Title: Nobody's Talking About This 'Major Crisis': Global Diesel Shortage Gets Worse | Paul Sankey Show: David Lin Report (host David Lin) Guest: Paul Sankey — lead analyst & president, Sankey Research (ex-IEA; former #1 Institutional Investor-ranked oil & gas analyst) Date: 2026-09-15 URL: https://youtu.be/76cKbIpMaQI Length: 41:41 Note: YouTube auto-transcript, two voices (host David Lin, guest Paul Sankey) with no speaker labels beyond the ">>" turn markers. Fillers (um/uh/you know) and stutters removed; wording otherwise verbatim. Includes a DeleteMe sponsor read (08:32–09:37). Auto-caption name mangles corrected in place: "Seni/Sanki/sankresearch"=Sankey / Sankey Research, "Worsh/Walsh"=Warsh, "Bessant"=Bessent, "Valera"=Valero, "Konico/Kico"=ConocoPhillips, "Kashi"=Kalshi, "Kepler"=Kpler, "Dangotei"=Dangote, "Bergam"=Burgum, "BWE ETF"=BWET (Breakwave Tanker Shipping ETF), "Babelman"=Bab el-Mandeb, "Hormuse/Formoose/whole moose/Hormones"=Hormuz, "Javier Blast"=Javier Blas, "Markins"=markets.
00:00 tanker rates are at absolutely all-time record highs. So, you'd have to say this is a highly inflationary environment. So, at some point, some of these guys have to turn around and if they don't, there'll be a risk of an accident. And in this tape with this much inventory, almost none.
00:14 In other words, that could be another massive upside to diesel prices that would be a huge shock. You're essentially out of marginal supply and your farmers are going to be running an extra 200,000 barrels a day of diesel and they're locked in. They have to use it. They can't not harvest. So that's going to be a very inflationary impact at the margin.
00:32 >> Welcome back. It's September 15th. Diesel prices have reached a new national record of $6.30 a gallon according to AAA. WTI is above $106 per barrel this morning and Brent crude is over $110 per barrel. Shipping through Hormuz remains severely restricted with data showing just four vessels transiting through the strait on Monday.
00:54 Saudi Arabia's East West pipeline remains offline after drone attacks, disrupting a major export route that bypasses Hormuz. Estimates suggest it could take 3 to 5 weeks to repair. Meanwhile, Oman says two sailors are missing and 23 were rescued after another attack on an oil tanker today.
01:12 So, it's a day before the FOMC rate decision and the big question is what happens to the economy once the Fed hikes into a supply shock and what our next guest says will be demand destruction coming next. Joining me now is Paul Sankey, lead analyst and president at Sankey Research. Paul has covered energy markets for more than three decades, beginning at the International Energy Agency.
01:33 He was ranked the number one oil and gas analyst by Institutional Investor for three consecutive years, and built his career covering major oil companies and refiners. We'll discuss the diesel shortage, the refining crisis in America, record utilization rates, interest rates, and strategic reserves, and of course, the outlook for Middle East energy supply lines, and importantly, China's influence on crude prices, and what could be next after China renews oil imports.
02:01 Paul, welcome back to the show. Good to see you. >> Hey. >> Hey, to you and thank you for coming on. Such a crazy time for the entire economy. 10-year yield hit 5.04% today earlier in the day and this is the highest level since 2007. With a Fed hike pretty much priced in on Wednesday. The question isn't whether or not oil has impacted the Fed's decision.
02:24 The question becomes what happens to the economy after the Fed hikes into historic highs for diesel and $100 for oil. WTI and Brent. Does Fed chair Warsh potentially hike into an economy where we have really high prices for distillate products that would justify perhaps a hike. But what many are calling for a supply shock that may cause a recession.
02:51 What happens? >> Well, I think what you're going to see here is a continuation of high diesel prices basically because of the chaos that we've got going on in oil. The first point there obviously would be Russia Ukraine and the request apparently from the Trump administration that Ukraine stop bombing Russian refineries didn't seem to last 24 hours according to press reports.
03:14 So there's a concern and that bid did actually, the announcement they had asked for a hold did get diesel to gap down a little bit on Monday yesterday but overall the overnight attack that continued became a major concern for a market that was already very very worried about the situation with Saudi Arabia.
