$120 Oil Ahead?

This is The Markets. I'm Chris Hussey, and today is Tuesday, March 3rd, and I'm here on the Goldman Sachs trading floor with Jerome Dortmans, who is co-head of Global Oil and Products Trading. Let's cut to the chase. Oil's up about $10 a barrel since the Iran conflict started this weekend. What do you make of the move? Good

question. We've actually, in my opinion, given what is going on on the ground, somewhat of a subdued response on the oil price. you know we've had precedence over the last sort of eight years where every time something like this happens and the market starts to fear sort of a contagion or a spread to the region it hasn't

really played out and anybody that vests in getting long you know has ultimately had to take the pain and had to sell out this situation is clearly very different you know we are definitely seeing you know oil barrels being affected and just to give you an you know, the amount that's at risk here, you know, it's

20 million barrels a day on crude and it's up to five million barrels a day on products, you know, which is obviously, and 20% of LNG production, you know, these are meaningful and unhedgable volumes of oil.

The world only produces 100 million barrels a day. So 20 million is like 20% of the whole oil. Yeah, and this is the first time, you know, that that the barrels have actually been impacted. Fine, it's four days right now, five days.

So obviously, you know- Well, let me ask you about that because it is only four days so far. I would imagine how long this lasts has an impact on this as well. How do you factor that into markets? How are markets thinking about how long? Yeah, again, true. The issue is that if we are talking

how long? Yeah, again, true. The issue is that if we are talking about up to 20 million barrels a day of production that is affected, the reality is there are you know paths there's a pipeline that can take oil from you know from the east to the west of saudi you know up to you know five million barrels a day there's a pipeline that can take you from

inside the persian gulf to outside to fujira but as i said earlier that's already been attacked so the ability to to continue those flows again will will may well be constrained but if we're talking about you know, these kind of volumes, you know, every day matters. You know, if we are losing that kind of

volume on a daily basis, we built stocks in the second half of last year, you know, this will eliminate that stock build very, very quickly. And there is no meaningful response to that kind of volume. OPEC can't increase production. And even then the production is Part of that is inside the Persian Gulf, so it can't come out

anyway. So it doesn't, you know, this morning again, just as a tidbit, you know,

anyway. So it doesn't, you know, this morning again, just as a tidbit, you know, Iraq has had to shut in production because their storage is full. And so that's the next level of a problem. So I think we are getting very close, you know, to a situation where we need to try to resolve this choke point.

The U.S., Israel, the market has to try to solve this. sooner than later. It

can't just because the contagion and the domino effects on other parts that are not being affected by Iranian activity are real and meaningful. So I think, you know, another two or three days, this becomes a serious issue. And whilst we are now trading $84 oil, as we go towards that two to three

days, we will start trending towards $100 a barrel because it's every day that goes by is more meaningful. in terms of the impact, I think, on the oil complex.

Yeah, these spot supply commodities like oil, they just work differently than a stock or something like that. If there's nowhere to put it, what do you do? Let's drill

down a little bit more, because products as well, because that in the end is what hurts an economy. You've got diesel, you've got jet fuel, you've got regular gasoline.

What's most at risk here with what's going on? Yes, so the most impacted in terms of products is definitely the diesel and the jet fuel. fuel. A few reasons.

One, that region is a diesel producing machine. The US

refinery complex, by example, is a gasoline producing machine. The

Middle East has been built to be a diesel producing machine. Jet fuel is, whilst airports have been shut, which obviously is going to temper demand in the short term, there's a high dependency on jet fuel supply from the region especially for Europe. So jet fuel is a major impacted product.

The other, I would say, more impacted products are on the light ends, not gasoline, just because it's not a major producer of gasoline, but LPGs or NGLs, petrochemical feedstock, is a major impacted product there. The

Iranians are also a big exporter. of those feedstocks and a big export of condensates which also act as a feedstock to plastics production down downstream. So those are probably the three biggest impacted. Fuel oil is also impacted because when you hit a refinery in Saudi they are a big producer of fuel oil. So that market is also

seen a reasonable appreciation. Okay, run it out even further. The markets

now, it's not just the commodities markets getting hit, other markets, the stock market today under a little bit of pressure. As you see investors in this fairly constrained commodities market relative to a stock market or a bond market, are you seeing Do people come in to try and hedge exposures to global growth at this point already?

