Javier Blas on Why Oil Could Go Much, Much Higher

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2:17Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, one of the weirdnesses of our current market moment is that you have all these oil analysts who keep talking about how the Strait of Hormuz closure is like the theoretical exercise that the entire market used to have nightmares about. This was like the big risk in the entire oil market. And yet, and yet, if you look at the actual price of oil and where it's trading, I mean, it's gone up. It's gone up a lot. But it's not – it doesn't strike me as panic levels. Yeah. I mean it's gone up a lot.

2:56And, you know, it started the year – I'm just looking at Brent. It started the year around 60. It had climbed to around 70 before the war started, now at 115. So it's a huge move in some sense. But it's not even at 2022 levels, which were very high. And all that's true. And yet there is this disconnect. I don't understand. Like why isn't it at 200 yet or whatever because Strait of Hormuz is closed, et cetera. Why isn't it even higher? But then the other thing is, OK, like prices are up a lot. But then you look at like what governments around the world are doing and it's like hair on fire panic, particularly in East Asia.

3:31So you get stories about, you know, Korean government workers being told to drive on every drive to work, depending whether their license plate number and even an odd like extreme. A very 1970s. Rationing. Yeah. And so I'm trying to like it still feels like there's some puzzle pieces here that I'm trying to fit together. Absolutely. The other thing I would say is it feels also like there's this disconnect between what's going on in the financial world and what's going on in the physical world. Yeah, and there was this really interesting note. This wasn't purely related to oil, but you could kind of extrapolate from it.

4:05But it was from Bloomberg Green Markets the other day, and they were talking about urea coming out of the Middle East and the pricing that they've been seeing from it. And one of the analysts says the real issue on pricing is that while sellers and buyers can quote almost any price, nothing is actually getting out of the gulf. That reality makes most discussion academic rather than representative of actual business. So I wonder how much of that is happening in the oil market as well, where you have all these quotes that are flashing across the screen, but like for barrels that are essentially not going anywhere for a while.

4:37Yeah. And I still don't totally get it because, right, like these things do have to settle at some point. And I don't know, I'm confused. And then there were those headlines early on about how physical oil quoted in Oman were$50 a barrel above the front month. Many things I don't understand. So we have to talk to someone who can answer all these questions for us. The great thing about an oil crisis, Joe, is that we will learn about all the oil benchmarks throughout the entire world. OK, well, we really do have the perfect guest, someone who's been on the show before, who a lot of people have requested us to bring back to talk about this particular moment in time.

5:11So without further ado, we have, of course, Javier Blas. He is the energy and commodities columnist over at Bloomberg. Been writing about this stuff for a very long time. Javier, thank you so much for coming back on All Thoughts.

5:22Javier Blas:My pleasure. It seems that every time that you come back, it's because of a crisis. Yep. That's right. Okay. Well, let's just jump into it. How bad is this one? It's bad. And it could get really bad. But in any energy crisis, there are two elements that are very important. One is the size of the disruption, and the size is huge. And then it's the length of that disruption, how long it goes. And so far, the disruption is relatively sore-lived. We have been a month. So that's one of the reasons why we are not at crazy high oil prices yet. It's just because it's a bit too early. Give it a few more weeks and certainly we will get there.

6:05Javier Blas:But so far, the crisis is relatively short-lived. How short-lived? Well, look at 2022 with Russia. We are still at it four years later. Or look at how long it took for the resolution of the invasion of Kuwait in 1990. That was about eight months. So at times we forget how long other crises were, and they were a lot longer than this one. Okay. So now connect that to what we're seeing with governments around the world, like already going into rationing mode. Almost everywhere you look, particularly you see it a lot in Africa already, a lot in East Asia. If the story is, OK, the price hikes haven't exploded to crazy high levels because this is still short lived, maybe there's some buffer stocks.

6:56Why this rationing reality?

6:59Javier Blas:Well, you are absolutely right that what is really cushioning the market right now is a number of buffers that we are going through. One is regular inventories that every country, every refinery has to normal functioning. Then it's also the strategic inventories that some countries own, particularly industrialized countries like the United States, Europe, Japan, and also China. Those have been mobilized in most places have been released. And also we enter the crisis with a market that was oversupply. There was even floating storage. That is, when an oil tanker has been loaded, it's on the high seas, but they cannot find a buyer and just basically sits on the high seas looking for someone who will take the oil.

7:48Javier Blas:And we have quite a lot of that just going into the crisis. So there was quite an element of buffer through the system and probably a larger buffer than in normal circumstances because the market was oversupply. That is helping to cushion or to mitigate the crisis. Where we are seeing some actions by government is where countries are closer to the crisis, which is the Strait of Hormuz. So the closer that you are to that location, the more action you need to take because you typically depend more of that flow of oil coming from the Middle East and also because you are impacted earlier. If you are moving oil from, say, Saudi Arabia into India, that's only a few days at most a week of sailing time.

