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The HC Commodities Podcast
The State of Oil with Homayoun Falakshahi
00:53:36
As we begin to wrap up the year, we return to the crude markets. What has been oil’s journey in the latter half of 2025? What has all this meant for trader performances after a challenging first half? What is the outlook for 2026 in prices and volatility? Our guest is Homayoun Falakshahi. He leads crude analytics at Kpler, the data and analytics firm for the commodity markets.
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Foreign.
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Welcome to the HC Commodities Podcast, a podcast dedicated to the commodities sector and the people within it. I'm your host, Paul Chapman. This podcast is produced by HC Group, a global search firm dedicated to the commodities sector.
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Today, as we begin to wrap up the year, we return to the crude markets. What has been going on in the Latter Half of 2025 and what is the outlook for 2026? How do prices reflect the current supply and demand story as well as geopolitical risk? And what are the key tension points as we head into 2026 and how might the markets break and what has all this meant for traders this year and what might it mean next? Our guest is Homayoun Falakshahi. He leads crude analytics at Kepler, the data and analytics firm for the commodity markets. As always, you can really support the show by leaving us a positive review on the platform you're listening on. And as always, I hope you enjoy the episode. Homo Un. Welcome to the show.
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Hi Paul, thanks very much for having me. It's a pleasure.
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B
So we've got a somewhat of a tough task, if you'd like, certainly when you get into the details of catching up on where the oil markets, crude in particular have been the second half of 2025 and then what we might expect, what are the key elements to look out for in 2026? So let's start with 2025 and I guess, you know, you're sat around a dinner party for Christmas and so forth. You know, I guess I'd try and sum it up something like, you know, it's sort of an oversupply narrative fighting against a political risk narrative if you'd like. Is that a fair over assessment? And can you dig into where we've been in 2025?
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A
Yeah, I think you've nailed it, Paul. It's really, you look at the fundamentals and a lot of what's happening seem and actually is quite bearish for prices, as you said, huge oversupply globally. And it's something that, that really kind of got accentuated in the second half of 2025 with, you know, OPEC plus bringing all these barrels and you know, they accelerated those hikes in the summer, but also non OPEC plus production really boosting as well. You know, you had kind of a convergence of a lot of these projects starting at the same time or at least hitting, you know, their production capacity at the same time. So towards the summer. And so that meant 22nd half, 2025, a lot of, a lot more supply in the market and at the Same time, you know, you have prices have been in a declining trend really over the past, over the past few months actually you know, really since the, the kind of you know, risk premium that we saw during the Iran Israel war. But since then, you know, it's been on a slow declining tre. We haven't seen prices really crash despite again that oversupply. And I think one of the main reasons why it's, it's what you, what you outlined and it's the you know, higher geopolitical risks that are to be factored in enterprises and, and a lot of uncertainties when it comes to you know, what's going to happen around Russia, Ukraine, around Venezuela maybe also around other places such as Iran, Israel also. I think the conflict is kind of just frozen. I don't think it's, it's dead. So I think a lot of these reasons have prevented prices from, from crashing. But on top of this of course you have other things like you know, sanctions on Russia and, and also the Chinese stockpiling strategy obviously also supported prices.
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B
Let's unpack sort of some of the more interesting pockets of that story and I want to go back to sort of that, that supply picture and in aggregate is this just a normal commodity cycle playing out? You know, 2018, 2019 people saw that actually you know, there wasn't enough investment going into hydrocarbons that followed came through till sort of, you know, the energy shocks of of 2022 and this is some of that paying off or is there something else going on? And I know that's probably a different story for OPEC vs non OPEC but can you just help us understand is this investment paying off or is this something else going on?
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A
I think you're right. I mean a lot of that was actually expectable and was to be expected because apart from the US which you can highlight as a place which the shale play reacts much differently to prices and so we're much more short term factors play a larger role in US supply. But apart from the US you look at the other main countries and if we focus on non OPEC countries these are projects that have been sanctioned a few years ago and so a lot of that was to be expected. I would say that the big difference here is that you have a lot of supply that again has come at the same time you look at some of these main places out of OPEC where supply has increased massively this year. So I'm really talking about the Atlantic Basin countries, the likes of Brazil, Norway, Canada, Guyana and even Argentina. And yeah You've had a lot of new supply just hitting the again, reaching production at the same time, which is a bit odd, was to be expected. But I think that due to the fact that we've had some project delays and so on, that also has pushed. And also on the other side, some projects reached production earlier. Like for example, the one Guyana FPSO on the yellow tail field in Guyana reached production 2, 3 months in advance. So yeah, a lot of that production hit the market at the same time was to be expected. And that's also, I think, why we haven't seen such a huge reaction from the market, despite the fact that that means there's a lot of oversupply. But as you say, I think, you know, these are typical cycles in the industry and it means that I think if we look forward to 2026, but especially beyond 2026, it also means that we're probably going to have potentially more supply problems because we haven't invested enough in the past two years. These are projects that were sanctioned more than three years ago.
