Because the things we do use petroleum for that's the only option. The market is remarkably resilient. The US oil inventories are not just high and they've been building aggressively far faster than the seasonal norm over the past 6 weeks, but for much of the global south, you will just see no food. You will see gas stations run dry. Iran is in no hurry to get a deal. Trump and the White House generally firmly believed one of two things. Rory Johnson, energy market analyst and founder of the commodity context Substack. It is a true pleasure to
host you on Palisades Gold Radio today. Thanks for having me. Excellent Rory. I'm really excited for our chat today as in this conflict in the Middle East, you're one of the leading analysts looking past the headlines and focusing on true supply fluctuations. So because the image is so murky, how much supply in energy markets is truly being disrupted and how close are we for oil and gas and petroleum based products to be unobtainable for large parts of the world. Yeah. So let's start with the kind of very basic barrel counting math of the straight of
Hormuz. Uh how much has been rrooted and what exactly we're talking about. So in total I'm sure you know we're now seven plus weeks into this. I'm sure people have heard various numbers like this before, But you had roughly 20 million barrels a day of oil uh transiting through the straight of Hormuz. It was about 15 million barrels a day of crude oil and 5 million barrels a day of refined products about half of which were middle distillates like diesel and jet fuel largely went to East Africa and uh and Europe and then you also
the other half of the refined products were lighter lighter hydrocarbons like LPG Napa etc that went into went to Asia as as petrochemical feed so that's kind of your overall hit 20 million barrels a day 20% of the global total thankfully We have not had to deal with that entire hit yet. So there have been some notable reroutes. The most important of which is the rrooting uh through Saudi Arabia on the east west pipeline which goes between the Gulf side of Saudi Arabia to the industrial port of Yonbu on the Red Sea. And that pipeline
has a total capacity of about 7 million barrels a day. But only but you had about two 2 and a half million barrels a day traveling on before the war. Uh so your total switching capacity was about 4 and a half to five. Add in uh a uh anati uh pipeline to uh the the blending and kind of important uh hub port of Fujera. And up until very recently you had Iranian oil that was continuing to transit the straight at about one and a half to 2 million barrel a day clip. put it all together
and you have about 7 million barrels a day of that initial 20 that has been successfully rrooed to markets. But that if your math is is you know if if your if your quick mental math we wait there's 13 million barrels a day That's still not getting out and that is the true supply loss of this market right now. We've had about we have about 13 million barrels a day of uh production that has been shut in across the Gulf um between Iraq, Kuwait, Saudi Arabia, uh uh the UAE, uh Qatar and Bahrain. So that's
a lot of oil and that is essentially the the the you know countdown the clock on the global oil market and I think by proxy the global economy. Um, and so far the cumulative total loss of this is roughly just more than half a billion barrels. And given that these things don't just turn back on at the flip of a switch, they need to kind of ramp back up gradually. Uh, that reamp will probably take weeks to months. Uh, I've been modeling it as kind of an aggressive uh, ramp over 3 months with 70 20
and then 10% kind of lagging back in. accounting for that and accounting for that kind of uh reamp time, even though we're at like let's say 550 million barrels of loss supply thus far, that total climbs to around 900 million, upwards of a billion barrels if the straight reopens next week. Um, which as of right now, it does not seem like the straight is going to open next week. So that's the total loss and that is a lot of oil. I think a lot of people will say, "Well, look, Roy, I've read that there are
8 billion barrels of stocks in the global system." And that's correct. Um, the important thing is that not all stocks are proper inventories as you and I would normally kind of uh, you know, understand it. That includes all oil on water. So, basically ships that are transiting between place to place. That includes all oil that's currently in pipelines. Again, also in transit. These are the basically any this 8 billion barrel stock is the total kind of if you I view the oil market as a big stock and flow model. If you kind of view this
as um you know a stock is anything that has been produced but has not yet been consumed. But you've got all these oil in transit. You've you know you have you have minimum thresholds that you could hold in inventories because these things are flowing chemistry sets. they need to keep, you know, any interruption, the whole thing kind of shuts off. Um, so of that 8 billion barrels, you're really only talking maybe more like 2 billion barrels of real true commercial stock piles. And even that might be an overcharitable estimate. Um, so that, you know, pulls
down and and, you know, that is the that's the total we're talking about. sort of a billion barrels if that entirety fell on commercial stock would I would like have global stock piles you know over this crisis which is very serious now again thankfully we've had we'll have SPR releases and stuff as well which will help chip away at some of that but I think end all be all end of the day this is an extraordinarily large supply truck the largest supply truck in the history Of the oil market and now I'm assuming we're going
to talk about why despite all this crude on Brent on my screen right now is turning $95 a barrel, which is a shockingly low price given the scale of supply loss we've seen thus far. That is shocking. That's definitely something we'll have to talk about in just a second. But before that, perhaps we should also touch base on why other places in the world can't just replace this these 13 to 15 million barrels that we're actually missing. It can't just be replaced with Russian oil or American oil, can it? No, that's right. So, just to
be clear again, this is a lot of oil. At the US's peak, when the US grew at the fastest US oil production grew at its fastest pace ever was in 2018, and it grew in total liquids, that's crude, uh, natural gas liquids, etc. Um, that grew by about 2 million barrels a day year-over-year. That was the fastest it's ever grown. That's the fastest that any country's production has ever grown organically in the history of the oil market. So if you're talking about the peak, the fastest we could ever go was 2 million barrels a day.
