Does the market know anything about oil?

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0:45Katie Martin: There's more information in the show notes.

0:54Pushkin. The oil market is really big, really important and really super weird. Oil prices blasted higher in March, as all good listeners to this podcast know well. War broke out in Iran, rockets were flying around everywhere and ships full of oil were suddenly unable to get through the Strait of Hormuz. all a recipe for pricey oil. Well now, war is still going on, rockets are still flying around and the ships are still stuck. And yet oil prices have come right back down and they're barely responding to scary headlines. A barrel of Brent crude will cost you about$90 a pop. But here's the thing.

1:35The US is running out of the stuff. Its strategic petroleum reserves have plunge to the lowest levels since 1982. And we're in a pretty precarious spot. Today on the show, why do these reserves matter? And when will the oil markets start freaking out? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist down in the sad grey basement of the FT in London. Joining me in this glamorous little spot once again is Malcolm Moore, the FT's energy editor. Malcolm, thanks for coming on.

2:11Malcolm Moore: Thanks for having me, Katie. Our listeners love hearing from people who know things about the oil market, unlike me and Rob. Well, as you were doing your intro, the thought that went through my mind was, oh no, we're going to get into the unknown unknowns territory. I'm not sure what to make of that. Look, first things first, are oil analysts idiots? because in March, some of them at least were saying, be afraid, terrible things are going to happen, oil's going to go to$200 a barrel, it's running out all over the world. And actually a lot of things that people thought might happen kind of didn't happen.

2:52A lot of things worked out much better than people feared. Has there been a bit of soul searching around what we really understand about how the oil market works?

3:01Malcolm Moore: There's definitely been some soul searching. I'd like to just divide up some of those things that you mentioned. So the first thing is, should people be talking about, oh, oil's going to 200, oil's going to 300, 400, whatever big number you want to pick? Maybe that's not wise. You know, analysts have historically been very bad at calling what the oil price is going to rise to. There have been lots of apocalyptic sort of numbers plucked out of the air before, and they've never really come true. So that is definitely something that people shouldn't do. Nice. And, you know, we can all agree on that.

3:35Okay.

3:35Malcolm Moore: However, you know, looking at the fundamentals of the market, were they right to be saying we have a serious problem here? No, I don't think so. It's just that there were some big moving parts. One was, of course, that the world agreed to release a lot of oil from strategic reserves, and we'll come to that. The second one was China, for reasons that we still do not know, totally unknown, could be to do with the price, could be to do with something else, who knows, stopped buying oil and dug us all out of a big hole. Since then, we had the ceasefire and all of those ships that were stuck in the Middle East, you know, all got out or a lot of them got out.

4:16Malcolm Moore: So that released a lot of oil onto the market. And ever since then, people have been thinking, okay, panic over, price can go down. We're working towards some sort of solution and there's a lot of oil around. So prices don't need to be higher. Where we are now is we don't actually know how much oil is coming out. The US is claiming a lot of oil is coming out nonetheless. Some oil may be coming out, but we actually don't know. And I've been calling around people this week, all the trading houses, and asking them, do you know how much oil is coming out of the Strait of Hormuz? And they all say, yes, absolutely.

4:54Malcolm Moore: And I say, well, how exactly do you know? And they went, Well, what we're doing is we're sort of counting ships that approach, and then we're sort of counting the amount of oil that's being loaded. And we're looking at some satellite pictures, and then we're kind of getting a sense of the momentum. So we're guessing. Yeah, they don't know precisely. Yeah. Now, the US, Chris Wright, the US Energy Secretary, he came out and said, nine million barrels a day is coming out of the Strait of Hormuz. Don't worry, everybody. It's all good. That would be about half of the normal amount. Pre-conflict now?

5:28Malcolm Moore: Yeah, pre-conflict, it was about 20 million barrels a day. Nine million barrels coming through the strait, plus whatever's coming out of the pipeline into the Red Sea, which is also diminished, and we don't really know the status of that either. That would kind of settle people's nerves a little bit because a lot of countries have decreased their consumption, particularly in Asia. But none of the traders I spoke to could get to nine million. No. They were all like, okay, we thought it was maybe four or five. Now maybe we might say it was five or six, just because the US is being very bullish about it.

6:06Malcolm Moore: But we can't quite get there. It's almost like the world's oil supply, I guess if you're a kind of oil numpty like me, you can think of it settling into two things. One of them is the amount that just flows out of the ground and into a ship and around the world, you know, coming through pipelines or going on ships and coming through the Strait of Hormuz or wherever it goes. That's like new stuff coming out of the ground. But the stuff that's held in reserves is really important, right? Countries hold strategic reserves of things that are important to them all the time. India, I think I'm right in saying, has a strategic onion reserve.

