Transcript: How oil got to $90 a barrel

This is an audio transcript of the Unhedged podcast episode: ‘How oil got to $90 a barrel’

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Ethan Wu
While we were all busy gawking at Nvidia and where interest rates are going, oil — it’s been creeping up. It hit $90 the other week. It’s down a little bit today, but it’s still high. It’s been up about 15 per cent this year. This is a big deal. Oil goes into everything we make, everything we use. It’s a key input into the global economy. Today on the show, why oil’s at $90 and why you should care. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu here in the New York studio, joined from London by FT markets columnist Katie Martin.

Katie Martin
Hey, Ethan, how’s it going?

Ethan Wu
Hey, it’s going good. I mean, I don’t wanna take away from the episode. We’re two stock people talking about oil, but it’s important, right? Like, this is something that matters.

Katie Martin
(Laughter) I mean, I’ve been paying attention to oil. As you say, it’s had like a hell of a run so far this year. So one tiny kind of thing here is the likes of the Brent oil price, which is effectively the European benchmark, that hit $90 a barrel. The WTI US benchmark, without meaning to sound like a kind of boring nerd, that hasn’t quite got to the same level. But the two generally move in lockstep and they’ve moved by very, very similar degrees. So I mean, we are definitely sitting at the tail-end of like really quite an impressive run higher in oil prices.

Ethan Wu
The oil price increase has been a surprise, right? Like there are some environments where there’s a lot of predictions and then oil ends up going up. But this time it took people, you know, a bit off guard. So, you know, one way to make that point, right, is you look at the forecasts put out by the International Energy Agency, the IEA. This is like the kind of — Katie, how would you describe them? Like the foremost authority on . . . They’re the oil . . . 

Katie Martin
They should know what they’re talking about. They know one end of the oil market from the other, for sure.

Ethan Wu
Yeah. They got energy in the name, all right, so they know what they’re talking about. In January of this year, they were projecting a quote unquote, substantial surplus of oil supply. In March, they changed their forecast to a slight deficit, right? So that’s a big change going from we’re going to have too much oil to we’re not going to have enough oil. In the span of two months, right, that forecast from the leading global energy authority changed. Why is that, right? So we had a look at that recently in the Unhedged newsletter. And I think it comes down to three general factors: demand, supply and geopolitics. And, you know, I think the demand story is like the most intuitive. And in some ways we’ve been talking about it on the show, Katie, just . . . Things are going better than I think a lot of people thought that they would. And it’s not just in the US.

Katie Martin
No. I mean, you just cannot hold the US economy down, seemingly. And that’s obviously a massive source of supply for oil, as you say. You know, everyone’s been beating up on China for the longest time, but there are potentially signs that that economy is possibly bottoming out around now and that things have stopped getting more and more terrible, and that might be a meaningful source of demand picking back up again. Investors are not super keen to get their fingers burnt on China all over again, but the economic impact of it being a big source of potential oil demand is not to be sniffed at.

Ethan Wu
Yeah, I mean, we just got first-quarter GDP numbers a few days ago from China. They beat expectations by, you know, not a ton but like a little bit. 5.3 per cent growth — that’s above the Communist party’s growth target. Now I . . . There’s, you know, there are ways to like shit on the report. And, you know, it’s not a clean number, but it does show that — especially in the manufacturing sector of China’s economy — things are doing a little better than they were last year. Well, the manufacturers need a whole lot of energy to make stuff, right? And so that’s kind of helped oil demand along. You’ve also seen a lot of energy out of India, which is supposed to be one of the fastest-growing oil-consuming economies in the world for the next several years. So between those three, right, the US, India and China, you throw Europe on there, which, you know, it’s not doing amazing, but the bottom hasn’t totally fallen out, at the very least. You got a pretty decent global demand picture right there.

Katie Martin
Exactly. These, you know, constant repeated calls for a recession have been like greatly exaggerated, as we’ve discussed in the past.

Ethan Wu
So then you move from demand to supply. The main player when it comes to supply is a little cartel affectionately known as Opec. Katie, what is Opec?

