Robert Bryce Why Are Oil Prices Still Relatively Low?

One of the most interesting discussions of energy I have seen in a long time is this colloquy between energy expert Robert Bryce and Robert McNally, the founder and president of Rapidan Energy Group.

The whole thing is worth reading, but first: Why isn't oil at $150 a barrel?.

Robert Bryce Why are oil prices still relatively low?

It seems like everybody was saying that oil would go to $150 or $200 per barrel, and yet, we’re at, what, $85? Prices are still relatively low. Why?

Robert McNally That’s a great question… It’s a tale of two markets. Crude-oil prices have been restrained, but refined product margins are screaming. A $100 diesel crack‚ man bites dog, that’s five times the normal crack spread.

It’s a historic high. So the question becomes: Why has crude been buffered or restrained a little bit despite the biggest disruption in history? There are surprising reasons and fundamental reasons.

The surprising reasons are two. One is a Chinese crash diet in terms of crude imports. While we saw a Hormuz crisis coming well before February and modeled its oil and LNG impacts, an abrupt drop of Chinese crude imports by 5 mb/d was not on my bingo card.

My firm, Rapidan Energy Group, fully modeled a Hormuz disruption in 2019 and updated it last June. We invited a decorated Navy intelligence officer to help. I’d done disruption analysis in the White House‚ Hormuz, seven days, 30 days.

That's interesting. But the thing I never thought was that China would drop its imports by 5 million barrels a day overnight. I call it a crash diet.

They can do that in a command economy. That demand shift offset a third of the initial 15 million-barrel-per-day crude loss. Then came redirects and SPR releases.

The SPR release we expected. The other surprising thing is persistent and deep optimistic sentiment about a quick end to the conflict and normalization of regional production and flows. *** Almost in equal measure to the belief that a long-term disruption of Hormuz was unimaginable, there is blazing optimism that Trump is going to turn it off with a stroke of the pen.

Everything is going to return tomorrow, and we’ll all be talking about how to mop up a 2-to-4 million-barrel-per-day surplus next year. Let's hope that optimism turns out to be justified. I just hope it's soon enough so the effects are felt before November.

Now for natural gas: RM Long story short, there are issues over the next five years in balances and so on, but it’s super-bullish. Three countries have 60% of the LNG market, each with about 20%: Qatar, the United States, and Australia. … The Australians aren’t going to expand LNG exports much.

Russia will remain sanctioned for the foreseeable future. So it’s the United States and perhaps some Canadian projects. I’m fascinated to go to Alaska and see whether this puts Alaska LNG‚ which is really expensive‚ in the money.

We thought it wasn’t in the money last year, but we’ll see. Or maybe the best way to monetize North Slope gas will be data centers. The question is open.

But Asia has already started barreling to the Americas‚ from Alaska to Tierra del Fuego. Step back further. Before we got into this war and this unprecedented situation, in which the world’s most prolific hydrocarbon basin is facing a previously unimagineable security risk, everyone thought demand for oil and gas would peak by 2030. That wasn’t just the IEA and green fanatics; forecasters across the board were repeating this near-term politically preferred peak oil and gas demand view, perhaps some even believing it.

People certainly invested like it. People were investing as if global oil and gas demand would stop growing in about five years. Cut the bullshit.