[MUSIC] Welcome back to another episode of the Oil Ground Up podcast. I'm your host, Rory Johnson. A reminder to 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]. Oilgroundup is distributed in partnership with the ClearCommodity Network at clearcommodity.net and also the Oil and Gas Global Network, the leading podcast network for oil and gas. There's one story in the oil market and it continues to be the Iran War, the largest single supply shock in the history of the oil market. We're just going to continue covering this from every angle we can over the coming weeks and Dear God Hope, not months. And next up on the podcast, we have Matt Reid, one of my great friends and someone I speak with regularly. He is the Vice President at Forum Reports and has been a lifelong watcher of golf, of Arab golf politics and the oil market. So I hope you enjoy. Matt Reid, welcome back to the oil ground up podcast. Thanks for joining us. It's good to be back. I wish I wasn't. I wish I wish that we were all better rested and you are on the tail end of a cold or potentially heading into cold. So we're all we're all dealing with our own ways. But let's just talk oil, golf, everyone knows what we're going to talk about today. There is one story and one story alone in the oil market. So let's talk about it. So as of right now, why don't you summarize for us kind of very briefly how you see if you have a mental framework for this crisis. What is that mental framework? I mean, I think times like these, you can actually, you can boil things down, keep them simple and not overanalyze. And the one point I keep coming back to is that the straight-of-hormose is closed to virtually everyone. The straight-of-hormose is closed and there is no plan to reopen it soon. The one thing I'm looking for every day is some potential off-ramp, some way that both sides could thread the needle and find a way to at least start talking. Not that it would resolve anything soon, but at least take some of the pressure off markets, prevent a panic and we're still haven't found it yet. There's still no sign that either side is willing to engage in a meaningful way. Instead, what we have is both sides, we're treating to the same talking points, you know, promising to win on their own terms. And maybe that's the most worrisome thing I think about this particular moment. You know, we're three weeks in. And both sides have defined victory very differently in terms that match their means, which means they're both convinced that they can win. It's debatable how soon, but what we have is in the US, the Trump administration believes that it can degrade the Iranian military to a point where it won't pose a threat to its neighbors. Maybe that takes four weeks, maybe it doesn't. Who knows? That was the original timeline. But now that the straight is closed, now that prices are skyrocketing, now we get into this question of whether or not the US is actually going to have to jump in with both feet and reopen the straight by force, which would be a much more ambitious mission. Obviously, it might require boots on the ground. Either way, there's no reason to believe that the straight is going to reopen soon, or that there will be navel-ass courts, which might not achieve all that much in their own right. So we're talking about this dragging on for weeks, if not months. I'm getting more pessimistic by the day. And the Iranian strategy here is even simpler than the US strategy over the mission, which is to drag this out as long as possible, raise the cost of intervention so much that the US and Israel don't attack again, and to create or establish lasting deterrence. Knowing that the next time the two sides come to blows, there might be a global recession. Yeah. And I would say, okay, and let me push on that, because I would even say, and one thing I will credit you with in this context is, I have always been relatively polyanish, a polyanish about this kind of risk. I never thought I would see the straighter hormone was closed ever to this date. This is the first time we've ever seen traffic through the straight halted, even through the tanker wars in the 1980s. We never actually saw officially. We never saw a stoppage of flow. I didn't think it would happen. It's not to say that I don't think I didn't think a wrong couldn't do it. I was skeptical, honestly, because again, I'm like, can they do it? It seems like a big task. They didn't, they couldn't historically. So like, what's different now? But obviously, I've been wrong. This is now, this flashpoint is being realized. We are now three weeks into this war. I did not think Trump had the appetite for three weeks of war. I don't think Trump planned to be in this for three weeks, which I'm sure we'll talk about more. But my kind of bias here is still that I'm expecting some kind of Trump back, Trump being the one to backs away. And I'm going to present a kind of scenario for you. And I want you to tell me whether you disagree. Let me just respond to that. Yeah. Just the, the, you know, basic suggestion. Trump can't chicken out now because the Iranians won't let him. That's how this works. You know, these these events have progressed in such a way that you can see a logic for this dragging out only because the US can't walk away and declare victory if the Iranians can simultaneously turn around and declare that they control the Gulf from here on out. Yeah. And if it ended today, if Trump declared victory today, Iran would still determine who passes through the straight. Yes. So let me, let me, let me walk through my logic here. So I think I start with the fact that a long term months, years long closure of the straight is not a recessionary event. It is a global depressionary event like this is catastrophic, like nothing, nothing we have ever seen before in the energy market. So I start with that being such an intolerable reality that someone has to budge somewhere along the way to avoid that. And maybe, maybe I'm wrong. Maybe we do end up literally in the end times. And then, well, I've got bigger problems than being wrong. But if someone