Why is oil so cheap? With David Wech

Summary

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Podcast Summary: The HC Commodities Podcast

Episode: "Why is oil so cheap?"

Host: Paul Chapman (HC Group)

Guest: David Wech (Chief Economist, Vortexa)

Date of Recording: June 11, 2026 (Aired June 16, 2026)

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Overview

In this nuanced and timely episode, Paul Chapman is joined by David Wech, chief economist at Vortexa, to break down the unexpected resilience and relatively low pricing of oil amid ongoing Middle East turmoil, including the near-blockade of the Strait of Hormuz. The conversation leans heavily on real-time shipping and storage data to separate political narrative from market realities, focusing particularly on evolving supply routes, demand destruction (especially in China), and the longer-term implications for the global energy transition.

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Key Discussion Points and Insights

1. Strait of Hormuz Flows & Recent Political Claims

• Context: Recent US and Israeli actions against Iran, and President Trump’s claim of “sneaking 100 million barrels out” of Hormuz.
• Analysis: David Wech confirms a genuine shift in oil flow tactics but calls political claims “exaggerated.”
  • UAE began shuttling crude via smaller ships or VLCC shuttles to Oman, then buyers take the risk ([02:41]).
  • In recent weeks, Iraq and Kuwait have joined these efforts, likely under tacit US military protection.
  • “It may be somewhat different to attack a tanker from SOMO, the national oil company in Iraq, as compared to any international buyer that is trying to sneak out oil.” ([03:26], David Wech)
  • Net outflows have not increased, with lost Iranian supply largely replaced by these rerouted flows ([05:02]).

2. Actual Flow Numbers and Regional Supply Adjustments

• Current Flows Out of Hormuz:
  • Only 3 million barrels per day (mb/d) are currently leaving Hormuz, a dramatic drop from pre-crisis 18 mb/d.
  • The Saudis have rerouted 3 mb/d via the Yanbu pipeline; UAE uses Fujairah pipeline for 300–400k b/d ([06:27]).
• Compensating Global Supply:
  • Surge in exports from Brazil, Guyana, Venezuela, and especially the US (including draws from the Strategic Petroleum Reserve, SPR).
  • “Not all the supply that has been lost actually needs to be replaced.” ([07:19], David Wech)
  • Net shortfall after adjustments estimated at 5 mb/d, not 13–14 mb/d ([08:46]).

3. The Strategic Petroleum Reserve’s Role & Shale Responsiveness

• US SPR releases attributed to about 1 mb/d in recent months ([09:46]).
• SPR levels at ~350 million barrels, enough for several more months, but finite.
• Shale’s limited short-term responsiveness: “...it really doesn't make a difference… we're talking many million barrels per day of rebalancing in the market.” ([10:28]–[12:06])
• Structural discipline in US shale—no rapid swing back due to lead times and consolidated, cautious producers ([12:06]).

4. Why Is Oil Still Relatively Cheap? Supply vs. Demand

• Despite lost Middle East supply, ample new/shifted supply and surprising demand declines keep prices moderate.
• “We have a lot of data that is suggesting that there is no real supply problem in the market, that nearly all relevant segments... are reasonably well supplied.” ([15:53], David Wech)
• Product price signals (e.g., gasoline, diesel) remain subdued, further suggesting adequate supply ([15:53]).

5. China’s Critical Role in Oil Demand Destruction

• China has stepped back its purchases dramatically (esp. crude, naphtha, LPG).
• This does not imply a matching drop in consumption or a recession. Key factors:
  • Massive strategic stockpiling ahead of the conflict.
  • Fuel-switching: surge in EVs, expansion of LNG, use of high-speed rail, increased coal feedstock for petrochemicals.
  • “China has by far the highest stock coverage of any country in the world.” ([22:58], David Wech)
  • Estimated demand loss in China: ~1.5 mb/d, not catastrophic ([18:49]–[22:58]).

6. Rest of Asia and Global Demand Response

• Other Asian nations (South Korea, India, Indonesia, Malaysia) felt early strain but are adjusting with redirected US and South American oil.
• “I don't think that these [demand] levels are particularly high... probably not much more than 2 million barrels per day, perhaps 2 to 3 million barrels per day and not 5 to 6...” ([24:15]–[26:41], David Wech)
• Oil demand in the West is now very inelastic—economies will pay what is necessary to avoid disruptions ([26:41]).

