“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. I remember that on

sub-stack, 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 hormones is not normalized. In fact, the situation in the middle

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 Parsfield, which is the part of the same gas

structure in the Gulf. And yeah, and we're seeing attack spread, as we will 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 to the Red Sea. And we saw attacks overnight that were confirmed

on the port and on the refinery at Yanbo. 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, you know,

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 U.S. Shale, which is the fastest responding sources supply in the market,

it acts too slow. We're talking probably six months at a minimum to see a 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 on perspective,

that was the peak of COVID demand loss in March and 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 it's one of

these things like, I, I am, 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 strait of hormones or used to go through the barrel

yesterday of hormones. 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, maybe you could go

back to like the early early days of like 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. OPEC wasn't keeping up, et cetera. And the IA said that Russian supply could fall by

three 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 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 a kind of a selective re-reading. The Arab

OPEC 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,

barrels have a really, really good way of kind of solving themselves and figuring out flow and

filling holes. And, you know, traders are going to arb into it, you know, 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 kind of panicked, but, you know, tried to scramble for barrels. And, you know, 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

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, you know, right now, for instance, physical cash Dubai barrels off the coast of

Oman are trading at over $150 a barrel. They're like, well, Brent's at a high or sorry, WTI's 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

refiner's that had been avoiding trying to go for these further filled barrels who 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 a WTI because they're going to need to start filling not the current whole,

but the whole 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, you know, very, very small. So that didn't even happen. And what it's looking at

now the disruption from the straight of our moves with with Iran is could be seven times bigger

than what the fear was in 2022 that didn't even happen. And in, of course, in 2022, the price

of oil spikes and went to you 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 through our moves. But on top of that,

we also now have confirmed massive production shuttons across the region. So basically the 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 you could. But anyways, the because when you run out of the capacity to ship this stuff

of field. 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 it. And we saw that it'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

nine million barrels a day of confirmed shuttons. This isn't just supply loss. This isn't the

Hormuz stoppage. This is actual barrels that have stopped being produced. And again,

we're going back to that that fear of 2022 in Russia. That was three million barrels feared,

maybe one million barrel A realized for a month or two. This is nine million barrels. They

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 Hormuz being blocked,

once that straight removes is open again, which hopefully 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 three million barrels not being produced by Iraq,

Kuwaiti oil, one million barrels. This talked to you about the scale of it right now. So nine

million barrels not being produced. Do you see the production going to go even even lower,

a greater disruption than not million barrels? Also, let's say the straight of Hormuz 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 Hormuz blockage in this overall

situation is affecting different types of supply and production in different ways.

I think there's three big buckets here. So the way I've been describing the straight of Hormuz

stoppage is basically like a kinked garden house. To your point, you unkink 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 supply chain bottlenecks we experience in COVID. All these ships are going to

be on top of each other. They're going to try and unload at the same time. It's going to 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 Iran

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've, 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. But I think you do to muck with that normal flow

can cause negative side effects in the longer term. But I think even in 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 finally, I think there's this final piece to this. This is even worse than the other two buckets,

which is if there are facility tax, like we, like what we saw overnight in Qatar 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, that's when Iran hit the Saudi massive,

largest oil processing facility in the world at Abkake. And that is actually, Abkake is the point

at which oil begins to flow through the East West pipeline. So obviously, this is all connected.

And obviously rush, sorry, obviously, Iran knows this. So that's very tempting. If they start

hitting those facilities, then we're not talking weeks to months. I mean, 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 that to cover the gap. So 20 million barrels through the street of Hormuz,

let's say that be generous. Let's say 10% of it is still flowing through from Iran and stuff.

So 18 million barrels off the market. How much can get through other means through this East

West pipeline, through Saudi Arabia, through, I don't know, going up through Russia? How much?

What else can be done to fix that? 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 15 million barrels is crude oil and the other 5 million

barrels are refined products. And that, and 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 reroute. So this is the East West pipeline. I would say,

yeah, yeah, yeah, for Saudi Arabia. So this is also the petrol line. It was actually a line that was

built in the 1980s during the Iran or Iraq war during the tanker wars specifically as insurance

against me, especially against this current and exact risk. So it's now serving its purpose.

Then the pipeline has a name plate capacity of 5 million barrels a day. Saudi

or Ramco said they can push up to seven through the use of an associated NGL pipeline or natural gas

liquid pipeline. There's probably only already two or two 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 fineries. So let's say optimistically you can get five more million more barrels.

