SPEAKER_01 0:00

Yo, yo, Mr. Rory, how are you, man? Welcome to the stream. I'm awesome, man. It's an absolute pleasure to have you here. Um, thanks for being with us. I can imagine it's a crazy time for you.

SPEAKER_00 0:09

It's a crazy, crazy time.

SPEAKER_01 0:10

Yeah, it is. I'll start. I'll give you a quick intro, real quick, because I don't know if you're familiar with me. Um, but I'm Thread Guy. You can call me Michael, Thread Guy, if you want. And we are primarily myself, people in the chat, are a bunch of traders. And this is primarily like a crypto stream. Historically, it was a crypto stream. Crypto got you know boring, market got a little, a little weird. We transitioned to a lot of AI stuff, talking about stocks, talking about equities, uh, a lot of what was going on in that market. And basically, over the last 45 days, as I can imagine a lot of other people have, we have talked about nothing else but the Middle East and oil. And I actually have got the the Philip66 back there. I've been trading oil, it's driving me crazy. Um, but in this sort of pursuit of just trying to learn more about how this works, how to trade commodities, how you know everything in the Middle East plays out. Your tweets and some of your interviews have been like essential to our coverage. And so I want to thank you so much. Of course. I watch the breaking points and we talk about you basically every day on stream. So I appreciate you joining. Do you want to maybe whip out a quick intro back and then we can fire into some fun stuff?

SPEAKER_00 1:21

Sounds good. Uh hi, everyone, thanks for joining. My name is Rory Johnston. I'm the founder of Commodity Context. I'm an oil analyst. Prior to this life, I led commodity economics research at Scotiabank here in Toronto, where I covered about two dozen commodities. But these days I'm all oil and refined products and everything in between. So let's talk oil prices, let's talk oil markets, and let's talk the Iran war.

SPEAKER_01 1:44

Let's do it. Here's where I want to start is about four weeks ago, you did an interview on breaking points. And it was a really good one, by the way. It was relatively early in this conflict. And I have the quote, and you said something along the lines of if this goes on much longer, we will enter the largest energy crisis since the 70s, and maybe ever. That was four weeks ago. Where are we right now on that scale?

SPEAKER_00 2:13

We're rapidly converging on that reality. I think, you know, at this stage, the shortages, the actual air gap as I've been describing it. This is this idea that it takes while the market and prices move at the kind of the speed of tweet, uh, physical oil markets move much slower. Uh, that, you know, six weeks ago you still had tankers leaving the Gulf. It takes time for those tankers to get to where they're going. So the first areas to feel the physical shortages were East Africa. Then you began to see it in East Asia, you know, West and East Asia, South Asia, um, and then from there, Europe. And now us in North America. I'm assuming you're you're stateside. Um, us in North America, Isalastria will basically be arriving, you know, any day now within the within the next week. Um, after that, and this is when those physical shortages are starting to bite. We've already seen multiple cases where, say, a tanker of diesel going from the US Gulf Coast was heading towards Europe on a fairly normal trip. Uh, and then it basically rapidly and kind of abruptly diverted uh around the Horn of Africa uh to actually service the East Africa diesel trade. And because that was basically where you saw the shortages first hit. So I think while paper markets, you know, uh futures markets are able, and I think we can talk about the degree to which they are very sanguine right now, I think that they are very optimistic about the future, but they can look through this and they can they can you know have a view theoretically in the in this um in this world. Physical markets are just going to try and reconcile by bidding for whatever barrel they can possibly get. I think Bloomberg had a a headline out today talking about ASAP barrels. And I think that is a good way of thinking about it. When we talk about spot barrels, we want them now. It's you know, someone's so desperate for barrels, they don't need them tomorrow or next week or next month. Heck, they want them today. Um, and I think that's one of the unique aspects of this crisis thus far is that it's it's manifesting almost entirely in what we call term structure or the shape of the futures curve. Um, so let's do a little term structure and futures curve 101, because I think it's a useful, a useful perspective here. Before I go, any any any clarifying questions?

SPEAKER_01 4:18

Well, I would uh love for you to do that. I wanted to ask, and I wanted to ask how are and how and where do you see these physical shortages show up? Like how do you how are you tracking this? What does it look like practically?

SPEAKER_00 4:33

Yeah, so looking for it practically is difficult because most of the oil market data that I rely on and many people rely on is is lagged by months. Uh typically we're operating at least two months lagged for good, solid government data. Uh, this we're kind of feeling around the shadow. So, what it looks like in the immediate term, as we can kind of see this happening, is you know, there are run cuts at uh at refineries across Asia. We know that's happening. That's been widely reported. And that happened from the very beginning because they didn't want to run out of crude. So they actually reduced the run rates to try and extend their, extend their runways. That prompted uh, you know, jet fuel prices in Asia in the first week of the crisis to jump over $200 a barrel equivalent. Um and you've already been seeing, you know, Asian airlines cutting back flights, cutting back routes. Um you're seeing it basically shortages are going to manifest in two ways. They're going to manifest as sky-high prices, uh, which we're seeing in spot markets, and they're going to be seen through reductions in activity. This is where you get cuts to airlines, et cetera, et cetera. There was a story over the Easter weekend that uh airports in Italy were beginning to ration jet fuel and prioritize long haul flights over shore haul flights, and prioritizing and keeping some jet fuel available for, say, air ambulance and air taxis. I think that is the kind of thing that you'd that you will be seeing more of. And at and at this stage, again, so the physical storage has only started hitting. We sell of some inventories, those inventories will keep drawing down, and that's when we get into a real pinch point. I think for say Europe or wealthy, wealthy areas, again, like North America, given enough time, this likely won't um this likely won't manifest as long-term shortages. I think, you know, consumers in these countries are wealthy enough to bid these prices quite high. Yeah. And they will start incentivizing those barrels away from poorer areas of the world. Um, so while we will feel debilitatingly high price shocks, will, you know, are it's effectively a tax on us, uh, much of the poor, many poorer countries around the world are going to face physical shortages. Like they just will not be able to get diesel. Like there will be nothing at the pump.

SPEAKER_01 6:41

And has that already happened? Like, are we deep enough in this crisis where that is just going to manifest itself in the coming weeks?

