Chuck Yates Needs A Job

0:20 Hey everybody, welcome to Chuck Yates needs a job, the podcast, honored to have back on the podcast, Rory Johnston, hey Rory, my mom's watching this, do you mind telling mom what you do?

0:37 Absolutely, and thanks for having me on Chuck. So my name is Rory Johnston, I'm the founder of Commardy Contacts, which is an oil research platform, you can check it out at CommardyContextcom, I

0:48 published on Substack. Previously to doing this, I led Commodity Economics Research at Scotiabank in Toronto, which is a major Canadian lender, heavily heavily focused in the oil and gas and the

1:01 Latin American metal space. So that's kind of my background is energy and metals, but for the last kind of two years now I've been focusing extra special hard on the crude market given. just how

1:14 exciting it's been through COVID and over that period kind of branched out and doing more refined products markets, refined product market stuff now as well. And the markets keeping me busy. I

1:24 think today we're gonna try and just go over some of the weird things that have been happening in this market and how, you know, relative to last year's kind of, you know, crazy spike and then

1:35 claw back down, this year's actually been kind of a weirder, range-bound kind of beleaguered. Yeah, so why don't you just lay that on me in terms of, 'cause I appreciate you coming on, 'cause I

1:46 wanted to understand what is going on with crude. It seemed like we had a run, we were going back to 200 crude, I would be smart again, all those wonderful things. And anyway, tell me how we got

1:59 here.

2:02 Yeah, so just, you know, and I'm sure many of your listeners kind of know these broad details, but I'll just kind of pull it all together for a nice kind of narrative overview here. The first

2:10 thing I want to stress is last year, Everyone thought markets were going to get exceptionally tight last year and they just never did. So even the price spike that we saw initially in kind of March

2:21 and April, and then again in June, I still firmly believe was more reflection of market overreaction to anticipated losses rather than realized kind of losses and massive supply deficits. And of

2:35 course, you know, coming through 2021, coming through, coming out of like the COVID slump, we had very, very large deficits for a very, very long time, which is why, which is how we went from,

2:46 you know, a record spike in inventories through COVID and the collapse and super-contango and everything that we dealt with in 2020. And then through the end of 2020 into 2021, we had this, these

2:58 really, really big deficits as demand bounced back and OPEC kind of kept, you know, some of the supply and kind of lagged it back onto the market as it was necessary. So those deficits, you know,

3:10 hold that inventory position back down. And that's how we entered 2022, was we were rapidly depleting inventories. OPEC was unable or seemingly unable to keep up with its own commitments. It was

3:21 having, you know, what looked like capacity issues of its own. And then on top of everything else, of course, Russia invades Ukraine, and then the IEA comes out with the, you know, the

3:31 ultimate kind of, you know, shock and awe piece and kind of assuming in their forecast that Russia was gonna lose upwards of three million barrels a day of supply That would push us into kind of at

3:43 that stage, kind of unprecedented durable deficits. And yeah, you know, I think very, very easily, if that had actually happened, I think very easily we could have ended up back at 200 plus

3:54 crude because you would need to essentially moderate demand at that stage so that the market would have an opportunity to clear. Now, of course, that's not what happened. We all now know with the

4:05 benefit of hindsight that Russian supply didn't actually fall off Nearly that much and certainly not as durably. We lost about a million barrels a day of Russian supply for a month after the

4:16 sanctions first hit. And then you bounced right back. Now we come down a little bit again, but again, nowhere near the losses that the IEA had kind of baked in for our expectations that stage.

4:27 Not only that, but last year we had the double whammy of COVID zero policies in China, massive lockdowns, really, really draconian stuff. So we went from an expectation of, continued Chinese

4:42 recovery and massive Russian losses, straight through to no Russian losses and a big dump in Chinese demand. So we had more or less a four or five million barrel a day, swing and expected balances

4:54 through the bulk of 2022, which honestly is fundamental justification for how we jumped to one, 21, 30, and then crashed back down by the end of the year to kind of 70 or 80. And I think, so

5:07 that's how we started this year, right? This year, relative to the boom and bust of last year, has been really kind of a range bound. If you were just looking at the screens, a pretty boring

