No Stopping Oil Price Shock | Rory Johnston and Jimmy Connor

Key Concepts

• Strait of Hormuz: A critical maritime chokepoint for global oil transit, currently shut down.
• WTI (West Texas Intermediate) & Brent: Global benchmarks for crude oil pricing.
• Jawboning: The use of verbal interventions (e.g., social media posts by political leaders) to influence market sentiment and suppress oil prices.
• Crack Spread: The difference between the price of crude oil and the petroleum products refined from it (e.g., gasoline, diesel), representing refining margins.
• Spare Capacity: The ability of an oil-producing nation to increase production on short notice; a key metric for OPEC influence.
• Strategic Petroleum Reserve (SPR): Government-held stockpiles of crude oil and refined products used to buffer supply shocks.
• Middle Distillates: Refined products including diesel and jet fuel, which have been the tightest segments of the oil market.

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1. Current State of the Oil Market

Despite the ongoing closure of the Strait of Hormuz and the loss of approximately 13 million barrels per day (bpd) of production, oil prices have remained lower than expected (WTI ~$100/bbl, Brent ~$110/bbl). Rory Johnston attributes this to two primary factors:

• Political Jawboning: Frequent, optimistic statements from the Trump administration regarding the "imminent" end of the conflict have repeatedly caused short-term price drops, discouraging traders from holding long positions.
• Inventory Lag: The physical oil market reacts slower than the "speed of a tweet." While the supply deficit is real, it takes 6–8 weeks for tanker transit disruptions to manifest in visible inventory drawdowns. Currently, U.S. crude inventories remain above seasonal norms, masking the underlying scarcity.

2. The China Factor and Demand Uncertainty

A major point of contention is the state of Chinese demand. While imports have collapsed, mobility data (flights) remains robust. Johnston posits that China may be drawing down secret strategic stockpiles of diesel and gasoline to support domestic demand while keeping crude inventories untouched. This creates a "confusing data picture" that provides ammunition for bearish market participants.

3. The UAE’s Departure from OPEC

The United Arab Emirates (UAE) exited OPEC on May 1st, 2024, after being a member since 1967.

• Reasons for Exit: The UAE invested billions to expand production capacity to 5 million bpd by 2027 and felt constrained by OPEC quotas. Furthermore, the UAE felt abandoned by the U.S. regarding the "Carter Doctrine," as they were the primary target of Iranian missile and drone attacks during the current conflict without receiving adequate protection.
• Impact on OPEC: While this is the largest political fracture in OPEC’s history, Johnston argues it may actually make the remaining group more cohesive under Saudi leadership, as the UAE was previously the primary "thorn in the side" regarding production discipline.

4. Economic Impact and Consumer Consequences

Higher oil prices are acting as an "unwanted tax" on consumers, eroding disposable income.

• Refining Margins: Gasoline crack spreads have surged to $40–$50/bbl (double the seasonal norm), signaling that the market is pricing in scarcity ahead of the North American driving season.
• Industrial Strain: While technology companies driving equity indices (S&P/NASDAQ) appear insulated, the industrial sector is beginning to feel the "crunch" of high energy costs and feedstock shortages.
• Corporate Impact: Airlines like Delta are facing significant financial headwinds, with projected additional costs of $2 billion in Q2 due to elevated jet fuel prices.

5. Canadian Energy Policy

Johnston notes a "180-degree shift" in the tone of the Canadian government under Prime Minister Mark Carney. While the previous administration was viewed as hostile to the oil sector, the current government is taking a more pragmatic, pro-production approach, focusing on simplifying permitting and reducing regulatory redundancy.

6. Synthesis and Outlook

Johnston’s base case is that the market is currently in a "wait and see" phase. The fundamental deficit is massive (roughly 650–700 million barrels of expected production lost so far).

• Prediction: If the Strait of Hormuz remains closed and production does not restart by the end of June, Johnston expects Brent to exceed $150/bbl and move rapidly toward $200/bbl as inventories hit critical scarcity levels.
• Final Thought: "The world just can't deal with this loss of supply without a near-term end. We're going to have to go higher."

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Source: Interview with Rory Johnston, founder of Commodity Context.