has to move, there are three major participants in this world. You have, you know, the US, you have Israel and you have Iran. Israel is wanted to do this for decades. They are not going to be the ones that decide to pull out first. Iran is not going to stop counter attacking because as long as it's being attacked, this is its main way of retaliating. And very clearly, it's being very effective at this so far, so of the three participants, the only one that can really be budged at all by external stimuli, by which I mean this context largely cost of living pressure. The price on the screen that we're seeing is Trump. Now, I don't disagree that I think again, I think that Trump would have wanted to declare victory already and that clearly, very clearly, Tehran is not caracas. There was no Delce Rodriguez character that kind of came out and said, "aha, thank you for liberating us. We'll make deals. We'll let Exxon. You'll let BP back in the country. It's going to be Iran." You know, yay, not happened. So I think now he's in this and he's trying to find, I think he's going to have to find a way to declare a victory. And I think two Trump's credit, I guess, if we're going to call it this, he is an uncanny capacity for for inventing the kind of conditions for declaring victory, whether or not that's tolerable to Gulf states, entirely different question. But in terms of him saying, I want on my terms, I killed the Supreme Leader, I sunk their navy, da da da da, all back out. I think in that case, and I think I get a lot of pushback saying, well, Iran's not going to let up, Israel's not going to let up. I personally don't think that Israel would continue with this, at least this ferocity without US cover. You've seen multiple moments historically where the United States has been able to hold back Israel from these types of attacks directly on Iran. And I think that, well, I do agree that I think that even if this happened, even if the US and Israel kind of unilaterally pulled back, that I do think that Iran would continue pressing this pressure point for at least some time longer to get this really reinforced. We can cause pain without a nuke. We don't need nuclear power, we don't need nuclear weapons to cause an existential threat to the global economy and to your own economies. I never forget that. But ultimately for them, the key goal here, even above regional hegemony remains kind of regime survival. That this is the thing that propels them, that they just want to survive. And that's why for them, the June, the 12-day war last June, was this a disaster? The regimes should stand. Even now, the regime still stands. So for me, if there was a pullback, they also want to stop being bombed.
Whether or not I don't think I can ever go back to the way it was. I think we've passed that point of no return. But I do think that again, however intolerable any kind of hybrid post war kind of order in the Gulf is. And again, I think any order after this is going to be intolerable to almost everyone involved. But it is less intolerable than the end of times global depression that I was just describing. So walk me through which parts of that you think I'm wrong on. I think it makes sense. And what I'll say is at least a big picture, like I said before, I'm looking for off ramps. If Trump declared victory tomorrow, it might be the starting point for a dialogue, which of course would be torture and dragged out. And traffic in the street would not resume fast enough. And that's what I keep going back to is. Now, we're three weeks in and there's no end in sight as cliché as that sounds. It just isn't. We're chatting before this. We both shared that title on our pieces this last week. We did. We did. I believe that I'm pure exhaustion. I think that's kind of as generous as I'll be is that if the US and Israel declared victory tomorrow, it would be the start of a conversation. The problem, the complication is that the Iranians have already said point blank publicly that we're never going back to the way things were. So you've got a bill that's going to go from the leader of that, the parliament, right? They were like, they're a speaker. I'm a Buckier Calvap. What he said was we're never going back. And now you've got a bill going through parliament in Iran that's calling on Iranian authorities to set up essentially tolls or taxes where they want to charge ships potentially for passage. What was that 10% toll? Something like, I haven't seen a specific number, but I think what it speaks to, right? Is this incredible source of leverage that the Iranians thought they had in theory and now have demonstrated in practice. And that's what makes me so nervous about the short and medium term is that this is not as simple as everyone going back to their corners anymore because hostile Iranian regime, even if it's weak, if it still has that kind of power, if it can still control global energy flows like that, I'm not sure that the US will tolerate it or that the Gulf states would be willing to live in the shadow of that. But to push on this, because I think I actually think those are all extremely reasonable points, but like what's the alternative? Because I, again, I don't just agree. And I think that there is no tolerable situation coming out of this with the exception of a full blown barrenuckle boots on the ground, takeover of Iran, which is not a month's long process. Like we're talking like the United States doesn't have a good track record. I mean, I don't have, you know, I wish I had an answer to that question of what's the, what's the alternative? I mean, the, the alternative would be something like we had, what we had before this broke out. The problem though is that, and what the White House is now debating is, well, how do we at least return to that? That's why we're hearing so much, you know, it's a gossip or rumors or there's so much speculation about whether or not the US might do something bold, like try, try to capture Carg Island and use it as a bargaining chip, or whether or not the US is going to try to seize land close to the straight on