5:18 market, at least relative to last year. And I think the reason, again, I see these as fundamentally justified developments in pricing. You essentially, since the end of last year into the big,

5:28 into the first bulk of this year, you had markets that were slightly oversupplied, but it's still overall kind of a low-ish inventory levels, but overall market balance. Rest through the end,

5:40 through the bulk of the year, year to date, and we're just now starting to see these very large deficits open up in the market, which is why I think that we're beginning to durably test those kind

5:50 of higher ends of the range again. So just to kind of recap, year to date, basically from December through, we've essentially peaked out around the high 80s for Brent, and then we kind of

6:02 bottomed around the low, sorry, the high 70s for Brent. In the first half of the year, Silicon Valley bust happened, kind of, you know, torqued.

6:11 sentiment even further lower, and then we kind of drop to the low 70s, but we're kind of bouncing back and forth in that range ever since. And I think today we're back up at the higher end of that

6:20 range, but I think we're going to need to see realized, durable and lasting deficits and supply to clients, sorry, inventory declines, particularly in OECD countries, particularly in the United

6:33 States with high frequency inventory data, and I think that will finally allow us to kind of push a little bit higher and kind of stick there. My bias for the year is, or my bias for the second

6:43 half of the year at this stage is, you know, 90 to 95 dollars a barrel Brent, so slightly higher than where we are right now. But again, I think it's important to note that I see the ceiling of

6:53 that, at least the near-turn ceiling, as far more capped than we saw last year, because this year we don't have a lot of those same factors that have been driving us to kind of panic last year

7:04 shale bottlenecks are unwinding in the United States, Russian production seems to be. more lasting and resilient than we expected. And now OPEC has a lot of surplus and spare capacity given that it

7:14 has unilaterally, particularly in Saudi's case, tightened the market. So I think those three big factors that helped drive us to those crazy high levels last year really aren't present this year.

7:25 That said, we still have realized deficits in the market because of Saudi production cuts. And those will tighten the market, but I just don't think we'll have that overreaction function on the

7:36 other side. So my summary of what you said to make sure I got it is last year we head faked. Well, head faked the market and the markets come back and said, no, show me BS until I see lower

7:51 inventories. Gotcha. So what did the Biden administration and the SPR have to do with any of that? Because it, I've gone back and forth in my mind on that Sometimes I'm sitting there going to act.

8:05 just wasn't that much and all, but then you start doing calculations. It may have been a million barrels a day, something like that, whatever it was. That had to have played a role too. And did

8:15 we miss that maybe?

8:19 No, I think you're absolutely right. And that was actually the last time we were, you know, I was on the podcast, we were doing an energy policy kind of, you know, roundabout. And my topic was

8:27 all about the SPR and how and how to use the SPR more wisely, which honestly isn't a very popular opinion in the industry broadly. A lot of people just think that the White House should just leave

8:37 their hands off oil entirely and kind of let the market solve. I would say my views slightly slightly different. Although I got to cut you off. 'Cause you came on and you're being way too correct

8:47 about it. You came on and said, let's trade the SPR. Let's make money on it. It was epic. I did. And I loved my line about, well, skilling needs something to do these days now that he's out of

8:57 prison. So yeah, that was fun. Yeah. Right? So to confirm your kind of gut feeling, I do think the SPR did play a large role, especially into the latter half price pressure we saw last year.

9:12 This is obviously a huge amount of oil in total over 200 million barrels of crude from the SPR between the emergency release in early 2022 around following Russia's invasion. There was also another

9:25 emergency release at the end of 2021, just because prices were getting very heady. But I think there's a lot of things that the Biden administration has done well and done poorly with the SPR. And

9:35 I kind of want to give, you know, darts and laurels where they're, where they're kind of deserved here. So I think first and foremost, where I will disagree with a lot of people in this industry

9:44 is that I do think when the 180 million barrel a day, sorry, 180 million barrel, SPR release was ordered and authorized following Russia's invasion of Ukraine, we were staring at 120 plus crude,

10:00 We had this massive rotation, as I was saying at the beginning, of huge unprecedented deficits. I think that was 100 justified. I think that's exactly why the

10:08 SPR was designed for its purpose. We had ultra-backwardated markets. This is exactly the moment that you should be feeding into the spot price. What I had said on your show back at the time is that

10:20 I think that it should be more than just a release. I think the worry with a release is that you blunt the price impact, which is good You don't want consumers to be hurt by this kind of war in

10:31 Ukraine, but at the same time that price impact is useful to the supply side, because that's how we get more supply. And that's how this market usually solves, right? So if you just dump a crew

10:41 of the SPR, you risk just pushing out the pain into the future, which I think is what would have happened had everything gone like we'd expected with Russia and China. What I suggested at the time

10:54 was to pair it with an immediate buyback.