Katie Martin
So Opec is like a grouping of big oil-producing nations kind of effectively led by Saudi Arabia, which is one of the world’s biggest oil producers. Now this grouping doesn’t include the US. So the US kind of has to, you know, tag along pretty much with what the rest of the world decides. But they very explicitly agree on what output levels are gonna be, right, how much oil they’re gonna suck out of the ground and produce and spit out into the global economy in an effort to control the price. They don’t want it to shoot too high, too fast because that will kill demand. They don’t want it to be too low because they need the money. So they kind of keep this balance in check.

Ethan Wu
Yeah. It’s a weird thing where like if Exxon and Chevron and like all of the frackers in Texas decided to make a cartel, that would be enormously illegal and like the FTC would be showing up at their door tomorrow, right? If a bunch of sovereign states do it, what are you gonna do about it? Invade them? Like, no. Right?

Katie Martin
It’s fine. It’s fine. This is just how the oil market . . . The oil market has a large number of weird idiosyncrasies and this is one of them.

Ethan Wu
Yeah. And so, you know, importantly, Saudi Arabia wants to see higher oil prices to kind of fund its budget. It’s got like a big, ambitious domestic economic diversification plan where they’re building this like Neom, this like ridiculous futuristic city. They’re building like, do you remember The Line, Katie?

Katie Martin
Do I ever remember The Line? It’s like a really long line in the desert that is like hundreds of kilometres long, and it’s like a really tall, thin building. I understand they’ve scaled back plans for this, but, you know, it being Saudi, it’s not just any old kind of tower complex. It’s like the world’s biggest, most spectacular, huge mirror-in-the-sand development complex.

Ethan Wu
Yeah. And to build this kind of futuristic stuff, they need high oil prices. So what they do is they limit the amount of oil supply going on to the market to support the price. The output cuts that Opec has done right now have been, if you ignore the pandemic, which was a unique situation, obviously, have been the deepest since 2008, right? So these are deep oil cuts as they’re really restricting supply. They wanna see oil at $80, $90-plus a barrel. And they’ve been successful in that. Just the other month, they extended those production cuts through June of this year. There’s some expectation they’ll do it again in June. So that’s been a big part of the story, is that in the face of hot demand, Opec is pulling back supply, which kind of increases the efficacy in a certain way, right? If everyone wants oil and you’re like, whoa there, settle down, one at a time, 90 bucks, please. Then, you know, it’s more effective.

Katie Martin
Yeah, exactly. But yeah, the real sort of near-term trigger for things going a little bit bonkers in the oil market is the elephant in the room, which is the Middle East, right? You cannot talk about oil prices without talking about Iran. Iran is making friends and influencing people in its own very special way across the Middle East right now. And the more tension there is between Iran and Israel, the more jittery the oil market gets.

But one thing that’s really notable to me is that we had the attempted missile strikes on Israel from Iran just the other day, and the oil price did pick up, but it soon fell back again. So you’ve got this like weird dynamic where, you know, traders and oil consumers are kind of looking at this market and saying, yeah, this could get really nasty, but we don’t think it’s got really nasty yet.

So I was just reading a note from SocGen, the French bank. They slapped another $10 a barrel on top of their previous oil forecast on the back of the attempted attacks just the other day. But that still leaves you at just under $90 a barrel at the end of the year. But what they are also saying is that prior to April 14th, they thought there was a roughly 5 per cent chance of direct conflict between Israel and Iran. They now think that probability is more like 15 per cent. And they said, look, to be clear, if this were to happen, the oil price would go straight to $140 a barrel and then some in a straight line. So what you’ve got is this horrible, for many reasons, tail risk that’s sitting there in the market. And were it to crystallise, that would be absolutely explosive for the oil price and extremely damaging for the global economy.

Ethan Wu
Yeah. And we should spell out like why it’s so important that Iran has gotten pulled into this conflict in Israel. And there’s a couple of reasons. I mean, one is that the Strait of Hormuz, which is a major international waterway through which a fifth of global oil flows, that borders Iran — Iran conceivably could close it if it wanted to. Or perhaps there could be conflict such that it wouldn’t even intentionally close the Strait of Hormuz, but it de facto would be closed. That’s one way things could go wrong. Another way things could go wrong is that Iran’s supply itself is actually up a lot in the past year or so.