7. Shipping, Flows, and Freight Rates

• Longer trade routes, especially from the Americas to Asia, are generating “ton-mile” demand and supporting shipping rates ([35:43]).
• The number of tankers trapped is minimal relative to the fleet; rate strength models are now highly flow-dependent rather than tanker-availability driven ([35:43]–[37:42]).
• However, total seaborne oil volumes have shrunk, indicating underlying demand weakness, especially for key products ([38:06]).

8. Structural and Long-Term Implications

• Pre-existing trends of slowing demand, especially gasoline, observed even before Hormuz crisis.
  • “It’s a bit difficult to see strong demand performance. A lot of that has come from increasing exports, e.g., LPG from US to Asia…” ([38:06]–[39:38])
• The “energy transition” may be accelerated by this crisis, as Asia learns from China’s diversification and storage strategies ([40:37]).
• “China looks really very smart and strong in this crisis because they have been so well prepared.” ([40:37], David Wech)
• Others in Asia likely to focus both on stockpiling and accelerating non-oil energy alternatives ([42:13]).

9. What to Watch Going Forward

• Stock draws: Currently not rapid—could become a critical signal if acceleration occurs ([42:47]–[44:13]).
• Product cracks: Watch for signs of shortage in gasoline, diesel, etc.—not currently present.
• Chinese crude buying: A key swing factor; as of now, floating roof tank data shows little drawdown.
  • “The huge majority of stocks in China is in floating roof tanks and with satellite imagery you can see how full they are. And these tanks have simply not drawn down. That's a fact.” ([44:41], David Wech)

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Notable Quotes & Memorable Moments

“There has definitely been a significant pickup in flows from inside the Strait of Hormuz, primarily initially from the UAE... shuttling the crude to offshore Oman... putting all the risk on their side and selling the oil, so to say, risk-free to the buyers.”
— David Wech ([02:41])

“What is perhaps... important from a global oil balance perspective is that the net outflows from that region have not yet changed dramatically because these extra supplies... have made up for the loss of the Iranian barrels.”
— David Wech ([05:02])

“Not all the supply that has been lost actually needs to be replaced. So at least 2 million barrels per day or so, the market was running into oversupply.”
— David Wech ([07:19])

“There is no real supply problem in the market... Nearly all relevant segments are reasonably well supplied.”
— David Wech ([15:53])

“China has by far the highest stock coverage of any country in the world.”
— David Wech ([22:58])

“The important point is the oil that is still stuck in the Middle East Gulf since the beginning, that is very often on vessels operated by these big shipping pools, Western style low risk operators. The Iraqi government or the Kuwaiti government may at some point of time…say, okay, let's take the risk.”
— David Wech ([33:08])

“The war…might actually be a huge accelerant to the energy transition… particularly in China, certainly in Europe, that will destroy oil demand much faster than forecast.”
— Paul Chapman ([40:37])

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Key Timestamps

• [02:41]: UAE, Iraq, and Kuwait's rerouting strategies out of Hormuz
• [06:27]: Actual flow quantities and routes from the region
• [08:46]: Breakdown of new global supply making up shortfalls
• [09:46]: US SPR role and finite capacity
• [12:06]: Limited responsiveness of US shale production
• [15:53]: Data- and price-based evidence against a supply crisis
• [18:49]–[22:58]: China’s demand reduction, storage strategy, and the transformation of its energy mix
• [24:15]: Responses in the rest of Asia, demand estimates
• [26:41]–[27:44]: The West’s inelastic oil demand and historic supply shocks
• [33:08]: Long-term regional supply strategies and pipeline expansion
• [35:43]: Rerouting, shipping market effects, and global flows
• [38:06]: Underlying trend of softening motor fuel demand
• [40:37]: Long-term energy transition acceleration
• [42:47]: Signals to watch: product cracks, stock draws, Chinese purchases
• [44:41]–[46:05]: Visibility on Chinese storage via satellite/floating roof tanks

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Takeaway Summary

Despite what might appear to be a textbook supply crisis in global oil—nearly a total loss of the Hormuz route, persistent geopolitical risk, and finite SPR—prices have not spiked catastrophically. The market’s resilience is rooted in creative rerouting by Gulf producers, a wave of new supply from the Americas, and an underappreciated collapse in apparent demand, especially from China. That demand “loss” is itself nuanced: China has been drawing on immense reserves and dynamic energy switching rather than simply tanking its own economy. The likelihood is that barring major new supply shocks or a sudden shift in Chinese strategy, this surprisingly stable (albeit somewhat higher) oil price range could persist through summer—potentially until storage begins to truly bottom out toward September. Longer term, these events are accelerating the structural shift toward diversification and demand reduction, especially in Asia, suggesting oil’s golden era of inexorable growth may already be in the rear view mirror.

