Mart (host): Welcome back everybody to another interview for the Contrarian Codex, and this time I welcome for the first time Rory Johnston, founder of Commodity Context and self-proclaimed professional barrel counter. And Rory, for the guys and the girls who don't know him, he provides one of the most balanced views that I've seen on oil Twitter. And right now, if you are anywhere close to oil Twitter, you will know that the balanced view is very, very much appreciated. So Rory, thank you for taking some time to talk to the audience today, and I'm glad to have you.
Rory Johnston: Thank you so much for having me. A pleasure to be here.
Mart (host): All right, Rory, given the time that we have and given the sheer amount of subjects we need to discuss, can you just do a quick introduction about yourself? Where can people find you? What do you do? What keeps you busy on a daily basis? Go ahead.
Rory Johnston: Yeah, so everyone can follow my work at commoditycontext.com and on Twitter @Rory_Johnston or Blue Sky if you're of that persuasion as well. And I'm an independent oil analyst. Most of my time is spent following crude oil and refined product markets. My background prior to doing this was I led commodity economics at Scotiabank here in Toronto, which was the most energy and resource intensive of the Canadian major banks. And when I was there, I covered like 2 dozen commodities, including uranium, actually.
Mart (host): Really?
Rory Johnston: At one point. But I did a lot of base metals, bulk and steel complex, agriculture, you name it and I did it. 2020, I left the bank and I started at a small fund, was planning on making a switch. And then 2020 ended up being a really, really bizarre year. And I started writing a newsletter about it when oil prices went negative. So that's how Commodity Context was born as a bit of a side project. Then Russia invaded Ukraine in 2022 and I was like, wow, this seems big. So I thought, well, could we throw a paywall on this thing? And that's essentially how Commodity Context as a business was born. And over the next year, I left the fund and now my wife and I run Commodity Context as a family business. And that's basically -- so all day, every day I count barrels and I battle people on Twitter as nicely and as humanely as I possibly can.
Mart (host): I love it, man. That's great. What I love a little bit less is that you stole my CC abbreviation for my own service. But actually, I might have stolen it because I started later.
Rory Johnston: It's all about alliteration. I think we can appreciate the alliteration here.
Mart (host): Absolutely. Absolutely. That was the entire reason, by the way, for everybody listening, why Rory decided to come on in the first place. That was my convincing argument. All right, Rory, to say that we are living in interesting times right now for global oil and gas market would be a massive understatement. How do you view the unfolding chaos, all the Hormuz numbers being thrown around, how much stress there really is, all the damage to oil and gas infrastructure? There is a lot happening. Can you distill it down and give your view of the current state of the market?
Rory Johnston: Yeah, I think it's even actually important to step one step even higher than that, which is particularly in this world, and we had had a little bit of, before we turned on the recording, a little chatter about Twitter bulls and bears. I think what's fascinating is this is the market where people get especially entrenched in a view, in a tribe, increasingly in this market. And the bizarre thing is, even before we get to all the craziness actually happening on the ground right now, I would argue this is the most unbalanced oil market I've ever experienced in my life by a long shot. And by that, I mean that going into this, the market was supremely oversupplied. I was very, very bearish going into this year. And I think a lot of people -- my following has grown through this crisis, and I think a lot of people know me as the guy who screamed $200 crude. That's very rare for me, actually. Historically, people that have followed me a longer time typically more associate me with a perma-bear than this kind of alarmist bull.
Mart (host): Mm-hmm.
Rory Johnston: But I think we had this structural oversupply that I had expected this year to basically crush crude prices. I was expecting Brent around $50 a barrel this year, absent the war. And then we had the largest supply shock in the market's history in the closure of the Strait of Hormuz, and this ever-spiraling conflict. So we find ourselves in this very weird, acute historic deficit in between what are, I think, pretty firmly viewed now as 2 very, very -- a trailing massive surplus and this forward anticipated surplus when this actually comes out the other side. And on top of that, when we typically talk about oil, we talk about total liquids. So everything all in one, this is the 100+ barrels a day that you hear about. Not all that's crude. It's a total liquids number. And when people talk about that, I think it also obfuscates or skates over the fact that on top of this really, really tight overall market, we also have this historic dislocation between crude and refined products, particularly diesel. Now, I'm looking at my screen. Diesel crack spreads this morning versus Brent are around $113, $114 a barrel, the highest on record.
Mart (host): Wow.
Rory Johnston: That means that your barrel of diesel right now -- again, I got a lot of hate for getting $200 oil. Diesel right now is at $220 a barrel. And that's New York Harbor. That's not a niche price. That's the main benchmark.
