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Chapter 1: Why did the $200 oil prediction not materialize?
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Bloomberg Audio Studios Podcasts, Radio, News Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wiesenthal.
And I'm Traci Allaway.
Traci, recording this June 24th at noon, Brent Crude is below $74 a barrel.
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Chapter 2: What factors kept oil prices under control during the crisis?
Thankfully, we did not have to destroy that demand. And what we will talk about shortly, I'm sure, is all the ways in which the system adapted and flexed. And I think we saw this most notably above all in China.
Yeah. OK, well, why don't we just dive into it? Give us your overview on what happened and why we didn't actually hit $200 a barrel.
Yeah, so I would say the two biggest things, one on the fundamentals, on the barrel counting side, was China. We always knew that China had huge stockpiles of oil, but we didn't know how they were going to react to this crisis.
And what we've seen through this crisis is that Chinese oil imports, crude oil imports into China, the world's largest crude oil importer, fell by upwards of 5 million barrels a day between the three-month average prior to the war through to June. Now, we're not quite done this month, but that's roughly where we're trending for June so far.
That 5 million barrels a day was upwards of half of the total spot market supply hit to Asia. And that allowed a lot of those other Asian importers to basically not have the competition that they would have had for the barrels they were importing. So the countries that were hit hardest by this crisis and the governments that were most panicked, governments in South Korea,
Korea, Australia, Japan, Taiwan, et cetera, there was a period where like the prime minister of Australia was coming out daily and announcing the Australian government's successful acquisition of a cargo of diesel. Like it felt very COVID-y. Now, those importers saw imports collapse through March and April. But through May and into June, they actually recovered basically to pre-war levels.
And the largest facilitator of that was the fact that China was not competing for any of the other barrels. And it absorbed so much of the shock itself.
Just on China specifically, I have so many questions already. But do you have any sense of how much of this was genuine demand destruction or substitution in China versus just releasing from stockpiles?
It's a good question. And the firm answer is we do not have 100% certainty as to what the exact composition of that swing was. We know the oil going in fell by 5 to 6 million barrels a day, given products as well. But in terms of the actual demand destruction, the thing that we have seen across China is that all of the mobility indicators ā and you guys were actually in China very recently ā
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Chapter 3: How did China's oil imports change during the conflict?
The challenge is that it's not the sales penetration, the sales composition that drives fuel demand. It's the fleet composition. And while new energy vehicles in China are like 60 plus percent of new vehicle sales, the overall stock of vehicles in China is still 10 to 1 internal combustion engines to EVs.
So the implication would have to be that Beijing had this massive fleet of EVs that are like waiting to roll off the line. And that just doesn't seem plausible on the timeline we're talking about.
That is a very important stat to keep in mind. And I didn't know the exact numbers, but I do think that's important because we all, yeah, we talk about the declining like oil and intensitivity of the Chinese economy due to growing EV sales. You know, it's going to take a while before it really swings and enough to make a difference.
I think, you know, you don't think they have a secret stockpile of EVs.
They have a strategic pork reserve. They just swap out everyone's cars. Like everyone gets a free EV for a few months.
And you get an Apollo. And you get an Apollo.
You know what's really cool about the Chinese EVs?
Yeah.
Or sorry, the Chinese automatic driving vehicles. All cars, whether they're the official like robo taxis or when you're in a car that you push on self-driving mode, they have this blue light that shows up. So it's not like the typical red light. And so you can see every single car on the road in China that is currently operating self-driving. in an autonomous manner and know if there's a human.
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Chapter 4: What role did the Strait of Hormuz play in oil supply disruptions?
I think the only challenge with this theory is that if that was true, I would have expected China to say something about it. And the fact is, is that so far we have seen, we've heard virtually nothing from Beijing or any of the regulatory authorities that this is happening, why it's happening, or the scale of what we're talking about.
The other, I think, more nefarious option, and you were just talking about how I'm a humble barrel counter, I don't like to go grand strategy, but I think there is like the, put my tinfoil hat on for a second. Why would China do this and not talk about it? The other option, I still think this is less likely because it seems very nefarious, but...
We had the Trump administration visiting Beijing a couple months ago. At the time, it seemed like nothing much came out of those meetings. It seemed pretty lukewarm at best. But I think there's a chance that you saw some kind of discussion between the Trump administration and Beijing over like, help us out with this, and we will do something for you in the future. Now, what could that be?
One of the things that was happening at the time was with all of the military equipment destroyed in the Middle East from the Iranian attacks, lots of advanced radar systems, anti-ship, anti-aircraft missiles, et cetera, et cetera, Washington began migrating all of its kit that had been in Asia back over to the Middle East.
So maybe this is part of this broader kind of Dunrow doctrine that Trump sees himself as pulling out of Asia. And maybe someone somewhere made that point and said, like, if you help us, we'll keep this going. That said, again, I don't think any of this perfectly fits. And I think the easy answer is that it remains a mystery as to why China is doing this.
The only problem is that given that we still don't understand why China did this, or even to that degree, how exactly they managed to pull it off, It makes it difficult to handicap when they're going to enter back into the market because obviously a 5 million barrel a day swing is massive in this context.
And right now, I think part of the reason that crude prices and time spreads are back into contango today is that we have this rising surge of exiting transits out of Hormuz that are running up against a still relatively weak import market driven first and foremost by China.