the Iranian coast. Yeah. And it is, you know, as, as unbelievable as that may be when you think about how ambitious emission like that would be, it's hard to believe, but common sense also dictates that there might only be a few ways to return to the kind of the status quo Andy, right? Yeah. So you work with, so you work your vice president at Foreign Reports, you've worked in the oil market and particularly closely with many of the Gulf states for over a decade, you know, 15 plus years now, are you able to kind of speak to what they're feeling right now? Like a, like a, like a general sense of like these are some of, you know, the, this is, in addition to being an acute and existential economic threat to all of these countries in this exact moment, like we're talking about like if this process were talking, like, like we're set, not recession, like we're talking like multi, like 10 double digit contractions and economies on year over your terms, like crazy, crazy stuff. And like you will, if you look at the, the Emirates and you look at Dubai, like the way the Dubai property market has imploded the way that this entire bubble of the Gulf, like I mean, not bubble in terms of an asset, I mean like bubble in terms of this like defensive kind of, you know, haven in the region, all of that seems to be kind of like under threat right now. Is there a way, how are people talking about this? Like again, I just can't even put myself mentally in the position. The people I speak to from the Gulf are just in perpetual disbelief that this is happening. It's a great question. You know, I think the answers you might get depend on which state we're talking about. Obviously some Gulf states have suffered considerably more than others so far. Yeah. You know, if you look at the losses experienced in Qatar just economically, if we're talking about their industry, they're enormous. But in broad strokes to talk about the Gulf, I don't want to put words in anyone's mouth. Yeah, let me, let me paraphrase. In general, if you can, if you can summarize the feeling, I think it's a lot of feelings, but anger and helplessness are right up there at the top of the list. Even the countries that were prepared for something like this, even countries that knew the risk, appreciated it, even countries that have some redundancy are able to move oil out of the straight beyond the straight. Even those countries, I think the best they can hope for is that this is over soon. They don't have to get directly involved more than they already are because they still I think are resistant to the idea of taking sides or at least being seen as going in the offense. Something to play defense, but I think there's still a real reluctance to go on the offense because it can only poison relationships in the Gulf more. But where does that leave you? That leaves you playing defense, appealing to Washington to get this over as soon as possible. It leaves you again, help us in a long for the ride and a bystander, even if you've done everything right. And that is a difficult place to be when your most important industries have been taken hostage, when you're seeing exports collapse, when you're seeing your economy teetering. That is not a good place to be, it's just hunker down and pray. I think also there's definitely a recognition in the Gulf that this is a historical moment that will redefine the future. This relationship in the neighborhood, potentially relationships with Washington, I don't think anyone, no one can speak was confidence about exactly what things will look like in a few years, right? It's too soon. There's too much happening right now. No, it's too much. It's too much happening right now. infrastructure so far. One was the also Israeli attack on the fuel depots in downtown Tehran, which again at that time prompted some pushback from the White House. Now again with this attack on South Pars, Trump says he knew nothing about it. Oops, you know, pushing the Israelis. Don't do that again. There was the crazy tweet last night about this or the truth social post. He basically threatened to turn, you know, the entire Iranian gas industry like basically like a bolder smoldering rubble. With that, we've seen this kind of escalation that up until now we still have only been with threatening shipping. We've been going after a part in buildings in Dubai. We had the, you know, the, you know, the Iranians at the palm, you know, they had, they launched muscles into Azerbaijan. Like they've just been spraying kind of chaos and terror around the region. That's been the M.O. There have been some dedicated, you know, dedicated tax. You've got the, you know, the, the refineries in Boston, Nora, you've had more refinery attacks this morning. All that's been happening. But generally up into this point, they've been avoiding, they've been avoiding durable damage to production infrastructure, to loading infrastructure. They have an apports majorly to the degree they could have. But last night again, and you had mentioned the fact that like the Saudi Arabia has the most important offset to this, which is the US pipeline that theoretically, which again, we're seeing how much can actually be done. But theoretically could switch upwards of five million barrels a day from the Gulf. So that is again, that's a huge chunk of, let's say, 20 million barrels a day of loss to the Hormuz. If you can get five million barrels, that's a quarter of the crisis, diverted. But you end up the Red Sea up until recently. The Houthis have been like literally the thing we were all talking about. They've been all dequiet through this so far. And last night, you got reports that there was a missile attack on the port at Yonbu, which is where the, with these West pipeline terminates and a drone hit the, the refinery in Yonbu. So like, talk to me about how you're thinking about this escalation into, because clearly, I think there's a, to your point, everyone's like, this is terrible. It's so bad. It can't get worse. I'm like, no, no, it absolutely can get so much worse. So talk me through how you're thinking about the