And I should be clear, this is back during the period where US show is basically constantly drilling unprofitable wells and kind of setting, you know, billions and hundreds of billions of dollars on fire for their investors. Uh they are far less uh kind of aggressive with their drilling programs now. But yeah, even then the peak was 2 million barrels a day. So that takes a long time to eat through 13 million barrels a day of supply hole. You're going to have other sources of supply growth as well. we were going to supply to grow this
year. For instance, the main nonOPEC sources of supply growth you're looking at are the United States, obviously, Canada. I'm up in Toronto here, so I spent a lot of time looking at the Canadian oil market, um, uh, Guyana and the new offshore, Brazil, and Argentina. So, those are five America's kind of main sources of future production. Today's episode of Palisades Gold Radio is proudly brought to you by our parent company Palisades Gold Corp. Canada's leading junior resource investment vehicle trading on the Toronto Venture Exchange under ticker symbol P AI with equity and warrant positions in
over 200 companies, ownership of mineral projects and royalties and a significant stake in Newfound Gold. Bellisades offers investors powerful leveraged exposure to precious metals, uranium, copper, and other critical minerals. Bellisade shareholders directly benefit from our team's extensive industry knowledge and access to deal flow opportunities historically reserved for a small group of investors. To learn more, visit us at pelisite.ca and join us in our mission to level the playing field for investors. Now, back to the show. But again, it just isn't enough fast enough. So if you can't fill with supply and you can't keep drawing
inventories down forever again like let's just assume just to understand the logic here. Let's assume that Hormuz remains closed for a year. What does that look Like? Because I think it's important to kind of parameterize the kind of downside here for the world. Um, if you're in that scenario and you can't fill in that supply, which you can't, and you can't draw down inventories at 13 million barrels a day for a full year, um, it's just too much oil. Um, that ends up in a situation where you need to destroy demand to balance the equation.
So, this is when we talk about demand destruction and that is the level at which prices need to rise to get people to stop consuming. Not just, you know, gasoline and diesel, but jet fuel and NAPA and petrochemical feed and LPG and shipping fuel and everything in between because this is 13 million barrels a day of of crude oil production. And crude oil doesn't just make one product. It makes a whole suite of fractions of products that the demand destruction needs to occur in all of those segments kind of simultaneously. And we've never done that
before. We have no people people will often say like ah yes the literature the academic literature says that you have like like let's say a 10% sensitivity. So like if prices rise 10% then you might see a 1% reduction in demand. But all of these are kind of make believe for the types of cuts we're talking about because we've never in the history of the oil market needed to grind that far down the demand curve of every single industry on the planet. So that frankly we just Don't know where it's going to go. I think
very reasonably crude at 200 you know all of these prices are going to be astronomically high because like in most of the advanced world we're not going to see demand destruction at you know until extremely high prices. Like I I always say like it will take it would take like 10 bucks a liter for me to kind of blink before driving my kids to school in the morning. Like that's like that's a lot. It's very important. I don't consume a lot of oil anymore. I think and that's the thing not a lot of North Americans
don't actually consume that much oil on an individual basis. Let's say not as much as they would have as a proportion of their income back in the 1970s. But that actually also means that we have a much lower price sensitivity because the things we do use petroleum for that's the only option. So, it's either that or you I take my kids on the city bus, which is like that is very ownorous and I don't want to do that in the morning before I've had my third cup of coffee basically. No, definitely. It's a very interesting
point. Something I've been thinking about as well. I mean, if you look at the oil price right now, it's just so cheap if you compare it through an inflationary adjusted lens. And we'll definitely talk more about that. But how can there be such a large bifurcation between what we're seeing, you know, with this story that you're telling of of supply being disrupted to this extent and futures prices just not seeming to price that in? Yeah. So, let's talk about a couple things. Let's start first with the way this crisis has primarily manifested has Not been
the most notable way it's manifested has not been in flat price, right? In the price we see on our screen. The most notable expression of this crisis thus far has been in record backwardation which means the kind of steepness of the futures curve and when people and so that you know just for like basic uh you know you know commodities 101 here when you have a backward egg curve what it's essentially saying is you're putting a premium on near-term or prompt deliverable commodities uh prompt deliverable supply barrels in this case um and that's basically saying
that there's a deep shortage right now which is exactly what what we should expect that's you know that is how we would expect this crisis to manifest is in backwardation. What I've been surprised at is that flat price hasn't done nearly as much lifting as I would have expected because I would have expected people to be far more kind of alarmed and concerned by the scale of this of this kind of supply loss I'm talking about. And again, just for my own little like, you know, just validation here, prior to this war, I was generally
viewed as like a fairly bearish person in the oil market. I wrote a bunch of pieces in the months prior to the war about how we were overs supplied notably in the oil market overs supplied. We were building stocks. I viewed I I accepted you know with crude at you know you know high 60s low7s kind of you bit you know overwhelmingly downside risk to those prices over the next 18 months and like kind of joked at the time like the only thing that would that would put us into like triple digits in that environment
would have been like if someone was reckless enough to close a straight of four moves and voila bing bang boom that's exactly where we are now. So I think the first thing that's important in in Understanding how the market is currently trading this is how consensus that view was that I held in January and February that the market was overs supplied that we had been building stocks pretty aggressively for nine plus months. We had a lot of crude in storage um and this was kind of this you know the belief in this consistently from basically
