00:00 Speaker A
Where is that supply now that normally would be going through the straight? And if things do calm down and it opens back up, how long does it take to start moving it through there again?
00:07 Don
Yes, I think that one key point is that the impact on oil prices for an additional day of of disruptions to the straight becomes bigger and bigger when if the disruption lasts longer. You sort of have a non-linear effect because if it’s lasting a few days,
00:23 Don
um the producers in the Middle East can simply store the oil they can’t get out and they don’t have to cut production. However, once their storage tanks are full, and Iraq is already in that situation. Once you hit congestion, you need to cut production. And so in that in that longer disruption scenario, you are not only reducing your exports today, you’re also not going to make up in the future, uh and and so there’s a permanent loss in supply. And our base case forecast has 200 million barrels of lost production because some countries like Iraq are are already hitting the storage uh storage constraints. And so this this highly known
00:54 Don
linear impact of oil prices as a function of the length of the disruptions, reflects two things, storage constraints, which become relevant if the if the disruptions last a couple of weeks. And then and then second, uh if it lasts longer, say longer than a month, prices may have to rise to demand destruction levels.
01:10 Speaker A
So, it sounds like all things, you know, sort of bottom line here when we’re talking about that average price forecast for the second quarter of $76 a barrel.
01:19 Speaker A
It could end, you you might end up having to raise that at some point if the if this continues.
01:23 Don
Yes. So we lay out laid out a benchmark of assumptions for flows through the straight. We laid out a benchmark for production losses. Uh and if the flows to the straight of our moves, uh don’t start picking up early next week as as we laid out in our base case, then our our framework suggests that prices uh, you know, will be will be higher than in our base case. And so I think, you know, the the value of that framework is for for investors to assess the incoming news.
01:44 Speaker A
Right. And and you did compare this situation to a situation I in 2019, I believe, but like, is there any, um, true analog to what’s going on right now historically that help that is helping you figure out what’s going to happen?
01:57 Don
So in 2019, um the largest oil production facility in Saudi Arabia, Abqaiq, which produces around 7 million barrels per day of oil, uh was hit. Um it was offline for for around 10 days. We saw the largest intraday price movement in the history of oil markets. We went up 20%. But as it became clearer that Saudi Arabia was able to bring production back quickly, prices quickly quickly moderated. Um the supply shock here is even larger than 7 million barrels per day. We’re we’re estimating that between the 20 million barrels per day of normal flows and the roughly 4 million barrels per day of flows that you can redirect via via pipelines, you have essentially 16 million barrels per day of supply at risk. That’s bigger than the 2019 shock, which was 6, 7 million barrels per day.
02:35 Don
That’s a lot bigger than um the volumes we lost in 2022 uh around around Russia. So this is a very, very large shock.
02:44 Don
But I think one reason why prices are not higher is because investors need to put weight on on various scenarios. Our base case, which is close to market pricing, you start to see recovery uh next week, gradual recovery in flows. Um a situation where the the conflict ends earlier, perhaps the US decides that its main objectives have been reached and and then prices would come down very sharply.
03:03 Don
But then also a tail scenario where this conflict lasts lasts longer. And I think that many investors are reluctant to go for very for this very for these very bullish views and and put on very bullish positions because they they can’t rule out this scenario where very quickly the conflict is resolved and and and flows flows normalize.
03:16 Don
So that makes it extremely complex uh for for investors and and oil traders to to decide what to do given the very broad range of outcomes here.
03:24 Speaker A
Right. and tricky for any companies that need to hedge oil prices for example as well.
03:28 Don
Exactly.
03:28 Speaker A
Yeah. Don, good to see you. Thanks so much for coming in. Really great to get your perspective at a time like this when so much is going on. Thank you.