Rory Johnston on Why His $200 Oil Prediction Didn't Turn Out Right

The Strait of Hormuz has (mostly) re-opened! Crude prices are still up since the start of the war with Iran, but popular predictions earlier this year of $200-a-barrel Brent didn’t pan out. Why is that? We last talked to Rory Johnston, the founder of the Commodity Context newsletter, at the start of the conflict. And in that conversation he said that the Strait’s closure would lead to $200 oil if it persisted for any length of time. Today, he returns to tell us what he’s learned about the oil market since then. He explains the various factors that kept a lid on prices, including some re-routing, Trump jawboning, and (crucially) surprise import reductions from China. Previous: Rory Johnston on How Oil Could Surge to Over $200 a Barrel https://bit.ly/44sr0if Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox, plus unlimited access to the site and app. bloomberg.com/subscriptions/oddlots https://www.bloomberg.com/subscriptions/oddlots?in_source=oddlotspodcast See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Tracy Alloway?

  There are some market stories where you want every detail. Joe and I have made quite a few podcasts on that basis. But sometimes you've only got 10 minutes and just want to know what's moving markets fast. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and Research get you up to speed on what's happening and what to watch next. Concise, focused, and brief. Search Barclays Brief wherever you get your podcasts.

• 0:26Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 1:08Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.

• 1:52Speaker 01

  Bloomberg Audio Studios. Podcasts, radio, news.

• 2:07Joe Weisenthal?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm show Weisenthal.

• 2:11Tracy Alloway?

  And I'm Tracy Alloway.

• 2:13Joe Weisenthal?

  Tracy, recording this June 24th at noon, Brent crude is below $74 a barrel.

• 2:19Tracy Alloway?

  I know. It's crazy to look back when the Iran war started. I don't think we ever got above like $120 per barrel on Brent, despite this scenario, the closure of the Strait of Hormuz, the thing that oil analysts had talked about as a tail risk event for years and years and years actually happening.

• 2:40Joe Weisenthal?

  No, it is really remarkable. We had two peaks. There was one right at the end of March and then one right at the end of April, basically, and the closing price right around, just a little bit shy of 120 both of those days. But no, absolutely not like some of the doomsday scenarios, at least for now. You know, their crossings are picking up. I guess negotiations are ongoing of some sort. But no, they clearly, the doomsday scenarios about how this couldn't even stay closed for a few weeks, let alone two or three months, did not pan out.

• 3:11Tracy Alloway?

  I see a lot of people on Twitter slash X making fun of the barrel counters right now.

• 3:16Joe Weisenthal?

  Yes.

• 3:16Tracy Alloway?

  Which I, I have a lot of sympathy for barrel counters because I like, I like my analysis to be grounded in facts and numbers, but there is clearly a disconnect here between what happened with the price and some of those predictions.

• 3:30Joe Weisenthal?

  Well, maybe we learned something. Maybe we learned something about the oil market in the last few months. We've gotten a lot of requests for this episode, and so we are going to talk to someone that we talked to right at the very beginning of the war, someone we've talked to a lot, someone whose oil analysis we greatly respect, even if this particular incident did not perhaps pan out the way he and many others, almost all the others, expected. We're going to be speaking with Rory Johnston. He is the founder of the Commodity Context Newsletter, and maybe he learned something about the oil market in the last few months. So Rory, thank you so much. By fan request and our request, because we want to learn something too. By fan request, welcome back to the podcast.

• 4:08Speaker 03

  Thanks for having me, guys.

• 4:09Joe Weisenthal?

  Let's just start with like, what was, let's before, let's start with like, okay, early March. Remind listeners what the sort of your take and the sort of general wisdom was, you know, first couple of weeks of March about how long this could persist and why this, remind people why the Strait of Hormuz was seen as sort of the choke point among choke points when it comes to oil.

• 4:33Speaker 03

  Yeah, so let's transport ourselves back to our last conversation.

• 4:37Tracy Alloway?

  We need a time travel machine music, right?