Mart (host): That's what I've been benchmarking as well.
Rory Johnston: Is that right? And I think so. This is a crazy, crazy market. On top of all that, the core dilemma at the heart of this market remains Hormuz. Now, we'll talk about Russia and Ukraine as well, which is a secondary and major aspect of this as well. We also have China, we also have Venezuela happening. All of this stuff is happening. At any moment in my life, I would like to spend a full year on any one of these topics, and instead we're kind of cursed with plenty all at once. They have to do it all at the same time. Can't spend enough time on any one thing. But I think that the core of Hormuz is this war, right? And I think wars are always especially political, particularly an American war in the Middle East. I think we're in the crux of politics here. So to your point around how much is getting out of Hormuz, what's going on with the war, these have become extremely political questions, and you end up with a large portion of the market debate on social media, even in broader mainstream media, as being explicitly politics layered on top of the market.
Mart (host): Totally.
Rory Johnston: And I think that is further confusing because everyone goes in with a pretty indefatigable I think it's very, very interesting that you say that.
Mart (host): And I think it adds so much noise, which is another reason why I wanted to talk to you, because at this point, it makes it very difficult to give a balanced view. Over the past few months, I wrote, I think it was 3 large reports, 15, 20 pages. One was on how Venezuelan crude, no, it's not going to flood the market. And yes, it does require a lot of nuance. Also, one on oil and gas infrastructure damage in the Gulf, which I landed at anything that doesn't get repaired in the coming 6 months would land me at around 1.2 to 1.5 million barrels equivalent a day offline for longer than a year to 1.5 years. So, those repairs take longer. And then the last one that was just recently was an analysis on Strait of Hormuz flows that were just rising and rising and rising.
Rory Johnston: Yeah.
Mart (host): So, the entire picture, it's very complicated, but it is such a Wild West right now in terms of the oil space.
Rory Johnston: Yeah. So let's dwell on the flows for a second, because I think that's the number one thing everyone's talking about, which is how much is actually getting through Hormuz? What's going on in the Red Sea kind of handicapped this? So our initial numbers, roughly 20-21 million barrels a day flowed through Hormuz prior to the war. 15 of that was crude, 5 of that was refined products, largely diesel, jet fuel, NGLs. What we have seen since then, obviously at the beginning of this crisis, flows got completely cratered, through March and April, basically 2 million barrels out of 20 was making it out and all of it was Iranian. Then eventually you had the US blockade imposed that crushed Iranian flows. At the same time, you saw the beginning of Project Freedom, which was this clandestine effort for the US military to shepherd these convoys through Hormuz. That was initially off and on. We weren't quite sure whether it was going to be successful. Then we got the MOU signed. That was in June. You had this June and July, you had this massive breakout of Hormuz, and you had this massive rise in ships. And the big trigger and the big impetus behind the force of those flows was the fact that up until that point, you had had 150-plus million barrels of crude and products stuck in the Gulf. These were captive vessels. So as soon as that MOU was signed, they all bust for the doors. And we saw temporarily 7-day rolling average flows rise to above 15 million barrels a day.
Mart (host): Yeah.
Rory Johnston: That wasn't sustainable because the pace of fresh loadings was never up that high. But that's how we got our levels. Then that ended. War flared back up again. Those cratered back off maybe to around 5 million barrels a day. Then, as you noted, over the past month and a half or so, we've seen this steady grind higher. And let's start with the ending here. So right now, the latest number that I think is reasonable is that the high watermark on the 7-day moving average this past Sunday was just shy of 12 million barrels a day. I think it was 11.98 million barrels a day.
Mart (host): Yeah.
Rory Johnston: That number got me some hate on Twitter because now I'm apparently a Trump apologist, even though before I was pretty squarely -- I was one of the people that kept being quoted by media contradicting the prior claims. And again, there's this confusion, right? The people on the side of either the White House is always telling the truth or the White House is always lying. I would argue that back when Chris Wright, the US Energy Secretary, initially talked about 10 million barrels a day of flow getting through Hormuz, these were effectively lies. I think we can call them exaggerations, we can call them cherry-picks, whatever, but they were purposely deceitful in the scheme of what was really going on in Hormuz. But since then, we have actually gotten up to those numbers. So there's two feelings here. One is the more Trump-friendly view is, well, you're probably wrong, they were just early, whatever else. They were just early? That's not how numbers work. Either they were or were not flowing at that point. And I would still say the balance of evidence is they weren't. But I think this also speaks to an innate behavioral trait of the Trump administration, which is, one, they hate media, analysts, experts, heavy air quotes, whatever. They hate these people, so they love to pick fights. So when they said 10 million barrels a day, if they had said 7 million barrels a day in early August, we would all be like, okay, yeah, that's basically true.
