Ep. 238: Rory Johnston on Oil to $65, Middle East Risks and Trump Agenda
Oct 18, 2024
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In this discussion, Rory Johnston, an oil market researcher and founder of Commodity Context, delves into the nuances of the oil market for 2024. He highlights the impact of Middle East conflicts and Saudi supply adjustments on global prices. Johnston also analyzes the surprising decline in Chinese oil demand due to economic shifts and geopolitical factors, as well as the implications of U.S. oil policy amidst these dynamics. His insights provide a fascinating glimpse into the forces shaping the future of oil markets.
Rory Johnston emphasizes that OPEC struggles to manage oil prices amid external pressures, leading to ongoing production cut challenges.
The rise of non-OPEC oil producers like Guyana and Brazil signals a pivotal shift in the global oil market dynamics.
Geopolitical tensions in the Middle East have not resulted in sustained oil price increases, reflecting market fatigue and skepticism among traders.
Deep dives
Rory Johnston's Journey into Commodities
Rory Johnston's path to focusing on commodity markets was unconventional, beginning with a major in philosophy before transitioning to political science and international relations. His fascination with commodities, particularly oil, sparked from reading Daniel Yergin's 'The Prize,' which highlighted historical geopolitical ties to oil supply chains. After completing his graduate studies, Johnston initially pursued a career in security and counterterrorism before shifting into the economics department at Scotiabank, where he spent six years managing commodities research. This journey culminated in the founding of Commodity Context, allowing him to specialize in oil and refined products.
OPEC's 2023 Strategies and Market Dynamics
As 2023 began, OPEC's primary concern centered around its ability to manage oil prices through production cuts initiated late in 2022. Despite higher price aspirations, including the goal of by mid-2023 to return to previous production levels, OPEC faced unexpected market challenges, including increased non-OPEC supply and demand fluctuations from key players like US shale and emerging markets. The inability to sustain price increases led to Saudi Arabia implementing additional production cuts, which did not stabilize the market as anticipated. This created an ongoing struggle for OPEC to regain control of oil prices amid significant external pressures and conflicting production strategies among member countries.
Current Oil Market Balance and Future Predictions
The current oil market is characterized by a persistent undersupply despite visible efforts to stabilize prices through OPEC's production cuts and market management. Fundamental analyses indicate that the inventory levels are lower than optimal, suggesting upward pressure on prices; however, expectations of an eventual return of 2.2 million barrels per day from OPEC create potential for oversupply in the latter part of the year. Predictions suggest that if market conditions deteriorate further, particularly without adherence to quotas, a sharp decline in prices could return. Therefore, a cautious outlook is maintained as global dynamics shift and demand remains unpredictable.
Impact of Non-OPEC Producers on Global Supply
The apparent rise of non-OPEC oil producers like Guyana, Brazil, and the US underscores a significant shift in global oil dynamics, impacting OPEC’s traditional market control. Guyana is projected to become the world’s largest per capita oil producer by the end of the decade, thanks to state-of-the-art offshore drilling technologies that have drastically lowered production costs. Similarly, Brazil's production is consistently rising, bolstered by its established capacity and output from Petrobras. This surge in non-OPEC oil supply highlights a competitive landscape where traditional OPEC strategies face increasingly stringent challenges.
Geopolitical Concerns and Their Market Influence
Recent geopolitical tensions, particularly in the Middle East, have failed to trigger sustained increases in oil prices due to market fatigue from repeated crises without supply disruptions. Although incidents such as conflicts involving Israel and Iran raised concerns, the actual impact on global oil supply remained minimal, leading traders to adopt a sell-the-spike mentality in response to geopolitical news. The historical context of previous events, like the Saudi Aramco attacks in 2019 and the price collapses that followed, has shaped current market perceptions. Consequently, the geopolitical landscape remains complex but is now viewed through a lens of skepticism regarding its immediate influence on oil prices.
Rory Johnston is a Toronto-based oil market researcher, the founder of Commodity Context, a lecturer at the University of Toronto’s Munk School of Global Affairs and Public Policy, as well as a Fellow with both the Canadian Global Affairs Institute and the Payne Institute for Public Policy at the Colorado School of Mines. Prior to founding Commodity Context, Rory led commodity economics research at Scotiabank. In this podcast we discuss the key themes in oil for 2024: Middle East conflict, Saudi supply, China demand and the Trump agenda.