Title: The Oil Supply Shock Hiding in Plain Sight
Show: Peak Prosperity — "Finance U" (YouTube)
Guest: Adam Rozencwajg — founding & managing partner, Goehring & Rozencwajg Associates (G&R), a New York natural-resource investment firm (~$2.5B AUM)
Date: 2026-08-25
URL: https://youtu.be/-toOFYJ3wVk
Length: ~64 min
Note: Fillers (um/uh/you know/like-as-tic) removed, stutters and false starts collapsed, and non-verbal markers ([music], [snorts], [clears throat]) dropped; wording otherwise verbatim. Auto-transcript garbles corrected: "Finance Hugh"→Finance U; "Chris Martinson"→Chris Martenson; "Adam Rosenwag"→Adam Rozencwajg; "Garing and Roen Schwag"→Goehring & Rozencwajg; "GNR"→G&R; "straight of Permuz" / "straight of form moves" / "trade of war for moves" / "trait" / "street"→Strait of Hormuz (strait); "theou" / "the was signed"→the MOU; "Abake"→Abqaiq; "perian" / "Peran"→Permian; "NYX"→NYMEX; "bread"→Brent; "ura" / "uras"→urea; "Qar"→Qatar; "LG"→LNG; "Anoir"→ANWR; "egg"→ag (agriculture); "Bernaki"→Bernanke; "CO" / "co"→COVID; "shells" / "shelves"→shales; "ENTP"→E&P; "anthrop roic"→Anthropic; "gorosen.com" / "Goen.com"→gorozen.com; "amilarate"→ameliorate; "facitious"→facetious; "leerary"→leery; "wellbor"→wellbore; "whooes"→whooshes; "flotillaa"→flotilla; "accreative"→accretive; "halfNav" / "half nav"→half NAV; "reportported"→reported; "321"→3-2-1; "growth short positions"→gross short positions; "the await recessions"→the '08 recession; "those crews, those poor crews"→those crudes, those poor crews; "Roof crack spreads"→crack spreads (garbled lead word dropped); "Elino"→El Niño. "Operation Epic Fury" left as spoken. Every (mm:ss) / (h:mm:ss) cue kept in place. Interview: Chris Martenson (host) ↔ Adam Rozencwajg; ">>" marks a speaker change, as captured.

(00:00) Nothing in this program should be considered investment advice. It is for educational purposes only. Please hit pause and read this disclaimer in full. The crisis is still ongoing. But even if it were to ameliorate tomorrow, I think the damage might already have been done and it just takes a little while to play through and to manifest itself in the balances in the markets.
(00:30) Hello everyone, welcome to this very special episode of Finance U. I'm your host Chris Martenson and today we're going to be talking about well, oil, the Strait of Hormuz, what it means in general for natural resources, but really we're going to be talking oil and this is a very very important update.
(00:47) Obviously there's a lot going on in the world. A lot of concern these days about where we really are in the oil story and there's a lot of confusion and to help us unpack that and make it not confusing is Adam Rozencwajg, a founding and managing partner at Goehring & Rozencwajg, G&R, a global natural resource investment firm based in New York City, approximately I guess two and a half billion in AUM, and prior to G&R Adam had lots of experience working in the finance industry so he's deep pro and it's worth noting that during the past 19 years Adam's broadly
(01:18) followed original research, which I follow like a hawk, has really made him widely regarded as the leading authority in the natural resource sector. Adam, welcome back to the show. >> Thanks, Chris. Nice to be back. >> Well, what's going on? So we're going to — I want to go into your, you put out a, this report came out in May and so much has happened in May and then there's this, an interim oil market update.
(01:49) We'll get into that, but very quickly if you can, what is going on with the price of oil? >> Sure. Well, it's been really quiet summer over here. Not too much to discuss at all. Obviously, I'm being facetious. Back in March, early March, obviously Operation Epic Fury started and the Strait of Hormuz was initially closed and that led to the huge oil disruption that we've really been living through ever since.
(02:20) And around that time, we started to try to put some pen to paper and obviously there was a lot of uncertainty mostly around how long the conflict would last and how long the strait would remain closed. But essentially with 10 million barrels per day affected, because remember we had 20 million barrels crossing through the strait before the crisis started.
(02:41) Some of that was rerouted via pipelines out through the Red Sea and overland into Turkey etc. But by all measures it's been essentially, it's impacted upstream production by about 10 million barrels per day. So 10 million barrels at the wellhead got shut in because it wasn't able to transit out through the Strait of Hormuz and we sort of quickly ascertained back in April and then when we published in May that this is going to be a real problem and in short we said that if you take away for 100 days
(03:15) 10 million barrels that's going to be essentially a billion barrels of oil that never made it to market and that's going to have to come from somewhere. And it can really come from two places. The first place that it can come from would be inventories being drawn down and the second would be demand destruction.
(03:34) Except there was a problem on our calculations. We didn't really have a billion barrels of easily mobilized inventories to draw down. Now you might see numbers that show inventories well in excess of that back then as well as today. But the key there is a lot of that is really more working capital, if you will.
(03:54) It's oil that fills pipelines and it fills tankers and you need that oil essentially in storage, right? But in inventory, but it's not readily available to be drawn down. Think of it like working capital in your business as opposed to straight savings in your savings account. Yes, it's cash. It might sit in the account, but you need it to fulfill payroll, etc.
(04:17) The same type of thing exists in the oil market. You needed a lot of that oil to keep the pipelines filled. You needed it because it takes 20 to 30 days for these vessels to transit to different places, assuming they're operational. Forget the one stuck in the strait, but the rest of the world that was still operating its tanker fleet.
(04:37) And so we came to the conclusion that you wouldn't have a billion barrels and that the tanks could, as we said, run dry. And that was our view back in May. Our view in April. And it wasn't just us. There's a number of analysts that felt the same way. JP Morgan had a big report that was widely circulated and they did their math a little differently, but as you expect, it kind of came to the same results, that we don't really have enough, which means one of two things would have to happen. Either prices
(05:05) would need to skyrocket to squeeze out demand or we would run into a catastrophe and essentially we would run out of oil. Now, the thing about running out of oil is we've never really done that before. We filled oil to the brim. That happened during COVID when we shut off demand very quickly and supply was still going and inventory swelled and they essentially, the tanks hit their tank tops.
