00:00Yeah, so briefly it looked like we were on track for a normalization in Hormuz flows by mid-May when
00:06on that Saturday morning we did see a big pickup in flows when on Friday Iran did communicate that the
00:13strait was open.
00:15But then it turned out that very quickly flows dropped back again and over the last few days actually flows
00:20have been lower, roughly 5% of normal levels versus 10% of normal levels since the start of the
00:27war on average.
00:28You know, we've gone sometimes from day to day and headlines go back and forth and trying to make sense.
00:33And there are times markets react and there are times markets are like, we're not going to touch this one,
00:38we're just kind of waiting.
00:38How do you know, how do you have the conviction that you think this is going to be going on
00:43for much longer?
00:44Yeah, so in this environment where there's so much uncertainty about the geopolitical inputs, but then also the logistics and
00:50shipping inputs,
00:52I think the value that we provide to investors is tracking, now casting what's going on and then mapping scenarios
00:59for supply, demand and taking some geopolitical assumptions and translating that into price and trying to help investors to think
01:08about those different scenarios.
01:09Our conviction is stronger on the pricing framework than on the exact set of geopolitical assumptions.
01:14But is there an assumption that, I mean, we've seen no talks this weekend, you're assuming, like, I think the
01:22latest we were talking about that maybe Iran offered opening up the strait and putting the nuclear and, you know,
01:29the uranium kind of on the side for now.
01:31The talks about the uranium.
01:33Correct.
01:33Not like, here's uranium, we're going to put it to the side right now.
01:36I meant the talks, yeah.
01:38But I mean, how do you gauge what to kind of trust?
01:43Because I think the thinking has been, you know what, it's just, it's going to happen.
01:46And one day it's going to be like, everything's fine, back to normal.
01:49It doesn't go back to normal quickly, does it?
01:51No, especially on the production side.
01:53We actually think that even by December, the recovery in oil production in the Persian Gulf as a percent of
02:01lost supply will only be around 90%.
02:04So still 10% of the lost supply in our base case is not back by the end of the
02:08year.
02:08Which is significant, right?
02:10Absolutely.
02:10Yep.
02:11We estimate that the world will lose cumulatively about 2 billion barrels of Persian oil production by year end.
02:21To put that in perspective, you know, that is, you know, roughly 20% of global oil inventories in the
02:29whole world.
02:30Wow.
02:31Okay, so demand destruction that we're seeing or will see as a result of this.
02:38I just, I talked to a colleague last week who was set to fly to Cincinnati this summer to watch
02:44the Cincinnati Open.
02:45He loves tennis.
02:46You can get closer to the players than you can at the U.S. Open.
02:49It all sounds great until he looks at ticket prices.
02:52To get to Cincinnati, he was saying it was like $600.
02:56He's now not going.
02:57Yes.
02:58And I thought to myself, that is demand destruction as a result of higher energy costs.
03:02Absolutely.
03:03What's the price tag you're putting on that right now?
03:05Yeah.
03:05So the longer the Hormuz supply shock lasts, the more the rebalancing mechanism will shift from inventory drawdowns, which you
03:13cannot do forever, to demand destruction via higher prices.
03:17We are seeing pretty significant demand destruction exactly in the jet fuel aviation market, also in petrochemical feedstocks, especially in
03:27Asia.
03:28And, you know, we do think that if this lasts longer, that the market, you know, may have to rebalance
03:34via significantly higher product prices as opposed to crude prices.
03:38Ultimately, product prices are what consumers and businesses ultimately pay.
03:42Our brands upgrade to $90 per barrel by the fourth quarter.
03:48That's $30 higher almost than our forecast before the war.
03:51That would be even higher, around $100 per barrel, if we did not incorporate some significant demand losses.
03:58We now look for global oil demand to stagnate, even if at the start of the year, we were looking
04:03for pretty solid oil demand growth just above a million barrels per day.
04:08Okay.
04:08So let's pull out a little bit further, Don.
04:11Do you expect that there's going to be, and of course, Europe and Asia impacted differently from the United States,
04:16but eventually it all trickles down.
04:18Exactly.
04:18Um, so is a recession, a global recession, a part of this?
04:23It's not our, not our base case.
04:25Okay.
04:27But if you go to the severely adverse scenario that we, that we consider, um, where you get one month
04:33of additional delays in normalization of, of Persian Gulf export flows,
04:37and some damage to oil production capacity, um, either damage to infrastructure or the possibility that the straight never opens
04:45more than 70%.
04:46Whoa.
04:46In that scenario, we see brands at 120, uh, even by the fourth quarter, uh, product prices arguably would be
04:53significantly higher as well.
04:55And in that scenario, uh, you know, the probability of, of recession for, uh, various economies, uh, goes up.
05:01So I would say, especially, uh, in, in countries that are more vulnerable, um, you know, EM Asia, EM Africa,
05:07frontier economies, potentially some European countries as well.
05:10We'll look at Pakistan and the way that Pakistan has this vested interest, not just from a national security and
05:15economic perspective in getting this war done,
05:18but from a diplomatic perspective, uh, as well.