03:35 Saudi Arabia is a tough one because basically they're being attacked from both Iraq, the Shias in Iraq and those are the guys that have blown up the pump station on the East West pipeline. That's going to cost 5 million barrels a day of oil right there. It seems to be initially there were reports that this was flaring.
03:53 That was the Friday afternoon reports. But as of Monday, it's been confirmed by the Saudis themselves that the East West is shut down. Additionally, the Saudis are being attacked by the Houthis to their south and that obviously is an Iranian-backed effort. So that's a complete mess. The one offset is that MBZ, the head of UAE has said to have just met the Iranian president.
04:17 Not many people have missed that sort of dovish aspect of the market. But broadly speaking, we're probably at the level of tank bottoms for distillate in the US, which is why the price is just rising aggressively now because you're essentially out of marginal supply and you are looking, as you referenced, David, for demand destruction pricing now, right as we go into harvest.
04:41 So harvest season is upon us. Farmers are going to be running an extra 200,000 barrels a day of diesel and they're locked in. They have to use it. They can't not harvest. So that's going to be a very inflationary impact at the margin. So this is a tough one and it's unfortunate to have to say that the whole Hormuz situation is almost deteriorating since February at this point.
05:03 >> Yeah. As we speak two sailors are missing after new strikes in the Strait of Hormuz hit tankers. Meanwhile, Saudi Arabia has refineries were hit last week. And just last week as well, the West East pipeline was hit by drones launched from rebels in Iraq. Now, what is a bigger risk to the oil market right now? The situation in the Strait of Hormuz, which like you said is deteriorating or China re-entering the import market? You have a video about this on your own channel, Sankey Research is a YouTube
05:34 channel. I'd encourage everyone to check it out. And you talked about this issue. What is a bigger risk for oil? Yeah, I think we settled into this idea that there's now a collar on oil which is set by the Chinese because they are just the most important marginal buyer of oil and the price of oil is always set by demand right so what's been happening in the US is we've had extremely high oil prices all-time record diesel prices but if you look at oil demand in the US is actually holding up quite strong and a lot of that is AI
06:01 capex I would postulate so what we're seeing is strong demand at high prices in the US and by the way that means oil is up in GDP and oil in GDP correlates to oil in the S&P 500. So what you'll see now is as you've seen all year the oils will be outperforming the market and generally that's not good for the rest of the market.
06:20 But you're putting your finger right on the key point which is what does China do here? If you really believe in the China collar, the China collar concept is that once you get much below $80 a barrel, Brent, China starts buying more oil, potentially also rebuilding inventories that they've drawn down this year, although they'd already built huge inventories over the course of last year.
06:43 The upper end of that band we had said we thought would be around 100 and now you're not far off. You might hit 110 today. So, exactly as you say, the key marginal question here is, do the Chinese keep buying at the pace they've been buying? They're sort of pregnant with the stuff they've already bought, which drove oil off the lows in late August up $10, $15 a barrel because of China buying, which has then been hit by the Saudi outages and the Russia Ukraine situation.
07:10 But the question is, will they keep buying aggressively or will they back off again? They have to be getting concerned about their oil supply. They really have two major suppliers in the Middle East at the margin. The most marginal obviously is Iran and the US has shut down Iran. There's really not getting much oil there.
07:26 And then of course the second one which was really in many ways replacing Iranian barrels was Saudi to China and that one's being shut down or is an enormously large long voyage all the way up through Suez Mediterranean round Africa and then to China. So, China has a major concern and another major theme here right now, David, is tanker rates.
07:46 Tanker rates are at absolutely all-time record highs. So, you'd have to say this is a highly inflationary environment. And what's happening, I think, is you'll see the market is trading quite clearly in some sort of inverse correlation with oil prices with the 10-year and so on. Interest rates also trading closely with oil prices.
08:05 At this point, it's a triple effect. High oil prices are inflationary. They also cost money in terms of the ongoing defense that we have to spend or military spending that goes on as long as the conflict continues. So there's really a double whammy immediate effect from this conflict continuing as long as it has and we're now thinking about heading into winter and typically you need to build inventories at this point of the time of the year into November.