• 4:40Joe Weisenthal?

  They can add that.

• 4:41Speaker 03

  So yeah, the reason that it was such a massive deal and still remains, I would say, I mean, while we have avoided the doomsday prophecies, it is still the, by far, the largest supply disruption in the market's history. And for the numbers, for the barrel counting, for Tracy, the total flow through Hormuz prior to the war was roughly 20 million barrels a day. Now, we knew we weren't going to lose all of that because we knew that we had some offsets, you know, the Saudi East-West pipeline, the Emirati pipeline to Fugira on the Gulf of Oman. But overall, net netting for all of those known rerouting options, which again, at the time, we didn't know if they would fully work because they'd never been fully tested. But they did work, thankfully. But even netting of those, we were still down

• 5:24Speaker 03

  roughly 13 million barrels a day of Gulf oil production, excluding Iran, that had been forcibly shut in through the duration of this crisis and is only now beginning to pick back up again. That's a lot of oil. That's 13 plus percent of the global supply. And the reason we thought that prices were going to hit 150 or even $200 a barrel was that when you have a supply shock that large without any more offsets, you end up at demand destructive pricing really, really fast. And to destroy that level, the depth of that demand, we had never seen that before, but $200 a barrel seemed like the reasonable price at which that would happen. Now, thankfully, we did not have to destroy that demand. And

• 6:06Speaker 03

  what we will talk about shortly, I'm sure, is all the ways in which the system adapted and flexed. And I think we saw this most notably above all in China.

• 6:16Joe Weisenthal?

  Yeah.

• 6:17Tracy Alloway?

  Okay, well, why don't we just dive into it? Give us your overview on what happened and why we didn't actually hit $200 a barrel.

• 6:25Speaker 03

  Yeah, so I would say the two biggest things. One, on the fundamental, on the barrel counting side, was China. We always knew that China had huge stockpiles of oil, but we didn't know how they were going to react to this crisis. And what we've seen through this crisis is that Chinese oil imports, crude oil imports into China, the world's largest crude oil importer, fell by upwards of 5 million barrels a day between their, the three-month average prior to the war through to June. Now, we're not quite done this month, but that's roughly where we're trending for June so far. That 5 million barrels a day was upwards of half of the total spot market supply hit to Asia. And that allowed a lot of those other Asian importers to basically not have the competition that they would have had for the barrels they were importing.

• 7:10Speaker 03

  So the countries that were hit hardest by this crisis and the governments that were most panicked, governments in South Korea, Australia, Japan, Taiwan, et cetera. There was a period where like the Prime Minister of Australia was coming out daily and announcing the Australian government's successful acquisition of a cargo of diesel. Like, it felt very COVID-y. Now, those importers saw imports collapse through March and April, but through May and into June, they actually recovered basically to pre-war levels. And the largest facilitator of that was the fact that China was not competing for any of the other barrels, and it had absorbed so much of the shock itself.

• 7:48Tracy Alloway?

  Just on China specifically, I have so many questions already, but do you have any sense of how much of this was genuine demand destruction or substitution in China versus just releasing from stockpiles?

• 8:01Speaker 03

  It's a good question. And the firm answer is we do not have 100% certainty as to what the exact composition of that swing was. We know the oil going in fell by 5 to 6 million barrels a day, given products as well. But in terms of the actual demand destruction, the thing that we have seen across China is that all of the mobility indicators, and you guys were actually in China very recently. All the mobility indicators showed no notable decline. The level of implied demand destruction that we see, and importantly here, China does not publish official demand data. It also doesn't, very importantly, publish official inventory. Data. So we're left kind of feeling around the shadows. The implied demand destruction we saw through this crisis was on par, was the steepest demand destruction implied in history.