fact that Iran still has clearly saved room for escalation in its own calculus. Like there is, we're not at the pinnacle of this yet. Like we can still go so much further. Talk me through how you're thinking about that. Well, I think the striking thing about last night, no pun intended, was that, you know, the Iranians are firing less. They're firing less musicians, but more of the same musicians, excuse me. I think the musicians are safe, don't worry. So they're firing less. They're using the same systems they've used before and they're having greater effect. And I'm not a military analyst. I can't explain it, but I think that's hopefully a wake up call for everyone. You know, you watch US press briefings, briefings at the Pentagon, some of the numbers that come out of Washington, when you hear the administration talk about just how degraded Iran's military capacity is, how many launchers have been hit, how many drones have been taken out, all this stuff. And I think it should be a source of concern that the Iranians are shooting less bullets and hitting their targets more. What happened last night was those strikes, the ones that hit, you know, they hit two refineries in Kuwait last night, they shut down a gas field and in oil field in the UAE, they hit a refinery on the west coast of Saudi Arabia. Also, the tax said the refineries were reawed, I believe, wasn't there? There was also a lot of that. That attack at least was thwarted. It sounds like the Samarit refinery on the west coast was actually hit. We just don't know how bad yet. The NASA imagery was showing fires, showing up through satellite imagery this morning. And into that, all the damage done by ballistic missiles yesterday in Qatar. So clearly, I mean, the threat is potent. It's not going away. Even if Iran has a fraction of its arsenal at its disposal, it can still use it. When it comes to escalation, you know, we've seen it. It's been very steady, I'd say, you know, kind of every few days, we kind of go another step up the escalation ladder as it were. I think the Iranians were careful not to target everything all at once. Obviously, upstream stuff, everyone knows how important it is. So that was reserved until later. It's reserved until recently. But, you know, we're still talking about we're still talking about Iran doing a lot of damage with some of the least sophisticated weapons in its arsenal, which should make everyone nervous. If this is going to drag on for weeks, let's say it drags on to the three weeks. Just picking up a number out of a hat. The Saudis at this point are shooting down dozens of drones every day. We've seen attacks on other Gulf states go down, but the Iranians are clearly targeting the Saudis more and more. There was a day this week that the Saudis almost shot down almost 100 drones that were going at targeting Riyadh and the Eastern Province. Most of those were going to the Eastern Province, where major weapons were. We're a lot of the oil productionists. Yeah. So I think, you know, just judging by what the Iranians are going for, and those attacks continue today, by the way. They didn't stop just because the Iranians had more success last night. They're still doing it. I think clearly the strategy has shifted for the Iranians, where they know what is going to give them the biggest bang for their buck when it comes to prices. And that means hitting upstream. It means hitting things that are very difficult to place like refineries. And that's the way we're going. Of course, the Iranians also have in their back pocket, they also have tankers that they can pick off one by one if they like to. Not not not to mention, you know, they could they could tap the hooties and all the sudden, you know, a couple missiles, a couple, you know, even RPGs off the coast at tankers, at tankers coming through that region back to Asia. I mean, that could send prices up a 10 bucks a barrel, just like one guy with a rocket launcher. Like, like, this is, we're very, very sensitive here to these developments. The hootie question is a really important one. You know, the hooties are a complicated group with a complicated history and they have their own kind of selfish interest right now, which might be preventing them from getting off the sidelines. One reason for them to not get involved is because the entire Yemeni economy now is hanging by a thread and that thread is Saudi financial support. It's deposits in central bank. Certainly, if the hooties got involved, if they decided that they were going to attack Yanbu, if they were going to shut down the bottom on the straight, I think the Saudis would reconsider that. I think the Yemenis understand that. For the hooties, I should say, understand that. Now, the flip side of that, that's a very logical reading of it. It's just that the hooties have something to lose if they decide to get involved. The flip side of that is that the hooties are a notoriously fractious group. There are many different factions under that banner. So it's entirely possible that some might be more trigger happy than others and the effect would be the same for the market. Moving on to another topic that's obviously been quite volatile in the current moment, which has been oil prices. I know if you're looking at your screen right now, I've got up in the corner of my screen here. Brent peaked this morning our last night at around $119 a barrel. As we're speaking right now, and earlier in this conversation, we had dropped down to $104 Brent again. And it's been a roller coaster. It's a feeling a little bit like that Monday, two Mondays ago, when we kind of had $35 a barrel spread coming out of the weekend. How are you thinking about the financial market parsing of this? Attempting, how do you think of price formation? And again, I think many of your clients are the largest oil producers on the planet, the people that have the most vested interest in oil prices. How are they thinking about oil prices? Because I think again, I think there's this view of like, how are we only at a $100 crude right now? We are staring down like, this is going to make the 1970s like child's play if it continues. It already is looking like child's play in comparison. Why are we so low? That's a great question. And it's another question that I don't have an answer to. But I've been asking the same question of clients of mine who have skin in the game who are actively trading day to day. Because I am mystified by it, I struggle to explain it. I have asked them, and these are people who have been trading oil for decades. They have seen it all up to this point, right? They are at a loss to explain why Brent is as low as it is. It should be higher. We are talking about the worst case scenario right now, right? Now, I can't explain it. So what I've done essentially as an analyst, I have moved on. Brent, I focus on less and less, and I am more curious to see where the market is breaking and how, which means looking more at fuel prices.