week two was that this was a week or two from ending. So, let's just kind of pretend, and I'm actually writing a piece right now, hopefully out later this week, kind of steelmanning or kind of putting the most optimistic charitable interpretation of the market's reaction to this crisis to try and understand what's going on under the hood. And I think there's a couple important things that are driving that. One is kind of fundamental and then a couple of the others are a bit more um you know, particularly one is is think a bit more you
call it Trump idiosyncratic. So on the fundamental side, oil and commodity markets are not good at being forward-looking. They are not anticipatory assets in the in the words of of Jeff Curry. Um and I think that is important because when people look at the futures curve and they see it backward, they see a a downward sloping co curve in the future. what they think that means, what the kind of most natural conception of what that means is is that the the market is basically charging or or offering a discount on future barrels relative to today,
which is I guess technically true. But the way the pricing actually works is it's not about a discount in the future. It's about a premium for today that kind of causes that upward tilt in the curve. Um so that all we really know is that that's kind of um That's that's driving this higher. Um so the challenge is that oil markets move slowly. Uh it's only now only this week that the final ships final tankers out of Hormuz have actually landed in their destinations. Up until now places that had been importing oil from uh Hormuz
in many areas of the world had not felt the physical scarcity yet. Now that's starting to manifest. You saw this first in East Africa, then East Asia, then Europe, now North America. Um, and it's only going to be after inventories start drawing down in a more meaningful, visible way that these markets have historically kind of durably shown the pricing impact because very frankly, I think it's very reasonable for the oil market to doubt alarmist analysts like myself. There have been I'm not saying that I have always been alarmist but over the past six seven years
we have had many many opportunities for acute alarm in the oil industry from Saudi Arabia's attack on abcake in 2019 to co to Russia's invasion of Ukraine to the Houthies in in Yemen and closing the Red Sea like the attacks on Russia all of this stuff all of this stuff would have been you know a decade ago two decades ago each one of those would have been enough to push oil easily into triple digits and higher. Um what we've seen over the past six seven years is that the market is remarkably resilient, remarkably flexible to
these types of disruptions. This is in many ways what has fueled my own kind of what people would consider a bearish bias. I think That that the market is really really good at squeezing value out of a relatively low nominal dollar barrel. Um so I think that's the important thing. I think if you look at the realized inventories to date, it does make sense that since we haven't seen them draw, we haven't seen them draw down deep enough for long enough to kind of inform a true regrading upwards on the crude curve. Um, but it
is manifesting in that crazy backwardation and I think that is how we should expect this to continue manifesting until we have let's say another month or two of this. And I would say that I thought that prices would react more aggressively, more forward-looking. So, in some ways, I always argue that crude is not, you know, crude is not being is not good at forward-looking and not good at being anticipated asset. And now I'm kind of a little upset that it's not being an anticipatory asset. Like look what's coming. It's right there. It's coming. Like the
the trend's barreling towards you. But I have to remember my cardinal rule. It's not it's not forward looking. So, we have to wait for it to kind of come back the or wait for those inventories to really show up. The other thing I think there's and I know there's two other pieces here. So, the one is that we may have avoided the absolute worst of this. So I think at the very least the signing of the ceasefire indicates that the White House is now in enough of an of a mood to deescalate that we could
avoid the very worst of what this scenario could the darkest scenario which was not just that Hormuz remains closed but that Iran perpetrated Additional kind of more durable attacks on upstream infrastructure in the region that would have pushed that recovery timeline I talked from weeks to months to months to years. And what we did see is the the counterattack against the Rosloffen Qatari LNG facility reduced Qatari LG export capacity by 17% for up to 5 years. If those types of numbers were applied to the whole 13 million barrels a day, it's the end times. Like
that's the kind of that's the kind of true crisis scenario. And if you were pricing any probability of that prior to the ceasefire and you know the day of the ceasefire we had dated Brent which is the physical pro you know the most spot visible spot reference for for Brent crude hit an all-time nominal high of more than $144 a barrel on the day the ceasefire was signed and then it rolled over and I think that tells you something about what the market was really worried about was a lot of that upside uh risk and
now we're back into the scenario where it's we've avoid the worst, but we're still in a deeply un unsustainable scenario where hormuse remains closed. I think the final point of this is what we'll call the kind of the Trump factor. I had not experienced I had not expected and we have never experienced the degree of verbal market intervention in the oil market and the broader equity markets than we have experienced thus far over the past seven weeks from the White House in the Iran war. You know, it started with what I call the Monday, which
was, I guess, the ninth day of the war. That Monday, we came out of the weekend. Everyone thought that the war was going to end that weekend. It didn't. It got worse and prices rocketed higher on on Asian Open. But then Trump came out the next day and said, "It's almost over. We're going to wrap it up. It's all fine." And at one point that day, crude oil was down intraday, $35 a barrel. That is That's unreal. That's crazy types of volatility in the world's largest most liquid commodity market. So firstly, you absolutely know people
people had b, you know, precautionary trying to get ahead of this, trying to see this wave that's coming I'm describing. They're trying to price it in and all of a sudden they probably just lost their jobs. They got blown into their positions. The people that were most aggressive were the were the worst hit. um the people with the most propensity to price upside risk in this environment, lots of them no longer are working in the industry or at least not employed with the large kind of capital they had at their disposal prior. So there's a