8:33Javier Blas:If you are moving that to, say, the Philippines, that's about 15 days. It's longer if you are moving that oil into Europe, probably around three weeks. And it's even longer if you are moving that oil into, say, the United States, where Saudi oil takes about 40 days. So all of that means that the crisis is felt in some places quicker than in other places. Also, it's how the global oil market works. And to put it in quite simple terms, and I'm afraid that I have to go with colonial vocabulary, but the oil market is divided in two large chunks, east of Suez and west of Suez. This is like, you know, the British Empire was still around and everything was east or west of the Suez Canal.

9:20Javier Blas:Countries that are east of Suez, mostly Asia, rely a lot on Middle East oil these days, and therefore they are impacted earlier on the crisis. West of Suez, Europe, Western Europe, and the whole American continent is a bit detached from that market, and therefore the crisis will hit then much later. So I know a bunch of EMH bros are going to get mad at me for even asking this, but could do you get a situation where you can't get oil at any price in certain countries? I mean, in an absolutely full-blown crisis where we have the Strait of Hormuz closed for many months, we may have a land war in Iran.

10:04Javier Blas:Yes, I think that we can get into a situation that no matter what you are offering for a barrel of oil, no one is willing to sell because there will be a wall of export bans where every country is trying to keep the oil for themselves, etc. And I think that, yes, I can see a scenario in which no matter how much you are paying for a barrel of oil, you may not find a buyer or you may find enough barrels for whatever you are offering. But that will be in a really extreme, extreme situation. I have a very rudimentary Oil 101 class. Actually, I found a free book on my sidewalk called Oil 101 yesterday, and I picked it up.

10:43I should have read that. Why would anyone throw that out right now? I don't know. It seems crazy. No, it's really, it's like a full-on book. Do you know this book, Morgan Downey? It's a very thick book, Oil 101. Someone just put it on my sidewalk. Anyway, I have an Oil 101. Wait, are you sure someone's not like laying a trap for you or something? There's cyanide. Like trying to lure you out of your house? But I'm going to ask you an Oil 101 question because when we see, okay, Brent crude, 115.25 is at the time. How is the Brent benchmark formed?

11:12Javier Blas:Oh, gosh. Okay, sorry. No, it's a simple question and a complicated one. Effectively, we are talking about a bunch of crude oil from the North Sea. So mostly UK and Norway, but also crude oil from Texas that comes across the Atlantic. And through effectively buyers and sellers on the physical market, We get a price that then cascade into the financial market. But here is a very important - I guess the reason I'm asking is because I associate Brent with the North Sea, and that's west of the Suez. And so when we're talking about east of the Suez oil, why is this the price and how connected is that price to the oil moving that actually affects these markets?

11:59I guess that's sort of why the question was on my mind.

12:01Javier Blas:No, that's a crucial question. There are about 250 different grades of crude oil that we track on a given time. And Brent is used effectively as shorthand for the average barrel in the world. And it's not really the average barrel and certainly not the average barrel that comes from the Middle East. So you will have to look at benchmarks like Oman, Dubai, that they are closer to the quality of the Middle East oil. And those benchmarks are a bit higher than what Brent is trading today. But if I may suggest, forget about the price of a barrel of oil. OK. No one cares about the price of oil unless you are someone producing oil in Texas or Saudi Arabia, or you are someone who owns a refinery.

12:52Javier Blas:Those are the people that care about the price of a barrel of crude. The rest of us, you and I, we care about the price of a refined product because that's what we consume. We consume gasoline, we consume diesel, or we consume other refined products that they're embed into a service that we are buying. Think about an airfare ticket where inside that ticket is a big proportion of that that is jet fuel. or you are buying, I don't know, a cup made of plastic, well, that is, you are buying effectively some kind of transformed NAFTA, and obviously, you know, the transformation and the retail margin and so on.

13:31Javier Blas:But what matters really is the price of refined products. And there, actually, we are beginning to see, particularly in the Southeast Asian markets, some very extreme prices. So, well, if you look at the price of crude or Brent or WTI or Oman, things look relatively contained. You know, we are trading around$100,$110 a barrel. That is well below the all-time high. If you look at the cost of diesel in Singapore, which is a benchmark for the Southeast Asian market, the price there is approaching$200 a barrel, which is something that we have never seen. So the refined product is where really we are seeing the real tension.

14:17This is exactly what I wanted to ask you. So if you look at the benchmark prices for crude oil, we've seen higher prices before, right? And relatively recently in 2022. But if you look at the refined products, we're getting to places, again, that we haven't seen. What explains that disconnect? Like back in 2022, why didn't we see the higher cost of crude feed into refined products the way that we seem to be seeing now?

14:46Javier Blas:For two reasons. One is because we have lost not only a lot of crude oil production, but we have lost a significant chunk of refined production. The Middle East also has a lot of refineries which are export refineries. They are just devoted to the export market. And the global trade of refined products is a lot smaller than the global trade of crude oil. So even a small reduction on supply could have a much larger impact. You think about the global market for crude oil, which is 100 million barrels, around 60 million are traded globally. But if you look at the market for, say, jet fuel, that market is a lot smaller, and we have lost a significant proportion of the refineries who are serving that international market for jet fuel.