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Chapter 5: How did geopolitical tensions influence oil market predictions?
And on the eve of the war, it was 70. Just real quickly, would you say a non-trivial amount of that $10 a barrel increase was... I mean, people were talking about the risk of war all year. Would you say at least some of that was driven by war premium already rising before the initial strikes?
Yes. And I think part of that, too, again, remember that the oil market was exceptionally weak prior to this. Now, flat price is rising because, as you noted, I think there was this kind of precautionary kind of geopolitical premium being built in. But on the eve of the war, the last week before the war, we saw prompt rent also dipping into contango.
That was your sign that we had too much supply. So I think that that was exactly what happened.
So right now, oil is like, again, just below 74 and like 70 on the eve of the war. Not necessarily a reason to think that that's a floor given what we know about the world swimming in oil. So maybe it could even go lower. All right. I'm going to try and do something that's like a very like we're all doing like self-criticism here, a theme of the day.
So we're going to do like a sort of double counterfactual question. So if I had been a smarter interviewer in March of 2026, which feels like a long time ago, You know, I think I probably asked you, you know, it's like, OK, well, what about that pipeline that Saudi Arabia has gone on? And I might have said, well, what about the role of SPRs?
Or maybe even I might have asked something like, what about lowering sanctions on Russian oil, et cetera? I did not ask. Rory, China is importing so much more oil than it needs to operate its economy day to day. So if I had asked you, and so this is going to force you to put yourself in early March mind. So let's imagine it's early March.
And I say, Rory, but can't China just massively reduce its imports? They don't use that much oil. It's a bunch of EVs. What would Rory in March 10th or whatever, 2026, how would you have thought then if I had proposed that as a possible way out of this crisis? I like this game.
So I think that what I would have said at the time is we knew we were going to get IE member state strategic releases. We probably were also going to get some kind of, or at least at the time, the thought would have that we might have get some kind of Chinese release, or at least they would have stopped stockpiling.
But still at the time, I would have found it very implausible that they reduced imports by 5 million barrels a day. I think it's, in terms of the scale, I think that yes, there could have been a little bit of reduction there. But even in hindsight, it's still very, very surprising the scale of reduction we saw. The other thing I think is that
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Chapter 6: What lessons were learned about demand destruction in the oil market?
And I think going forward has really shown the degree to which the oil market is much more resilient, at least in this kind of condition, to a big shock like that in a way that I just hadn't appreciated at the time.
Can I just ask on the inventories and strategic reserves? So one of the bullish arguments I've seen, and there are still some oil bulls out there, but they say, well, stockpiles are low now, so people are going to have to fill them up, right? And you're going to get like maybe structural, structurally higher demand for oil for the next couple of years or so. Is that a theory that you buy into?
People need to refill their oil tanks?
Yes and no. And I think, again, it goes to that split between how I think about strategic and commercial inventories differently, or strategic stocks and commercial inventories differently. I think that, yes, there will be an impetus to, let's say, refill the SPR in the United States, refill the SPR in Japan. Countries that didn't have SPRs going into this, that all of a sudden...
wished they had them, like India. You've seen a lot of examples of countries building. Adnok, the Emirati natural oil producer, has now made plans for a 50 million barrel commercial strategic stock in India coming out of this. So I think that will structurally undergird demand for the next year or two, or maybe even three.
But I don't think that that demand is going to manifest as long as the market is tight. So you need to get back to a stage where the market is looser. Otherwise, you're just kind of retighten the market through SPR rebuilds. I think on the commercial stock, I think that is a situation where you kind of need a surplus in order to rebuild those stockpiles in the first place.
So I do think that right now we are deeply underwater on most global kind of trackable commercial stockpiles. And I think we need a period of surplus in order to get us back up to normal levels. But we probably don't need to get back to where we were, say, at the beginning of the crisis, where we had abnormally high levels of inventories.
That was fantastic. By the way, this reminds me, you know what an episode I really want to do? And it's been requested actually by a listener. We should do an episode about the $20 billion Dengote Petroleum Refinery that opened recently in Lagos, Nigeria. So this incredible engineering feat, one of the most important refineries in the world right now. Hasn't been open very long.
Anyway, I was only reminded by that because of your point about maybe more countries are going to think about having SPRs in the first place. Rory Johnson, thank you so much for coming on. Really appreciate you willing to talk about an incorrect call. Appreciate your candor and coming back on Outlook. Thanks for having me, guys.
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Chapter 7: How did the U.S. and China respond to oil supply challenges?
Right. Right. We don't really know. And then just in terms of, I guess, the short to medium trader question, will and when will they reenter the market in the same levels that they were pre-war is like a really interesting question for people to watch currently.
I would love to see one of China's oil caverns.
Oh, that would be good.
Yeah, that would be good.
Let's do it. Let's do a road trip.
All right. Shall we leave it there?
Let's leave it there.
This has been another episode of the All Thoughts Podcast. I'm Traci Allaway. You can follow me at Traci Allaway.
And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our guest Rory Johnston at Rory underscore Johnston. Follow our producers, Carmen Rodriguez at Carmen Armand, Dashiell Bennett at Dashbot, Kale Brooks at Kale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more Odd Laws content, go to Bloomberg.com slash Odd Laws, where we have a daily newsletter on all of our episodes.
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