How much slack is left in the global oil market?

0:00Support comes from wise, the smart way to manage the currencies you need around the world. Your life is global, your money should be too. Some providers promise no fees on overseas transfers. Don't be fooled. Extra costs often hide in bloated exchange rates. Choose wise. You can send, spend and receive money in over 40 currencies. Count on the exchange rates that you'd usually see on Google. That's how millions save billions on hidden fees. Be smart, get wise, visit wise.com. Season C's apply. Welcome to HubHits. I'm Felice Chin, Alberta Bureau Chief for the Hub. Brankroot, the international oil benchmark, is back above $100 a barrel. We've been here before, but this time some of the shock absorbers that brought prices down before are looking considerably weaker. US strategic reserves are depleted, refineries are running hard, and the Houthis are threatening another major shipping route in the Middle East. And where does Canada fit into all this?

1:03Amid this trade war we're still fighting with the US. Today I'm bringing in a special outside perspective. Jocomo Prendelli is the founder of The Merchants News. It's a popular commodities and geopolitics newsletter. He's based in Switzerland. Hello, Jocomo. Hello, thanks for having me Felice. I'm very happy to be here with you today and I can't wait to start this discussion. Well, let's start with the headline, $100 bread price. This is not the first time we've seen this kind of number let alone this year. In April, Brent went as high as $126 before eventually falling back, but you argue that this time could be different. How so? Yes, correct. Actually, as you rightly say, is not the first time that we're seeing oil prices above $100. Especially if we speak about Brent because WTI right now as we are speaking, is below the $199 yesterday was like the above and right now is back below the free digits.

2:07So speaking about the oil prices this year were of course very volatile because of the war that we are seeing right now in Iran is the seven month of this war and the only different thing is that this year the last time that the oil prices were above $100 and I'm referring about June, where the escalation between Iran and US were very active after that what happened they signed a MOU memorandum of understanding between the two countries and these effective say agreement pushed the oil prices below the unrest also to reach a lower level during July and also because the commerce, the trading, the vessel were more free to operate. But right now the situation is completely different because what happened after Friday there was the weekend and during the weekend the escalation between US and Iran revamped. Actually there was a little tension in

3:14Cargailand. Cargailand is one of the major hub for Iran if we speak about exportation of crude oil from Iran and a very strategic hub and the US then maybe decided to target not the island but some vessel that were stocking the oil and Iran decided to re-enlight the fire but not on the US vessel mainly because they understood the fact that on the sea US is superior but on the US so in Jordan. Basically this trade of attacks and action with drones pushed the oil price because on Monday when the oil price is the future is reopened especially for the brand we saw an increase in the price and on top of that so we reached the price for brand and after a couple of days so arriving on Wednesday Thursday actually also the WTI follows the same pattern. The thing is that after

4:15also the UTIs on another straight so the straight of Belalman Deb decided to block the straight and to try to target some strategic arbore in the straight to damage Saudi Arabian exports of crude oil. This is another heavy damage for the worldwide economy and right now this morning we need to speak about also diesel price because at the end of the day we that we are normal people we don't really pay for crude oil. What we pay for are the refined products such as gasoline for our car or diesel for our car but also for the trucks and I think that diesel is very important for the economy because mainly all of the trucks that we see in the farm or in the mine or in whichever industrial manufacturing plant they are moving through diesel so the real demand that we are seeing right now for diesel that is keeping literally the same but the output for it is decreasing because

5:19we saw what happened in Russia because there is another big war actually and the point is that Ukraine are damaging Russian refineries. Russia count for overall 10% of the worldwide production of diesel and without that output you can imagine that the demand if it's the same demand the production is lower and so that's why we're seeing the diesel price that are going higher and higher. But talk to me about the shock absorbers that have helped bring down prices in the past and what's changed now? Yes so I will as I was telling you the first one and I think the most powerful one is the MOU so the memorandum of the standard between US and Iran and I think this is the ultimate weapon that the US can use again right now because we need to open a little bracket and we need to say that in a couple of months there will be the midterms in US and we know that Trump really wanted