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For further details:

• David Wech, Vortexa: Vortexa website
• Paul Chapman: LinkedIn

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(Ads, introductions, and outros have been omitted from this summary.)

Transcript

[A]

Foreign.

[B]

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. Today we return to the subject of oil. How have flows adjusted in the wake of US And Israeli attack on Iran? And why? And how are prices so relatively low? Is this a function of great PR work on behalf of the Trump administration or is something else happening? Why, contrary to all expectations, oil prices remain relatively subdued. And how long can this go on for? Here to answer those questions is David Veeck, chief economist at Vortexa, the energy data and analytics firm. As always, you can really support the show by leaving a positive review on the platform you're listening on. And as always, I hope you enjoy the episode. David, welcome back to the show.

[A]

My pleasure to join you. Looking forward.

[B]

Yeah. So as we have to do it apparently this year in the podcast, I'm date stamping this. So we're, we're doing this on June 11th. It's going to go out next Wednesday. Who knows what may or may not have happened in the interim. And to some extent we're kind of putting that to one side because in general we're in a period of stasis. There are attacks, there aren't attacks, etc. It doesn't, it's not making too much difference to the story right now, which is really to try and get you back, keen to get you back on. Glad you're here. To understand we're now sort of in June. We haven't covered really the oil flows for, you know, four weeks or so. And really to answer a few questions around what flows are actually happening right now and then ultimately kind of how prices have managed to stay so low by actually counting barrels and looking at the underlying flows and relying on your expertise. So, so that's what we're here to do. We are going to do one bit of current events, which is that yesterday, June 10, President Trump in the Oval Office said that, well, that they'd quietly been sneaking 100 million barrels out of the Strait of Hormuz under the Iranians nose. And now that they've, they found out about it, it stopped. And you know, if you were to listen to some of the political commentators, some are saying that this is nonsense and others are, are doubt, you know, are saying we don't know anything about it. But just, just before we move on to the broader conversation, be great to get your take on that. Have we actually seen that happening? Has it Stopped what's going on there and was it indeed material and part of the story of why oil hasn't rocketed up.

[A]

So there has definitely been a significant pickup inflows from inside the Strait of Hormuz, primarily initially from the uae. The UAE have been leading this and they're doing this already for a couple of months. They are basically shutt out the crude to the outside area offshore Oman and then they are doing sts. STS is to the vessels of the buyers of the oil, basically putting all the risk on their side and selling the oil, so to say risk free to the buyers. Over the recent weeks, first Iraq and then Kuwait have also joined this effort. And it seems likely to us that this was facilitated by US military protection. But it is also from my point of view a type of logical reaction to this three months of, you know, huge loss of exports. These countries have to think about how they get out the oil. There is increasing concern that this could go on for much longer. And I think we simply see a shift of the risk taking from the buyer of the oil to the supplier of the oil. And that makes also a bit of a difference, I would argue from the Iranian side because it may be somewhat different to attack a tanker from somo, the national oil company in Iraq as compared to any international buyer that is trying to sneak out oil.

[B]

Yeah, fascinating. And sorry just to understand that. So they're using smaller ships to take this stuff out, lighter it out to a big VLCC sort of on the other side of the Strait.

[A]

Is that what it's. It's both. It's partly relatively smaller ships. So for example Alpha Maxis, but partly they also taking the loading one VLCC partners, typically an older VLCC of less value inside the Gulf, shuttling the oil out and doing a one to one transfer to another VLCC that is operated by the buyer side and bringing the oil to their clients this week.

[B]

Yeah, so. And we would assume that whilst it has military cover from the US it's also done with the. As you're kind of alluding to the tacit knowledge. Well the knowledge of. And the tacit sort of allowance of the Iranian regime too.

[A]

It's for sure they have seen what was going on. It's not that this can be done without.

[B]

I was going to. And that's because you can, you can. A pair of binoculars will tell you what's going on in the Strait of, of Hormuz. Right. So yeah. Okay.

