MacroVoices #465 Rory Johnston: Oil Markets Under Trump 2.0
Rory Johnston discusses oil market fundamentals entering 2025, arguing that despite Trump's drill-baby-drill rhetoric, proposed tariffs on Canadian and Mexican crude would significantly disrupt U.S. refining operations since these heavy crudes are essential for blending with U.S. shale oil. He sees modest supply deficits continuing with gradually higher prices.
Summary
Rory Johnston provides comprehensive analysis of oil markets under Trump's second term, beginning with current fundamentals showing low inventory positions and modest supply deficits that point toward gradually higher prices in the low-80s range for Brent. He argues that while Trump promises energy dominance and drill-baby-drill policies, U.S. production growth is likely to slow to around 300,000 barrels per day in 2025 due to geological constraints and industry discipline, despite reduced regulatory burdens. The discussion extensively covers Trump's proposed 25% tariffs on Canadian and Mexican oil imports, which Johnston considers highly disruptive since Canadian heavy crude is structurally difficult to replace due to crude quality requirements and pipeline infrastructure. U.S. refineries were built before the shale revolution to process heavier crudes, requiring Canadian heavy oil to blend with ultra-light U.S. shale oil for optimal refining. Johnston estimates tariff costs would be split roughly equally between Canadian exporters, U.S. refiners, and consumers, potentially adding 13 cents per gallon to Midwest gasoline prices. He notes the irony that tariffs could push Canada to accelerate pipeline construction to its own coasts, reducing dependence on the U.S. market. Regarding sanctions policy, Johnston expects Trump to tighten enforcement on Iran and Venezuela, potentially removing over a million barrels daily from markets, but suggests Trump would first seek commitments from OPEC to replace lost barrels. He speculates about potential territorial expansion scenarios involving Venezuela's massive oil reserves. The interview concludes with analysis of how broader market volatility from events like China's DeepSeek AI breakthrough might affect oil prices, and discusses OPEC's likely resistance to Trump's requests for increased production given their focus on maintaining higher price levels.
Key Insights
- Johnston argues that Trump's proposed 25% tariffs on Canadian crude would create a roughly one-third split of costs between Canadian exporters, U.S. refiners, and American consumers, potentially adding 13 cents per gallon to Midwest gasoline prices
- He contends that U.S. production growth will slow to around 300,000 barrels per day in 2025 despite Trump's drill-baby-drill policies because geological constraints and industry discipline matter more than regulatory relief
- Johnston explains that Canadian heavy crude is structurally irreplaceable because U.S. refineries need to blend it with ultra-light shale oil to achieve the medium-grade crude they were designed to process optimally
- He predicts that Trump's tariff threats could accelerate Canada's construction of pipelines to its own coasts, reducing long-term dependence on the U.S. market in an unintended consequence
- Johnston suggests Trump is more likely to successfully implement sanctions on Iran and Venezuela than meaningfully increase U.S. production, since sanctions can be imposed immediately while drilling takes time
- He argues that oil prices remain fundamentally anchored to supply-demand dynamics despite being the most financialized commodity, meaning broad market selloffs would only temporarily affect prices unless they caused recession
- Johnston claims that OPEC learned from Trump's 2018 reversal on Iranian sanctions and will likely wait to see actual supply losses before increasing production rather than acting preemptively
- He identifies a core paradox in Trump's energy policy between wanting higher U.S. production and lower overall oil prices, noting these goals often conflict
- Johnston speculates that removing all OPEC production cuts could crash oil to $30-40 per barrel, but this would primarily hurt U.S. producers who are the highest-cost marginal suppliers
- He suggests there are limited U.S. sources of heavy crude that could replace Canadian imports even with a 25% price incentive, as the scale required doesn't exist domestically
- Johnston argues that 2024 represented a fundamental shift toward lower volatility and slower supply-demand growth after the extreme disruptions of 2020-2023
- He contends that current low inventory positions combined with modest supply deficits point toward gradually higher prices reaching the low-80s range for Brent crude
Topics
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