The Red Sea crisis is a temporarily supply shock for oil market: Rory Johnston

Rory Johnston, founder of Commodity Context, joins BNN Bloomberg to discuss outlook for oil prices amid geopolitical uncertainty and after Angola’s departure from OPEC.

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OIL HAS BEEN EDGING LOWER TODAY ON THE NEWS OF ANGOLA’S DEPARTURE PACK. THERE ARE OTHER FACTORS TO CONSIDER WHEN IT COMES TO OIL AS WELL. FROM SURGING U.S. PRODUCTION TO THE DISRUPTION TO SHIPPING IN THE RED SEA FOR PERSPECTIVE ON ALL

OF IT. AND HIS OUTLOOK FOR OIL PRICES IN 2024. WE’RE JOINED BY JOHNSTON, FOUNDER OF COMMODITY CONTACTS. RIGHT, THANKS SO MUCH FOR JUMPING ON WITH US. THANKS FOR HAVING SO THIS NEWS THAT ANGOLA IS LEAVING DUE TO A DISPUTE OVER THE REDUCTION IN OUTPUT

LIMITS. JUST HOW SIGNIFICANT DO YOU THINK THAT THIS DEPARTURE IS AND THEN THE THE POSSIBILITY OF WHAT IT COULD MEAN, YOU KNOW, IN TERMS OF THE PRODUCTION SIDE OF THINGS OF ANGOLA FELT LIMITED. IS IT GOING TO BE TRYING TO PUMP OUT

OIL AT THIS POINT? >> YEAH, I THINK THERE’S GOOD NEWS AND BAD NEWS HERE, DEPENDING ON WHICH SIDE OF THIS DEBATE YOU’RE ON. I THINK THE GOOD NEWS FOR OIL BULLS IS THAT OPEC AREA ANGOLA. IF IT DOES, IS FREED OF ALL THAT

OPEC OBLIGATIONS. THERE’S A REASON IT SPREADS BEEN PRODUCING UNDER QUARTER FOR THE PAST 3 CAN’T PRODUCE THAT MUCH. SO EVEN WITH OUT, YOU KNOW, UNSHACKLED FROM OPEC CONTROLS, IT’S NOT LIKE PRODUCTION IS GOING TO GROW BY ANY OUT. I KNOW, TECHNICALLY

NEXT YEAR WE WOULD BE EXPECTING A MILD CUT FROM ANGOLA IF IT WAS TO FOLLOW THROUGH WITH ITS OPEC QUOTA. BUT AGAIN, WE’RE TALKING MAJOR VOLUMES HERE. AND I THINK FUNDAMENTALLY, IT’S ACTUALLY MOSTLY NEUTRAL OR NEGLIGIBLE EFFECT ON THE MARKET. THAT

SAID, I THINK WHERE IT DOES BECOME MORE BEARISH IS WHAT IT SAYS ABOUT THE BROADER POLITICAL STABILITY WITHIN OPEC AND OPEC+, MORE BROADLY. OBVIOUSLY, ORGANIZATION NOW IS A HOLDING FOR 5 MILLION BARRELS A DAY, DEPENDING HOW YOU COUNT FROM THE MARKET

THERE, YOU KNOW, CONTRIBUTING YOU KNOW, SUPPLY SUPPORT AND MARKET SUPPORT. YOU BEGAN TO SEE CRACKS EMERGE, THAT COULD BE KIND OF WHITE AND AND YOU COULD SEE NO FURTHER DAMAGE TO COHESION. I THINK THAT’S THE WORRY HERE AND AND WE’VE KNOWN

THAT, YOU KNOW, OPEC+ AND ANGOLA NIGERIA PREDICTED HAD ISSUES WITH THAT, THE REVISED AT VOTERS BASELINES THING. NOW THIS IS JUST YOU KNOW, THIS IS THE FINAL STRAW AND THEY’RE OUT. AND I THINK, YOU KNOW, THAT, YOU KNOW, THE THE

OPTIMISTIC RUB HERE IS THAT THE REMAINDER OF OPEC IS ACTUALLY MUCH MORE COHESIVE AND ALIGNED AROUND PRODUCTION POLICY, BUT THEY’RE, THEY’RE NOW ONE MEMBER DOWN. OKAY. SO THERE ANOTHER MEMBER THAT JUMPS TO MIND WHERE YOU THINK, OH, THEY MIGHT BE DISGRUNTLED