[A]

And what is perhaps if I may just to add important from a global Oil balance perspective is that the net, so to say, outflows from that region have not yet changed dramatically because these extra supplies from the uae, Kuwait and Iraq have made up for the loss of the Iranian belts that have materialized since the overall pretty successful blockade of the US on this, on this fl.

[B]

Okay, so net. Net, it's largely the same amount of. The same trickle of oil is coming out of the straight of Hormuz because you replace those blockaded Iranian barrels with.

[A]

Yeah.

[B]

Okay, so, so in terms of our story here, and that's where I wanted to sort of start off, which is kind of, you know, we're trying to understand what's going on and, and I guess why we're all sort of surprised that June is. Is benign as it seems so far. But that might change quite quickly. But what are. So we. The straight of Hormuz. Can you give us some actual sense of. In this. And I'm, you know, roughly 100 billion barrels a day consumption world. Like how many barrels, you know, are actually trickling out of the Strait of Hormuz? You know, you sort of mentioned there 3 million. What else, you know, what else is coming out of that region from other, you know, the port on the southern side of Arabia and. And so forth. Like, what are the actual flows coming out of that region? And then we can start to unpack, you know, what's going on on the demand side.

[A]

Yes. So from inside the straight of Hormuz, the volumes have been somewhere around 3 million barrels per day, perhaps a bit higher, including the products as well. So that means that the huge majority of the flows before about 18 million barrels per day are still being lost. So this is a massive figure. What has been very helpful is evidently that the Saudis managed on their own to reloc about 3 million barrels per day of their exports to this pipeline to the port of Yanbu via the pipeline. So that is reducing the coal. The UAE has also managed to get some 300, 400,000 barrels per day of extra supply via a pipeline to the port of Fuchsiara outside the straits. So that is basically rerouting of Middle Eastern supplies, but otherwise it's really also the global, and in particular the American supply side that has changed things. We have seen dramatic increases in oil liftings from various American countries, North and South America. And that is also pointing to this general situation that the world was actually really moving into significant oversupply when the war started. So that's part of the storyline is basically that not all the supply that has been lost actually needs to be replaced. So at least 2 million barrels per day or so the market was running into oversupply and that was driven by extra exports from Brazil, from Guyana. More recently, Venezuela has joined with much higher exports after the changes there. And the latest development over the last two months or so is of course, the release of the US Strategic Petroleum Reserves, which is predominantly going into the export market and which is allowing US Exports to surge. That is primarily going to the European market. So while you have overall initially had a shortfall of somewhere between 13 to 14 million barrels per day on the crude side, from a balanced perspective, we would argue that the shortfall that remains after all these adjustments on the crude side is only around 5 million barrels per day. That is already significantly smaller.

[B]

Fascinating. Okay, so let's say that 14 number, you've got two to three coming from, if I heard you right, Brazil, Guyana, soon to be Suriname. And yeah, incredible finds going on in that, in that region. And you've had this, just looking at the presentation you kindly shared with me, 6 million barrels sort of taken up by the US export of that 6, I think, and correct me if I'm wrong there, and I guess this is very consequential, the 6 million barrels per

[A]

day is all the extra supply that came to the market in April, May versus February. So that's combining the U.S. the other Americans, and also the Middle Eastern pipeline, bypassing.

[B]

Okay, okay, because we're going to come on to the demand piece, the sort of China miracle that's going on, but just staying on that supply piece. How much of that 6 million barrels is SPR from the US and other contributors that essentially can't be replaced? I mean, because that's the, you know, and, and how low is the SPR right now? Because that of course is a finite resource.

[A]

Yes. So on the export side, about 1 million barrels per day of exports from the US can be attributed to the SBIR. That's also relatively close to the draw rate there. The level. I don't have the exact last figure, but it was something like 350 million barrels, if you remember. So in theory, the SBI could be drawn down nearly an entire further year, but probably not even Trump would go to a complete drawdown there. So that can continue for easily for another couple of months, perhaps even half a year. It's not an immediate limitating factor.

[B]

Yeah. And do we have any sense of the shale response to this in terms of how much they're contributing to that increased export?