6:23the lower oil price especially the gasoline price and so we do whatever it takes to lower those prices and the ultimate weapon is to find another MOU with Iran. But unfortunately right now for in the situation it's not that easy so I think it is very difficult for him to achieve another MOU so the other weapon that he can use is to deploy SPR but as you say at the beginning during the introduction of the podcast right now the levels are super low so the last time the two so those levels are like 200 years old. My understanding is that the US strategic petroleum reserve is right now down to under 300 million that's after being drawn down repeatedly throughout this conflict so yeah how big of a difference does that make? Well the difference that's you know when you have a safety line if you keep going very close to it the risk is that you can not use

7:29it anymore and right now what we are seeing is that we are going very very close and here we have the strategic position of Canada because we need to speak about the importance of Canada for US and of course vice versa but in terms of oil I think that Canada is the top partner for US the one who explores more crude if we compare with any other country to US and especially the quality of crude that Canada is selling to US is the one that really cares for the price of diesel and gasoline because it's heavy crude and this crude is used by the refinery in US because they like just kind of API and gravity oil that Canadians are producing so here there is another major point because as you know of course better than me carne and trump are not friends anymore they just have a major a major discussion about the story if I mean I think like in the future we're going to see Canada trying to find new clients or try to supply at least its oil to somewhere else such as

8:38Asian countries but of course you need to build a proper infrastructure to do that and another interesting point is that when I was reading the list of the product that were put under tariff oil and gas were on the list so it means that US really really care about those commodities from from Canada and we'll try to protect at least the price if the demand will keep like that if the war especially in the Gulf will keep like that like we're seeing this week for sure the war will still asking to refine product to the only real supplier that are selling in the market and those suppliers are the US refineries so those refineries needs to produce a very high pace because the rate of utilization is 97% can you imagine 97% so basically they cannot stop because the demand is very high they see the marginality super interesting like for diesel if you sell a diesel the crack spread

9:43is over 100 and so on top of the price of the oil is over 200 those are crazy numbers we never saw something like that really maybe in 2022 during the Russian and Korean war but here the situation is much worse but I want to close here so if the war will keep going the US internal demand for oil will keep the same pace and the same level as we are seeing right now and the refining cannot stop because they're supplying the word and right now the demand for crude especially the same quality that Canada produce is super important for US and they cannot lose it I want to talk to you about how much slack is actually left in the system you talked about these refineries running that you know full capacity maybe even over time so they're going extremely hard right now how much slack is left if there's another disruption so if you speak about refinery there is not a nice buffer actually

10:46and we need to bear in mind that anything can happen because when you run at that pace there could be some little incident as we saw in the valero refinery in US there could be like maintenance like this autumn some of the refinery in US there would be under maintenance and of course there would be some weather atmosphere issues like storms or other kind of things that can happen so they don't have a buffer of safety and on top of that the other major players are the Chinese okay if we speak about refining capacity and production the two biggest country worldwide are China and US they can roughly produce 50 million bars per day of refining product an easy number to remember and after that we have Russia of course but right now is a heavily disrupted so right now China is the missing piece in the puzzle they decided to keep their production at home

11:49we saw that in the latest week they were trying to ramping up the exploitation actually the data are very interesting because if China decided to join the market okay even if there were one of the let's say most interesting ally of US because during the war China wasn't really purchasing enough oil as used to be in the past so the volumes were a little bit lower not a little bit actually massive lower if you compare to last year and that's why the oil prices were lower the Chinese were not purchasing it yes this is the famous missing one million barrel from the Chinese demand side of things this has led some people to even speculate that they've gone full call or renewables and there's no going back to the old world but we're seeing signs of the opposite happening now right

12:50yes right now actually we are seeing that China is trying to reactivate in the terms of pushing the production and of course the exportation they understand the market they see what's happening in the market and with this level of margin since of course the majority of the refining plant in China are under the control of the Chinese government and they like to generate revenues with these prices they say okay let us join the market too because we need to take a stack of these great profit that the US refining are generating we want to do the same but if this happens okay I'm assuming that they will help to reduce the refining so the diesel and gas oil price also the jet fuel because new capacity would come in the market the one that for the moment was not there but at the same time the crude price so the one that is not refined yet so speaking about WTI and brand the price will go higher because the Chinese refinery and also the