05:21I mean, you look at what's happening in that country, you mentioned Europe, uh, what countries in Europe do you
05:26think could be most affected?
05:28Um, so yeah, in Europe, um, with the exception of, you know, Norway and the UK, everybody's a major net
05:35importer of, uh, of oil and gas.
05:38From a natural gas perspective, Italy is the most, uh, vulnerable, whereas countries such as, for instance, Spain,
05:44have made a lot of progress in increasing, uh, the share of solar and other renewable sources in their, in
05:49their power, uh, power stack.
05:51But overall, Europe is pretty, uh, pretty vulnerable.
05:54What about here in the United States?
05:55Because we're still, even though, you know, we don't rely on oil from the, through, from that travels through the
06:02straighter from use to the same extent that other countries do.
06:06We're still seeing WTI up over $96 a barrel right now.
06:11We, anyone who's filled up their tank knows that we're not.
06:13Especially diesel.
06:14Especially diesel and the flow through on diesel to all the products that we buy, you know, produce, other cargos.
06:20Um, what, what's the effect on the U S and sort of how, how long is, how long does that
06:24go?
06:25Yeah.
06:25So initially the, the surge, uh, in refined products and crude prices was very much an east of Suez, eastern
06:32part of the world phenomenon.
06:34But when you see shortages, when you see extremely high prices, uh, in the Middle East, in Asia, markets do
06:40their work and they bring, for instance, diesel and gasoline.
06:43And crude from the U S to, to the east.
06:46And we have seen pretty sharp drawdowns in U S refined product stocks in the last couple of weeks.
06:52In fact, the U S is pretty much at full export capacity for crude and products.
06:57We're, we're starting to face some pipeline constraints, port constraints.
07:00And so the more the U S exports that provide some relief to the rest of the world, but it's,
07:04it sort of narrows, uh, this, this gap between, um, prices in the rest of the world and the U
07:09S it's a pretty global market, the oil market, different from the gas market.
07:12Yeah.
07:13I love that you went there.
07:14I am thinking about lessons on the other side of this.
07:17I'm going to, I'm going to make the assumption that at some point we do get to the other side
07:20of this.
07:20I think about COVID and what we learned about global supply chains.
07:24What do you think are the lessons that we will ultimately learn off of this?
07:28The need to invest in several energy sources to diversify, uh, supply in a world where supply concentration is high,
07:36where commodities are often used as a source of, uh, economic and geopolitical leverage.
07:41You may argue that it could accelerate the transition to, uh, commodities that you can produce at home, such as
07:47solar.
07:48Renewables, right?
07:49We've been hearing this a lot.
07:51Yeah.
07:51Uh, I also suspect that many countries, uh, will, uh, follow China's path in building very high strategic reserves.
07:58Not only of oil, but of plenty of, uh, critical commodities that you are, that you're importing from the rest
08:03of the world.
08:04But there's also a lesson for Iran here.
08:06And that is how powerful it is to close the strait and the power that it has over the rest
08:12of the world as a result of this critical waterway.
08:14Yeah.
08:15Yes.
08:16Um, it was interesting that, uh, one of the Indonesia, uh, policy officials, you know, did, did mention that, um,
08:23you know, they don't, they don't rule out starting to consider tolls, uh, for the strait.
08:28It's the strait of Malacca.
08:29So I think how this, um, you know, conflict is settled may set an important precedent, uh, for future management
08:36of, of water, waterways.
08:38Um, on that just quickly though, if you're charging to, on all the oil that comes out of the Gulf,
08:45that automatically then is going to increase the cost, right?
08:49Or no?
08:50Um, so the burden will ultimately be either on, um, the Gulf producers that produce oil at pretty low costs.
08:57So you could imagine that their margins get reduced.
08:59Okay.
09:00Uh, the other, you know, potential impact is, is higher prices for, for the rest of the world.
09:04For the rest of the world.
09:05Yeah.
09:05Hey, before you go back to sort of the beginning here and you thinking what the fourth quarter price of
09:11Brent's going to be,
09:12at what point will you say I'm comfortable lowering my price prediction there or raising it?
09:21Like at what point, you know, where it's April 27th right now.
09:25So when will you say we either have to raise or lower this thing?
09:29Yeah.
09:29I think, um, if the supply or demand fundamentals significantly surprise our, our base case, um,
09:35um, I could imagine upgrading the forecast if supply takes more time to, to normalize.
09:40Um, I could imagine lowering the forecast if supply comes back more quickly, but I think our,
09:45our base case is already, you know, close to a realistic best case possible.
09:49One scenario where you could see a downgrade is if demand losses are bigger than expected.
09:54Now that could be a mixed bag for the global economy.
09:55If that's because, you know, we work more from home, we switch to other energy sources,
10:00the damage to GDP could be limited a little bit like during COVID.
10:03We, you know, human ingenuity.
10:05Right.
10:05Limited to damage and allowed to recover quickly.
10:09The flip side could be if it's as a result of weaker GDP, especially in frontier economies,
10:13it's, it's bad news for the global economy.
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