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00:00Joining us now is Bloomberg Energy and commodities reporter Stephen Subczynski who joins us now
00:03from Singapore. Stephen, great to have you with us. And I want to start just by asking you how
00:07the contours of this war have changed here in recent days. The Houthis, which are of course
00:11aligned with the Iranians getting into this conflict, announcing this blockade. And maybe
00:16I could ask you first, what effect that's had so far on the oil trade and sort of what traders,
00:23what investors are thinking about the consequences of that going forward?
00:26Yeah, I think the market is still trying to digest exactly what is happening in the Red Sea and at
00:32the Bab al-Mandeb Strait, which is where the Houthis are trying to tighten control. Now, let's put this
00:37into context. Since the Strait of Hormuz closed effectively since the end of February when the
00:42U.S. and Israel began strikes on Iran, Saudi Arabia was beginning to ship more of its oil. Four million
00:49barrels per day were loaded in the Red Sea through an east-west pipeline. Normally, that oil would be
00:54flowing through Hormuz. It was shut, so they were using this workaround. The oil would then go south
00:59down through the Red Sea, through the Bab al-Mandeb Strait, and then out to customers in Asia. And what's
01:05happened is with the Houthis rebels increasing attacks targeting specifically Saudi ships, there
01:11was a fear that this key workaround was now in danger and either would really lead to delays or even
01:17a reduction in loading from Saudi ports because that would require them going through the north,
01:24through the Suez Canal, and then around the southern cape of Africa to get the customers in Asia.
01:30We did see a few ships U-turn over the last week away from the Bab al-Mandeb Strait. But
01:37in the last
01:3724 hours, we did see two China-linked super oil tankers, though carrying Saudi crude, did get through.
01:43So it's a mixed picture. There is some oil flowing through. But at the same time, there are some ships
01:50turning around. And you saw oil prices. Brent was about $100 a barrel when I was leaving the office
01:56Asia afternoon. But it closed the session U.S. afternoon around $96, $97, which indicates a bit of a fall
02:04after those Red Sea flows continued. But at the same time, you have to remember, this is Friday. You never
02:10know what Trump's
02:11going to do. It was probably a lot of people just wanting to enjoy their weekend as well and not
02:16have
02:16to worry about having a long position going in. But at the same time, the market, the way they're
02:20looking at this, it is a risk. And this is the biggest escalation of the war in the region and
02:27attacks on infrastructure and risk to oil that we've seen since March and April.
02:33I'm wondering, can you define that risk a little bit? Because I know, according to a report from CBS,
02:37at least seven major pipeline projects are under construction, trying to find alternatives to the
02:43strait. And I know the main threat right now in the Red Sea is the distribution point. But we've also
02:48got reports this morning, the Houthis have claimed to obstruct Saudi Arabia with missiles on Saturday
02:52morning. Is the concern mostly about that Red Sea distribution point? Or is the concern also that
02:57an escalation between Saudis and the Houthis could start to impact Saudi production as well?
03:02You know, I think that's a really good point. And it's both. And we'll go even a step further
03:07that any sort of flare up between Saudi Arabia and the Houthis and the Houthis attacking ships,
03:13Trump himself has said that they will then, if their ships attack by the Houthis, they will then
03:16attack Iran. And he's threatened power plants and bridges. Iran in time said that if that happens,
03:23they will attack energy infrastructure throughout the region. The biggest risk in this war since
03:28February hasn't necessarily been the closure of these straits. These waterways, sure, they can be
03:34closed, but with a good peace deal, they could open up within weeks and trade could resume to normal in
03:40months. The real fear has been if this escalates into a wider conflict within the region, if energy
03:47infrastructure, pipelines, liquefied natural gas plants, ships, if they're getting attacked, that's
03:52infrastructure that can't easily come back online if there is a peace deal. So the reason why oil
03:58was at $120 in March wasn't so much because of the Hormuz closure, it was because Iran kept
04:04attacking infrastructure across the region. We haven't gotten to that worst case scenario that
04:09we've seen three or four months back. But if it does spiral into that sort of situation, yes,
04:14certainly that is something that the market is going to be deeply worried about. And if Saudi Arabia,
04:18Kuwait, other countries, Qatar's LNG export plant, if all those facilities are either damaged more,
04:24or if they have to reduce production, then certainly we'll see another leg up in Brent and WTI oil
04:30prices.
04:31Stephen, I sat down with the Fati Birol a few weeks ago and we talked about the state of inventories
04:35around the world and countries have begun to kind of refill those reserves that they had in the lulls
04:42that we've seen. It sounds like they haven't. Can you just get us up to speed sort of on the
04:45status
04:46of reserves globally? I know there's been a lot of focus here in the U.S. where the Strategic Petroleum
04:50Reserve is the lowest it's been in a very long, long time. How much effort has there been around
04:55the world to kind of replenish those reserves that have been deployed on an emergency basis
04:59since the start of this conflict?
