Ep. 376: Rory Johnston on $100 Oil, the Refined Product Crisis, and China's Swing Power

Bilal Hafeez (0:03)

Welcome to the Macro Hive Conversations Podcast. I'm Bilal Hafeez, Head of Strategy at Macro Hive. Before we dive in, a quick update. Following Macro Hive's acquisition by the BGC Group, BGC has launched a new regulated business called Macro Hive Markets. For the first time, onboarded clients can also access execution services via Macro Hive Markets. This new workflow will allow macro institutional investors to benefit from strategy and insights, alongside access to global liquidity. Please contact Andrew Simon or Gail Motibrian on Bloomberg, or click the link in the description below for more details on Macro Hive Markets and its service offering.

Now, on to this episode's guest, Rory Johnston. Rory is a Toronto-based oil market researcher, the founder of Commodity Context, a lecturer at the University of Toronto's Munk School of Global Affairs and Public Policy, as well as a fellow with both the Canadian Global Affairs Institute and the Payne Institute for Public Policy at the Colorado School of Mines. Before founding Commodity Context, Rory led Commodity Economics Research at Scotiabank. Now, on to the podcast conversation. Greetings and welcome back, Rory, to the podcast show.

Rory Johnston (1:10)

Thanks for having me.

Bilal Hafeez (1:11)

I think it may be a record. I've never had somebody on my podcast show three times in one calendar year, so it may well be a record.

Rory Johnston (1:19)

Oh, well, I'm glad to set the hat trick or the first hat trick, and hopefully there will be many more. Yeah, yeah.

Bilal Hafeez (1:24)

And I think it's a sign of the times that I've had to keep pulling you back into the podcast. And yet again, we have oil prices at a very elevated level at the time of recording, which is the 9th of September. Brent is trading around $100.

You know, we've got the Middle East crisis kind of escalating after what we thought was the end of the war. So where are we right now in terms of supply and demand and how you're looking at the Middle East, for example, to start with?

Rory Johnston (1:55)

Yeah, so I think everyone has been watching this market this year. I, for instance, was sure that prices would explode and we would see acute deficits far earlier. There were a bunch of things that occurred to offset the initial loss or move supply, some of which were expected, like rerouting pipelines and the largest strategic petroleum reserve releases in history.

And then one big one, namely China, was something that I did not expect, at least at the scale that we saw it realize. And that's really what's bought us time so that we can still be talking in like not, in like entirely apocalyptic tones about the closure of the Strait of Hormuz on, you know, the second week of September. I honestly never thought we could get it this far and it's been a very interesting concoction of ingredients that has allowed us to live this long. But, well, I think a lot of people, a lot of particularly macro observers that are looking at this market and say, look, we've lasted this far. Hormuz has been largely closed the whole time. This is kind of proof in the pudding, if you will, that Hormuz never mattered. Those oil fundamentalists, they were, you know, they were offside. They don't really understand how their own market works. But the one thing we can just truly see under the surface is that inventories have continued to drain. SPR releases have begun to run out. China is beginning to buy again.

And all the while, so the overall crude oil market, as you noted, we're back above $100 a barrel today on Brent. This is on, at least relative to the close, the highest level since the initial come down in May.

I think we had an intraday spike in July that got us to 102 But it looks like we're heading for that as well if this continues. All the while, term structure, so this is the shape of the futures curve, has remained very, very tight. So all major crude benchmarks will leap between $3 and $5 a barrel, prompt backwardated, which, while not as high as we got at the peaks of March and April, is an extraordinarily backwardated market in any other kind of period of normal history. So the oil market-

Bilal Hafeez (3:53)

Just to interrupt there on the curve, are we seeing that elevated spot level? I remember there was a phase during the war where we all started to look at spot levels of crude.

Rory Johnston (4:04)

Yeah, the actual spot deliverable barrels. That is also beginning to spike. And actually even, we're seeing a lot of that today or this week, while prompt Brent futures backwardation has kind of remained pretty level around $4 a barrel. Again, this is lower than we reached the peak, but still exceptionally high versus any normal period, like top one percentile kind of activity. The DFL or the data to frontline spread has been rallying even more aggressively. So that now is sitting just shy of $6 a barrel. And at this stage, it looks like it's going to keep running here as long as it keeps going. So crude itself is tight and flat price is around $100 a barrel. But the other aspect of this, and the one thing I will even say that looking and when you can go back to interviews early in the crisis, the one thing I was least sure about was I was sure that prices are going to explode higher. I was not sure about the breakdown between flat crude price and the crack spread.