The Calm Before the Oil Price Storm?

0:00Welcome back to Market on Clothes, I'm Sam Vargas, in New York alongside Marley Kaden over in Chicago. So let's turn our attention to oil and welcome in Ellen Wald, who's a PhD author, Saudi Inc, President Transversal Consulting. Ellen, thanks so much for joining us. I just wanted to get your thoughts on how you would characterize the response we've seen in oil this week. Obviously, given the moves, some say they're surprised we didn't get to 100 quicker. You said it's been a fairly restrained reaction. Yeah, I would give a lot of credit to oil markets for being rather restrained in their actions. I think that this is probably due to the fact that previous events, I mean, we have a kind of similar activity, not quite to this extent, that happened over the summer and prices zoomed up and then quickly combed back down when they realized that there wasn't that much of a threat to actual oil movement. The issue is this time there is a very real threat. I mean, we are seeing this unfold in real time.

1:01There is no tanker traffic, essentially, that is getting out of the straight-of-form moves. And like you said, it's not like Iran puts down a gate. It's not like it's actually capable of closing the straight-of-form moves. But the issue is that no one wants to try getting through right now. It's too expensive. They're worried about missiles. They're worried about drones. They're worried about potential ecological catastrophes happening in there that could then cause even worse backups. And so, essentially, what we've seen is this stoppage that is causing prices to, I would say, fairly slowly rise, although if you look at how much prices have risen and how quickly, it's actually fairly fast. And, Ellen, last we spoke, we talked about the idea of this straight-of-form moves being fully shuttered, not really being in the realm of possibility. And now here we are. We're no one's passing through. We did see a ship get hit by a missile or Ron claiming credit for that. As we look at that, how much cushion do we have in the global supply?

2:04While we are stuck in this sort of shutdown, I mean, we've mentioned there's no actual physical blockade, but no one wants to pass through. No one wants to test it out. Exactly. And so, you know, what we're seeing is we actually entered this in a fairly well-supplied oil market. Lots of countries have a good amount of storage. If you look at the way that Saudi Arabia, which is, you know, not the largest oil producer in the world, but certainly the largest exporter right now, they have been incredibly resilient in transferring the flows of oil to other ports accessing oil from storage to satisfy customer demand. But at the same time, you just can't compete against the fact that so little product is actually moving. And so, what I think that we are seeing is we're seeing a fairly restrained reaction to this. I think in the beginning, a lot of people probably said, you know, look, this is going to be over really quickly. But now we're the messaging that we're getting from the administration is four weeks, five weeks, six months even.

3:11And so, I think that the oil market by next week, if we don't see any movement at all, or at least efforts to create movement, I would now be surprised if we see oil in the triple digits. Okay, obviously that is something that the market is watching very, very closely. And we are keeping tabs on developments. But so, what's more concerning right now than because we were just talking to our colleague KG here at the network. And it feels like the market has very quickly this week shifted from obviously the straight up or was being the most important and concerning part of this story to now potentially the facilities and the refiners. Yeah, exactly. And I think that's where everyone is looking very closely because in the initial couple days, the fact that there were no, no oil facilities on either side, you know, we didn't see the US or Israel targeting Iranian facilities. And we didn't see Iran targeting anybody else's oil facilities. And that's now changed. I do think the fact that if if Iran is indeed making a concerted effort to try to target regional oil and gas production and refining, the fact that they haven't been able to do more damage shows that they probably can't.

4:24On the other hand, if this is just, you know, some opening salvos to see what happens, then, you know, next week we could be in for more hits. And that's really the big question. Is this the best they can do or do we need to prepare for worse? So with this sort of air of uncertainty around everything, what do you think is the bigger red flag here? Is it a potential direct hit continued direct hits to infrastructure? Or is it prolonged shipping disruptions? What is going to create more chaos here and gets us into the triple that it's faster? I think right now the prolonged closure of the straight-of-formers could get us into triple digits soon, but that's easily reversible. Okay, so if we do start to see movement, I think we would come back down from that very quickly. If production facilities are hit with the, you know, knowledge that these are going to be out for months, you know, months, it's going to take months to get them back online, then we're looking at a much more prolonged price increase. However,

5:27I do think that if we see indications that production in the Middle East is going to be down for a while, we will then see movement in the US from US producers and a movement to put more wells into production because they will see that the prices are going to be elevated for some time. And they see that, you know, they're able to do that in a financially stable situation, which in turn once we start seeing those increased production numbers could bring prices down a little bit. Could temper that rise. Alan, we so appreciate you bringing your expertise to the show this week, particularly with everything going on, offering some perspective there on oil and where we may see it go here. Alan walled PhD author of Saudi ink and the president of transversal consulting.