• 8:44Speaker 03

  And on par on the volume with the COVID zero demand shock in 2022. But you guys were in China. I've I have not seen any reporting that indicates that level of lockdown. So we start asking questions. Okay, what's going on in the middle? Also, when you look at typically, you'd assume that that level of demand destruction without COVID zero lockdowns would have had to be driven by massive price increases. But part of what also happened to this crisis is that China had basically throttled the ability of domestic retail prices through their normal regulatory procedures. Prices of petrol in Beijing only rose maybe 30% versus the doubling we saw globally. So again, it just doesn't track for me that all of that, or even most of that, was demand destruction.

• 9:28Speaker 03

  So then we go to this this point about substitution or outright releases of strategic petroleum reserves. Now, the one thing we can say is that the inventories we can see, these are the floating roof storage tanks for crude oil. Those are still very, very high and roughly where they stood at the beginning of this crisis. Though, as far as we can tell, they're not drawing down aggressively on those stocks, at least not yet. The caveat there is that we can't see through those satellite analyses. We can't see underground storage tank, underground storage caverns and their proper SPR. They have six storage caverns, at least that we know of, about 131 million barrels.

• 10:07Speaker 03

  The likelihood is that they have been drawing down those because the falling crude oil imports fell far faster than the decline in refining run rates. So again, had to be made up somewhere. So we're just kind of feeling around the shadows for the Occam's razor here is that they have been releasing silently additional crude inventories. But above and beyond that, we know that crude crude refining run rates also fell dramatically by three to three and a half million barrels a day. So where's the implied demand destruction? Now, this is where we either get one of two things. We either get a very large release of refined product stocks. Now, we know that China has large stocks of refined products like gasoline, diesel, jet fuel, et cetera.

• 10:49Speaker 03

  We have virtually no firm information on those stock levels or can track them very closely day to day or week to week. Because unlike crude, they don't have they don't have floating roofs. So we have to kind of, again, infer. Those stockpiles upwards of a billion barrels, but the implication is that they're drawing them down very, very, very rapidly. The other thing we could have seen is, and your colleague Javier Blas was on this very early, was on the potential to switch some of the petrochemical feedstocks from oil-derived products like NAFSA and LPG towards more gas-based products, natural gas, or even, like the extreme, coal-based chemical products. That could again have a switch on the margin. And then the other thing that you hear is that like, well, China has massive penetration

• 11:34Speaker 03

  of electric vehicles. So maybe that was making part of it as well. The challenge is that it's not the sales penetration, the sales composition that drives fuel demand, it's the fleet composition. And while new energy vehicles in China are like 60-plus percent of new vehicle sales, the overall stock of vehicles in China is still 10 to 1 internal combustion engines to EVs. So the implication would have to be that Beijing had this massive fleet of EVs. They're like waiting to roll off the line. And that just doesn't seem plausible on the timeline we're talking about.

• 12:06Joe Weisenthal?

  That is a very important stat to keep in mind. And I didn't know the exact numbers, but I do think that's important because we all, yeah, we talk about the declining like oil intensivity of the Chinese economy due to growing EV sales. You know, it's going to take a while before it really swings and enough to make a difference. I think, you know,

• 12:26Tracy Alloway?

  You don't think they have a secret stockpile of EVs? They have a strategic pork reserve.

• 12:30Joe Weisenthal?

  They just swap out everyone's cars? Like everyone gets a free EV for a few months?

• 12:35Tracy Alloway?

  And you get an Apollo. And you get an Apollo.

• 12:38Joe Weisenthal?

  You know what's really cool about the Chinese EVs?

• 12:40Tracy Alloway?

  Yeah.

• 12:40Joe Weisenthal?

  Or sorry, the Chinese automatic driving vehicles? All cars, whether they're the official like robo taxis or when you're in a car that you push on self-driving mode, they have this blue light that shows up. So it's not like the typical red light. And so you could see every single car on the road in China that is currently operating in an autonomous manner and know if there's a human.

• 13:03Tracy Alloway?

  Oh, I see.

• 13:03Joe Weisenthal?