08:32 So, we're very bullish for the next two months as we try and address particularly the European shortage of natural gas and the global shortage of diesel as we head into winter. >> Before we continue with the video, let's talk about your most important asset, your personal privacy. Now, most people assume that their personal information is private unless they share it, but it isn't.
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09:37 Scan the QR code here on the screen or go to joindeleteme.com/davidlin, link down below, and use my code davidlin for 20% off. Now back to the video. But does China need to replenish its reserves? Though according to this particular report published in Yahoo Finance two weeks ago, China still has between 1 to 1.
09:58 4 billion barrels in the stockpiles. Is that accurate? >> It's about as accurate as you'll get. Yeah. And a lot of it is underground. So we don't really know the levels. So the way the satellite trackers do this is they count literally the tankers arriving in China and then they look at the floating lids of the storage tanks on satellites and they calculate how high or low they are.
10:22 Problem is China's built a lot of their strategic inventory like the US underground. US reports how much inventory they got and we've run it down a lot. China doesn't report it. So what they've been looking to do, David, is maintain stability within China. As you know, really the Chinese Communist Party is an existential party.
10:40 There's one that really above all wants to continue existing. And I think they feel very threatened by oil. And as a result, they will use inventory aggressively and build inventory aggressively to protect themselves because the Chinese hate to be dependent on anything outside China. and their clearest dependency is very much basically oil and gas.
11:03 So, I think they will remain very defensive on how they handle it. And I think that's why the China collar argument is a good argument. The question for me just here is whether or not they're going to keep buying aggressively at 110 as you were sort of leading me into that concept that maybe they'll back off a bit.
11:20 But in the meantime, the supply shocks that we're getting are strong enough to keep oil going higher in my view. Let's talk about demand destruction. You mentioned we're about to see that. We're not new to $100 barrels for oil. That happened earlier in the year. At what level do we start to see material demand destruction? >> Well, earlier in the year, Oman priced the all-time high marker crude price ever reported, which is $166 a barrel at the start of the Hormuz crisis.
11:50 So, I think people at times have been looking at the headline Brent price of oil without understanding that underneath it there's a lot of major action here. And a good example today is Shanghai oil is trading a good $10 above Brent. So, you're in a situation where that could also cause the Chinese to back off the market a little bit, but they must be very worried about supply because you've got a major issue with Iran and you've got a major issue with Saudi and very difficult to get some of
12:15 their other traditional suppliers such as Iraq oil as well. Iraqi oil has actually been coming out quite a lot and we think that includes Iranian oil by the way but broadly speaking the Chinese must be very very concerned about the current situation as we head into winter and China have a winter peak demand season as well.
12:35 So it's going to be a marginal decision by the Chinese and at the moment the market action, because we always say the only good number in the oil market is the oil price. The market action suggests that there's some real tightness here. And it's not just what you see on the line on your screen. It's what's happening with the physical markers like the famous dated Brent, Oman, some of these other Shanghai prices are all quite a bit above where Brent's actually trading.
13:00 And that implies a very tight market right now as we try and build inventory into winter. US distillate inventory, I think, is at the bottom of the tank. And I don't think they can go any lower. It's as low as it's ever been on an observed basis. And the only really good way of knowing how low inventories can go is by looking at observed history.
13:21 And we're at the bottom. We're as low as we can go. We have never been lower. So, I think that's why diesel prices have gone exponential here as well. >> Yeah. On that note, average diesel prices surpassed $6 a gallon for the first time. That's the highest in history in the US.
13:38 And according to some reports, inventories, like you said, are 13% below the 5-year average. However, in other reports, the US refineries are already operating at 98% utilization rate. And so the question is how much more leverage does the administration have here if they want to bring down the price of gasoline or diesel at the pump? Well, you clearly 98% utilization and 17 million barrels a day of capacity.
14:07 That's incredible industrial performance from the US refiners. You have to tip your hat to these guys. Mexico's refining system runs at 45% utilization. Russians probably might even not be at 50% utilization right now. And so you've got these US mega refineries running at 97% utilization at $100 a barrel margin. It's a phenomenal effort.
14:28 But there's only really one way that number can go, right? And that's been our concern. Now, fortunately, we haven't had any hurricanes as yet, and it may be a benign season. It may well be that we get a warm winter because of El Nino. But the reality is that the refineries at some point can't keep running that fast.
