MacroVoices #400 Rory Johnston: All Things Oil

Episode Summary

Executive Summary: Commodity analyst Rory Johnston argues that oil balances still suggest a tight market, but data gaps—especially opaque Chinese demand and EIA adjustments—help explain why the predicted 3-million-barrel-a-day deficit has not translated into an obvious shortage. He sees Iranian supply losses as possible but a Hormuz blockade as a tail risk, while discussing Venezuela, OPEC+ spare capacity, refining imbalances, and SPR refills. Host Eric Townsend remains more concerned about geopolitical escalation; the market commentary also reviews oil, equities, bonds, gold, and currencies.

Main Topics: Oil balances, data quality, and China: Johnston says his balances show deficits since May–June, but not a visible 3-million-barrel-a-day shortage. Possible explanations include underestimated Iranian supply, exceptionally strong or partly stock-building Chinese demand, and EIA adjustments that correct overstated demand or understated supply. Middle East escalation and oil-supply risk: Johnston considers a Hormuz closure unlikely but sees a potential reduction of roughly 500,000 barrels per day or more in Iranian exports if sanctions enforcement tightens. Townsend views escalation as a substantially greater risk than the market appears to price; Johnston stresses uncertainty and Iran’s use of proxy forces. OPEC+, Saudi Arabia, and spare capacity: Johnston estimates global spare capacity at about 3–3.5 million barrels per day, concentrated in Saudi Arabia and the UAE. Saudi policy and potential production increases matter greatly; under a major Iranian supply loss, available spare capacity could be consumed. Venezuela sanctions and crude supply: A six-month U.S. sanctions easing is linked to promised electoral steps by the Maduro government. Johnston estimates a limited potential production increase of 200,000–300,000 barrels per day, while noting heavier Venezuelan crude could help supply constrained refinery feedstock. Refining margins and gasoline–diesel imbalance: Heavy, sour crude cuts have constrained feedstocks that tend to support diesel yields. Diesel cracks remain strong while gasoline margins have collapsed, partly because refiners must produce a mix of products. Johnston notes that falling gasoline demand during the energy transition could create a longer-term refining challenge. SPR, market charts, and near-term positioning: The hosts discuss the limited pace and funding of U.S. Strategic Petroleum Reserve refills, weekly EIA inventories, and technical levels across oil, equities, gold, bonds, the dollar, and yen. Townsend emphasizes geopolitical upside risks; the other hosts describe a more conditional, technically driven outlook.

Key Arguments: Johnston argues that balance models are useful but imperfect: the EIA’s crude supply adjustment is bearish in interpretation because it implies reported supply is too low, demand too high, or both. EIA revisions and possible unreported flows help reconcile model deficits with less dramatic market outcomes. Chinese oil demand data are especially opaque: China reports production and trade rather than directly comparable monthly demand figures. Apparent demand growth could reflect genuine consumption, strategic stockbuilding, or both; Johnston says the data do not rule out unusually large product stock accumulation. Iranian exports could fall if Washington tightens sanctions enforcement, but Johnston views a direct Iranian move to close the Strait of Hormuz as a tail risk because it would invite retaliation and damage Iran’s own oil relationship with China. Townsend contends that geopolitical risks are underpriced and that a major loss of Iranian production could exhaust global spare capacity. Johnston agrees that eliminating a major producer would be sharply bullish for oil, while stressing that such an outcome is not his base case. Saudi Arabia has the central role in spare-capacity management. Johnston expects it could add supply if prices surged substantially, but its timing and willingness to ease voluntary cuts depend on its interests and market conditions. Refineries cannot freely choose to produce only diesel or gasoline. When they run to capture strong diesel margins, they also produce gasoline, which can become a low-value or even negative-margin byproduct when gasoline supply outstrips demand. Townsend argues that Saudi production restraint helps rebuild global spare capacity and therefore improves resilience to future disruptions; he contrasts this with the U.S. SPR drawdown, which he considers a reduction in the system’s buffer.

Data Points: Predicted global oil supply deficit: About 3 million barrels per day in Q3 and Q4 - Prior forecasts discussed by Townsend; Johnston says the market does not appear this tight despite modelled deficits. EIA crude supply adjustment-related demand revision: About 600,000–700,000 barrels per day - Johnston says EIA changes reduced reported demand to address blending and accounting issues. Potential understated supply / production revision: About 300,000 barrels per day - Johnston describes a further possible production-data adjustment, expected to be incorporated later. Brent prompt-versus-second-month spread: About $1.25 per barrel - Johnston cites backwardation as evidence that crude remains reasonably tight. Implied Chinese oil-demand growth: About 2 million barrels per day year to date - Johnston says this would represent roughly two-thirds of global demand growth and may include stockbuilding. Possible Chinese refined-product stockbuilding: About 500,000 to 1 million barrels per day in some months - Johnston’s speculative estimate of surplus apparent demand potentially flowing into strategic stocks. Possible Iranian export reduction: About 500,000 barrels per day or more - Johnston says tighter sanctions enforcement could put this volume at risk; he contrasts it with a much less likely Hormuz closure. Potential Venezuela production increase: About 200,000–300,000 barrels per day over roughly six months - Johnston’s estimate following the temporary U.S. sanctions easing. OPEC+ supply withheld: More than 4 million barrels per day on paper; closer to 3 million in realized cuts - Johnston distinguishes announced reductions from actual barrels withheld, including chronic underproduction. Global spare oil capacity: About 3–3.5 million barrels per day - Johnston’s estimate, concentrated mainly in Saudi Arabia and the United Arab Emirates. U.S. crude inventory change: Build of 774,000 barrels - EIA weekly data reported in the post-game segment. Cushing crude inventory change: Build of 272,000 barrels - EIA weekly data reported in the post-game segment. U.S. gasoline and distillate inventory changes: Gasoline build of 65,000 barrels; distillate draw of 792,000 barrels - EIA weekly data; distillates were the only listed category with a draw. U.S. crude production: 13.2 million barrels per day - Reported unchanged in the weekly EIA data. SPR monthly purchase proposal and remaining funds: About 3 million barrels per month below $79 WTI; approximately $4 billion available, potentially enough for about 50 million barrels - Johnston describes the revised rolling refill approach and its funding constraint. Oil and market scoreboard, week ending November 1, 2023: December WTI $80.44, down 5.80%; S&P 500 December futures 4,256, up 1.12%; 10-year Treasury yield 4.73%, down 23 basis points - Weekly market figures presented in the episode introduction.

Pivotal Quotes: "The balances, like the deficits, are there in the data, but I think it's pretty reasonable to say that no one looks at the market right now and it's a market that looks like it's 3 million barrels a day in deficit." — Rory Johnston: Explaining the gap between modelled supply-demand balances and observable market conditions. "I think that any outcome that involves the zeroing out of a major oil producer is going to be, you know, blazingly bullish." — Rory Johnston: Responding to the hypothetical destruction of Iran’s oil-producing capacity and its effect on spare capacity. "The part of his response that caught me off guard and really made me think was when he said that he agreed with me that China-Taiwan is a very serious risk. But then he went on to explain why he saw that as potentially being massively bearish, not bullish, oil prices." — Eric Townsend: Reflecting on the possibility that a conflict could disrupt trade and weaken global demand rather than simply lift oil prices.

Implications: Oil investors face a market with conflicting signals: backwardation and tight inventories suggest firmness, while data uncertainty and weak product segments complicate the balance. Geopolitical shocks could overwhelm estimated spare capacity, but disruption may also depress demand. Watch sanctions, Saudi output, Chinese stocks, refinery margins, and SPR funding.