  Yeah, it's pretty nice. You know, you mentioned, Tracy, at the beginning of the episode, barrel counting. I think one of the reasons I like, we like talking to Rory is that I do consider you to be a humble barrel counter because it's so easy in oil conversation to get tempted by grand threads about geopolitics, right? Because it's sort of intertwined. So I really do appreciate the humble barrel counter. But when we talk about This sort of like China's willingness to either draw down stocks, et cetera. There's two sort of related questions that I have. It's like, one is, could China just be like, have done its neighbors a solid? In the sense that it's like, you know what? We really do have quite a big buffer.

• 13:44Joe Weisenthal?

  And we know that Singapore and Taiwan and Korea are really going to be, Japan are going to really be under strain. So from like a sort of soft power goodwill thing, like we don't really need to be adding. And B, given that we know, and B, given the EV penetration, even if it's small now, it's going to grow. Is the consensus in oil world that the massive stockpiles in China, do they exist in the event of like, preparation for a theoretical war, which would be a very oil intensive process?

• 14:17Speaker 03

  Yeah, so let's work in reverse there. And I think so, back in 2023, I wrote a piece called Chinese Oil Demand Stats, which was about how in 2023, with this massive growth in Chinese impairment demand. Again, remember China doesn't official, doesn't publish official demand stats. It was so big and China was still pretty weak coming out of COVID zero at that point. It didn't seem plausible and I kind of speculated that maybe they were building refined product stocks, which we can't see because of the way we calculate this stuff. And at the time, the worry was that it was in anticipation of a war or an invasion of Taiwan. At that stage, you had an increased bellicosity of Beijing, a lot of saber rattling, buzzing airspace, naval drills, et cetera. So I think that was definitely part of it. That was the thought at the time.

• 15:00Speaker 03

  Now, what we've seen is that obviously came in very, very handy. Now, for much the same reason, although not getting blockaded through Malacca, but just the lack of Hormuz itself, which again, was always part of China's kind of strategic or perception of strategic precarity of its, of its stockpiles. And but I think to this point of like, why? This is the question that like continues, I can you do obsess about? Because it also kind of tells you like when they're going to re-enter the market. Because as we will talk right now, not only are crude oil prices collapsing, but we've actually seen prompt Brent time spreads, the difference between the first and the second contract, actually flip into outright contango today. So I think it's a particularly suspicious day.

• 15:39Joe Weisenthal?

  So we're swimming in oil.

• 15:40Speaker 03

  We're swimming in oil, at least relative to demand. And I think part of that is that China just still hasn't stepped back in as a competitive importer. So to your point, Joe, this idea that like, maybe Beijing was playing the altruistic neighbor, which I think is, I think, one of the theories I'm holding as well. Which is, not only do they want to kind of be seen as the good neighbor, not only do they want to be seen as kind of standing up and defending its neighbors, when very clearly in their, in their telling, Washington has abandoned you and kind of stuck you with this massive energy crisis. Yeah. The challenge, I think, with that, I want to think also, if China is trying to pivot away from the US market, its only other market options are Asia or Europe, really, in terms of like a sizable sources of demand.

• 16:24Speaker 03

  So it's not its interest to see those economies kind of collapse while North America remains relatively insulated, given domestic supplies. I think the only challenge with this theory is that if that was true, I would have expected China to say something about it. And the fact is, is that so far, we have seen, we've heard virtually nothing from Beijing or any of the regulatory authorities that this is happening, why it's happening, or the scale of what we're talking about. The other, I think, more nefarious option, and you were just talking about how, I'm a humble barrel counter, I don't like to go grand strategy. But I think there is like the, put my tinfoil hat on for a second. Why would China do this and not talk about it?