SPEAKER_00 6:48

I don't know if I don't know if I could say for sure that, you know, uh, you know, that we're not past a point of no return. I think, you know, I was just running some some scenarios right now uh for a piece I'm writing on kind of let's say, let's say Hormuz opens on Monday.

SPEAKER_02 7:03

Okay.

SPEAKER_00 7:03

Uh let's say, for instance, and I'm not saying this is my base case. Yeah, but I'm saying let's be maximally optimistic that you get strong, uh, like some kind of negotiated settlement uh at these negotiations in Pakistan. Something happens, and like, you know, on Monday, Hormuz reopens full tilt, uh, you know, 130 vessels a day both ways, uh, and you start getting the production that's been shut in across the Gulf. There's about 13 million barrels a day of production that is actually shut in, that's not producing. Um, those barrels, you know, those those uh those fields and projects can start ramping back up. That's gonna take time to ramp. But even just between all of that, you know, by the end of the month, basically right, you know, right now, we've already lost over 400 million barrels of liquids that have not been produced. So that is because of these shut ins and the accumulated uh deficit that's emerged is 400 million barrels, give or take. Um, and by the end of the period, by you know, I've been modeling a three-month recovery for these shut-in fields, with most of that happening in the first month, but still kind of trickling out. In total, by the end of summer, that the full barrel cost would be upwards of 800 million barrels. Um, I had modeled this earlier, uh, that if the conflict continued through the end of April and basically started the hormous opened full tilt at the first of May, that would be roughly 1 billion or 1.1 billion barrels of unproduced oil. So that's a lot of oil. That's a lot of oil. And I think at the bare minimum, we went into this. I think now it's funny, is like obviously I've done a bunch of podcasts and you know, I've been talking a lot, and everyone thinks I'm this like alarmist permable, which if you talk to anyone in the oil market that's been around for like more than 45 days, they're like, oh yeah, this guy's like a permabear. This guy's the guy that's always bearish about oil prices. And that's the irony, is I think I've found myself in the situation where the math, the barrel accounting is just so stark, it's hard to come up with a scenario that doesn't have this market shifting from kind of an oversupplied, bearish trajectory as of early February to the current scenario that even if we went back to that kind of bearish supply-demand balance, we had oversupplied markets, you'd be coming out of it with, you know, seven, eight hundred million barrels less in the global inventory stockpiles. That's just a tighter market. So it's gonna be higher prices going forward.

SPEAKER_01 9:32

So this entire, I mean, this, I remember one of the first uh bearish catalysts for oil prices going down was the SPR. That entire reserve is like 1.2 billion barrels, isn't it? Is that right?

SPEAKER_00 9:43

Yeah, so that's that's basically what the IE uh the International Energy Agency considers the government-controlled and government-mandated strategic or commercial stockpiles across the 32 members of the IEA. Um, that's roughly give or take 400 million in the United States and 800 million elsewhere across the rest of the IEA.

SPEAKER_01 10:02

So your 800 and some change million is a lot of a lot of fucking oil.

SPEAKER_00 10:07

Yeah. And I and I think, and to be clear again, on it's I think it's important to understand on the price formation side. If that entire 800 million barrels was entirely absorbed by strategic stock releases, that would be, you know, it would take most of the strategic stock piles up of the world. Yep, but you could make a case that that wouldn't have an apocalyptic price upside because these barrels are meant for emergencies, they're meant to get dumped from the market. That they could basically manifest as additional supply. The challenge with all those, that even that 400 million, that initial, like the largest release that's ever been announced that got announced in the second week of the crisis, that can only be released at a certain pace. So when we're talking about 13 million barrels a day shut in across the Gulf that we need to make up for elsewhere, it's not, you can't, you know, you can't draw down the 400 million at 13 million barrels a day. You I've been modeling at roughly 3.3 million barrels a day because it's gonna be released over like 120 days. Got it. So that takes time to get into the system, which again goes back to these short-term logistical problems that the market's trying to solve via price, uh, to get the barrels to where they're most needed, uh, to the person who's willing to pay the most for them.

SPEAKER_01 11:21

Thank you for the explainer on that. And so, you know, you said at the very beginning, you think the market is being very generous to oil prices right now. I also think a day or so before you went on breaking points four weeks ago, because they pulled it up on the screen, you had this tweet with price prediction of $200 a barrel for crude. Uh, where are you right now on the price prediction?

SPEAKER_00 11:44

So, okay, so let's talk prices as well. Because the the price that actually matters is you know the price that's paid. Yep. On the day that the uh ceasefire was announced on Tuesday, we actually got dated Brent prices, which is the global spot price of, so that's the not the futures. So prompt uh Brent futures are for June. This is actual for barrels, basically for delivery in 10 days, give or take. Um, those those prices hit a nominal all-time high of a hundred and over $144 a barrel on Tuesday. So there's a huge spread between those spot prices and those June, even before the ceasefire, June delivery was down to 110. So this is that backwardation that's really pressing on markets, it's just signaling like a five alarm fire, being like, give us every barrel you can right now. If you have, if you have inventory and storage, um, it's basically creating this massive opportunity cost. Because let's say, you know, you, Michael, sitting at a uh at a Cushing a storage tank in Cushing, Oklahoma. If you have a barrel in stock, last week we had WTI prompt spread. So the difference between the first and the second month, so May and June for WTI hit more than $15 a barrel. If you were to sell that barrel to the market in the spot basically in May, you could buy the same barrel back for $15 cheaper in June, you could rent it to the market basically for a month and pocket $15 a barrel. That's the kind of incentive that's being created to try and fill that hole in spot markets. Wow. Um, and I think that's the so where do I stand on $200, right? I think if Hormuz remains closed, the way I would parameterize the $200 call is if Hermuz remains closed, $200 or more is the type of prices we would need to see to destroy 10 million plus barrels a day of demand. Now, the one the one trick I will add to that, and this could be Weasley depending on the listener, but the ultimate thing that drives price destruction or demand destruction is not necessarily crude oil prices, but is rather refined product prices. So diesel, jet fuel, et cetera.

SPEAKER_02 13:48

Okay, okay, okay.