14:45 They have to turn around. And if you look at the dynamic of the current US refining systems growth in throughputs that they've got at the moment, typically this is when they turn down for turnaround season. and they're beginning to sort of rocket off the edge of the cliff. So, at some point, some of these guys have to turn around.
15:01 And if they don't, there'll be a risk of an accident. And in this tape, with this much inventory, almost none, in other words, that could be another massive upside to diesel prices, there would be a huge shock that is definitely still out there as a possibility. The cavalry, I think, is going to be Chinese exports of products, and so we're still waiting for those to occur way through into late November.
15:25 they've only just started buying the crude from the Middle East to run harder. So, there's another 50 or so days before that oil hits a Chinese refinery and then they decide to export it or not. So, it looks like this market is going to keep tightening into November, December.
15:42 Normally, we would short oil Labor Day and buy it at the first snow in New York, which I always say is December the 5th. And in fact, it's funny. Over 20 years of saying that, the first snow in New York has literally been on December the 5th at least four or five times. It's a good date to pick for first snow if the winter's going to come.
16:04 And normally, we would be then be buying oils. This year, I think what you do is you long oil from here through to December the 5th, and then winter doesn't show up. Hopefully, it'll be warm for the sake of the global economy. And you'd actually be selling oil at that point. But for the next couple of months, I think everything I'm seeing is that we've got high demand for oil in the US, high prices of oil in the US.
16:28 That means oil's rising in GDP. That means oil's taking margin from other parts of the economy and pushing it back into things like refining. And as a result, I expect the oils to continue outperforming versus the S&P for a good six or seven more weeks here and then we'll take another look. >> I want to come back to markets just a bit.
16:48 White House weighs how to use the Defense Production Act to expand US oil refining capacity. Sources say this is according to Reuters. Supposedly the Defense Production Act could expand US oil refining capacity, but the question is how and whether or not it'll come in time. Paul, >> yeah, the whisper on that seems to be that they would restart Benicia perhaps the Valero refinery which was regulated out of operation only in the last year.
17:14 Valero finally capitulated right before this latest crisis actually but it was nothing to do with the crisis it just was a bad economic place to operate in California and California has really caused its own problems in a lot of ways so it could be restarting Benicia the one that everyone's terrified about is whether or not and it came up today on the wires you could see a ban on oil product exports which would crater the price of gasoline and diesel but which would cause havoc globally and
17:44 havoc in oil markets. And I genuinely think that's a very bad idea. I think we should be paying a fair price for oil and sort of eating the cost of it, the true cost of it as opposed to trying to interfere in the market. Every time in history that you've interfered this aggressively in markets, it doesn't end well.
18:03 But it's a somewhat irresistible move into the midterms as they become increasingly desperate because clearly oil prices blamed on Iran are inflation are major voter concerns here, right? I mean, they're probably at the main street level. I think you'll find that those are sort of the three big things that people are obsessed about right now.
18:28 All of those could be tempered somewhat if you could just get gasoline diesel prices down somewhat by banning exports. I really hope they don't do it. I think it's a bad idea, but it's definitely a risk that the market's worried about for guys like Valero. You'll see the stock is up today.
18:44 I haven't checked it in the last couple of minutes, but the stock was trading off earlier on the idea that there would be an export ban. So we'll see. >> Is there going to be an export ban? I think that Burgum and Wright oppose it and I think that the refiners are honest. Chevron, I think, has the ear of the president as well and I think that they're doing a pretty good job of telling him, look, just don't interfere in the market.
19:09 We've come a long way here in US oil and gas through free enterprise. We've become the largest oil and gas producer in the world, largest oil and gas exporter in the world. It's been huge for the dollar. It's been huge for the economy. All of that came basically through free market.
19:28 And if you start mucking around with this stuff, you're gonna kill it. They kind of mucked around with it already coming in saying, "Drill, baby, drill, lower oil prices," which was just such a nonsensical construct. It was like, are these guys serious? They really think that if they talk about lowering the oil price, people are going to drill more.
19:48 I mean, it's kind of 101, right? But that seemed to be the message coming in. and that they would lower oil prices was a big plank of the administration's sort of policy promise as far as I could tell. And obviously it's not going too well right here. >> Yeah, the oil ban is supposed to lower the price of oil.