Mart (host): Yeah.
Rory Johnston: And they could have basically coasted on this and had, we are supported by the analyst community and all this stuff. And instead they basically picked a number that was implausibly high. And then everyone said, you're lying. And then there was this big fight and there were a bunch of different numbers over the thing and a bunch of different, oh, well, this is a 7-day moving average. Oh, this is over this 48-hour period or whatever. Whereas they could have just said, it's 7, now it's 10, now it's 12, and we'd be like, yeah, that's basically true. And we'd be a little more calm. Right? And I think it speaks to an innately difficult media comms instinct with the administration and a propensity for braggery, right? This is the challenge. At the same time, though, we talk about 12 million barrels a day -- that's the highest sustained level we've gotten since the war, excluding the MOU bump, which I think is not a good comp. So I think at this stage, we are basically 60-ish percent of flow out of pre-war Hormuz has been regained, and that is being sustained by fresh loadings. We're seeing 10-plus million barrels a day of loadings in the region as well. So these are real exports, real flows. The challenge is that at the same time, we just lost the East-West pipeline, which is this major--
Mart (host): Small detail.
Rory Johnston: Yeah, small detail, right? And again, on Twitter, this will keep coming back because I think we both spend way too much time on this platform.
Mart (host): Oh, 100%.
Rory Johnston: The debate always goes back to, oh, well, whenever you talk about Hormuz, you should talk about the offset or whatever. And it's like, no, no, no, sometimes we can also focus on narrow questions 'cause I think those are focused, answerable things. But no, we're not talking the total Middle East is recovering because some of that 12 million barrels a day of flows has actually been Saudi volume that has been reshifted from the Red Sea back towards the Gulf. So what are we talking about? The main reroute from the Gulf at the beginning of the war was the East-West or Petroline in Saudi Arabia, which has a basic nameplate capacity around 7 million barrels a day, 5 million barrels a day on the original main trunk line, and this 2 million barrel a day relief NGL line that's also been maximised to pump out crude given the massive crisis we face. That has roughly been successful the entire war. In terms of the incremental swing, it's not 7. The first mistake everyone says is, okay, well, there's 20 million barrels a day through Hormuz, 7 of that's now going to the Red Sea. That's a big chunk. It's actually the incremental swing's more like 3.5.
Mart (host): Yes.
Rory Johnston: Because you had flow in that pipeline before. The main way we measure this is the change in net exports out of the Red Sea or the Saudi West Coast. That went from around 2 million barrels a day of total liquids prior to the war to around 5.5 million barrels a day, as of the latest readings before the Houthi blockade.
Mart (host): Mm-hmm.
Rory Johnston: Then in August, the Houthis declare a maritime ban on Saudi activity in the Red Sea in total, and specifically a blockade of the Bab el-Mandeb Strait. That temporarily crushed Saudi liftings on the Red Sea. That's how we initially got some of the shift back to the Gulf, Gulf loadings. Saudi Arabia hadn't been loading very aggressively in the Gulf. All the other Gulf producers had been because that was their only way out, but Saudi had the Red Sea and they're like, this is pretty cozy. Then the Houthi ban occurred. The first that you basically saw a drop in loadings, a shift back to the Gulf. Then you saw a rerouting of a lot of those flows that had been going south through the Bab el-Mandeb to Asia are now going north through the Suez and the SUMED pipeline into the Med. And actually, because of the torquing of geographies, a lot of those barrels ended up going up to Europe and the United States rather than to Asia.
Mart (host): Yes.
Rory Johnston: So, yeah, you get all of this shuffling up. But overall right now, we had 4-ish million barrels a day that had been exported out of Yanbu, which is the west coast port in Saudi Arabia prior to the East-West outage. And now last week, this past Thursday, we all were glued to our Sentinel images trying to figure out what the heck happened to the East-West Pipeline? The NASA fire satellite analysis showed massive fires along the East-West Pipeline. Eventually, the optical imagery confirmed that we had very, very large attacks against multiple pumping stations on the East-West Pipeline. And right now it is presumed that the East-West Pipeline is down. This is what Saudi Arabia has reported.
Mart (host): Yeah.
Rory Johnston: Saudi Arabia itself, which is usually pretty sanguine with these estimates, says that it could take 3 to 5 weeks to get the pipeline back up and running. And that's a big problem because, well, all of a sudden you've lost a lot of your West Coast export flows. So that's been tightening up Brent as an example right now. At the same time, you actually also have refineries on the West Coast and if the pipeline is down for a considerable amount of time, you could actually end up in a weird situation where the West Coast of Saudi Arabia actually needs to import crude to actually keep the refineries going so they can provide domestic product.
