MacroVoices #400 Rory Johnston: All Things Oil

Episode Summary

Executive Summary: In Macro Voices Episode 400, host Eric Townsend interviews Rory Johnston, founder of CommodityContext.com, to discuss crude oil markets. They analyze why predicted Q3/Q4 supply shortfalls didn't materialize, examine geopolitical risks from the Israel-Gaza conflict, and explore the U.S. Strategic Petroleum Reserve. Johnston provides a balanced view, challenging Townsend's more bearish outlook on escalation risks, while covering OPEC+ dynamics, Venezuela sanctions, and refining market dislocations.

Main Topics: Supply Shortfall Discrepancy (Priority: 5/5): Analysis of why predicted 3 million bpd deficit in Q3/Q4 didn't show in data, with discussion of data anomalies including Iranian supply, Chinese demand, and EIA adjustments. Geopolitical Risk and Iran (Priority: 5/5): Debate on likelihood of Iran escalation in Israel-Gaza conflict, including Strait of Hormuz risks, proxy groups, and U.S. deterrence posture. Venezuela Sanctions and Production (Priority: 4/5): Impact of U.S. lifting oil sanctions on Venezuela, potential 200-300k bpd production increase, and political conditions tied to elections. OPEC+ Strategy and Spare Capacity (Priority: 4/5): Saudi Arabia's role in market management, spare capacity estimates (3-3.5 million bpd), and potential production increases. Refining Market Dislocation (Priority: 3/5): Divergence between gasoline and diesel crack spreads, impact of OPEC cuts on crude slate composition, and implications for energy transition. U.S. Strategic Petroleum Reserve (Priority: 3/5): Challenges in refilling SPR, limited purchasing capacity ($4 billion), and political dynamics around energy security.

Key Arguments: Predicted supply deficits are not reflected in market prices due to data issues like understated Iranian production and opaque Chinese demand. Iran is unlikely to escalate directly due to self-interest and U.S. deterrence, but proxy actions and tighter sanctions enforcement could reduce Iranian exports by 500k+ bpd. Venezuela sanctions relief is limited in scope (200-300k bpd) and politically fragile, with Maduro already backsliding on electoral commitments. Saudi Arabia controls OPEC+ and would likely increase production to stabilize markets if prices spike, but not pre-emptively. Refining markets are dislocated: diesel cracks remain high (~$40/bbl) while gasoline cracks collapsed (~$5/bbl) due to lighter crude slate from OPEC cuts. Geopolitical risk premium in oil has fully retraced, indicating market complacency about escalation risks. China's apparent demand growth may be overstated due to strategic stockpiling rather than actual consumption.

Data Points: Predicted supply shortfall: 3 million bpd - Expected in Q3/Q4 2023 by Goldman, JPMorgan, and others Iranian export increase: 500,000-700,000 bpd - Year-over-year increase due to looser sanctions enforcement Venezuela potential production increase: 200,000-300,000 bpd - Over next six months from sanctions relief Global spare capacity: 3-3.5 million bpd - Mostly in Saudi Arabia and UAE Diesel crack spread: $40/bbl - Current level, supporting refining margins Gasoline crack spread: $5/bbl - Collapsed from $40/bbl, likely negative net margin WTI crude price (Nov 1 close): $80.44 - Down 580 bps for the week SPR refill capacity: ~50 million barrels - Limited by remaining $4 billion in SPR account Cushing crude inventories: ~20 million barrels - Near operational minimums

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 disconnect between predicted supply shortfalls and actual market conditions "I think that the potential upside for Venezuelan production from these sanctions easing is quite limited. I think we're probably talking somewhere in the ballpark of 200 to 300,000 barrels a day over the next kind of call it six months." — Rory Johnston: Assessing the impact of U.S. sanctions relief on Venezuela "I think at this stage, OPEC is pretty clearly under the control of Saudi Arabia. And I think Saudi at this stage seems would seem pretty game, I think, to at least support the market so that Iran got hurt more and all else equal." — Rory Johnston: Discussing OPEC+ dynamics in a potential Iran conflict scenario

Implications: The oil market is tighter than prices suggest, with significant upside risk from geopolitical escalation. Investors should monitor Iranian exports, Chinese demand data, and OPEC+ spare capacity. Refining dislocations may persist, favoring diesel-related investments. Energy transition will create structural imbalances in product markets.