SPEAKER_00 13:49

We've seen the crack spreads for those explode over this crisis as well. At the beginning of January, diesel crack spreads in New York Harbor versus Brent. So this is the difference, the effective refining margin, the difference between Brent and a barrel of uh diesel in New York Harbor was about $30 a barrel. Wow. It peaked recently at $90 a barrel. Wow. Um, and is currently sitting just shy of $70. But like let's say, let's say in this case you had $110 barrel Brent and $90 crack spreads, you have $200 barrel diesel right there already. We've already had that. Um, but I think that those prices could reach like $253, inclusive of that refining margin and everything else. I think that's going to be the challenge is figuring out how much of this falls on the refined product side and how much ref falls on crude oil specifically. And then to the point of, well, everyone's like, well, Rory, you know, Brent crude is trading at 100 bucks right now. If you look at the prompt WTI prompt Brent Future for June. And that's true. And that I think is where I it comes to this fact of normally, in I would say almost all circumstances, I push back hard against the argument or the belief that the futures market is a prediction of what's going to happen for future prices. It's rather about clearing that spot market that if you have a big deficit, you need a big premium on spot prices to get that supply to where it needs to go. And if you have a big uh surplus and you have way too much oil, you get this big prompt discount. And that basically pays for inventory storage. Basically, people are, it's like fire, it's the fire sale, it's the force selling, right? Got it. Um so the question is whether or not things will be that much better by June. And I would say that at this stage, it seems like the market is trying, that part of this abnormally is a belief in the market that things will get better. And that's why you're seeing futures in particular react so seismically to news like the ceasefire.

SPEAKER_01 15:44

Got it. And so the biggest question that was by the way, that's beautiful. Thank you. The biggest question now remains is like, when is the trade of war moves going to be open? And so uh the other thing that I've learned in 45 days navigating geopolitics, basically for the first time, is how difficult it is to sort through what is real, what is fake, which political leader has an agenda, who's pushing propaganda, how much of this is the truth. And so, you know, we get this ceasefire announcement and some commentary that the trade is open, there's a toll, maybe, but maybe there's some joint venture between Iran and the we don't really know. There's a ceasefire, which is basically uh violated in the first, I don't know, 12 hours, and we're back to ceasefire discussions, and the strait is definitely not open. And so you have been tweeting this basically every three hours. The strait is not open, it's not open, it's not open. When it's become a bit of a meta meme, honestly. What does the strait being open again mean at this point?

SPEAKER_00 16:43

Yeah, that's a good it's a good question. So I think typically the strait of Remo's very busy waterway, very important waterway. Typically, depending on the sources you're looking at, between a hundred to a hundred to one hundred and thirty ships typically transit the Strait of Remuse each way, basically. So that counts both westbound journeys and eastbound journeys every day. What has it been averaging recently? Like for the majority of the war thus far, we've been in single digits for those transits, with the vast majority of those ships being Iranian. And one of the oddities of this crisis, and this would have bamboozled an oil analyst if you told them two months ago that, oh, guess what? There's gonna be a war, Iran's gonna shut up the Strait of Hormuz, but they're still gonna get to export their oil and no one's gonna stop them. That would be a surprise, I would say, to most oil analysts, myself definitely included. Um, so what would it be? So, but over the past week through April, we actually started to see a decent uptick in that. We started to get low double digits, kind of like 10, 12, 13 ships a day. Um, that was an improvement. And I think there can be lots of arguments as to why this is happening. I think one thing to just remember fundamentally from like a human perspective here is that there are like something like 20,000 uh seafarers trapped in the straight of the Gulf, right? You're talking about thousands, you know, you know, something like uh, you know, over a thousand, two thousand ships uh in different types, uh, and you've got, yeah, 20 plus thousand seafarers trapped there. They have, you know, they did not plan to be stuck in the Gulf for over five weeks. They are running out of food, water, medicine, all manner of things. It's a human terrain, a humanitarian disaster on top of everything else. So I think at a base level, there is going to be pressure to clear the ships that are currently in Hormuz out, just on that fundamental human basis alone. Um, so that's also part of this. Uh, and there are a lot of deals between, say, Iran and the Indian government, uh, the Indian government being a traditional uh kind of consumer of Iranian fuel pre-sanctions in kind of 2018-2019. Um they're also uh India is a major, one of the interesting things about Indian oil demand is like between a fifth and a quarter of Indian oil demand is LPG, or basically propane, um, liquefied petroleum gas, and they use it for like cooking fuel. So it's one thing to say that like you and I can't drive. It's another thing to say we can't cook food. And I think that like these are like fundamentally different levels of kind of uh the hierarchy here. So there was a lot of pressure, and there and some of the first ships that were cleared to transit uh the strait were actually uh LPG tankers headed for India. So there have been some kind of direct appeals. And then there's this stuff about like, okay, is are these ships paying a toll to Iran? Because Iran has been talking about a $2 million per dollar per ship toll, uh, which sounds very steep, but is much more reasonable when you like apply it to say uh a VLCC or a very large crude carrier tanker, uh, which holds two million barrels of crude, so a buck a barrel. And that's something what we've seen more recently is maybe the toll would be a dollar a barrel of oil or something of those varieties. That is very expensive, given that you know, before it was zero. Yeah, so it's exponentially more than zero. But in the scheme of oil transit, like we would not be having, I would not be on your podcast if oil was one dollar a barrel higher than prior, right? Like I think it's fair to say no one would care because that's pretty insignificant. Um, so I think that's the kind of like that is suboptimal by all means, but I think entirely reasonably kind of incorporated into the into the oil price, if that, you know, that's much better than our current situation where we're not getting any ships through. And I'm sure that many ships would be willing to pay the the the toll if they were able. And I but I think Iran also wants to kind of keep the straight tight because this accumulating pressure on the global economy is its main weapon against the United States and Israel in the war.

SPEAKER_01 20:48

I don't know exactly how to phrase this, but in this, you know, oil, like how does the oil hierarchy, if you will, evolve if Iran is actually able to hold on to this toll through the Strait of Hormuz in perpetuity?