10:57 So basically, for every barrel you sell, you buy another barrel a year or two down the futures curve so that both you lock in that kind of arbitrage. Essentially, the whole idea of super backward

11:11 aid, or in this case, if you don't extremely, extremely backward aid markets that we saw at the beginning of 2022, you can basically sell today, buy back later, and pocket that spread because

11:20 the front of the curve is so much higher than the belly in the back of the curve. I think this would have had a double whammy, a kind of a double positive whammy here because it would have helped

11:29 consumers because you and I pay at the pump, essentially the front of the curve, spot prices give or take. Whereas the supply response, those prices that incentive for more supply investment are

11:42 more typically kind of geared further down the curve because if you are a producer and you wanna hedge, you can't hedge into the future at spot prices, you need to hedge at whatever the prevailing

11:51 futures prices. So by buying back SPR volumes down the curve, you lift the back of the curve, which is helpful for a supply incentive response, while you blunt the front of the curve, which is

12:01 kind of bad for consumers. At that point, we were still dealing with the rising peak of inflationary pressure, which was obviously a major concern for the White House and the Federal Reserve. I

12:11 think that was essentially how I pictured it going. And I think that would have been a good trade. I think it would have made money and helped support the financing in the SPR. But I think more

12:20 importantly, and I think the purpose here isn't monetary or market driven It's to blunt the kind of extremes of the market because I think the worst thing for the White House and for most economies

12:31 is not an absolute price level, but the volatility of those moves. And I think that's what that helps kind of stave off. Where I will go ahead. Sorry. Yeah, you can cut in. All right. I was

12:42 going to say where I think they did not as well is I think highlighting the less nimble, less flexible elements of government. policy here. This was obviously a reasonably new direction and tenor

12:55 for the White House and for the SPR more broadly. Historically, they've typically done far smaller releases, more or less to offset hurricane impacts or smaller geopolitical stuff. Nothing of this

13:11 scaling anywhere close. So on one, they were a bit slow getting out the door. They didn't have the legal authority or policy authority initially to buy back down the curve with what you'd call like

13:24 fixed price forward contracting. They had to do an indexed price, which was essentially you would agree to a future purchase, but you would index it. So basically what you end up paying is

13:35 whatever the spot price is, which doesn't have that same kind of pushing up the back of the curve aspect that I liked about that previous idea. But the other thing is by that, as we well know now,

13:45 as we were discussing in the beginning, That boom in prices that we had been expecting, that huge supply loss didn't happen. So by the time the bulk of the SPR release was actually hitting the

13:55 market later in the summer, early fall, we were well past the peak of that even anticipated supply crunch. But once it had started, they weren't seemingly able to turn it off. And I think that

14:09 was the challenge. I think I supported the SPR release when it was first done. I think that within a couple of months, it was pretty obvious that it wasn't needed in the size. It wasn't the crisis

14:19 that we had expected And I think at that point, they should have pulled back. And I think that's where I think the failure is, is not be, if you want to interact with the market, you need to be

14:29 more flexible. You need to be more nimble because the market, as we all know, really, it only throws curve balls. So I think you need to be able to adapt to that. I think that's where kind of

14:39 the slower, more bureaucratic aspects of government have challenges in the same. Okay, talk Russia for me. And I will go ahead and best up on the front end one for two when it comes to Russia.

14:52 oil production for years. I kept saying it's gonna fall off a cliff. Those guys can't produce any more oil. And Russian oil production is one of the flattest things I've ever seen and I don't

15:05 understand that. So I was wrong there. That being said, I got number two right. When the sanctions were put in place, I said, it's just a price thing. The barrels aren't going anywhere. It's

15:16 just what they're gonna get. Somebody's gonna buy it at a discount and we saw that So talk to me about Russia.