prices and key markets, looking obviously at regional oil benchmarks, things like that. That I think that's going to tell you more because the prices you're looking at are prices that someone is willing to pay because they need it very soon. Yep. We'll be right back after this short break. Hey everyone, Trevor Hall here, host of the Mining Stock Daily podcast and CEO of Clear Commodity Network. If you're looking for timely interviews, sharp market commentary and straight shooting insight into the mining and metal sector, Mining Stock Daily is the show for you. We cover the latest mineral discoveries, company moves, and the macro forces shaping global metals markets every trading day. And now we're part of the Clear Commodity Network bringing you trusted voices across the entire resource and commodity landscape. You can find Mining Stock Daily on your podcast network of choice and at clearcomodity.net. Clear commodity network, digital news on the physical markets. I'm Rory Johnston, host of Oil Ground Up and founder of Commodity 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, Commodity 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.comodicontext.com or find us on Substext, you're joining 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 comodicontext.com/groundup. That's comodicontext.com/groundup for 20% off your first full-year. And now back to my conversation with Matt Reid. I mean, just for a reference for listeners, for those prices, this morning, cash, basically balance of the month, Dubai crude, breached $170 a barrel, jet fuel in Asia is over $200 a barrel. This is, I mean, this is, no way I've been describing it. Essentially, everyone has to remember that the oil market is a physical kind of time-bound thing. When we talk about oil prices, it's about a particular oil price and a particular time in a particular place. So we're like, why don't you just buy WTI? It's like, well, okay. Prompt WTI is going to deliver in a month to Cushing. Then we need to get it from Cushing out of the Gulf Coast to the Middle East to Asia. We're talking months, right? That's not a viable whole to fill. It's not a viable thing that you can fill the whole with. So I've been talking about it as basically the shock wave with like an epicenter in the Middle East that you've seen this kind of widening kind of deepening panic and scarcity spreading out, started with crude in the Middle East. Then the next point was refined products in Asia as you started seeing refineries turn down. When that air pocket that's kind of emerged from the lack of exports from the Middle East, hits Asia. We're going to see, I've been like an A to the B is like the looney tunes, like pulling the plug at the bottom of a crude tank and just like watching these things draw by 10, 15 million barrels a day, which is just a, that can't happen. That's literally insane. And I think that eventually, I think to some degree, as we've seen, the White House has been quite keen on jaw boning on, I think there's lots of questions right now as to why they aren't there actually directly intervening in this market. I can't prove that every trader is talking about it. So I think we should talk about it. But I think even more like, I think even even if we just go with the fact that the White House has been very successful in jaw boning, kind of verbally intervening in this market, scaring people at their length and kind of shaking loose what's going on, I think that's basically what's happened today as well. But I do think that like these physical realities are going to basically be forced to kind of pull the paper markets up by their nose. Normally, again, normally we expect financial markets, paper markets to front run this because the whole point is they're forward looking their anticipatory, but they're not being allowed to kind of get that high because of these various things. I think physical realities are not going to drag us out of that. And that's when things get really bad. That talked me in your mind like, how do you think? What does the world look like in two months of this? No, it's still not. The show of our news is closed in two months. In a driving season. Yeah. I mean, at that point, we've got to be testing or easily surpassing the highest highs we've ever paid for a barrel of oil on inflation. Obviously. I mean, two thousand hours, like you already seen. 220 dollars a barrel. I agree. We could definitely breach that with it. I don't. So here's the thing is I'm not. I'm not a forecaster. I'm not a modeler. My bread and butter is making sense of really, you know, market developments and political developments as they're happening, right? I'm lucky in that I don't have to get out my crystal ball. I'm focusing on something much more immediate, but getting back to the question of how long this could drag on. I think I started by saying, I don't see why this should end in a matter of weeks, which means we're going to be talking about months. Yeah. And if that's the case, you see estimates of a $200 oil potentially being in play. I think what's going to have to happen is I think probably market psychology at some point is going to reassert itself. And when we get towards the end of