00:00Julian, I want to start with you. As we come up on Monday, can you just get us up to
00:03speed
00:03on where you think the oil markets are headed and what we should expect to see?
00:08As you alluded to earlier, I think this very much depends on, A, the narrative that comes out of
00:15the White House, which seems to be affecting oil prices, and the continued closure of the
00:21Strait of Hormuz. And I think those two things are going to weigh on oil prices. You can perhaps
00:26add to that any damage that is sustained to oil production and transportation in the Middle
00:34East, and possibly any attacks from Hufi rebels in Yemen, who seem now to have entered the conflict.
00:43And if they start attacks on ships in the Southern Red Sea again, then that could have an impact too.
00:49So it's very much going to depend on how those factors play off against each other.
00:56We've seen a lot of volatility in prices over the last three to four weeks, and I think we will
01:01continue to see that volatility as we go ahead. The one thing I think is undeniable is that the
01:09longer this goes on and the longer the Strait of Hormuz remains effectively closed to traffic,
01:15the more upward pressure there will be on oil prices and the more difficult it will be to see
01:22those coming down quickly. Julian, I want to ask you about something that I asked Juman about just a few
01:27minutes ago, and that is the amount of oil going through the Seas-West pipeline in Saudi Arabia,
01:327 million barrels a day. That was the target, the goal for that pipeline. I'm curious sort of what
01:37that does to the flow of oil in the region, having that up and running to that degree.
01:42As an aside, I'm also curious why it's been Saudi Arabia that has done the most kind of contingency
01:46planning for something like this, to have a pipeline, to have another route for its oil to go,
01:51unlike some of these other nations.
01:55To answer your first question, what this does, it provides something of a lifeline,
02:02a partial lifeline, both for Saudi Arabia and for the wider world. 7 million barrels a day. Out of that,
02:11about 2 million will be used domestically. That pipeline feeds refineries in Riyadh and along the
02:19Red Sea coast. So, about 2 million barrels a day of that will go to those. The other five will
02:26go for export.
02:27Before the war, their exports out of Yanbu were about 700,000, 800,000 barrels a day. So, you know,
02:35that gives you somewhere at around 4 and a quarter million barrels a day of Saudi exports that have
02:41been diverted from the Persian Gulf to the Red Sea. That's about 60% of what they were exporting has
02:49been diverted. That's certainly a help. The worry is, as I mentioned earlier, the potential for attacks
02:58on tankers in the Southern Red Sea. Almost all of these exports that we've seen in the last
03:05two or three weeks are going south out of Yanbu. They're going towards Saudi Arabia's Asian markets.
03:13So, they would be at risk if the Houthis do step up attacks on tankers. Why is Saudi Arabia the
03:19only
03:20country that has this big pipeline to the Red Sea? Geography. They're the only one with a Red Sea coast.
03:30The UAE has a pipeline that goes across from its Persian Gulf coast to its Arabian Sea coast,
03:39but it was already using that to more than half of its capacity. We think it's added sort of seven
03:48or
03:48800,000 barrels a day to what it's shipping through that line. Whether it can sustain that in the long
03:54term is unclear, they've not tried it before. And equally, nor have the Saudis at the level they're
04:01doing now. Kuwait has no other good way out without crossing somebody else's territory. And I think the
04:11political difficulties that have bedeviled Iraq since the toppling of Saddam Hussein have made it very
04:18difficult for them to revive exports out through Turkey, which used to be a fairly substantial export
04:26route for them.
04:27And for now, at least, as we spoke about earlier, it seems like the Houthis are holding to that truth
04:31from 2022 with Saudi and not hitting that port. But we'll have to see if that holds. Philip,
04:37I want to talk to you because on a recent episode of the Odd Lots podcast, you talked about the
04:42risk to
04:43the petrochemical supply chain, specifically the global supply of ethylene, which is known as the
04:48world's most important chemical. Why is that and how is it being impacted?
04:54Well, it's impacted on multiple fronts. So firstly, just for a little bit of understanding of what we're
05:02talking about, ethylene underpins especially the global plastics industry via what's called polyethylene.
05:08We don't need to get into too much detail, but food packaging, even for a lot of infrastructure
05:13projects, all of them require a lot of ethylene. And what we're seeing in practicality right now
05:20is a lot of impact on multiple fronts. So firstly, we have the direct exports of those polymers,
05:26not of ethylene directly, but of the chemicals that ethylene are turned into. And we're talking about
05:31roughly 12 to 13% of the global market being directly cut off from the Middle East.