(05:32) And what did we see then? Well, we saw oil trade for minus $50 a barrel here in the United States. Which was obviously a massive dislocation. And it didn't last, but it was a collapse to levels that no one thought possible, right? And we kind of worried that the same thing would happen in reverse.
(05:50) If you hit tank bottoms, you might get a spike up to $2 or $300, might not be sustainable, but that the market was set up for this really, really dangerous period as we essentially went from having a buffer to operating a giant global just-in-time energy market, which we've never really done before.
(06:10) So now you fast forward a couple months and here we are as we talk today. It's sort of the third week in August and we haven't run the tanks dry yet and oil prices, particularly a few weeks ago when the US and Iran signed the MOU which would essentially reopen this Strait of Hormuz, oil prices traded all the way back down to where they were before the war started.
(06:31) So, it seemed as though this whole thing was a bit of a tempest in a teapot and everyone pushed back and said, "Well, everyone, we got it wrong." They didn't say we got it wrong. They said G&R got it wrong. It hasn't been this crisis. And in fact what we actually saw was sort of this twisting and this perversion where they said back in January before the crisis started the IEA said we had a big glut — that we didn't agree with that — but every day that you disrupted 10 million barrels
(07:05) and you didn't have a crisis that was almost like ammunition for the bears, right? They said, well, this proves that the glut must have been even bigger. If we can withstand this and there's no impact, then that means that this market must be unbelievably well supplied. And that's really been the sentiment I would say throughout this whole crisis.
(07:26) So again let's start at the beginning. I think there's a bit of a view that investors became wildly bullish on oil when the war started and they were all proven wrong and they ran home with their tail between their legs, if you will. Yeah. And that's sort of what happened back in 2022. In 2022, when Russia invaded the Ukraine, oil prices spiked up to 125 bucks, investors were worried that there might be upcoming disruptions to the oil market, right? Because Russia is a big exporter of crude and refined product as we know
(08:00) >> and there was a concern that down the line — it wasn't happening yet but it was possible that down the line with sanctions etc — that Russia's exports could be at risk and that number was widely circulated as 5 million barrels a day potentially at risk. Investors were bullish then so they bid up the price on the anticipation of that and when that didn't materialize, when the Russians were able to get that oil out in different ways, shapes and forms, the price came right back off and you ended the year flat with where you started.
(08:30) This time has been entirely different as far as I'm concerned. So, you started the year hugely bearish. Investors were more bearish than we'd ever seen them. Energy was 2 and a half percent of the S&P. Gross speculative positioning on all the futures contracts was at extreme levels. And even going into the weekend where the war started, that was true.
(08:52) And what we saw is obviously oil spiked on that Monday. The US attacked over the weekend and on Monday oil prices were up a lot and most of these firms were caught offside on their shorts and their risk managers came in and told them that they had to shed that gross short position. So they ran to cover those shorts and that helped to push the price of oil up to about 120 bucks again.
(09:18) Now, no sooner than that happened, that they started to kind of slowly put those shorts back on whenever they could. And you could see it if you look at the gross short positioning on NYMEX or on Brent, you had a huge level going into the war, a massive massive short cover and then it just started creeping back up and back up and back up as those risk managers essentially gave them more rope, and by the time the MOU was signed, we actually had gotten the gross short positions back up to where they were before the war started. So I
(09:50) would argue, 2022 people were bullish. They were worried about 5 million barrels that could be disrupted and they were proven wrong. Mainly not because the market was so loose, but because the impact never came. In this situation, they were bearish at the beginning. 10 million barrels was disrupted for much longer than anyone anticipated.
(10:13) And they've been covering when they needed to, but the sentiment throughout really hasn't changed. And that's why the oil stocks didn't do very much throughout this crisis. That's why the long end of the curve didn't do very much because sentiment has remained extremely extremely negative. So now we are here again third week in August, about a month after, six weeks after the MOU was first proposed.
(10:40) It now has sort of gone away again in the sense that hostilities have resumed and the strait is now closed. And everyone is just waiting to see what happens next. But I would say that the universal view is still we haven't had a crisis yet. We haven't had this big shock that people like us have been calling for and that means it won't come.
(11:01) And I think that's a very dangerous and complacent view to have in the market today. >> I've been a little bit surprised by things and so I'm always casting about for explanations. Financial Times in March reported that big oil traders were saying, "Wow, there's this mystery new trader coming in that's just going heavy short."
(11:19) And then Reuters reported that Japan was considering maybe shorting oil futures as a way of managing its external risk and all of that. Any truth to that that you've uncovered so far, that there's a mystery player in the markets right now? >> Oh, certainly nothing that I've uncovered? No.
(11:35) And the oil market is a really tricky one because people always blame speculators and it is true that the paper oil market is 40 times larger than the physical market and that it's heavily levered etc. On the flip side, as opposed to let's say financial markets, as opposed to stock markets or options markets, the oil market is grounded on some level in reality.
(12:06) We sometimes are quick to blame speculators or mystery traders or what have you and forget the fact that the physical side of this market is anchored in about 105 to 106 million barrels every day. I mean it's a massive volume of anything and it's an expensive something. So when you look at the dollars involved here, it's incredibly incredibly — $10 billion a day, let's say, at $100 oil.
(12:37) And so that has to clear at a price and that does, I do think, anchor the oil markets a little bit more than it does some other markets in the world. Though it doesn't mean that speculators can't get in in the short term and dislocate things, but I am leery of arguments that always sort of blame the speculators because there is a lot of physical volumes going around and I always prefer to look for an answer that's based in physical volumes as opposed to just pure speculative flows and I think we do kind of have one of
(13:09) those today. So this gets back to the core question. You shut in 10 million barrels for now 50 days. Why don't we see a problem? Why aren't we at tank bottoms? What is going on? And I think the answer to that is really kind of two or three different things. So, first of all, it takes a little bit of time to work through the system.
(13:35) It doesn't take 150 days, right? But we didn't see inventory start to fall for about 45 to 50 days after March 1st, after the strait was first shut. And the reason was that first you filled up all these onshore storage tanks, then you filled up all these vessels, then you shut in the fields, but it took about a month to six weeks from that before that oil was missing in the rest of the system because the boats would normally take 20 to 30 days to get to where they were going.