Mart (host): That would be super weird.
Rory Johnston: But no, so it's a very, very unbalanced market. And there's any corner of this we could spend a full day on talking about, but happy to take the conversation from there as well.
Mart (host): Absolutely. I think I also saw some reports for the people that track satellite imagery, where they said that after the Houthi blockade, and after we saw, of course, the bombing and the satellite images that looked like a giant burnt pancake in the middle of the desert, and after that, we saw more crude loadings again on the east side. So, the way that this balances out and the way they're trying to get everything out of one side or out on the other side, it makes for such a weird market, and certainly a very unbalanced market. And to that, I would pose a question to you. We are right now, at the moment recording this, we're at $107 Brent.
Rory Johnston: Makes sense.
Mart (host): Yeah. And looking at it, a lot of people at this point would have, I will say rightfully, expected 150. Some say 200. I've heard 250, but let's stick to 150 to 200 for now. I think that's bullish enough. How do you personally answer the calls? Why are we not at that point yet? And as sort of a follow-up question to that, if things calm down, hypothetically speaking, how do you see the coming 6 months develop?
Rory Johnston: Yeah. So, let's start on the what went wrong with $200 oil calls, because I pretty infamously made a pretty punchy $200 oil call in March of this past year. I needed to prep a works cited for a visa application. I was going to Hong Kong. Anyways, and I had open Astra or whatever the AI models, find some of my media from the COVID or from the Hormuz shock and organize it. And the first thing it brought up was, well, first thing I would highlight is Rory Johnston, you were on Odd Lots twice through this crisis. And the first one, it was Rory Johnston on why we could hit $200 oil. And then the next one is Rory Johnston on why he was wrong about $200 oil. You're like, that's a good summary of my early crisis. And let's talk about first why we thought $200 oil was viable, why that was even in play, because I'm not normally the person that would throw really, really high crude numbers. The reason is that even when we lost 20 million barrels a day from Hormuz, we knew we were going to get the East-West Pipeline reroute, the ADCOP pipeline. We knew about the reroutes. We knew about the record drawdowns we were likely to see from OECD Strategic Petroleum Reserves, all of the stuff we knew about. Even factoring for all of that, we still were likely going to have 8 to 10 million barrels a day that we weren't able to accommodate. So we were talking about potentially destroying 8 to 10 million barrels a day of demand, which is roughly the peak of COVID demand destruction, except this time we would need to do it purely with price mechanisms rather than a historic pandemic.
Mart (host): Yes.
Rory Johnston: That was extreme. It was a tall order, right? To say the least. To say the least. And people are like, oh, well, we've capped out and destroyed demand before, when prices hit -- why? You can't get to $200. We would destroy demand at $130, $140, $150. Historically, we have gotten up to $130, $140, $150 and have seen demand destruction, but historic deficits that have driven these have only been 2 or 3 million barrels a day deficits. So if we get 2 to 3 million barrels a day of demand destruction at $150, what do we need to get $200? That's where $200 came from. And I think it was essentially a question of the threshold of demand destruction. And the one thing I even flagged early on is that crude prices do not determine demand destruction. Refined product prices do in each of the actual individual--
Mart (host): Right now, right?
Rory Johnston: And I think that the one thing I said at the beginning is the one thing I'm not confident about. I think we're going to need huge demand-destructive prices. I do. I'm not confident on the split between crude oil and refined products. At the beginning, it was very crude oil loaded. Eventually we got refined products and now we have a bit of both. But I think the big swing factor that I hadn't considered, the thing that really saved us from the worst of that demand-destructive pricing, at least in the first round -- now we'll see if round 2 is the same. But in the first round, it was China.
Mart (host): Yeah.
Rory Johnston: And what I have called the Beijing swing, which is between the 3 months prior to the war to the bottom of June and July, China cut crude oil imports by 5.4 million barrels a day. That is the largest cut of imports of any country on record. Now, at first, this was entirely expected. China imports most of its oil from the Middle East, as does the rest of Asia. So initially when Chinese imports were cratering, you're like, of course they are. That's not demand destruction. That's the mirror, that's the identity of the export loss from the Middle East.
Mart (host): Right.
Rory Johnston: But eventually around May, early June, something weird happened. Prices crashed. The rest of Asia, the countries that had only recently been taught full-blown COVID-level policy panic -- we had the Australian Prime Minister daily announcing the cargoes of diesel that the Australian government had secured that day. It felt very like, we have got toilet paper for the COVID market.