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B
This is that sort of 5, $600 billion gap that the IEA signaled and many people think is a lot more right. We've kind of got through this period. But actually if demand doesn't tail well, even if demand continues as expected, there's that big investment gap and if demand doesn't fall as expected and maybe, you know, then it's, it's a different story. Let's maybe we sort of talk about that a little bit later. But the. Okay, so then, so you've had, and as you say, this is kind of in some ways very much a, an Atlantic story, a South America, well, a Central and South America story with regard to Guyana and Suriname and these huge fines and Brazil coming online and Argentina and stuff, but predicted and so the market was factoring that in. If I remember back to this time last year, we were having conversations with a few of your colleagues in other firms talking about this sort of what OPEC might do and this potential that OPEC might just tank the market like it did a decade ago.
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And to sort of, you know, for various reasons that, that. Well, just tell us, what has OPEC actually done in 2025? Has that surprised people? You know, have they sort of threaded a middle, middle course? What have they done?
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Yeah, I think it's a very good point because indeed, you know, as that increase in non OPEC was expected, the key there was really OPEC's action. What was OPEC going? And I have to say, yeah, they took most of the market by surprise, I have to admit, including ourselves. I remember at the beginning of the year simply because of the oversupply that we saw coming already without those OPEC barrels, incremental barrels, we were betting on the fact that they would have to delay their production increases. But yeah, they took the market by surprise. And I think it's a significant shift, quite a big strategic shift. Obviously not just, I think there's things behind the scene as well. You know, it's not just pure market, oil market dynamics at play. I think it's also down to geopolitics and other factors that may have played a role. But if we focus on the oil market side of things, I think it's a huge strategical shift because they were saying their strategy actually become a lose, lose strategy. Not only they were, you know, with withholding production, you know, not reducing production over the past two, three years. So between 2020, end of 2022 and, and 2024 and at the same time you had prices, you know, on a steady decline over the past two years. So it's not like, you know, they reduced production, but at least their revenues kept steady because prices would increase. They may have actually allowed for prices to drop at a slower pace than what they would have, but it was becoming a losing strategy on both sides. And so I think the fact that you know, they've actually went ahead, they actually went ahead and took a huge.
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Took on a huge shift in their strategy is quite meaningful and I think forward looking, you know, it's, it's something that we believe will continue and we think will actually, they will reap the rewards. Probably be after 2026 because 2026 looks still quite oversupplied. But, but after 2026 it looks like we, at least we do believe that prices could be reversing the trend towards the upside. And so it's more the long term play that they've been playing here.
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B
So they, they kind of win back market share, they, they, they potentially delay other projects, push out competitors, you know, non OPEC competitors. And then in 2027 when that kind of supply gap comes through, that lack of investment comes through, they're in a great spot. Then it's kind of the, the big picture strategy, right?
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Exactly, exactly. I mean you look at, you know, OPEC production versus non OPEC plus.
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OPEC plus production dropped by 860,000 barrels per day in 2023. It dropped by 1.3 million barrels per day in 2024. Meanwhile you had non OPEC plus output that jumped by at the same time. So when OPEC plus was dropping by 860, not Nanopec plus, production was increasing by 1.6 million barrels. And then when OPEC dropped by 1.3 in 2024, non OPEC increased by 725 KVD. And even this year, despite the fact that they've changed their strategy, we still see non OPEC stronger than OPEC increase. So OPEC we believe has increased on a year on year basis by 700 when non OPEC increased by 1.4 million barrels per day. So yeah, I think, you know, this really indicates the market share that they were, they were really losing. And I think it's even more telling when you look at the exports from these countries. You know, it's really telling. You know, unfortunately I cannot show you that graph here, but I remember that I created one where you easily see, you know, that those exports from OPEC dropping the past two years continuously or at least on a quarterly basis when non OPEC increased. So and I think, you know, you look at what happened this year.
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It is already starting to pay off in the sense that you look at the past two quarters, Q3 and Q4, where we are currently in Q4, we are seeing exports from OPEC overtaking exports from non opec. Well, non OPEC exports still grow, are still growing, but at least the pace of growth from OPEC is stronger. And the difference we're Talking of about 500 kbd and higher in terms of OPEC exports growth on a year on year basis in Q3 and Q4 versus NP. So it is already starting to pay off. I think this is, this is probably the first, the first point, key point of the strategy. And if I were to describe their strategy and decision making, at least on a pure all market, you know, focus, I would say the first one is market share and the second one probably is managing that spare capacity. Because if you remember over the past two years, in 2023, 2024, sometimes we had some shocks which, you know, triggered a short spike in prices, but then usually prices after a few hours, sometimes or sometimes days.