Yeah, it's a good question, and it's the one thing that has maybe surprised me a little bit. I think because of what has been happening over the last few years with these geopolitical events, as in we see the spikes and they very quickly come off again. So in my view, there's a decent amount of complacency here.

So we've not seen that. In fact, we've seen a lot of profit-taking. And a

lot of investors thinking, you know, we're now so far away from fair values. This

is not going to last forever. This is probably a window actually to look at positioning to the downside. And, you know, I can see the arguments for that, obviously.

But, you know, if I look at the next 36, 72 week, maybe even two weeks, I think that's a risky proposition. because we are seeing material impacts on price inflation across the oil complex into the petrochemical complex, into all the industries that are obviously dependent, car industry, whatever. It

is broad, as we know, penetration of hydrocarbons. So I think there's a little bit of complacency here, and I think it is betting that the pain you know, in terms of what the oil market does and its contagion on others will at some point be addressed, you know, by the market or by the U.S. administration. One of

the unique things about oil, too, though, is that ironically, the U.S. has all the oil it needs. I mean, it can produce, it's self-sufficient at this point, but it is a globally priced commodity. How does that factor into, do you think, U.S. policy

around the oil? Yeah, this is an excellent question, and we've been discussing that this morning. 20 years ago when the US

morning. 20 years ago when the US was short in the market, this would have been a very different discussion. The short

in the market today is China and India. It is their problem effectively. Now obviously

attacking Iran by the US and Israel is a problem created by the US and Israel to a certain extent. But ultimately they're not the ones that are going to feel the pressure from the shortage of oil.

I'm not saying that they're not going to act to help alleviate the burden or the issue that could arise if this is sustained for a period of time. But

I don't necessarily see them as being the first mover. I think if there is a coordinated IEA effort to try to soften the blow of obviously the supply issue, the U.S. is part of the IEA mandate and of course will do what they need to do. But I don't think the conversation in the U.S. administration is necessarily going to be focused on

U.S. administration is necessarily going to be focused on how is China feeling about what's going on to the extent that it would have done in the past when it was a real problem for the U.S. refining system

when they were importing 9 million barrels a day. I think the calculus has obviously changed. That's such a good point. Okay. What's the trade then? Yeah, in the short

changed. That's such a good point. Okay. What's the trade then? Yeah, in the short term, I can't look beyond, you know, focusing on what's happening on the ground.

You know we are still in full escalation mode. We have not seen the full impacts on price in my opinion just yet. So as days roll forward you know trading from the long side across the oil complex has got to still be the bias. But of course this has to be tempered with you know this could stop at any minute. you know if if objectives have been achieved and I'm

not a military expert I don't know what all the objectives are I don't know to what extent they are being achieved how far along we are in this operation but once they've achieved what they think they want to achieve and it stops I think then we can see obviously a reversal but that's not a given to me that Iran stops once the US stops because they've obviously been completely decapacitated so you

know there is still a risk that we see a situation unfold that we saw years ago in the Red Sea where there is continuous disruption. But

it won't be to the material impact that it's having now. But it doesn't completely go away. But I think watch what's on the ground and then at some point

go away. But I think watch what's on the ground and then at some point start to see signs from the US administration about how far along they think they are or how far they want to continue to take this. That is something that the market is clearly you know, a bit cautious about because of how quickly last

June this thing ended. So but I think you've got to just continue to trade the facts on the ground and the facts on the ground are are constraining supply and affecting supply in a in a real meaningful way. And I don't think certainly not the crude price is fully factoring that in. Yeah, the standard commodity trade, if

you're short supply, you buy the commodity. Yeah, that's certainly where my bias is. If

I want to be long oil, how high do you think oil can go? I

think if we continue to see this escalation continue the way it is, and as I mentioned earlier, as we're going into a longer period, there's no reason why we should not be trading between $100 and $120 oil. That, to me, if the straits of them stay shut, That has to be where the price has to go. Jerome,

thanks so much for taking the time. No problem at all. Thank you. That does

it for this week's episode of The Markets. I'm Chris

Hussey. Thanks for listening.

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