• 17:04Speaker 03

  The other option, I still think this is less likely, because it seems very nefarious. But we had the Trump administration visiting Beijing a couple of months ago. At the time, it seemed like nothing much came out of those meetings. It seemed pretty lukewarm at best. But I think there's a chance that you saw some kind of discussion between the Trump administration and Beijing over like, "Help us out with this, and we will do something for you in the future." Now, what could that be? One of the things that was happening at the time was with all of the military equipment destroyed in the Middle East from the Iranian attacks, lots of advanced radar systems, anti-ship, anti-aircraft missiles, et cetera, et cetera. Washington began migrating all of its kit that had been in Asia back over to

• 17:49Speaker 03

  the Middle East. So maybe this is part of this broader kind of Dunro doctrine that Trump sees himself as pulling out of Asia. And maybe someone, somewhere made that point and said, like, if you help us, we'll keep this going. That said, again, I don't think any of this perfectly fits. And I think the easy answer is that it remains a mystery as to why China is doing this. The only problem is, is that given that we still don't understand why China did this, or even to that degree, how exactly they managed to pull it off, it makes it difficult to handicap when they're going to enter back into the market. Because obviously, a 5 million barrel a day swing is massive in this context. And right now, I think part of the reason that crude prices and time spreads are back into contango today is that we have this rising surge

• 18:33Speaker 03

  of exiting transits out of Hormuz that are running up against a still relatively weak import market driven first and foremost by China.

• 18:56Tracy Alloway?

  There are some market stories where you want every detail. Joe and I have made quite a few podcasts on that basis. But sometimes you've only got 10 minutes and just want to know what's moving markets, fast. That's the Barclays Brief podcast. Every week, experts from Barclays Markets and Research get you up to speed on what's happening and what to watch next. Concise, focused, and brief. Search Barclays Brief wherever you get your podcasts.

• 19:23Speaker 01

  This is the Bloomberg Tech Minute, brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs. And hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

• 20:06Speaker 01

  But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 20:46Tracy Alloway?

  So China isn't the only one that's been releasing from stockpiles. So the US also has a strategic petroleum reserve. And I think we were getting pretty close to the operational minimum on that thing. And Jeff Currie, who's been on the podcast a number of times, he had a really good line basically saying, this is not supply responding to price. It's inventory responding to price and inventory, unlike production, has a floor. So devil's advocate question, but like, if this kept going, if the Hormuz shuts again, or if it hadn't been opened in recent days, and I guess I should mention we're recording this on June 24th, could that inventory response have gone away?

• 21:31Tracy Alloway?

  And could we see prices shoot up?

• 21:34Speaker 03

  Absolutely. You know, when we started this crisis, we had been in a surplus in the oil market for upwards of a year. We had built substantial stockpiles, both commercial and strategic, obviously in the case of China, strategic. We were as buffered as humanly possible to weather this shock. I still didn't think it was enough at the time, and that proved out to be thankfully incorrect. But now we have drawn down massive volumes of oil. To put in perspective, the, that 13 million barrels a day Of Middle Eastern productions and shut it. The cumulative volume of that to date is roughly 1.3 billion barrels. Like, we're talking massive, massive gobs of oil. The collective I A S P R release at its upper end is pegged at about 400 million barrels.

• 22:19Speaker 03

  The cumulative reduction in Chinese imports over this period, again, relative to three months prior to the war, is between 400 and 500 million. So at least on that basis alone, China swung as much and likely more than the collective I A member states. And what I will say about S P Rs, in my modeling, in my mental model, I think about S P Rs not as inventory per se, but as discretionary supply and demand. That when you think about the effect of inventories on prices, and I think they are the primary thing that drives prices and perceptions of scarcity, it's mainly the commercial kind of merchant inventories that catch the residual, the remaining surplus or deficit after all is said and done, that drives that kind of marginal pricing influence.

• 23:03Speaker 03

  But an S P R release, as an example, manifests in the market as new supply, not new production, but new supply that wasn't available before. And we're actually seeing another stock or strategic stock release of that kind in a way right now in Hormuz itself. We've had for this whole period, we've had well over 100 million barrels of oil trapped in Hormuz. These are the ships that have been trapped and unable to escape. Those are the ships that we're seeing rise very quickly in terms of their exit pace out of Hormuz again. But because that is the stockpile, the floating oil available in Hormuz is drawing down faster than it is being replenished with new loadings. The pace that we're seeing come out of Hormuz right now also is inherently unsustainable

• 23:47Speaker 03

  and itself represents some kind of stockpile release from a stockpile that was not accessible to the market in the Gulf to now a stockpile that is accessible to the market in the broader market, in the broader world. But that's right now what's running up against the lack of Chinese import demand.