AND NAFTA TO WALK AWAY AS WELL, MIGHT ACTUALLY BE IMPACTED BY BY THE LIMITS THAT ARE ARE BEING IMPOSED ON THEM OR THAT THEY’VE AGREED TO >> AND THE WHO COULD HAVE, YOU KNOW, HAVE POTENTIAL HERE TO ADD TO THE MARKET. YOU KNOW,

IF WE’RE LOOKING FOR A CONTRACT THAT THE ONLY ONE THAT SPRINGS TO MIND IN MY LONG SHOT AS THE UNITED ARAB EMIRATES, THE UAE RIGHT NOW IT’S BASELINE. IT’S THE ONLY MEMBER THAT’S ACTUALLY MANAGED ARGUE FOR AN INCREASE IN ITS

BASELINE NEXT YEAR. SO THE REST OF OPEC’S ACTUALLY CUTTING NEXT YEAR. >> THE UAE WILL ACTUALLY BE INCREMENTALLY INCREASING PRODUCTION TO REFLECT THIS NEW BASELINE. AND THE REASON IT’S BEEN ABLE TO KIND OF SECURE BASELINE DIVISION HIGHER. IS OPEC’S CURRENT BASELINE IS A

FULL MILLION BARRELS A DAY BELOW THEIR TECHNICAL PRODUCTION CAPACITY. SO IF IF OPEC WAS TO EXPLODE TOMORROW, YOU DON’T SEE ANY HUGE AMOUNT. MORE OIL FROM SAUDI ARABIA, A ROCKET CETERA, BUT MOST NOTABLY, YOU GET A HUGE AMOUNT

MORE OIL FROM THE UAE. SO I THINK, YOU KNOW, THEY’VE BEEN KIND OF SPOILERS IN PREVIOUS NEGOTIATIONS. I THINK IF YOU’RE WATCHING FOR WEAKNESS OR A SIGN THAT THINGS WILL REALLY IMPACT THE MARKET. I THINK IF YOU LOOK AT THE

>> WE’VE BEEN FOLLOWING THE ATTACKS IN THE RED SEA TO 2 SHIPS THAT ARE TRYING TO MAKE THEIR WAY THROUGH THAT AREA. AND YOU KNOW, AS A RESULT, WE’VE SEEN A LOT SHIPPERS NOT WANTING TO TAKE THAT ROUTE. IN FACT, THE BLOOMBERG MOST

RECENT DATA SHOWS THAT ABOUT 30 TANKERS, INCLUDING CRUDE OIL AND FUEL CARRIERS HAVE MADE THEIR WAY THROUGH THAT AREA SO FAR THIS WEEK. AND THAT’S DOWN ABOUT 40% FROM YOUR AVERAGE WEEK. SO THERE’S STILL SOME TRANSPORTATION HAPPENING THERE, BUT IT’S

THERE’S BEEN QUITE DECREASE. HOW SIGNIFICANT IS THAT IT TO ENERGY MARKETS POTENTIALLY TO PRICES. RORY. >> SO IT’S, IT’S A VERY SUBSTANTIAL SHOCK AND PARTICULARLY HEADLINE SHOCK THE MARKET. I THINK ABSOLUTELY AS PART OF THE REASON WHERE, YOU KNOW, 7 BUCKS A BARREL

HIGHER, YOU KNOW, WEEK-OVER-WEEK RIGHT NOW OR OR RELATIVE TO THE LOW POINT OF LAST WEEK. AND THAT’S JUST TO GET IT. WE WERE SO WE’VE BEEN SO OVERSTRETCH NEGATIVE, KNOW, SUFFICIENT HAS BEEN SO BERESH THAT REALLY ANYTHING SHOULD HAVE SPARKED A RALLY. I THINK,

YOU KNOW, ACTUALLY DISRUPTING TANKER TRAFFIC THROUGH THE RED SEA REGION THROUGH OBVIOUSLY IS A MAJOR IS A MAJOR FACTOR. IT IT’S, IT’S 10% OF THE WORLD’S SHIPPING. YOU KNOW THIS, THIS IS A HUGE DEAL, BUT I THINK THE IMPACTS ARE INHERENTLY CAP BECAUSE YOU’RE

NOT ACTION. LOSING ANY FUNCTIONAL SUPPLY FROM THE MARKET. SO LET’S SAY, FOR INSTANCE, LET’S SAY ROUND NUMBERS, 10% OF GLOBAL OIL CAT WENT THROUGH THE REGION AND ALL OF IT GOT DISPLACED AND NOW GOES MUCH LONGER. TRADITIONAL ROUTE AROUND THAT.

