Oil Prices Could Crash — Diesel Might Not with Rory Johnston and Mikkel Rosenvold

[0:07] Hello all there. Welcome to Real Vision. Welcome to another show on oil, war, geopolitics, and everything in between. My name is Miguel Wema. I'm joined today by oil market researcher and founder of commoditycontext.com, Rory Johnston. Welcome to the show, Rory. >> Thanks for having me back. >> I want to put you on the spot right away here. The number everyone wants to hear. Where does Brent close out the year, Rory? >> Close out the year? I mean, at this stage we're we're we're getting really close. I think my initial bias would
[0:39] have been that we would have ended the year lower given that we are seeing more flow to Hormuz and everything else. But, I think at this stage, given the chaos in the Middle East, given the mounting kind of strikes, and I think given China's seemingly resurgent import appetite, I think I think we're probably going to end the year above $100 a barrel on Brent at least. >> Very interesting. We'll dive much more into that, both the situation in Ukraine, the Middle East, Hormuz, everything in this show. We are taking questions live on realvision.com. We are posting this to
[1:10] our audience there first, and then subsequently on on YouTube. So, if you're on realvision.com, please post your questions for for me or Rory, and we will get around to as many of them as possible. Before we dive more into it, I just wanted to remind people that we are running a great campaign at Real Vision right at the moment. We have opened the Real Vision Trading League, which has come off to a great start. You can pick three trades. You can win up to 80 80K in cash prizes. So, head on over to realvision.com to check that out. It's free access to all our content for a period, and then you can join the
[1:40] trading league. Some very very interesting trades happening in there right now, and you can still get in on the ground floor for that. So, Rory, great to have you on today. We We had you on the on the show back in March with the start of the US Iran war. Plenty of water under the bridge since then. How's this been year How's How's this year been for you overall? >> It's been crazy. Definitely the busiest year of my life. It's been great for business, bad for sleep.
[2:10] And but I would generally say again, I think you know, we've learned so much about a kind of our core assumptions about the oil market, these theories that have really never been tested until now. And for instance, you know, when we first spoke in March, I was quite sure that oil was headed to $200 a barrel for for a barrel of Brent. And we barely broke above kind of 120 briefly on dated Brent we got to you know, 144 physical even higher than that. But in
[2:40] terms of the actual kind of prompt futures benchmark that everyone watches, that capped out well below $200 a barrel. The thing I will say is that the reason I initially expected crude oil to rise to $200 a barrel was because that was at that stage where we expected we would need to generate the the degree of demand destruction that we would need to balance that market. You know, if people like, oh, did you not expect the reroutes or the SPRs? No, no, all that stuff was expected. That 20 million barrels we lost out of Hormuz, we
[3:11] expected reroutes out of East West and and through the Adcup pipeline to the Gulf of Oman. We expected the world's you know, history's largest SPR release. This was the big show. This was the point that we had built them all up for in the first place. What I didn't expect and what ended up proving to be by far the largest swing imbalances that loosened that market was what I'm calling the Beijing swing, which was China's collapse of about 5 and 1/2 million barrels a day, roughly 45% of their pre-war crude imports just dropped
[3:42] out of the market entirely and let the rest of the world, particularly the rest of Asia, recuperate to pre-war level imports far quicker and at far lower prices than I would have expected. So, we're going to talk a lot about trying all of this, but that is why I I you know I I want to be clear that I still do think that presented with pretty well the exact same conditions, I would still have the same call in hindsight because we still don't fully understand the rationale of why China's done what it's done. And happy to talk about all of that in the meantime. >> No, and it has great implications for
[4:12] geopolitics as well. We get back into that and how Trump acts in various arenas. So, we'll we'll we'll dive much more into that. Let's just get the current picture straight because uh Onyx, you're one of my favorite follows on X especially on this topic, but you get so much noise in there. So many reports about this and this amount of ships. Uh Iran is shooting at ships. Does that mean a lot of ships are going through when they're shooting at them? Well, well, and um you have a lot of reports that we're back to pre-war levels almost through the whole Strait of Hormuz. Then you have a lot of diverging reports on the
[4:42] East-West pipeline through Saudi. So, so maybe where could you just give us a a breakdown of where are we right now? How close are we to uh usual levels of of um maybe just focused on oil through through through the Strait of Hormuz and how bad is the situation right now? >> Yeah, so through First thing I will say, we have seen a remarkable improvement in the flow of patrolling and through the Strait of Hormuz over the past 2 months. I think at this stage that is undeniable. There have been lots of people that will accuse me or these numbers as being some kind of government
[5:12] plant. Believe me when I say that the White House is not a big fan of me. So, I want to be very very clear about where kind of where my allies are in this. Um but to be clear, what we've seen is right roughly through the second last week of September, we saw oil flow through the Strait of Hormuz specifically. And this is on a 7-day rolling average basis because this stuff is pretty volatile and you definitely need to smooth it to get a clear picture of what we're talking about. But overall, that flow relative to the pre-war norm of say you know nine you know, sorry uh 20 or 21 million barrels
[5:43] a day, we got back up to roughly my high water mark is around 17 million barrels. That's really, really high. And excluding Iran, I think for all intents and purposes, that is fair to say that at that moment we re-reached pre-war Hormuz levels. But they were fleeting. And I think this is the important thing is that we got to those levels. We are still high, but we are nowhere near as high as that. That was right around the time of the UN General Assembly, and we'll talk you know, more about exactly why we think Iran was letting that many ships go go through. But right after you
[6:14] hit those really, really high levels in the end of September, you saw Iran launch what has become the largest series of attacks, bombardments against shipping through the Strait of Hormuz, since before the beginning of the war. This is This is actually the biggest stretch of attacks thus far. At various points through the beginning of October, we were seeing an average of two confirmed ship strikes a day. And I think at this stage we all assume that the actual actual number of ship strikes is higher than that which is confirmed by UKMTO or the IMO.