6:41Canada has got strategic reserves of maple syrup. I swear I'm not making this up. But so countries have strategic oil reserves precisely to behave like buffers when bad stuff happens. That's what reserves are for. And that is quite why China had such enormous reserves of oil and quite why it knew how to be so canny with them after the war broke out. So, yeah, China appears to have really played a blinder here. And it's been like a really important player in the market overall, just globally, isn't it?

7:12Malcolm Moore: So China is the world's biggest importer of oil and has been. And it was importing extra large quantities last year when prices were low to build up its strategic reserve. And then this year, what happened was kept on buying in the early stages of the war. And then suddenly, after Trump's visit to Beijing, just stopped buying and sort of, you know, imports fell in half. And obviously, they had the reserve so they could use the reserve. But it's a little bit unclear whether they stopped buying because of price or whether there was some sort of deal or something else happened. Either way, they saved the market because if they had continued to keep buying at the same sort of pace as previous months, the price most certainly would have got closer to what those analysts were breathlessly predicting.

7:59But the US has got massive strategic reserves and they're a big deal politically and they're a big deal strategically for the US and they are shrinking, right? How fast are they shrinking?

8:12Malcolm Moore: So the strategic reserve is now below 300 million barrels. And it's the first time it's been below 300 million barrels since the early 80s. So not good. I mean, it's worth saying again, we pay particular attention to the US, just because the US is just about the only country that produces weekly data. like we don't actually know the status of anybody else's reserves because the data comes out so late and we don't know china because because china secret yeah um but the u.s publishes every wednesday they publish what is going in and out and so the last number we have is from not last week but the week before and it's under 300 million which caused a lot of political wrangling democrats saying oh my god what are we going to do so on and so forth now just to put a few things context.

9:04Malcolm Moore: If that reserve goes to 252 million, that is actually the legal minimum requirement in a non-emergency. But you can't just legal up new oil. Well, so 250 million is, so this reserve, it's actually in the ground. It's in caverns, salt caverns on the Gulf Coast. There are 60 of them. And if they go too low, then actually you have structural problems in the caverns so you can't get it any lower than 252 which is why being under 300 everybody is starting to go oh we're getting quite close to you know now the u.s government is saying don't worry because everything we draw out of it this year we're going to put back into it next year whatever like that's the deal that they struck they basically said when they agreed to release all this oil um i think it was around 170 180 million barrels.

9:59Malcolm Moore: They said, we'll give it to you this year, but you have to give it back plus 25 % next year. That was the deal. Malcolm Ward, just let's remind you, shuffling my papers here, I have in front of me, March 2023, a press release from the Committee on Oversight in the US Congress. President Biden damaged America's oil security by depleting the Strategic Petroleum Reserve. He's a terrible person, yada, yada, yada. They're my words, not theirs. But so in the past, this has been seen as a legitimate cause to throw shade at presidents and say, you've let the country down. This is all terrible. Not hearing that this time, strangely.

10:36Malcolm Moore: Well, there's a slight change of circumstance. And actually, I have some sympathy here because President Biden released oil from the Strategic Reserve because he wanted lower petrol prices or gas prices, if you're listening in the US, right? That's not what a strategic reserve is for. What we're in right at the moment, this is what a strategic reserve is for, right? Now, I still think there's going to be some political blowback, because essentially what we've seen since this war began is all the countries got together and said, all right, we're going to release oil to the world, to the market, calm things down.

11:10Malcolm Moore: And who's done the lion's share of it? The US. Essentially, every other country has been buying US oil at a reasonable price. The Russian oil refineries are getting bombed by the Ukrainians and because the situation in the Middle East is what it is. And so the US has sort of turned into the global supplier of last resort. Exactly. Exactly. So tick. Yes, this is what a strategic reserve is for. However, I'm sure some political, you know, I'm sure some voters in the US are going to be thinking, do we need to bail out the rest of the world indefinitely? I mean, obviously, sitting where we are in London, the answer is yes.