(14:04) So, we didn't see inventory start to fall, let's call it two months after the crisis started. So if we're talking about now March, April, May, June, July, five months, right, that we have data for and the July data is quite preliminary. And two of those five months didn't feel the impact.
(14:23) Well, that means that if the strait were to reopen tomorrow, presumably it would take two months to work it back into the system on the other side. So we're only just more than halfway through the physical manifestation of this problem, even if it were to get better tomorrow. Inventories are going to keep drawing for another two months.
(14:41) And where we are right now, we've drawn like 400 million plus barrels. So, if we thought a billion barrels was the sort of total nut for this problem — now granted, it's lasting longer than we expected, so it should be even higher than that — but just because we haven't had a problem yet doesn't mean by any stretch of the imagination that we're not going to have a problem even if things get better from here.
(15:03) So, that's the first thing, right? Just because the problem hasn't happened yet doesn't mean it won't. And the same was a little bit true during COVID where you could see some of these supply chains getting disrupted and there was lead time to it. There's lead time before you kind of felt it immediately.
(15:21) And I think that if people were more bullish in their outlook on energy, perhaps we would be more forward-looking, but everyone's bearish and every day we don't have a crisis, it feeds the bearish narrative. And so I think we're going to have to get hit over the head a little bit with it here. So that's number one.
(15:38) Number two, we did work through what I would call sort of a one-time burp in crude oil, and that was when the MOU was signed, the strait did reopen for a period of time, and you had a huge backlog of vessels that were stuck in the Persian Gulf, and they made a beeline out of there, right? So if we were doing 20 million a day through the strait before, there was a period, you got 100 million barrels out in fairly short order there, right? Pretty quick. And that happened at a very very particular time in the oil markets.
(16:13) Three major sources of refineries were essentially no longer running. The first was the Middle Eastern refineries themselves because some of that oil would have been refined domestically within the Persian Gulf. Maybe not domestically, but within the Persian Gulf. And obviously, if you couldn't get out since March, you loaded a tanker as best you could, right? And then if the refinery, or with the strait open, you didn't take that oil and run it through a refinery.
(16:45) You got it out of there. You said, "I don't know what the future's going to hold. Who knows if this strait's going to stay open for another week or two. Let's just get out while the getting's good." And frankly, that was a good call because the strait did close again and that refined product and those crudes, those poor crews would be still trapped inside the Persian Gulf.
(17:02) That's number one. Number two is Russia and a lot of that infrastructure, the refinery infrastructure, was destroyed by the Ukrainians. And then the third and this is the really notable one was China. China decided to massively reduce its refinery runs. And why? Well, they used to refine product.
(17:22) They used to import crude, refine it, and export the refined product. And they stopped doing that. As soon as the war broke out, they said, "We're just going to concentrate on our domestic market. We're going to bring in the crude that we need along with our domestic production in order to meet domestic refined product demand and everything else.
(17:41) The rest of the world can deal with that." Why they did that we will debate for years and years. Was it just a policy decision? Was it a dry run for what China might look like if it were all of a sudden embargoed, if it, let's say, invaded Taiwan? Most of the conventional war game and strategy says that you choke China off in terms of its oil imports.
(18:03) Did they want to show the world what that looks like? Who knows? But they stopped importing, they stopped refining, and they stopped exporting refined products. So that created a backlog where you had all these flotilla coming out of the Persian Gulf when the MOU was signed and three big buyers weren't buying. Now the big question is, were the end users still consuming the refined product? Because if not, if everyone lowered their refinery runs to meet end use demand, that would be a balancer in the market.
(18:36) That would explain why things aren't so bad. But if, as we think, end users continued to consume just like they did before, but the refineries didn't run, that just means you've shifted the problem from crude to refined products. That means that refined product inventories are probably falling faster than anyone realizes.
(18:56) And that's notable because that's the blind spot that we have in the energy market. Nobody has a good handle, particularly in the emerging market world, what level are the refined product inventories at today? So I think that the reason the crude side of the equation has held in is one, because of some lags, two, because of this flotilla that did come out and that was a big hunk of oil, and three, because most of the problem is actually originating in refined products and will then spread, because what's going to happen is we have to refill those
(19:32) gasoline, diesel, jet fuel tanks that are probably at dangerous levels in most of the world if not at tank bottoms. And to do that, we're going to have to bid a lot of crude back into the refining system, and that's going to, I think, catch people off guard. So, it's a very, very complicated market right now.
(19:50) Old adages and rules of thumb that you've been able to use for years are tricky today. And I'll give you a very quick example of that. We talk about oil supply and demand. No one appreciates, we're really talking about two completely separate and distinct markets. Oil production is what comes out of the ground.
(20:11) It's crude and NGLs and oil — that's production, supply. And demand is essentially refined product demand. We don't talk about refinery demand that sits in the middle. It's like an intercompany transfer. It gets netted out, if you will. But if what's happening is you're dislocating that middle part, the refining system right now, which is what I think is happening, then all of your models that just kind of treat this as one system break apart and you have to really change the way you look at things.
(20:38) And that's why I think it's such an opaque market today. >> Well, it's fascinating. So to get my hands on demand, I think my preferred instantaneous demand is just the flight tracker. How many flights are in the air, because that represents demand on the fly and it's very sensitive.
(20:56) If the economy is falling off, FedEx flies less and things. I consider that to be a good proxy. Flights are higher this year than last year. So, that tells me that whatever the price is of jet fuel, at least in that market, is not sufficient to pinch off demand. >> I agree with that and that's a metric that we like to look at as well.
(21:17) It doesn't correlate — 5%, which is I think at this point five or six percent is where airline or total commercial traffic year on year is up — doesn't correlate one to one with a 5% increase in oil demand, right? Because that would be 5 million barrels a day of growth. That's not the case. But the two series do line up incredibly well and what's nice about the air traffic demand, even though jet fuel is only what, 9% of global energy demand or something like that, maybe even lower than that. The correlation holds
(21:51) super super well, including during COVID. I would have thought for instance that it would have broken apart during COVID because yes, we traveled less in automobiles but disproportionately less in flights, very clearly. I went from driving 30 miles to maybe 10 miles a day.