Mart (host): Exactly.
Rory Johnston: It was a bad situation. But then all of a sudden, May, June, all of those Asian countries and Pacific countries that had been worried, all of a sudden their crude imports started rebounding. By late June, early July, those had completely recovered to pre-COVID levels. Sorry, pre-Hormuz levels. That's going to happen a lot. Then the weird thing is that when the rest of Asia was recovering, China kept falling. That was when you knew something was weird, when China was no longer moving with the rest of Asia, but was essentially making room for the rest of Asia to recover. That's why we really talk about what went on in China. I can bore you ad nauseam with the details. I encourage everyone to read my Beijing Swing series on Commodity Context. But I am pretty confident at this stage that what we saw from China was -- basically, China turned every single knob possible at their disposal to make this work. China had been preparing for a decade-plus this massive energy security blanket, initially to counteract what they call the Malacca Dilemma, which is the worry that if they ever go after Taiwan, the United States would basically park a carrier group in the Strait of Malacca and block it, and then they would be without all of these imports. They had prepared this massive system, and boy does it work! Because they turned everything. Their coal to chemicals went up. They drew down inventories here. Whatever. But I think the core of it is, and the core debate right now is a lot of people, some very prominent people on Twitter, will say that this is demand destruction. That what we saw was evidence that China's demand elasticity in this increasingly electrified economy, which is definitely true. But they claim that this demand elasticity is so high now that you saw actually a 40% reduction in Chinese demand in the span of 3 months. I don't buy it. It's completely implausible. And then the last piece I went through was a product-by-product balance in China of diesel, jet fuel, gasoline, everything, and tried to tie it to end-use activity indicators. Jet fuel, you can actually make sense of, right? Jet fuel, you saw some flight cancellations. You saw, like most refineries in the world, Chinese refineries prioritized kerosene production. That's what jet fuel is. And you saw export curbs, which pulled a lot of jet fuel back in the market. Jet fuel, you can square without big, massive interventions. But diesel, as an example, 70% of diesel demand is in road freight, transportation, trucking. As in most countries, but particularly in China. 70% is in road freight. Road freight activity was up more than 3.5% in June year on year, and apparent diesel demand -- this is the available visible supply of diesel in the economy -- was down 20% year on year, relative to pre-war levels. That doesn't square in my mind. Now, you have seen erosion of diesel in this market. You have seen LNG penetration, you have seen electrification. But again, the main thing here, and this is the same in gasoline, a gradual, steady increase in diesel or gasoline-displacing modes of transportation does not explain a 20% rout in apparent demand in 3 months.
Mart (host): It just doesn't. No, it does not.
Rory Johnston: And I think this is the issue. So my main conceit, my main argument in the series thus far is that one, this was not a natural reaction of the Chinese system. This was a purposeful discretionary policy choice that Beijing engaged in -- for what purpose, we still do not know. But it was a purposeful choice, and it involved a heavy drawdown of inventories, both crude and refined products, and both commercial and strategic that we can't see. And I think that is an important piece of, where did all of this oil go? We saw really, really large, probably on the scale of the entire OECD, IEA drawdown, we've seen similar types of drawdowns in China alone. We've seen at least 100 million barrels of commercial crude drawn. I'd probably put strategic crude another 100 million barrels or so on top of that, with diesel in a similar-ish ballpark. All of these numbers are very, very large. And the reason that's important is that it means it's inherently unsustainable, that eventually they have to come back. Now, what we're seeing is they are beginning to come back to the market, and they're also beginning to draw down invisible stocks more aggressively. Now, we're on this other side. I think the final thing I'll say on China is the why, because I think that everyone gets hooked up on this, and there's so many conspiracy theories, and I have many conspiracy theories myself.
Mart (host): We'll be here for a few hours.
Rory Johnston: Exactly. I think the most plausible explanation, the one that's least conspiracy theory, is that China depends on the global economy a huge amount. It depends on its exports considerably for merchandise exports, and its historic engine of growth that the government would historically use to juice the economy, the construction real estate sector, has been in a decline structurally for 5 years now. So its exports now are even more important than they were, let's say, in 2022 or 2020 during the last crisis. For that reason, it would be very unadvantageous for China to see the world go into a Hormuz-driven recession or depression right now.
Mart (host): I think that's exactly right.
Rory Johnston: I think even more important on this is that China has been trying to diversify away from the US market because of the trade war. And the only 2 other regions that have similar economic clout are Asia and Europe, the 2 regions that were going to get hardest hit by the Hormuz crisis. So my argument is basically that at least thus far, they have backstopped their own export markets to prevent economic catastrophe. But again, how much longer can this go on? It's not unlimited. And that's why we're on this other side now. And that's why part of why oil markets are tightening right now is partly what's going on in the Middle East still, but partly that China is also coming back to the market and buying more.
