, all the things we talked about are the things I'm going to be writing about on Friday. And then, you know, Jones Act, Iranian tax picking up on physical infrastructure in addition to the kind of shipping, it's it's a stream of consciousness mess very frankly. What happens if oil goes to 200, 250? How does the price of oil get get back down? I think the quickest and easiest solving mechanism in my mind is the oil price is going to continue rising until Trump just one day says it's over, you know, he's going to post something on true social. He'll, his superpower is that he can he can move goal posts, he can create the conditions for victory kind of, you know, out of his sleeve. That's where I think he'll do. He'll say, the IOTO is dead, you know, we killed this free leader, we wiped out many layers of their government, we sunk their navy, we destroyed their launchers, etc, etc, etc. We're done. And now we're and now we're going to the Middle East is a safer place. Even if that's not true, he will say that. And I think at that stage, it will fall to Iran as to whether or not they buy that and whether or not they let up their attacks. I think that at the end of the day, Iran wants this to end as well. They do not want the regime to fall. They do not, they want the bombings to stop. But I do think eventually they will yield and seed and pull back. But again, then we end up in a in a really complicated and kind of durably problematic kind of middle ground. And again, this is why there's always a sentiment, I think, in the term administration of like, all my predecessors were cowards. They didn't, you know, no one all I need to do was use the mites of the US military and we could just solve any problem in the world. And that worked really well in Venezuela. And I think he got overly confident. And then they thought, you know, Iran was Venezuela and the political culture of Tehran was the political culture of Caracas. And it could not have been further from the truth. And now we're stuck in the situation. And I do think he's going to need to pull back. But even if he pulls back, we're in such a worse situation now that we were before that I just don't know how he can he'll claim a win. But it is people have been talking about, oh, this is the flex of US military might it's not a flex. This is more of a Charlie horse at this stage, very clearly showing some of like the limits of US military power, particularly used in this kind of flippant and capricious way without all the normal planning you would assume from major adventure like this. Rory, I know a lot of oil analysts often talk about the word spare capacity. What does that mean? What is spare capacity right now? And what are the consequences of that answer? So spare capacity right now in a real way is functionally zero. Normally when we talk about spare capacity, we talk about basically how much production capacity OPEC has cut back. You know, when at the peak of the COVID cuts in 2020, we probably had upwards of you know, 10, 11 million barrels a day of spare capacity. And this is a capacity usually to find is capacity to come on quickly and last for a certain amount of time. Kind of durable emergency reserves of production levels. Yeah, like in Texas, whatever we're producing in Texas now or anywhere around the world that's not in the Middle East, to produce more you have to invest. and it takes months, years. The point in the Middle East is that it's so available, they can just stick the straw down a little bit more and produce more instantly. And normally that figure is millions of barrels a day. - Yes, and I think even historically, Texas actually did have spare capacity with the Texas Railroad Commission kind of managed production levels, the initial kind of OPEC market controller. But now, yeah, everyone, basically in the West did any kind of free market economies. Everyone's producing full out because it doesn't make sense to hold, it's literally leaving money on the table. For OPEC countries, it was always a means of market management, a means of geopolitical influence, kind of soft power, but also hard power. That I think, and what part of this crisis has revealed. And I think this is always known, but again, we'd never seen this straight closed even during the tanker wars in the 80s. The Hormuz and Iran short circuits the market's normal response mechanism, which is tapping into that spare capacity because virtually all that spare capacity was in Saudi Arabia, the UAE Kuwait. These Gulf, these GCC producers, these core of OPEC. And yeah, all the spare capacity is now on the wrong side or the bad side of the straight. - Right, and just to give numbers on this in terms of the amount of oil exports that are down, it runs, exports down 30% Iraq, oil down 67% Kuwait down 59% Qatar 62% Saudi Arabia 35%. So it's not looking good, Rory, thank you so much for coming on. Thanks for having me, Jack. Thank you for listening. Remember today we have a special offer for monetary matters listeners. Go to the link in the description to save 20% on annual subscriptions to commodity context. 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