13:57people refinery they will ask for more volumes and so the price will go higher did you get ready okay now I understand yes this could result in crude prices going up but refined products going down correct what does this all mean for America so in the short term I think that the economy is winning okay very hard especially if we speak about energy and not only speaking about oil but also about gas and energy because another major point is the energy without Qatar that was the second biggest exporter worldwide of LNG liquefied network gas right now US as the monopoly of this business worldwide and both Europe and Asian countries are literally all going to US to buy some energy for the winter and the other one are of course the oil producer and the refining company in US that they are

14:58exporting to the world and they are generating a lot of profit but this is the short term in the long term I see of course an inflation of everything going higher and higher if the world doesn't stop and I'm assuming that this is also linked with the all the issue with the treasury that we're seeing right now in US everything is linked the fact that US dollar would be lower in terms of value because of the huge debt that US has and the fact that we're going to see a huge change in the economy as we are seeing right now I think the world will be more fragmented and also the economy will be more fragmented that's why the commodity and especially the price of all the commodities will increase with all that in mind then let's come back to Canada so many test pieces here how should we think about where we stand overall I think Canada is a very strategic position Canada is a very rich

16:05country if we speak about the natural resources and commodities both for minerals, metals and energy my idea is that Canada used to be one of the strongest ally of US and also the same for US to Canada so they were very united as country and they were very strongly in but we saw it last year when Trump decided to put tariff heavily punish the Canadian goods last January analysed what carne was trying to do at the beginning of this year it went in China so he spoke with Xi Jinping and they decided to try to develop a better partnership especially for energy because China as we know is a leading manufacturing economy worldwide but at the same time they are not independent if we speak about energy of course they are developing a massive renewable ecosystem at the same time they are investing heavily in the coal sector actually they are

17:12managing 50% of the money they have internally but also from Mongolia they can import but still they need oil for the petrol chemical industry and they need gas and that's why this is okay if we cannot buy any more from Venezuela because in the past Venezuela was a sanctioned country and right now Venezuela can trade with anyone especially under the control of US so you as took Venezuela away from China and China in the past was purchasing Venezuela oil as discounted prices the same thing right now in Iran because Iran right now they're not shipping any vessel outside of the country so China cannot purchase any more Iranian crude and is roughly 10% of their imports have only Russia okay still Russia is huge but it's not enough and so this okay maybe Canada can be the additional failure because we like the quality the quality is the same one of the

18:16Venezuelan oil so heavy crude but feel the price is the problem because of course Canada cannot sell at discounted prices because there are other customers like Europe or other countries that are willing to pay the the normal price because they're not under sanctions and so that's why I think there are some issues and that's why we saw the volumes to Asia that are slightly increasing but still not enough and they can cannot compete with the volumes that Canada is generating with US so I think the trajectory is longer but the plan for sure is to try to develop those infrastructure and build also strategic way to escape the the say monopolitan US right now every with the with the Canadian oil and gas yes this gets at one of the biggest debates in our country which is you know pipeline capacity to the last coast that gives us export capacity to the Pacific meanwhile though

19:23like you said there is this problem still that 90% of our oil still goes to the US we depend on them and vice versa as well there is growing pressure for Canada to use oil as a leverage in this current trade war what jumps out for you from where you stand observing those forces at play of course Canada is a leverage we need to understand also what's happening in Alberta of course if you know better than me Alberta is a strategic area in Canada where all the oil production is and I think like they need okay in Alberta they need to be friendly also with the oil producer in US why because they land especially in Alberta if you want to extract oil it's not easy to extract oil there because it's heavy and so they need the oil from US so it's a more light oil okay to be

20:28pushed inside the oil sense okay that there are enough delta and try to get it back a win-win so they need this cooperation that's why I'm seeing very difficult for Canada if you want my honest take okay that's why I'm seeing very difficult for Canada to escape this kind of trade tariff war without any issue all right so they will they need to find something else they need to find new partners that can support this specific cooperation that US was doing and is doing right now and on top of that another important thing is that the companies so if you compare for instance what is happening in other countries like Qatar Saudi Arabia those major oil companies are managed by the government the country or China or also Brazil that is another interesting country for oil but in Canada of course they are private owned so you cannot really switch off as you

