Deep Basin – Oil Price War and Its Implications

**Patrick O'Shaughnessy** (0:00)
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Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_2** (0:56)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions.
Clients of O'Shaughnessy Asset Management may maintain positions and the securities discussed in this podcast.

**Patrick O'Shaughnessy** (1:21)
This week, I'll be recording and immediately releasing a series of conversations on business and market reactions to the spread of coronavirus. The conversations will be on oil and gas, corporate credit, and the reaction within the venture capital community.
Today's conversation is with Matt Smith, Ian Singer and Kobi Platt of Deep Basin Capital, a long short energy specialist. We are investors in Deep Basin and they were guests on the podcast last year.
We discussed the new price war in the oil markets and the impact that it might have on equities, and especially on the US oil producers. We cover commodities markets, equities and geopolitical considerations globally. Please enjoy.
Gentlemen, we're going to talk about what the hell is going on in oil and gas markets. Over the weekend and the beginning of this week, it's been probably a historic, maybe the last 30 years most significant big event in oil markets. I thought to begin, we could lay a very broad picture with Kobi, you describing in the most basic terms, how much oil is produced in the world in terms measured in barrels, maybe pick apart the supply, where does it come from and then pick apart the demand. What are the major sources of demand and where does that come from? Because that will help us explain what happened with OPEC plus over the weekend.

**Kobi Platt** (2:29)
So just laying the framework for the global oil market, it's roughly 100 million barrel a day market. About 30 million barrels a day on the supply side come from OPEC.
Then the other major producers are the US and Russia. The US actually surpassed Saudi Arabia and Russia last year, now is the largest producer of crude oil in the world. In terms of talking about the global oil market and bucketing it at 100 million barrels a day, that's important to note that that's total liquid. So that includes things like biofuels, NGLs, things that aren't necessarily black crude.
Then on the consumption side, that crude oil gets turned into products that are used in industry by various consumers. The main focus for the economy is gasoline use, but there's jet fuel and then there's a host of fertilizer, different types of manufacturing processes that rely on hydrocarbons both as a feedstock and as a process element for manufacturing of things like plastics.

**Patrick O'Shaughnessy** (3:37)
So obviously the price of oil is very much a function of supply and demand.
Can you just at a high level describe what kind of supply and demand shocks we've seen from the virus and from this increase in supply from OPEC? Just a general idea for what's happened in the last couple of weeks.

**Kobi Platt** (3:53)
On the consumption side, the non-OECD, so China, India, Brazil, have been some major consumers of oil demand growth over the last really decade or more. And China has been an incredibly important engine for that demand growth. So at the start of the year, consensus expectations in the market were for roughly a million barrels a day of demand growth.
Most of that was expected to come from China and the non-OECD.
In the middle of January, we started to get the headlines about coronavirus, and the market went through the process of effectively assigning and trying to understand the magnitude of the demand shock. We could see very quickly that China started to slow refinery runs. So China imports crude oil and then runs about 14 million barrels a day of that crude through refiners, and then exports the product into the global market. So when they shut down refinery runs, that immediately sort of started this backlog to build in the system. Of the roughly 14 million barrels a day of refining capacity and runs in China, early estimates and sort of the best we can gauge right now, they cut three to four million barrels a day of that capacity almost immediately. And what that did was cause a surge in inventories because the oil was already on the water and was already headed to China. And so the oil basically had to go somewhere and when it wasn't going through the refiner, it showed up in inventory. The situation remains very fluid. And now because the virus is spreading, it's frankly getting more difficult to assess from the demand side. So when it was isolated to China, it was fairly easy to tell what the demand impact was.