(22:09) But my airline travel went down 100%. Right? And so I would think that that would have broken down and it didn't. It correlated super well during COVID, during the '08 recession, all this stuff, and as you mentioned before it is a real time piece of data and you can get it on Bloomberg or even on the internet. It's the same company that tells you if your flight's going to be delayed and where your inbound aircraft is coming from. It's a consumer website and they package the data and offer it up available. So
(22:36) by looking at that you have very real time data and like you said I can't use it to necessarily say exactly what oil demand growth truth is. I can say with almost 100% certainty that we are not down 5 million barrels a day, which is what you'll read in the headlines in terms of oil consumption, refined product consumption, and have that commercial flight data. Those two things are irreconcilable to me. It's just not possible. >> Yeah, so do you trust the EIA's data? Do you think it's good? >> Yeah, I think the EIA's is better than
(23:13) the IEA. I think all these data sources have a lot of challenges. I mean, you forget you're counting 105 million barrels of both supply and demand every day. And so that's very very — it's a big challenge and as much as I knock the IEA, which I do quite a bit, I'm awfully happy that I do have that data because I wouldn't be able to recreate it.
(23:40) Certainly if I went out and made estimates it would be much worse. So I'm happy to have it but there are some systemic errors in it. That's true in both IEA which is international and EIA which is the US Department of Energy. But by and large I find the EIA data is to be quite good and I find it to be largely less editorialized than the IEA.
(24:02) So the IEA data, you read the sort of chairman summary at the beginning and they do all these kind of weird things where they'll release that summary to the press without releasing the backup data and then they release the backup data eight or nine hours later after Reuters and Bloomberg has written their article already.
(24:20) And so undoubtedly, undeniably, it's always a bearish commentary backed up by some bullish data. So the EIA, the US guys, don't do that quite as much. But I do like the EIA data. It's not without its limitations, challenges, and errors, but I'm awfully glad I have it. >> Yeah.
(24:38) So, I mean, if it's directionally correct, so they put out this — their August short-term energy outlook came out I think the 17th. It's pretty recent. Anyway, if the normal outage is like 2 million barrels per day just for normal reasons, unplanned liquid fuels production outages, from the start of the war, it's anywhere from 10 to 16.
(24:59) This is just through July. We don't have August data obviously yet, but if we look at that, we sort of squint at that and we say, "Okay, that's — I'll just say 10 million barrels a day missing on average. We're day 176. We're missing 1.76 billion barrels now." And fascinatingly, the EIA in that same outlook, they said, "Oh, there's going to be — we're just down to 55 days of crude inventories and other liquids days of supply."
(25:26) We're down to 55 days of supply, but wouldn't you know it, it just trundles right back up to normal range through 2027. What are your thoughts on that? >> I think that that is really where the rubber meets the road here because we were bullish on oil in January and February and before this all started.
(25:47) And the reason we were bullish on that is that we didn't feel that the market was in a surplus. Inventories weren't growing nearly as quickly as everyone said they ought to if you believe the headline numbers and that told us that the headline numbers were likely incorrect. There was a slight surplus, but that surplus would probably go away given the robust state of demand growth over the next year or so.
(26:10) And everyone was bearish, prices were low, and we felt that the market was actually pretty close to balanced and would require a higher price going forward. So that's going to be the big shock when we open everything back up. It's going to be very difficult, very difficult to grow inventories back up off these dangerous low levels.
(26:30) And that's where I think there could be quite a bit of panic. That's where this shifts from a short-term trade the headline to a longer term, oh, we have a problem. And the problem that we have — and you and I have discussed this in the past — is that we brought on this unbelievable field or series of fields in the US, the shales.
(26:51) No one expected them. They were unbelievably prolific and they resulted quite frankly in basically a glut for 10 or 12 years in the oil markets. Not such a bad glut mind you. For all that shale production was able to add to the market, market stayed remarkably balanced, but nevertheless, everyone did sort of appreciate that if oil got too high, the shales could just bring on more and there wasn't a feeling of scarcity in the market.
(27:17) And that does what that always does. It results in capital leaving because everyone grows complacent. No one invested in the next generation of fields. And the IEA put out this really good report last year that showed essentially what the base decline of all the existing fields around the world was and what we might need to spend, and their whole thing was, what do we need to spend to hold production flat? And it showed that there was a big gap between what we were spending, about 550 billion a year, and what you needed to
(27:49) hold production flat. But I don't think production needs to be held flat. I think it needs to grow because demand is not being held flat. Demand is growing and they also had a lot of shale contribution from here on out in terms of that growth number and neither of those things you're going to get. So when you really look at it, on my math you probably need instead of 500 billion a year about a trillion and a half a year in spending over a decade or so to really rehabilitate and recapitalize the energy industry. And
(28:18) until you get that, it's going to be difficult to go into a period of plenty again. And I think what this has done is this has served — in retrospect will have served — as the catalyst to make people aware of that because the shales have stopped growing. And that's true now. We see it.
(28:34) Those numbers have just marched steady. There you go. And if you look at the most recent one that came out just last week, they're even lower still. So the shales have stopped growing and that's what we've relied on for a long time. >> Yeah. This is I think from your May quarterly report and it's Permian year-on-year oil production growth and it's just a downtrend line but I'm just going to note the level down here.
(28:58) If this is 0.5 we're somewhere like half that roughly. Okay. And then we flip back to the short-term energy outlook again, came out in August from the EIA, and they surprisingly — in December they had this very flat but now they're very bullish. They see 2027, they see 400,000 barrels per day of oil growth and it's mostly coming from the lower 48.
(29:19) So that's the shales at this stage. Gulf of America, I guess I have to call that now, is actually a net minus a little bit there. Alaska is coming online. Where's that 400 — where's all that green coming from in this? Do you think >> it really at this point can only come from natural gas liquids, because as you saw on the crude side of things, production has now essentially turned negative year on year.
(29:45) NGLs continue to grow but that growth is slowing precipitously as well. And that raises — maybe too technical for this discussion but I'll try to be brief — it raises an interesting point which is essentially the Permian produces gas and oil together and we got this wrong. I'm happy to admit when we get something wrong, we got this wrong.
(30:09) The Permian produces gas and oil together. It's not a gas side and an oil side. In the same wellbore, in the same formation, there's gas dissolved in the oil, just like carbonation in a can of soda. And as those wells get older, as the downward pressure, the reservoir and the formation lessens, it's analogous to opening that can of soda, and the gas separates out from the liquids.
