Does the market know anything about oil?

Rob Armstrong (0:00)

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Katie Martin (0:55)

Pushkin, 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.

The US is running out of the stuff. Its strategic petroleum reserves have plunged 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.

Malcolm Moore (2:11)

Thanks for having me, Katie.

Katie Martin (2:12)

Our listeners love hearing from people who know things about the oil market, unlike me and Rob, so.

Malcolm Moore (2:19)

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.

Katie Martin (2:30)

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 is going to go to $200 a barrel, it's running out all over the world. Actually, a lot of things that people thought might happen didn't happen. A 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?

Malcolm Moore (3:02)

There's definitely been some soul searching. I'd like to just divide up some of those things that you mentioned. The first thing is, should people be talking about, oil is going to $200, oil is going to $300, $400, whatever big number you want to pick. Maybe that's not wise.

Analysts have historically been very bad at calling what the oil price is going to rise to. There have been lots of apocalyptic 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 we can all agree on that. However, 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? Stop buying oil and dug us all out of a big hole.

Katie Martin (4:06)

Yeah.

Malcolm Moore (4:06)

Right. Since then, we had the ceasefire and all of those ships that were stuck in the Middle East, all got out or a lot of them got out, so that released a lot of oil onto the market.

Ever since then, people have been thinking, okay, panic over, price can go down. We're working towards some 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. 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.