This is where 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 has pumping stations with can be bombed. It terminates at the Red Sea, which up until very

recently was being terrorized by the Houthis, which are Iranian allies. And last night we actually

got confirmation from the Saudi Ministry of Defense that a ballistic missile and a drone were shot

at the port and the refinery at Yandu. So clearly this is now becoming a target. And after

Israel targeted and hit the South Powersfield yesterday, Iran released a list of targets,

one of which was the refinery at Yandu. So we knew this was on their radar and now it's also

been confirmed. So that's the biggest single. Let's say, charitable 5 million barrels a day,

although there's lots of astrixes 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. 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 good and bad side of the

straight. So it travels from the good side to the bad side of the straight to the good side of

the straight. And it terminates at the major kind of blending and shipping hub of Fuzera,

which if anyone follows this market, those are the Middle Eastern weekly inventory stats that we

get 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 in the line. So let's say charitably 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, and you're right. So so Ron is still shipping. So let's

take out two. So that's 18. Let's take out five and a half. So now you're at, you know, 12 and a

half million barrels. Am I doing that right? Yep. Okay. Now that'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 Wright 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 the math easy. So now we're nine million. We're nine,

then we're nine million here. And again, that's time bound. So that only lasts for four months.

Then we have excess Russian supply, Russian oil and water. And again, one of the things I've

been pressing here is that Russia is the single greatest beneficiary of this war in Iran. Prior,

I don't say a lot of nice things with the Trump 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 six to eight

months, following the sanctions on Rosneft and 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,

but that has now also created a little bit of an offset because we can tap those Russian barrels.

And what we've seen is that basically in two weeks, all the progress the Trump administration had

done over six to eight months has been undone. So basically, Russia is everyone's kind of preferred

barrel of choice because it's a major producer. It can put it can load and ship into the

in the Pacific basin. And it's not on the wrong side of the straight from this. So that is likely

going to continue happening. Roughly, you're like, let's say 60 million barrels or that we're

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 because

I think this is actually the stuff that's going to 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 12. So this is explicitly talking about these floating barrels and this kind of oil

and water that I think again and also exempt exempted sanctions on any of the shadow fleet. So

basically said if there's a Russian barrel and 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 two 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 going to 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 worst 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 skyrocket over

$200 a barrel Brent? We already have over $200 a barrel jet fuel in Asia. We have $150

Dubai cash basis physical crude in the Middle East. This is the way this is heading longer this goes.

Tell us about the refineries in Asia and the the time lag between when they are going to 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 like monthly tons or

whatever else is the market works. And it's best to think about the entire thing is 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 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 the rest of Asia.

So we it's not going to be until those barrels hit land that basically this really begins to tighten.

Because 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 going to really start tightening. And to your point about Asian

refineries, there are the, I mean, refineries available 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 feedstock.

Initially, very frankly, I was like, well, they're going to just going to chase these sky high

refining margins. And my, you know, very, very wise kind of analysts, they know on the refining

side, like actually, they're going to be terrified of shutting down because it's expensive.

It's complicated. They could be off for weeks or months. And they're going to get none of

these refining margins. And again, especially if you think they're going to 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, the profit margins of refining crude oil into refined products

is already still high. Exactly. Exactly. So, and let's say, for instance, 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 because 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 because it's very, very delicate and kind of

specific specifications, I get it 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 that 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 dollars

a barrel relative like let's say a pre 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 middle distillates really explode,

you saw that hit between 80 and $100 a barrel. And I think if this continues, it's going to go

keeping higher and higher and higher. And a part of the reason that in addition to the Asian

refinery turn downs, part of the reason this is hitting diesel and middle distillates 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 all of these 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 and 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,

you know, the price at the pump? Yes. So I think that's the 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 you've even seen

President Trump begin shifting his narrative around lower prices are better to where the world's

largest oil producer high prices are great for us, which again is actually one of my most concerning

signs about 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 are medium to heavy

sours 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 what we

call pads which the EIA terminology petroleum areas for defense districts to hold over from the

from World War II, 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 X in very, very good fashion because otherwise the United States shale 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 term administration here is to begin restricting trade and keeping that from leaking out

in the world, particularly when we're talking about major SPR releases, it's just

petroleum reserves. Yeah, yes, petroleum reserve. 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 going to release them. They're going to go to where they're most demanded to fill the

best hole they can. And I don't think Trump is going to like that. I think he's going to 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 of refined products. We

actually saw the Biden administration regrettably mall 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 prices in the United

States at the national average is over five dollars 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 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 kind 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 what is the East Coast gets gasoline. You can

actually have this is actually another point that I think is leading us towards trade restrictions

you saw Trump this week repeal or wave 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 like 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 for if we leave the system alone, we probably won't see trade,

physical shortages in advanced wealthy markets because we can pay for these sky high prices.