15:25 Yeah, so I mean, you weren't alone. I think many people expected Russian production to fall far quicker. I think a lot of people had expected even before the sanctions that Russian supply was

15:35 going to have challenges. Yeah, I'm talking about last 10 years. I kept, I mean, my last 10 years of fundraising at Kain, I kept saying, man, as soon as that Russian oil production falls,

15:43 boom, we're in the heyday and never happened. Yeah I mean, there's a huge resource in place. It's just a question of getting the expertise and capital deployed. And up until the Ukrainian

15:57 invasion, they were very good at that. They were very good at JVs. They were very good at getting capital expertise into the oil field deployed. And obviously the Kremlin would just, you don't

16:08 have to deal with a lot of the same regulatory and kind of permitting concerns that you have across most other kind of large resource countries that are outside of OPEC, Canada, United States in

16:20 this case I'm up in Canada for the record. But I think so, so that, you know, historically they've obviously been very good at that. Now when it came to, you know, after the invasion of Ukraine,

16:31 the concern there was, okay, well, you know, the only reason they were able to defy expectations for so long was because they had all the oil field service contractors in there. You had all of

16:40 this joint venture expertise from Exxon and BP, et cetera, after the invasion, after those sanctions started leveling on. And then you also got all the self-sanctioning activity from all of these

16:51 companies. BP pulled out of its joint ventures, Exxon, a lot of the oil field services companies just up and left the country entirely. That was when I think everyone was very confident. There

17:04 were a lot of very confident proclamations that you were gonna see production fall of a cliff. So far that hasn't happened. I think we've, I'm the first one to say that Russian production, both

17:14 guidance and data, is very muddy and kind of foggy right now I think no one really for sure knows exactly how much they're producing. We know roughly what they're exporting, at least by ship. And

17:24 those have remained exceptionally high. Now, more recently over the past couple of months, we have seen them pull back production in line with their promised commitments to OPEC. But again, that

17:35 it, for me, I have a hard time believing that OPEC, sorry, that Russia is really playing ball here. For me, there's been so much loosey-goosey obfuscation around commitments and. quotas and

17:48 OPEC policy, et cetera, that it mostly just seems like Moscow's going to do whatever it wants on the production side. And then OPEC and Moscow are going to figure out a way to justify it within the

17:58 framework after the fact. You know, initially, like even when this initial cut, before it was part of OPEC, this OPEC voluntary commitment from early April, before that it was actually initially

18:12 in opposition and punishment for the ramping of sanctions against Russian oil.

18:20 And around the same time, it was also because they had issues with logistics. So there's a question of like, why, it's gaslighting. The simplest explanation is Moscow is fantastic at gaslighting

18:32 a whole bunch of issues. And I think this extends entirely to OPEC and production guidance more broadly. I will say that while we did get a lot high profile exits. from Russia in that initial kind

18:46 of early mid-2022, others did stick around. And you also did get additional expertise from other kind of less allied members. So you did see obviously that the big stories in terms of import

19:00 displacement, or I guess export displacement from Russia's perspective was shifting from Europe mostly towards India, China and Turkey. These are countries that have continued to kind of play ball

19:13 with Russia both on buying its oil, but also supporting and supplying other goods into Russia that it was having trouble getting from the West. So generally, yeah, everyone still expects Russian

19:26 production to fall off eventually. But I think everyone has had to moderate their expectations because they've just been durably kind of

19:34 stronger than anyone could do. So let's go back to 2017, 2018 I'm out fundraising Energy Fund A. for Kane Anderson. I've got this

19:49 poorly drawn graph showing the number of rigs running in the kingdom in Saudi Arabia. And data's horrible, right? But at the end of the day, your best guesstimate is they had 50 rigs running kind

20:02 of forever. And during the Shell Revolution, they actually bumped up and may have had as many as 250 rigs running. And my whole point was Saudi Arabia has zero excess capacity. I don't care what

20:16 they say. They wouldn't be running that many rigs if they had it. And now they're cutting back. So I missed on Saudi Arabia. So tell me what's going on with Saudi

20:36 and what they're thinking these days. Yeah. So Saudi's an interesting place recently in the market. And I should say that, you know, I've followed Saudi Arabia for a long time and its oil policy