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I mean short shocks like, like bombing Iran, you know.
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Yeah, that's one of them.
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In 12 hours.
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Absolutely.
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Yeah.
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And yeah, and I think one of the reasons why every time you had prices coming back very fast cooling down was because the market was aware that the level of spare capacity within OPEC was still very, very high. And at the beginning of this year we had assumed, I mean our number, our estimate was that OPEC spare capacity was at 6.5 million barrels per day, which is roughly around 6% of global demand and much higher than historical levels of usually that spare capacity global are more around 3% and most of that in Saudi Arabia. So I think the key goal for them is to bring that level back to closer to historical levels of 3 million barrels per day so that when there's a market event that should trigger a spike, then the bulls would not shy away and would be much more comfortable holding onto their positions.
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The energy and resources sector is experiencing unprecedented change. To help navigate this change and capture its opportunities, HC Group launched Enco Insights, a global advisory network dedicated to the sector providing senior advisors and subject matter experts to investment and infrastructure funds, law firms and corporates. Enco Insights leverages HC Group's 20 years of connections in energy and commodities to give clients the expertise they need when the stakes are high and insight matters. Learn more@encoinsights.com yeah, is there so. So in some ways we're in danger of thinking of a, a world that hasn't experienced inflation, or at least I am, right? So I think of $60 oil and I think, ah, that's not too bad. But Chat GBT tells me that if you do inflation adjusted for the price versus a decade ago, it's basically the same, right? So today's price, inflation adjusted is to compare to 2015 is $43, which is basically where we were in 2015. So are we actually in an oil market at the moment where it is completely reflecting that oversupply prices are unbelievably low and you know, they were, you know, and probably, you know, are in some ways at that kind of base level that we hit a decade ago in the nadir of the commodity cycle.
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Is that a truer picture than thinking crude prices are okay and that reflects political risk? Is it actually they're at rock bottom. It's just that we've had 40% inflation since 2015.
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I think for sure that's absolutely true. And it's actually something that if you look at the OPEC press release and what they say that they focus on, say they highlight the fact that if you compare all the commodities in the 10 or 15 years oil is, has been extremely stable in terms of prices despite the sort of crisis that we saw and the increases that we had in, in 2022. And I think, but you know, the fact is the main divergence here between oil and other commodities is obviously, if you look at demand, even though demand is, there's still demand growth radically. And we expect that to continue for, you know, until at least early into the next decade. But that demand growth is obviously really, really weakening. And we are seeing that shift take place especially in places like China where demand is already kind of plateauing partly because of the, you know, the growth in the EV fleet that we see in the country. And I think that's one of the key differences between oil and.
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Other commodities. You look at most of the other commodities, I'm thinking, you know, gold, silver, copper, aluminium and so on. You know, we're potentially, we could be at the beginning of a new super cycle for some of these commodities. And it doesn't look like it's the case for oil because of oversupply, but I think more fundamentally because demand for oil is already nearing its peak and unfortunately for bulls, there's not much that really can be done. So I.
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There is going to be, this is still going to see cycles in, in the oil space, but I think it's hard to, to foresee prices, you know, really strongly going on the, on the, on the ups towards the upside, even, even in the event of, of of, you know, political shocks. And that's because again, the, the, the, the, the pace is, is just not there.
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B
But what does that mean for OPEC strategy for 2017 and beyond when they see this sort of lack of investment coming through? Are we just simply saying that the price of oil is still bounded by this fundamental lack of demand? Even if there are going to be price spikes, they're just not going to be as high as we've seen historically?
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I think so. And I think there is that realization already within OPEC and especially, you know, for the, for the leader of the group, Saudi Arabia, there's the realization that especially in the short term, right. It's, it's hard to see very high prices now because of the lack of investment in the past two years. You know, later in the decade after 2026 and 2027 prices, we do believe that should be a bit higher than where they are now, but not massively higher. Probably we could get, we could head closer to an average on the, on the year, you know, around 80, $90 per barrel. Brent, I would say, which, you know, again would be much more comfortable.
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Right.
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Compared compared to where we are now.
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And inflation adjusted is somewhere like that 60 that we've kind of got in our heads right now as not being too bad. Right?
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Yeah, yeah, absolutely.
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Yeah.
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Indeed. Indeed.