[6:44] Um, but we saw that, and basically, predictably, you saw both prices begin to firm again, you know, factoring for that risk, and the flow through Hormuz dropped from that kind of 17 million barrel-a-day level. Again, we're still early days, it takes time to identify lag transit and everything else, so these numbers are tentative, but probably in the ballpark now of 12 to 14. Still ex- you know, excluding that high-water mark in September, basically the long the the highest sustained pace of transit
[7:14] through Hormuz thus far. Now, the bullish interpretation of this news is Iran has taken control back of the Strait, you know, there's you know, oil is going to get crushed again through the Strait, and we're going to the moon. The bearish interpretation is that we have the highest, most sustained pace of attacks in Hormuz of the war, and yet we still have 12 to 14 million barrels a day of oil going through Hormuz, much, much larger than the virtual zero number of barrels that we're getting out in
[7:44] March and April. So, two ways of looking at the same thing and I think there's truth in both of them. >> And the big problem is Rory for macro guys like us at Real Vision, uh even though you've had 2 months of more or less relief uh in oil flows out of the Hormuz. Um um energy inflation is still through the roof. Um mainly because of lack of refineries to diesel. How do you see that entire diesel supply crisis? What are the outlooks for that from from from where you're sitting? >> Yeah, and I just before going to that I I should also mention that we we have
[8:14] also seen you mentioned East-West pipeline and everything else. So, all of the reroutes are also pumping. Uh East-West pipeline has not been able to regain its full 7 million barrel a day capacity after these attacks, but it's been doing a good showing. Probably between 5 and 6 million barrels a day flowing on the line. Same with what's going through with the the Emirati side at the Gulf of Oman. So, all in all, we do have a decent amount of oil coming back into the system, but as you noted, our big challenge now is not necessarily crude oil, although looking at my screen, crude oil looks pretty freaking
[8:45] tight as well right now. Um but on top of that, we have this generational refining capacity crisis that as you noted for macro people looking at inflation, consumers and and even businesses don't typically consume crude oil, they consume refined products. So, depending on which one you're looking at, if you're looking at household, typically gasoline. Gasoline was pretty elevated, it started coming back to normal levels, but diesel. Diesel is that kind of epicenter of this crisis. And normally, you know, at the end of
[9:15] September, we hit New York Harbor all-time high diesel prices of just shy of $230 a barrel equivalent. It's it's quoted in in gallons, but I think and I think in barrels, so everything's a conversion. Um and in terms of how we typically measure these markets, we don't typically talk about the flat price or the kind of nominal price of diesel, we talk about the crack spread. And And crack spread, my favorite thing as a as an oil person is that you know, you talk to uh any generalist that little smirk on their mouth as soon as as soon as you see crackspread mentioned. But, a crackspread
[9:45] essentially just highlights the fact that that that the oil system, the oil market and industry, and specifically refineries are basically just one big chemistry set. And when we talk about cracking, what we're really talking about is, you know, all oil and petroleum, it's hydrocarbon chains. The longer the chains, the heavier or denser the type of liquid or fuel, you know, like petroleum coke or heavy sulfur fuel oil, really really long chains. Gasoline, LPG, really really short chains, right? So, what we're talking about with cracking is we're just adding heat and chemical catalysts to literally
[10:15] crack those chains into smaller portions. So, a crackspread is effectively the difference between the value of the barrel of finished refined product, so let's say in this case diesel, and the barrel of crude oil that would go into produce it. Now, refineries can't just turn a barrel of crude oil into a barrel of diesel, unfortunately, given our current our current prices. It's all turns into these fractions, this kind of rainbow spectrum of different products. So, essentially a refinery margin at the end of the day is a weighted average of those crackspreads adjusted for other
[10:46] costs. Now, the crackspread for diesel in normal non-crisis markets typically sits around, let's say $20 a barrel. Currently at my screen, it is $99.30 a barrel. Recently hit above $120 a barrel. So, in many cases over the past month and a half, we have seen diesel more than double the price of crude oil. And people are like, "That's price gouging, right? Like, how can this possibly be the case?" And the issue that everyone has to remember is that while we talk about oil as one
[11:18] contiguous thing, the challenge is that diesel, gasoline, crude oil, jet fuel, etc., all of these things are actually technically different products with different supply and different demand factors that drive them, different points of demand destruction, different industry trends like obviously during COVID, no one was flying and gasoline got absolutely sorry uh jet fuel got completely obliterated. Well, at the same time diesel, as we all became obsessed with remodeling our homes we couldn't leave, that actually was really really firm because everyone was shipping stuff everywhere.