20:40 really did actually start to shift. around the point that you mentioned, right around that point of the rise of Muhammad bin Salman as this kind of overarching figure across the governance of the

20:51 kingdom. And at the time, I had always wondered, 'cause I think for perspective, it's important to note that Saudi oil policy for decades and decades and decades, ever since the '70s, just

21:03 beyond, has had this tendency towards small sea conservatism. It was incremental, it was small moves, it was consensus-based. That is very much the opposite personality style of Mohammed bin

21:18 Salman. So the question was, what would happen not just as MBS started to take over more of the economy and the military, but eventually also the oil industry. And for the first while, nothing

21:29 really happened. It was still more of the same. But then you come into 2020, you have this price war. That seems a little pushy in the moment, It was high,

21:44 it was unprecedented situation, and sure, they did end up getting Russia and the others on board, so good for them. I still hold that the OPEC cut in 2020, at the beginning of 2020, really did

21:56 save the market, not just on the downside, but also on the upside, because if they hadn't cut and you needed to force, let's say, 10 million barrels a day additional of non-OPEC supply off the

22:07 market from prices alone, we would have had zero to 20 prices, likely the majority or at least months and months in 2020, which would have had far deeper impacts on where our production is today.

22:23 So I would say that OPEC really came to that and saved the market in a good way, I think, shows the value of having policy-driven guidance on the production side Fast forward to today and

22:34 specifically through the end of last year, that was when you first So initially, we were all back, then prices were very weak. OPEC plus agreed to what I called at the time a paper cut because it

22:50 was largely on quotas, but Saudi always does its part. So initially, we got about 500, 000 barrels a day of cuts from Saudi at the end of 2022. Fast forward to the beginning of this year, April

23:01 of this year, you had another 500, 000 from Saudi. And then at the latest OPEC plus meetings for when all the ministers were there, when it was in person, they announced another million barrel a

23:13 day. This was entirely a unilateral voluntary cut. So the first thing I will reflect on is the fact that relative to OPEC's norm, we now have three separate types of cuts that

23:23 the kingdom, actually four if we count Russia, but three specifically that OPEC is embarked upon. We have official cuts, which are quotas, which are kind of, you know, that's a very formal,

23:33 then you have voluntary cuts amongst a group of producers, Basically anyone that really had. know, you know, control over their industry. These are, you know, Saudi and core golf golf allies

23:45 among a couple others. And then you also, and then as of, you know, June, July, you have unilateral Saudi cuts. Historically, Saudi has not liked to cut its production because back in the 80s,

23:57 you know, my example, I was going to 1985 after the rise of the North Sea. Saudi Arabia was briefly producing less than the British portion of the North Sea. That was, you know, the final straw.

24:09 They couldn't balance, they couldn't, you know, swing production and balance the market on their own. So they let it rip, they brought production back up. And that really prompted a lot of the

24:18 kind of, you know, the really, really terrible bear market that we saw over the balance of the 80s into the early 90s. That is the worst case scenario today, because now we are depending on a lot

24:29 of unilateral Saudi production cuts.

24:33 And if they decide that they're doing too much work and everyone else is free writing, there's always the option that can dump production back on the market. And again, the deficits we're seeing

24:42 right now are very much, you know, thanks to two million barrels a day of Saudi production, you know, curtailment and discipline. Now, to your question as to where the, I've heard this a lot,

24:54 which is, you know, maybe they, you know, every time they get too high, they cut back. Is this evidence that this is them running up against production, you know, limits? And I will, you

25:06 know, in the, I'm in the same boat as you, I don't have access to Saudi Aramco kind of data and, you know, class, you know, these are like the highest guarded secrets in the kingdom. The only

25:17 thing I will note is that when you look at historical production, it typically does, it gradually rises in these kind of chunky bits, and you kind of jump around a new height. So I would say that

25:30 I do believe that Saudi can produce roughly what they say they can, at least temporarily. and probably not far off that on a more durable basis. But I will agree that I think that there is evidence

25:43 that they don't like to run at those levels for very long. They've only breached these levels kind of a handful of times. That said, they are also committed to further investment and increasing

