Oil Hoarding Becoming a More Dominant Theme, Currie Says

Venezuela, Iran & Geopolitical Risk in Oil Markets

Key Concepts:

• Geopolitical Risk: The impact of political instability and conflicts on oil supply and prices, considered more significant than purely fundamental supply/demand factors.
• Hoarding: Accumulation of raw materials (oil, metals) as a safe haven asset due to perceived financial or geopolitical risk.
• Dark Fleet: Ships used to store oil, often off the coast of major consuming nations, indicating a potential supply glut but also vulnerability.
• Real Assets: Tangible assets like oil, gold, and raw materials, seen as a store of value during times of economic or political uncertainty.
• OPEC+: Organization of the Petroleum Exporting Countries and its allies, a group of oil-producing nations that coordinate production levels.
• Short Position: A market bet that the price of an asset will decline. A large short position indicates widespread expectation of lower prices, making the market vulnerable to a price spike.
• New Order to Inventory Ratios: An economic indicator showing the relationship between new purchase orders and existing inventory levels. Rising ratios suggest increasing demand and potential inventory building (hoarding).

I. The Shift in Risk Perception & Global Implications

The primary focus has shifted from the fundamental supply and demand dynamics of Venezuelan and Iranian oil to the geopolitical risks they present. This risk isn’t primarily felt by the United States, a significant oil exporter, but by major importers like Europe, China, and India. The freezing of Russian central bank assets by the US and Europe created a surge in gold demand as the dollar became perceived as risky; a similar dynamic is now unfolding with oil and other raw materials.

As stated, “The geopolitical impact is by far the larger impact.” This is driving a change in strategy, particularly for China. Previously comfortable with oil reserves in the ground, China now prioritizes securing oil above ground due to increased geopolitical instability. This necessitates accepting greater risk to secure supply.

II. Market Positioning & Potential for Price Spikes

The oil market currently holds a record short position – approximately 230 million barrels – exceeding the volume of oil currently held in “dark fleet” ships in locations like the South China Sea. These dark fleets represent a perceived oil supply glut, but also a vulnerable stockpile. China’s ability to seize this floating oil is enhanced by its control over the ships themselves, Chinese insurance, and Chinese payment systems.

This situation creates a high probability of hoarding, potentially escalating prices. The speaker notes, “The odds of this thing disappearing and people beginning to hoard, I think is a lot higher than what it was even a week ago.” Demand isn’t decreasing; it’s actually increasing, further exacerbating the risk. Combined with the all-time high geopolitical risk, the conditions are ripe for a significant price spike.

III. US Foreign Policy & the Rare Earth Metals Parallel

The discussion pivots to US foreign policy regarding access to raw materials. The speaker suggests the US approach isn’t necessarily one of “by all means necessary,” but acknowledges a strong desire for secure access. However, the US is now facing a situation mirroring its experience with rare earth metals, where China previously exerted control.

China’s dominance in rare earth metals demonstrated the power of controlling critical resources, and this is now prompting a “rerating of real assets prices.” The speaker draws a parallel to gold, which rose from $2000 to $4500 as a hedge against dollar risk, suggesting a similar price surge is possible for raw materials.

IV. The Currie Chart & Industrial Materials Tightness

The “Currie Chart” (a visual representation of raw material prices) illustrates a tightening in industrial materials. This chart, reminiscent of observations made during the speaker’s time at Goldman Research, indicates rising costs throughout the economy. This is driven by a combination of hoarding and increasing new order to inventory ratios, signaling growing demand for inventory in response to political risk.

V. OPEC+ & Supply Constraints – A Delicate Balance

The question of whether OPEC+ or major resource companies (BHP, Rio Tinto) can mitigate the situation is addressed. Increasing supply carries the risk of hitting capacity constraints and, paradoxically, increasing fear and further fueling hoarding. The speaker emphasizes that once hoarding takes hold, it becomes a dominant market force, as observed in 2021-2022 when markets doubled in many cases.

VI. Current Market Conditions & Recipe for a Spike

The current market is uniquely positioned for a price spike. The record short position, coupled with increasing demand and unprecedented geopolitical risk, creates a volatile environment. The speaker concludes, “That’s a recipe for a spike in prices right now.”

Conclusion:

The escalating geopolitical risks surrounding Venezuela and Iran are fundamentally reshaping the dynamics of the global oil market. The focus is shifting from traditional supply/demand analysis to a risk-based assessment, driving a surge in demand for real assets and a heightened potential for hoarding. China’s strategic shift towards securing oil above ground, combined with the existing record short position in the oil market, creates a highly vulnerable situation ripe for a significant price spike. The situation echoes past experiences with rare earth metals and gold, highlighting the power of resource control and the importance of hedging against geopolitical uncertainty.