[11:48] In this moment that we have right now, well, for instance, crude oil flows through the Strait of Hormuz have recovered very well, refined products haven't. So, again, we hit probably again the the exact numbers are are are fuzzy, but let's say roughly in mid end September we hit pre-war crude oil export levels out of the Middle East total. On that same basis, we are still probably half or less of the total refined products coming out of the region. And this is for two main reasons. One deals with the logistics of this
[12:19] dark trade that has emerged. So, again, at this stage I think everyone's heard of the dark shuttles or things basically how you jump back and forth across Hormuz with these big ships, then you transship or ship ship transfer to other ships sitting in the Gulf of Oman that then go off and and final you know, deliver the final barrel. Basically, they're the rust buckets they're jumping back and forth across Hormuz that no one cares as much if they get hit and they'll transfer to the blue chip tankers that will actually deliver to, you know, nice cleaner Asian ports. Um that economics of that trade and it and
[12:49] depending on the sort of you're looking at you're looking at between 20 and 35 dollars a barrel to get a barrel of oil through the Strait of Hormuz um because of insurance, because of these war costs and everything else and obviously just the demand uh you know, everyone wants to get out not everyone wants to do that run given the very very high chances at this moment that you get hit by a missile or a drone. Um but it's those costs are much easier to to spread across a very very large tanker. So, the largest category of crude oil tankers, very large crude
[13:19] carriers, carry 2 million barrels uh of oil of crude oil. Um typically product tankers are smaller, it's less easy to spread that cost. So generally the economics of these smuggling operations favor crude over products. On the other side, I think even more structurally, we likely have pretty extensive damage to refineries across the Gulf. Now, early in the war we saw many reports of Saudi refineries hit by drones and missiles and raw tea and most and most acutely Kuwaiti refineries that really
[13:50] got pummeled. Um on top of that, we've also seen now that the Houthis have really increased their attacks against Saudi infrastructure across the Red Sea. Most Saudi oil refineries on the Red Sea coast. So they weren't actually tip they weren't as pummeled by by Iran early on compared to the other Gulf kind of exporting states. But now that the Houthis have really done a number on those other refineries. So all together we've lost, you know, a considerable volume. In terms of diesel specifically, probably between 700,000
[14:21] barrels a day and a million barrels a day of diesel supply across a total market of diesel, let's say, 25 to 30 million barrels a day. So a considerable volume given, you know, the comparisons to crude oil. At the same time we've had, you know, you know, Russia's invasion of Ukraine and increasingly effective Ukraine's response, its strategic defense against these attacks by taking the the war basically home to the Russian home front and attacking shipping, ports, fuel
[14:51] depots and I think most importantly here refineries. At various points you get half upwards of half of Russia's total refinery fleet offline. And typically Russia is the second largest exporter of diesel in the world, shipping just below a million barrels a day compared to say the US's 1.1 1.2 million barrels a day. That those exports have fallen to barely more than 100,000 barrels a day, roughly 80 90% down from their normal levels. That has unambiguously contributed to this massive shortage of diesel in the
[15:21] market. At the same time, so we've lost all the supply. And now the the question basically goes, "Okay, so, you know, I talked about $200 oil at the beginning of the war. We've got more than $200 diesel right now. Where is the demand destruction?" We've seen a little bit of it, but what we're very quickly learning, and we always suspected, but again, this is a natural experiment and many theories are being tested, diesel demand is much stickier than say gasoline or even jet fuel demand. If let's say pump prices, you know, I'm sitting in Toronto normally were between
[15:52] let's say a buck 50 and $2 a liter. If I went to the if I went to the gas station and it was 5, 6, $10 a liter, I'd be like, "Wow, okay, maybe I'll take the maybe I'll maybe I won't drive or maybe I'll take the bus or whatever. Maybe I'll bike. Maybe not in the winter, but you know what I mean." And there are household decisions being made on budget. With diesel, um it really comes down to a business cost. So, as long as your overall blended business margin remains positive, you're going to continue shipping your
[16:23] products. If you're not shipping your products, you're not selling anything. This is groceries, this is Amazon, you know, packages, this is everything. Every I like to joke that like even that EV that you may have purchased because gasoline prices were high, that EV would likely be delivered on a diesel flatbed. And I think all you know, diesel does everything. So, to your point about, um you know, inflationary pressures, I think many consumers, it's a sneakier inflationary pressure cuz I think they're Consumers are used to going to the pump and getting getting punched in the face by a high, you know,
[16:54] gas price. Uh and they'll complain about that, you know, the the the the Biden or the or the Trump stickers that I did that. Um but diesel's way more insidious. It's kind of like an aching, creeping dread that moves through your entire body because it just touches everything and you can't really get away from it, no matter how hard you try. So, now that we're stuck in this situation where the White House is basically pulling every single lever trying to get these prices back down ahead of the midterms in two two and a half weeks and they are not having very much
[17:24] success at it. >> And that's exactly where where where I wanted to head this Rory because obviously this is not lost on President Trump. Hopefully he had as good as introduction to crack spread and and diesel refineries you just delivered Rory. That was I can tell you've been doing that a lot to journalists so over the past year maybe. That was wonderful. But this is obviously not lost on the on the Trump administration. My my reading of this or analysis of this has been that the Iran war and the fallout of the Iran
[17:54] war in in initially oil prices and then in diesel prices has essentially forced Donald Trump's hand. We can get back to China. I think it played a lot a huge role in how that summit played out but it's very very evidently forcing Trump's hand or influencing his decision making in the Russia-Ukraine war as well because it's it's it's it's overshadowing everything else. It's pulling the air out of every other US diplomatic effort. So the result was obviously the diesel deal with Russia. We heard reports today that the Russians