(30:37) And what it does is it whooshes preferentially. There's still some gas dissolved in the liquid, just like there would be in your soda, but you get a whoosh of gas that comes out. So if you kind of — I guess you have to pour it out and open it at the same time. As you're doing that, the pressure lessens for a period, you'll get a lot more gas relative to liquid.
(30:54) And then there'll be more gas in the liquid as well. And that's a sign that that field is getting older. Now, as you drilled more and more wells in the Permian and production, oil was growing and growing and growing, the average age of the wells was actually getting younger.
(31:11) You were drilling lots and lots of new young wells compared to the old tails. Now, as oil production slows and the field matures, the average age of the well is getting older and older and older. The production coming out, and so it's becoming gassier. And with the gas, you're getting NGLs. That's where your NGL stream comes from, is from your gas. >> Methane, propane, butane. >> Yep.
(31:36) And that gets then blended back into the crude side. It can go either way. It could be added into the gas stream which increases the energy content of your gas or it can be stripped out and run through the crude refining, within reason, and you do that based on what's more profitable, right? So the operator can decide whether to strip NGLs or not and for a long time it's paid to strip the NGLs, so it's gone into the crude stream. That's not the sign of healthy robust growth. That's the sign of a field that's getting older.
(32:10) That's a little bit of a swan song in that field, right? And so we've been calling it a gas burp. We've been calling it all different kinds of things. We didn't have that modeled properly a couple years ago. It's resulted in Permian gas production in general staying more robust. It's been one of the reasons why US gas production, dry gas and wet gas, has actually been able to hang in there better than we would have expected.
(32:36) Everywhere else it's been quite weak except the Permian, and the Permian oil has been very weak. You can see it's slowing day by day by day. But gas is this kind of last gasp of gas coming out. And so that would be the only way that you could get 400,000 barrels of year-on-year growth in liquids, would be from NGLs.
(33:00) But I don't think you can. I think if you look at what the NGL numbers year on year have done, they're coming way down too, as you would expect, right? That works for a while. But if gravity and inertia is pulling all these streams down, yes, the split to gas goes up and so you can get this little dislocation, but it doesn't last.
(33:19) >> Can I get your quick reaction to this very short clip? Just came out. I just found it today. I think it came out yesterday. >> In fact, people are amazed. One of the reasons that oil hasn't gone to like the proverbial $300 a barrel, it's at 83, 84, 85 and it'll be a lot lower when this is over because we have plenty of oil.
(33:41) But one of the reasons it never went the 3 and 350 number is because we have a lot coming up >> and people are finding alternatives to, and one of the alternatives, Texas. Another one, Alaska, Louisiana. They're coming to the United States to get oil. And people say, "Oh, you shouldn't say that because it makes it sound." Well, it is what it is.
(34:04) I mean, they're coming to Texas, Louisiana, and Alaska. >> And the reason I'm confused is because the EIA puts out this beautiful weekly report and they show that we are a net importer of crude oil. How does a net importer of oil supply the world? >> Well, look, there's some truth to the idea that the US shales have been hugely prolific and there's a lot of truth to the fact that on a global basis, we would have had a very different past 15 years had we not brought on the US
(34:40) shales. All that Malthusian thinking back in 2007, 2008, right ahead of the GFC, that we were running out of oil. Just like the fears that we were running out of US natural gas at a point. I mean, there's some truth to those concerns. And as they say in our business, the cure for high price is high price.
(35:06) What that means is that high prices incentivize the industry to get to work. And it incentivizes the industry to go and find new fields and sometimes they get luckier quicker and sometimes it takes them longer. There is lots of oil and gas in the world in the ground. And the US is unbelievably well-endowed with oil and gas resources.
(35:28) I mean almost miraculously. So on the long term, I don't disagree with that. If you look 10 years out, we're going to be consuming more energy than we produce, which means, or than we do today, which means that we'll be producing more than we produce today. But the question is just the path in the middle when you've relied on a couple fields and they're all exhibiting very clear geological trends and they all point to the fact that they're now turning negative.
(35:59) What you're going to need is a new cycle. This isn't something that can be turned on. You can't >> a new price cycle, new capex cycle that takes years and years. And just like in 2003 to 2010, let's say, there was this feeling like, oh my god, we're running out of everything and we're never going to get it back.
(36:19) And then we brought on the shales. There'll be something else that comes and it's very possible that that next thing that comes could be in the United States. Who knows? We are well-endowed. But when I look right now, the fields that are adding barrels today are fewer and fewer. The only one left is the Permian.
(36:33) You're down to six counties in West Texas. As I lease land out there in front of, royalty side, and when the brokers bring me things you just see how much it's been drilled particularly in the good area, so you're moving further into the fringes. All these things we've been talking about for a long time now, they're all coming home to roost. And people criticize us at times for having been sort of early on this call, but look, back in 2019 using our AI models that we were
(37:02) building ourselves back then — there was no ChatGPT or Anthropic available for public use then — we built our own deep neural networks to analyze shale trends. And in 2019, shales were growing 2 million barrels a day and every year they were growing more than they were growing last year.
(37:19) So you had first and second order derivatives were positive. We were growing and the growth was accelerating. And we said, I think this is it in terms of growth. I think this is peak growth, not peak production, peak growth. And that if we're right, we'll never grow more than we do in 2019 and then by 2025 we'll actually turn negative year on year. That's exactly what's happened.
(37:41) So this is not — maybe we got lucky, that's always a possibility — but I think this is very well rooted in some deep analysis and I just don't see where the US can turn. Remember when Trump ran for a second term. He ran, one of the things was the three arrows and drill baby drill.
(38:08) And I know what some of the people in the administration think. They think that there is — very well educated people, very sophisticated. They've been presented with reports that think that they can get growth. So far through the administration thus far we've not been able to get that growth. Prices have been pretty high honestly, despite Trump's best efforts to get them lower. There hasn't been regulation that's stopped people from going after it. Productivity has just trended lower and
(38:39) lower and year-on-year growth has trended lower and lower to the point that a lot of the administration's talk now has turned to getting Saudi Arabia to increase production. That was the big talk back in >> Oh, if they — which that's okay because if we look at this, that's production over there on the right side of this. We can talk about refinery runs maybe in a minute. But when I look at this, looks like 2025, we really haven't materially advanced in a while, looks like about a year.
