Rory Johnston on How Oil Could Surge to Over $200 a Barrel

SPEAKER_2 (0:02)

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Joe Weisenthal (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:24)

And I'm Tracy Alloway.

Joe Weisenthal (0:25)

Tracy, did you see that oil is already technically in a bear market?

Tracy Alloway (0:30)

I did, I did. So I think the definition of a bear market is down, is it 10 or 20%?

Joe Weisenthal (0:35)

20%, yeah. I can't remember now. 10% is a correction.

Tracy Alloway (0:38)

That's right. Okay, so it's down 20% from the high of, I think Brent was at something like 120 per barrel.

Joe Weisenthal (0:45)

Almost 120, 1,950.

Tracy Alloway (0:49)

So yeah, it's coming down. However, it's still up quite a bit from where it was like a week ago.

Joe Weisenthal (0:55)

Oh yeah, absolutely. I mean, it's still up 8% from Friday. I mean, that's how crazy the oil market is right now.

Tracy Alloway (1:03)

We're at that moment in time where numbers kind of lose meaning, I feel, right?

Joe Weisenthal (1:08)

Yes. And obviously, look, we all know the context, just extraordinary surge. I think one of the things that's surprising to me or maybe not surprising, but notable to me, and we'll get into this with our guest, of course, in a minute, is that Iran war risk was well known. The price of oil had already been creeping higher a bit, even prior to the first attack. So this was already a concern, but it sort of goes to show like how, I don't know exactly what the term is, how unexpected or the degree to which basically this was not priced in. The fact that traders were already very keen and aware that there was a very high possibility of a strike in Iran, and yet we've just seen this absolutely massive surge in just the span of 10 days, really.

Tracy Alloway (1:57)

Well, the other thing that's happening now is because we had pretty good oil supplies out there at the beginning of the year, that's kind of become, I guess, a vulnerability because you had a lot of oil in floating storage, for instance. But that means now the floating storage is filled and it can't go anywhere because you can't get through the Strait of Hormuz. And therefore all the new production is getting shut in a lot faster than it would be otherwise. So it feels like some of the buffers that we had are kind of turning into, I guess, vulnerabilities.

Joe Weisenthal (2:29)

Yeah, totally right. Now, the thing with a lot of commodity people is that, and I love them, so this is, but the thing, no, but a lot of them are like sort of, I don't know, like perma-doomers, like sort of a little bit crankish, a little bit more always thinking about risks and so forth and ways that things could go bad and how we could go back to the stone age if we don't have the free flowing commodities of all sorts. And again, I love them all, but someone else pointed, I forget who tweeted it over the weekend, but they said like even the least alarmist, I think this might have been Stinson Dean actually. He said even the least alarmist people in the commodity space are very alarmed right now. And so yeah, people are talking about this being one of the worst oil shocks ever. I mean, it's very extreme.

Tracy Alloway (3:17)

Joe, if you worked in an industry whose lifeblood was the liquefied remains of prehistoric organisms and there was a finite amount that you knew one day was going to run out, you'd be a doomer too.

Joe Weisenthal (3:29)

You're right. Well, we're going to be speaking with someone who is not a doomer. Overall, a very pleasant fellow, but someone who is quite alarmed, who thinks that oil could actually go to $200 a barrel quite plausibly, depending on how the war unfolds. I'm very excited. We haven't talked to him in a while, but an Odd Lots favorite here. We're going to be speaking with Rory Johnston, founder of Commodity Context, all around oil nerd. He even teaches at the University of Toronto. So Rory, thank you so much for coming back on Odd Lots.

Rory Johnston (3:59)

Thanks for having me back, guys.

Joe Weisenthal (4:01)

Let's start with this idea that Iran war risk was already very much on the radar of traders long before the strikes. The price had been creeping up and now we've seen this huge surge. So we were at about, I'm looking at the Brent chart, we were just over $72 a barrel the weekend before the attack, currently right around $100. What has happened in the last, just over a week that's been so far beyond what traders might have been anticipating?