00:00Dan Struyven of Goldman Sachs writing the following. We see significant upside price risk from potentially more persistent Middle East
00:06supply losses, but also meaningful price downside from weaker demand. Dan joins us now for more. Dan, good morning. We'll
00:14get into the sequencing in a moment. I just want to start with the risk of this inventory story running
00:19out of oxygen. How close are we to that becoming a problem?
00:22Yes. So we are the most focused on tightness in the product markets rather than the crude market, in particular
00:28the diesel markets. And if we were to continue to draw at the recent pace in terms of OECD commercial
00:34diesel stocks, we would hit an estimated critical inventory threshold of 20 days of demand covered by August. By August.
00:42In practice, I suspect we're not going to hit it because higher prices would reduce demand. But you say August
00:48and I'm thinking, OK, then could this go on for a bit longer?
00:51This back and forth. Can we get through another month of this, these negotiations that go nowhere?
00:57The lower entries go, the higher the fair value of oil prices should be. But the honest answer is we
01:03don't really have good historical evidence of what it means to go to tank bottom.
01:07So it's an empirical discovery process that the economy and markets may have to go through if the straight were
01:12to remain closed.
01:13Where is the demand destruction going to come from? Because it hasn't come from the developed economies in any way.
01:18And frankly, politicians have been incentivizing people to continue with their habits.
01:23Yeah. So three areas of surprising and large demand weakness.
01:27One, petrochemical feedstocks. Two, global jet fuel demands.
01:31And three, gasoline demands, especially in China, but also in several Western European countries.
01:36In China, we estimate that as of April, gasoline volume sales were down just over 20 percent year over year.
01:44China has reduced its imports of crude by 40 percent year over year.
01:48That's really, I think, a key reason why crude prices are not higher.
01:52So do you think that people are overstating the potential for a supply shock in the next couple of weeks
01:57even, should the straight of Hormuz continue to be closed?
02:02I think the longer the straight remains closed, the more entries are rolled around, the higher oil prices should go.
02:07The exact sort of tipping point is uncertain.
02:10We are the most focused on the diesel market, where our models point to August as a potential inflection point.
02:16Even in the United States, it's August for diesel?
02:19Yes. So if you look at U.S. weekly petroleum statistics, and the beauty about the U.S. data is
02:24we can track everything weekly in real time.
02:26If you look at the last eight weeks, it's the largest draws in U.S. oil stocks in history.
02:32Diesel stocks in the U.S. are at the lowest level since 2003.
02:36I think U.S. refiners have helped to fill in the shortfall of refined products in the East and in
02:42Europe.
02:43And as long as trade is free, the tightness will be felt very much in the U.S. too.
02:48How much do you see actually getting to the straight of Hormuz right now?
02:50We've had reporting that Adnok is getting product out.
02:52The Japanese prime minister had a call yesterday with the Iranians.
02:56They got 15 ships out.
02:58Are you seeing more get through because individual nations are striking their own deals with the regime?
03:03So we think that about 10 to 15 percent of normal oil volumes are coming through, 2 to 3 million
03:09barrels per day.
03:11But it's a challenging data problem as ships turn their satellites' data off.
03:17So we are also tracking arrivals of oil.
03:20We are tracking inventories data, 10 to 15 percent of normal.
03:24But it's a challenging data, data measurement issue.
03:27If the straight of Hormuz were to open today, how much would oil prices go down because of the demand
03:33destruction that we already see in certain places?
03:35I think the risk premium at this point has come off quite a bit along with positioning.
03:40I would expect that if the straight reopens fully and on a sustained basis that the risk premium comes down
03:45somewhat further.
03:46But I think oil prices will stay high.
03:48We have Brent at 90 in the fourth quarter just because inventory levels are very, very low.
03:52Most of the risk premium at this point has come off.
03:55So wouldn't you say that the upside risk is substantially greater than any kind of downside risk going forward?
04:00And that ultimately people are still on the low end of the pricing curve both now as well as in
04:06December?
04:06Yeah, we see the risk as two-sided but skewed to the upside on net.
04:10If the demand weakness we're seeing in gasoline markets in China and Western Europe were sustained, we would predict Brent
04:17at 80 by year end.
04:19But in practice, I expect that demand weakness should unwind once conditions normalize.
04:26On net, still upside from a more persistent Hormuz supply chain.
04:29Our experience with this story of the last three months, terrific engagement in the first month.
04:35The second month, things started to fade.
04:37And the third month, no one even wants to talk about it.
04:40Can you describe the arc of your conversations with clients?
04:43How engaged are they still with what is taking place in the Middle East?
04:46Clients are tired.
04:47It's a challenging trading environment with headlines moving prices up and down.
04:54So, yeah, I think positioning in oil markets is significantly more limited than at the start of the company.
05:01Have they stopped engaging in the market because of that?
05:03Have you seen certain pockets of this market in commodities where liquidity started to dry up because people aren't engaging
05:09in the way they were before?
05:10Traders are telling me that liquidity, especially in the refined product markets, is pretty poor at the moment.
05:15And I think many corporate clients, investor clients, have already set up the hedges they wanted to implement.
05:22And many of them are in a wait-and-see game.
05:24So, when you see liquidity dry up, how much signal can I take from the paper market from futures right
05:29now?
05:31Yeah, somewhat less than in normal times where liquidity is higher, for sure.
05:35So, that's why you need to complement the price information with looking at stocks, imports, exports, anecdotes from clients on
05:42the ground.
05:43All of these are necessary to get a sense of what's going on.
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