[18:24] aren't really delivering in the diesel to the US. I'm not even sure if they have that much diesel to deliver to the US in the short term. So my thinking I wanted to get your take on this is that initially at least it puts some of the blame on Ukraine rather than the Iran war because I don't think and I'd love your take on this that that the diesel deal and then whatever Russia might be able to provide is not really going to help ahead of the midterms in terms of that. Not at all. You probably need six months for that. But it puts some of the blame on Ukraine. Is that fair because you
[18:54] talked about various sources of this refinery crisis? How much of that is Ukraine? How much of that is the Iran war? I know it's hard to put percentages on but but you get what I mean. >> [snorts] >> Yeah and I'll try and put some percentages on it because I think there has been you know Trump has undeniably and I want to just say up front, I completely agree with your characterization. This is entirely both all of these things that we'll talk about that Trump is trying to do. Basically, none of them are going to move the needle on diesel prices. Pretty well all of them are intended to
[19:25] create political uh kind of scaffolding for both Trump and congressional Republican candidates to either shift blame or point to a thing that isn't working and say, "Look, we're doing that." So, that's the framework of I think what's going on. Well, let's talk specifically about you know, how much Ukraine has contributed and the Ukraine's specific strategy of targeting Russian refineries isn't By my numbers, you're looking at again, it it it it varies seasonally a little bit, but I think in total, I
[19:55] would say between a third and a half of the total diesel crisis is the Ukrainian attack specifically, which leaves between half and 2/3 for the Iran war. I want to be clear that both are contributors. I think anyone that is defending like any people that are defending Ukraine in this, and which I think is a very reasonable thing to do because it's a very reasonable strategy for a country being invaded that really has no other external choices here. I don't want to say that that it is wrong for them to do that, but I think it is correct to say that it is
[20:25] contributing. Um and I think people that try and deny that, I think are doing themselves a disservice in just how to have this conversation. Um in terms of what we're totally seeing, um yeah, so I would say, you know, let's let's say for for these purposes, 2/3 Iran. That I think is the part that's really structural. I think the world potentially could have handled uh Ukraine's attacks on Russian refineries. It could have absorbed or buffered that shock without the Iran war. And that's
[20:55] the difficulty in talking about contributions here because I think any one shock or strain, the market can tend to adapt to. What causes problems is when they start layering on top of each other. So, now we're talking about this deal. This It was a two Fridays ago, President Trump announced just in the final like hour and a half of me writing my weekly, so thanks for that. Um [laughter] love writing up something rapidly at last second. But so, Trump announced that basically after a phone call with President Putin, he would there would be some kind of
[21:26] deal whereby Russia increased its its uh its diesel exports, and in exchange, uh the US Treasury has issued a uh general license waving sanctions on Russian diesel for for 6 months, basically through next April. Um what are you know, what volumes are you talking about? So, again, we're talking let's say normally Russia exports 900,000 barrels a day. Let's for say for easy math, a million barrels a day. Right now, they're exporting just more than 100,000 barrels a day. Way way way way way down. Most of that
[21:58] has been driven by Ukraine's attacks on Russian refineries. They you have not had enough domestic diesel to satiate the Russian market. Um particularly during kind of the diesel-heavy industrial use through farming and harvest season. Now, what we've seen in in President Trump's Truth Social post, which is our basic way of now interpreting all information in the world, so that's fun. Um Putin apparently pledged 500,000 tons of diesel in November. Now, that sounds
[22:28] like a lot of oil and a lot of diesel. The challenge is that it's roughly only 125,000 barrels a day. Which is again, every little bit helps. I'm not going to you know, let let's not let's not throw away diesel here. Like we need everything we can get, but that's a very very very small drop in the bucket of the current crisis we face. And to your point, none of this diesel is going to be going to the United States, or very very unlikely any material volume of it will go into the United States. Yeah, Russia does not normally supply diesel to the to the US even outside of
[22:58] a sanctioned environment. Um what this is about is increasing global seaborne supplies so that other countries won't have there won't be as much competition and overall price will come down. Remember, the United States is now the largest diesel exporter in the world. Why is everyone so focused on it importing Russian diesel? Clearly not the thing that it actually needs right now volumetrically. So, I think overall, this I think the most charitable interpretation is that maybe we will see a doubling of current Russian diesel and gas oil exports from let's say October
[23:29] to November levels. In I but there's also a chance that Putin has just recommitted to the current volume of exports, which is not it which is literally nothing and he got this massive sanctions relief out of it. And even at the same time, even if none of this happened, we would have just generally seasonally expected Russian diesel exports to rise a little bit in November and December as that harvest season ends as and as domestic use declines. So, I think probably we're going to see a little bit more Russian diesel, but I would say virtually none of that is because of Trump's deal or because of
[24:01] even the sanctions relief. I think that would have happened regardless. Um, Yeah, so let's And then the final thing I will say is that all of this supposes that again, Russia wasn't voluntarily throttling back 90% of its diesel exports, it was doing so because Ukraine had demolished huge, you know, volumes of Russian refining capacity. So, in order to actually achieve any more Russian diesel supply, you need you need Ukraine to stop these attacks. So, as part of this, the day after this
[24:32] deal was announced, then Trump randomly unilaterally announced a energy truce, which apparently neither side had even actually heard of and I think one of the journalists was like, "No one said they heard of this. Why is there a deal?" And he's like, "Because I said there is, okay?" Okay, so again, this is just how the world works now. But, Zelensky said, "Sure, if Moscow wants to stop attacking Ukrainian power plants ahead of winter, Obviously, no one wants an energy crisis during winter, even countries at war.