25:54 that kind of level again. I think that's probably what we're going to see. They're probably going to cut back now, they're going to hang out, they're going to invest in more and they're going to

26:01 lift production again once the market can allow But no one will ever know. And I think that was really what we were all kind of wondering at the beginning of last year, was is this going to the

26:15 moment that we finally see what Saudi Arabia can produce at the max level? Because if you lost all of that Russian supply, they would be producing basically full out. And I think that was going to

26:28 be this natural experiment that we never really got to see born out, which is a shame from a kind of an academic perspective, good from a market kind of stability perspective, of course. But I

26:38 think it would have, it would have finally answered a lot of questions. I think one way or the other would have given us more information from which to kind of further anticipates Saudi action. So

26:48 you earlier made your prediction or said where you were thinking the second half of this year were 90 to 95.

26:57 Look into the crystal ball a little further than that. But as you're looking into that crystal ball, 'cause you've got a standing invite to come on the podcast anytime. And I'm sure we'll do this

27:08 at least once a year. What are we talking about in three years that maybe we're not thinking about right now?

27:19 So, I think the one thing that's really important for everyone to understand coming out of COVID is that we don't actually know what the post-COVID oil market looks like yet. From basically the

27:32 financial crisis right up in the COVID, you had 10, 12 years of very predictable, at least a man's side kind of reactions. In hindsight, you could see shale and how it responded At the time, it

27:46 was kind of constantly surprising because we couldn't believe how fast it was growing. But there were rules, and I think the challenge right now is that we don't have great visibility on what,

27:57 let's say, the trend in kind of air traffic looks like. So I'd say there's two really big questions. One, what is the steady state of demand growth going forward? Prior to COVID, you would say

28:11 like 12 to 16 million barrels a day of growth.

28:16 one to one and a half percent of growth year on year. That was just the trend rate of growth. And essentially it was up to supply to keep up with it and prices to kind of drive that relationship.

28:27 Now, we've had this period of like multiple years in a row where we're growing at, you know, two to three million barrels a day because we're coming off of those COVID lows. But we're still kind

28:38 of struggling to durably breach those kind of pre-COVID demand levels And I think one of the challenges is that we've been in this kind of COVID era market so long, but we've kind of developed a

28:51 couple bad habits, in my opinion, about how we even discuss things like supply and demand balances. Most notably, this obsession with pre-COVID, you know, the 2019 level, you know, we've now

29:01 just reached, you know, you'll see breathless headlines forever about, and I've written them myself because, you know, that people like this kind of thing. But, you know, like, you know,

29:12 brand new all-time high demand. you know, record demand, you know, in May or whatever else, which once upon a time, that was like the most normal thing in the world. Every single year, by

29:23 definition, it was the highest ever because it was always growing. The fact, I actually get a little worried when people start to adopt this language because it's like, it makes it seem like the

29:33 years of like growing durably and reliably above last year, that was just an expectation. The fact that we are now celebrating it is actually kind of a bearish phenomenon Am I in my humble opinion?

29:44 So are you telling me - I think the question is like going - So are you actually telling me Aunt Martha doesn't turn 39 each year? Is that what it is? Right, is that

29:52 right? Yeah, yeah. Exactly, exactly. You know, it's my 50th time around 30 or whatever. But no, so I mean, the question is like going forward. Are you fundamentally, where does oil demand

30:05 grow? How much is that driven by China? How much of that is driven by India and the rest of emerging Asia? These are like big questions. And I think it's hard to say fundamentally where we're

30:16 going to be in three years in a price basis. If we really have kind of debates around what demand growth is gonna look like, because the difference between one and 15 over three years, that's a lot

30:27 of oil. And so I think this compounds very quickly. You know, just as an example, I'm doing a piece right now that kind of looks, I have this kind of piece of this series of articles on commodity

30:38 context called barreling ahead And it kind of compares the major forecast outlooks most notably between the EIA, which I typically find is slightly more bearish on supply demand balances in their

30:50 short-term energy outlook. And then OPEC, which is they release their monthly oil market report and they also have forecasts and kind of outlooks are there as well. So OPEC's typically very bullish

30:58 on balances, strong land demand, a little bit weaker on supply and then EIA is the opposite. Over the next year, they both see reasonably kind of, We'll see tighter markets, deficit, et cetera.

