00:00What happened to the post-war premium that so many people thought would stay in this price?
00:05Yeah, I think markets are increasingly challenging that premium because the sharpest oil supply shock in history
00:10has somewhat ambiguous effects.
00:13Yes, I think we're learning that supply disruption risk is higher than widely believed.
00:17On the other hand, I think we're also discovering that there's potentially more flexibility in the system
00:22on the demand side, in the Middle Eastern supply picture from a pipeline perspective.
00:27And so maybe this idea that you need a very large sticky security premium is being challenged by markets right
00:33now.
00:33So right now, do you see it continuing to rapidly decline because of the demand destruction that will stick in
00:39China,
00:39because of the increased barrels, because of the increased production from the UAE?
00:43What exactly are the factors that you see at play?
00:46Yeah, I think oil prices are coming down pretty quickly for three reasons.
00:48One, reopening is going well and quickly.
00:50We estimate that total oil exports from the Gulf are already back at 60% of pre-war levels over
00:56the last week.
00:58Second, I think markets are challenging this idea that you need a sticky, large security premium for the reasons we
01:04discussed.
01:05And third, I think markets are putting some probability on the possibility that oil demand will be structurally weaker as
01:12a result of the shock.
01:13Our base case is that 90% of the 5% global demand oil losses that we saw in the
01:20spring bounce back, as has happened in the past, in 2022, 2011.
01:25But with the rise of EVs and EV sales are surging, it's a fair question to ask, how confident can
01:30we be that most of the demand comes back?
01:32Is that China?
01:33Is that Europe?
01:33Is it also in the United States in terms of the structural demand destruction that's at play?
01:38Mostly China and then Europe.
01:40If you look at the 15 largest EV markets, 13 out of the 15 EV markets saw big increases in
01:47the share of EVs in sales since the start of the war,
01:51with a global average increase in EV sales of about 3.5 percentage points.
01:55But look at China.
01:56We had an 11 percentage points increase in the EV share of sales.
02:01It just seems that China is responding more quickly to the largest oil supply shock ever, and China crude imports
02:06remain down 40%.
02:08Our assumption is that if prices moderate, China will go back to the crude markets, start refilling inventories.
02:15But we can't be sure, and I think the market is testing that assumption.
02:19Dan, on the heels of the OFAC waiver, where is the Iranian crude going?
02:22Still China, or do you think more customers will be willing to buy?
02:25Mostly China, and I think that India is likely going to be the second most important buyer.
02:29What do you make of the president basically saying oil companies are price gouging?
02:34It was in the middle of the night.
02:34You might have missed it.
02:35But he was up, I guess, looking at oil prices and saying this is where Brent and WTI are.
02:40Why are not gasoline prices across the United States falling as quickly?
02:43Yeah, I think it has to do with the seasonality of gasoline prices, which tend to be higher in the
02:48summer.
02:49And in general, there tends to be a lag of about 10 days or so between wholesale prices on Wall
02:54Street and retail prices at the pump.
02:57And then third, structurally, we think that refined product markets are tighter than crude markets.
03:02What did the bulls get wrong in the last three months?
03:05I feel like the industry's scarred a little bit.
03:07And by industry, I mean strategists who are looking at this situation, not necessarily yourself.
03:11What did everyone get wrong?
03:12I think we as a community of analysts and I think also most investors, I mean at some point oil
03:18was at 120, have underappreciated the flexibility in the system.
03:24Whether it's China oil demand, whether it is storage facilities and pipelines allowing the Middle East to reduce production losses,
03:32or third, the strength of supply outside of the Middle East.
03:36We estimate that global oil supply as of May was up 3 million barrels per day year over year, with
03:41very strong growth in places like Brazil and the U.S.
03:43How powerful was the China pivot?
03:45How important has that been in the last three months or so?
03:48Critical.
03:49Yeah.
03:49Chinese crude imports dropped from about 10 million barrels per day to six.
03:54So that's 4 million barrels per day of less demand for crude.
03:58And you see it especially in the Middle Eastern grade prices, the so-called Dubai oil price is now in
04:06contango, meaning that you actually get a discount to buy a barrel now versus a barrel tomorrow because of the
04:11weakness in the Asian pull on Middle Eastern grades.
04:14It's kind of crazy when you think about it, and you don't have to respond to this, but from a
04:17political perspective, China actually bailed out the situation for the president.
04:22Now, I'm not saying that was their objective.
04:23I'm saying that was the outcome, the consequence of their pivot.
04:27Yeah, China helped, actually, the global consumer as well throughout all of this.
04:30A lot of things had to go right.
04:32Think about Babel Mondeb straight.
04:34The Houthis didn't get involved.
04:35The fact that we had a glut.
04:36The fact that we are seeing oil in other places.
04:38We were able to run off inventories.
04:40But then, of course, the biggest, of course, was going to be China.
04:42They really have their thumb on the scale when it comes to the oil market.
04:46It made a lot of people turn their focus away from the oil market to other critical minerals, rare earths
04:51in particular, because that is not something that can be replaced so easily.
04:54And one thing that Scott Besson, Treasury Secretary Scott Besson said last night, was in today's economy, supply chains are
05:00the domain in which that leadership is tested.
05:02And ultimately, that, to me, is the stockpiling that we're now watching, not just oil.
05:07Has the phone gone quiet?
05:08You're getting some nice rest now.
05:10Because I'm sure it was off the hook.
05:12Time to look at other commodities, finally, including rare earths, metals.
05:15I'm excited.
05:16Resources are freed up.
05:18He was bored of talking about crude as well.
05:19Well, yeah, because this is where the actual action is going to be.
05:21Okay.
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