But as soon as you start mucking 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 in terms of counting

the barrels, looking at the official data, looking at the prices, and then weaving together

of a picture of what's going on based on that sort of constellation of facts you haven't

been disposable. Yeah, so thank you. So at commodity context, I publish typically twice a week.

I publish a weekly every 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 the 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 data decks, which are essentially my

versions of an IEA monthly report or 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, etc.

And then also an OPEC kind of compliance and tracking and production and, you know, official

versus implied production. And 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 key one 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 data visualization driven your work is like, you know, 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, you know, just how in the weeds you

are. And then also you've got, you know, a chart I was looking through, which was interesting to me

of like the trade volume of the WCS Houston versus WCI, the West Texas intermediate. And basically

some, something a little, you know, there's some new player in that market, like that's really

spiked up a lot that some people trade specifically trading the spread between Canadian oil and

and US oil. And yeah, so, you know, the work is really good. And I also think, you know, the

like most oil research is from a bank, which you have to be a hedge fund to join. And you know,

some of the research is good, you know, like the Bank of America's fixed income work, I think is

very good. But like 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, what Rory, Rory is not biased

to, 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, on the data, not because he's, you know, trying to get you to buy Brent calls or

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 a 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 there's been two

slightly different ways. I think let's assume, let's assume in the most bearish case that

the United States and the Prime Minister's win 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 Iran,

which has been chronically uninvested and that could open up to international investment,

you could get a resurgence of Iranian supply. Yeah, there's a scenario that this, and again,

if we remember, we're actually in an oversupply and an acutely oversupplied situation going into

this war. So if we return to everything as normal and we had kind of the prospect of a lot more

Iranian crew in the horizon, yeah, I actually think this could become a bearish situation. 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, you know, how this is going to be better

because you didn't realize it, but because of Iran, you're always pairing, quote, a terror premium

in the price of oil. So their thought is that after this, the Gulf is safer, shipping is safer,

and that kind of more Iranian production against the exact same argument as that 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 are

repaired instantly. At the most bearish, or sorry, like the most optimistic for the global

economy, we basically resume where we were, which is 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 lessen inventory. That I think,

so basically, we basically rewind where we were in January or February, but with way less inventory

cushions, we have a higher steady state of oil, a state of 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. That's going to 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 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 brings us back in our 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, okay, how can we, 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 is going to want to continue pressing its case. It's

wanted to do this for decades. It's not going to let up unless it's forced to let up. Iran is not

going to let up on its attacks against regional infrastructure and on its pressure 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

that's kind of how I come to this. But obviously, even in the scenario of a Trump taco,

the situation is deeply unstable. And he's just 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.

You know, the Dubai, a bunch of the Dubai markets are in freefall. Like, it's popped this kind of

dreamy bubble in the golf 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. Security guarantees. 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 to stop attacking or we're going to 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. They think that now, and we've seen the speaker 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 polyanna-ish here that I think he can talk, and I think that's the only

way that it's going to end. But I think there are legitimate counterarguments that this is 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 even in that polyanna scenario, I think there's a floor

at 90. I think probably we're kind of 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. And I think that's,

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. I think it's earned

a bit of the boy who cried wolf. There's a lot of permaboles in the commodity sector generally.

And I think generalist and kind of market observers were 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 in 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,

that's not sustainable. That can only go on for a couple of months at the best case.

So let's say we, let's say just again, 15 million barrels. Let's say the East West pipeline is maxed.

There's no issues at Yonboo, the Houthis 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 of barrel 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 crude oil 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 crude oil 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 the 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 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 continue. 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, you know,

not used very often. No, no, for sure. Energy production, but you know, LNG, certainly, sorry,

sorry, natural gas and then you LNG is and LNG is its own own issue that's being blocked by

the closure of the straight of her moves. Okay, so yeah, you said you'll real all-time high in

real, oh, inflation adjusted prices. So that, you know, the nominal high in Brent and WTI was

$147 in 2008. So you think on an inflation-justed basis, we get to even higher than that.