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Yeah. I just find it sort of fascinating that actually we sort of, you know, I've been salving myself as this idea that it's at 60, but really it's my historical 40. Okay, so let's, let's. And we're going to come on to what this has meant for trader and sort of a sneak peek is obviously it was a bit of a rough start of the year but a slightly better second half when all of the rule by tweet got replaced by some more normality in terms of supply and demand and fundamentals and a bit more directional. But we can argue that. But yeah, let's talk about that demand piece. And again thinking about this time last year we'd had that sort of first slew of data out from China that was like, you know, this actually looks like they've sort of hit the peak demand, peak oil demand. You know, there's been a tipping point in EVs. You know, has that narrative been strengthened in China? And actually where we have seen demand, it's for being, for their strategic reserve. What's going on there?
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Yeah, that's a, I mean, that's a good point, Paul. I think, you know, look at Chinese demand. It's, it is plateauing because of, you know, a huge, massive fleet of evs and they're probably, you know, starting to, it's a trend that I would say probably is going to accelerate. And as you know, most of the EV makers in China are actually looking more at going overseas as well as expanding overseas now that the domestic market is starting to get that saturated. So you look at demand growth in China, it's, it's still there but, and it's still actually one of the, the biggest, the largest growth markets for oil, for coal products, for example, we're Talking of about 350,000 barrels per day growth next year. So yeah, it's not much when you compare it to total Chinese demand, it's like a jump of about 2%, but it's still much more than what you can find elsewhere. In Europe, for example, it's stagnating. In the US it's only growing by half of those volumes in China. But I think you look beyond the core products actually what is going to be overtaking core products in the next two, three years we do believe is going to be the case is, is the increase in demand for LPG and ethane. And that's due to, you know, a lot of new PTH plants being constructed and implemented and launched in China. So that actually is going to have also another impact by the way. You know, it's, it's more a detail of the old market, but it's going to have an impact on the crude quality.
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Pricing and differentials because you know, the, the, the plants over there are going to be looking more for the lighter, sweeter type of barrels that they can process at those type of new demand centers. And I think you're right. This year the Chinese stockpiling story has been a massive one. And it's probably one of the main reasons why prices haven't dropped much in the second half. You look at between March and right now in December, China was, has absorbed about 90% of the oversupply that we had globally. So that's really a key, I would say, factor and reason to continue watching over the next few months to try and assess if the market is going to break. If something has to give, is it prices or is it not going to be the case simply because China continues to massively buy. And I think if you look at their storage capacity, which they are strongly expanding, everything seems to suggest that it could continue next year. And it is actually, we do believe, going to continue. And we do think that, you know, this year they built their inventories by more than 100 million barrels. Next year, you know, we could have at least as much as a build, if not more because of even higher capacity. Now there's a few reasons, you know, why they could be doing this. Maybe linked to the geopolitical situations, maybe, maybe they are expecting something around Russia, around Venezuela, around Iran, who knows. But also maybe they are preparing for something else. You know, there's some rumors in the market as well.
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B
It's pretty terrifying, right? And we actually did an episode in the summer on wheat markets. We called it war and wheat. You know, talking about actually when you went back, you could see Germany start to stockpile core commodities prior to, prior to, you know, launching both invasions in both world wars. So I mean it's, it's not sort of particularly heartening to hear that. Where does this, so this rise in oil on the water come in? Can you tell us what that is and what that potentially means as well? Because that seems to be the, the story of right now.
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A
Yeah, I think, you know, it's really the result of partly the result of that oversupply that we've started to see kicking, especially in the summ. So I would say that it's again mainly the result of that. But not only there's a lot of, I would say short term, medium term reasons as well, other drivers that have explained that. So just to give you some perspective, we've seen oil and water Volumes jump by about 200 million barrels, even a bit more since September. And to put that into perspective, that's about 20% increase. So it's quite massive because the pace of the increase and the length of it is just comparable with a crisis that we had like Covid five years ago. So very significant. And at the same time you could think that oversupply, it is going to impact the market structure if there's that much oversupply. We should have seen.
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Market structure heading to Contango, for example, and it's not the case. I mean, of course we, the backwardation isn't that steep right now on the key benchmarks in the oil market, but it has weakened quite a lot, but it's still in backwardation. So I think to us it indicates that.
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Yes, there is an oversupply in the short term, but a lot of that is also linked to other factors such as. And what the main one we think being that there is kind of a divergence between where refining capacity right now is and where the supply is, the supply increments are coming from. And that's because if you look at this year in 2025, you had, if I'm not mistaken, about 600 kbd of capacity closures and that's mainly in the west of Suez. In Europe has closed two, three refineries. Likewise in the US you've had, for example, in October, no later than October, you had the closure of the Los Angeles refinery. Earlier in the year you had the closures of closure of the Houston refinery. And so those, and that means that demand for actual crude has come down because of those closures. And on the other hand, the new capacity is more in the east, in Asia, in the Middle East. And so that means that also, you know, the crude has to be on water for a longer time, longer period because it is originating now incrementally from, from the west of Suez and the demand is actually mainly located further away, such as in Asia. So that's part of it.