• 24:03Joe Weisenthal?

  First of all, I have a very short question. The start of the year, Brent was around 60 and on the eve of the war was 70. Just real quickly, would you say a non-trivial amount of that $10 a barrel increase was... I mean, people were talking about the risk of war all year. Would you say at least some of that was driven by war premium already rising before the initial strikes?

• 24:24Speaker 03

  Yes.

• 24:24Joe Weisenthal?

  Okay.

• 24:25Speaker 03

  And I think part of that, too, again, remember that the oil market was exceptionally weak.

• 24:28Joe Weisenthal?

  Yeah.

• 24:29Speaker 03

  Prior to this.

• 24:30Joe Weisenthal?

  Going into.

• 24:30Speaker 03

  Now, flat price is rising because, as you noted, I think there was this kind of precautionary kind of geopolitical premium being built in. But on the eve of the war, the last week before the war, we saw prompt Brent also dipping into contango. That was your sign that we had too much supply.

• 24:45Joe Weisenthal?

  Yeah.

• 24:46Speaker 03

  So I think that that was exactly what happened.

• 24:48Joe Weisenthal?

  So right now, oil is at like, again, just below 74 and like 70 on the eve of the war. Not necessarily a reason to think that that's a floor, given what we know about the world swimming in oil, so maybe it could even go lower. All right, I'm going to try and do something that's like a very like, we're all doing like self criticism here, a theme of the day. So we're going to do like a sort of double counterfactual question. So if I had been a smarter interviewer in March of 2026, which feels like a long time ago, you know, I think I probably asked you, you know, I was like, okay, I was like, well, what about that pipeline that Saudi Arabia has gone on? And I might have said, well, what about the role of SPRs? Or maybe even I might have asked something like, what about lowering sanctions on Russian oil, et cetera?

• 25:33Joe Weisenthal?

  I did not ask, Rory, China is importing so much more oil than it needs to operate its economy day to day. So if I had asked you, and so this is going to force you to put yourself in early March mind, so let's imagine it's early March. And I say, Rory, but can't China just massively reduce its imports? They don't use that much oil. It's a bunch of EVs. What would Rory in March 10th or whatever, 2026, how would you have thought then if I had proposed that as a possible way out of this crisis?

• 26:06Speaker 03

  I like this game. So I think that what I would have said at the time is we knew we were going to get I E member state strategic releases. We probably were also going to get some kind of, or at least at the time, the thought would have that we might have get some kind of Chinese release, or at least they would have stopped stockpiling. But I still, at the time, I would have found it very implausible that they reduced imports by 5 million barrels a day. I think it's in terms of the scale, I think that yes, there could have been a little bit of reduction there. But even in hindsight, it's still very, very surprising, the scale of reduction we saw. The other thing I think is that. The other question that I, you know, if I was to go back and kind of challenge my own, challenge myself, I'll do the meta meta here.

• 26:51Speaker 03

  I would say that, okay, we had this big surplus beforehand. Everything looked very, very bearish. This was thought to be a temporary shock at the time. And it's inherently temporary because we all thought it wasn't going to be sustainable. The challenge is, is that when we think about fair value in the market, we think about the relationship between inventories and prices. Part of what we've historically seen is that when inventories get really low and prices get really high, the outlook for future balances is also pretty precarious. But what we see in this crisis is that going in, we were oversupplied, the future was looking even more oversupplied. So when you saw inventories drawing down towards tank bottoms, yes, if we hit tank bottoms and we actually like hit that acute reckoning where you had to destroy demand because there's

• 27:36Speaker 03

  literally nothing left, then yeah, you could have gotten this massive spike. But in terms of the market's wariness or concern about those lower levels, you could make an argument that, well, it doesn't really matter if they go low because we know they're going to get swollen again next year as soon as this is open. And I think that that's one thing that I may have misappreciated at the time, even if I went into this, if I went into this crisis bearish before flipping bullish during, you know, after Hormuz was closed, I still thought that Hormuz was such a larger kind of shock to the system that even going in with a 3 million barrel a day surplus, a 13 million barrel a day loss of production was still going to put you in an extraordinarily tight position. But again, I think that that's part of what I may have misconstrued.