20:08 Interior Secretary Doug Burgum seems to disagree with that. But let me show you something else here. This >> Burgum I think particularly has the president's ear as best I can tell and he's a proper oil guy and he's kind of smart. He's okay. I'm okay with Burgum. I'm kind of okay with Chris Wright, but he said some really crazy things over the course of Hormuz that just inexplicable.
20:30 Early on he said a tanker had crossed Hormuz. And I checked in with Javier Blas at Bloomberg like hey what tanker just crossed? And he's like it was an Iranian tanker. It's like oh my god. So, yeah, he's out today saying on CNBC that the Saudi outage is only going to be a few days.
20:49 Kpler's base case, as far as I can tell, from Kpler is 4 to 6 weeks. So, I don't know why, unless he has some information that Kpler doesn't have, which is a bit of a push. I think the Saudi issue is going to take a little bit of time to solve. And you've got to remember, it's an active war zone, right? So, it's not like they're rebuilding this stuff in a sort of safe and secure environment, it's a disaster down there at the moment as regards attacks from both the Shia and
21:19 the Houthis. >> Trump also promised that Venezuelan oil is going to bring down the price of gasoline. This is from Kalshi. It's a prediction market. Which companies will sign a Venezuelan oil agreement? It looks like Shell is in the lead 62%. whether or not a Shell or Exxon, I'll let you comment on that, but the bottom line is whether or not Venezuelan oil production will kick in early enough to make a difference.
21:39 >> All right, I'll go in. I mean, as you know, the legality of these things, which is actually not me worrying about whether it's illegal to gamble on it, but the actual terms under which that question is set, which is, what is a Venezuelan oil agreement? You have to kind of read the small print.
21:57 But yeah, >> if Shell signs itself through controlled affiliate, a binding agreement after issuance granting it an enforceable upstream crude oil economic participation right in Venezuela before January. >> Yeah, the problem with that one is that as far as I understand it, Shell's pretty much into the gas.
22:13 But yeah, they might be. I mean, I think the odds are right actually. I think the one I would probably short Exxon on that one basically because Exxon and ConocoPhillips have the major legal cases against Venezuela and Exxon is just not going to, I've been covering Exxon for 25 30 years and those guys don't back off their legal position and their legal position is that the Venezuelans expropriated them illegally.
22:35 It's been found to be the case that they did in the international courts of arbitration and that they have like a multi-billion dollar payment due to them which during the White House Venezuela meeting the president sort of just swept it away saying you're not going to get that back.
22:50 But Exxon doesn't just walk away from that stuff it's like yeah they'll just wait for the Democrats if that's what it takes and ConocoPhillips settlement is bigger so they're owed more and Ryan Lance isn't going to back down on his one either. So you're in a situation you could argue that Chevron buying ConocoPhillips would actually solve the ConocoPhillips problem, but I think it would make the legal settlement Conoco go away.
23:13 So Shell is the most likely of those three quite rightly priced I think there I would probably be long Shell short Exxon right there. >> the Venezuelan thing is quite marginal that's the only thing. So you've got to remember that we're in call it 100 million barrel a day market for oil approximately normalized.
23:33 We were actually at 108 million barrels a day in February of 26 which would be the all-time high oil market might be the all-time high oil market after all, Hormuz, it becomes a structural issue of reduced supply and at 100 million barrels, we just lost four million to 5 million of Saudi, so we've just lost four to 5% of the market, which is why we've gone nuts on crude prices.
23:59 The Venezuela is more of the order of 1 million barrels a day, right? So, basically, they started at the lows at about half a million barrels a day and they've been climbing up towards 1.2 million and they can kind of keep climbing about 50,000 barrels a day incrementally probably for several months to get them towards maybe 2 million barrels a day, but it's not going to be a vast flood of oil and it competes directly with Canadian oil.
24:24 So the refiners can only buy so much of this heavy stuff. If the Venezuelan's available, they'll typically just buy less higher transport costs Canadian and it doesn't net make that much difference to the market. So I think Venezuela is a bit of a sideshow to be honest with you. And separately we had Libya today declaring force majeure on their oil deliveries which is about a million barrels a day.
24:49 So right there suddenly you've lost a million barrels a day that you forgot was a problem which is Libya. So it's a mess out there I'm afraid. Let's say the US needs more diesel with inventories already down, utilization rates of refineries at 98 97% like we said, lost refining capacity from Saudi Arabia.