[25:03] So, I think he was open to the idea. But, then that night, Russia bombed a major power plant outside of Kyiv. Kyiv was blacked out for a large chunk of the night. You know, this is obviously not happening. And I think very reasonably, uh Zelenskyy was like, "Well, this kind of proves that Putin is not interested in energy as he is far." I think, again, rightfully so. Um at the same time, there was an Axios report like the next day after that. There was like, "Oh, wait, wait, wait. It wasn't an energy truce. It was a {quote} refinery-for-refinery proposal." OKAY. WHAT DOES THAT MEAN?
[25:34] SO, first of [clears throat] all, >> Ukraine has one refinery as far as I know. >> Yes, Ukraine has one badly damaged, semi-functional refinery, which is, let's just say, not integral to the Ukrainian war effort. Whereas, Russia has between 32 and 36 refineries, the third largest refining fleet on the Earth. Uh it is a core, you know, strategic asset of Moscow. This is not symmetric. And I would absolutely not expect Kyiv to recognize this as part of this deal. And and very clearly,
[26:05] after a couple days of waiting, Ukraine resumed its its bombardment of various refineries. I think there have been three or four hits since then. So, this is clearly not happening. So, I do not expect any huge, massive windfall of uh you know, diesel from Russia. The one final thing I'll mention here is that, on top of just the blatant threats against Ukraine, Trump and the and and the, you know, various, you know, elements of the US government have been beginning to tighten the screws on Ukraine to try and press this point. Withholding intelligence, uh you know, a
[26:36] you know, a very very well-reported this stage, you know, slowing access to Starlink and, you know, Starshield or whatever we're calling all these things. And again, there's so much, you know, bloviating and kind of misinformation out there. But, I think at this stage, it's pretty clear. You know, and and I think it was it yesterday there there was also an NFT report that uh that Washington was holding up in delivery of US weapons. They were actually already paid for by European allies. Not even this wasn't even US funds. This is just using the control of US weapons manufacturers. So, all of
[27:06] this very clearly appears that they're trying to press Ukraine to stop this. But again, even if they were successful, let's say they are. None of it's going to matter for the midterms because midterms are like two, you know, two plus weeks away. You As soon as you stop attacking refineries, you don't just pop up to normal. Now you need to spend months repairing them. And it doesn't seem like any of this is going to happen. So, all again, at the end of the day, we can talk about all the other things that have happened that they've tried to pull, but you know, at the end of the day, this is all noise
[27:36] meant to provide Republican candidates to say, "Look, we're doing that." We will see if it works, but I would say it's a pretty pretty tight balancing act to hope that US voters in a fraught, you know, midterm election are not going to blame the incumbent party that started a war in the Middle East for an energy price spike. Like I think that's actually the most routine reflexive US electoral response, period, end of sentence. >> I usually say when when when looking at statecraft and and governments, two
[28:06] things bring down governments routinely, corruption and inflation. And it is very very hard to look at this current inflation and not not expect a change in government. But we'll have to see, Rory. It's very interesting. >> yeah. Well, well, thankfully there's no corruption, right? >> [laughter] >> Sorry. >> Well, it's not a big issue, it seems. It it doesn't seem to be a big voters' issue. So, so I mean, it it's only the >> [clears throat] >> beholder here. But but but but I agree with you completely. It's yeah, yeah. It's a crazy situation. >> So, a quick break in your regular programming. If you're serious about
[28:37] your future, grab my free report called prepare for 2030. I think you've got 5 years to make as much money as possible, and this guide will help you navigate what's coming. The link is in the description. Download it now. >> I also put just posted a video on the I'll be posting a video later this week on some of the other effects of this break between the Ukraine and US. Also, how Ukraine might actually be the path of least resistance towards a peace towards a peace there in a very very cynical analysis. But but
[29:09] let let's circle back a little bit Rory to your point about the um what happened because we we the closure of the Hormuz Strait was always sort of the ultimate risk scenario, the worst-case scenario both in geopolitics and probably also in your your field. It was almost almost like in geopolitics it's like if we attack Iran, the Strait of Hormuz shut off and and then who nobody knows. It's it's it's like the almost like a nuclear war scenario. Nobody knows what happens then. Now we know
[29:40] kind of and it was it's been bad. It's probably going to topple a few governments around the world. Um but it didn't end the world yet. So, talk us about how China saved the world as you as you I'm rephrasing the word a little words a little bit here. >> No, I I I think I've literally I think there's literally a quote of me saying China saved the world. And I want to be clear at the outset. This is not an altruistic act. This is not good guy China saving us all because it's being nice about it. I want to be very very clear up front because I think a lot of
[30:10] people have interpreted my comments that way. I think Beijing has even tried to kind of amplify that particular slant interpretation. I want to be clear. That's not what happened. But what we know for sure is that China cut roughly 5 and 1/2 million barrels a day of crude oil imports between the the average quarter preceding the war so December to February and the bottom in June and July. That is gargantuan. Again, that is in terms of the total volume of oil kind of demand
[30:41] that has been shifted. And I want to be clear, this is not necessarily domestic Chinese consumption, but this is seaborne import demand. But, in terms of the way we all interact with the oil market, seaborne import demand is really the thing that matters for price formation. So, for the purposes here, that was a larger reduction in seaborne import demand in China than the collective total release of SPRs from all of the IEA members combined. So, in terms of the contribution, China was far and away larger.