March, when we start getting towards milestones, like, oh, this has been going on for 30 days. April 1st is just around the corner when people start to realize like, oh, it's already dragged on for a month and we're no closer to a resolution. I think that's when you kind of start to get the reinforcing anxiety for sure. So I'm looking at stuff like that, which could be a tipping point for the market. And then, you know, looking a little bit further ahead, I think one thing that's helped, at least manage, you know, the potential panic because we're talking about like the worst case scenario playing out in real time. You know, the market does have a little bit of cushion. It's uneven. Some of the measures that have been announced up to now are going to help, even if they can't fix it. Yeah. So I think what you're seeing is that maybe this is the best explanation for why Brent isn't higher is just that they're still a little bit of cushion. You know, things like the SPR release can help with the margins. We were talking about a glut a month or two ago. I think what remains to be seen is how much some of these golf states prepared in advance because they saw what was coming around the corner. You know, we know that the Saudis hiked production in February because as the build up was happening, as Trump was getting everything in place, the Saudis were not going to be caught off guard even if they weren't told in advance what was going to happen next, even if they were the last to find out. They prepared accordingly, like they prepared last summer. And you know, ramping up production is one thing. The Saudis raised production by like 800,000 barrels a day in February over January. And to this point, no one caught this because no one read the OPEC OMR because much bigger things were going on. No one cared about February. But yeah, there was this asterisk and it was like, yeah, we actually read 800,000 barrels a day in crease month over a month and no one talked about it. So let's assume because, you know, seasonal demand in Saudi was probably pretty muted this early in the year. Let's assume that all of that oil that was produced above and beyond the quota. Let's assume all of that oil was moved out of striking distance. And I think it's fair to say that, all right, this is my assumption. I don't have any inside information to confirm this, but besides putting extra barrels on tankers and shipping them out, the other thing the Saudis can do is they can rearrange their stocks abroad. So it would not surprise me if they drew down some stocks internally inside the kingdom and then sent them to Asia, sent them to Europe just to be safe knowing that those storage tanks in the kingdom would be within striking distance. Or I should say, maybe the better way to put this is that that would be the common sense thing to do if you are also raising production, right? To rearrange your stocks makes sense too. But what that means for the market is that we are going to learn probably very soon how easy it is to buy Saudi oil no matter where it is because that's more cushion. It'll be exhausted over time, but it's still something is better than nothing at this point because so a few barrels are getting out of the Gulf. Yeah. Talk to me. Okay. So let's talk about Asia for a second because if Nitalis is the epicenter of his supply loss, Asia is going to be the epicenter of the demand pin. And these are global markets as long as trade remains free, which is a giant open question right now. But as long as trade remains free, it'll hit everyone but it'll hit Asia first. Why haven't we seen more of a response from China today? I mean, the Chinese are. in a pretty good position, all things considered because they gorged on sanctioned oil for so long, they built up inventory so much that if they have to go without, if they cut back imports, obviously, they don't have to pay the market price for imports because they can pay essentially the price they did six months or a year ago when they bought those same barrels for $50 or less. I mean, they are less sensitive to price only because inventories are so great, which was the strategy all along. And if you're asking, you know, why aren't the Chinese taking a more hands-on approach to this crisis because they stand to lose? You can have to ask yourself, well, how much influence could they bring to bear anyway? At this rate, they are still buying what they expect to from the Iranians who are still exporting oil at pre-war levels, if not a little higher. And I think you can bet that it's probably a combination of things that will allow the Chinese to ride this out, which is inventories. I imagine that a country or a producer, like Saudi Arabia, will probably prioritize some of its biggest customers if it's forced to, if there's a pecking order, yeah, China has to be at the top. So the Chinese might make out okay depending on how long this drags on. But I think part of it too is besides the Chinese being insulated from this to some extent. What influence can they bring to bear when Iran is fighting an existential conflict? It's not going to be talked out of doing anything it feels as too it's advantage right now. So it probably makes sense if there's real engagement, it might just be behind the scenes, it might also be ineffectual. Yeah. So let me talk through one of the, I'm getting a lot. I would just tell the camera towards another major Asian importer. Besides China, I mean, sanctions relief for Russia is a game changer for the Indians. The Indians apparently have already bought 30 million barrels that they've lined up. Yep. You know, it should surprise no one if in a couple weeks the US extends that 30-day waiver and the the Indians are allowed to buy more. That's probably that's I think absolutely what's going to happen at this rate. So at least when you talk about China is China in India, right, like the two top Asian importers, you can see how they can kind of let it through and navigate. Yeah. So I completely concur by the way that I've been pounding the table that the biggest beneficiary of the Iran war is