Drill pickle: oil prices still misjudge shock

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0:20The Economist

0:26Rosie Blau:Hello and welcome to The Intelligence from The Economist. I'm Rosie Bloor.

0:35Rosie Blau:Today on the show, who will stand in France's pivotal presidential election and Brazil's chances at this summer's World Cup?

0:51Rosie Blau:But first...

0:58Rosie Blau:Oil prices have hit their highest level since 2022 The price of Brent crude, the global oil benchmark passed$125 a barrel as hopes for a swift end to the conflict in Iran evaporated This week too, the United Arab Emirates announced it was leaving OPEC, the oil cartel that theoretically keeps prices and supplies stable. The sustained blockage of the Strait of Hormuz, through which roughly a fifth of global oil consumption flows, once seemed unimaginable. Now we're experiencing the biggest supply shock in the history of the oil market. Yet, high as prices are today, they may not yet reflect that reality.

1:43If you look at oil prices, you wouldn't really believe that we are on the brink of energy apocalypse.

1:49Rosie Blau:Mature Favas is our commodities editor. And that's because oil prices today, Brent crude, the global benchmark, is still lower than it was at the peak of the Russia-Ukraine crisis of 2022. Yes, petrol is a bit pricier. Yes, it costs more to buy a plane ticket. But most people still drive. So there's a feeling of normalcy that is, I would say, quite misleading. Just put this in a bit of context for me. We're talking about an oil shock, but how big is that hit? Before the war, you had about 18 million barrels per day, which is roughly 18 % of the global supply of oil that went through the Strait of Hormuz.

2:31And this now is mostly shut. Now, you need to make a few adjustments because some of that oil is being diverted in Saudi Arabia and the UAE via pipelines. And you make a few other adjustments for increasing production from elsewhere that making up for a bit of the deficit and things like that. And you land on a number that's about 13 million barrels per day, give or take. Deficit compared to what we expected. It's a very big number. It's much bigger than what we feared would disappear when Russia attacked Ukraine in 2022. That was about like 3 million barrels per day. And this, in the end, did not even disappear.

3:04And prices rose higher than they are raising to today. It's the largest petroleum supply disruption in history.

3:12Rosie Blau:So why hasn't there been a day of reckoning? There's a few factors to that. So first, we entered the crisis with a bit of a buffer. One buffer is that we expected the oil market to be in surplus this year. So there was a little of surplus that can absorb some of that gigantic loss. Also, just before the war, Gulf countries were sensing that tensions were rising. They saw American warships accumulate in the region. And in preempting that, they exported much bigger volume than they do normally. So a lot of these cargoes were already at sea when the war started. And also you had a lot of oil from Russia and Iran that was basically idling on shadow tankers because sanctions before the war, America and Europe tightened their sanctions on Russia and Iran.

3:58And the usual buyers of Iran and Chinese oil decided to start shunning more of these tankers. So you have an excess of Russian urine oil at sea as well. But there's been another help that's come from the release of strategic stocks. So rich countries, America, most European countries, Japan, South Korea, they have emergency stocks of oil that they can release if they are in a pinch. But again, you know, like the oil and water, it's one that you can't repeat forever. And I guess the more you release strategic stocks, the less you have. And that also makes the market anxious. So we are at the stage now where these buffers are pretty much exhausted.

4:31Rosie Blau:You're painting a pretty apocalyptic scene. The market price for Brent crude rose above$125 yesterday. But why haven't they gone further? Why haven't they gone crazy? Because there's been a third reaction, which is that in some parts of the market, demand has already contracted. So something that we would consider quite apocalyptic in our countries has to an extent already happened in developing countries in Asia, in Africa, which relied on exports from the Middle East. So that's, for example, India, which no longer receives cooking oil from the Gulf. It's Asian petrochemical plants, which no longer gets a refined oil product called nafta, which they use to make plastics.

5:09So you've got these sort of pockets of demand which have disappeared in countries where there is less real-time data that people track, in sectors that are less visible to the general public. So if you have the buffer that I was talking about just before and this sort of demand destruction that's already happened, you account for quite a big chunk of the deficit that we expected from the Hormuz closure so far.