SPEAKER_00 21:03

Yeah, so and I would say that I think my current base case scenario, I wouldn't say it's a really, really strong base case, because I think there's so many options out there what this could look like. But my base case, or the nearest thing to it, is that uh the United States and the Trump administration, given this mounting market pressure, pulls back, doesn't want to kind of get into this mess. Iran in this scenario maintains effective functional control of the Strait of Hormuz. The rest of the Gulf states will hate it, they will kick and scream. Uh, obviously, beyond the fact that they don't want anyone controlling the strait, they've just spent the past, you know, 45 days being bombed uh by uh by by Iran. Uh, and obviously there's a lot of bad blood there, very reasonably. Um but again, I think the status quo is existential for these countries. Uh, they, you know, this cannot continue. Iraq, Kuwait, uh even Saudi, Iraq and Kuwait are basically producing negligible volumes. Volumes of oil now relative to before. It's almost all shut in. Saudi Arabia obviously has the East West Pipeline, which by the way, today was a confirmed that you had an attack on the East West Pipeline, which hit which kicked out a pumping station, which the Saudis have reported reduced flow rates on the pipeline, which is a total flow rate of about 7 million barrels a day. This reduction in pressure has reduced the flow rate by about 700,000 barrels a day. So about 10% reduction on that line. And they also confirmed attacks against two upstream fields, collectively costing about 600,000 barrels a day of Saudi production capacity, not just even, and this is one of the big fears is that if these attacks spiral to upstream facilities, that kind of three-month recovery window I talked about is, you know, goes from weeks to months to months to years. And as an example here, we have in late March, uh mid-late March, uh, we had the when Israel attacked the Iranian South Pars gas fields. Yes. Yes. Um, they immediately counterattacked in what is like now their pretty classic escalatory tit for tat uh ladder uh against the Qatari Roslafen LNG facility. And that, and they like did a number on this facility. Um they made it count. And the Cutter Energy CEO told Reuters that week that that would reduce Cutter's LNG export capacity by 17% for up to five years. Whoa. And I think that's I think that's the that's the thing I really keep stressing is like the current situation is unsustainable. We need to reopen hormones, but the situation is not nearly as bad as it still could be. If we got, say, boots on the ground, if we did see further military escalation, Iran would start going after more of these durable production assets and hitting them directly and greatly extending the recovery window and thus greatly inflating that total lost barrel count that I had earlier.

SPEAKER_01 24:00

I don't mean to throw you off topic with this, but I I love some lore. When you talk about, you know, the the I don't know, greatest is the word, but biggest energy crisis in history is like how did the 70s situation resolve?

SPEAKER_00 24:14

Well, so the energy the energy prices in the 70s was was largely a redirection of flows away from the United States and Great Britain and other countries allied with Israel. Uh the overall loss was far smaller than today. Uh the challenge at the time, I think, was twofold. Um, one, the energy intensity, or particularly the oil intensity of all of our economies was much, much greater. Um we have, you know, you know, we we can we consumed a lot of oil for the economic activity that we were producing. Now we're produ we're consuming much more oil, but our economies are like vastly, vastly larger. So in terms of uh kind of the, you know, the impact of $100 or $200 oil on our economies, like the impact of $200 econom uh oil today would likely be less than the pricing pressure that we saw in the 70s. But it's the volumetric loss, that demand destruction for the global economy that I think we're talking about primarily. Um, the other thing about the 70s that I think typically gets remembered are those physical shortages, are those extraordinarily long gas lines. And a lot of that was actually to do as much with uh the the kind of reaction of the policy framework from the Nix administration, which did things like implement price controls. And I had mentioned earlier that in most of my outlook, I do not see kind of notable scarcity in the medium term in advanced Western kind of wealthy nations. The thing that could mess up, mess that up is if you didn't have the ability for price to compete and incentivize those barrels back to your shore. So if you say have domestic uh caps on on gasoline prices, well, you're not gonna get the barrel then because someone doesn't have the cap and they're gonna pay for it. So that's the thing that kind of short circuits this is if if you start mucking with trade or the ability of these countries to trade, that's when you can get notable kind of dislocations and shortages in these advanced economies that otherwise the market would still satisfy.

SPEAKER_01 26:19

So, what do you think about price caps? Is there any realistic scenario where the US puts price controls on oil?

SPEAKER_00 26:24

I mean, it seems unlikely. Um, I think more likely, I think even politically, uh, because I think price caps to a Republican kind of Trump administration would seem especially draconian. Uh, although again, this is the this is the the president who who campaigned on on wars in the increasing afford no wars in the Middle East and and increasing affordability. And look where we are right now. So who knows? Fair but I would say more likely than price caps is that you could see them start trying to restrict if the crisis gets worse, uh, if hormous remains closed, they could start restricting the ability to export refined fuels, in you know, in particular from the United States. Uh, one of the United States and and Canada, so I'm up at Toronto, um, are the kind of North America is the most energy secure place on planet Earth right now. Um, that, and particularly, say, where do you live? Uh I just moved to New York. I was in LA before. Okay. So from coast to coast. In both of those spots, you're gonna have a hard time because there's a lot of exposure to global trade because you're right on the coasts. Yeah, yeah. The the nearer you get to the center of the country, like say if you're in the Chicago area, um, you do not have the same competitive pressures that can that you would need to either, you know, compete for a barrel or that someone could compete and take your barrel away from you. Uh, those, you know, the set what we call like mid-continent or mid-con is satisfied by a lot of domestic US oil production and also a lot of locked-in Canadian oil that can only travel on those pipelines. You can't compete, you can't incentivize those barrels away. So, for that reason, the most energy secure people in the world right now, arguably, are those in the center of the United States.

SPEAKER_01 28:06

That's uh that's wild. Good, good to know. I guess I'm in the wrong fucking place right now. Um, aren't we always? Yeah, aren't we always? What what about what's happening in Russia? Is the market under-indexing for uh you know energy infrastructure getting blown up and attacked in Russia right now?