(39:12) And then I just heard a couple of E&P companies in the shale basins actually were trimming their capex budgets despite oil prices right now. And we had this big ANWR auction which was a flop, a complete flop. Yeah. >> So, I think all this bearish talk has landed in the oil company boardrooms and they're not as eager as I would have thought to sort of jump on their marginal acreage or really hit their better acreage hard.
(39:40) They're just not doing that this time as far as I can see. What are you seeing? >> No, I agree with you. And remember when these guys go and set their capital budgets for a year out, they need to essentially control some price risk and they look to the futures curve and the futures curve hasn't done nearly as much as the spot curve has.
(39:58) So they're not seeing particularly high incentive prices there and oil stocks remain out of favor. And so we did this study, oh gosh, maybe five years ago and it's really really informative. At the time valuations were even more depressed, I suspect, than they are today.
(40:19) But if you were an oil CEO and you wanted to spend 100 million bucks sitting as cash on your balance sheet, the market was giving you credit at essentially 100 cents on the dollar if you have cash, right? You're backing it out of your enterprise value. And if you went and put it to work, you might create something that had $200 million of net present value.
(40:38) Net of the capex, you could double the value of that. So your cash would go down 100 and on the balance sheet would be something with an NPV of 200, right? Except the market at the time was capitalizing that stock at half NAV. So that means that you could either sit with $100 million in cash or you spend it, that goes down 100, you bring on 200 million of NPV, capitalized at half NAV, and you were flat.
(41:04) You didn't have the cash anymore. You drilled out your best acres, your presumably next best acres is what you go after, and you were kind of at a flat stock price. So yeah, you kept people employed, etc. But of course, there was another option that you could do which was you buy back your stock at half NAV.
(41:22) Now all of a sudden that was massively accretive and so it created a real disincentive. And to a certain extent I think that has lingered in the market. You couldn't really let production fall because then people came after you. They didn't like that, right? But if you could show that you could hold production basically flat and take all that extra money, all that extra cash flow over and above maintenance, and buy back stock with it, that was a preferred path.
(41:50) And I don't think that the psychology has largely shifted. So, I think that these guys still remain very cautious and they're not going and trying, and of course, like I said, they also can't get access at this $100, $90 oil price when they're looking out on the futures curve. >> Let's talk about tank bottoms for a second.
(42:10) I had to do a whole analysis on the SPR because there's a lot of theories and ideas floating around. So I'd read a 170 page report from the DOE, which is pretty nice. It was actually fairly complete. Here we're looking at the SPR being drawn down and at the time I did this analysis there were 331 million barrels in there. Now there's 290 something.
(42:32) And what I found was that there's 130 million barrels in what are called ESR early storage caverns, which by the way if you draw those down they're called single cycle and I was just assuming nobody's that reckless. We'll probably not touch those. So I subtracted that. And then in the remaining caverns that weren't ESRs, they want to leave a 10% minimum for reasons.
(42:53) And so that would have been 580 million barrels of remaining capacity. So 10% of that's 58. So I thought, okay, if you subtract all of that out, there were about 143 million barrels to go at that point. We're now down at least 30 some plus that. So let's say there's 110 million barrels remaining to go at 6 million barrels per week.
(43:15) We can sort of calculate where I think you get to what a non-reckless tank bottom in the SPR would be. And that's about 18 weeks from now, I guess, is how I analyzed it. Tell me what I'm missing. What do you know about the SPR? >> No, I think that's fairly good math.
(43:35) I think when the OECD countries announced that they would release oil from their SPRs, they announced that they would do 400 million barrels out of the SPR. And that was a big number. And people kind of quickly then followed it up with, well, are we going to need all of that? Could that actually result in commercial inventories going up, right? Because you're releasing too much oil.
(43:58) And then what would we have remaining after that? And could we do a second SPR release? And we'll only know in retrospect, but I suspect that that 400 million was where everyone felt comfortable releasing. I don't think there was a lot after that. And the reason I say that is you can watch the government, they didn't release at the initial pace that they claimed to, right? So I think that was kind of analogous to Draghi saying we'll do whatever it takes at the ECB or Bernanke just flooding liquidity into the
(44:30) system in '08. It was the idea that just don't worry about this. We're going to put everything we have after this, right? And put 400 million barrels in. So, I would kind of take that at a little bit of face value that that's where people feel comfortable. Obviously, I think you can get it down below 400 million, not just in the US.
(44:49) This is OECD in general, right? In a pinch. But I suspect that your math is awfully close. Yeah. I think 10% tank bottoms on the SPRs and like you said the single cycle stuff, could you bring that out? I suppose you could, but it is single cycle. And then that's going to have to be refilled.
(45:07) I think that it would be the height of stupidity, the absolute height of stupidity, to not look to refill strategic petroleum reserves after what we've learned here. And look, these numbers are big numbers, but when you look at the total cost of providing that security to the country, it's a very very cheap insurance policy.
(45:36) Very very cheap insurance policy. >> Now, it's interesting in the latest EIA report as well. Commercial crude stocks have powered up the last couple weeks here. They look okay to me. They're right in range. Nothing to write home about. Gasoline stocks obviously pretty low.
(45:54) Looks like we're at least 10, 15 million barrels off of where we ought to be there. Distillate stocks again 10, 15 million barrels below where we would want to be. Cushing is just dragging the bottom. And of course the thing that makes all of this really crazy to me is that we look at this — this is Middle East and Russian Federation monthly exports of gas oil / diesel. This has just cratered.
(46:18) Just absolutely cratered here into August. Down 80% from its usual 2.5 million barrels per day. And obviously diesel is the big thing on people's minds and of course diesel feeds into everything. It's a cost push price increase pressure. I hesitate to call it inflation because it's slightly different process, but it'll seem inflationary, right? How close to a crisis are we in diesel at this point? >> Yeah, I think it's bad.
(46:42) I think that if you just step all the way back and you look at the entire oil supply and demand balances, okay, we've lost 10 million barrels a day in supply. As we've discussed, we've been drawing down inventories by about four or five million barrels a day. And the other five is like, what's going on? And that's demand.
(47:00) If you read the numbers, they assume that demand has fallen by 5 million barrels per day. Now, I don't think that's the case. Again, if demand had fallen 5 million barrels a day, that's a huge, huge, huge number. Absolutely massive. That's more than what we lost during 2008. That's essentially — maybe not the worst months of COVID, but some of the bad months of COVID when we were under lockdowns — is 5 million barrels a day.