31:12 After that, OPEC assumes basically that we jump right back on the pre-COVID kind of trend growth rate. Whereas EIA basically said, you know, it starts to see a slowdown, you know, of maybe it's

31:23 a million barrels a day of growth. Maybe it's even slightly less. Those become big differences because, you know, while everyone will kind of make a huge amount of hay around the fact that the US

31:33 shale is slowing, and it is for sure slowing. I think, again, it's important to note that in the decade prior to COVID, it's like two thirds of every incremental barrel produced globally came

31:43 from US shale, which is just like a staggering level of concentration and supply growth. So no doubt we're seeing a slowdown there. Maybe it goes from two million barrels a day of total liquids

31:52 like we saw in 2018 to maybe only 600, 000 to a million barrels a day. It's still going to be some of the largest source of supply growth globally, particularly on the NGL side, where also you're

32:03 actually seeing a lot of the demand on petrochemicals.

32:08 That's why it's so hard, you know, to say, and before we could kind of say like, US is gonna grow by one and a half, you know, demand will grow by one and a half. You'll kind of see some like

32:16 bouncing around the sides and everything will balance out. Now it's much harder to say like, well, if, you know, demand only grows by a million, well, by, you know, year three, where one and

32:26 a half million barrels shy of where we would have been had we been growing at pre-COVID levels. Even at US shale growth reduced pace, you know, combine that with a little bit of growth from Canada,

32:36 a little bit of growth from Guyana and Brazil offshore, where you're seeing a lot of optimism on the growth outlook on supply there. I think it's quite reasonable to think that we will maintain a

32:47 reasonably balanced market. Now, I think that if we end up in a situation where we are growing at one and a half to two million barrels a day a year, let's say we, you know, one and a half

32:57 percent every year and that keeps compounding, then I think we'll end up in a much tighter environment because I think US shale is gonna be much more important and there obviously is less appetite at

33:06 any price level. invest in US shale. I think that is this challenge we face now is it really all comes down to demand

33:14 which really means a lot of comes down to demand. Yeah and I don't have a good read on China. My gut tells me that Martin Grissano is probably onto something that they're way over leveraged, maybe

33:29 the stimulus. The stimulus there is just not going to happen. And you know the problem with China is a 0001 degree difference in the trajectory is a big freaking number you know. And so yeah I'm

33:46 sort of starting to get the end. I always get a vibe first and then get researched. I have the worst confirmation bias when it comes to statistics. But my vibe is we may see more trouble out of

33:57 China than I think people are anticipating

34:02 I'm also very much in the concerned category on China. One of my pieces recently I taught you is titled China oil demand debts. And I think the part of the challenge with China right now is we don't

34:13 have official Chinese demand data. Like we don't get, you know, from the IEA or from Statistics Scatter or wherever, but there's like a consumption or even a product supplied, kind of line item.

34:25 You don't really get that for China. So what you do get is you have trade data, you have refinery data, you gotta put those together and you can say, this is roughly how much they have available

34:34 in the country or apparent demand, if you will. That's agnostic to inventories 'cause we don't have great visibility on all the inventory capacity in China either. So again, you're trying to

34:45 analyze shadows here. But what's interesting about it is that those

34:49 apparent demand numbers for April and May were the highest on record. So we see apparent demand in China absolutely running gangbusters right now while the rest of the economy by all indications is

35:01 struggling So there have been, sorry, I'm stuck in my throat. there have been a variety of kind of debates going on as to what really is happening in the Chinese economy. I think, I mean,

35:17 clearly the macro side seems conservative. You know, Beijing wouldn't be talking and leaning on so many policy stimulus levers if the economy was doing well. That was the whole point of their pivot.

35:29 They wanted to push away from a lot of the stimulus kind of dependence. They wanted to build a consumer economy That was the plan. And it doesn't seem like it's going all that well, particularly

35:40 not, you know, this year was supposed to not just be a bounce back from last year, but like a raging bounce back, I do. As you had all this pent up demand and people were gonna jet set and travel

35:50 and kind of kick the economy off again, it just didn't seem to be happening. So one of the theories I have, and I think this is, it's still, I'm very open to being proven wrong, because at least

35:60 something will begin to make sense. But it seems like the Chinese government buying and storing a lot of finished refined product with some of the more concerning reasons that that could be happening.

