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Chapter 1: What is the current outlook for oil prices amidst Middle East tensions?
Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics, and more. I'm Sean Elmer. Oil, gas, copper, rare earths, iron ore, all at the centre of the global economy right now. Today, the outlook for the commodities that matter most to Australia... look pretty good. Maybe.
Vivek Dhar is Head of Commodities and Sustainable Research at Commonwealth Bank. Vivek, welcome back to Fear and Greed Q&A. Oh, thank you for having me. So let's start with the energy commodities and obviously oil and gas front and center there. But beyond that, coal, uranium, what's happening?
Well, we know what's happening in energy markets, but where do you think we're going to go in the next six months or so? Sure.
So look, a lot of the price expectations in coming months will be completely determined by when this trade of HOMUS is eventually reopened. And this is the X factor. Like I think the whole market right now, you know, all the scenarios were initially testing, okay, we're going to open in April, then we're going to open in May. And it's looking like, is it going to be June?
But the problem is there is a time limit to this, because if we look at what prices have done so far, it actually jumped in March because everyone panicked. Everyone was like, I need physical cargoes of oil and refined products. So we saw diesel and jet fuel prices go crazy in March. But we've seen that come back as these supply chains have normalized. Refineries aren't panicking as much.
They found a way to do inventory drawdowns. But this is now going to become the limiting factor, is what happens with the rate of inventory drawdown and at what levels do we need to get to before panic comes back in? And this is where every analyst is paying attention.
Because if you look at the drawdown rates and what's happening, our estimation is that by June, July, it's going to get to levels where you'll have operational stress. And that's probably where prices for oil, for example, will have to be set at levels that cause demand destruction, where prices are effectively too high, for certain consumers, but particularly in emerging Asian economies.
And that we put at around $150 a barrel. So you can see that there is a real time limit on this if we don't see a resolution very, very soon. But the worst part comes if in September we don't have a deal. That's when we get to operational floor levels for global inventories. And if that gets reached, you know, we're talking potentially demand destruction for advanced economies.
And that's a number which no one really has had to price. But that's when people start talking about $200 a barrel for oil.
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Chapter 2: How might oil prices reach $150 or even $200 a barrel?
So that's been shut in. And basically, you've got to have to find a way to make up for that difference. Now, Inventory drawdowns are the way the market has really responded to this. And thankfully, there's a lot of oil inventory. But as I said before, there's a limit to it. And these workarounds are already in play. You're seeing some tankers risking the journey through the Strait of Hormuz
And, you know, Iranian cargoes can't come through. You're seeing pipeline bypasses. So that is happening and that's already factored in to what is in these calculations. But the other thing is we're also seeing U.S. trying to pump as much oil out as possible. The problem is the volume lost versus what can be really subtracted from it.
It's very challenging not to see this net inventory drawdown play out.
So what's it mean for other energies? So coal, uranium, gas, does this give particularly the fossil fuels an extra life or at least a longer life?
So look, in terms of how it's working across the other, the commodity side, like look, LNG has been impacted too. So, you know, we're talking a fifth of global LNG goes through the Strait of Hormuz. So we've started seeing those prices tick higher. So if you look at LNG spot prices before the crisis, they were just under US $11 per MMBTU. They're now around $20.
So we've already seen about an 80% lift in LNG spot prices. And if we go back to 2022, when we saw the whole crisis play out with LNG post the Russia-Ukraine war, we're nowhere near those price levels.
And what has really helped in the gas space from us avoiding the peaks, which hit $50 plus in that world, was we've actually seen about two thirds of the supply gap almost be solved by new supply coming onto the market. which is phenomenal. It is very, very lucky that this market was expecting a surplus in LNG and massive supply growth.
And therefore, LNG as an impacted commodity, it hasn't been nearly as impacted as it was in 2022. So part of that story has been new LNG supply, but we've also seen coal usage in Asia pick up quite a bit. And so that's been the other way that we've played it out. But now thermal coal hasn't lifted nearly as much as we saw previously. But in terms of that LNG story, it's right now early days.
But our worry is that once you get into the Northern Hemisphere winter, which is talking 1st of October 2026, that is when the market can get tight very quickly. And so we're watching that restock cycle by Europe. But so far, LNG has managed to wear this pretty well. We haven't seen thermal coal prices really jump on this.
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