Katie Martin
Well, that’s the thing. And, you know, in a full-blown conflict, you would have to imagine that supply of oil would dry up very quickly. But right now, it’s exporting at the fastest clip in about six years. So its output was about 400,000 barrels a day not so long ago, like in the sort of Covid period, which, again, there was some weird stuff going on in Covid, but nonetheless, that shot up to something more like 1.5mn barrels of oil a day. So it’s obviously in Iran’s interest, again, to keep filling its own coffers and to keep those oil exports going. So what you don’t have, you obviously have the geopolitical risk in play, but you don’t have the signs of constrained supply from Iran yet. And that, I think, is what’s stopping the oil market from being super ugly right now.

Ethan Wu
Yeah. So, I mean, I think we’ve laid out demand, supply, geopolitics. OK, oil’s at $90. That’ll make sense. But we should ask the sort of bigger question, Katie, which is like, why do we care? Should anyone, like, if you’re not a commodities trader, which I don’t recommend unless you’re really, really smart, which I’m not. Who needs to know about this market?

Katie Martin
Let me tell you who cares, Ethan Wu. Americans.

Ethan Wu
Americans.

Katie Martin
You lot care about this stuff like a really disproportionate amount.

Ethan Wu
It is a topic of conversation. Have you seen the gas price lately? Oh my God.

Katie Martin
Like petrol that you put in your car.

Ethan Wu
Excuse me. Petrol.

Katie Martin
Yeah, petrol. Petrol. Yeah. It’s like a big deal. And it’s like a really kind of hot potato politically, right? We don’t really do that here. So this is an American thing.

Ethan Wu
Yeah. I mean, the salience of gas or petrol in America cannot be overstated. I mean it’s like probably a top three or top five political issue. When people think about inflation, largely they’re thinking about gas prices and food prices, I think, and it directly affects consumers’ pocketbooks too. If the price of gas doubles, that’s a huge chunk for people that . . . especially people on fixed incomes, but also, you know, people that are wage earners. Your purchasing power has just decreased because oftentimes your, you know, the amount you need to drive around, it can’t be decreased that much. A lot of people in America drive to work. There’s not that much public transit. That’s how you get around. You see family or friends. If it’s suddenly vastly more expensive to do that, you have to cut back in other areas.

Katie Martin
Exactly. Yeah. You’re not eating out. You’re not buying your new clothes. You know, whatever it is, you’re not treating yourself. You are paying for the absolute basics to get around. You guys should try having some public transport. I mean, it’s just an idea. Maybe you should have like Infrastructure Week.

Ethan Wu
Maybe we should have it every week, actually. This is a great idea. I would love if there was more American public transport. And here in New York City, we have the greatest train system in the world, the greatest ever. But it’s a big country. There’s a lot of land. Come on, Katie.

Katie Martin
Also, you are late for this recording like every time we do it because you’ve been stuck on a train.

Ethan Wu
(Laughter) That information is on a need-to-know basis.

Katie Martin
(Laughter) I’m gonna tell Rob Armstrong.

Ethan Wu
I think Rob is late more often than I am.

Katie Martin
OK. So let’s give you another opportunity to be wrong about things on the internet. Just love it. $100 a barrel this year? Yes or no. What do you reckon?

Ethan Wu
Ooh. I’m gonna say yes. And I’m gonna say yes because there are just so many ways it could get there, right? There are like various supply disruptions that are sort of on the horizon. So we talked about the Middle East. But another one is like, is Biden going to sanction Venezuelan oil again? This has been like a he will, he won’t story for a while. I saw a story in Bloomberg earlier this week saying that Biden officials are kinda on the verge of doing it. That would take more supply offline. You know, I think there’s between strong demand, which seems to be kind of a global pattern and really travelling in one direction and, you know, various supply disruption issues looming on the horizon. I think 100 is not unreasonable. I mean, we’re today at $87, we were $90 a couple days ago. So it’s trended down a bit, but it would just take a couple more, you know, bludgeons on the head to the oil price to get us up to $100. So we’re just not that far. That’s why I’m down to say $100.

Katie Martin
I’m glad you said that, because I disagree. I think, for what it’s worth, I think unless there is another really ugly escalation in the Middle East, I can’t see a sufficiently big trigger. And so then I can’t . . . I can imagine it being like a really hot political issue in the States, particularly in the run-up to an election. But I, at the moment, can’t see it being much of a thing that, for example, bond investors that I speak to or stock market investors that I speak to are like super animated about because unless the price gets high enough to really mess up the US inflation profile, then it’s gonna be something that is kind of on the periphery. But yeah, I think without a huge escalation, I don’t see $100.