bit of a sorting effect that's been going on, but generally I'm not an oil trader. I am an analyst. I like to write. I like to read about this stuff. I like to model it. But I don't trade the barrels myself. What if I was a futures trader? With gold trading at new all-time highs, gold producers are printing money. And this means that for the first time in years, money is beginning to flow into expiration. This is a trend that we at Palisades Gold Corp have long anticipated, which is why we spent the last decade
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if you sat here and said like, "Okay, Rory, um, it's still going on. Brent's at 115. Do you go long here?" Well, I would say fundamentally all of the risk is to the upside, but empirically what we have seen time and time and time again over the past couple weeks is that while you have the fundamental reason to drive to grind higher, more likely what will happen is that Trump will come out with a true social post and you'll be blown out of your position 15 bucks to the downside and you'll be back, you know,
subundred bucks Brent. that's happened like a half dozen times over the past half dozen weeks. So that I think is like that has to be part of this in terms of like at the end of the day people that consume consume you know paper barrels are traders. They are people that are doing this professionally. Um and there was even a piece yesterday I felt very validated by this. the FT had a piece where they basically talked the the head uh commodity strategist at um at Citadel, you know, that little shop called Citadel. They were talking
about this. They were like the the president's interventions in the market verbally have fundamentally changed how commodity markets are pricing this crisis. And that I think is something that we still don't fully know how to wrap our heads around because there's not a lot of time series sample on a knowing exactly what this means. But yeah, so all those reasons I think that yeah, I think that the price is more sanguin, but the physical loss is still real and it gets worse every day this goes on. So when people talk about like a twoe ceasefire,
I people hear two weeks of no fighting. I I hear 182 million barrels additionally that are not going to be produced. Those numbers are very large and they add up very very quickly. And Rory, what do you think of these rumors of the US Treasury stepping into the oil market and potentially suppressing the price? Is there any credence to that? You know, I I've got this question a lot over the past couple weeks. Um, and you know, I was I was curious about I heard this rumor. You heard these rumors very early on in the
crisis and you heard them most loudly from the trading like like the desk community like people are actually trading these barrels like there was like this force pressing down on them. But one I've never seen firm evidence. I would not put it past this administration by any means, but I have not seen evidence. I have not seen evidence. Um you've also seen comments From from the Japanese that they were thinking of doing similar things that that they were also uh you know weighing the option of kind of intervening in in paper kind of future markets
for oil. The reason I think that it's probably an overdone narrative now is that even if it had happened and again it may have and again on that one Monday where we dropped 35 bucks a barrel intraday did someone help that you know uh the the the hand of God came down and you know pushed the barrel 35 bucks a barrel lower maybe. Um but again no evidence but I think at this stage we're we're like six seven weeks on from that now it feels unlikely that you would have had a concerted you know durable
selling pressure from say Treasury over that period of time that wouldn't have been more notably I think that you know at this stage I'm pretty confident that you know enough people would have been talking that you're like yeah no no that one's actually definitely Treasury selling that and I just don't think that we've seen that. And talking about the situation of petroleum reserves around the world, you of course had this chart, I believe one and a half months ago, maybe a month ago, that went around X quite fiery, of the last pre-war shipments arriving in
different distributions of the world, I believe it was 1st of April for Asia, 15th of April for the US, 10th of April for Europe. When do we really start to see oil and and LG and petroleum based products to become unobtainable for some of these areas that are dependent on Middle Eastern oil. Yeah. So the first thing I will say all credit to JP Morgan Kamari Research who actually made that map. I just saw it floating around and I thought it was awesome. So I decided to retweet it and it did go a bit viral.
Uh so hopefully they appreciated that but I appreciated the research. Um okay so where do we go from here? At the end of the day, again, the true loss is 13 million barrels a day of supply uh every day uh less whatever we're netting out for SPRs. At this stage, we've drawn down the excess oil and water that had built up uh during the prior 9 months to the war, mostly Russian and Iranian oil. Um so that's been drawn down. SPR will be in there, although the the pace of it lagging out out of uh
the caverns is pretty slow. Right now, USSPR is trading at only about, you know, just more than half a million barrels a day again versus 13 million barrels a day supply loss. The end of the day, we're going to need to see these inventories draw down. And I think back to this of the other question around like why isn't the oil market reacting more strongly? Again, you hear alarm you hear a very alarmed analyst, but you look at your your EIA data and wow, US crude inventories are not just low. They're not low. They're actually
high. uh US oil inventories are not just high and they've been building aggressively far faster than the seasonal norm over the past six weeks and I think that adds additional kind of skepticism to what we're seeing here. Now I think the way this you know makes sense is essentially most of those buildup of stocks have occurred in pad 3 which is the US Gulf Coast. This is the main export area. My view on these barrels is they're export staging. you've seen President Trump got very into a particular tanker chart uh or tanker map that he
stole from me. Um but anyways um anyways he uh he brought he kind of sees this large string uh this this caravan or convoy of tankers heading towards the US Gulf Coast. And as I noted in that tweet, you know, you're seeing like a record volume of VLCC's is the largest tankers carry each carries about 2 million barrels all heading to the US Gulf Coast because that is now the main swing source of supply on planet Earth. You no longer have the the the Persian Gulf, which is obviously the big daddy kind of supply source.