THE CAPE OF GOOD HOPE IN THE SOUTHERN TIP OF AFRICA 40% LONGER JOURNEY. ITS YOU KNOW, IS 26 DAYS BETWEEN ROTTERDAM AND SINGAPORE. IT’S 36 DAYS. LET’S SAY 10 DAYS EXTRA BASICALLY WOULD MANIFEST IS A SUPPLY SHOCK FOR 10 DAYS, BUT

VENUE WOULD RECONNECT THAT LONGER, YOU KNOW, OUT PIPELINE WATER, IF YOU WELL, AND THE OTHER ASPECT HERE. SO IT WOULD TEMPORARILY CONTRACT MARKET. REDDIT, YOU KNOW, PRESUMABLY THIS DESTRUCTION ALSO ISN’T PERMANENT. SO WHEN THAT’S DESTRUCTION, EVENTUALLY, YOU KNOW, YIELDS AND SECURITY

IMPROVES IN THE REGION AND TANKERS GOING BACK THEN THAT THAT PIPELINE AND MADE A LONG ABLE ACTUALLY BEEN DUMPS BACK. SO YOU ACTUALLY GET TO PLAY BOOSTING THE OTHER. AND SO I THINK IT’S A TEMPORARY SUPPLY SHOCK, BUT INHERENTLY TEMPORARY. YEAH, IT’S

SOMETHING TO CONTINUE TO WATCH AM. YOU KNOW, AS WE’RE HEADING INTO THE NEW YEAR. RORY, ARE THERE. >> YOU KNOW, PARTICULAR FORCES THAT YOU’LL BE WATCHING OUT THAT YOU THINK COULD BE PARTICULARLY INFLUENTIAL IN 2024. >> I THINK THERE’S 2 THINGS

THAT THE MARKET IS WATCHING ENTIRELY AND IT’S GOING TO BE HOW MUCH DOES DEMAND GROW NEXT YEAR BECAUSE AGAIN, THEY’RE STILL THESE QUESTIONS ABOUT HOW SUSTAINED WHAT IS THE NORMAL PACE OF GLOBAL DEMAND GROWTH COMING OUT OF COVID. SO

WE GET, YOU KNOW, ONE AND A HALF TO 2 MILLION BARRELS A DAY. AND THAT’S, I THINK WHAT WE’RE GOING TO NEED FOR A TIGHTER MARKET. ANYTHING LOWER. AND I THINK THE REST OF NON-OPEC SUPPLY IS EASY JOB KEEPING UP WITH THE OTHER

ASPECT OF THIS IS OBVIOUSLY U.S. APPLY, WHICH SURPRISED VIRTUALLY EVERYONE TO THE UPSIDE THIS YEAR. MOST OF THE AGENCY’S MERCED IS A GROWTH THIS YEAR OF ONE HALF MILLION BARRELS A DAY. A LOT OF THEM SEE THAT FALLING BACK TO 6 OR

700,000 BARRELS A DAY NEXT YEAR HAVING FROM CURRENT YOU KNOW, MORE THAN HAVING FROM CURRENT GROWTH. THAT IS A PATTERN THAT WE’VE SEEN REPEATED TIME AND TIME AGAIN. AND I THINK US OF US APPLY HAS HISTORICALLY SURPRISED. I THINK THAT’S THE BIG THING TO

WATCH. AND IF THOSE THINGS DON’T GO THE DIRECTION, DON’T GLOBAL OBSTRUCTION, DON’T TIGHTEN MARKETS. THE FINAL REMAINING QUESTION IS HOW DOES OPEC BEGIN TO EASE THE SUPPLY BACK INTO THE MARKET BECAUSE, YOU KNOW, A BROADER X OPEC DE