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B
So travel days have gone up basically as part of.
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Yeah, yeah, absolutely.
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B
I guess the question is. So you can. There's all these sort of the redirecting of flows and these and so forth. Is there anything a part of this story that all the traders are loading up on VLCC sort of park somewhere quietly waiting for a big Oil, you know, for price for Contango markets? I mean, is that, is that any of that story?
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A
We're not seeing that. We're not seeing that because if we, we have done a quite an extensive study looking at this topic and one of the metrics that for example we were looking was the, the pace of, of, you know, where, how, how the pace of, of moving for, for these ships like the. Was we seen slow steaming, have we seen some tankers move, let's say 2, 3 knots slower than usual and it's not the case actually. So I don't think that's one of the reasons. I mean also another reason behind this increase is the sanction barrels and the fact that you've had those sanctions on Rosneft Lukoil recently.
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Increasing sanctions on Iran and at the same time in China at the end of the year, you know, most of the private refineries have reached their, the maximum for the quota. And it's true that the new quotas have been released just about last week, I think two weeks ago, early late November. But.
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It also has reduced the willingness from some of these refiners in China for example to import in the short term, very short term. So there's the sum of those factors which are more short term driven like these, the Chinese quota constraints, some you could say more medium term driven driven like the sanctions on Iran, on Russia. I'm saying medium term because who knows, maybe you can have an agreement tomorrow on Russia, Ukraine and some of these sanctions get lifted. I think that's part of that. The open arbitrage is also part of that. Meaning that the barrels from Brazil US are still cheaper than barrels from the Middle east into Asia. And actually if we look at the destination of this crude, most of that increment, incremental build is going to Asia. I think out of that 200 million barrels we're talking about 150 million barrels which is going to Asia. And most of the remaining is still unknown because you know, for us it takes sometimes a few days or weeks to exactly estimate where the destination of these cargoes is. And I think lastly on this point, which is again quite interesting because it, it points to why markets haven't really crashed despite this huge build on the water, which in the end is going to mean a build on, on, on land as well. Right? Because these, these, these barrels at the end of the day are going to hit.
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You know, onshore and are not going to in the first place goes be being stored in, in onshore tanks. And it's the fact that if you look at the product side side of the, of the story, the products on water have actually been decreasing over the past, over the same period. So since September, you know, we had the 20% or roughly 200 million barrels increase in crude on water. But you have, we had the 50 million barrels drop in products on water, so that's roughly about a 10% decrease in products on water. And again, I think it really points to that dichotomy or that divergence between where, where new refining capacity is and the fact that new refineries are also kind of slow in terms of ramping up their operations. Such as for example, Dangote in Nigeria, having had a lot of issues.
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And the fact that products market are quite tight, stronger margins mean that this really is an indication of a looser crude market, but a tight product market that means that.
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The prices are still holding up quite well despite the huge build.
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B
Yeah, which brings me nicely to I guess one final comment talking about 25. And we can crack our crystal balls out and have a look at 26. But.
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The narrative from trading performance in 2025 has essentially been one of very tough for the most part in general for crude trading desks, better performances from the products desks. I know obviously you're in the business of supplying data to these guys, but do you have any? Because where do you think that's coming? Do you agree with that narrative as a synopsis and where do you think that's coming from?
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A
I mean, I think yeah, first of all, I agree you look at where margins are right now, refining margins, where crikes are a lot of volatility. You look at where, how crude prices have been behaving.
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For most of the year. And, and that includes, you know, the market structure. It's been a lot more boring. I would say, you know, not so so much volatility or at least you had some volatility, but in a much narrower range. So I'm not surprised to hear that, you know, the, the traders have been doing a lot more, a lot better I would say on, on the products side of the, of the market. And I think where this is coming, it's, it's mainly. So there's two main reasons I think. First one is again the decisions that we're taking before 2025, so the closure of some of the, some setups in the Atlantic basin, namely in the US and in Europe and new refineries coming up, being a bit slow to ramp up. The likes of Dangote in Nigeria, the likes of Dospokas in Mexico or other setups in Eastern Asia, Russia. And the second point, and the most important one is the, I think the big flip in the US positioning on the Russia, Ukraine war, which allowed Ukraine to really ramp up its attacks and drone operations against Russian infrastructure. Because I think most of those, you know, that that spike, that increase that we have seen in the products market, or at least that volatility is really due to the fact that we're seeing a lot Russian products hit the market. Russian crude exports are still very high. They're actually at almost an all time high as I speak, despite the sanctions on Rosneft and Lukoi. But exports of Russian diesel especially have almost halved since spring this year and that has really allowed for a huge reshuffling of the products market with countries like Brazil, for example, becoming short in diesel and so turning up to new markets for.