05:01You know, I think the better way to look at it, perhaps, is that a lot of customers in Asia
05:09of
05:09Persian Gulf oil, they're really looking at, they were looking at replacing their supply instead of
05:14replenishing. So there hasn't been a really big effort to refill inventories. As you said,
05:21the SPR in the United States, lowest level in decades, Cushing as well, a key point,
05:26it's getting low, it continues to decrease. Chinese oil inventories are something that
05:33are opaque. You're not exactly sure what's going on there, but there is an expectation that China
05:38used quite a lot of their oil inventories when their imports dropped pretty significantly in
05:44April, May, and then into June. And then Japan as well, all the other G7 nations had been using
05:51their SPR. So you're in a situation where oil inventories are low, but it's not just oils,
05:56also other fuels, diesel, gasoline, jet fuel. The amount of supply globally is at an uncomfortable
06:05level. And that's why you're seeing those product prices rise as well. And it's also not just oil
06:09products. It's also natural gas in Europe. Natural gas inventories at the lowest seasonal level
06:15in about five years. They're not on pace to hit an 80% target refill by November, which is what
06:21they
06:21want to be at when winter starts, because in winter in Europe, they use a lot of natural gas for
06:26heating.
06:28So inventories are a problem. And I think the issue is we pulled that lever in March and April to
06:34help
06:34ease some of the pain in the oil market. And because of this current situation with depleted
06:40inventories, you can't really pull that lever again if this Hormuz closure continues and if the
06:45Babel Mandib straight as well is affected. So it is a worrying part of the market.
06:52Are you starting to see that stress a little bit in the prices of oil? I mean, it seems to
06:56me as we've
06:56been covering this conflict, there's been kind of this indefatigable optimism of somewhat frustrating
07:00optimism for those of us who cover diplomacy that this is going to get resolved. But I'm wondering
07:04if that's because they did have those strategic reserves as kind of a buffer and as they'll start
07:08to deplete, do you think that optimism will start to wane as well?
07:12I think there are a few reasons why oil has, I mean, granted, we're at $100, Brent, in just a
07:19few
07:19short weeks. So I would say that we're at a pretty relatively high level. We're not at the highs of
07:25$120 that we were before, and we're certainly not near $200, which is what some analysts were warning
07:29about. Part of that is because of the workarounds, you know, the Saudi Arabia's Red Sea.
07:34The east-west pipeline they had there, ADNOC and the UAE being able to do their shuttle service
07:41to get some oil out, which is to a degree continuing, perhaps, although those ships are
07:46going dark. As well, Chinese demand has not really returned. And China is one of the big
07:51factors. They're the biggest buyer of oil globally. So as long as Chinese demand doesn't come roaring
07:58back, that does add a lot of length and it does provide some ease to the market. But I would
08:05say
08:05it is showing up in some prices. I mean, you look at the diesel run rate or basically the profits
08:11that
08:11you can make from refining crude into diesel, gasoline, and other products has jumped. There is
08:20a need for those fuels. And there is a fear that those supplies are depleting. Natural gas supply
08:26is natural gas in Europe. Those prices are at a settled basis at the highest level since 2023.
08:33LNG prices in Asia are at the highest level since March and almost the highest level since January
08:392023. So you are starting to see that some of that pain, maybe not showing up in crude itself,
08:44which is about $20 off from the highs of March. But you're seeing it in other products.
08:49Steve, before we let you go, let me ask you about another shooting war, the one taking place in
08:53Ukraine and the effect that that's had on energy prices. We've talked a lot about the crack spread
08:56in recent weeks on this show, talked about refined products. And we've seen Ukraine launching those
09:02attacks on energy facilities in Russia. And we've seen Russia reply in kind targeting energy facilities
09:07in Ukraine. What's our sense of the broader implications of that on the global energy market,
09:13the way that that's escalated? I mean, that's again, that's one more lever that the market was
09:18depending on that is now gone. So let's look at it from a crude perspective. The Black Sea is a
09:23key
09:25export area for for Kazakhstan oil. It goes to the CPC through the CPC pipeline to a Russian port. And
09:33right now, Russia, Moscow has basically said that it is unsafe for them to to be docking there. Ukraine has
09:39targeted in recent weeks, over 90 ships that that are connected with Moscow. So you're removing those
09:48Kazakhstan supplies, which I believe is about one to one point five percent of global seaborne oil
09:54supplies. It's not nothing. So again, with with Bab al-Manadam Strait, with Hormuz, that's one one
09:59amount of oil that's that's reduced. Then you look at the refining capacity in Russia, which has been
10:04greatly affected and disrupted by constant attacks by Iran on on the refineries. And Russia is a big,
10:13pretty big supplier and exporter of that fuel. And they've had to restrain and essentially stop
10:18exports of diesel. Again, that tightens the global diesel market. So you're getting the the crude hit
10:24from Kazakhstan and also the diesel hit, again, tightening things for for consumers globally.
10:29Okay, let's see.
10:29Okay.
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