5:33Rosie Blau:So Mathieu, what happens next? It's likely that at some point, at least in some parts of the world, for certain products, you know, be it like gasoline for cars, diesel for your trucks or kerosene for your planes, you'll reach a level whereby there's not enough stocks. and therefore prices have to rise to Russian consumption. So whereby demand so far is contracted mostly because the supply was not there, now demand will have to contract or be forced to contract via higher prices. So this is why you shouldn't take comfort in prices being high but not super high today because it's likely that they will have to rise quite a bit higher.

6:07Rosie Blau:It seems like markets have responded to good news but not bad news. Is that right? It's a very good point. So when the Iranian foreign minister and then Trump declared the Strait of Hormuz opened, prices fell by$10 to$90 a barrel. And then when Iran, less than 24 hours later, said, actually, no, the strait is closed. Prices rose only by$5. So there is this sort of asymmetry, which is quite puzzling. And it's also puzzling that futures prices are not at the level you should expect them to be given the size of the disruption. And part of the reason here is that the Brent futures market is a financial market.

6:41What's traded there are paper contracts. It's not actual barrels. It's a market that's dominated mostly by financial players. Some of them are algorithmic traders. So they react to tweets. They react to headlines. So whenever there's something really clear, really binary, they're very quick and within milliseconds, they buy or they sell. So that explains why sometimes you've got a tweet by Trump and you don't know how much weight to put on it. You see a price fall pretty much straight away. So that partly explains why prices are at the same time volatile. typically biased toward the downside and perhaps a bit lower than you should expect them to be.

7:16And one thing that visibly quite a lot of these financial investors get wrong is how long it takes for energy markets to normalize after Hormuz reopens. It's not like flicking a switch because first you need oil production to be resumed in the Gulf. Many of these countries have cut production. That takes time, maybe like four, six weeks. Then you need the ships to come out and you need new ships to come in. And many of the ships that used to save the Gulf, those that are trapped in the Gulf, I'm going to do business elsewhere. They will want to complete their journey, say from the US to China, that's 90 days.

7:45And then once that oil gets to its destination, it will have to be refined into usable fuel. And that may take, you know, another few weeks. So if you add all this together, you get to three, four months before energy markets can sign relief.

7:58Rosie Blau:So what difference, if any, will the UAE pulling out of OPEC make? So in the short term, it makes no difference because the UAE cannot export more of its oil. So no difference. Where it makes a difference probably is when Almuse reopens, because then Diri can decide to export more than it probably would have if it were still part of the cartel. And then it's also really important, even more important for the future of OPEC, because one big member has gone, others may follow, and Saudi may find itself on its own to shoulder the burden of pollution cuts. It's not an unviable position. Mathieu, thank you very much.

8:35Thank you, Rosie.

8:37Rosie Blau:And how high could the oil price go? That's the question on today's episode of Insider, our video offering, when we'll be drilling even deeper into our well of knowledge. Check it out on our website or app. You'll need to be a subscriber.

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9:23Rosie Blau:A year from now, France will elect a new president. One name will definitely not be among the candidates. The incumbent Emmanuel Macron. After serving two consecutive terms, Macron is barred from competing in the next poll. So who else could be on that list to lead the republic?

9:44Sophie Pedder:If you look at the polls for next year's two-round presidential vote, they consistently show that the only candidate who's pretty much certain to reach the runoff will be whoever represents the populist right national rally. So that could be Marine Le Pen or it could be Jordan Bardella.

10:02Rosie Blau:Sophie Pedder is the Economist's Paris bureau chief.

10:06Sophie Pedder:As for the rest of the field, there is really no obvious frontrunner at this stage at all.

10:15Rosie Blau:Sophie, I think you and I have already talked about this election often, and it's still a year out. So why are people thinking about it so much? Just lay out the stakes for this election.