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For the diesel supply. And that means that generally speaking stronger margins have really allowed for a much stronger products market and that also supported crude markets because otherwise I think that we probably would have seen oil prices drop a lot more than what's been the case so far.
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B
I guess the segue there really is Russia, Ukraine and then we also need to throw Venezuela into that mix and you know, the US being the source of geopolitical volatility at the moment, ultimately both in, in policy towards, well, to both those, those, those, those countries. Where do we at the moment? Well, let's start with Russia, Ukraine. What's the general expectation out there do you think from the market on that conflict and how it plays through into crude markets?
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A
You know what I think what's interesting here is that for crude markets.
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It'S not going to have much impact even if you have a deal tomorrow and even let's say a ceasefire and let's be ambitious appeal this total peace sign between Russia and Ukraine. If you look at the crude side of the equation, you know, it hasn't really been impacted by the, by the, by the war. I mean, of course you've had, you have had sanctions which kind of decreased indirectly the price of Russian crude for the buyers. You know, Russian crude still much cheaper than the, than the competition. But I think it's really hard to see the likes of the European Union, European Union countries go back into buying Russian crude. I mean, it could happen, right. I'm not a geopolitical analyst, but still hard to, you know, being based in Paris, living in, in close to the center of Europe, I would say that I would be very surprised if this.
- [36:49]
B
It seems, I mean, like, yeah, like the sort of, you know, sort of schizophrenic almost in terms of kind of. On the one hand, we sort of see various attempts at rapprochement. We've seen, seen Putin actually leave Russia, obviously, to come to United States soil. At the same time, you're seeing the US Government be many ways tougher when it comes to energy policy than the Biden administration. Right. We've just gone through the sanctioning of Luke Oil. That puts, I think, was it three refineries in. In jeopardy around the world that's going to add to that disparity between crude and products if, you know, something doesn't happen. And then the cascading events at Gumball. This is me saying it, not you. You know, I mean, it, you know, if anything, if you kind of just look at actions rather than words, we could expect further, you know, as tightening and actually, you know, we're talking early December. Last week you had a tanker hit on the water in the Black Sea. Right. I mean, it would seem that those attacks on Russian infrastructure will continue, that actually you might have a tightening of sanctions or in the very least, companies far less willing to move Russian barrels if the US government really starts to get aggressive around even financing some of these trading houses and so on. I mean, it seems quite a, Quite a, you know, a perilous picture out there in terms. It doesn't seem like it's going. Things are normalizing anytime soon with regards to energy markets.
- [38:20]
A
Yeah, I think we're really within a new order that started in 2022.
- [38:29]
But that's not going to change. I mean, even if there is a ceasefire and most probably in one day you will have some sort of peace or the conflict becoming a bit more frozen. But I think the new order where we are in, which really has Russia a lot closer to the kind of emerging powers, or I'm thinking about India, Turkey, but obviously also closer to China, I think this is going to stay, and I think it will take years, for example, the EU to go back into considering buying Russian crude again or increasing their imports of Russian LNG or natural gas. And so I think that the new order where we are in every player in the world is trying to get the most out of it. And so whether that's Russia, obviously the key point here is to keep the exports elevated the maximum and try to sell at the highest price possible. Now that's not really possible anymore because of the sanctions. I think if you look at it from the US lens and.
- [39:42]
The Trump administration, they're really trying to solve that issue or at least to have a sort of victory so that Donald Trump can call himself another time a peacemaker.
- [39:55]
And they know that one of the key tools that they have is sanctions. But the sanctions that they have been implementing on Rusnev, Lukoid, they are not crazy either. They haven't implemented, for example, secondary sanctions on Russia because once you do implement secondary sanctions, then for sure you have India, for example, totally stopping imports of Russian crude. But, for example, the import sanctions on Rust and Flukoil have not prevented India from importing Russian crude, even though that has decreased in the short term.
- [40:27]
B
Although there have been threats, right? I mean, again, it's sort of. Yeah, yeah, you know, they have been threats.
- [40:32]
A
Yeah, absolutely.
- [40:34]
B
Hard to find. But I guess we as a. There's a sort of, you know, that's a live topic and well covered. I guess the bit that sort of the wild card for me and a bit less understood is obviously, what's Venezuela, right. And if I can frame it up, we're sort of in this bizarre situation where sort of, you know, a pretty significant battle fleet is surrounding Venezuela. At the same time you've got Chevron with license to produce from Venezuela, you have this added complication that all of the US Refineries demand heavy crudes, which doesn't suit what we've been producing in shale. That's why we continue to import Canadian crude crudes from elsewhere. You know.
