Transcription
What would be your prediction given the peace talks falling through or not succeeding to end the conflict of where oil opens tonight?
I think oil's gonna open quite sharply higher, you know, in IG trading. If that's any guide over the weekend, it's already up 6%. You know, what surprised me in this market is this consistent belief. I would say a lot of the macro traders have that somehow there will be a resolution because the alternative is just too difficult to fathom, too difficult to kind of really think through and say, okay. What does this do to the global economy?
I don't disagree with that except that that's not the reason why the, straighter shot to begin with. So we're in denial, essentially, about the ramifications of this? Absolutely. And I I I think Christina said that, you know, if this is a real supply disruption, it has been a real supply disruption pretty much since, the February. Across March, 10,000,000 barrels per day of upstream production was shut in. That's rising to thirteen one three this month. The damage has been done already. We've drawn down all the oil on water that was floating from Russia, somewhat Iran as well. All the buffer that, you know, people have been talking about, the oversupplied oil market, that has gone.
Attacks on Saudi Arabia, the kingdom came out and also highlighted. Yes. They fixed a lot of those attacks already. That just goes to show how strong Aramco is and and and the amount of buffers they build up. But the fact that there have been attacks reduces the volume of spare capacity available to the market going forward as well. So this is the biggest energy shortfall in history. And the fact that, you know, we're still talking about whether this is real or not, I think that's almost the problem we have, the discrepancy we are seeing in the futures market, like, you know, what you and I see on the screen versus the physical price of crude oil. It's anywhere between 30 to $40 higher, and that's never happened before.
My other question is, this is not like even if they'd come up with a deal in Islamabad overnight, it's not like this is a switch they can just turn back on. Right? You've gotta get those ships that are still 20,000 sailors and mariners stuck in The Gulf. You gotta get them out. And then you have to be brave enough to get suppliers who are willing to go back in when a deal could potentially fall apart again. So I'm I'm wondering what the difference is between the straight being, we said this over and over again, nominally open and function functionally open. And if that's gonna impact price, if insurance rates, if what you have to pay people to be willing to crew these ships goes up even if the Street returns to a faster tempo, is that gonna reflect in in oil prices and futures as well?
I think you've literally hit the nail on the head, and that's why I I that's why I said at the start, right, I find it fascinating so many people are considering this to be binary. It's open or shut, but it's not. It's anything but binary. Right? Like, first and foremost, like you said, the cost, right, the cost of getting a ship in. When the ceasefire first happened, we found out from certain sources that the quote that the ship owner was giving them for a ship to go in was $40 per barrel compared to $6 per barrel outside of the strait. Right? $40 per barrel, that's even before insurance. And imagine the cost of doing that. Basically, everything then just gets more expensive. And nobody wants to be the first one to get their vessels in. The vessels out, you could argue, slowly, but surely they will get out if, you know, whenever that is, we get some form of a ceasefire that is that holds, not the one that's right now where Iran clearly has complete leverage over this rate right now. Right? So it is going to be a very gradual process. There's the rumors about mines, I think that's gonna make commercial shippers extremely, anxious as well because you don't want to necessarily take the risk. So I think there's a whole host of factors that we need to consider.
Also, production takes time to bring back up. It could be months for certain countries like Iraq, certain fields in Kuwait. We've got satellite data, and we're very privileged to have that through Keros, and we can see that actually tanks across the countries are not full. At best, you have five to six days of inventory cover. So let's say, best case scenario, you get six days worth of, quote, unquote, flows, then what happens? It'll still take weeks and months for production to come back, so then there'll again be a gap. Right? So this whole normalization, even in the best case scenario, is months away.
And, Rita, we're gonna be speaking with, former national security adviser under president Trump, former US ambassador to you and John Bolton a little later in our program. And and he said that The US should blockade the strait, allow no Iranian oil out at all until Gulf oil can transit safely as well. He also talks about military force being used to open the strait. You're nodding. Is that is that where this goes? Is that ultimately what happens?