10:27Sophie Pedder:Well, it's an interesting election, partly because Emmanuel Macron, who is the incumbent, cannot constitutionally run for a third consecutive term. So whereas he has won in the last two elections, he's beaten Marine Le Pen, there is no possibility that he is that person anymore. And that means that the rest of the field is wide open and it makes people very nervous, those who don't want the populist right to be elected in France, because the stakes are not only high for France, but they're high for Europe. You know, France is a founder member of the European Union. It's one of the biggest players in shaping both domestic and international policy.

11:06Sophie Pedder:And so having a populist government at the heart of Europe makes a lot of people outside France as well as inside France feel really quite nervous.

11:15Rosie Blau:The national rally has been rising for a long time. So how are we in a position where it's not clear who's going to oppose it?

11:24Sophie Pedder:The problem is not that there's no opposition, but that the opposition is just so divided and so fragmented. And there are so many candidates who think they have a chance of running for the presidency. And that on the left, you can see not only among the sort of centre-left parties, so the socialists have a candidate, at least one, possibly two or even three. The Greens have their own candidate. And then on the far left, you have Jean-Luc Mélenchon, who is very much planning to run again for the presidency.

11:55Rosie Blau:And Sophie, you mentioned the centre there. What about it? Macron won by creating a broad space, really, at the centre. Does he have an heir?

12:05Sophie Pedder:Well, it's an interesting question because he is an unpopular president. And in a sense, I think if he were to anoint a successor, that might not necessarily help his successor do well in the polls. So what you've got is a split sort of succession race between two of his former prime ministers. You have Edouard Philippe, his very first prime minister back in 2017, who is the best place in the polls currently, not just to make it through to the second round, but he's the only candidate who looks as if, you know, he could, within a margin of error, beat Jordan Bardella or Marine Le Pen in the second round.

12:43Sophie Pedder:But he's not the only one who wants to try his hand. You also have Gabriel Etal, another former prime minister, much younger, who has just published a book. about his life. It's a sort of autobiography, and that's got a lot of coverage in France. Est-ce que les Français ont besoin de savoir avec qui vous partagez votre vie? Je parle beaucoup de ma vie personnelle dans ce livre, et j 'essaye de le faire d 'abord pour montrer d 'où viennent les combats que je mène politiquement aussi. He is quite popular, and he also wants to have a go. He runs Emmanuel Macron's party, which is now called Renaissance, and I think that we're going to see over the coming months a real rivalry between the two of them in order to try and inherit the crown of leading the centre.

13:25Rosie Blau:Is there any prospect of a determined unified opposition to the national rally?

13:29Sophie Pedder:Well, I don't think you'd have a single candidate for sure in opposition to the national rally. I think what really matters for anyone hoping to beat the populist right is to make sure that there is a single candidate at least on the left or a single candidate in the centre or even a single candidate that unites the centre and the centre-right. Because if you don't do that, the chances are that you could end up fragmenting the vote so much that you end up with a final choice between the extremes. And that's what everyone wants to avoid. Now, it's not as if politicians at the centre and on the left don't understand that, but it's very difficult to find the way of selecting a candidate and whittling it down.

14:11Sophie Pedder:Some people want primaries, some people have ruled them out. Some parties already picked their person. But I think in the end, what you're probably going to see is that, especially for the centre, that it will be the polls that end up being the sort of sorting tool. And that could happen very late, not even till the early months of 2027, when it becomes really clear that one of them has a much, much better chance than the other of making it through.

14:34Rosie Blau:And when will we know who's representing the national rally?

14:38Sophie Pedder:Everything hinges on a court of appeal ruling, which is taking place on July the 7th. Marine Le Pen last year was banned for running for public office in a court case to do with the misuse of European Parliament funds for party use. And she has appealed that. If she can run, that is the plan, she will. If the Court of Appeal upholds the ruling, she won't be able to run. And it will be Jordan Bardella. The two of them have agreed that. There isn't any question, but we will know that in July, which leaves whoever is the winner only until obviously next April. for them to put together the proper candidacy and make clear that they are running to be the next president of France.