(47:26) Okay? And we just don't see it. I was traveling with my family in the last couple weeks. The airports are absolutely packed. Everyone's mobilized. It's just not the case. Okay. So, if that's true and people are reading — and by the way, the reason people think that demand is down 5 million barrels a day is that one of the big inputs in your model to estimate demand is refinery runs.
(47:52) So, if the refiners stop running not because of an economic slowdown, but because of a war, you could see that as a signal that demand is down. And that's the tail wagging the dog. Maybe that's happening or maybe we have a major crisis in the refined product market and diesel is a huge part of that.
(48:11) Now, if you have a big problem in the refined product market, how should that manifest itself? And I think one of the ways it should manifest itself is in these big crack spreads. If we were balancing this market by shaving off 5 million barrels a day of end refined product demand, as the agencies would have you believe, then oil should be relatively weak and refined product prices should be relatively weak.
(48:37) Maybe the spread goes up a little bit, down, whatever, right? But they should be both moving lower because what that's telling you is your demand is acting as the buffer. Crack spreads are huge. The 3-2-1 is at record highs and just straight gross diesel pricing is at record highs.
(48:59) So why would that be if demand has actually been impaired? And again it's another reason I think demand is not being impaired. So now if demand's not being impaired and you lost 10 million, inventory is doing the work of five, maybe you lost a million of demand — I don't even think that's true but maybe. So now you're talking about 4 million barrels per day of refined product inventories that are coming down that are not being captured in anyone's data because we have such bad data on refined product inventories.
(49:26) And that's a huge problem. That's a gigantic problem. And you can criticize me for having been early, but I think that that could manifest itself any day. >> So, if the diesel crack spread I saw just a couple days ago was 102, normal 20 to 30, right? That's the normal refining margin.
(49:49) Hey, it's a complicated piece of equipment. Yeah, you make a profit. So that if 20 to 30 is normal, but we're let's just say 70 above that. It means diesel's being priced today — I'll make this up — oil's roughly 85 today, I guess. I haven't looked at it in a couple hours, but something >> 85 plus 70 is 155.
(50:07) So, diesel's trading as if oil was 155 a barrel. And that feels appropriate for this crisis to me, right? That's not a bad number, right? >> Yeah. I don't disagree with that. I think that's where you should be, eventually, right? You do need to have demand destruction. That's what will have to happen.
(50:29) If you don't have this availability of the product, you will have to take down demand and you'll need to do that at a price that has been historically consistent with that. The only two real times that we've seen that happen was in 1981 and in 2008. And in both of those cases in real dollars adjusted for today, oil was like close to 200 bucks, right? So yeah, I think that you should be pushing that $150 to $200 level in diesel, implied oil price in diesel, in order to start squeezing out demand eventually.
(51:03) I don't think it's happened yet. I think the price has to go higher. And then the big catch up that's going to take place is oil up to diesel because there's no reason why that should stay the way it is other than this flotilla of oil that got out of the strait with the MOU and other than the fact that China is essentially transmitting the crude problem.
(51:28) It's keeping the price of crude low at the expense of the price of refined product. And that — I don't know, maybe that goes on forever, but somebody's going to obviously work to optimize other refineries in order to collect that spread because it's absolutely massive.
(51:48) >> Well, one way to interpret that, of course, is if you somehow knocked out a lot of refineries, you could see this exact scenario. In fact, let me take it all the way to the extreme. You knock out every refinery, you'll see products go to infinity and oil go to zero, right? Or below zero, depending, right? So are we — is that possibility because we have all the Gulf state refineries which are not operating at anywhere near maximum.
(52:10) And then we have Russia. Last, I don't have good Russia data, but I saw an analysis that suggested a month ago that they've lost about half their refining capacity. I don't know if it's true. They can repair things, but that's a pretty big knockout actually. >> Oh, yeah. No, listen, yeah, if you want to talk sort of theoretically, if you took out the whole world's refining complex, then like you said, refined products would go up to the point that you would bid the last barrel of refined product away at
(52:39) whatever the highest marginal use in the world would be, probably running the generator at a hospital or something like that. And the price of crude would go to zero. But that's true hypothetically. However, what I think that obviously misses the point in the real world.
(53:00) The point here is that the issue at the end of the day is that you've taken 10 million barrels a day of upstream production offline. I mean, that's what started all of this. Yes, Ukraine and Russia is not directly tied to what's going on in the Persian Gulf, but remember, a huge amount of the refining system outages right now are taking place in China and in the Middle East.
(53:22) Russia was just adding an extra layer to that problem, right? But ultimately, I think the primary driver, the primary mover, if you will, of this whole crisis is the fact that you turned off the taps upstream. The rest is how it's working itself and manifesting itself into the marketplace today.
(53:45) And so we didn't invest in the US refiners, for instance. We chose to get our exposure to this crisis — was before — but we thought that the crude oil molecule was the mispriced asset today. I continue to think that the oil molecule is the mispriced asset. I'm not a physical or paper commodity trader. I trade the equities. But if I were, I probably would be betting that the crack spread would come down with oil benefiting. Now maybe diesel prices stay where they are, maybe they come down and join in the middle. I'm not sure. But the oil price
(54:17) today, given that that is where the problem has started, I don't see how this all accrues to product pricing and that crude pricing stays low, because remember, yes there's outages, but the main catalyst for this crisis is shutting off upstream capacity. >> So let's talk about that upstream capacity.
(54:41) Do you have any sense yet what kind of damage — there's speculation damage, Iraq's fields get shut in, Kuwait's fields get shut in, some of Saudi Arabia's etc. When they turn them back on, any sense that they might not come back to 100%? >> People have been talking about that. They've been worried about that. I'm less worried about that.
(55:01) And again, if you had gone back pre-2020, we'd never really experimented with shutting in fields on a really grand scale. Obviously, we did when Iraq and Kuwait went after it and at various times on a shorter basis and more localized, but on a big broad basis, we never sort of shut in whole countries the way we did during COVID.
(55:22) There was a lot of concern that those fields wouldn't come back online. They came back online no problem. Now, there's some actual war damage in some of the infrastructure as well. And Abqaiq, the oil processing facility, was hit again a couple weeks ago, which went fairly under-reported, but the same attack that happened in 2019.