25:08 The question is, Paul, where does the US get more diesel or any distillate products from if it needs more? >> Well, you can't really price it in at the moment because you can't import it because tanker rates are so high and nobody else has really got any either. So, if you look around the world, there's some hope that Dangote refinery in Nigeria can perform well.
25:30 That's a big new refinery. The Middle Eastern guys all have a problem. Russia has a problem. Europe is structurally short refining capacity. And so you'd have to buy it in competition with Europe, which you won't do. So, the answer fairly simply is there isn't any incremental supply, which is why the price is going exponential right now.
25:50 And if I look here on my screen, I haven't got heating oil up. Always happens. But basically, you'll see that heating oil has been leading crude which is essentially distillate which is essentially diesel as we squeeze the market. There's one big issue out there by the way which is a further incremental problem which is the Europeans are going to stop importing LNG from Russia any gas from Russia as of January the 1st 2027 [gasps] last time I checked that's 2 and a half months time and they've been getting
26:24 about 15 million tons from Russia of this LNG that I believe they will cut off and they're going to cut it off because they're basically rearming against Putin they're increasing their spending. They're increasing their militaries. It's a war situation down there in Europe, certainly on the front lines in Scandinavia, Ukraine, obviously, and they do want to cut off Russian gas.
26:49 And that's going to be another 15 million hole, which implicitly is also more tightness in diesel. So, it's a pretty wild situation out there. David, I think we can circulate. If we don't have immediately more supply for distillate products, where do you think the price goes? Let's just concentrate on diesel for now into the wintertime if we had to make a speculation.
27:13 >> Well, you start to see it as people in the Northeast begin to fill up. You'll see the demand impacts, but ultimately a lot of this stuff has to be bought. Particularly we referenced the harvest. They have to harvest. There's no choice.
27:28 So they're going to have to pay the diesel price. So at the moment we've seen remarkably little price elasticity of demand in the US. The most remarkable is really jet fuel where you've had 100% increase in jet fuel prices over the past year. Jet demand is up 2%. So your price elasticity seems to be positively correlated.
27:48 The higher the jet price the more people fly. And it's [snorts] actually backed up by behavioral analysis, where people increasingly view flying and travel as a staple of the experience economy. Now everyone wants experiences and travel is non-negotiable and to travel you've got to take flights.
28:07 The rich are also getting richer. The problem with all these regressive taxes on consumers of oil like gasoline prices being high and diesel being high is it's regressive. It's disproportionately bad for poor people. But the rich just keep getting richer because you're inflating the market and you're inflating the economy.
28:24 There's dollars everywhere. So essentially that's why jet fuel demand has been price inelastic. But having said that gasoline demand in the US hasn't really reacted to high prices either and nor for that matter is diesel particularly. So it looks like prices have to go a lot higher. Additionally the whole AI theme which is booming the economy in many ways we think is diesel intense because these guys are building stuff.
28:49 they need diesel for backup generation. All the generation equipment being built needs diesel etc etc and so AI is driving strong distillate demand that is again very price inelastic right I mean the AI guys going to spend the money and they're going to want you to build the factory and you're going to have to run the truck so basically at the moment it's hard to say how high we can go but I can tell you we're at $250 a barrel right now and it's going up every day so it's a pretty crazy situation.
29:16 One of the conclusions is it is even with Valero at $400 a share. It's very bullish for the likes of Valero. The problem for those guys, they're going to make too much money and then it becomes the threat that somebody in Washington somehow gets their hands on the cash pile or bans exports or something stupid happens.
29:37 But for now, the profits of these companies going to be absolutely enormous. And you've got to remind people that's because they stuck with refining when everyone else gave up. So they deserve to be rewarded for the fact that people kept driving cars and flying planes but shut all the refineries and good luck to Valero.
29:55 They're in a great place at the moment. So how high could price go? It's a complicated calculation because the elasticities just aren't working. That's really what I'm saying is if we could pick a point historically $4.50 gasoline and you see a step down in demand. So that's another 20% higher on gasoline and that would fit with around $120 $130 a barrel Brent for a demand destruction number.