[31:11] Now, how do we explain this? So, roughly half or just more than half of that was refining cuts. The largest cuts to refining runs we've ever seen in China's history. We're going to return there, cuz that doesn't explain it. It just kind of pushes the problem downstream. But, leaving the rest of that, say, you know, half of that, you know, let's say 2.7 million barrels a day, where did that go? [clears throat] How did that How How did they shoulder that reduction? Then the debate basically becomes how much was China preemptively storing
[31:41] beforehand. Everyone knew that China was building up its SPR. It was importing excess crude oil to do so, largely from Iran and Venezuela and all these other cheap cheap kind of sanctioned jurisdictions. If you assume that was a really really large volume of kind of pre-building, that is bearish, because it means that we do not are bearish for crude oil, because we do not need to go back to those levels. But, I think at most, we're talking maybe a million barrels a day of that was this SPR pre-building, as I'll call it. Whereas the other
[32:12] balance, say, almost two-thirds, seems to still be some kind of likely strategic drawdown that has been undisclosed. Now, I want to be very very clear. There is no evidence of it. The evidence is is in the kind of dislocation of the normal data we follow. So, there has been no acknowledgement by Beijing that there has been a large release of SPR crude. In fact, the only government official on earth, to my knowledge, that has actually said China has released its SPR or released
[32:43] its reserves was US Energy Secretary, right? So, that's the only person that's actually actually said anything. But, I think that the the data seems to paint a picture that this has likely happened. But, I want to be clear that that is still an argument and very highly debated by analysts. Then, we'll move downstream to the refining space because saying that they've cut upwards of 3 million barrels today of refining runs, that's fine, but that doesn't really answer the question of how they did that because China refines oil because it consumes a lot of
[33:14] oil products, right? It's the second largest consumer in the world. So, you can't just say, "Okay, well, they're doing without." Well, that's a massive question right there, right? How are they doing this? I wrote a piece and I I encourage everyone to come check out some of these pieces I've written on this topic at at commoditycontext.com and there's this Beijing swing thesis I've worked on mostly over the summer. And essentially, I worked down to every single major product category in China and said, "Okay, which ones can we explain? Which ones can't we?" As an example, we can probably explain most of
[33:44] jet fuel. Jet fuel, China was actually exporting a decent chunk of it before the war. We did see some flight cancellations back at the stage when everyone thought we were literally going to run out of jet fuel in the world. A bunch of carriers canceled long-haul trips because they weren't sure they were going to be able to they were going to be able to get back, right? Like, this is a very kind of almost the equivalent of like work-from-home mandates in terms of demand destruction. That we can explain roughly the decline in in apparent jet fuel demand. Now, this apparent word is a is important here because
[34:15] China doesn't publish official monthly demand data like we'd find in most other countries. So, essentially, what we need to do is apparent calculations, which is out you know you know net production of various products netted for visible trade. So, it's essentially a supply-driven demand estimate of demand, which is understandably flawed in the current situation. But I think that's where we can kind of go from here. So, apparent demand for jet fuel makes sense. But diesel is the one that really stands out as this like gaping hole in the
[34:46] data, which is 70% of Chinese diesel consumption is used in road freight, long-haul trucking, etc. Like basically the same kind of balances you see in the United States. Um that apparent consumption was down between 18 and 20% year-over-year in June and July. Big, huge collapse, larger than we saw during COVID zero when you actually had everyone locked down across cities across China. Well, at the same time, despite this nearly 1/5 contraction in apparent demand, you see road freight
[35:17] activity up 3 and 1/2% year-over-year in both June and July. So, what the heck is going on? For me, the only viable explanation here is that there has been, in addition to strategic releases of crude oil, we have likely seen strategic releases of diesel as well. Now, an important caveat and implication here, which is if we think they're drawing down strategic stockpiles of diesel, the implication is that they had to be building them in prior states. So, some of our historical estimates
[35:47] of Chinese diesel demand were too high. And there are two periods, particularly in 2021 and 2023, where the apparent demand of diesel in China raced way ahead of where we saw the actual economy performing. And back in 2023, I actually wrote a piece called Chinese oil demand out, specifically flagging that I thought that China was likely building diesel and other refined product stockpiles strategically. At that stage, the worry was that it was about fortifying energy security ahead of a potential incursion in Taiwan. It's
[36:18] feels like a million years ago at this stage, but that was when Beijing was really beginning to buzz Taiwanese airspace and test kind of naval limits and all of these things. So, there was a lot of concern there then. But, at the same time, as we've seen, they seem to have pulled all of those energy security levers in the response to this to the closure of the Strait of Hormuz. So, I think the final thing I'll mention on Chinese demand here is EVs, because I think everyone's like, "Rory, you've got to you've got to be kidding me. Everyone knows that China doesn't need oil anymore. Look at the EVs, right?" And it's true. Roughly 2/3 of
[36:50] Chinese total vehicle sales now have a plug attached to them, with the bulk of those actually being pure battery electric vehicles. And I was just in Hong Kong, and aside from like the old taxis, basically every other vehicle on the road is an EV now. So, like this is happening. It's very, very clearly happening. Now, that's primarily a gasoline story. Um so, what we have seen is likely indications that, you know, that helped balance gasoline specifically. But, the important thing here is that 2/3 that
[37:20] 2/3 number is not of total vehicles, it's of the total new vehicle sales. In terms of actual China's vehicle fleet, new energy vehicles are only still between 10 and 15%. So, the predominant share is undoubtedly still, you know, internal combustion engine driven. But, the one thing I'll note here is that I did this analysis 2 years ago, and kind of found that apparent charging kind of basically fossil fuel or road fuel demand displacement from EV charging in China
[37:50] was only probably around 200, you know, 250,000 barrels a day. It was going to be annoying for oil bulls, but it wasn't going to be this existential drag on the system. I ran those numbers this year for this piece. We're talking about upwards of 6 plus 100,000 barrels a day of demand displacement this year, and it's still accelerating. So, even if I do not I still firmly do not believe that China can do without this volume of oil through this crisis, but give it 3, 4 years, and this will actually become a permanent component of
[38:20] Chinese reduction in oil demand, which I think in terms of the long term is a really, really heavy kind of bearish burden on the barrel that's going to be very, very difficult to over- overcome. If it's difficult right now for the world to get more than a million barrels a day of of overall oil demand growth, back when in the 2010s we were talking like the norm was 1.5 to two. Um now we're struggling to get one. It's going to be even harder to hit that one number or any positive growth when you're seeing that kind of demand destruction in China specifically from EVs.