China is now kind of banned its oil exports and refined product exports. So, it's not helping. So, if you have a VLCC tanker, you're like, where can I get a cargo? G Coast. So that's where everyone's heading now. That means and when the president kind of flexed it, Trump was like, ah, you know, rah rah USA, you know, energy dominance, which is an element of this. Yes. But the only reason that you're you're go you're seeing those ships transiting to the United States is because other people around the world are willing to pay more for
those barrels than Americans are. Which means that if Americans want to hold on to their barrels, they're going to need to pay more. Which means pump price hikes, which means jet fuel hikes. It means hikes across the board right now. One of the weird things and you note this kind of map and this kind of when you physically can't get you know it's unobtainable uh these barrels and I think we're seeing a little bit of that in Asia already but I think it's deceptive and I the reason I think that is that when we talk
about that demand destruction earlier what we really need is that everyone basically has you know ready liquid access to the to bid on these barrels um and then prices will rise to the level that kind of shaves off the 10% % of demand or whatever, right? But what we're having is that we're having local shortages kind of acute stops of of ships arriving particularly in Asia that are happening well ahead of this kind of true spreading out because again you know the shock happened very quick and the tankers still you know the tankers are just
landing you know uh in US and Australia uh that left before the war. So that's how long it can take to begin to bridge or arbitrage out these kind of inongruencies between geographies. So right now you could have gang you do have gang buster kind of unsatisfied demand and willingness to pay much higher prices in Asia. But even if someone's willing to pay a higher price, it's like there's no barrel to buy. So that I think is you know if you're looking in Japan or you know Korea or Europe or North America or any of
these highincome regions of the world they are going to be willing to pay a lot more for their oil but it's going to take time to get there and they're going to Need to incentivize those cargos away from you know poorer areas of the world the global south which have a lower propensity to pay and a higher price sensitivity. So we're going to see this as debilitating price shocks in advanced economies, all the normal recessionary concerns, it's attacks, you know, erods, disposal income. But for much of the global south, you will just see no fuel.
You will see gas stations run dry. You've already seen cases, for instance, in Pakistan where they just don't have power because they can't get LG from the Gulf like they were before and they can't and they haven't been able to quickly enough source alternatives. A lot of these systems do not have a lot of buffer in them, particularly in emerging market countries where you don't have massive tank farms that you can start to draw down in the interimm. Ironically, China may actually because the one of the things that drives me nuts in this uh narrative
uh thus far is the claims that like this was all a concerted plan by Trump to squeeze China. Um oh yeah, you know, Venezuela was about getting rid of those cheap barrels for China. And now this is about getting rid of the cheap Iranian barrels for China and whatever else. First of all, all those barrels were cheap for China because of Trump's sanctions in the first place. That's the only reason that they were getting, you know, discounted access to the barrels was because no one else was willing to kind of risk US sanctions. So, first
of all, kind of solving the own problem, your own problem you kind of made. But in addition, China has built up over the past couple years, you know, prior to this, one of the major things we talked about the market was how quickly and voraciously China was building up its strategic petroleum reserves. That now Seems like a really freaking good bet because now they don't have any oil available. So they now have they're arguably the mo the single most energy secure country in Asia, a region that is dominated by historic US allies. and China is
the one that's going to get through the best out of this crisis, not the worst. And I think that's the other aspect of this that just doesn't seem to to make sense. That's actually very interesting and perhaps that's something we can talk about a bit longer, the incentives behind this war because of course keeping the straight form closed is one of the only ways Iran can really harm the superpower that is United States. the other way around like you outlined earlier. A lot of analysts are outlining that energy is normally seen as the Achilus heel
of China. You outlined they have a significant petroleum reserve. That of course at some point is is finite. So when would it become a problem for China? Eventually it would become a problem for China. And I think you and you know like China is now the world's largest importer of oil. Most of that oil comes from the Middle East. Eventually, it would definitely become a definitely it would eventually become a problem. But to your kind of core question of what's the incentive for this war, I am deeply confident that Trump never meant for this to
happen. That this was not his intention to have to be six, you know, seven going on eight weeks of a war in Iran, a mess in the Middle East, a closed straight. You know, this was a president who was like, if you didn't know anything else about Trump, like if you Just showed up on the ballot box one day after seeing like a maybe a smattering of comments, well, first of all, God bless you. But let's say that you had no idea this is happening. Um, the two things you'd know was that Trump was going
to going to fight for affordability and he was going to extract the United States from endless wars in in the Middle East. This literally goes the opposite direction on both. So I would say that this is not at all within the kind of core Trump MAGA kind of framework. This was something else. And I think what you saw what you've seen from the president's kind of preference for he's very clearly willing to use the might and the kind of kinetic strength of the United States military far more flippantly than his predecessors. Far more willingly. And
I think that has always been a one of the Trump or kind of MAGA kind of um you know general criticisms of prior kind of consensus US politicians was they were they were too they were too wary of the use of military force. Uh you know what's the use in having the world's strongest military if you never use it kind of the criticism goes. So he was always more willing to use military force, but all the moments we saw him use it, it was bing bang kind of boom, made for TV in, out very quick.
We saw that in the 12-day war last year between Israel and Iran. Basically, by the time the United States got involved, it dropped 14 bust bunker buster bombs on three Iranian nuclear sites on a Saturday, and by Monday, they had signed a ceasefire. If you look at Venezuela, they kidnap Nicholas Maduro on a Saturday and by Monday, Delia Rodriguez is acting president and is agreeing to kind of Play nice with the United States and kind of hand over control of the Venezuelan oil industry to the United States. This was the kind this was the practice.