30:23 So you'd argue that you can go 20% higher but not a lot more. >> Okay. So once we have demand destruction 20% higher on Brent, going back to my initial question at the beginning of the interview, how does monetary policy evolve in that situation where presumably 120 Brent is going to cause inflation to creep up even higher but demand destruction starts kicking in? You can't justify contraction in the money supply in that scenario, can you? >> Well, I think it's a very difficult position to be in, right? because it's
30:56 obviously inflationary and I ground through the components of CPI, PPI, PCE in my last note over the weekend writing about the diesel impact on inflation. A lot of these measures that they use PCE CPI are very lagging and as you know really levered to other things than oil namely in the case of CPI shelter costs which is a really dodgy sum and doesn't really make any sense how they work it out in reality.
31:24 And then of course in PCE medical expenses are a big part of that relative to CPI but none of them really include diesel. So when I hear Wall Street economists for example if I go on CNBC or Bloomberg and I hear people talking about the Fed and interest rates and everything else I really rarely hear if ever them talk about diesel prices.
31:43 And what we keep saying to you is diesel is $250 a barrel. I mean it's a major crisis and it's really out of inventory and it's got upside as you're dragging out of me. it's got upside leverage by at least another 20 to 30% if not more in a crisis in a cold winter. So it just seems that people still look at Brent.
32:04 Now of course once Brent goes through 100 then they're like oh god here we go and so I think that there will be very significant worries about inflation under the hood as you saw in last week's PPI print. I don't think the Wall Street read on Bessent or Warsh is great right now. I think people, the market, the bond vigilantes are clearly worried, right? And we'll see what they do tomorrow, but I think there's a real fear, although it's more than priced that they'll raise, you just wonder whether
32:36 or not actually with the midterms coming up, they actually shock the market and don't raise. And whether or not the market would then actually take that negatively would be pretty interesting to watch tomorrow. That's for sure. These are wild tapes. David, you're in a good place doing what you do in these tapes cuz they're well interesting.
32:53 >> very interesting. A lot of crosscurrents, different things affecting each other. You mentioned something I also want to touch on. This is freight costs. One of the best performing funds this year is actually in the freight business. The Breakwave tanker shipping ETF.
33:10 This came to my radar earlier this morning. I was on CNBC. BWET up 3,600% year to date. It tracks the price of shipping oil. I went to their website, their fact sheet. Their portfolio allocation is just freight futures of 1 to 6 months forward. I have a chart here. I'd like you to comment on please how this industry works, how shipping costs are calculated.
33:31 Because if you take a look at this chart, the blue line is WTI and the bar chart is the BWET ETF. So you can see that during the summer months of May to July when WTI dropped like 40 50% on the Iran Hormuz, shipping cost didn't move that much. Can you just comment on how this works? >> How do they price things? How tankers price things >> because tankers Yeah, but tanker rates did go nuts.
34:07 So I'm not sure why the ETF is not reflecting that better. They did go nuts in the first phase of the crisis, right? And then they came back. But that ETF performance doesn't look to me. Wait a second. What's the other line? The blue line is WTI. >> WTI is the blue line. >> I'd have to check, let me check a tanker rate.
34:29 See if I get the same chart. Let's just do a dirty VLCC to Japan. You always love the idea of a dirty tanker. >> Yeah. Actually, yeah. No, it did spike. I mean, it's a bit of a dodgy series. You got to remember as well that these tanker rates are really set by a conversation. There's a guy in red braces with two telephones and this kind of Greek guy in a really luxurious office and they set the price between each other and then Platts calls them and says, "Hey,
35:04 what's the price today?" and they kind of go, "Yeah, that's pretty high." So, the reality is that, yeah, tanker rates are up enormously. It gets a bit arcane, actually, to be honest with you, and I don't always have the access to the data I need on Bloomberg, which is to look at what tanker rates are doing.
35:22 But I would say that they're definitely spiking to unprecedented levels right now. And that's because you have a dual whammy of the strait being shut and Bab el-Mandeb being shut and having to try and compete for very high price oil which is heavily affected by the very high tanker rates right so a lot of the arbitrages in oil that make the trade work from let's say the US Gulf coast to northwest Europe are very affected by the price of tankers and so that can heavily affect the final price of oil in the given markets
35:56 and that again is why prices are going so crazy because tanker rates are so high. You essentially have to pay a very high price for oil in order to encourage the barrel to come your way allowing for the tanker cost. So it's another aspect of the whole thing. I haven't looked at that particular ETF I have to say but as I say when I look at these flows I see a much higher spike than you have in around the initial Hormuz problem.