11:51Malcolm Moore: Yes, please. Yes, you started it. You can keep bailing us out. But, you know, domestically, that may not fly for much longer. And Americans obsessed with the price at the pump, which is going up pretty fast. Yes. In fact, new records are being hit for diesel in particular this week. They're still low by our standards, aren't they? Well, again, we're buying it all. the last few months have been the largest exports of diesel from the US on record in that period. Wow. So, I mean, yes, it's not that expensive in the US, but they are supplying the whole world with it. So, this might be a stupid question, and tell me if it is, but all this oil is sitting in salt caverns.

12:33What bad things happen to the salt caverns if you do get below that magic 252 number?

12:38Malcolm Moore: Yeah, this is like the last time I came on and you asked me about barnacles on the hulls of the tankers. And we got endless people writing in to explain the technical things about barnacles after I poo-pooed it. This time around, again, non-expert in the structural qualities of salt caverns that contain petroleum. But I don't think good things happen. I think, you know, maybe the structure is weakened and you end up in dangerous situations. Listeners, if you are an expert in the structural integrity of subterranean salt caverns, unhedged at ft.com is your friend. Copy in Malcolm.Moore at ft.com.

13:16Oh, no, thanks, Katie. We will all be wiser. I should just clarify for listeners who weren't around when you were last on the show. There was a story in the FT saying that all these ships that are stuck in the Strait of Formos, nice warm water, they've been stuck in the water for like weeks and weeks at a time. Apparently, the bottoms of the ships have become encrusted in barnacles. And barnacles, first of all, really slow ships down. They can... Malcolm is sighing.

13:42Malcolm Moore: I can't believe you've reopened the barnacles this year. Barnacles are bad. So at the time we last spoke about the barnacles, you were very dismissive of the barnacle problem. You poo-pooed the barnacles. And then we received lots of emails from people who had, like, PhDs in barnacles saying they're actually really serious. They could really chew up a ship and make it very difficult for it to progress. So just goes to show all sorts of people listen to the Unhedged podcast, Malcolm. You can't just be tap dancing the whole barnacle question. Look, it's true that we did get a lot of readers saying that barnacles were a serious issue.

14:17Malcolm Moore: I'm still going to rank them below missiles as a problem. Yes, the ships can outrun barnacles somewhat more easily than they can outrun missiles. We don't want to trivialize the missile thing. It's terrible and very scary. So I think I'm right in saying, right, the US, these reserves are getting drawn down and they're being turned into refined products. They're being turned into stuff that we can actually use because that in a way is kind of the crunch point here, isn't it? It's all well and good having oil at large, but you can't just put crude oil in a car, I don't think, or an airplane or other things, right?

14:53So what's going on? You definitely can't do that.

14:55Malcolm Moore: Definitely do not do that with your car. So you're saying you shouldn't put diesel in when it says petrol or the other way around? Don't do that, Katie. Have you done that? Don't do that. I've never done that. What's going on in the refined product space? So actually, that's where the crunch is. I was going to come to the fact that even though the US strategic reserve is falling, commercial stocks are actually rising or they rose in the last set of data. So Saudi Arabia has been shipping all of its crew to Asia through the Red Sea. And then a few weeks ago, the Houthis in Yemen said, we're going to start blowing up ships coming past us in the Red Sea.

15:36Malcolm Moore: So then Saudi sent a bunch of ships through the Suez Canal and they were going to go all the way around Africa to get to Asia. Turns out that journey is too far and those ships have just gone to the US instead. So a load of Saudi crude is actually arriving or has arrived and is in the process of arriving in the US. So actually, stocks are kind of being replenished a little bit. It's less urgent than it was. But where the real problem in the system is that these poor refineries have been cranking out gasoline, diesel and jet fuel at maximum capacity, beyond maximum capacity. And there's still not enough of it.

16:16Malcolm Moore: And that's because, as you said, the Ukrainians have cannily blown up all the Russian refineries that were producing diesel for us. And of course, all the diesel that was being produced in the Middle East is not coming either. And so, yeah, we have a refining problem. And so even though the price of crude at the moment is relatively benign at$90 a barrel, the price of diesel, price of gasoline is rising again and becoming a political problem. Yeah, so that's, I guess, the bit that confuses me is if this stuff is not getting through the Strait of Hormuz and if it can't go all the way around Africa just to get from Saudi to Asia, and if we have got this refining pinch, why is the benchmark crude oil price not much higher than it is today?

17:04Like$90 a barrel, the world can live with$90, right? Where do we get to in the March spike? $1.26? Something like that? Yeah. Yeah. So what sort of scenarios are people sketching out to you for where we go from here? Because I'm starting to hear people in markets who normally care about other stuff, right? They care about stocks and they care about bonds. Now they're starting to say, yeah, getting a bit worried about this strategic reserves situation, wondering when that starts to really spook the oil price. So when does it spook the oil price? I'm going to say when people get back from their summer holiday, they're going to look at their screens and they're going to make a whole new set of judgments.

