MacroVoices #400 Rory Johnston: All Things Oil
Commodity analyst Rory Johnston discusses why the predicted massive oil supply shortfall of 3 million barrels/day in Q3-Q4 didn't materialize as expected, analyzing data inconsistencies from China demand and Iranian exports. He views geopolitical escalation risks from the Israel-Hamas conflict as tail risks rather than base case scenarios.
Summary
Rory Johnston, founder of Commodity Context, analyzes why the widely predicted massive oil supply deficit of 3 million barrels per day in Q3 and Q4 failed to materialize despite consensus forecasts from major banks. Johnston's independent supply-demand analysis confirms the deficits exist on paper, but identifies several factors explaining the disconnect: understated Iranian production (200-300k bpd), exceptionally strong Chinese demand that appears disconnected from broader macro data, and significant EIA data adjustments including crude oil supply adjustments and understated blending demand. He suggests China may be building strategic refined product inventories, potentially 500k-1 million bpd during peak months, either for economic reasons or national security purposes related to potential Taiwan tensions. Regarding geopolitical risks from the Israel-Hamas conflict, Johnston views Iranian escalation as unlikely, arguing Iran wouldn't risk its primary economic lifeline to China or provoke direct US retaliation with two carrier groups positioned for deterrence. He expects looser sanctions enforcement on Iranian crude to tighten, potentially removing 500k+ bpd from markets. On OPEC dynamics, he notes Saudi Arabia controls the market through voluntary cuts (2 million bpd unilaterally, plus organized cuts), estimating total global spare capacity at 3-3.5 million bpd concentrated in Saudi Arabia and UAE. Johnston discusses Venezuela sanctions relief as limited upside (200-300k bpd over 6 months) contingent on electoral reforms. He explains the current gasoline-diesel crack spread dislocation, where diesel trades at $40/barrel while gasoline has collapsed to $5/barrel, driven by refiners chasing diesel margins while creating gasoline oversupply. This reflects the challenge of heavy crude shortages from Saudi cuts affecting refinery yields.
Key Insights
- Johnston's independent analysis confirms the predicted 3 million barrel per day supply deficits exist on paper, but real market conditions suggest significant data inconsistencies
- Chinese apparent oil demand has grown by 2 million barrels per day year-to-date, representing two-thirds of global demand growth, which seems disconnected from China's broader economic slowdown
- Johnston theorizes China may be building strategic refined product inventories of 500k-1 million barrels per day during peak months, potentially for national security reasons related to Taiwan tensions
- EIA data shows large crude oil supply adjustments that are actually bearish, indicating either understated supply or overstated demand by approximately 600-700k barrels per day
- Johnston views Iranian escalation as unlikely because it would cut Iran's 1.5+ million barrel per day lifeline to China and provoke immediate US retaliation
- He expects tighter sanctions enforcement on Iranian crude despite no official policy change, potentially removing 500k+ barrels per day from markets
- Total global spare capacity is estimated at only 3-3.5 million barrels per day, concentrated primarily in Saudi Arabia and UAE
- Saudi Arabia effectively controls the oil market through 2 million barrels per day of unilateral voluntary cuts plus additional organized OPEC+ cuts
- Venezuela sanctions relief offers limited upside of only 200-300k barrels per day over six months, contingent on electoral reforms that appear unlikely
- Current refining margins show extreme dislocation with diesel at $40/barrel while gasoline has collapsed to $5/barrel, making gasoline effectively a waste byproduct
- Heavy crude shortages from Saudi cuts are reducing diesel yields at refineries while oversupplying gasoline markets
- The energy transition poses long-term challenges for refiners as diesel demand may persist longer than gasoline demand due to heavy equipment requirements
Topics
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