Moscow, like hands down, no debate. To the Trump administration's credit over the past six to eight months, they had actually done a very good job at clamping down on Russia's oil trade. Below now discounts, a having of Indian purchases and explosion of Russian oil and water. And now in two weeks, two and a half weeks now, all of that has been undone. And then some, there were reports last week that barrels of yearls were lending it in India at premiums to Brent. Again, every physical, sour, medium barrel, you can bloody get your hands on. They're going to be buying right now. You've even seen Eastern Europe clamoring to relieve sanctions on an import ban on Russian oil to refill the juice with pipeline. Like we're rewinding rapidly on any kind of strategic leverage you had over Moscow. This is an absolute boon for them. But let me talk through one more thing. I get a lot of increasingly kind of irritated reply guys right now because again, I'm coming off as a doomer. I think you've known me long enough. I'm not a doomer, Matt. If anything, I'm actually probably a bit too sanguine in many moments of the market. I think the market is going to solve a lot of stuff. This can't be solved through market mechanisms alone. And I've kind of been saying that I don't think the Trump administration had any plan to be in this this long. For me, the evidence of that is the fact that we didn't get an IE release coordinated until two weeks after the war began. We didn't get the very insufficient war insurance facility. I have treasury until like a week into this. All of the things that you would have expected to be like going into the rock war. This stuff was lined up. Like the Bush administration had a plan for the oil risk. The Trump administration seemingly had none. And the pushback I am getting at the beginning was basically, don't be a panicking. He has a plan. He's just said it's going to be wrapped up in no time. No worries. Keep on keeping on. In the last couple days, I've seen the discussion flip to Trump now saying, the US largest oil producer, we make tons of money when oil prices are spiking. Trying to goal shift. Again, these kind of like he can, you can distort reality to kind of make anything winnable here for him politically. But again, the law of those reply guys are kind of saying, you misunderstand idiot that this is going this is this was always the plan. The energy crisis is not a bug, but a feature of this of this adventure that if you were looking to clamp down and kind of push back against Beijing against Europe against an entire world that potentially now is barreling towards a GI and kind of these energy intensive, you know, AI applications. Why not throw a massive wrench into the gears of the energy economy clamp down on North American energy dominance and kind of go to town here. I would describe this as sanity washing, clearly nonsense kind of execution of a plan, but play with me with it a little bit. Like talk me through like how you would even think about something like that. Well, I don't want to take a fight with the reply guys because they have it off figured out. I'm sure they're right. But it's hard to believe that there was a plan to cope with this kind of market shock only because we've entered the phase now where the administration is clearly yanking on every policy lever it can find to the point where the secretary of the treasury went on Fox News this morning and said actually we might provide sanctions relief to Iran. So we can allow upwards of a hundred million barrels back onto the market. So we can create supply essentially with a sanctions waiver or a license. If you are flirting with giving your arch-nemesis sanctions relief when you're in the middle of a shooting war and they are shooting your friends in the neighborhood, maybe you should have planned to have better. Yeah, but I think to this point that like Iran continues to export when we talk about a 90% reduction in straight-up farmhouse like okay, who's still going through largely Iranian ships still going to market in some cases actually have increased their import volume or sorry export volume. Larger going to China, but now with the if sanctions relief maybe going to India, maybe going to other countries as well, which is especially bizarre given that only earlier this year we saw the U.S. Navy engage and impose a firm embargo on Venezuela and literally chase down ships and board them and capture them. Clearly this could be done in the Gulf. You literally had the U.S. naval submarine sink an Iranian frigate coming back from from you know exercises in India. They clearly have control of the water if they wanted to use it. But almost in a weird I would call it the less competent execution of an already questionable Biden administration policy of basically saying well we really don't like that that Russian invaded Ukraine but we don't want a risk of oil shock during an inflationary crisis so we'll do a price cap thing. It's almost and again Republicans I think legitimately and reasonably took the administration to town over this. I took the intention to task over this. But they're doing the same thing, but with no price cap, no anything else and in fact they may be easing sanctions on Iranian oil. We'll see about that. I bring it up just as an interesting example of how far the debate has come in the White House about what they can do, what they should do, what options are actually on the table. But when it comes to lifting sanctions on Iran, it might be more clever than it appears at first glance. There might be conditions applied. There might be some some way you could finesse that relief in a way that maybe we saw similar to Venezuela where you know the sales are conditional somehow. Who knows? I mean I'm spitballing here. I don't know because they haven't said yet. But I think there has to be some nuance there only because
