Why Oil Could 5X To $350, ‘Crater’ World Economy | Bjarne Schieldrop

beond shrop joins the show he is a chief Commodities Analyst at sebb research we be talking about his outlook on oil welcome to the show beond good to see you pleasure to host you today thank you for being here in your recent research report that you published in the first week of October you wrote so if worst came to worst and if the straight of Horus was closed for a month or more then Brent crude would likely Spike to $350 a barrel the world economy were czy and the oil price would fall back to below $200 a barrel again over some time but the risk for this currently seems very remote and both the US and China would likely move in to try to reopen the straight if it was closed walk us through that scenario and some of the assumptions behind um a $350 oil Target under that scenario yeah I mean um if you look back in history and you don't need to look long back uh far back you can see that when you have Commodities severe disruption in supply of of specific Commodities you know they tend to move like 5x or 10x to normal price I mean look at nickel price when when uh Russia invaded Ukraine it went from 20,000 to $200,000 per ton and of course it was due to some technical reasons as well but then the NAT gas price in Europe moved to like uh 500 $50 per barrel of oil equivalent in Europe and to 385 per barrel of oil equivalence uh in Asia on the l&g market and then fell back of course and and and when you calculated these uh these cost to the share of the economy you know the pricing of electricity on the basis of that g that gas was like 20% of GDP for a whole year uh priced on on the 2023 contract which is just unachievable with with you know the the the economy would crater and and obviously you know the price fell back rapidly and and if you look at the oil flowing out of the straight of remou we're talking 18 to 20 million barrels per day flowing out there and um you know that accounts for close to 20% of global demand so for sure if it was really close and you lost 20% of Supply you know the price would just explode and and the fact that you know we have only witnessed um prices moving up to $149 $150 historically which is a much more much higher price in today's money it doesn't mean it can't move there if we get this real Supply and and we really have to move back to the 70s to see this 5x move in in oil prices H but it's so far long back for oil to have seen these massive spikes of 5x normal price or 5x the the prior year price so we kind of have forgotten and and you know markets tend to be surprised when things happen which hasn't happened for a long time I mean look at inflation suddenly spiked we haven't seen since the 70s and 80s and then pandemics we haven't had a pandemics in in 100 years and and and you know governments Panic around the world and stimulate the global economy with 10x the stimulus of of global financial crisis so just the fact that just long ago doesn't mean it can't happen again well we know that the state of hormo is very important and vital for transporting oil from the Middle East to the rest of the world but do they not have other alternatives besides the straight of hormo pipelines perhaps Inland you do have one pipeline going um from east west from the straight of horuse and into the Red Sea and it holds something like 5 million barrels per day of capacity uh Saudi Arabia is holding that pipeline so you know as a as an alternative Outlet Saudi Arabia could ship oil into the Red Sea and out into the global market either up um into the Mediterranean or down through uh to uh the the Persian Gulf area or or around there and and around Yemen and and to Asia but of course then you have the hoties could who could threaten that oil so for sure there would be a lot of adaption to such a supply shock losing 18 million um and some would be adapted by oil coming out of strategic oil reserves in the US and the OCD countries China would use from strategic reserves uh and uh Saudi Arabia would would Channel oil um uh through the Red Sea rather than to the Persian Gulf you know so yes we always have Market adapting quickly and as fast as they can and then of course you would have um Russia lifting production by a million barrels um stuff like that but I mean we are talking like 20 million barrels and even with shifting uh oil to to the Red Sea by five million barrels we still short like 15 million barrels on on on the supply side now if the straight of Horus was closed by Iran presumably through a naval blockade of some sort right uh what what does this imply that there has been a significant escalation in this war between Israel and Iran perhaps Israel has already retaliated by this point what needs to happen for the straight of horuse to be closed you know I think um you know we recently had like 200 ballistic Rockets um hitting Israel from from Iran many were intercepted though um like Tuesday when a half weeks ago um for sure Israel is going to retaliate that is for sure we don't know when we don't know how we know that they have like a mile long list of possible targets which they s could choose from um is going to be just a soft reply like we saw in in April where like it's just two dogs barking at each other and then sort of moving back or is it going to be a hard hit to military installations or is it going to actually hit and the oil installations of Iran hurting and closing down Iran's possibility to export currently around 2 million barrels per day of oil including condensates and you know if Iran then is is losing its ability to export oil I mean it could hit back uh by closing this trate of REM moose just uh saying okay if we are not going to be able to enjoy oil exports enjoy oil income then why should the rest of OPC enjoy that and we want to hit back at the world Hit back at the US with high oil prices you know it could be a possib teror retaliation by Iran to to put the sea mines in the straight over Moose for example but you know I think so that is one possible route to to closure of the straight of moose the other is that it's just war in itself is