[A]

Yeah, there is generally no real short term change to supply due to such, due to any type of price or political developments. Actually, up to this SBR release, the US crude exports have been pretty disappointing. There was not really much dynamics going on there. So it was really the other American countries that have contributed or have led to this oversupply in the situation that was first emerging in autumn last year. In the medium term, higher prices can make a bit of a difference, but it also really depends on how companies are seeing that, whether that will be a permanent change in pricing or only a temporary change in pricing. Of course, a bit this upside can be used for hedging. So, yes, there may be some extra bells, but in the bigger picture here, it really doesn't make a difference. Yes, I've heard some people revising the US shale outlook up by 200,000 barrels per day, 300,000 barrels per day, but we're talking here about many million barrels per day of rebalancing in the market. So it's really a minor share that may come from the US shale industry.

[B]

Yeah. And is that disappointing? Is that disappointment and disappointing because it demonstrates that actually that sort of, you know, and this has been a bit of an ongoing theme on the POD as well, that the Permian is sort of turning over and they just, they are unable to respond. Or is it just sort of discipline in the shale producers? You know, the economics work well for them. It's hard, you know, it's now dominated by large players. There's less wildcatting, like, what do we do? We know what's going on there. That seems quite fascinating to me that.

[A]

Yeah, generally speaking, you know, even though the cyclists in the shale industry are relatively short, it's not something that you turn on and off like, like a switch. You have lead times, you need to do the drilling and bring the valves on stream and all this type of things. And it takes at least half a year between decisions and actual additional supply. And as said before, you will not ramp or take these decisions just due to geopolitical development or to a temporary price spike. You will make your assessments on how you, you know, balance your investments, your spending over time, and how you see the market outlook. And there is, of course, how to say, the problem. We shouldn't forget where we started the year. Even Goldman Sachs at the beginning of the year, known as a type of perma bull, was coming out with a very bearish price forecast and the expectation of significant oversupply materializing in 2026. So that was the expectation when we started the year. Very widely shared, of course, the situation now is different, but I assume most people understand that if and when there is a solution to the problems in the Middle east, then we will very quickly move an oversupplied situation.

[B]

Yes, yes. Depending on how much damage has gone on in the.

[A]

Yeah, I would be cautious in. I, I'm, I'm, I know there is a lot of speculation that there may be a lot of damage and it may take a lot of time to restart crude production. I personally think this will be well, swift, swift restarting crude production when everything can get the oil out. And yes, there has been done some damage, but again the market was structurally at least 2 million barrels per day long. OPEC still wanted to bring back a lot of extra production. The UAE has left OPEC and is targeting even higher production than before. So the potential losses of production are small compared to the spare capacity in the system.

[B]

Yeah, actually the comments from President Trump yesterday were suffix to him saying I love the inflation which obviously caused a social media firestorm. What he seemed to be about to say was because as soon as, and he sort of sidetracked himself as he does, as soon as the straight is open, inflation is going to come crashing down and I'll get that boost for the midterms is basically what he was about to say because he usually says what he's thinking, so which I guess you're supporting that we have to be

[A]

careful about the timelines, whether that is all that quick. There will also be second round effects from the currency to situation in terms of pricing in agricultural goods and other spheres. So I'm not sure there will be an immediately massive dampening on the inflation, of course from the energy costs. Yes. But in the wider economy I would be a little bit more cautious. And then of course the solution has still yet to be found.

[B]

Yeah, yeah, exactly. And, and as we know, inflation coming down still means prices are going up and that's often lost. Right. You know, the prices don't, you know, we have yet to see deflation and you know, that would be a whole story. Okay, fascinating. So actually I kind of started this with kind of the sort of general sense of. It's unbelievable. Oil is at 90 bucks and now it seems a bit more believable. But a key part of that is that 5 million barrels a day that China is not using. Right. Or broader demand destruction in Asia. Can you. Because that's, that's the critical piece. Right. So a, is that, how on earth is that happening and China not in a massive recession? And how long can that go on

[A]

for yeah, yes, absolutely. If I may just say from a bigger picture perspective to this, for most people the current pricing environment is surprising. They think it's not aligned with fundamentals. They think it's driven very much by the constant messages of President Trump that this war will be over in about two weeks time. I have been thinking like this earlier in this development, but over the last month or so I must basically recognize that we have a lot of data that is suggesting that there is no real supply problem in the market, that nearly all relevant segments of the market are reasonably well supplied. And there is another very important independent proof which is pricing. It's the outward price itself, but it's also the relative prices. Example gasoline, diesel, jet, quacks, they are all from a historical perspective, relatively high, but they're way lower than they have been all the time since this conflict started. So they've been trending lower, lower, lower crude differentials, for example. So the spot differentials for the specific crudes in Brazil and so on, they're all pretty low. So that suggests that there is no shortage of supplies. And as you just alluded to, a crucial reason for that is that China has taken a huge step back from the market. They're buying much less. Whether that's crude or NAFTA or lpg, they're taking their intakes much down. But again, very important, buying less and importing less does not mean that they are consuming less, at least not to the same extent. Nor does it mean that they are held back from running their economy. So let's try to unwind it in steps.