SPEAKER_00 28:21

I would say the the oil market just generally is like suffering from deep headline fatigue. Like there's just too much going as someone whose job it is to like try and follow all this, it's been impossible to follow everything as closely as you'd really want to. So, what's happening in Russia is one thing I stressed from the beginning of the crisis is that Moscow was the single greatest beneficiary of the Iran war. Yeah. That both because obviously it is a major oil exporter and this was very bullish for oil prices, but also prior for like the prior nine months before the war, the Trump administration, to their credit, had done a lot of good work tightening restrictions on the Russian oil trade. You saw blocking sanctions against Rosneft and Luq will in October last year. You saw punitive uh uh tariffs put on India, a 25% for their import of Russian oil. Those tariffs were removed. Uh, you've seen sanctions on Russian oil and water broadly waived. You saw differentials or discounts for Russian barrels hit like $30 a barrel before the war, and they were back to single digits. You actually had some landed Euros barrels, a major Russian export grade, landing in India at a premium to Brent. So that was a huge uplift. Now, someone is also in a war with Russia. You know, Zelensky is also seeing the same stuff that I'm seeing. They're seeing kind of the relaxation of sanctions. They're seeing these gangbuster prices or these windfall prices. And he's kind of like, no, like you don't get to benefit from this. So what you've seen is this pro-cyclical kind of upward spiral of attacks against key Russian oil export infrastructure in the Black Sea and in the Baltic Sea. Um, you've seen kind of repeated drone attacks taking these facilities out at one point, uh, Reuters had reported that 40% of Russian and Russian oil export capacity was offline, which they noted was the largest uh shock. Yeah, 40%. Uh it is unlikely still that. And that's the thing, is these are things are moving targets. Unlike, unlike the stra, unlike the Gulf, where this is uh, I mean these barrels are shut in, and until Hermuz starts flowing again, they're gonna stay shut in. Moscow has every every incentive to get these facilities back and running, which is why Ukraine keeps pummeling them over and over and over again to basically keep this offline. So every couple days you see a new, you know, uh uh open source intelligence kind of video come out of like a major uh drone strike at Primorsk or Novorossisk or wherever else, these major export points. Um, so that's so that's ironically, as the price goes higher, the incentive for Ukraine to hit Russian export infrastructure also increases, which would then increase the price of oil more. So it's this kind of this is the pro-cyclicality of it, uh, on top of everything also happening in the Gulf.

SPEAKER_01 31:10

Wow, 40 is a fucking massive number.

SPEAKER_00 31:13

They they noted in the Reuters piece that it was the largest disruption to Russian uh energy infrastructure basically since the fall of the Soviet Union, um, which is a big number. And I was saying at the time, like like we only have like enough mental and emotional space for like one largest shock in history kind of thing. Multiple of them, it's not good. Um, so yeah, that's something that's happening on top of this. Now, very frankly, I have not been able to follow it as closely as I normally can. Because my eyes are on this straight. But yeah, this is all happening at once.

SPEAKER_01 31:43

Wait, so what is the oil market normally like? Like what how how does this compare to your normal life?

SPEAKER_00 31:50

It's it's normally I usually spend a lot of my time working on like Canadian pipeline economics and like stuff that a lot of people would find kind of relatively boring. I think it's very interesting, but I think a lot of people will be like, ah, okay, yeah, you know, a couple dollars here or there. Like a big deal for Canadian oil would be the difference between a $12 differential for accrued and a $15 differential for accrued. That is a big deal for me, not for most people. This is one of those things where it just kind of drowns everything else out. And that again, I'm normally a much more like calm, non-alarmed person. Um, it's just in this moment that it's just these numbers are so big. And it also can just kind of like start to make you feel like you're insane. You're like, you're looking at these numbers accumulating, and then Brent just sold off 20 bucks and the straits still not open. Like maybe, maybe I'm hoping the oil market's right because that means that the worst of it's behind us, but it doesn't look like the worst of it's behind us quite yet.

SPEAKER_01 32:49

So when you say, like you say you're not an alarmist, which is why it, you know, is maybe alarm for someone like me. And I I sort of already asked you this, but like, can you talk a little bit more about how the global like oil power structure evolves if Iran controls the Strait of Hormuz like forever? Like is Saudi just completely out of the picture? Does Iran become a stronger world power? Like, how does this evolve like global standing?

SPEAKER_00 33:11

I would definitely say that if Iran maintains effective control of the Strait of Hormuz, it will become a much more important global player than it has been, which has essentially been a pariah. And I mean, like, yes, there's been security concerns, there's been the proxies, like, there's been issues, but it's kind of always been like an annoyance. I mean, obviously, Israel has a different perspective, and I think a legitimately different perspective. But for the global oil market, it's kind of been an annoyance. Um, now it's like a power player, it's the power player right now. So, this is where we go back to this question of like, do the Gulf states tolerate Iran controlling the strait? Got it. The answer is like, not really, but also in the interim, what are they going to do about it? Um, because they don't have themselves the military capacity to do what would be needed that the United States could do, which would be a months-long campaign with boots on the ground and everything else. Um, it seems unlikely that the that the Gulf monarchies are going to follow that course. That said, if Iran does maintain control of the Strait of Hormuz, and honestly, even if they don't, um, every Gulf state right now is going to be building pipelines to route around Hormuz because that's one of these things. Like, that's a no-brainer now. Um, the Saudi East West pipeline took 40 years to pay off. It was, it was conceived of in, I mean, it's paid off. It's been doing stuff in the interim period, but like it paid off big in the over the past month. It was built in the 1980s during the Iran-Iraq War, okay, when you had the tanker wars, and there were concerns about the closure of the straightforward movies. They built it then, and it was 40 years later that it basically was like, wow, thank God we have that thing. Um, and I think a lot of the other states are gonna be following course. Now, then we get into the extremely messy kind of geopolitics of of laying linear infrastructure across the Middle East. And obviously, these are not foolproof, as we've seen that you know, there was a strike on the on the Saudi East West pipeline very recently. Yeah, um, they're not foolproof, but again, this is kind of a no-brainer. And and the other thing it's important to stress here, back to the economics, is it's not because it's gonna be cheaper, even if Iran's charging a toll, because let's say they're charging a dollar a barrel toll, you're not going to get a pipeline built for cheaper than a dollar a barrel, like a dollar a flowing barrel of capacity, right? Yeah, you're gonna need much more than that. Probably like you know, you're gonna need a decent amount more than that at the very least. So it's not about the economic cost per se, it's about this kind of ongoing existential geopolitical fear that Iran, you know, even if they're charging a toll right now, at any point they could say, no, no more, no more passage for you. And and even right now, like I was saying, many ships would be paying the toll to get out if they could, and Iran's only letting some ships through.

SPEAKER_01 36:01

Maybe this is naive of me, but I I at this point, I think there's like two things that are true. One being the market wants to go higher and oil wants to go lower, or the market wants to force oil lower. And the second is it feels like Trump pretty desperately wants to get out of Iran.

SPEAKER_00 36:17

Um, how with both assessments?

SPEAKER_01 36:20

Okay. How do you, I know we're full, this is full speculation at this point, nobody really knows, but how how do you think Trump gets out of Iran? Like, how does this conclude?