[38:51] Let alone the fact that now they are pushing these EVs all over the world and they're going to be exporting that demand destruction as well. So I think again, I'm not saying I think it's like going to destroy oil markets, but it will be a very, very heavy weight around the neck of the barrel to overcome. >> My neighbor here, just north of Copenhagen, he sold his Tesla and bought a Zeekr, Chinese EV. So there's something to it from a purely nautical >> [laughter] >> It's They're all over the place in in northern Europe at the the moment, the Chinese EVs. They're taking over everything. Is it Is it also trucks? And
[39:21] just dialing in on this because I would expect a large part of the the the diesel consumption to be the road freight. Is that also being taken over by electric because we don't see that at all in Europe or almost none at all. >> No, and I would say that you're starting to see a bit more of the electrified truck sales penetration in China. Um what you saw previously was not electrification, but actually displacement of diesel with natural gas. >> Mhm. >> So LNG and CN- uh liquefied and compressed natural gas in these trucks
[39:51] were actually a major point. Uh particularly back, you know, a year or two ago, this is actually something I was covering pretty extensively that we saw diesel weakness in China and it appeared that you were seeing increased competition from natural gas in the trucking fleet. Now it is electrification as well. I think at this stage it's pretty clear that China is working extremely hard to displace this this uh kind of requirement for external fuels. Um or at least at the very least trying to broaden and diversify that dependence across different fuels,
[40:22] different suppliers, different geographic routes, etc. Um, and that I think again goes back to this that gasoline will be the first one to fall in China. But I think at this stage diesel's going to come behind it. Now, what happens to China's refining at that stage? You're like, well, what happens if you don't have gasoline, you know, demand? Well, the nice thing is that gasoline is not that far from It's basically really fancy naphtha. And naphtha is like a light hydrocarbon, one of the ones that comes at the top of the distillation tower, that is typically
[40:52] put into uh steam crackers and other things to produce petrochemical uh products, you know, ethylene, polyethylene, etc. Um, that is likely what we're going to see with gasoline, as well. And if if we go back all the way back to, you know, you know, uh you know, John D. Rockefeller and the kind of emergence of the oil market, it started as an illumination market. It was all about kerosene. Gasoline was too volatile. They tried tried gasoline lamps and then this nasty habit of exploding and burning the house down, cuz gasoline's really volatile stuff. Um, but what they would often do with
[41:23] gasoline is they would just like pour it onto a lake and set it on fire. Um, so I'm not saying that China's going to pour it on a lake and set it on fire, but I do think that you're going to see a a a a rerouting of those molecules towards petrochemical uses gradually, even as it as the kind of primary road use is displaced. >> I just wanted to just one final point before we look at the the head at the at the outlook for oil. This is where things get get tricky for you, I know, but you you just one question ahead of that. Uh I've been my feed has been bombarded with uh with images from Indonesia and
[41:55] other Southeast Asia countries um with where where we're seeing huge um huge lines at gas stations where there's talk about uh a a complete lack of fuel there. Um that tells me that the price is not high enough for demand destruction. There's still demand, but there's probably no supply. What are you seeing down there? Is it all anecdotal? Are we seeing anything Is that or and how's that related to the to the diesel crisis here? >> I would I would actually count that as a form of demand destruction. I think there's it's important to kind of break
[42:26] demand destruction in a couple of different chunks. So, we we typically have about, you know, the you go to the you go to the gas station, you see the high price, you're like, "Ah, not today." That's like price elastic demand destruction. There's also income elastic demand destruction, which is say high oil prices in 2008 crashed the economy, I lost my job, and then because of that I don't need to drive to work anymore, so I don't need to consume the fuel. In this case, there's another type, which is this almost physical lack of supply, these shortages emerge. Now, when we spoke in March, this is what I had
[42:57] expected to happen. Essentially, that we were going to need to see demand destruction, but it would not be born in our countries, in wealthy economies. We, again, while everyone's going to complain about, you know, $5 a gallon gasoline or $6 a gallon diesel in the US, no one's really going to stop using it because it's still such a small portion of our overall household budget. But for many economies around the world, particularly in Asia, particularly in in in emerging and and kind of poorer countries, even if you personally have enough
[43:28] money, the overall economy may not. And because of that, the actual importers of fuel can't justify the extremely high prices. And the thing we the other thing we haven't talked about and we could talk for hours at this stage. But the other thing we haven't talked about is the extraordinarily explosive shipping rates that add, you know, 20, 30 dollars a barrel to every delivered shipment you're getting. This makes it very, very difficult. So, if the median kind of consumer cannot afford it, then the then the pump station is not actually going to get enough fuel in to actually get the job
[43:58] done. And this is I think what we're going to see increasingly as this crisis continues to percolate, is that most of us will be watching for signs of demand destruction in advanced economies cuz that's where we live and that's where the data is best. But if we see this continue to emerge as a demand destructive event, it will be primarily exactly what we're seeing in Indonesia, which is a lack of of barrels actually entering the economy and people can't buy them no matter how much they want to pay. >> No. Let's look a little bit ahead, Rory, here to round off the show, because uh