unpredictable uh and then suddenly it spirals out and and one action take next to the next level so it's like a tit for Tot um escalatory ladder where Israel has to respond hard Iran even harder and then suddenly you have have it going the US is dragged into the equation etc etc you know this is the unpredictable of war is just keeping the door open for for anything when you start to shoot directly between Iran and uh Israel before we continue with the interview I'm going to tell you about another way you can invest your Bitcoins and store them safely instead of using a traditional wallet or an exchange consider an IRA today's sponsor itrust capital is one such Ira that offers 35 crypto assets and the lowest trading fees in the crypto Ira space at 1% only and being an IRA it also offers unique tax benefits if you like to get started and learn more click on it trust. capital David in the link down below or scan the QR code up here if you're over 18 and you want to open a new account with cash or roll over an existing account you can do so using my referral link and if you use referral link you'll get $10000 in signing bonuses you also wrote that if the straight of Hormuz were to close uh China and the US would likely move in to try to reopen it is what you wrote how would they how would they do that I mean I would you would see warships uh um going full speed to to the Persian Gulf and and try to open it with Force shoot down military installations in Iran to be able to demine the rate if that happened you know they would open it with Force because they would know that you know this kind of energy shock it's like the ' 70s and basic full scale uh escalation against Iran well that in itself wouldn't that in itself be bullish for oil as well even without the stra of horos closing that scenario you just described yeah exactly so so if you take sort of the first step assuming that Israel actually take out uh uh the car Island export Capac capability of 1. 5 million barrels and start to hurt uh um Iranian oil installations you know the more can easily cope with that because OPEC plus has some five to six million barrels per day of Reserve capacity you know so just losing that isn't all that problematic for the oil market and that is why oil prices are fairly muted in action still under $80 sniffing at the High 70 or or sniffing at the $80 but but still a little bit below um but then you know when that happens you're actually starting to get closer to the really bad scenario so then the risk premium would add much more to the oil price than it does now I would like to understand how oil reacts to war in the first place so take a look at this chart of the long-term price of oil uh following September 11th 2001 the um Americans as you know went into the Middle East and that War lasted uh the latter half of the last two decades how much of this uptrend in oil between 2001 to uh basically 2008 before the great financial crisis and then we had a a big correction there how much of that was due to war or were there other more important macro factors involved be I think it's always several factors on top of each other because if you look at sort of the oil prices through the '90s they were really low right so basically uh capex spending through those years in Upstream oil and gas was really low as well and and then you had War like you say in the Middle East with Iraq um uh but also you had this massive acceleration in demand from China you know so uh low capex low production growth capabilities um strong growth in China and some um curbs uh on the supply side due to war in the Middle East so I think most of that upturn was quite sort of uh or orderly it wasn't like a war uh jump it was an fairly orderly increase in the oil price due to these strong forces of subdued cap expending the decade before and very strong oil demand growth uh from China and Emerging Markets interesting so let's talk about the other scenario so instead of the straight of hormo being closed uh Israel has uh said that a possible retaliatory strike would be against the oil refineries of Iran Iran said that if that were to happen it would strike their oil fineries of other Arab countries uh friendly to the West so that may include the UAE for example under that scenario what would oil uh what would the price of oil do I mean that's it's a very interesting question because if you look at the crisis we had with with um uh Russia Ukraine uh Europe I mean oil was flowing more or less like normal from Russia into the global Marketplace but the problem was that Europe used to import large quantities of oil products and feed stocks to produce oil products um both intermediary feed stocks and special crudes so suddenly we had to reorganize the whole flow of Oil Pro uh oil products in the world and we had this massive increase in diesel prices on top of the crude prices and and basically what you saw was that the normalization in refiner margins didn't really happen before uh a few months ago and that is also when the oil price weakened so a very stressed out refining margin means that the rest of the world uh refining system will run as hard as they can and buy as much crude as they can to produce the refined oil products which uh is no longer produced by Iran possibly so it could upset um the global oil Market through very high uh refined uh product prices possibly and lift oil price as a result if okay so if oil refineries in the Middle East were destroyed and I guess even if the uh state of Hormuz were closed temporarily and we have uh limited supply of oil from the Middle East how quickly could the rest of the world fill in that Gap in production and Refinery I think if you take the simplest one first in terms of uh like losing 1 and a half to 2 million barrels per day of of crude from uh from Iran into the global Marketplace that could be replaced very quickly by the OPEC countries including in addition of course Russia which also could lifted so I think that would be very quick and and you know um it would actually be a very good thing for OPEC plus because you know they want to lift production by 2.