Mart (host): Absolutely. I think that's a really good theory. But also, I am biased because it's my theory as well. But for the people listening, Rory is the oil expert. I cover oil a little bit, but you're all here to listen to him. All the uranium, gold, and macro stuff you can find in the newsletter, shameless plug. But for the oil, no, no, for the oil we refer to Rory. So I'm super glad that he has the same theory on that. So with that kind of context in place right now, and given where we are now heading with China going back to the market with Strait of Hormuz oil flows picking up, but we are, as you said, at a pretty high point. Is this sustainable? That remains to be seen, especially if we see more oil and gas infrastructure damage. Where do you think we are in, let's say, six months' time? Let's say we talk again, because I definitely want to get you back on the show and then we'll get a two-hour slot. Get the end of Q1 or start of Q2. If we have this conversation again, where do you think we are at that point? And as a bonus question, if you want to answer it, in a perfect world where everything is sunshine and rainbows and nobody's shooting rockets at each other, what do you think is the right price for a barrel of crude?
Rory Johnston: Well, okay, so I think it has to be a scenario answer because I think that obviously at some point this war will end. It is not sustainable for this to be as long as the Iraq War. It can't go on that long. I think that at the very least, this is going to end. I think that if it hasn't ended by Q1, we will be at such offensively high prices for all of this stuff--
Mart (host): Especially credit spreads.
Rory Johnston: --that it's going to force itself open. You're going to force some massive taco from Trump. I still think there's a possibility that we get what I called at the beginning of the crisis the unilateral taco. Which is, oh, Trump can't walk away. He's stuck there. He's entangled. Totally true. But also, Trump doesn't really care about other people or consequences all the time. So he could just literally be like, hey, 5th Fleet or whatever, just sail home. Leave 'em. And it's like, okay, well then what? And then it's a deeply catastrophic environment, but the US is no longer involved. I do think that right now, we talk about prompt Brent prices at $107.50 on my screen, on the dot right now. That's a nice round number. The dated Brent, the physical benchmark, closed yesterday at $131.77.
Mart (host): Yes.
Rory Johnston: We are getting very close to the all-time highs set back in April. This market is getting extremely tight again, and I think that part of the issue here is there's so many macro people in this market right now that everything moves on, well, the deficit's slightly smaller today than yesterday, so therefore the price should be down considerably. It's like, no, no, the market's still in deficit. We keep drawing inventories down the longer this goes. So even if it's a smaller deficit, it doesn't actually matter. The market will continue tightening until we actually get into an actual surplus. Now, if the war ends, I had mentioned earlier that I think this market is caught between 2 massive surpluses. I think that when this eventually does end, I do expect crude prices to have a very, very rude other side of this. I think that if I had said $50 a barrel was the target for this year before the war, I think you could see $50 or even $40 a barrel by mid to end next year, because--
Mart (host): Right.
Rory Johnston: There's just so much crude in the market. And that same glut that I was worried about occurring this year, it's gotten worse because now we've had another year of non-OPEC production growth in the Americas. We've had another year of weaker demand growth globally because of these higher prices. We've had the UAE leave OPEC, so it's now unbounded to the upside. And you have all of these producers that have been so starved that they're all going to try and chase prices and try and chase market share next year. It's a very, very bad combination. But at the same time, I think the diesel question is harder to answer. And we haven't really talked about diesel that much, but we had briefly mentioned diesel's at $220 a barrel right now. That's extraordinarily high. Part of this is Hormuz itself. There's still a massive loss of products coming from the Middle East. But then on top of that, you've had Ukrainian attacks against Russian refineries. Depending on the numbers, you've seen upwards of half of Russia's refining fleet throttled. You've seen Moscow ban the exports of products, including diesel. That, I think, is the other question. I think the one thing that could potentially help the market, I think the most mobile and nimble piece of this, although still very questionable at the moment, is China. In the winter of 2022 and 2023, the last time we had a big spike in diesel tightness still coming out of that Russian invasion, China basically doubled refined product exports between that summer and that winter, with a huge amount of that being diesel, mostly from these independent teapot refineries. The main area of spare refining capacity in the world right now is China. People ask, why hasn't China already done this? Why are they not letting their refiners chase these massive margins? And the answer is that they have for a decade now actually been trying to consolidate and wind down the independent refining sector, all these teapots. They don't want them to make money. They've been trying to get them out of this business. So handing them this massive windfall is actually going against a longer-standing policy priority. But going back to this rationale of why we think that China has helped the market so far, well, now we're ending up in a moment where it's not crude oil that's the problem anymore, it's diesel. So I do think that I could see them hiking diesel exports and diesel export quotas, which will tighten the crude market, but I think have a larger effect on patting down the current diesel crack spreads. The other piece of this that I still think is this massive risk between now and the midterms in the United States, I'm hearing a lot more over the past week on the prospect of some US ban on refined product exports.