17:43Malcolm Moore: But the issue here is we're into those unknown unknowns again, right? How much oil is actually moving? Because is it 9 million barrels a day like the US says? Is it 5 million barrels a day or is it somewhere in between? That calculation actually matters a lot, I think, for where the price goes. And it's remarkable that nobody knows. When I was calling the traders, I was saying to them, why don't you just send someone down to the strait with some binoculars and count the ships? And they said, oh, yeah, no, we tried that. But actually, I heard all sorts of things. The curvature of the earth doesn't quite work.

18:19Malcolm Moore: You can't get high enough on the cliff to be able to see the strait. You need all sorts of night vision. Curvature of the earth is a great excuse. It's a very narrow straight. But anyway, the long story, some of them said, we tried this, it didn't work. So everybody is working with imperfect information. Because beforehand, everybody just used to look at the ship tracking data and just go, well, we can see the ships moving. Now that all those ships have turned off their signals, it is just the occasional satellite image, plus triangulating other bits of information, and then sticking your finger in the air and making a guess.

18:55And they've turned off their, I'm going to say transponders. Is that a word? Did I make up that word?

19:01Malcolm Moore: No, they've turned off their transponders. To try and confuse people that are trying to shoot at them? Exactly. Right. Because the Iranians have been shooting at ships for at least two weeks. I mean, you know, 14, 15 days in a row, they've attacked ships, usually hitting ships. They hit a ship today. They hit one yesterday. They hit one the day before. Or what's amazing is that at the beginning of this conflict, everybody looked at it and went, can't do it for the insurance. Captains won't go through the strait. Everything's blocked up. I'm sorry, not moving. So, like, with this conflict in Iran, I sometimes genuinely feel like I'm going nuts.

19:37Like, every day there's a social media post from Donald Trump saying this thing is going to be over within 24 hours kind of thing. And it's the same thing every day, every week.

19:47Malcolm Moore: It's been remarkable in the timing because, you know, what happens is that as the market closes, that's when you get the escalation. And then just before the market reopens or just after it's reopened after the weekend, then you get, you know, the de-escalation. And everybody in the industry is saying that one thing that we can definitely tell is that it's hard to predict prices when the White House is intervening all of the time with mixed messaging about whether the war is on or the war is not on. Malcolm Moore, how much would someone have to pay you to get on a ship that goes through the Strait of Hormuz?

20:21Malcolm Moore: I mean, there's no chance I would get on a ship going through the Strait of Hormuz. I'd be way too chicken. No way. They're firing missiles at them every day. Yeah. But so there's some brave, brave maritime people out there who are presumably desperate to get home apart from anything else and just want to get the job done. Yeah. I mean, clearly there's some things happened there where actually captains are now saying, yes, yes, sir, I will do this. Not sure what the dynamics are, but it's a bit of a, it is definitely a shift. It sounds like the application of money to me. Could be. Malcolm, thank you for filling us in.

20:54We're going to be back in just one sec with Long Short.

21:03Okie doke, it is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Malcolm Moore what you're saying it's not allowed to be barnacles it's barnacles

21:18Malcolm Moore: I'm gonna go short on sunshine Katie we've had enough sunshine it's time for less sunshine please do you know what Bryant the editor on this show does his nut every time Brits come on and complain about the weather but we can't help it it's been insane there's so much sunshine it's on fire the UK is on fire. You see, Brian, I keep telling you, this is the only thing the Brits are talking about at the moment. I am long Brian Moynihan, the CEO of Bank of America. I was just reading a story in the Wall Street Journal, which informs us that apparently he deliberately drops obscure words into his statements in a kind of game.

21:58So these words are randomly chosen at the last minute and his job is to try and weave them into his statements. So words like gainsay, concomitant and fandhods, you want to mean.

22:11Malcolm Moore: Is he playing a drinking game? Sort of. So one of his recent pronouncements was, a perspicacious analyst might wonder whether talk of inflation, recession and other factors would fructify in slower spending growth. He's definitely been dared by someone to say that. It's literally a game, apparently. I'm here for it. I think this is great. I'd like a regulatory investigation, please. Brian, if you or your handlers are listening to this, please come and fructify our podcast. You'd be very welcome here. You know where to find us. Let's make it happen. We'll be back on Thursday.