2 million barrels per day gradually from December this year to November next year and if the market loses like a couple of million barrels from from Iran you know that would be sort of full open door for them to actually put that back into the market um it would remove a lot of downside risk for oil prices and and put it on a more steady footing uh around 75 to $85 rather than to drive the price to the sky but Market would be extremely nervous in that situation you would start to erode and use up parts of your um spare capacity within OPEC driving it down to maybe like three uh three million barrels of of readily available capacity um and also you know the scare factor of this escalating further would come on top of of the steady oil price of around $8 let me uh show you my screen one more time uh B so this is the price of oil on October 1st was when a ranch launched uh launched 200 ballistic missiles against Israel uh and on that day the oil price spiked and it remained relatively high but before then the oil price was trading around $69 are you if I'm reading this right the Market is only pricing in a $6 geopolitical risk premium yes and and I think part of that reason is just uh the fact that you have this spare capacity in OPEC which is more than enough to cover losses of of Iranian Supply if that was to happen of course it doesn't really and then it probably um assigns a minuscule probability that it really completely spirals out of hand involving the straight over moves if you remove the uh conflict in the Middle East right now between Lebanon between Israel and Iran would you expect the oil price to be much lower than it is today uh I mean you probably will be like down to uh the 70 Line and and and I think the whole discussion then would be about two things will OPEC plus lift production by 2. 2 million barrels over the coming 12 months from December um and how will um uh Chinese oil demand and the global economy uh develop uh you know those would be the two two main topics because sh o is fairly muted in this growth right now so the you know we're not going to drown in Shale oil but we're going to have plenty of of new Supply from from Canada and Brazil and and Guana including some more also from from from the US so it's it's plenty of Supply um and I think that is an interesting discussion what will OPEC do and you know I've been thinking a lot on that yeah yes and looking ahead as well uh how important is the Chinese stimulus package that was recently announced late September uh for not just the Chinese economy but for oil demand you know I think it's taking a taking away some of the downside risk in the market because the I mean the market has clearly be concerned about the development in the Chinese economy is it going to just unravel and and and fall yet lower and now at least they will stabiliz stabilize it at uh at around 5% growth Target and try to drive it up to that level rather than allow it to slip and Tumble uh so you know it takes away some of the the the outlayer downside risks for oil I think it doesn't necessarily Drve Chinese oil Demand right up it's not like a humongous bazooka stimulus package going looking forward then we talked about OPC plus being something you need to look at what are some of the most important demand drivers for the next op OPEC plus being a supply driver what about on the demand side of course you know it's it's the total global economy per se um but I think it's interesting um article and report from the international monetary fund basically saying that um you know from 2000 to 2005 to to 2015 was great decade for emerging markets uh together with China they were growing very rapidly and faster than the US economy um and then you had uh a very very sad period from uh from 2015 to to uh to now but the coming five years Emerging Markets like 88% of Emerging Markets are going to grow faster than the US so it's a good setup for that part of the global economy which consumes very little oil today and and of course India is part of that equation uh and if you look at um Indian oil demand growth uh it's now up to like 250,000 barrels per day while China consume growth was closer to half a million barrels per day per year over the past decade but you know when you look at sort of U uh economic growth uh per cap consumption growth in Oil we're quickly moving to like 350 400,000 barrels per day growth per year in India so India is now on par with China and now it's going to take over and and be a significant oil demand growth to get the rest of of non-china Emerging Markets War aside if you just take a look at the price of oil over the last couple of years from 2020 its bottom during the pandemic when it went to negative for very for a very brief period of time all the way to the top we're looking at a 47% uh increase are the conditions still in place beyond for oil to retrace and stabilize around $100 a barrrel no I no I think it's it doesn't make sense for oil to stabilize around $100 and and you know it was some articles in the market where you know um Saudi Arabia is giving up on the $100 Target you know they didn't have a $100 Target they could wish to have $100 it would be great for them to have $100 if it was possible to have that sustainably but you know they've seen that you know if they try to to push it too hard you get too much sale oil you get too much uh production growth from non OPEC plus uh so you know it's it's not a sustainable price to keep it at $100 uh for a long period and um so it it trailed down and and the the crisis from from Ukraine Russia event faded along with with the refining margins coming back to normal so let's finish off in your projection that even if let's say in the worst case scenario revisiting your worst case scenario we have the straight of hor moves close oil goes up to $350 a barrel historically when it spikes it doesn't stay up for very long could this time be different could we expect oil to stay up to very high levels for a significant amount of time or would that just be a temporary Spike up to that level you know it can't stay up that long because it will just kill the global economy and it will kill oil demand so oil demand will crash if it stays up there um so just due to sort of demand destruction the oil price would fall back even if you didn't have uh adapting factors on the supply side but of course you have adapting factors on on the supply eyes side as well um so no it wouldn't stay up there very long um and then it would move and if it stayed close it would probably move down to uh to like $200 and and and maybe somewhat below that that would still be very painful on the demand side but uh probably something like that and what is again you said that that that worst case scenario is very remote what then is your base case uh scenario for how the oil price will evolve in the next year I mean our base case I think is um much like the market is pricing now the base case is that we are not going to have disruptions in in Iran Israel isn't going to shoot AP part oil infrastructure there um and oil demand is is not going to be very strong like uh8 million barrels per day per year this year and and just 1. 1 million barrels next year so fairly muted oil demand growth you know the global economy is not really firing on all cylinders rather sort of a lot of weakness uh around but still waiting for the acceleration which is um expected to come in gradually next year and then more of the year after H which of course will be supportive for oil but most important is going to be in addition to sort of um acceptable demand growth of around 1 million barrels per day per year what is OPEC going to do OPEC plus going to do you know they talk about these plus 2.