Ethan Wu
All right. Listeners, $100, not $100. Let Katie know: katie.martin@ft.com. (Laughter)

Katie Martin
Let Katie know because Ethan, you have some information to share with the class, I believe.

Ethan Wu
I do, I do. I’m heartbroken to say this is the last episode that I will be appearing on the Unhedged podcast.

Katie Martin
I’m shaking my head.

Ethan Wu
I know. Katie’s usually looking disappointed, but today she looks extra disappointed. I’m moving on to some exciting new opportunities, but launching this podcast, doing the show twice a week for the better part of a year has been just so incredibly fun, and doing it with Rob and Katie has been sort of the highlight of my week every week. And I think I’m leaving it in good hands. But with that, Katie, we have a Long/Short to get to, so I think we need to take a break.

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Katie Martin
Yeah, let’s go to Long/Short.

Ethan Wu
Let’s do it.

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Ethan Wu
Welcome back. This is Long/Short, that part of the show where we go long a thing we love and short a thing we hate. Katie, long or short?

Katie Martin
I am short the departure of Ethan Wu from the Unhedged podcast. I think it’s a bad thing. I’m long and short in the sense that, like, we made a thing and it’s been a good thing and it’s been fun and it’s been really nice chatting to you and apparently entertaining and educating people. So I’m very sad to see you leave. However, as of now, you are Ethan Who as far as I’m concerned, (Ethan laughs) and I feel sure that people are gonna carry on listening. So don’t let me down, listeners, because if our numbers go down now that Ethan Who is gone, this is gonna look really bad for me. And that’s not allowed.

Ethan Wu
Listeners, you can’t see it but Katie’s currently doing the Stalin thing where you, like, etch out people from the back of the photo to all photos of us together now.

Katie Martin
Who? Ethan Who? Who? (Laughter)

Ethan Wu
Well, I came with a substantive long/short, Katie Martin. Unfortunately, I’m also short. I’m short Cathie Wood, OK. Like, I know this is so overdone, but she just keeps doing it again and again and again. People might know Cathie Wood, head of the Ark Innovation ETF. It’s kind of like, you know, like early-stage promising tech investor. She’s had good times and bad times; more bad times than good recently. But notably, for somebody that runs the biggest innovation ETF in the US, she did not catch any of the AI wave. And so what she has done, she did this last Friday, is she bought a stake through their venture capital firm in OpenAI, possibly at the peak of OpenAI’s valuation while having completely missed the AI windfall everywhere else. I just, I mean is innovation investing real?

Katie Martin
This is news to me. I didn’t realise she missed this wave. Even I knew about AI. And I’m not like a kind of innovation specialist.

Ethan Wu
She got out of Nvidia before the stock went crazy. Like it was just, I don’t know, brutal. I’m not convinced innovation investing is real. Like someone will have to call me and make the case because I just don’t know. Can you do it? Maybe. I don’t know.

Katie Martin
I’ll call you while you’re working on your little magazine somewhere else, in future. I’ll call you and let you know.

Ethan Wu
Well, Katie, I think this brings us to the end of Long/Short and to the end of my time on Unhedged. I’m repeating myself, but thanks again to all the listeners who wrote in over the past couple months. We loved hearing your comments and you should please keep writing to Katie: katie.martin@ft.com. She reads all your emails.

Katie Martin
Keep it polite, keep it nice.

Ethan Wu
Nice things or unpleasant things, all to Katie from now on. And you’ll be hearing more from Rob too. But thank you so much for listening. It’s been a real blast. And, well, Katie, I guess uh . . .

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Katie Martin
Leave it with me, Ethan, it’s gonna be fine.

Ethan Wu
I guess I can’t say see you next time because I certainly won’t, but . . . 

Katie Martin
Catch you (inaudible). You still owe me a beer.

Ethan Wu
(Laughter) That’s true. Not til Q4, not til Q4. I look forward to catching you next time on the Katie Martin-hosted Unhedged podcast.

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Ethan Wu. Thanks for listening.

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