15:39Javier Blas:And therefore, prices are reacting much more stronger than we saw in previous crises. There's also the way that the world of refining works. Some refineries are slowing down intake of crude oil because there is not enough crude oil in the market, but we have not really seen yet the consumers react in the same way. So what is happening is the refining wall is acting as a buffer in between crude oil that is not there and consumers that they have not yet realized that the crude oil is not there. So the refined market is trying to basically get that two together. And the way that it can only do it is by extreme pricing and indicating to the consumers, hey, I don't have enough crude to make these refined products.

16:28Javier Blas:So please, can you stop demanding the refined products? And the please is basically$200 a barrel diesel. I should just say we're recording this on March 31st and a headline related to this. Trump tells allies to buy U.S. jet fuel or take it from Hormuz. I have no idea if we have spare jet fuel. I do know that speaking of refined products, though, in East Asia, one of the charts that's probably gone the most viral is that Singapore jet fuel chart. And that, more than any other chart, probably shows that gap that Javier is talking about between the underlying quoted price of barrels, which is high, but that jet fuel price is way above now, the 2022 highs.

17:10So that speaks to it. Javier, you were just down in Houston. Are any Americans, from your perspective, are we going to pick up this slack? Do you see American oil entrepreneurs doing more drilling and exploration to take advantage of these high prices?

17:22Javier Blas:I mean, for sure, at$100 oil, everyone is going to try to do more, just basically because it makes a lot of money. I mean, a US shale producer in Texas was looking to sell his oil about six weeks ago for$60 a barrel, and he can sell the oil at$100 today. So everyone who can increase production a bit is going to try. But do I see a massive amount of extra drilling coming in the US over the next three months, which is what really we needed? No, that's not going to happen over the next three months. And also, we are losing so much oil that it doesn't matter what the US shale producers do. I mean, it will help on the margins, but the gap is big.

18:03Javier Blas:And I have been discussing with some of the colleagues on the newsroom and with analysts and traders, how big is the gap? Is it 8 million? Is it 9 million? Is it 10? Is it 12? I mean, at the end of the day, it almost doesn't matter because we are talking about debt about 10 % of the global oil supply. I mean, whether it's 8 % or 11%, it really doesn't really matter. We are losing so much oil that either the conflict ends soon or prices need to move much, much higher. I mean, I am surprised that we are not much higher. And in some ways, it really speaks to how good the White House has been at job-onning the market, make verbal intervention, make threats, make promises.

18:50Javier Blas:A lot of them false, but it has worked in preventing a lot of the panic buying that we have seen in previous crisis.

19:27We'll be right back. the all-new Fidelity Trader Plus. Learn more about our most powerful trading platform yet at fidelity.com slash trader plus. Investing involves risk, including risk of loss. Fidelity Brokerage Services, LLC. Member NYSE SIPC. Support for the show comes from Public. Lately, it feels like there are two types of investing platforms. Some are traditional brokerages that haven't changed much in decades, and others feel less like investing and more like a game. Public is positioned differently. It's an investing platform for people who are serious about building their wealth. On Public, you can build a portfolio of stocks, options, bonds, crypto without all the bugs or the confetti.

20:07Retirement accounts, yep. High yield cash, yes again. They even have direct indexing. Public has modern design, powerful tools, and customer support that actually helps. Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Add paid for by Public Holdings. Brokered services by Public Investing, member FINRA SIPC. Advisory services by Public Advisors, SEC Registered Advisor. Crypto services by ZeroHash. All investing involves risk of loss. See complete disclosures at public.com slash disclosures. Here's a paradox. We buy insurance for peace of mind, yet the very policies we trust can deliver the biggest financial shocks.

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21:57Javier Blas:Yeah, NatGas in the United States is trading almost as a six-month low, which considering what is happening on the global energy market, almost incredible. I mean, the reason there is US shale, and the reason is that you cannot export gas easily. For exporting gas, you first need to cool it down, liquefy. That basically means having an enormous fridge that cools gas from room temperature to minus 160 Celsius. Then it liquefies, and then you can put it on a tanker and send it to the rest of the market. Because we have limited liquefaction capacity, when it does increase quite quickly, that creates a bottleneck that means that the US and Canadian gas effectively is trapped inside North America, and that's keeping prices completely detached from the global market.

22:50Javier Blas:And that is a huge difference from previous episodes of high energy prices. Even in 2022, the price of U.S. natural gas went from around$3.50,$4 to almost$10 per British thermal unit. This time it's staying at around$3, actually below$3 at MBTU. And that is incredible because it means that the heavy U.S. industry, electricity generators, chemical companies, fertilizer companies, it's like there is no crisis. While everyone else in the world is suffering, the U.S. is completely insulated. There is something odd and perverse about some of the disparate impacts here in terms of who is behind and who has catalyzed this war and which side of the Suez you're on there and who is feeling the brunt of it.

23:44But that actually, you know, you mentioned fertilizer. We've talked about fertilizer on the podcast. These are the type of things, you know, food insecurity that creates serious political instability potentially around the world. How worried are you? We all know you as the oil guy, but you've written a lot about food over the years. I remember you wrote a great piece about in 2022 about how rice is going to come to the rescue and people couldn't get as much wheat. So I know you know the food world, too. How concerned are you about food and the sort of fallout from that?