00:00Are we now in a structurally higher oil price regime?
00:05Yes, so we do have somewhat higher oil price forecasts, even for the end of this year than before we
00:12entered the conflict.
00:13So in the absence of the Iran war, we think that a reasonable price for Brent would have been sort
00:19of in the 60s.
00:21And now we forecast Brent by year end of 80.
00:24We do think that the largest oil supply shock ever is going to lead to two structural changes.
00:31One, faster strategic stockpiling by governments as they're going to deplete SPRs this year and realize that in this uncertain
00:39supply environment, you probably want to have a higher target level for your SPRs.
00:44And second, I think the recognition of the risks associated with the high concentration of production and spare capacity is
00:50probably going to lead to the pricing in of a security premium in longer-dated prices.
00:56And so we now expect a somewhat higher oil price of Brent 80 by year end, both because of the
01:02damage from the hormone shock to global commercial oil inventories and because of those two structural factors I just discussed.
01:10At the same time, Goldman Sachs notes that perhaps the supply shock is not fully spread in the West with
01:18the US, Europe, for example.
01:21Asia, of course, is feeling it already. Does this mean that things get worse from here?
01:25Yeah, absolutely. That's one of the key reasons why you have this very large gap between extremely elevated crude prices,
01:32for instance, in the Middle East or for Dubai or Oman markers that are very relevant for Asian refineries.
01:38On the one hand. And then on the other hand, the Western crude benchmarks, including Brent in the North Sea
01:43or especially double TI in the United States, which are which are less less elevated.
01:49In the end, the oil is a physical market. And while we're seeing extremely large draws in inventories in the
01:57Middle East, in Asia, large draws in oil and water.
02:01Actually, in the US, crude oil inventories are still edging up because before the shock started, global supply on our
02:07estimates was exceeding global demand.
02:09Now, if this shock lasts longer, this extreme tightness that's now concentrated in the Middle East and Asia would spread
02:17to the rest of the world because these very big prices in Asia and the Middle East create very strong
02:25incentives to ship barrels,
02:27for instance, for instance, from the US to Asia. And that should should eventually narrow, narrow the gap.
02:34What sort of upside risks do you see to that forecast? And I guess, does the rhetoric or the jaw
02:40boning that we hear from President Trump change that assessment at all?
02:45So it's an important reminder that the risks to oil prices are two sides, especially in the short term.
02:51I think it's important to distinguish between how we forecast prices over the medium term after the shock there.
02:57It's based on fundamentals counting the barrels while in the short term.
03:02We think that a lot of the price increases we have seen reflect a risk premium as the market tries
03:07to hedge against the risk scenario,
03:09not necessarily the market space case, but against the risk scenario of a long disruption.
03:15And so today, while I think the base case for many investors did not change dramatically,
03:22I think in the minds of many investors, the probability of a very lengthy disruption or the probability of substantial
03:29persistent damage to oil production potential,
03:32that probability has come down somewhat.
03:34And if the price on the screen ultimately reflects sort of a weighted average across outcomes,
03:40I think the reduction in the probability of the right tail of very high prices helps to explain the almost
03:4612 percent sell off we saw in Brent on Monday.
03:51The gap between Brent and WTI has been such an interesting one, right?
03:55Particularly if we consider the sort of outsized role that pump prices have in the U.S. economy.
04:01When you look at it from that angle, do you expect this to motivate more U.S. shale to come
04:07online?
04:10So at the margin, we would expect somewhat stronger, short, stronger shale supply.
04:15But I think it's modest.
04:17You know, we could expect perhaps 300 or 400 kV of extra shale production over the next year as a
04:24result of the price increase we have seen.
04:26Perhaps a little bit higher because of the hedging at higher prices that some producers have logged in.
04:31Now, taking a step back, that is quite small compared to the roughly 18 million barrels per day hit to
04:37exports of oil from the Burden Gulf that we're experiencing at the moment.
04:42Even policy, while it can be quite powerful, including SPR releases, releasing sanctioned crude, even policy cannot fully offset this
04:51extremely large, large shock.
04:52So if the shock lasts, and to be clear, our base case is that flows start to recover in mid
04:57-April.
04:58But if the shock lasts longer, and that's definitely plausible, you can't absorb this very large shock with policy levers.
05:06Ultimately, you cannot draw inventories forever.
05:09And so if the shock were to last for a long time or if you were to see persistent damage
05:13to oil production potential,
05:14eventually demand destruction via higher prices would be required to help to rebalance supply.
05:21And that demand destruction, for example, being felt already in other commodities, we have seen the pullback of base metals,
05:29for example.
05:30Yes, so we're seeing pockets of evidence of demand destruction.
05:33You're seeing it, for instance, in the LNG market, where LNG deliveries in countries that tend to be somewhat more
05:40price sensitive.
05:41Pakistan, Bangladesh would be examples, have come down somewhat.
05:45In the oil market, we have seen now headlines from three airlines planning to cut their flights by about 5
05:51% of normal levels.
05:53Jet prices now exceed $200 per barrel in several Asian and European geographies.
06:01And so at these extremely high prices, since jet fuel tends to be about 30% of airlines' cost in
06:08normal times,
06:09these extremely high jet fuel prices are likely going to lead to demand destruction.
06:14Obviously, it will all depend on the duration of this disruption, which is really why we have laid out scenarios
06:20for investors to think about the effects,
06:22both in the short term and the medium term, depending on the length of the disruption
06:25and depending on whether there is persistent disruption to oil production potential.
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