MacroVoices #424 Rory Johnston: Crude Oil Update: Fundamentals, Geopolitical Risks, and SPR

Episode Summary

Executive Summary: Macro Voices 424 centered on Rory Johnston’s bullish-but-cautious view of crude oil: fundamentals remain tight from OPEC+ cuts and improving demand, but prices are also being amplified by speculation and geopolitical risk. Johnston argued the key question is whether demand and U.S. shale can offset OPEC discipline, while noting Iranian and Russian conflicts could tighten products and crude further. The post-game shifted to a broad risk-off market correction, firmer dollar, stronger gold, and higher yields.

Main Topics: Crude Oil Fundamentals and Price Regime (Priority: 5/5): Johnston said oil has rallied from the mid-70s to around $90 Brent due to inventory draws, better demand expectations, and OPEC+ restraint. He framed the market as fundamentally tight but also increasingly driven by speculative flows, leaving room for a near-term pullback even while the broader backdrop stays supportive. OPEC+ Cuts, Spare Capacity, and Price Defense (Priority: 5/5): The discussion emphasized that OPEC+ is withholding roughly 3-4 mb/d on a realized basis, mostly from Saudi Arabia and the UAE. Johnston argued this is the largest support since 2008 outside COVID and that OPEC appears willing to defend prices in the high 80s to 90s, possibly through June or longer. U.S. Shale and Non-OPEC Supply Growth (Priority: 4/5): Johnston argued U.S. shale is not yet tapped out, but growth is more cost-sensitive and likely slower than 2023. He also highlighted Canada, Guyana, and Brazil as important structural non-OPEC growth sources that OPEC must offset if it wants to sustain a tighter market. Geopolitical Risk: Iran and the Middle East (Priority: 4/5): He said a closure of the Strait of Hormuz is an extremely low-probability but high-impact tail risk that could send crude far above $100. The more realistic oil-market channel is through Israeli retaliation, sanctions enforcement, or disruption to Iranian exports rather than immediate broad regional shutdown. Russia-Ukraine Energy Disruptions (Priority: 4/5): Johnston described Ukraine’s intensified attacks on Russian refineries as materially tightening refined product markets and beginning to pressure crude flows. He said 13-14% of Russian refining capacity may have been affected, and Russia’s shift toward production cuts may signal real damage to its oil system. Strategic Petroleum Reserve Policy and Politics (Priority: 4/5): The interview examined SPR refill strategy, with Johnston saying refill rates are constrained more by policy, contracting strategy, and politics than pure technical limits. He criticized the administration’s communications and argued another major release is unlikely unless there is a true market emergency. Post-Game Market Correction and Cross-Asset Signals (Priority: 3/5): Patrick and Nick described an overdue S&P 500 correction, with the index below its 50-day moving average for the first time since the November breakout. They also noted a stronger dollar, elevated volatility, resilient gold, and rising Treasury yields as signs of a broader risk-off shift.

Key Arguments: Oil’s year-to-date rally is supported by real inventory draws and improved demand expectations, not just speculation, but near-term momentum may have gone too far. OPEC+ is deliberately keeping the market tight; current cuts are large enough that the group can tolerate prices in the high 80s to 90s and likely prefers at least $90 Brent. The biggest determinant for OPEC’s next move is demand growth; if 2024 demand is closer to 1.2 mb/d, cuts likely stay in place, but if it reaches 2.2 mb/d, normalization becomes more likely. Saudi Arabia still has meaningful spare capacity, so this is not the explosive scenario where OPEC has no ability to add supply; the real issue is policy willingness, not physical exhaustion. U.S. shale is still growing, but cost inflation and lower expected 2024 growth mean it is no longer an automatic shock absorber for global supply gaps. Non-U.S., non-OPEC supply growth from Canada, Guyana, and Brazil remains structurally important and relatively price-insensitive, limiting how high oil can sustainably go. Geopolitical risk matters only when it changes actual physical flows or precautionary buying; the largest tail risks remain Iran/Hormuz and broader Middle East escalation. Ukraine’s strikes on Russian refineries are meaningful because they hit both refined-product availability and Russia’s ability to move crude through an inflexible pipeline/export system. The SPR is a useful emergency buffer but should not be treated as a routine price-management tool; political messaging around it has been counterproductive. In equities, the sell-off appears more than a one-day dip: breadth and technicals suggest a real correction is underway, while the dollar breakout may reinforce risk-off dynamics.

