Ep. 376: Rory Johnston on $100 Oil, the Refined Product…

PodcastMacro Hive ConversationsRory JohnstonSep 18

The oil market has adjusted to the Hormuz disruption through rerouted flows, reserve releases, and China’s changing import and export patterns, but supply remains tight: Brent is back above $100, and refined products have recovered more slowly than crude. The speaker highlights severe product-market strains, including high diesel cracks, constrained regional exports, and damage to Russian refining capacity. China’s stock draws and potential return to higher product exports could affect the balance, though the outlook remains uncertain.

Oil Energy Markets Geopolitical Risk China Supply Chains Commodities

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Key Takeaways

Hormuz oil transit was estimated at only 8 million barrels per day, potentially 9–10 million, versus a normal 20 million, while war-risk insurance for a VLCC reached about $20 million—roughly $10 per barrel. As inventories drained and supply supports faded, Brent rose above $100 per barrel, with prompt backwardation around $4 and the DFL spread just shy of $6, reflecting tight near-term supply.

The speaker described broad refined-product deficits and slower recovery than for crude: Middle Eastern product losses were roughly 3 million barrels per day, and products had recovered only about 20% versus as much as 60% for crude. Diesel’s crack spread was just below $100 per barrel, while U.S. gasoline cracks remained at $34—more than three times the roughly $10 shoulder-season norm—and the speaker said each product might need its own demand-destructive price, though he was unsure how the adjustment would divide between crude prices and crack spreads.

Saudi Gulf loadings of roughly 1–1.5 million barrels per day, at times nearly 2 million, reflected barrels rerouted from the Red Sea rather than recovered production. Separately, Saudi Arabia shifted roughly 3.5–4 million barrels per day through the East-West pipeline, but Yanbu capacity constrained observed flows to about 3–3.5 million, while some Yanbu barrels headed to Europe and the United States rather than Asia.

Disrupted Gulf exports were being restored through uneven workarounds: Iraq offered $30–$50-per-barrel discounts to attract ships to Basra, and the speaker described covert operations and smuggling as part of the recovery. Iraqi truck shipments west through Syria toward the Mediterranean were also beginning to move the needle, though their volume was not quantified.

China’s crude imports fell about 5.4 million barrels per day from the December–February average to the June low, while the speaker argued that stockpile draws likely explained a substantial part of the swing; one estimate implied 2.2 million barrels per day of undisclosed draws. China’s unexpectedly large contribution helped initially offset supply losses, but the speaker said China began buying again as inventories drained.

GEO-POLITICS

Saudi Rerouting — Saudi Gulf loadings rose to roughly 1–1.5 million barrels per day, and sometimes nearly 2 million. The speaker says these barrels were rerouted from the Red Sea, not evidence of a production recovery. He interprets the shift as a sign that Riyadh sees the Houthis as a more credible shipping threat than Iran.

“Now we're seeing upwards of a million, million and a half, sometimes almost 2,000,000 barrels a day of Saudi loadings in The Gulf again. Now, some people initially when…”—

ECONOMY

Export Ban Risks — The speaker warns that a U.S. refined-product export ban could briefly lower domestic prices by building inventories. But a prolonged ban could fill storage, push prices low enough to make refineries cut runs, and leave some areas importing gasoline. He calls the policy a terrible idea.

“Everyone is like, this is a terrible idea. And it is. I want to be very clear. It is a terrible idea…”—

MARKETS

Crude Supply Tightness — Rerouted pipelines, record Strategic Petroleum Reserve releases, and China’s unexpectedly large contribution helped offset the initial supply loss and delay the effects of the Hormuz closure. As inventories drained, SPR releases ran down, and China began buying again, Brent moved back above $100 per barrel. Prompt Brent backwardation was around $4 per barrel and the DFL spread just shy of $6, reflecting tight prompt supply.

“There were a bunch of things that occurred to offset the initial loss or move supply, some of which were expected, like rerouting pipelines and the largest Strategic Petroleum Reserve…”—

Product Deficits — The speaker says unusually wide deficits across refined products mean each product may need to reach its own demand-destructive price. He was unsure how the adjustment would divide between flat crude prices and crack spreads.

“I was not sure about the breakdown between flat crude price and the crack spread, because ultimately demand destruction was going to need to be forced by products…”—

Diesel Crack Premium — The speaker says the refined-product crisis was beginning to eclipse 2022’s. The diesel crack spread was just below $100 per barrel, while crude was around $100 and diesel around $198.

“So on top of this very, very tight crude oil market that remains very, very fundamentally kind of underpinned by obviously the loss of Hormuz supply and now increasingly little…”—

FORECASTS

China Product Supply — The speaker expects China may loosen restrictions on independent refiners into winter, but says that is uncertain. A repeat of the roughly 1-million-barrel-per-day increase in product exports seen in 2022 may not offset the larger losses from Hormuz and Russia.

“So that's the complicated factor with Beijing. And very frankly, with as with everything with Beijing, I think they probably will begin to loosen that into winter…”—

Hormuz Supply Shock

Johnston says rerouted flows, reserve releases, and China’s import reductions have delayed the anticipated deficit, but inventories are draining and crude remains exceptionally tight.

Diesel Crack Crisis

Refined products are under greater strain than crude, with exceptionally high diesel and gasoline cracks reflecting shortages that have outlasted the initial crude-market shock.

Red Sea Rerouting

Refinery damage is difficult to verify, while Houthi attacks have disrupted Saudi Arabia’s Red Sea route and pushed some shipments toward Europe and the United States.

Iraq’s Risky Exports

Iranian rail shipments remain modest, while Iraqi trucking and discounted Hormuz sailings provide partial outlets; regional oil and product flows still fall well short of prewar levels.

Russian Refinery Losses

Ukrainian strikes have cut Russian refining and sharply reduced product exports, adding to shortages even though Hormuz remains the larger overall source of lost supply.

China’s Swing Power

China cut crude imports by more than five million barrels a day, an unexpectedly large shift that helped cushion the global market and revealed substantial supply-side flexibility.

China’s Hidden Stocks

Johnston argues China’s import decline reflected refinery cuts and likely inventory draws, while opaque stock data leave the scale of its crude and product reserves uncertain.

China’s Export Option

China could ease the product crunch by relaxing export limits, but Beijing’s effort to shrink independent refineries complicates that response and may not replace all lost supply.

India’s LPG Exposure

India faced acute LPG vulnerability because the fuel is essential for household cooking, prompting calls for stronger strategic reserves and regional storage arrangements.

Venezuela’s Heavy Oil

Johnston says new U.S. involvement may accelerate Venezuelan investment, but the near-term market effect is limited and increased Venezuelan supply pressures Canadian heavy crude in Gulf Coast markets.

Canada’s Westward Pivot

With U.S. trade relations less reliable and Gulf Coast competition rising, Johnston sees stronger reasons for Canada to expand westward pipeline access and diversify its oil markets.

Commodity Context Research

The conversation closes with Johnston directing listeners to his research and podcast, followed by the host’s subscription appeal and the show’s standard notices.