This was how Trump conducted military policy. And and most of the reporting indicates that Trump and the White House generally firmly believed one of two things kind of going into Iran. It's easy to forget that, you know, this all started back in kind of late January, early February with the massive uh kind of demonstrations and protests in Iran. And this initially started as Trump saying that he was going to kind of go in and and defend uh the protesters. So that was the first thing. And the other thing was that, you know, a lot of
reporting has indicated that Trump believed kind of again going off the experience in Venezuela that there would be some pragmatic entity within the Iranian government who was willing to play the Iranian Deli Rodriguez, right? Someone who says, "Thank goodness the Supreme Leader is dead. I always hated that guy. Now let's make some money." And that was kind of what he thought. That's how his brain works. And I think that he there's always been a joke, right? You know, there's, you know, ah, Trump's a dictator. D. If anything, I think personalitywise, he's quite similar to kind
of like a Latin American strongman, right? Like that's kind of the way he comports himself. Um, and I think he understands the Chista government, which is a which is effective like the Chista regime. It's effectively a gang. It's a bunch of people who have side businesses trying to kind of it's a kleptocracy. Um Trump understands kleptocracy very intimately. Um but when it goes to Iran, You know, the political culture of Iran could not be more different from the kind of kleptocratic chista regime in Karacas. You know, in Iran, you have a half century of kind
of theocratic resistance built and kind of, you know, born into these individuals. Like this is the United States is the great Satan. Like this is the entire culture has been built around resistance to believe that you would as easily be able to convince kind of someone who is pre like like Rodriguez used to work with Chevron. Like these are like these are fundamentally different people. And I think that was the other mistake is that he thought someone would come across and and Iran's like absolutely not. We're going to make this painful. And that's what they've
done. And I think now now I think they're just playing into this. Trump clearly wants the war to end now. I think that much is clear and I think markets are reflecting that. But Iran is in no hurry to get a deal. Um at this stage it's very clear that Trump is desperate to get a deal. And I actually literally went up um to uh I went up and went looked up one of the the quotes on desperation from um the art of the deal uh just cuz I thought it was funny. Uh but he
basically says that the worst thing you can do in a negotiation is seem desperate. You know, your your negotiating partner will walk all over you. And he seems very desperate in these negotiations. He wants us to rap. He wants to not give up anything that, You know, Obama didn't or, you know, he had a post yesterday about how any deal he makes is going to be way better than the JCPOA. But I think at the end of the day, again, like he has to he has to give something to Iran to get them to reopen
the straight. Clearly just not bombing them isn't enough. Uh and prior to this war, Iran, like control of the room was not part of a concession that Obama made to Iran during the JCPOA. That was something that was never on the table. And now they're demanding recognition of a go forward right to kind of control traffic through the straight, which feels like a backtrack. So at the end of the day again you know the you know this ceasefire or whatever um the longer it goes on and again every day the ceasefire goes on Iran's not
being bombed and the world you know you know uh hemorrhages another 13 million barrels of of liquids from the from the market that serves Iran's interests far more than it serves the White House's interests. I think that's the challenge is that I mean Trump today in his squawkbox interview that's been like was literally just like half an hour of like the most quotable things you've ever seen in your life including I would have won Vietnam quickly and things all these other kind of quotes but he said like I'm not in a rush like well we
really want you to be in a rush and I think that again goes back to this market view Here that Trump doesn't feel rushed because oil is under 100 bucks and equities are at their all-time highs. Why would he feel rushed? The market is not saying hurry up. The market's saying we believe you're about to finish this. But by believing that and trading on that thesis, it reduces the pressure on the president to actually wrap this up. So, we're caught in this deep paradox of how because I I still fundamentally believe the way this ends
is that prices and market reaction grinds higher. Trump gets very uncomfortable in a world of like a$130 140 $150 crude or more depending on how long this goes. Um particularly going into a midterm election and I think that is essentially what will eventually force him to make a concession or two that he's currently uncomfortable making. Um and I think Iran knows this. So I think the longer this goes on, the more this plays into their hands. Although I'm sure the Iranians are also looking at their Bloomberg tickers being like, "What's going on, guys?" is like
where where's where's the love? Um or at least where's the fear? And I think that is it's it's a it's a pickle. I I honestly never I never thought I'd see the the straight of horses closed in my life. I never thought this crisis would happen. Um again, I was someone that used to like berate her bulls that you know people have been talking about the straight of was closing next week for like 10 years. Like that's that was that's how often this has been brought up and it's never happened in the history of the
oil market. So, I would say I never expected this to happen, but on the same token, I cannot believe we're seven weeks into this. And one, oil prices are below 100 bucks a barrel. And two, we are Legitimately having people argue that this quote proves we never needed this trade of Hormuz, which is just an insane thing to say given the kind of physical reality of the oil market. But again, the price is right. Right. The price is right. Yeah. Continuing to talk about the incentives for a second, like you outlined earlier, Iran's position seems
to stren strengthen the longer they wait. Of course, like you outlined earlier, if Trump truly didn't expect this to happen, he seems to be in in the weaker negotiation spot. I guess the third party we should involve in that discussion would be Israel. And for them, it almost seems like the worst time possible to end hostilities hostilities, as you know, there's another country in the region that just became more powerful than them effectively. It's interesting, right? I think like on the one hand, I think it's important to remember that like Iran, I think while it
could exit this crisis in a more geopolitically advantageous position if it continues to hold control of the strait. The country itself has been devastated by, you know, weeks and weeks, a month and a half of bombing. So, there has been considerable damage. Iran, sorry, Israel feels like it's gotten a lot out of this. And I think that if this was the cherry on the Sunday of Netanyahu's kind of past years um after October 7th um kind of going through uh all of the Iranian proxies in the Region wiping out Hamas, wiping out Hezbollah, w you