- [41:17]
Obviously no one, we weren't on this little podcast figure out what's going to happen there. But in terms of scenarios, how big do you think does the world think that crude is part of? Well, Venezuela obviously is a very big part of the story. Is the crude story here. If there is a conflict of varying shapes, what happens to the market at the moment in terms of those Venezuelan crudes stop flowing? Are they already at a low ebit? Can you help unpack that for me?
- [41:49]
A
Yeah, I think the impact is very limited. And again, to me, it seems that historically.
- [41:59]
One of the most important energy policies for the US President is to keep gasoline prices low, to keep gas prices low domestically for the US consumer. And that's also a boon normally for the US Economy. And I think there is the realization within the White House that, that.
- [42:20]
Even if you go ahead with, let's say, the most extreme scenario, which would involve a war.
- [42:27]
Between the US and Venezuela, I think you still wouldn't have a huge reaction in the oil market. And that's simply because you look at Venezuelan production and exports and it's really, really limited. The country has lost about 70% of its production capacity in the past last seven, eight years. And so the average exports so far this year is roughly around, if I'm not mistaken, around 800, 850,000 barrels per day. And even if there's a war, no one really could be able to predict what's going to happen. The exports, maybe you would have those flows continuing just like you had the flows continuing between Iran and Israel. So I think there is the realization that even if in the worst extreme scenario, the old market is going to react, of course, but you're not going to have the reaction that we had back in 2022, you know, at the beginning of the Russia Ukraine war when prices jumped to brand jump to as much as close to $140 per barrel. And I think the fact that the, the White House knows this, they know that they have relatively the upper hand here with Venezuela and so it allows them to, you know.
- [43:41]
Becoming quite much more demanding, I would say. And same with, with Russia, you know, again, the sanctions are not going to be having too much of an impact on, on prices. You know, whenever you have that dead, that headline on if there's going to be a ceasefire or not, you lose or you gain about $2 per barrel, which is about let's say 3% of an impact. But the oversupply is such, I would say in the market that even if you lose Venezuela, even if you lose a bit of Russian crude, even I would say if you lose some barrels from Iran, yes, the, the trend could be re reversed, we could have higher prices, but it's not going to be the reaction that we used to see a few years ago. Now that said, the, the reaction, the, the, the oil market structure is going to, to be changing and especially you know, the differentials for those heavy crudes as you mentioned, you know, Canadian for example, is going probably to gain a crudes from the heavy sours from Latin America. Other places Latin America are going to gain. Because if you lose Venezuelan crude, then yes, the heavy crude market is going to get a lot tighter, especially in the US Gulf coast and maybe in China. But the actual crude, let's say front month prices is not going to be reacting too massively. And that's I think something that the White House knows and they are playing it at their advantage.
- [45:07]
B
Yeah, yeah. So we've covered obviously probably status quo, Russia, Ukraine just continuing worsening for everyone involved there.
- [45:18]
Venezuela, goodness knows, but the short term impact on oil markets probably is somewhat limited just given where the status, where they're at.
- [45:29]
Where else? When you look at 2026, we've kind of painted this picture of continuing oversupply into the latter part of this decade when the bet is, and it's certainly a bet that this lack of current investment going on will start to pay off for the, for OPEC and non OPEC countries alike where significant money, you know, talked about Guyana and so on has been going in. You know what else I guess in 2026. Is there anything else that is on that could fit into that surprise category if you'd like? I know that's the one of the hardest questions.
- [46:06]
But is there anything out there that, you know, people should just have their eyes on, on that might have an outsized impact on crude markets?
- [46:15]
A
I think beyond the general.
- [46:20]
Geopolitical surprise that you could see. So whatever happens with Venezuela, whatever happens with Russia, Ukraine and maybe with Iran, beyond that, I think.
- [46:32]
One of the key topics is going to be the crude quality imbalances that we are going to have because most of the new barrels coming from the Atlantic Basin are light sweet or medium sweet type of crude. And that's when.
- [46:51]
The new demand, so the new capacity that's been installed mainly in the Middle east and in Asia is actually more inclined to process in a medium sour, heavy sour type of barrels. So I think I'm still, I would say it's hard to, obviously it's impossible to predict the biggest surprise of next year. But I think my expectation is we're still going to stay within a relatively boring market.
- [47:18]
Pretty much limited volatility when it comes to crude. However, within.