SPEAKER_00 36:30

This goes back to like I view like the unilateral taco scenario as my like primary scenario here. And again, people, some people take issue with taco as a framing. It is pejorative. I'm I'm fine with it, but I think what it really means more re more realistically is that kind of Trump backs down from his prior goals or makes some concessions because of external market pressure. So that's really all in this context, taco means. But what's like what that's going to mean is there are lots of areas right now where Iran and Washington remain diametrically opposed. Like today, the issue was Lebanon and the status of whether or not Lebanon was included in the ceasefire. There's also this core disagreement. Iran insists it has the sovereign right to domestically enrich uranium uh for its civilian nuclear program. And again, I don't think anyone's under like any like illusions that Iran wants a bomb and it's doing this in all manner of way, but it it insists that it has this kind of domestic enrichment right. Um, also, again, the straight-of-four moves itself. Trump seems to be flip-flopping every like couple hours over whether or not he's okay with Iran having a toll. That at one point it was like he he mused that he could like make make maybe they could split the toll. Where it's like, what?

SPEAKER_01 37:46

I don't know. Yeah, right.

SPEAKER_00 37:50

It's you know, you know, fractional, uh straight up four moves, uh, you know, flow through. Um, but that I think is what needs to happen is is Trump's goal, if Trump wants to get out, if Trump wants without further pain, and I think this is why it probably still isn't happening yet. Yeah, because I think that I don't I don't think that again, prices are uh oil prices are 100 bucks. Every time the market sells off, the on on the belief that Trump is backing down, the irony is it reduces the pressure on him to back down. So there's this constant chicken and egg back and forth, um, that it's been very kind of I don't know, bamboozling to follow. Um but yeah, I think that's how it eventually happens is some kind of concession, whether or not whether or not that is on enrichment or any, you know, uh restraining Israel uh for in its attacks against Lebanon or or other things. Again, it seems unlikely that he'd be able to depart without leaving Iran in control of the strait. Um, and that's kind of how I think this ends is he leaves, the US Navy kind of pulls away, and Iran starts. Because again, Iran, if the war is done, Iran doesn't want to uh kind of close the strait in perpetuity. It doesn't want to be a global pariah. It wants power, it wants prestige, it wants respect, whatever. Now, but it will allow that to ramp back up over time and under its control. And now the question is like, what does that look like and how long can that last? I would, well, people I push back into people that say it can't happen because it would be politically intolerable to the Gulf states. I hear that, but I still think it's better than the current situation. That said, it's an inherently unstable kind of equilibrium. And it's not, it's not an equilibrium, it's deeply unstable.

SPEAKER_02 39:34

Yeah.

SPEAKER_00 39:34

Um, and the challenge is that now that Iran has a taste for closing the strait, uh, again, if you had asked me two months ago what the odds of closing the straight of hormous were, I would have said negligible. Like I would have, like, seriously, this is one of those things that, like, this was always something that was such a remote possibility in my mind for most analysts. You know, you know, back to this, like, people thought I was a bear. I had heard that Iran was on the verge of closing the straight of Hormuz, like every month since I started working in the oil market. This has been the perennial kind of boogeyman in the market. And it was one of these things that just, I was like, okay, whatever. Like, there's lots of things that happen in the oil market. They're not going to close for moves. Whether or not that was mostly because I didn't think that like a US president would start bombing Iran, uh, you know, attempting to call Tehran's bluff, because I thought the it's too big a bluff to call, and they tried and it wasn't a bluff. So now we're in this situation. Now that Iran knows it can close the strait, now that you know this has been happening, it dramatically ups the odds from you know, near zero in my mind previously, to a real possibility. And given the scale of the impact, one of the main risks the entire market will be watching for years going forward, as long as the situation remains.

SPEAKER_01 40:48

It's fascinating that you add that at the end. And I also think you kind of skipped over the market take, I thought was a really good one, which is like, you know, Trump sort of starts getting dovish and acts like he's really gonna pull out, market rallies, and it's this perverse incentive where the market rally and gives Trump more leeway to then go escalate, dump the market back down. It is this like cat and mouse chicken and egg game that's being played. And I guess on that topic of the market, the first, you know, I guess February 28th, strikes happen, Friday close, markets are closed, but on hyperliquids of these platforms, you can trade oil, uh, Brent crude, everything goes crazy, and then by Monday open, we're really high, and then there's this, you know, abnormal activity of really large cells that sends oil down back below, crude back below 100. Do you think that there is government intervention in the oil order books right now?

SPEAKER_00 41:44

It's hard to say. And I think if you had asked me earlier in the cr, it seems unlikely that you would have had sustained intervention for this long. I think there was an argument that, you know, again, unprovable uh fundamentally, but there were rumors. There was an argument that, like, let's say in the second week of the war, that there was some kind of intervention. Some people believe it, some people don't. I think at this stage, there's two things I think that are true, which is one, to your point, the market wants this to end. The mark, the broader equity market, and it's funny, you talk about rallying, uh, you talk about like bullish on the on uh equities going up. I talk about bullish. When I mean bullish, it usually means equities going down because I'm talking about oil going up. Um, but I think clearly the market wants to go higher and they want oil to go lower. So there's a huge kind of like, I don't know if it's a confirmation bias per se, but there's a lot riding on. And again, this goes back to back in uh a couple of weeks ago, there was the major oil and gas industry conference in Houston at Zero Week.

SPEAKER_01 42:43

Yeah.

SPEAKER_00 42:44

Was that Chris Wright? Spoke to it. Yeah, Chris Yeah, Chris Wright was there as well. Um, and I I also have my own podcast that I'll plug here called the Oil Ground Up Podcast. And my last guest that's published is uh Kareem Fawaz, who uh works with SP Global and was at Zero Week. It's their event. Uh and he talked about this kind of this irrational optimism. And I go back to this point that like everyone in the room, like it was like right in the middle of this war and the largest kind of disruption to uh to oil supplies in history. Um and everyone was kind of like okay, yeah, there's a war, but like it's gonna sort itself out. It's it would be catastrophic if it didn't. So clearly it's gonna sort itself out. And I think that I think that in a lot of that, there's been a lot of this. I myself feel an element of this. Because again, I just this is why I think that this ends by Trump pulling out, because the consequences if he doesn't just seem so, so large. So all that to say, I I think that you can explain you know futures markets and paper barrel markets better through this like collective hope than through government intervention. Because again, to sustain this level. Low selling pressure for it's just too much. Uh, I just I don't buy at this stage that that the reason prices are lower is because like best sense sitting there sitting the sell button.