know you know crippling uh the Iranian regime. I think that this has kind of been a dream come true for them. We've known that Netanyahu's wanted to bomb Iran directly with with the implicit umbrella of the US security system um for as long as he's been around, right? This is like this is his like forever, you know, uh dream. So, he's getting that now. Now, the question is I you know, people will say like, well, Israel won't end the war with Iran uh if the United States has. I don't believe that cuz I again if
Israel was willing to go alone they would have gone they would have gone alone a long time ago. They don't have the volume of interceptors and and honestly by the end of the by the end of the fighting before the ceasefire was was signed you saw a a concerning number of Iranian missiles that were breaching through Iranian missile defenses sorry Israeli missile defenses and hitting residential areas. So, like they were having problems and if this was to go alone, yes, Israel has the most powerful military in the region, but it would take severe damage from
a direct confrontation with Iran that wasn't supported by the United States. Um, so I do think that if the US pressed them, they will stop. Now, Lebanon is a different story. Um, and I think what we have seen is that Iran has been very explicit that any ceasefire, Any deal includes Lebanon, Hezbollah, and Israel is now effectively kind of occupying southern Lebanon. Like this is like they are deep in they continue to bomb Hezbollah. Um, there is a temporaryish ceasefire. Um, but it's precarious. Um, and I think that's going to be a kind of a
continuing source of frustration for any peace deal. And if you if you remember, so back to the 12-day war, back to that Monday after when, you know, uh, prices spiked coming out of the weekend because of the Iran the US bombing of the nuclear sites and then they cratered like 10 15 bucks a barrel. They ended lower on the day um, because this ceasefire was signed. And then there was this one moment, I can't remember it was the Monday or the Tuesday. I need to go back and because this is an important reference now, but
there's this one scene where Trump is get about to get on air for get on Marine One and he's really really pissed because the Israelis had bombed something uh and kind of violated the ceasefire. And he's like they don't know what the they're doing. And this is like the alltime quote for Trump in this and I think does catalyze like you would have never seen. There are many other presidents that have been much less differential to Israel uh obviously throughout US history, but I don't think you would have ever seen any of them speak about
Israel like that publicly to media. And I think that it shows like there is a clear difference and support for Israel, but Trump is not going to kind of get he's not Trump's not going to lose because of Netanyahu, right? Trump sees himself very clearly as the alpha in that relationship. And if we get into a situation where Israel is trying to spoil uh what Trump sees as His kind of final we're finally done with this, yeah, I think he'll go really hard on them. Rory, I would love to put everything together for a second
and really talk about what your base case is for the next few months. How are you currently modeling, you know, energy markets and and oil prices going forward. I know this is an insurmountable task, but I would love to hear your thoughts. Yeah. So, I'll say I've been very alarmed and very very loudly sensationalist with some of these kind of initial fears because I do think if Hormuz remains closed, that is the terrible nightmarish world we will face. But at the end of the day, I I've always believed that Trump was going to taco. Now,
it I think I think it's hard to call it a taco after 8 plus weeks now. But I do think when I say taco, I mostly mean Trump will bend on some victory condition or make a concession he wouldn't otherwise do because explicitly of market pressure. Now, the market pressure is not here yet. So, I think that the way this has to go is I think we're going to play the ceasefire game for a while longer. I think we're going to bat back and forth. The deficits will continue to mount. um the pressure will continue
building the system. Eventually, oil markets will lose their patience with the president, with the white house, and they will start shooting higher again. I think it is at that point we will see a statement or a concession from Trump that gets the Iranians to the table and gets them to Agree to reopen the straight under their control, whatever. I so I think my base case is this ends with Iran having some kind of kind of recognized although not perfect control over the straight of Hormuz um whether or not that's tolling or whatever but they'll kind
of remain the policemen of the kind of region again can't believe we're saying this but I think that's the most likely way this goes and that basically this that maybe by miday we have the street reopened um things are flowing again that's when we can get things going but at that stage if if this does not reopen till midMay and if we do not re you know start that restart schedule for those shut in wells by midmay the number I was telling you earlier we're assuming that the start this restarted next week so if we
don't get to mid if we get to midmay we're talking 1.2 two plus billion barrels of oil that the market will have lost. And I think what will happen is the day this is announced, given the amount of speculative hot money in these in crude prices right now, we will puke, right? Like this is I think it's pretty obvious that if this thing ends, we're going to have a big kind of gap down day for crude prices. But I think that only after that will the market begin to realize recognize and price in the o
the the the supply losses that have already happened. So I kind of picture this kind of sharp down and then grind higher back from it trajectory um as it takes months for the system not just for those wells to restart but for the system to kind of rebalance itself. Tankers are in the wrong spot. Uh you know you have a bunch Of tankers in the Gulf that are sitting there. They're going to all going to try and un unload at the same time. It's going to take them, you know, a week or two to even
clear the ships out of the straight cuz you've got like a thousand plus ships back there. They're not not all of them can leave at once. So that's also going to take time. All this takes time. And again, if you remember like the crisis is one of lost time and that kind of six week delay period of kind of the ships leaving Hormuz and then the air gap hitting and everything else that also works in the other direction. It takes 6 weeks to refill that kind of pipeline and water. So even after this starts, you're
not going to see physical supply relief for another month and a half in many regions of the world. So I I think that inevitably the markets will remain tight and things will kind of uh kind of move higher from there. But I think endall be all the the at this stage the only thing I'm 100% confident in is that going into this crisis we had an overs supplied market. We had high stocks and we had downward pressure on prices for the next 18 months. Now, I think it's unlikely that we reexit this in an overs