(55:43) I'm a little less worried that we can't bring those fields back on because we brought them back on a couple times already. And quite frankly, when the MOU was signed and the strait did open, a few places in the region did take the opportunity to actually increase field level production, which presumably has now been shut back down again.
(56:03) And it responded fairly well. So, the truth is, no, I don't have any great special insight there. I don't really think anybody does unless you're sort of in the boardrooms with the oil service companies, or not in the boardrooms, in the conference rooms as they're discussing the work that they're doing.
(56:18) But first of all, I don't think you really need that. I think that this market has all kinds of crazy dislocations in it that makes it very very tight. I'll let that be a bullish surprise as opposed to baking it into my estimates for now. >> Okay. Yeah, I just wait and see on that for me as well.
(56:37) But if we could, looking forward, so 2027 has a lot going forward at this point and we're just touching on oil at this point. Obviously, a lot of things got hit. It's really a polycrisis out of the Gulf. We've got urea, we've got sulfur missing. And that has all sorts of implications for fertilizer. And then coming into next year, we have an El Niño which is now looking like a monster according to all the projections I'm seeing here.
(57:01) And I think that's almost pretty much in the bag at this point. 2027 is looking like it could really shape up to be pretty spicy, especially around food production. Is that part of your — I know your natural resources, but are you looking at that side of things too? >> Yeah. Now, we certainly do.
(57:17) The El Niño is going to be really, really interesting because historically it has been correlated with more volatile weather patterns, which can obviously hamper and harm crop yields. But it has also been historically correlated with wetter summers. And the big problem that the United States faces today is a big widespread drought.
(57:44) And so groundwater is very very low and soil is very very dry. So I think the jury is still out as far as what the El Niño is going to actually do for crop prices next year. You could make a case that the El Niño and the Super El Niño could actually be somewhat bearish for crop prices. Going the other way of course is the fact that fertilizer availability is now extremely tight because of all the disruptions through the Strait of Hormuz.
(58:16) Phosphate goes through the Strait of Hormuz and then ammonia and urea is made through natural gas conversion and of course all the LNG coming from Qatar has been disrupted. So the LNG gas market is very very tight and so it's going to be tough to get those two fertilizers on. When you put it all on balance, like you said, it's going to be a very, very, very interesting year and a lot of different primary materials from here on out.
(58:42) Where that shakes out, I think you just have to watch. So far in 2026, it looks as though the crop is probably going to be okay. But we didn't get enough fertilizer on the fields this year either, already. So it's anyone's guess, but the weather has cooperated thus far. >> Yeah, I guess, who knows? We'll have to see, but the concerns I heard were that Brazil, which supplies a lot of grains to the world, is actually in the crosshairs for drought, for being drier
(59:15) potentially if past patterns, and if the monsoons fail to materialize, India obviously big trouble. >> Absolutely. Both of those are actually very astute points and are absolutely correct. The drought is not just in the United States. If you look on a global basis, the whole world is in a huge drought right now.
(59:34) All of Europe and the breadbasket and Ukraine etc. is all — the Black Sea is all in a big drought. Brazil is as well, and you're right that what could help us would potentially be offset by hurting Brazil in terms of its moisture. So, it's just something you're going to have to monitor. But what I would say is it relates to ag in general.
(59:54) So ag is always very weather dependent. Gas is as well; ag is weather dependent to another level. But in the past 15 or 20 years or so we've seen a material uptick in demand for grain as people have consumed more protein in their diets in the emerging market world and that's been met with just these unbelievable crop yields.
(1:00:14) And so it's a little bit like a trade where everyone's on one side of the boat. How often are you going to get these really, really great crop yields and how vulnerable are you to even a minor disruption in growing conditions that could hurt the crop yields? And growing conditions, it could be lack of fertilizer, right? Anything that you're priced to perfection and people have come to be very very reliant on incredibly good crop yields.
(1:00:40) And so that's where the El Niño does actually play in because volatility in general I don't think is your friend in this type of a market because demand has been actually so strong. So yeah, there's a risk there. There's certainly a tail risk and it could be fairly dramatic. We increased our fertilizer exposure a little bit, but it's not yet to the point where we're ready to make it a full conviction.
(1:01:01) >> Yeah, I mean Mosaic cut back their phosphate production pretty hard and I'm not totally clear if that was because of the sulfur issue. I suspect it is, probably the price of sulfur. Sulfur by the way traded exactly like what I would expect something to trade for when you get a 50% disruption of global exported supplies.
(1:01:20) It went from 300 to 1100 a ton. That price signal, I was like, that makes sense. Not a lot has made sense to me in the energy markets yet. On the oil side >> I would just get back to what I said before, which is just wait. This is not done. I think that's the big mistake that people make when they look at the oil market and the energy markets today, is that they're reading what has happened or what has not happened given the stimulus — when I say stimulus,
(1:01:48) given the fact, given all the war issues that have been compounding over the last several months — they say it's not a crisis yet so that means we're in the clear, and that's just really really really myopic thinking. You could very well be in the eye of the storm here where it calms down a little bit before things get a lot worse.
(1:02:08) And before I leave I just want to say one thing. The administration when they signed the MOU — and we won't talk politics but fairly bipartisan agreement that that MOU was an awfully good deal for Iran and not such a great deal for America. It gave Iran quite a bit. And when both Trump and Vance were interviewed about it after, they both said, "Look, we had to do something because if this crisis lasted even four more weeks, there was going to be a major problem."
(1:02:42) We're five weeks after that, six weeks now. >> We had that little burst of tankers out. >> That, we're six weeks past it and the strait shut again. So, I think that just because we haven't had a crisis does not mean we're out of the woods. If we don't have a crisis by, I don't know, November or December, I suspect, then next time we speak, we can try to figure out what's going on there.
(1:03:05) But I think it's far too early to declare this crisis as over. Not least of which because the crisis is still ongoing. But even if it were to ameliorate tomorrow, I think the damage might already have been done and it just takes a little while to play through and to manifest itself in the balances and in the markets. >> Okay, very well said.
(1:03:28) We're going to have to leave it there today. Adam Rozencwajg, thank you so much for your time today. Anybody, if you want to go and check out their fund, their company, their amazing analyses, you go to gorozen.com. That's with a Z in the middle of that. gorozen.com. Adam, thank you so much. Really appreciate this.
(1:03:45) >> Thank you.