• 28:21Speaker 03

  I think the one final thing I'll say, and the one thing I haven't mentioned so far, and I think we should, is the jawbone, is the fact that when I talk to traders, the one thing I heard time and time and time again is that, and these are like, these are prop kind of oil and products traders, they have their own models that show them fair value. They keep saying, like, all their models say this is a raging buy, but they got so blown out repeatedly in that kind of March and April period, all their risk management kind of limits have been throttled down by 90%. That there was this general, the quote was, everyone's bullish, but no one's buying. And I think one thing I also deeply misappreciated going into this crisis was the potential power of Trump himself, more broadly, Trump administration,

• 29:04Speaker 03

  to inject so much downside volatility that it kind of arrested the normal meltup process. And I think that if we had just had jawboning, I don't think it would have been enough. If we just had China import contraction, I don't think it would have been enough to arrest that meltup that we saw through March and April. But I think the combination of them proved to be especially potent, that you had, you kept resetting the clock, and all the while, markets kept loosening because of China's kind of pullback on imports. So I think the combination of them proved to be way more powerful than I have ever expected. And I think going forward has really shown the degree to which the market, the oil market is much more resilient, at least in

• 29:49Speaker 03

  this kind of condition, to a big shock like that in a way that I just hadn't appreciated at the time.

• 29:55Tracy Alloway?

  Can I just ask, on the inventories and strategic reserves? So one of the bullish arguments I've seen, and there are still some oil bulls out there, but they say, well, stockpiles are low now, so people are going to have to fill them up, right? And you're going to get like, maybe structural, structurally higher demand for oil for the next couple of years or so. Is that a theory that you buy into? People need to refill their oil tanks?

• 30:23Speaker 03

  Yes and no. And I think, again, it goes to that split between how I think about strategic and commercial inventories differently, or strategic stocks and commercial inventories differently. I think that, yes, there will be an impetus to, let's say, refill the SPR in the United States, refill the SPR in Japan. Countries that didn't have SPRs going into this, that all of a sudden wished they had them, like India. You've seen a lot of examples of countries building up. Adnoc, the Emirati natural oil producer, has now made plans for a 50 million barrel strategic, commercial strategic stock in India coming out of this. So I think that will structurally undergird demand for the next year or two, or maybe even

• 31:04Speaker 03

  But I don't think that that demand is going to manifest as long as the market is tight. So you need to get back to a stage where the market is looser. Otherwise, you're just kind of retighten the market through SPR rebuilds. I think on the commercial stock, I think that is a situation where you kind of need a surplus in order to rebuild those stockpiles in the first place. So I do think that right now we are deeply underwater on most global kind of trackable commercial stockpiles. And I think we need a period of surplus in order to get us back up to normal levels. Little and but we probably don't need to get back to where we were, say, at the beginning of the crisis, where we had abnormally high levels of inventories.

• 31:45Joe Weisenthal?

  That was fantastic. By the way, this reminds me, you know, an episode I really want to do, and it's been requested, actually, by a listener. We should do an episode about the $20 billion Dengote Petroleum Refinery that opened recently in Lagos, Nigeria. So this incredible engineering feat, one of the most important refineries in the world right now, hasn't been open very long. Anyway, I was only reminded by that because of your point about maybe more countries are going to think about having SPRs in the first place. Rory Johnston, thank you so much for coming on. Really appreciate you, you know, willing to talk about a, you know, an incorrect call. Appreciate your candor and coming back on up.

• 32:24Speaker 03

  Thanks for having me, guys.

• 32:25Tracy Alloway?

  Thanks, Rory.