- [47:24]
That crude market, if you look at the different grades, there's going to be a lot here to play around because for instance, if we look at 20, 26 year on year supply, we have medium sour and heavy sour overtake by a lot more medium sweet and light sweet. And especially it's really medium sour versus light sweet. So for example, we see 700 kbd next year of higher supply globally of medium sour. And that's mainly coming from opec. It's mainly the baseline actually effect because, because when I say 700 kbd and 1,000 barrels per day, I'm not even included, including the potential future hikes from opec even if they don't hike anymore. On a yearly average, we should have 700 kbd more medium sour globally. Production on the other side, light sweet, we should see a decrease of about 100 kbd globally. And that means that if you remember what we were talking about earlier, we were saying that most of the new demand next year is actually going to be the first year where, where LPG ethane demand growth is going to overtake that of core products. And that means that at least in the short term and in H1 we are going to have strong demand for, for those sweeter barrels, lighter barrels.
- [48:45]
B
That's all China's huge amount of petrochemical industry that they've developed over the last couple of years, Right?
- [48:52]
A
Absolutely.
- [48:52]
B
So that's, that's good news for shale producers, presumably.
- [48:56]
A
Yeah, that is as long as they can sustain their, their production. Indeed it is, yeah.
- [49:02]
B
And that sustaining it is the concern about those fields getting more rapidly depleted than thought.
- [49:09]
A
Yeah, I mean, you know the, Again, back to your surprise question. And it's been a surprise for I would say the past 10 years, maybe every year. It's really the behavior of US China sale this year for sure has been one of the biggest surprises. And, and I think, yeah, again thinking, thinking this over again next year potentially that could once again become one of the biggest surprises. We do actually see us peaking, US shale production peaking right now. So on a yearly average maybe it's going to remain stable. But on a December to December basis we do think that US output is going to decline by around 300kb.
- [49:48]
B
It has continued to surprise to the upside is the fair statement. Right. Every year there's sort of the same prediction of its, of its impending doom and every year it continues to outperform. And so there's also the argument there's no, no, no reason it shouldn't do the same next year. Right. There's certainly a live topic that we've discussed on this podcast as well about sort of, you know, where it actually is. But the story of this year is actually outperformance as opposed to, to that predicted decline.
- [50:15]
A
Yeah, for sure. I mean the efficiencies that we've seen, especially thanks to longer laterals, have been massive. Right now, total US production around 13.8 million barrels per day to record high. But I think we're starting to see the cracks though. For example, I think the latest two readings from the EIA showed that production from Texas and New Mexico, if I'm not mistaken, have been on the decline. I think we're starting to see the cracks and that's why we believe that despite the fact that you've had a lot of efficiencies, at the end of the day what really matters remains prices. And with the breakeven of new wells in the shale sector roughly around $60 per barrel, that's more or less where we are right now. Right. So if you have a bit of a decrease then the impact is going to be relatively big. I mean again, we don't foresee that. We do think that prices will mainly remain range bound again between 60 and 70. We actually do think that the trend will be reversed towards the upside and that US production is going to remain strong. But again we still expect a peak in US output and that's because of lower upstream activity over the past few years, lower drilled but uncompleted wells, lower recount and so on and so on.
- [51:33]
B
Yeah, and that sort of $60 break even actually, actually underneath that is a bell curve and there are some, some barrels that are no production that's break even at 30. Right. And it's, it's actually where how that proportion lays over that 60 mark. So you know, it's worth sort of while doing the deep dive there as, as we've discussed discussed previously and the.
- [51:54]
A
Consolidation also plays into that. So you have.
- [51:56]
B
Yeah, so exactly. These large, you know, the, the, the large producers owning it is a very different, different picture to, you know, how it looked 10, 10 years ago.
- [52:06]
A
Absolutely.
- [52:07]
B
Yeah. So, I mean fascinating. So, so there is, there's hope and life there for the, the crude traders in, in this imbalance of grades. There's continues to be significant political risk out there which many argue is, is underpriced and the world is becoming ever more fragile as some of its community, its structures for dealing with conflict and risk are, are being eroded.
- [52:30]
And I guess the, the, the look is towards 2017 and that plays into a conversation we've got coming up around actually are the, are the super cycles or the commodity cycle shortening, you know, in a more volatile world. But well, homo union, it's been absolutely fantastic to have you on. I've really enjoyed the discussion there. We were worried that we, we'd run out of things to say in 30 minutes but we're approaching the hour and I hope to well and I hope to have you back on this time next year and we can, and we can see where, where we're at and luckily both of us been quite wise and avoided any kind of predictions so no one can prove us wrong.
- [53:09]
A
It would be my pleasure, Paul. It's been a pleasure to be, to be on the, on the show, on the podcast. Thanks a lot.
- [53:20]
B
Thank you for listening. To find out more about HC Group, our global offices and our expertise in search within the commodities sector, please visit www.hcgroup.global.