SPEAKER_01 44:09

I wish I got to ask you that three weeks ago.

SPEAKER_00 44:11

Um I would have I would I would have had more more I would have been more more more spooky potentially.

SPEAKER_01 44:16

Like the God clip three weeks ago. I I I got a couple more for you, and I and I'll let you go shortly. Here is um there was the now I guess famous better than infamous Citrini Analyst number three folklore story. And I remember when Citrini published 2000 uh the I forget the exact title, 2008 intelligence crisis about the AI story on sort of the SaaS apocalypse software is worthless folklore story on Market Open the next day. There's 50 billion dollars evaporated from SaaS, specifically software. Was it the market was just red? Was it Citrini? I don't know. I like to argue it was Centrini. I'm curious for the real um like oil traders and energy traders and this people that are really deep in that niche. Did that article have any impact on new information, the way you were thinking about things? Like, did it really have a shockwave through the oil markets and like the oil community, or is it more folklore uh on Twitter?

SPEAKER_00 45:14

I would say it didn't have the same scale of impact as the SaaS piece. Um, I think a lot of people were talking about it. And I think the main thing for me is it is it confirmed that we saw a lot of increased traffic, at least immediately prior to the ceasefire, that there were ships transiting, that this was happening. And I think one thing that uh, you know, uh Citrini has pushed is this idea that Iran wants the straight open. And I believe that. I think I think Iran does want the straight open. It I don't think it wants the straight, I don't think it wants to wide open the strait immediately because it's still being attacked. Because I think at this stage, without a nuke, yeah, its primary kind of weapon of mass destruction, its primary leverage against against the world is the Strait of Hormuz. So I think it's true that they do want it normalized, though. They also want the war to end. And I think it's this question of like, I think the war needs to end before we get any kind of real normalized traffic through the strait. Because the irony, and I think I can't remember why I'd said this already, but like we've seen traffic through the strait fall since the ceasefire has started uh relative to the relative to the the the pace we were seeing before. So I think this is this issue is like I've been describing it as like Schrdinger ceasefire, because it's like fit, you know, Lebanon's included and it's not included, enrichment's included and it's not included. You know, Iran can control the strait and it can't control the strait. Both sides are basically just saying that the other side bent over and basically accepted all of their terms. And now we're gonna see like when the rubber hits the road, if these principles actually even meet in Islamabad this weekend. Um, we'll see where this goes because again, many of those points of disagreement are the same points of disagreement that you had in February before the war. And if if they could have decided on them, they could have done it then. And now, further complicating matters exactly solve here, yeah. Yeah, well, well, there's that. Uh, and there's also like now Iran is is Iran wasn't demanding control of the Strait of Hormuz before. Now it's demanding control of the Strait of Horizons.

SPEAKER_01 47:14

The craziest thing to me is we're now fighting over the opening of the Strait of Hormuz, which was open before February 28th. It's a fat, it's an unreal thought.

SPEAKER_00 47:22

It's it's made a good meme, certainly. Um, but yeah, I think it's it is crazy. And again, it's there's something to be said about I have no, I have no, you know, I agree, let's just say this. I agree with the concern that there is about Iranian nuclear program. I agree that and there's been a lot of, I think like both sides of the aisle in the United States. I mean, it was the you know, the Obama administration like like arrived at the JCPOA. Um, I think that there were better ways to disarm Iran than this. Um, and I think that this doesn't seem to have made the problem any better and may have made it worse. And I think that's kind of this issue is like people talk about like when this goes back to normal. I think we can normalize some degree of transit to the state. I do not know if the Middle East goes back to normal. This is like the genie, you know, the the genie's out of the bottle here. Um, Iran holds the straight. It's something that we never thought we'd we'd see, and now it's and now it's happening. And it seems like it's been a very, very difficult adventure to wrest control back from Iran because it seems like you would need boots on the ground to like forcibly do that. Um, and that just seems like something like I don't think the global economy can can tolerate months more of Hormuz closure. And again, the risk of those upstream attacks spiraling across the board.

SPEAKER_01 48:48

It's crazy it says it didn't happen sooner, really. I mean, I know I'm fully have no like very minimal context, especially speaking to you on this, but it's it almost seems crazy it it didn't happen sooner with Iran in the strait. I uh, you know, what I want to ask you one more before I I let you have a have a sign-off question, which is that at the beginning of the stream, I told you we were a crypto stream, which is, you know, I are we still, I don't really know. At one time, that's what we talked about primarily. And, you know, crypto has somehow snuck itself into the equation. One with Bitcoin in the toll, but not that interesting of a topic. But what's more interesting to me is hyper liquid and 24-7 perps. I don't know if you have you paid any attention to hyper liquid markets and seen commodities trading over the weekend, like if that's evolved the oil commodity markets at all.

SPEAKER_00 49:31

I think that I think more people are looking at it as like everyone wants a real-time indicator of like how weekend news is percolating through. I still don't think they have enough volume to really be a purely accurate indicator of what you know normal oil prices will be doing over, you know, closed weekend trading. The one thing I am optimistic, though, I thought someone point this out on Twitter. Um, if you know, once upon a time, you would always announce all of these things like after hours when the market's closed or on the weekends, um, in order to like avoid an immediate market reaction. And while I've always been like, I don't want 24-7 trading because I don't want to have to be aware of the oil market 24-7 over my weekends, someone made the point that if there's 24-7 trading, maybe we just renormalize like announcing things during normal business hours. One of the weird, one of the frustrating things about this year so far is I like haven't had a weekend since the beginning of the year. You know, Nicholas Maduro was kidnapped on a Saturday. Like all of this, every Saturday, every Saturday, there's some big event. And then it's like, okay, well, now my weekend's torched. Uh, you need to write a note for for Monday or talk to people for Monday or whatever. And yeah, so I would say my optimistic view of markets like hyperwitch, hyper liquid or other things, is just to get us back to a stage where like we announce big news when like normal people are supposed to be working and not like what I'm supposed to be like. Trump, even on more of the weekends. This like the ceasefire as an example. It was announced like I was trying to put my kids to bed. And like I've got like multiple children trying to get jammies on and stuff. And then like this tweet comes across. I'm like, no.