36:24 One interesting comment that was made just the other day to me was that you got to remember that LNG tankers cost, VLCC cost maybe you can't buy one but in theory would be about 60 or $70 million to replace and would take 3 years to replace in the current market. An LNG tanker is basically five times that. So an LNG, a liquid gas tanker is call it $250 million and carries a quarter of the energy.
36:53 And so you don't risk LNG tankers. One point they don't blow up. You cannot blow up liquid gas. It's the worst thing if you think about it, frozen gas to blow up. But you can damage them. And there was one damaged by a Ukrainian drone, which was one of the craziest stories of this crisis. Earlier this year, a couple of months ago, a Russian LNG tanker, a sanctioned Russian LNG tanker was heading towards the Suez and was hit by a waterborne drone which by all accounts was fired by the Ukrainians from Libya and that tanker actually burned and
37:26 became disabled and actually floated around the Mediterranean for several weeks, believe it or not. So, that gave you an idea of the risk to LNG tankers as well. So this has kind of been a nightmare because this age of drone warfare has revealed just how horrendously vulnerable ships and refineries are and how dependent we are on them.
37:48 And the concern is that this kinetic war is not going to calm down. It's a real worry for me I have to say. >> Does Russia export more oil starting now? >> They can't. I mean at the moment they're really struggling with their internal needs. So they are still exporting crude but Ukraine is unquestionably causing havoc in the Russian oil system and formerly Russia was the second largest diesel exporter in the world and they banned exports of diesel now. So
38:20 that's been a huge contributor to the diesel crisis that we're now facing. And I don't need to repeat to you that the global economy really runs on diesel. So all of your sort of channeling this back to the Fed is a real concern that we're about to get into a demand destruction recessionary type tape because of lack of energy supply and cost of energy supplies.
38:44 >> If Russia can't export oil, where does China get its imports from? presumably Russia. But if they can't do that, then are we looking at approved tankers through the Strait of Hormuz? >> The Russian supply to China is still quite high. I mean they continue to supply through pipes, gas through pipes and also I believe tankers.
39:05 I haven't checked the latest numbers but basically Russia is sort of a base load supplier to China. The marginal barrels though for China come as I mentioned from Iran and from Saudi and the Middle East in general. And those are the barrels because China is the world's largest oil importer, right? That normalized 13 million barrels a day, a lot of oil.
39:27 And I did a note when Trump visited Xi that basically I forget exactly how I did it, but basically it derived that the marginal barrel of China supply over or under comes from Iran. [snorts and clears throat] And so the US shutdown of Iranian exports I think has been a much bigger problem for China than people perhaps realize.
39:47 And now then the replacement barrels as I said were coming from Saudi. So I think there's going to be a lot of concern in China right now with what's going on in terms of the security of their oil supply which is why I'm not sure they're going to stop buying oil at $107 a barrel. As you know, in oil, as soon as you make a prediction, exactly the opposite happens.
40:10 But that's my best guess at this moment. >> Okay. Excellent. Paul, thank you so much. Tell us where we can follow your work and what you're preparing for your written research as well as your YouTube channel that we can look forward to right now. >> Sure. The written research this is an institutional product.
40:28 So, it's done for major fund managers, hedge fund managers, big companies, consultancies. You can see the examples of the research and generally the research is on sankeyresearch.com and then on YouTube there's a Sankey Research YouTube channel which I update when I'm in a good mood and at the moment we've been getting to about a weekly update.
40:54 There's so many moving parts right now David in so many markets not least oil and within oil it's pretty crazy out there. So the best we do is just sort of try and describe what we're seeing as I've tried to do on this call. The business making predictions is a tough one but at the moment the situation looks very concerning for the world economy and very bullish for the oil price as we head towards November winter inventory build season.
41:22 >> Yeah very concerning interesting times indeed. Please do follow Paul links down below and we'll speak next time Paul. Good to see you again. >> Thanks David. Good luck mate. Thank you for watching. Please do like and subscribe as well.