• 32:26Joe Weisenthal?

  Thanks, Rory. That was great.

• 32:26Tracy Alloway?

  We all learned something.

• 32:27Joe Weisenthal?

  Yeah, we all learned something.

• 32:29Speaker 03

  Me, me most of all.

• 32:43Joe Weisenthal?

  Tracy, I think I thought there were a lot of interesting moving parts. I liked his point about the sort of intersection between the Chinese import reduction and the jawboning, which at the time I didn't put a ton of weight on it because I was like, the barrel math is the barrel math.

• 33:00Tracy Alloway?

  Yeah.

• 33:00Joe Weisenthal?

  But if it did, as he put it, like, changed the behavior of traders who might have that point about their risk limits, but that's interesting.

• 33:07Tracy Alloway?

  That was really interesting. And also, if you remember back in March, sort of April, there was a lot of discussion of the disconnect between the physical market. Where like you couldn't get barrels versus the actual financial market, which like wasn't showing that big price increase.

• 33:22Joe Weisenthal?

  There are a lot of threads that I didn't totally understand, but there was, it was a really weird time in the market. And it was absolutely true that at least for several weeks, there were all those headlines about like, oh, in the Philippines, you can only drive to work two days a week or whatever. And so it was like a real crisis. It was not the headline crude barrel price never got to 200 or even 150, but it was like deep, deep stress.

• 33:49Tracy Alloway?

  Yeah, that's the thing, right? It's like the tension between people not being able to get oil and the prices actually not shooting up that much. But also, I think the big question that we're all left with is, what's China thinking? Like, why they do it, right?

• 34:04Joe Weisenthal?

  Right, we don't really know. And then just in terms of, I guess, the short to medium trader question, will and when will they re-enter the market in the same levels that they were pre-war is like a really interesting question for people to watch currently.

• 34:20Tracy Alloway?

  I would love to see one of China's like oil caverns.

• 34:24Joe Weisenthal?

  Oh, that would be good.

• 34:25Tracy Alloway?

  Yeah, that would be good.

• 34:26Joe Weisenthal?

  Let's do it. Let's do a road trip.

• 34:28Tracy Alloway?

  All right. Shall we leave it there?

• 34:30Joe Weisenthal?

  Let's leave it there.

• 34:31Tracy Alloway?

  This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 34:36Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our guest Rory Johnston at Rory underscore Johnston. Follow our producers, Carmen Rodriguez at Carmen Armand, Dashell Bennett at Dashbot, Cale Brooks at Cale Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more Odd Lots content, go to Bloomberg.com/oddlots or the daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 35:02Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we follow up on wrong calls, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

• 35:54Tracy Alloway?

  Congratulations, you've built a dashboard. But now comes the follow-up question, and the follow-up to the follow-up, and the dashboard for that. Meet Hex. Give everyone the power to ask their own questions, explore data, and build with AI, all in natural language. Because every answer should spark another question, limited only by your curiosity, not your data team's bandwidth. Go deeper than dashboards. Join over 2,000 leading data organizations. Visit hex.ai.

• 36:24Speaker 04

  Most meeting note takers get the easy words right and the important ones wrong. The client's name, the acronym. Whisperflow Note Taker is built to get the hard words right. It takes notes on any meeting platform: Zoom, Google Meet, Teams, even WhatsApp calls. Keeps every meeting searchable and connects to Claude or ChatGPT, so you can ask, "What did we agree to last Tuesday?" Free to try on Mac and Windows at whisperflow.ai. That's W-I-S-P-R-flow.ai.

• 36:54Speaker 05

  Wise is the smart way to manage the currencies you need around the globe. When you send money abroad using your bank, you could get hit with hidden fees and exchange rate markups. There's a better way. Try Wise. Wise uses the exchange rate you'd usually find on Google with no unwelcome surprises. Plus, most transfers happen in under 20 seconds, which means your money arrives in less time than you've been listening to me. It's simple and free to sign up when you download the Wise app. Be smart, get wise. T's and C's apply.