36:11 First of all,

36:14 the Chinese government loves buying commodities and storing them. It's just like a thing that the Chinese government loves to do back when I was doing more metals. The strategic metals reserve in

36:22 China is a constant factor in let's say copper markets or everything else. So you can't discount the fact that maybe they just are like, well, we're going to buy a low, sell back high, whatever

36:31 else, always a possibility We're talking these are big, these are big kind of volumes, and it does seem strange given the fact that even if it's cheaper than someone could argue it could be,

36:40 diesel is still over a hundred bucks a barrel easily. So it seems like that's an expensive buy low strategy. The other argument, there's a piece recently in the Economist talking about, you know,

36:52 how could you tell if China was preparing for war? And it's like, oh, well, it would stockpile a bunch of commodities. It would stockpile metals and food and fuel And then I'm like, let's not

37:01 break. It was a really interesting long read in the FT about how, you know, Beijing was increasingly aggressive with its kind of flights in and around Taiwanese airspace and kind of pushing the

37:15 pushing the edge here on a whole bunch of sides, kind of just trying to stress test the environment. So while I would say that, and a couple of people suggested this to me initially, and my

37:26 natural inclination is just like, no, like that's not what happened That's not what the statistical mirage is telling us, you know, there has to be a more reasonable kind of run-of-the-mill

37:35 explanation. But it does seem to square a lot of the corners that I, that don't seem to totally make sense. So I think that is, well, still not a base case by any means, because it's just such a

37:49 stark possibility. I think it's a higher probability that I'm personally comfortable with The other thing is even if it's not a sure sign that they are going to, let's say, invade, obviously is

38:02 your most extreme example of this. Maybe they just do plan on continuing to be provocative and they are ever worried, ever conservative, want to at least be prepared in the kind of case. But, and

38:14 I'll be all, if the consumption is not actually, if it's not true domestic consumption, that you can only store products for so long. So the question is, does domestic demand actually catch up to

38:27 these inflated apparent demand numbers? Or do we eventually see Chinese, you know, apparent or observed demand fall away, which could, which could take some of the, some of the wind out of crude

38:39 sales in a second. So we talked about this yesterday. I guess it got released today on, on BDE and Kirk Coburn's take was you, China Bears have been like this forever. You'll be right one day,

38:51 but not today. So there's certainly that.

38:56 I mean, I totally agree on it, a chicken on the metal side. But I mean, like it's just. It's one of these things that's, you know, it doesn't make sense. And I agree, I mean, the same thing

39:06 people used to say all the time about shale was that shale, you know, shale doesn't make sense economically at these price levels, you know, something's got to give. And it really took a pandemic

39:15 and essentially a sudden stop to the entire industry for this type of change to be made around cashflow discipline, around kind of a renewed contract, if you will, with investors, you needed a

39:27 shock. So was COVID and COVID zero the shock for China that you actually started to change some of this? I don't know. I think it's like, again, I have been on the side of throwing shade at, you

39:40 know, China bears forever because China will always come back with stimulus and it will always support the economy. And it, you know, it has too much to lose from letting the bottom fall out. I

39:48 still do think that that is probable here in some step. I do not think that China will let the bottom fall out. But I think that if you need to step in with that kind of support, it's really not

39:60 that strong an economy place. And again, it's just pushing these problems down the road. So one of my favorite Jerry Seinfeld jokes. What is the traditional greeting of the Chinese army? General,

40:14 I enjoy your chicken and I yours. I love that joke. Nobody ever laughs. You're kind to laugh. Hey, Rory, you were great to come on the podcast. I really appreciate it because I didn't

40:26 understand any of this. So this really helped me a lot. Standing invite to come back on anytime. And I will sure I will track you down to get you to do that. Mark Meyer and I've been talking about

40:39 how do we revamp the energy policy draft? So get your thinking hat on about that. But most importantly, tell folks where they can find you. Perfect. Well, again, thanks for having me, Chuck.

40:50 I will definitely be back on. Anyone can find me on Twitter at Rory underscore Johnston and you can find all of my research at commodity contextcom.