Mart (host): Yes.
Rory Johnston: This is something that has been a risk ever since the war first started. I think they're running out of time if they want to do it before the midterms and have any real effect. I think if they're going to do anything, it has to be in the next 3 weeks or so. But what I'm starting to hear about is the prospect of export restrictions specifically on diesel, which would be a big problem. And we actually saw Senate Majority Leader Thune yesterday talk about -- He's so creative. The first public comments that we're open to considering a refined product export ban. Now, it's worth talking about what that would look like, because it's huge. Right now, we had mentioned we'd lost refined product exports from the Middle East. We've lost about 1 million barrels a day of diesel exports from Russia.
Mart (host): Mm-hmm.
Rory Johnston: The big solve here so far, the only reason we're not even higher on diesel is the US has actually increased diesel exports by about 50 to 70% over this period, making up for, let's say, half of what we've lost from Russia alone. If you lost those exports in the global market, the diesel market would just break. The diesel market is much smaller than crude. I think it's a quarter or a fifth of the size. So when we're talking about 1.5 million barrels a day of supply loss in a 100 million barrel a day crude market, you 4 or 5x that proportional impact for diesel. So if you lost US diesel exports, that'd be a huge, huge tightening factor for the rest of the world.
Mart (host): It's even like 30%. It's incredibly high. Well, have a massive impact. You're completely right.
Rory Johnston: Yeah, it's huge. It's a massive, massive thing. And I do think that as you lose that, everything else would tighten, but you would actually crater domestic diesel prices in the United States, at least temporarily. It would work temporarily for the sugar high if Trump's looking to, say, shave a buck a gallon off of the price of diesel, particularly in the South and around the US Gulf Coast. The problem is that the US Gulf Coast is a structural exporter of diesel, and it needs to get rid of these barrels. If all of a sudden they can't get rid of these barrels, you start building rapidly. Basically, if you had to export 1.5 million barrels of diesel before, you're now going to be building 1 million to 1.5 million barrels of diesel a day in inventories. We can keep that up for a couple weeks because diesel inventories are very, very low right now. But the longer this goes on, the more you're going to crater the price of diesel domestically, which is going to nuke the crack spread or the refining incentive to run. And all of a sudden, you're going to end up in this really weird situation where US Gulf Coast refiners are actually cutting runs because they can't get rid of their diesel. Diesel crack spreads will go negative, in a market where global crack spreads are over $100 a barrel and US crack spreads will be negative.
Mart (host): Absolutely wild.
Rory Johnston: Very weird. And you end up in this weird situation where you have to cut back refining runs enough that you could be in a very bizarre situation where the US Gulf Coast needs to import gasoline, which would be truly bananas.
Mart (host): This market is so crazy, man.
Rory Johnston: It's crazy. So we'll see if it happens. But I think this is one of the big risks that we have for the whole market. It would wreck North American petroleum flows. As an example, I'm a Canadian, I focus a lot on Western Canadian oil exports. It would have a really, really negative effect on the value of Western Canadian crude, because all of a sudden all the refineries that are the primary consumers of that would basically go into hibernation.
Mart (host): Yeah.
Rory Johnston: So it would be very, very disastrous across the board for everything. But from the Trump administration's perspective, it would probably take a buck or two a gallon off of diesel, which might be enough for them to actually do it. And I'm hearing that particularly more of the MAGA nationalist side is the side that's pushing this. And I do think that that is what we might expect to see over the next couple of weeks.
Mart (host): That would be yet another absolutely wild development in what has already been probably a once-in-a-generation set of developments. It's absolutely ridiculous. Rory, that's some great context, and I really do wonder what is going to be happening over the coming weeks. But I will be following closely. I know you will do as well. I also at the same time want to be respectful of your time because if we would have had live listener questions right now, I think we would be here for another 5 hours. And that would be great. Maybe sometime down the line, but I wouldn't be--
Rory Johnston: Maybe we'll do it sometime.