[B]

Can I just jump into with just one comment just on that sort of fascinating reframing of, of what is going on is $90 oil is also inflation adjusted. 2012's $50 oil, right? $55 oil. So it is in absolute terms as well, it's incredibly low, you know, so in real terms, whatever the right phrase is. But you know, and actually the last time an economy got tanked, sort of 2008 or where the western economies were and we're no longer as elastic as we are because we've converted lots of stuff we could out of oil but was like 140 bucks a barrel and that today would be somewhere in the region of $230 a barrel. So we're incredibly far off the sort of the Jeff Curry early on and felt quite compelling. We hit tank bottom and this thing's going to go existent, you know, existential. It's just fascinating that actually markets have done what markets do, but Anyway, I digress. Let's talk China.

[A]

So yeah, yeah, basically let's go back to your 2008 reference. At that point of time, China was steaming ahead in terms of oil demand. It was accounting for 60% or so of global oil demand growth. It was the clear engine there. And what has happened since then, in nearly 20 years time, is a massive diversification of the energy landscape in China. The electric mobility boom that is driven by China, a huge move to using LNG liquefied natural gas for trucks. This massive build out of the high speed railroad infrastructure which allows people to move within the country very quickly off the road. So all these things have happened. China has been preparing very well also in the short term. China has built crude stocks ever since February, March last year consistently. And since June, when this first, first war in between the US and Iran materialized, they have hiked that stock building rate further. And we would argue that in the months ahead of the start of the war, China was importing about 3 million barrels per day more oil than it actually needed, both crude and products together. So that again means the loss in imports doesn't need to be fully compensated. It only about half of it needs to be compensated after a certain period of time because it was extra buying in the first place. And then there is this huge flexibility within the Chinese system, as said before. So you can assume all type of things, but China is one of the biggest oil producers as well. So you can assume that they're trying to do everything to increase the production. China has a massive network of pipelines and rail connections to Russia, to Kazakhstan, indirectly also to Iran. You can assume that more oil is coming in via those ways as well. China has cut back its motor fuel exports by about half a million barrels, barrels per day. That means less refining needs, less crude input needs. And then we assume that about 0.7 million barrels per day of multi fuel demand has been replaced. Retail prices have been not extraordinarily high, but relative to the rest of the world, to Europe for example, have increased clearly more. And with for example the high speed rail network, we assume that people are simply driving less or are using electric cars more. And then there is this big puzzle of the petrochemical industry. But there again China has a quite significant coal based petrochemical industry where coal is gasified or liquefied and used as a feedstock. There, there is an important role of biocomponents. They can produce their own feedstock. And what is important as well for the Chinese market is that there has been a massive overcapacity in the petrochemical industry, not only in China, in the entire Northeast Asian market market. So if we hear about run cuts in the petrochemical industry, it's not necessarily due to a loss of activity, but just how to say the overcapacity in that segment and probably the stronger Chinese performance relative to other players. So to, to wrap this off, one important thing there is, there is surely a certain amount of oil demand loss in China. We would estimate it somewhere around 1.5 million barrels per day. But there is barely any indication that there is a loss of economic activity in China due to this situation. So the Chinese economy is moving ahead. It's using other energy sources, it's switching around its portfolio. And yes, there are stock draws, but the stock draws in China, at least those that can be observed via satellite imagery and floating roof tanks, they have been very limited so far. Chinese crude stocks are still very high and they can easily run down stocks for 2, 3, 4 months without even going below the seasonal average of the last five years. And so relatively speaking, China has by far the highest stock coverage of any country in the world.