supplied market because I think that we will have some durable supply loss. Um, still hard to know how much, but I think we'll have some. We will have lost upwards of a billion barrels of oil from inventory. So, those inventories will not be low anymore. They will be very low. Um and prices will likely grind higher or at least stay level at high levels for a prolonged period of time. Um because you just need to heal that market. So I would say that if Trump and I think all His all his words and indications indicate
this, wants low oil prices, wants low pump prices, wants better affordable affordability for consumers, particularly headed into the midterm elections this later this year. This has been a catastrophe for that goal because if you had done nothing like if if Kla Harris was president right now assuming that you didn't do crazy crazy policy or whatever like if if the president did nothing oil prices would be much much much lower today and I even wrote a piece even before the war kind of saying that Trump had already failed on this goal because most of the things
that he had done had tightened the oil market whether it was sanctions and blockade of Venezuela or sanctions against Iran and Russia or everything else. All of this was actually tightening the market. We would have had even lower prices before this war had it not been for Trump's sanctions policy. And now we have the ultimate kind of bullish inflaming factor in the market which is this war. So if Trump if Trump wants to judge his performance by the price of oil, the policy has been a failure. I guess one more thing that I would love
to talk about with you for a second is we've seen these clips go around on X of refineries and other infrastructure you know in the all over the world you know combusting flames or or be damaged. Do you know do you know what that's about? All right. So, this goes it's similar to the kind of the Treasury intervention question, which is is something funny going on? Now, there is a deep availability bias at play here given that everyone is very concerned with the oil market right now for obvious reasons as we've discussed. Um, everyone's watching
everything. Refineries blow up all the time. These are very explosive chemistry sets and particularly in emerging market areas of the world they are do not have the best safety track records always. So it is not weird to see these. It was back I remember there was that there was that train derailment in the United States um a couple years ago during COVID and it like had all those uh you know it was a big chemical fire and it was everyone got very worried about it um and then for like weeks or months after you saw
all of these train derailments like oh my god what's going on with these trail derailments and everyone's like this happens all the time like this is just normal operating procedure in industrial systems we only notice it when we're particularly alarmed and we're looking for it um so I would say that that's mostly what's happening. But I do also think that the system is weird right now. Like the all of these refineries are not running like they normally do. They could be running on different crudes. They could be running at different operational levels. Uh let's say
they've reduced run rates from 90 to 70 or whatever. Um all of these things they're not normal in the way these refiners are operating. So if we assume A base level of accidents in any scenario, I think it's normal to assume that that baseline of accidents is going to increase if things are operating differently than the people who normally operate those refineries operate. So all this together, I do think it's probably I do not think it's like a I mean people are like this is a these are like Iranian agents flying around the world sabotaging
refineries, which I'm going to say that's farfetched because I think there are much better things that Iranian agents could do to advance the war effort than like bombing a refinery in Texas or Australia or Mexico or wherever, right? Like if you're going to do that, go bomb uh the the port at Yonoo where the East West pipeline is coming out. Go bomb um you know, US export ports. You know, there are so many things that could more directly frustrate the systems efforts to recalibrate away from Iran that Iran could take aim at and they haven't.
And for me, that is kind of the the most telling piece is if this is if this was Iran, um it just seems unlikely that this is the stuff they would target. more like I mean what we have seen for instance is like we didn't really talk about Russia but like Russia has been a major beneficiary of the war both through higher prices and by an explicit removal of sanctions uh by the US Treasury on Russian oil through the basically as an emergency measure but Ukraine has seen this and is like absolutely not are you
going to kind of benefit from this so they have massively stepped up attacks Against Russian refineries and export ports in the Black Sea in the Baltic um that is what you would expect in this kind of scenario if this was kind of more purposeful kind of stateled subtrafuge. Um, so I would say that gen I've gotten this question a couple times. Um, and I generally push back against the kind of more conspiratorial interpretations of it and would say that baseline normal uh kind of accidents accidents are probably a bit higher right now because the system
is not operating as it normally does. And then finally, if it was state subrifuge, there are many many more attractive targets that make a much more sense uh than these particular refineries that have blown up. I appreciate that additional caller, Rory. I would love for you to talk about the commodity context Substack for a second. Oh, thank you. And uh and thank you for having me on the on the on the podcast. So, commodity context is where I publish all of my research. Uh it's hosted on Substack. I publish oil context weekly, every Friday at
between 4 and 5:00 p.m. Eastern after we get the last batch of data from the CFTC. Um I publish uh three monthly data decks I call them. So kind of data heavy kind of PDF reports on global oil markets, North American oil trade and kind of industry and OPEC uh policy and production and export tracking. And then I have a bunch of thematic research that I publish which over the past while has been entirely Iran and before that was Venezuela and Before that was a lot of pipeline politics in North America. So that kind of
tracks whatever I'm mostly thinking about. So that's kind of kamari context. Then I also encourage you to check out I also host a podcast called the Oil Groundup Podcast which I encourage you to check out. Just basically me geeking out with other barrel counters. Um and I encourage you to follow me on on on Twitter or on uh on Blue Sky and uh and kind of follow with the the memes while we try and kind of stay sane through this insane roller coaster of a market. Rory Johnson, thank you so much for your time and
insight today. Really appreciate it. Thanks again. This podcast is for general information purposes only and does not constitute investment advice, an offer or solicitation to buy or sell any securities. The views expressed are those of the host and guest and do not necessarily reflect the views of the company or their affiliates. Guests on the show are not compensated for their appearance. Certain discussions may include forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially. Listeners should do their own research, consult a licensed financial advisor, and not base
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