“Sleepwalking into Crisis”: Why The Oil Market Hasn’t Imploded Yet | Kpler’s Matt Smith

**Jack Farley** (0:00)
Today's episode is brought to you by the Teucrium Corn Fund, ticker CORN. Let's get into it. Got a very important conversation today. I'm joined by Matt Smith, Director of Research at Kepler, which is a research platform focused on commodities, particularly energy.
Matt, welcome to Monetary Matters.

**Matt Smith** (0:19)
Yeah, thank you for having me.

**Jack Farley** (0:20)
It's my pleasure. So Matt, as we record here in June, we're four months into the Iran War conflict. The Strait of Hormuz has been closed for that period of time. So where do things stand? I mean, is the world running out of oil? And if it's not running out of oil, why? What's going on?

**Matt Smith** (0:40)
We've had the Strait of Hormuz essentially closed for over three months now. You've had about 15 million barrels a day of exports that would be leaving in terms of crude. You can add on another 5 million barrels a day onto that in terms of products. So that's jet fuel, gasoline, diesel, LPGs, that's not leaving. Some of the crude has been able to be rerouted, but that's only the stuff from Saudi Arabia, a little bit from Fajira, maybe 4 million barrels a day, something like that. So for all intents and purposes, you've had this huge chunk of supply taken out of the market. The way that I look at it simplistically, Jack, is that if we have supply and it's down about 11 million barrels per day over the last average, over the last three months, which is basically all those Mid-East Gulf producers that have had to throttle back on their production, we've lost 11 million barrels a day on that side.
To offset that, we have seen about 9 million barrels a day of refinery runs being cut on a global basis. So that's what and the difference in between the 2 million barrels a day is inventory draws. So the market is looking at things and say, we've lost all this supply. Inventories are falling, but not really that much, and they're very kind of centred around the countries that are doing strategic petroleum releases.
But the big crux of the situation is you've got refineries that are down 9 million barrels a day. So you're not having 9 million barrels a day hitting the market here of products.

**Jack Farley** (2:11)
So refineries take crude oil and they produce jet fuel, kerosene, gasoline, the things that human beings and the economy actually use. So people don't really use crude oil basically for anything. They refine it into these products. So if the refineries have cut 9 million barrels of consumption of crude oil a day to produce the products, does that indicate what's happened to the 9 million effective barrels of refined products have drawdowns and stockpiles of those refined products gone down or has there been demand destruction indicating that actually like the market has adjusted just by not consuming?

**Matt Smith** (2:45)
So it's a bit of both. So you have had some demand destruction in that it's been implemented by governments that particularly like in Asia in terms of rationing or conservation measures. So that's happening, but that's a very small piece of it. We are not at the point here where oil prices or product prices are so high that they are killing demand. They probably need to be, but they are not. So you have that piece of it, then you have these countries. So when we think about the immediate impact, it's been 90 percent of the crude that leaves from the Strait of Hormuz goes into Asia.
They've lost those flows for the most part. We've seen some rerouting and that, but essentially then Asia is not getting as much crude as it needs to be able to refine. So they're dialing back on those refinery runs, and they are dialing back on exports as well. So we're not seeing those countries exporting the products. So it's like a series of dominoes here.
The biggest challenge that we face is that we are likely seeing inventory draws on the product side of things in opaque areas, and we just cannot see that right now.

**Jack Farley** (3:50)
What does that mean, sorry?

**Matt Smith** (3:51)
So it's in countries where we don't have access to be able to track those inventories. So that's, you know, government agencies that, yeah, provide that. So-

**Jack Farley** (4:02)
China, you're saying China. China is drawing down its stockpiles, but you don't have access to that data. No one does.

**Matt Smith** (4:08)
China is very likely drawing down, yeah, its product inventories. And China is a wild one in itself, right? In that China is the largest consumer or largest importer of crude, imports about 11 million barrels per day there. And then suddenly they've just halted their buying, right? And maybe just even three, four weeks ago, we were thinking, perhaps they're drawing from storage that we cannot see. They're drawing from these caverns that they've filled up. But it turns out that they have just really dialed back on their refinery runs. And so what that has meant is the four and a half million barrels a day that they were previously importing that they are not anymore has been made available in the rest of the market. Even barrels that they had bought off West Africa, they have resold. So that has essentially provided four and a half million barrels a day of supply to the market that it wasn't otherwise expecting.