00:00Dan Struyven of Goldman Sachs raising his Brent forecast by 10 bucks.
00:03I'm writing this, risks remain significantly skewed to the upside.
00:06If Hormer's volumes remain flat for five more weeks,
00:09Brent would likely reach $100 a barrel.
00:12Dan joins us now for more.
00:13Dan, welcome to the program.
00:14Let's just start with storage capacity.
00:15How close are we to bumping up against some limits in key markets,
00:19key producers across the Middle East?
00:22Yeah, we already hit it in Iraq.
00:24And if you sort of look at the six key exporters in the Gulf region,
00:30you know, we estimate that, you know,
00:32most of them would hit storage capacity constraints over the next month
00:37if the disruptions were to be sustained,
00:39with some producers with more limited storage capacity hitting the constraints earlier.
00:43And we're talking days, weeks, not months here.
00:46Dan, what kind of workarounds do they have?
00:48We mentioned that pipeline in Saudi Arabia.
00:50Do others have a similar release valve?
00:53So the two significant pipelines are the East-West pipeline from Saudi Arabia.
00:58And then you also have the Fujairah pipeline from the UAE.
01:03You know, we estimate that if both pipelines operate at full capacity,
01:08and if the ports supporting the transportation of the barrels once they're out of the pipeline
01:13to the rest of the world, if all that infrastructure is intact,
01:16we estimate around, you know, 3.6 million barrels per day of extra pipelines per capacity
01:22beyond what you usually do.
01:25That's helpful.
01:27But that still leaves, you know, roughly 16, 17 million barrels per day of supply at risk.
01:34And at the moment, the data we're tracking suggests that the Fujairah pipeline
01:41is still not running at full capacity.
01:42And you're seeing the spillovers to supply chains.
01:45In fact, the ships that need to pick up the barrels in the Fujairah port
01:49are reportedly running out of marine fuel because the marine fuel typically comes via the straits.
01:55Other vulnerabilities are attacks on pipelines, attacks on ports.
01:59So this could be a partial offset, but it is vulnerable and fragile, you know,
02:04on its own in an environment with elevated physical risks.
02:07Given all of that, Dan, I'm surprised that you just have $100 a barrel for your target
02:10in the next five weeks should the Strait of Hormuz continue to be closed.
02:13Qatar's energy minister came out and said that he would expect it to be $150 a barrel
02:18in the next couple of weeks if the Strait of Hormuz does not open up.
02:21Why just $100?
02:24Yeah, so I think that the upside to that number is, you know, is meaningful.
02:29I think in that scenario, you know, we assumed 15% of the flows would still be coming through.
02:36At the moment, we're seeing less.
02:37That scenario also assumed full pipeline redirection.
02:41And that scenario sort of assumed that prices would require price levels to jump to demand
02:47destruction levels when you sort of hit the critically low levels of early 2022 during
02:53the Russian energy crisis.
02:55But the supply shock here is significantly bigger than during the Russian energy crisis.
03:02And so it's very plausible that markets start to price demand destruction more quickly at
03:08less low inventory levels just because the speed at which you're approaching these limits is faster.
03:14For context, you know, this supply shock, the supply at risk is around 15 times bigger
03:19than in 2022.
03:20So absolutely, I think the data that have come out in the last few days since we published
03:24that note are all consistent with significant upside risk.
03:28How much is we've been talking a lot about this note that we got from Jeff Curry of Carlisle over
03:33the weekend talking about a structural risk premium that needs to be priced into oil and
03:37other commodities.
03:38I just wonder how much you're rethinking your full year forecast as a result, not just for
03:43this disruption and however long it goes on, but also about the stockpiling that may go on,
03:48the change in people's sentiment around using the seas to get goods from one place to another.
03:54Yeah, so I think the two main mechanisms to which you could see a persistent impact of
04:02only a temporary supply disruption, one is, you know, inventory depletion, while drops in
04:08exports may be offset by an overshoot of exports down the road if you prevent production shut-ins.
04:13If you have production shut-ins, you simply start with lower inventory levels and that all
04:17things equals means higher prices.
04:18And second, the geopolitical risk premium, or sort of the security premium, as Jeff has
04:23coined it, is likely to be stickier for longer, especially in a world where, you know, Iran
04:31has some asymmetric warfare capabilities or its proxies have, you know, in other places too.
04:38To be clear, the straight-over moves is the biggest shock.
04:41We're laser-focused on it.
04:42But I think the events of the last week are a reminder that, you know, that broader risks
04:47to energy supply have to be monitored and likely priced.
04:51As we speak, Dan, getting some moves on a Bloomberg I want to share with our audience.
04:5588 on Brent, briefly through 85 on WTI for the first time since spring of 2024.
05:01Clearly, Dan, as we have this conversation, Asia is exposed to this story.
05:05Japan, India, other countries as well.
05:07But clearly, ahead of time, China stockpiled onshore and Iran actually filled tankers offshore.
05:14Now, I'm trying to understand, for Asian refineries specifically, what kind of cushions do they
05:19have at the moment?
05:20What kind of things, levers, can they pull?
05:23Yeah, I think it varies significantly across country.
05:25I think China is relatively well-positioned, despite the fact that they import about three-quarters
05:29of their consumption, because we estimate that China has stockpiled around 110 days of oil
05:36demand.
05:37Some other Asian countries have lower buffers.
05:40And we're already starting to see signs of shortages.
05:43In fact, the price of a barrel of jet fuel in Singapore at the moment is already above
05:51$200 per barrel.
05:54And I think there's a double whammy here.
05:56The Middle East exports a lot of jet fuel.
05:59And China's main refined product exports is jet.
06:02And China is cutting its refined product exports.
06:05And so ultimately, what matters for the real economy and for the impact on inflation and
06:08growth is the impact on refined products.
06:10And we're seeing the really violent price action in refined product markets as opposed to
06:15the crude market.
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