[44:29] all of this is a lot of this this is driven by the Iran war and uh none of us know when this is going to end. Uh we can have our analysis. I have a feeling that uh I did some calculations a few months ago that predicted that the Iranians were going to run out of money on October 8th, very specifically. Uh that that's always the case when you do these models, they always point to a specific date. Uh and and and obviously they haven't completely run out of money. I have uh I I do still feel that we have seen over the past few weeks a lot of increasing reports of Iranian willingness to compromise and negotiate
[45:00] and that that was the point of them running out of money. That that the that the that that the country would collapse. So, we're seeing that. On the other hand, it seems to be like the Trump administration or or just waiting waiting for the midterms to end, maybe do one or two more bombing runs and they're hoping for much much better terms than the memorandum of understanding. So, the way I view it, uh we don't have a solution uh to this war over the next weeks months, maybe. Uh but they not in the coming weeks. How do you see the outlook of outlook for oil? We we we touched upon in the
[45:30] very beginning and what what the and both for for for oil prices, but also the energy inflation if you look towards the end of the year and and into 2027. >> Yeah, so I think let's say we end the Iran war. Let's say we end it November 1st. We can all sleep again for a hot second and then we can kind of survey the damage in the wreckage. I think at that stage I still again I went into this year a structural a structurally bearish. I thought we were going to have way too much oil in the market, largely because OPEC was really rapidly
[46:00] unwinding it what were huge production cuts that were supporting the market at that stage. That has that still same structural phenomenon still exists on other side of this. So, and actually arguably it's gotten worse because we've had high prices which have depressed demand. I'm not I don't think that we've seen demand crater this year, but it's certainly not growing super quickly either given the high prices, right? At the same time, we had expected US shale production to begin to cap out this year because of those low prices and that
[46:31] would begin kind of healing that oversupplied market. Now, we actually have seen that US crude oil production did not peak, has not peaked this year and likely will not peak because of these high prices. So, that is you know, any deficit we any surplus we said at this year is likely now all else equal going to be larger next year. Now, the one offset is that we have drawn down a truly stupendous volume of oil from global stockpiles, both commercial and strategic. That will inevitably soften the effects of that surplus. So, let's say if I had
[47:03] expected this year prices to fall to $50 a barrel Brent or even lower. That was kind of where I thought things were going by the end of this year. You ask me where I thought oil was going to end this year now. If you would ask me that in January, I probably would have said $45 barrel Brent. Um now, we're no longer in that world. changes a lot. Um but I do think that next year even if we do see that re-emerge the oversupply, we likely won't as quickly go to that $45 barrel.
[47:33] I think that we will likely drift back down to say 60s by the end of next year should the war end. But I think there's a scenario where you do where you see crude oil fall back, but we haven't repaired the situation in Russia and Ukraine. And the Houthis are still harassing, you know, Red Sea refineries. You could end up in a scenario where you still have, let's say a $60 Brent, but you still have a $100 a barrel diesel crack. So, you're still at this kind of, you know, like a
[48:03] 150, 160 barrel diesel. Like that is a scenario that I think is very plausible. And that's because well, very clearly, I think, we have too much upstream crude oil production capacity structure in the world. What's very clear is that we increasingly do not have enough refining capacity to transform it reliably into what we need. And given those shipping rate blows, more and more of those refineries are not conveniently located next to either consuming regions or to the sources of oil. So, you're often, for instance, you know,
[48:33] India would often import crude from the Middle East and then re-export diesel to Europe. That's an extraordinarily expensive trade now given how expensive shipping is. So, up until recently, we never really thought about this because essentially time and distance was nearly free in the oil market. Shipping on tankers was so cheap that it was really, really easy to arbitrage various markets, you know, from surplus to deficit, etc. But now, you've essentially this this explosion of shipping rates has essentially fractured
[49:03] that global oil market into a balkanized oil market that's increasingly difficult to effectively arbitrage between those pools. And I think that's the reality we're now going to deal with uh until we can sort that out. >> Very interesting, Rory. This has been a fantastic conversation. Great to to get a lot of detail insights also to uh the year that you've had here in 2026. Uh I think we're we're looking at it as very, very bullish for refiners, very, very bullish for all the market researchers such as yourself, hopefully, also leading into to to 2027. So, uh
[49:33] always a pleasure, Rory. Um thanks a lot for joining us. I suspect we'll be talking again in a few a few months' time. Maybe new wars, maybe ongoing wars. We'll we'll we'll have to see. But uh but a great great pleasure. Thanks to everyone for chipping in with your questions. We we covered a lot of them during the show, and we We be covering them in uh in the future also here on uh on Real Vision. If you're watching this on YouTube, please remember to subscribe to the channel both Real Vision and my geopolitical edge channel. We're doing this as a collab on on YouTube. We're trying to build that. So,
[50:04] do that. Do check out Roy Johnston on X and his Substack Commodity Context. It's a great follow. So, nothing left to say but thanks a lot, Roy. It's been a great great pleasure to have you. >> Thanks for having me, guys. >> See you around. >> So, you obviously liked this video enough that you've got to the end. That's quite a big task. But listen, do me a favor. Hit the like and subscribe button and also check out what video's next cuz I think you'll love it. But if you want even more, and when I'm talking more, I'm talking about member-generated ideas, incredible alpha research,
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