Yeah, I haven't shut the latest adjustment, but I think that the inflation-justed that was like

$230, $220 a barrel in 2008. I think we, I think we sail past that if this, again, if we're,

if it's a month and this has an open, I think we're back up, we're back up above a hundred bucks.

And that is a very, very, sorry, 200 bucks. Yeah, 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, that's like, how are we not

already it? 131.4, 150. How are we not already back at nominal old time highs? And the answer

that is, again, I think that Trump, I think Trump has to talk, I think the market believes Trump has

to talk. 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, 25 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 five, six, seven dollars

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 bucks 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've even seen 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 crude three, 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 at 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 futures contracts, leading physical

markets, because again, markets are forward looking. But what we've seen is that again, two Mondays

ago, when we hit that, we had that massively volatile Monday after open, it was the second weekend

of the war, Brent hit, I think over, it was like $11670 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, we've seen

right job owned, we've seen best end drop job owned repeatedly. And every one of those times,

we see prices fall by $5, $6, $7 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, you know,

paper players by the nose higher. And yeah, I generally agree with the claim that financial

markets are leading particularly the stock market, you know, the bond market and credit markets too.

So, you know, the stock market bottomed on March 23rd, 2020. And the economy didn't start getting

better until the summer, but you know, we had a ferocious rally in stocks and that presage and

you know, kind of 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 like, 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.

Yep. So Kevin has it. He was in the White House working for President Trump. He said,

said, look at the futures curve, you know, and what he's saying is, oh, in December 27,

December 20, 28, 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 that's a backwardated market where

you know, 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 future's curve works, at least not in physical markets. I think

there could be an element of this and say, rate futures 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 backwardated 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 to 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,

any, you could sell that barrel into the market today, instantly, immediately,

rebuy 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. Any one 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. What that slope basically pays for is inventory

storage. So when we hit the deepest points of a week market and say the bottom of February of

2016 or the bottom of March and April of 2020 when WTI hit negative prices, these were what you

call super contango markets where you basically, there's such a spread. This is where you can get

these floating storage trades where hedge fund will 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 kind of 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 an anticipatory demand and concern or 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

commitment to trade support. 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 way because eventually,

I think the future market will get back into this. But I think they've been so shaken so

repeatedly and kind of rug pulled repeatedly by the Trump administration that it's too risky

to kind of get too far ahead of the physical market now. So in 2022,

and the market was getting backwardated front dated front dated prices,

spot prices were exploding higher. But inventory was actually rising. Yeah. You were tracking

network. 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, we're just like, we're releasing the markets, you know,

what, you know, the movie, the Titan or something, it released the Cracket, you know, released the

barrel. Yeah. Yeah. Yeah. So I think that, okay. So let's talk in the two phases. So our inventories

are already drawing 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 to 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

then 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 it 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 that 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 a 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 draw,

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 and water is rising, that is an

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 them are explicitly strategic part of them are 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 a 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 Lexforts again just 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 Trafigures, your kind of major trade houses, VTOL, etc. They all have

their own stocks as well that they use to essentially arbitrage these time spreads in the market.

They're typically held with the major hubs. So in Cushing around ARA, the Amsterdam water dam

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 backwardation

of insane levels, these are the these are the participants that are only holding these stocks for

you know, 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

if you had a barrel inventory when that time spreads, prompt times were Brent were 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

refiners that are, you know, preemptively turning down operations in order to not shut down

permanently. Those, you know, that's the example like they're going to they're going to keep doing

that. But after they run out of crude, like it's it's end game. You know, those refiners 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? Because, 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 for, 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 a similar, let's say we

just use the similar kind of reference point for Chinese SPR, then we're going back to like Bo's that

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 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 given the situation. So that 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, or 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 refiners 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 one of the big

conspiracy theories of this is that oh, this isn't 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 and China is obviously paranoid about its energy

insecurity, which is why it built up the SPR 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 2027, 2028, talks me about geographic

spreads, the spread between Brent's and WTI. I know that they're composite. Brent is like

European WTI is in Texas, as well as the price of oil in the good part of the straight-of-form

use versus the price of oil in the bad part of the straight-of-form use. 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-of-form use 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

9 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 $2 million barrel tanker,

basically for going like literally like a couple hours journey across the straight.

