Javier Blas on Why Oil Could Go Much, Much Higher
Odd Lots Podcast Recap
Published:
Duration: 41 min
Guests: Javier Blas
Summary
Javier Blas discusses the factors driving the recent surge in oil prices and the potential for prices to rise even further. The episode explores geopolitical tensions, market dynamics, and the impact on global energy consumption.
What Happened
The price of Brent crude has seen a significant increase, starting the year at $60, climbing to $70 before the war, and now standing at $115. This surge is attributed to geopolitical risks like the potential closure of the Strait of Hormuz, which, despite its significance, has not yet caused oil prices to reach panic levels.
Governments, particularly in East Asia, are responding with drastic measures such as rationing based on license plate numbers. This is part of a broader disconnect between financial and physical oil markets, exemplified by physical oil in Oman being quoted $50 above the front month.
Javier Blas sheds light on the current energy crisis, noting its significant yet short-lived nature, lasting about a month so far. Strategic and regular inventories, along with floating storage, have cushioned the market, though the crisis is felt more acutely by countries closer to the Strait of Hormuz due to shorter oil transport times.
A division in the oil market exists between regions East of Suez and West of Suez, affecting the speed at which they experience the crisis. In extreme situations, some countries might face the inability to purchase oil at any price due to potential export bans.
Morgan Downey's 'Oil 101' is highlighted as a comprehensive resource to understand oil markets and pricing, relevant to grasping the complexities discussed in the episode. Meanwhile, refined product prices, such as diesel in Singapore, are hitting unprecedented levels, nearing $200 a barrel, amplifying supply disruptions due to the smaller global trade of refined products compared to crude oil.
US shale producers have incentives to increase production due to high oil prices, but a massive ramp-up in drilling is unlikely in the short term. The gap in oil supply is significant, potentially ranging between 8-12 million barrels per day, impacting global markets.
US natural gas prices remain low due to limited export capacity, insulating the US from the global energy crisis. This contrasts with the situation in Europe, where natural gas prices, benchmarked by TTF, have increased by about 70% since the 2022 crisis, though they are at the same level as 14 months ago.
Javier Blas also touches upon the geopolitical impact of Iran's control over the Strait of Hormuz and potential threats to international shipping. Despite these tensions, there is no significant move away from pricing oil in dollars, highlighting the continued dominance of the US currency in global oil markets.
Key Insights
- Brent crude oil prices have surged from $60 to $115, driven by geopolitical tensions and potential supply disruptions, particularly surrounding the Strait of Hormuz.
- East Asian governments are implementing rationing measures based on license plate numbers to manage the crisis, highlighting the region's vulnerability to oil supply changes.
- The oil market is bifurcated into East of Suez and West of Suez regions, influencing how quickly they feel the impact of the energy crisis.
- US natural gas prices are low due to limited export capacity, providing a buffer against the global energy crisis, unlike in Europe where prices have risen significantly.