No. I'm nodding because I've suffered what he said. Look. I mean, this is the most complicated picture right now. Right? The fact that the strait wasn't secured is what has given Iran the biggest leverage it's had over forty years. And our view going into the weekend, a, was the fact that, you know, deal or not in the sense that this is not gonna get resolved in two weeks' It's gonna take a lot longer. And we were often we still are of the view that Iran is more likely to give in on some of their nuclear, issues given, you know, their their nuclear capabilities have been heavily depleted versus the strait. The strait is their leverage. So, yes, look. I think there's been a lot of chatter in the market about how The US has allowed Iranian oil to flow. But I'd also say the the the this has gone further because The US has also given waivers to allow Iranian oil that's floating to be bought by buyers. So and that is money that's going back to the Iranians. I think this is fundamentally the issue. Right? Yes. The US is the biggest producer in the world, and we are not expecting shortages outside of maybe the West Coast. But US policymakers have to appreciate this is a global market, and this kind of a blockade does mean high domestic prices. I think that's where the conflict is, so as to speak, within The US. Right? If you don't want to allow oil prices to go up, that's why, you know, things like Russian oil and water is being allowed, Iranian oil and water has been allowed, even Iranian ships are being allowed. Because whatever you can flow to get, quote, unquote, oil prices down is being ok'd right now, and that's why we have this discrepancy.
I also wanna ask about the possibility of a toll. The big fear from a lot of EU and global allies, and we're just talking with, our white our White House correspondent, Mason, about this, is that the president who keeps saying over and over again The US doesn't need the straight, which I think you can debate, will pull out of this conflict, which some sort of nominal deal, something that lets him save face, claim victory, and leave the street in a worse straight, pardon the phrasing, than it was before, and Iranians could functionally enact a toll. What would that do for oil prices globally, and is that something people in the industry are factoring in?
That is genuinely one of the worst case scenarios in terms of, what could come out of this situation. There is no way we see the GCC agreeing to this. Look. Ultimately, over the next few years, we will have alternative routes. Right? New pipelines will get built, But these things take time. It's a huge region. It's gonna take five, maybe ten years to normalize that. But the right here right now for the next three to five years will then just mean much higher oil prices as a steady state. Right? Sure. And oil should be even higher today. Like I said, the physical price is at $150, and futures prices are about 100. So even if the futures prices catch up, what I'm talking about is, say, months from now, if that becomes the new reality, which, again, I'm struggling with given the GCC is not going to agree to it. Yeah. You just have to have a floor of maybe 80 to 90, even 90 to $100 because now you need to start taking those things into account as just the cost of doing business. And that may not be a fight Iran really wants to pick. Right? That's leverage that they're using, but do they really wanna go up against Saudi, UAE, Qatar, Oman, all these exporting countries that would not be able to tolerate this?
Yeah. I mean, to your point, we had Eddie Fishman, the author of choke points on last week, and he he threw out a number that was pretty mind boggling, a $100,000,000,000 in revenue per year if they charge $2,000,000 per ship. Wow. That seems that's serious, serious money. Listen. Speaking of money, if we look at the the the the futures curve for oil right now going to December, $82 a barrel. In your view, does that accurately reflect what you think prices will be?
No. But, you know, this has been such an interesting and yet challenging market, including for traders, right, to trade this and for any policymaker or decision maker, CEO, and and otherwise. For the simple reason that the way futures works, right, we tend to trade a month and a half or two months further out. Right? For Brent, we are now trading June, but we are in April. For WTI, we're trading May, but soon to be trading June. The problem we have is everybody is reflecting what is going on right now at the very prompt. That's why physical crude is trading at those crazy premiums. Further out, nobody knows exactly what this trade's gonna look like, but people are not willing to deploy risk either to bid that up because the general narrative still is The US doesn't want or will not allow high oil prices ahead of the midterm. The realities are very different, what we continue to see is as those contracts become prompt, it just keeps rolling up. Right? That's effectively been the trade. It's a roll up trade as we would call it. I don't think $82 further out. Sure. Look. If we get a massive recession to balance this, that's a different situation, and I do think the risk of that is rising every single day. But in general, prices just need to be higher than that $82 going forward.