That arbotrage 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 arbotrages are going to hopefully eventually incentivize

more risk-taking from tankers that they're going to jump across to say like, look, we're going to

make, we can, we can pay a $5 million kind of war insurance premium, which is the latest,

you were talking about five percent war insurance premiums up from 0.25 percent 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 that 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.

Yes, we're a good part of the straight, which is trading in a massive premium. And then Brent,

WTI. Yeah, so then Brent and WTI basically are global benchmarks. And there in the West, Brent

is in the North Sea and Europe and then WTI initially is priced in in Cushing, Oklahoma.

And then the main Brent that's exported is more Brent mid, sorry, WTI Midland exported the

U.S. 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 shockwave

that you're going to hit Brent first because Asian refiners can get those barrels faster than they

can get barrels out of the U.S. 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 crudes 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 quite acutely now.

So the Brent has blown out relative to WTI Brent, you know, very often is that it modest premium

to WTI, but now it's blown out tremendous over 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 discounts. 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, 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, you're going to 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, you know, 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 20 to 27 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

and it's almost like a flat note 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 unconfirmable, 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 it every single day. And I have yet to see evidence

against it beyond Bessent saying we didn't do it. But then prior you saw comments from Bergam that

kind of made it a little wishy-wash year 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 idiosyncratic pressure on WTI specifically because

a doubt treasury would be shorting Brent, they'd be wanting to short WTI. So again,

unconfirmerable, but I think one more element for people to watch about whether or not this continues.

WTI is the oil in Texas. Bessent, treasury secretary Bessent 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 energy secretary writes a point and Trump's point that the US

is a net exporter of oil and a giant giant, the world's biggest producer of oil, is the point

that you said earlier, U.S. 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 U.S. run short on

heavy sour crude? Yeah, so for the record, I'm Canadian, but I also say we would talk about

something as it's all the time. So the kid has a lot of heavy. Exactly. So yes, the U.S.

primarily produces light sweet crude from the Permian Basin and other kind of light, what it's

called, light tight oil from the shale patches and other tight formations. That is largely,

that is increasingly exported because the U.S. 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 U.S. refining slate, particularly in the Gulf Coast. You've seen the

average API density, which is a measure of how heavy your light crude is, the higher the number,

the lighter it is, the lower the number heavy. The average barrel refined in the U.S. 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 U.S. basically does not import any light sweet crude oil. 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

U.S. oil imports coming from Canada now, raw raw Canada. And on top of that, you also get barrels from,

you know, heavy barrels from Mexico, increased from Venezuela, which was again, what I was doing

all in January and February until this started happening with with with 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 U.S. refinerers don't

want to consume. That's why they're currently being exported. And the other risk here is the risk

reciprocal restrictions that if the U.S. starts doing this and you start, you know, 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 U.S. would begin to feel the, you know, could run out of,

you know, heavy sour crude on the balance probably not Canada because Canada's landlocked in this case.

It's going to have to supply the U.S. 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 U.S. export the light

sweet because of the export ban? 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 all, you know, maybe they could do

both and then it 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 U.S. market itself can't really process

that much for that long and you'd see U.S. inventories spike at a moment where global inventories

are plummeting and domestic or fine, 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 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 $5 million of 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 they were banned thereafter. Then you also

have things like, you know, the curve weirdness and the fact that you are seeing WTI at such an

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 to 50? How does the price of oil get get back down?

I think the 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 hill. 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 what I think he'll do. He'll say,

the Iowa toll is dead, you know, we killed this frame 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 Karakas.

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 than 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. 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 of 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 10, 11 million barrels a day of spare capacity.

And this is the capacity usually to find as capacity to come on quickly and last for a certain

amount of time, 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 dip, stick the straw down a little bit more and produce more instantly.

And normally that 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 it's you're 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 we'd never seen this straight closed, even during the tanker wars in the 80s.

The Hormuz and Iran short circuits the markets normal response mechanism, which is tapping into

that spare capacity because virtually all that spare capacity was in Saudi Arabia, the UAE,

Kuwait, these golf these golf these GCC producers, these core of OPEC. And yeah, all the spare

capacities now on the wrong side or the bad side of the straight. Right. And just to get

give numbers on this in terms of the amount of oil exports that are down Iran exports down 30%

Iraq oil down 67% Kuwait down 59% Qatar 62% Saudi Arabia 35% so it's not looking good. Roy,

thank you so much for for coming on. Thanks for having me Jack. Thank you for listening. Remember

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