05:38So for comparison, that's roughly the equivalent of what Europe in its entirety consumes.
05:44That's basically cut off entirely. So that's already one major impact. Then secondly,
05:50tied to oil, you have direct cut off from crude oil, which in Asian refineries are turned into
05:56petrochemical feedstocks called NAFTA principally. Thirdly, you have direct NAFTA exports with the
06:03Middle East being the world's largest exporter of this petrochemical feedstock, again, principally
06:08going to Asia. And to make it even more convoluted, another major chemical feedstock is called, well,
06:14liquefied petroleum gas, which is kind of an umbrella term for propane butane. Long story short,
06:20those two are also used a lot in cooking, especially in India. And that also has cut off. So that
06:27means that
06:27you have a lot of competition on this propane butane front from India, you have a direct disruption of
06:33NAFTA supplies, you have a direct disruption of significant crude oil supplies, and you have a
06:38direct disruption of polymer supplies, taking them all together. Now, there are a lot of numbers and
06:43assumptions that go into that. But if you pull it all together, you're talking about roughly one third of
06:49global ethylene and ethylene product supplies, which could be cut off. And now we're already three to
06:54four weeks into sustained supply disruption, where we're not feeling it yet, because partially a lot
07:01of ships will still arrived over the past couple of weeks, because those things take time takes 20
07:06days roughly to go from the Persian Gulf and the Middle East Gulf to South Korea or East Asia. So
07:12a
07:12lot of it still has to manifest, but we're likely going to see a very significant impact over the next
07:18couple of weeks.
07:19Phil, talk a bit more about that impact. So you've laid out very clearly here the amount of
07:23dislocation that's happening here as a result, as we look at these second and third order
07:27effects. What is that going to mean for consumers in London, where you are, for those of us here in
07:32New York? So how are companies, again, downstream from the oil producers, how are they going to be,
07:38how and when are they going to be reckoning with all of this?
07:42Yeah. So on the how, I think it's important to emphasize the regional differences.
07:48For Asia, it will most likely, and we're going to get to the when in a bit, but it will
07:52most likely
07:53turn into really a security of supply concern, especially for those chemicals that are foundational
07:59to, well, meeting the basic needs of society. And I would be particularly concerned about food
08:04packaging here. So that's probably top of mind for really Asia. For Europe and the US, it's a bit more
08:11tricky, because to me, it seems reasonable to assume they're not immediate supply concerns yet.
08:17But obviously, there will be a very strong pull from Asia, because Asia will have a very significant
08:22immediate shortage that will drive up its prices, and that will pull a lot away from the US and Europe.
08:28Now, what this means for consumers, to me, it stands to reason that you'll just see it will be a
08:34very
08:35strong upward effect on prices across the board. We'll have a very strong inflationary effect.
08:41How strong? That's a big question mark for me. As to me, it's also quite an unprecedented scenario.
08:46And we obviously still have to see how things play out further down the line.
08:49When it comes to the when, right now, the impact is still pretty muted.
08:55At least when it comes to also the price movement, a lot again has been driven by sentiment,
09:00not so much a physical shortage yet. That will probably manifest over the next weeks.
09:05And then with plastics, you also have a slight delay because you have some inventories that can
09:10be withdrawn. Now, taking all of that into account, probably the impact will really ramp up from April
09:15onward. And then, depending on how things go, it will just worsen by the month. May, June, at this
09:21point, also almost seems like a given that there will be very significant impact, first and foremost in
09:27Asia, but also further downstream in Europe and the U.S. Okay. Julian, I want to ask you, we don't
09:33have a ton of time, but the CEO of Chevron was at Sarah Week, this big oil convention in Houston,
09:39and was asked to compare this conflict with the conflict with the supply disruption when the
09:44conflict in Ukraine started. And he said there was a difference because there was still a constant
09:48supply happening there. What is your take on that? Is this worse? Is this different? Compare and contrast, please.
09:55Oh, this is this is much different and much worse. You know, as I said, there was a constant supply
10:02of oil out of Russia during the and has been throughout the Ukraine war. What we've seen
10:09there is a diversion of supply from European markets to Asian markets and a deliberate attempt
10:17by successive U.S. administrations not to impact the overall volume of flow. I mean, that's been very
10:27deliberate. What we've seen with with Hormuz is a slashing of the amount of oil that is available on
10:34the world market, regardless of where it goes.
10:36Thanks, guys.
10:37Okay.
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