given the stakes, given the circumstances right now, it's hard to believe it would be as simple as saying, "Aron, you can have a free pass. You can sell your oil." Just for now, just until the regime falls, right? So it might be more complicated than that. But I also think the question of what they're willing to do or how much planning went into this, it kind of misses the point. And the point I want to keep going back to is that the Strait of Hormuz is closed. And it's not going to reopen soon. The US Navy is not going to reopen it when the shipping lanes are a shooting gallery. That's just not how it works. If Naval escorts materialize soon, you've got analysts at Lois List and elsewhere, maritime experts, who have already raised the question of, "Well, how many tankers could you get through on a given day?" It might just be a fraction of what you need. 100%. I mean, again, there were over 100 to 130 ships that regularly transit the Strait every day prior to 60 plus tankers. The US doesn't have the naval assets to do that. And if they don't have a time and energy, like it's a ginormous expenditure and effort. And to your point, you're basically coordinating US naval vessels into a two-mile wide shooting gallery, explicitly trying to rest Iran's main point of leverage away from them. Obviously, they're going to launch everything they have at those ships. It is, I keep going back to it. And there were even points that, like, from the war insurance, like, again, I have no idea where this stands now because of the exchanging so frequently. But initially, when US naval escorts were initially floated, various people from loids, etc., were like, if you're being escorted by the US Navy, you are a combatant. Like, you actually are no longer eligible for war insurance. We're not going to ensure combatants in this war. So that's another rub. And again, no one knows how this is going to work out. The other thing that's, I think, bizarre here. I think maybe let's. We're going along in the tooth. And I think that you have a. I'm sure you're as busy as I am right now. It's wild. This. One of the things that has remained a question that I can't quite square. I think this is where we'll end this for the day. Why aren't ships transiting the straight in your mind? Because, as we noted, sharing the tanker wars of the 80s, you had hundreds of ships. I get 450 ships were attacked, 250 tankers, 55 tankers were actually sunk or scuttled, and basically abandoned by their crews in the late 80s through this war. Way more than we've already seen today. And yet, during that time, we never saw the flow stop. At the same time, sure, war insurance is exploding, I think reasonably, in the Gulf. It's gone from about. And it was 0.25% of a ship's value prior to the crisis. To the latest estimates I saw published from Bloomberg, we're over 5%. So you're looking at you, a $100 million tanker. It's costing $5 million for you just to transit the straight. That seems like a really high ticket price. But the arbitrage value across the straight is enormous right now. You effectively have negative priced. You have negative price crude on the bad side of the straight. Probably, I mean, we know this because they're shuttons. And if you could get any of those barrels literally across the straight to the coast of a mon, you can sell them now for cash $170. That's huge. That's easily enough to cover enormous war insurance. That's easily enough to cover risk bonuses to all of your maritime crew. And yet, and we're talking like you'd pay them $200,000 US. That's multiples of their annual salary. And you'd still make off like a bandit with that arb value. So why in your mind? Because I don't have a good answer to this. Aside from just like people think this might end soon and they don't want to die. Beyond that, is there anything that you can like add to color of like why you think that people aren't making the journey? Because again, this has never happened before. And it goes with this belief that like if prices go high enough on their side, you will incentivize action, but we just haven't seen it yet. Part of it is just safety, you know. It's easy to imagine this area where you do try to get through the straight. Your ship is hit. And you are stuck floating there waiting for help and who comes to help but the IRGC. Right? Not great. There's all kinds of mutations of how some of these situations could play out where you're taking your life in your own hands, you're taking your chances. But also you could be taking hostage, something else back could happen. Or you could be the ship that gets hit and causes an ecological disaster that causes headaches for all these states around the Gulf. Yeah. There's potential for this to go sideways in a million ways. I do think though that it's hard to overstate just the question of safety. And I think one thing we saw with the Houthi campaign against shippers was that those attacks were not that steady. I mean they went, yeah, there were a lot of them over time but we're talking about like a little over a hundred attacks over about two years. So you're talking about like really one or two a week, you're talking about averaging. And just look at what that did to Red Sea traffic at the Suez. So I think a lot of this has to do more with, you know, it's more than just dollars in sense. Yeah. Well, let's leave it there because I think that we could talk with this for literally hours and I know that you happen to us for literally hours. So use much for joining us Matt and we'll talk to you again soon. Thanks. I wish there was some off ramp I could point to some glass half full way to read this situation. But again, I start every day looking for a reason to think this is going to end soon and we're three weeks in and I can't find hopefully I find it soon. Hopefully we all find it soon. Hopefully this resolves before you have to have me on again. Yeah, agreed. Well, Matt, best luck with the rest of your work this week and into the weeks and months ahead. Thank you for joining us. Matt, read everyone. Thanks for joining. Thanks for reading. [Music] The information presented should not be considered investment advice. The ClearCam our 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. [BLANK_AUDIO]
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