SPEAKER_01 51:03

You guys could be up for a couple more hours. Turn the TV back. Seriously, I'm like, honestly, just go play. I need to do it. Here's the iPad, fuck it, right? I I guess a double up on that too. I have a polymarket sound in the background. Is is has that impacted your news flow? What's real, what's fake at all during this conflict?

SPEAKER_00 51:20

I would say it's funny. I would say I haven't been following the prediction markets as much during this specific crisis because I've just been like bamboozled uh kind of with all the other news flow. But I would say I started looking at uh, you know, polymac, polymarket or or um or other kind of prediction markets more as a kind of a just normal course of action. Things like like there was a while back during um I actually tried. I I live in Ontario and there's basically the on-again, off again regulation of whether or not we can actually use these things. So I actually tried to trade for the first time in my life on one of these during the uh 12-day war in June. And ironically, in hindsight, deeply ironically, was I wanted to basically just short. There was at one point there was like an abnormally high, like a 60 or 70% chance that Iran would close its trade reform is. And I'm like, absolutely not. And I was like, I went to go try and basically short that contract. Um, and then it was basically polymarket is not available, Ontario, because of blah blah blah. But I'm like, damn it.

SPEAKER_01 52:21

That's an insane market. That's a crazy.

SPEAKER_00 52:37

That's my main experience thus far with them, and it was unsuccessful. Cool. That's it's pretty ironic.

SPEAKER_01 52:42

I um Rory, you're incredible. I want to ask you as a sign-off. Like, we I mean, I can imagine there has been an explosion of like, you know, unique accounts trading oil for the first time over the last 45 days. And I want to ask, what do you think is like the biggest mistake or misconception a new oil trader would make trying to navigate the Middle East right now?

SPEAKER_00 53:04

You know, it's the irony is I would say that in virtually all markets, these markets overreact to these types of geopolitical scenarios. The irony is I would normally say fade this kind of stuff. Uh, because there's it, you know, again, the oil market over the past half decade has proven how exceptionally resilient and flexible it is to Russia's invasion of Ukraine. Uh, you know, a frickin' uh once-in-a-century pandemic, the Houthis closing the Red Sea, uh, a 12-day war in Iran last year. Like there was countless examples of really impressive uh flexibility. And I just think that the numbers here are just so big that that flex kind of begins to snap. Um, so I would say in this moment, if you're if you're uh if you're an oil market watcher, you know, try not to get run over because heck, it's it's crazy out there right now. Uh, and watch the straight up for moves because that's the I mean at the end of the day, the only thing that matters is that we get flow resumed back through the studio for moves. That's all that really matters. Um, and beyond that, uh usually try and not overreact to this stuff. Uh, and just don't follow my lead in this exact moment where I am like very alarmed. That's that's awesome.

SPEAKER_01 54:13

I love it. Um, Rory, you're incredible. Please chill everything, like plug links, newsletter, everything. You gotta, yeah, these people need what you're talking about. Really bad.

SPEAKER_00 54:21

Well, I encourage you to follow me. Uh, I I see that this is streaming live on Twitter. So follow me on Twitter at Rory underscore Johnston on Twitter. Um, I also host the Oil Ground Up Podcast, which you can Google and find on Apple Podcasts and uh and Spotify and the clear commodity network where it's distributed. Um, and then finally, you should definitely subscribe to my Substack Commodity Context. Uh, we publish a whole all manner of oil market research. I have an oil market weekly report every Friday that'll be publishing tomorrow. I've got three monthly data decks on global balances, North American detail. I go back to I used to just cover boring pipeline stuff. Uh, and OPEC policy, which is a lot of this right now. And then finally, there's a lot of thematic pieces, which for the past five weeks have been all around all the time. Um, before that was things like Venezuela or other major developments in the market. So encourage you to subscribe and follow me there as well. And thank you so much, Michael, for having me on the podcast.

SPEAKER_01 55:12

Dude, you're awesome. I can imagine you're in maximum demand right now as well. So thank you for coming on the stream. Hopefully, uh maybe we could do a part two later on some better conditions in uh in the in the oil situation. Yeah, unwinding the Hormuz stoppage. There you go. I'm looking forward to it. Rory, you're awesome, man. Have a good one. I appreciate you. See you later. Peace. Dude, that guy rocks. I mean, are you fucking kidding me? He's like before this, he spends all of his time learning about pipe transfers in in Ontario. I mean, what are we talking about? That guy is awesome. I didn't want to show him the barrel because I like sort of showed him it at the beginning, and then I don't want to like make it weird and make him like force a laugh. I mean, that guy was awesome, dude. It's crazy, you know. You talk to like the real deal oil people and they're like, bro, we're fucked. You know? That's what they say. The real deal oil ones are like, uh, yeah, not uh not great. Um that guy rocks. Commodity corner, how about it? He's just like a I love the people that are so like use this as a compliment, artistically obsessed with some niche thing. It's like only all he knows about is the flow of oil through Canada pipes. It's like what? These people exist, dude. It's crazy. Best guess you've had on it's the best guess I've had on a while, I think, because he's so focused on it. Like there's you just it's hard to locate these people. There's very few of them. And so what happens, right, is that there's very there's there's these communities everywhere. It's we're in the era of niche, right? So there's people that are experts on every topic. Okay, and then this topic becomes super particularly relevant, i.e., Calvin, the shipping expert. He's been talking about shipping all day, every day for 10 years on Twitter. Nobody cares. Not that nobody cares, but you know, it's not the topic. And then all of a sudden there's a shipping crisis, and then he becomes the most in-demand, hottest account on the platform. And by that time, it's too late. You're not gonna get any, you know, special info from him, you're not gonna get him on the show. We did because you guys are lit and you guys give give me motion so we can bring guests like this on. But it gets very difficult to do it. And so this is part of the thing is like if you are if you have some interest in some topic, get obsessed with it, and then eventually it will just like cool, you're the shipping guy, hasn't mattered for a decade. Now all of a sudden it fucking is not only does it matter, but it's the most important thing in the world. Um good luck. You know, it's it's it's incredible how that shit works. Eventually you end up on the threat guy stream. Um