Mart (host): Yeah, exactly. I want to be respectful of your time right now, so I just want to ask you real quickly, how do you feel about current sentiment and positioning data? Because you see a lot of people being very bullish right now. And of course, rightly so, given everything that's going on. But where do you see positioning and sentiment data? And where do you think the most value can be found right now, given where you expect we could be sometime in the middle or late of next year? So maybe more short-term orientated.
Rory Johnston: Yeah.
Mart (host): You don't need to name any equities. If you want, you always can. It is never investment advice, very important. But yeah, those are basically the questions. Go ahead.
Rory Johnston: Yeah, I would say, and I really don't touch equities at all. So I'll leave you to translate some of this comment into an equity call if you're so brave. But to this point of positioning in the main commodity contracts -- I publish a report called Oil Context Weekly every Friday at market close. And I basically publish it as soon as the CFTC's Commitments of Traders data comes out. So I have this big report I publish that is a full weekly roundup and also includes this big chart pack of all of this Commitments of Traders data and the way I analyze it. I do think that at these prices -- and it's not surprising, right -- that we are getting back up towards the high level that we saw in April for speculative positioning in major crude contracts. And I follow the big 6 crude contracts. So the various Brent contracts between ICE and CME and WTI and Dubai. I think that on that basis, we are getting pretty long -- I'm looking at my chart right now -- as a proportion of open interest, which is the way I normalize. We're sitting at right around 4.5% of total open interest is net speculative position. We have relatively low, although not as low as we had at the beginning of the crisis, we have relatively low shorts. We have fairly high longs. Usually when that happens, the balance of risk begins tilting, as you well know, to the downside. I think that regardless of what fundamentals say, flows rule everything around me. What was it? Was it flows before bros? I think that's a Tracy Alloway from Bloomberg quote.
Mart (host): Yes.
Rory Johnston: But no, I think that is a negative. I think that is a tailwind. I think the way we interpret this is to say that there is less incremental dry powder on the sidelines to fuel the next rally, and far more liquidation risk and reaccumulation of short positions that can fuel the next drawdown. So I would say fundamentals are still very bullish, but the positioning data is relatively bearish right now. So I do want to say that on a tactical basis, we can expect drawdowns to be more acute than blowups, than meltups. And I want to say that this latest data does not yet include the rally that we saw this past Thursday following the news on East-West.
Mart (host): Without a doubt.
Rory Johnston: But expect that we are even higher now, and we'll find out in Friday's data. But I think that on that basis, crude is relatively heady. I think gasoline is also relatively heady, as is -- basically all markets right now. Diesel percent of net interest is also around 9%, which is around its highest level it's maintained since 2024. We're at high levels. I could very reasonably see, and the timing could be very advantageous for the White House here, I could see a down cycle over the next couple weeks as these positions rationalize. What would trigger that? Maybe we get some flows out of East-West, they have a partial restart. It doesn't really matter what the fundamental trigger is, but there would need to be some fundamental trigger that would then spill into a momentum trade to the downside, and we would flush a lot of this. Maybe we go down $10, maybe even $15 a barrel. We reposition on the downside, and then we actually have a more sustainable rise again. That's how I could see this happening through the end of the year.
Mart (host): Depending on--
Rory Johnston: But I do think that, yeah, of course, for traders, which I am not, but for traders that are trying to position for risk, I do think that the downside risk is sharp right now, which is not surprising when we're at $110-ish Brent. Whenever we're at these levels, this is where we get into the jawbone zone. This is where we get into the White House trying to say anything they can to get prices down. In that kind of environment, and we see empirically, Trump can post something on Truth Social, we'll be down $15 a barrel on a Monday morning. In that kind of market, expect the volatility, prepare for it, but watch that the line keeps jostling, but it's heading up. And that's, I think, the direction of fundamental travel right now.
Mart (host): At least until we see some fundamental difference to prevailing circumstances, either a lasting peace, either, I don't know, there could be a myriad of things. But on the other side, me saying that there could be a myriad of things that get the price of a barrel down, there's also a myriad of things that could happen.
Rory Johnston: There are.
Mart (host): Absolutely skyrocket it. So it's important to keep a fairly balanced position. Again, that's why I wanted to have you on today, Rory. It was possibly the best conversation that I've had on oil on the Codex. So really appreciate you. Thank you.
Rory Johnston: And we really should do this again sometime. Absolutely. Always happy to. Always happy to join. And again, maybe we can do a Q&A sometime as well.
Mart (host): All right. Perfect. Also, thank you, everybody, for listening. Thank you as well for the support. I hope you like the WNA report and all the other reports that are coming in. There are a lot more interviews coming here, so I hope to welcome you as a subscriber. But in the meantime, I do also hope that you have a good and healthy rest of your day.