21:28want because otherwise you need to you need to also face the reality and the realities that right now is not easy the process and you need to have time okay you need to plan everything in the right way like I'm assuming that the PM of Canada and it did at the beginning of the year trying to find new ways of partnership new ways of cooperation with other countries but right now I think it's too early and if Canada decided to be aggressive with US like US is doing with Canada I don't know which one is going to win anything Canada is the country that will be not benefiting most out of this trade let's see what what I can right now with the midterms because I think after let's say in November we will understand everything much better so at the moment I think Canada needs to play the same game that China is playing so be patient wait and trying to okay trying to

22:37create the next moves but don't push too much because if you push and maybe you can make some mistakes the wiser way to understand things right now is to try to understand how to find new cooperation new partnership new sources of exploitation but at the same time try not to push like they did a couple of weeks ago looking at more long-term though even though Trump right now is waving around the Venezuela deal and putting Canada on notice right I know you've made a bet on Venezuela oil so how real do you think this competition is yeah this is another difficult honestly another very difficult story but but but I would say that is much easier if we compare to what's happening in Iran and so I think Venezuela at the moment if things stay like they are it's going to be completely changed by who by US companies and also European companies and the amount of

23:42investment that will be made there because on the paper they have massive resources the only thing is that they will not well managed in terms of infrastructure and our board and all the systems that it's behind my bet was initially made I made this one in January when we saw what happened with Maduro and the fact that basically US took over the country right now there is an interim president is a lady's call Rodriguez she is of course supporting US way of thinking and new path for the country but if they want to be declared as a democracy that's what they want to achieve because after our dictatorship they want democracy they need to have election so we need to check if they're going to make an election who's going to win and on top of that with the country's stability that is super important because if you don't have stability you cannot invest and that's

24:42what Chevron and other major companies are trying to understand is there stability or not? Right when you're talking about revamping the the infrastructure sometimes I'm not sure if you're talking about Venezuela or Canada Canada is in a much better spot honestly oh yeah yeah obviously obviously I'm just joking what signs will you be watching for in the coming days? There are two main points to look at the first one is related with the youthies the youthies that are like rebels from Yemen so from a country that honestly if you compare to Saudi Arabia so the leading country in the op-ech they should not be like a comparison actually they are getting whatever they want in the area and in terms of army they are achieving a lot and that's why it's a huge problem for the trade economy not only the oil but also worldwide trade because that

25:42trade is super important otherwise the vessel need to pass from South Africa and they cannot let's say cut it from the Suex Canal and Europe so this is a very important point on top of that I think there is another major agreement they're discussing under the table so the Gulf countries they will meet in mid-September in Oman and right now you know there is the Oman trade zone and the Iran one Iranian one and those two channels are the one very important for the oil that is passing through Kuwait through Qatar of course through Iraq so if Kuwait and Iran they find an agreement to collect a tool and manage the state of hormones I think overall the trade will increase and also the passage of the vessels but U.S is not happy with that so they already told that if a man tried to make a deal with the Iran they're gonna bomb also them and the last

26:45thing is related with Russia and Ukraine I do not think that this is the end but overall I think we're gonna see something very important in the next in the coming weeks especially because there are the midterms and Trump need to show that he cannot achieve something. And adding Canada versus U.S into that mix would be a terrible thing. Yes absolutely and again I think like the wiser way to play for Canada is to wait and see after the midterms. Well Jacomal thank you so much for giving us that outsider's perspective. Thank you was a pleasure. Jacomal Prandelli is the founder of the Merchants News. I'm Felice Chin, Alberta Bureau Chief for the Hub. You've been listening to Hub Hits. Support comes from wise the smart way to manage the currencies you need around the world. Your

27:46life is global your money should be too. Some providers promise no fees on overseas transfers. Don't be fooled extra costs often hide and bloat at exchange rates. Choose wise you can send spend and receive money in over 40 currencies count on the exchange rates that you'd usually see on Google. That's how millions save billions on hidden fees. Be smart get wise visit wise.com Season C Supply