Glickman: $100 Crude Oil "Speed Bump" to Steeper Prices if U.S-Iran War Worsens

SPEAKER_1 (0:00)

Joining us now is Stewart Glickman, the Deputy Research Director and Energy Equity Analyst over at CFRA. Stewart, great to have you on the show, and a perfect day for it too, with oil prices moving higher. I mean, we saw WTI back above 90 We've got Brent now approaching 100 At what point does this stop being a risk premium and start reflecting an actual shortage of barrels?

Stewart Glickman (0:23)

Yeah, hi Marlee, thanks for having me. So you're right, certainly the latest set of hostilities with Yemen and the Houthis attacking Saudi oil facilities, I think widens this war meaningfully. And I do think that $90 oil is still tolerable for the global economy. But once we get, I would say, if we spend too much time above $120 a barrel, I think it's gonna start to really weigh on the global economy and then all bets are off.

SPEAKER_1 (0:55)

So, Stewart, what has to happen to get us to $120 a barrel, though?

Stewart Glickman (1:00)

Yeah, so, you know, a lot of parties have done a lot of what I'll call investment in safety valves to try to reduce the impact of this war in Iran. There are two that are really kind of primary. One was Saudi Arabia on the supply side, spending a lot of time and effort redirecting a lot of their oil flow instead of going south through the Strait of Hormuz, instead going west to the Red Sea, and then from there either out the Red Sea to the south or north of the Suez Canal pipeline. Both of those I think helped to some degree.

The other safety valve that I'll call out is China, because China's level of crude oil imports dropped pretty significantly once this war began, really precipitously beginning in June. So both of those have really kind of collectively helped keep a lid on oil prices, but they're not sustainable in the long run, especially if the Houthis start taking out Saudi oil facilities, because then you're not only talking about logistics, now you're talking about actual oil productive capacity. And so those have helped a lot, but there is an end there that I think everyone has to be worried about.

SPEAKER_1 (2:19)

Yeah, I'm glad you brought that up, because I was wondering how viable that strategy is, now that we are seeing attacks on Saudi infrastructure. I mean, the disruption around the Strait of Hormuz was one thing, and they found a way around it. But now with this infrastructure attack that doesn't seem to be slowing, how potentially disruptive is that by comparison to the disruptions that we've already seen in the Strait of Hormuz?

Stewart Glickman (2:45)

Right, so for context, about 15 million barrels a day of crude oil was making its way out through the Strait of Hormuz before this war began. Perhaps, I've seen indications in the market, perhaps about two-thirds of that was still making its way out to market through other means either because tankers are moving dark through the Strait of Hormuz, turning their transponders off, turning their cell phones off so they're not showing any kind of electronic communications.

That was helpful. But if Saudi gets significantly impaired, Saudi alone represents about 7 million barrels a day of that 15 that was being exported. Just a quick look at that math, there's no viable way if you look at where spare capacity is, there's really no viable way to make up for the loss of a major chunk of that 7 million barrels a day. It's still too early to call that. I think it remains to be seen how long lasting these outages are going to be for Saudi, but if they're at all meaningful, then I think a $100 a barrel is just a speed bump at this point.

SPEAKER_1 (3:58)

There's an interesting paradox that exists here though, right? I mean, because higher oil prices are good for producers for a period of time, but as you mentioned, if it persists, we could potentially see that erode and it become a net negative for the entire economy. So where is the tipping point, Stewart?

Stewart Glickman (4:17)

Yeah. So I would liken it to sort of letting your six-year-old eat too much sugar. That sugar high feels great in the moment, and eventually your six-year-old is going to crash, right?

The risk is that oil prices soar, and the high water mark, if you will, is about $147 a barrel that was set back in 2008 As a reminder for folks who live through that experience, oil prices at $147 in July of 2008, collapsed to about $35 a barrel in February of 2009 We have seen this movie before, and if you have a dramatic breakdown in the global economy, which really high oil prices could induce, you do run the risk of having that collapse, and EMPs that at least for these days are probably gonna look really attractive when oil prices are in the 80, 90, even maybe low $100 a barrel range. Too much of a good thing turns out to be a bad thing. So I think that's the risk. If you ask most oil producers, I think they would tell you that 85 or 90 bucks a barrel is really their sweet spot, and if we start getting too much above that, everybody gets concerned.