Data Points: Brent crude price: around $90/bbl - Johnston described the market as rallying from the mid-70s toward $90 Brent during the first half of 2024. OPEC+ current cuts (headline): nearly 5-6 million barrels/day - Johnston referenced the announced level of cuts on the books, noting some are 'paper barrels.' OPEC+ current cuts (realized): 3-4 million barrels/day - Estimated actual barrels withheld from the market on a realized basis. Saudi share of cuts: about 2 million barrels/day - Johnston said roughly 2 mb/d of the cuts are Saudi Arabia’s. Saudi spare capacity: 3+ million barrels/day - Johnston estimated Saudi alone likely has more than 3 mb/d of spare capacity. OPEC demand growth assumption: 2.2 million barrels/day - Johnston cited OPEC’s 2024 demand-growth outlook. IEA demand growth assumption: 1.2 million barrels/day - Johnston contrasted this with the IEA’s lower 2024 demand estimate. Difference between OPEC and IEA demand outlooks: ~1 million barrels/day - He said the gap is effectively slack that determines whether OPEC can ease cuts. U.S. shale growth in 2023: ~1.5-1.6 million barrels/day - Johnston said U.S. shale growth last year far exceeded expectations. EIA 2024 U.S. crude growth outlook: ~300,000 barrels/day - He said current forecasts imply a sharp slowdown from 2023. Peak U.S. crude production (monthly): 13.0 million barrels/day in Nov. 2019 - Johnston cited the monthly EIA data. New U.S. crude production peak: ~13.3 million barrels/day - He said production later reached a new high in late 2023/early 2024. Average cost increase in major shale plays: $15 higher - Johnston cited Dallas Fed survey data showing higher production costs over the past three years. Canada oil growth potential: 150,000-250,000 barrels/day - Potential 2024 Canadian supply growth from wildfire base effects and TMX startup. Guyana annual growth: 150,000-200,000 barrels/day - Expected average yearly growth going forward through the end of the decade. Brazil annual growth: 200,000-300,000 barrels/day - Expected crude growth if Petrobras’ trajectory remains intact. Russian refining capacity offline: 13%-14% - Estimated share of Russian refining capacity affected by Ukrainian attacks. Russia diesel exports: ~1 million barrels/day - Johnston used this as context for how meaningful refinery outages are. Russia gasoline exports: ~100,000 barrels/day - He said Russia had exported only a small amount before banning gasoline exports. SPR refill pace: ~100,000 barrels/day - The U.S. Department of Energy’s current repurchase pace. SPR implied refill capacity: ~300,000-400,000 barrels/day - Johnston said technical capacity is likely higher than the current purchase pace. SP 500 futures: 5,062 on Apr. 17, down 422 bps week/week - Macro scoreboard opened the episode with equities weaker. U.S. dollar index: 105.94, up 61 bps - The dollar remained near year highs in the macro scoreboard and post-game analysis. WTI crude: 82.89, down 385 bps - Week-over-week move cited at the top of the show. Gold futures: 2,388, up 170 bps - Gold continued its advance despite stronger dollar conditions. U.S. 10-year Treasury yield: 4.58% - Yield rose 4 bps in the macro scoreboard and was discussed as potentially heading toward 5%. VIX: ~18 - Nick noted implied volatility had moved out of the 12-16 range into the high teens. SPX implied move into May 17 OPEX: +/- 190 points - Nick’s technical framework for the S&P 500. SPX support / resistance: 5,000 support; 5,100 resistance - Key technical levels discussed in the post-game. QQQ implied move into May 17 OPEX: +/- 20 points - Nick’s technical framework for Nasdaq-related positioning. QQQ support / resistance: 413 support; 435 resistance - Key levels discussed in the post-game. USD/JPY breakout level: 152 - Patrick identified this as a major technical breakout that could contribute to risk-off behavior.

Pivotal Quotes: "Fundamentally supported, but speculatively driven in this rally." — Rory Johnston: His core framing of the crude oil market, describing a tight fundamental backdrop amplified by momentum trading. "You need to get into the low triple digits for a decent period of time before I think OPEC would consider accelerating..." — Rory Johnston: On the price level needed to force OPEC to alter its current planned cut/off-ramp strategy. "This is an artificial tightness... a specific discretion policy choice, most notably by the Saudi government in Riyadh." — Rory Johnston: He argued the market’s tightness is being intentionally maintained by OPEC+, not solely caused by natural supply scarcity.

Implications: Oil remains structurally supported, but near-term volatility is elevated: OPEC discipline, slower U.S. shale growth, and geopolitical shocks can keep prices firm. For broader markets, the dollar breakout and equity correction suggest a more cautious risk backdrop.