Oil Gains as Middle East, Russia Hostilities Imperil Flows

SPEAKER_1 (0:02)

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You're listening to Bloomberg Businessweek with Carol Massar and Tim Stenovec on Bloomberg Radio.

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One thing we were talking about yesterday at almost this exact time, maybe a little later was an Iran-backed Houthi rebel attack on Saudi Aramco's headquarters.

SPEAKER_4 (0:28)

We were.

SPEAKER_3 (0:30)

Interestingly enough, I didn't see oil move that much in the last 24 hours.

SPEAKER_4 (0:33)

No, and we know Aramco massive. I just think about how many years we were counting down to it.

SPEAKER_3 (0:38)

That IPO.

SPEAKER_4 (0:39)

The IPO, and it's just been such a focus. It's crucial in terms of global energy markets. But it also, I don't know, you do wonder what is the lasting impact on global energy markets, and what really was impacted, and what do we know?

SPEAKER_3 (0:54)

Yeah, this latest just adding to an escalation in Iranian attacks on tankers in the Strait of Hormuz, it's threatening a rebound in Gulf supply. West Texas Intermediate rose more than 1.6 percent earlier in the session. Right now, it's just about 1 percent to $95 a barrel, brand up to $106 a barrel. I want to bring in Rob Barnett, Senior Energy Analyst for Bloomberg Intelligence. He joins us from Jacksonville, Florida. Rob, always good to check in with you. Taken together, the hostilities in the Middle East and trying to understand how close things are to getting back to quote-unquote normal if ever we are after yesterday's, what, fair to call it, an escalation?

Rob Barnett (1:34)

Well, I think that the damage that you're referring to, it's just an office building.

The real upside risk for oil comes if the attacks start to seriously impair production, refining, or exports. The Houthis, at least so far, haven't knocked out Saudi production, not in a serious way. But they are threatening routes that get that oil to market. One of the messages we've been reiterating with our clients is that energy security isn't just about where you drill, but how reliably you can deliver.

SPEAKER_4 (2:20)

Was that then read as a warning shot from the Houthis, like we know how to get to, but is that how it's seen and it's just a reminder, and maybe also a reminder that this thing is just going to go on even longer?

Rob Barnett (2:36)

Most of the oil price gyrations you've seen since the start of the year really relate to the geopolitical risk premium that's being reflected in the market. So much of your theory on the oil market today has to come down to how you see this wider conflict in the Middle East region either resolving or not resolving. When we run our fair value model for oil, we get a price that's much lower than what we're seeing on the screen today. So I think the fundamentals actually could paint a bearish picture if you could get the conflict resolved because right now the conflict is keeping barrels off the market. You get those barrels back onto the market, there's plenty of oil.

SPEAKER_3 (3:30)

How do we get the barrels back onto the market?

Rob Barnett (3:34)

We got to wave a wand and find a path to peace in the Middle East, it seems, right?

I think that the US has really put the world into a difficult position by kicking off the conflict. And the one saving grace is that compared with the oil shocks of the 1970s, at least today, there are alternatives. The economy is much larger. We are less dependent on oil to drive every aspect of the economy. If you look to China, EV sales, electric vehicle sales are roaring. If you look to Europe, you're seeing EVs and plug-in hybrids do quite well. So consumers are trying to find alternatives. And especially with prices where they are too, there's a lot of incentive to get that oil to market. So despite all the headlines you're seeing, we've actually seen during the month of September, that transits through the Strait of Hormuz, we're actually approaching the pre-conflict levels. So there's a lot of economic incentive to get the oil to the market. And it's just a matter of whether you can do that safely or not. And all things being equal, I think most parties would probably want to see this conflict resolved.

SPEAKER_4 (5:01)

You know, it's interesting. I was thinking about a documentary I did a few years ago, and it was about higher oil prices in the US and how we were talking about, I think it was the second Bush administration about introducing more ethanol. And we wanted to use corn-based ethanol and what it would do in terms of lowering prices. And I went to Brazil, and the 1970s oil crisis hit them so badly because they, at the time, imported something like 80% of their petroleum. So they moved to sugar-based ethanol. And I guess I think about these moments in time, these crises, whether it's, you know, that cause us to shift dramatically longer term. Is this crises, whether it's China, I mean, the US is a little bit insulated because we've become so oil-sufficient.