[B]

Wow. So, okay, so China, so 3 million, whatever, you know, 3 million was the draw was filling that stuff up that, you know, they barely scratched the surface of how much storage they have. You've got some petrochemical industry that's in pain, but it probably would have been in pain anyway is kind of what I'm hearing, just because of the overcapacity. But now you've thrown in very high naphtha prices and all the rest of it. So, you know, China sort of locked and loaded and we're also seeing as well record coal consumption, you know, as you alluded to, whether that's an alternative feedstock or just, you know, replacing power plants and so on. And then there's this sort of unbelievable, and it's still quite hard to divine shift to EVs that's going on and just an electrification of the economy in general. This is sort of the Kingston some kings mill bond. You know, China is winning the energy transition. It's happening faster than anyone in the west can imagine. You know, I find that fascinating. We had Tom Reed on a couple of times talking about that from Argus. What about the rest? So that's China's quite rosy, but what about Indonesia and Malaysia and so forth and Australia where they, you don't have the same strategic petroleum reserves, you don't have the same switching available to you, you know, all the rest of it.

[A]

So other countries in Asia have been under a lot of strain, especially early in the days after the Strait of Hormuz closed. Quite a lot of countries have immediately cut back the refining ones, including for example Saudi, sorry, South Korea, which supposedly has a lot of Strategic Petroleum reserves. But it was nevertheless interesting that they cut back their imports and refining operations very quickly or they were forced to cut back the inputs, of course. But what happened then in the second round was that the US amid others and this other American exporters have relocated a lot of their supply to the Pacific Basin, to the buyers in the east. And crude input levels have rebounded quite substantially. Actually, even storage levels in the countries outside China and Asia have rebounded over the last couple of weeks. So they're refilling the storage tanks as well in the current environment. And there is little indication that that anybody is running short oil. Definitely not Australia, in spite of the huge, so to say, exposure. But they have overall the money to pay what it is needed to get the oil. Where we're probably losing oil demand is in countries like Indonesia, Malaysia, India to a certain extent, where the increased prices are leading to a stop of consumption. India in particular has a problem to this very close proximity. They have been highly dependent on this Middle Eastern supplies and they had probably overall clearly too little storage levels. LPG is in particular product that is running short in India and that is leading to a loss of consumption. But from a global perspective, I don't think that these levels are particularly high. And overall we would judge that the loss of demand globally is probably not much more than 2 million barrels per day, perhaps 2 to 3 million barrels per day and not 5 to 6 million barrels per day as quite a lot of other people are claiming. I think very often, you know, the demand estimates come into existence by looking at supply. There is very little way to directly measure demand. And of course if you look at the supply over the last couple of months, you see a lot of hiccups. But that doesn't mean that the actual underlying consumption in that country was really going down that much. So we think that there has actually been relative little loss of demand so far.

[B]

Yeah, well, and also. So there's a quantifiable difference between 140 on your supply and demand curves and 90. Right. So early on it was impactful, but maybe less so now. And I also kind of find it fascinating as well. I forgot which guest said it, but kind of, you know, the west has essentially moved into a world where oil is largely inelastic. You know, the economies can't be there's very little room to turn off and dial down like there was historically say in the 70s. Right. Much less is run on oil and you can't turn off the west is not going to allow the power to be turned off for two days. So they're just going to pay what it takes. Right? To some extent.

[A]

Exactly. We have seen that with the Ukraine war and how Europe basically managed ultimately would argue surprisingly well to cope with the sudden loss of Russian gas. And yeah they have paid for a certain period of time very high prices for that but then the whole system had readjusted and yeah the market moved on.

[B]

So and, and I, I don't want to get into a game of asking you where. Where oil prices, you know are going to go but to me so. And I want to come on to the long. What's fascinating here is some long term effects of this. I want to also talk about what actually is going on with the flows and what you're seeing on the shipping side because that's where a lot of the volatility has been driven too do. But we're kind of in the worst case. You know worst case scenario is a hot war. Well that actually might be a better case scenario for actually sort of certainty and it not worst case scenario is probably a long cold war or sort of frozen, you know, armistice where all of these risks are and actually the flows don't. You know basically the worst case scenario is it's kind of kind of like now continuing. Right. But it seems that so given that we're probably in the worst case scenario or gradations off of I. E. Very little coming out of the Strait of Hormuz and in fact now that the, the it seems like the. The Iranians are no longer allowing that trickle to come out so we're probably entering into a worse case scenario. The, the fact that the markets are so sanguine and and you you're sort of highlighting is the story is not one of sort of jaw drawing down the down the price of oil. Right, right. And sort of social media games on a Friday night. You know, Friday and Sunday night actually the reality is that for the most part economies are coping and China is emblematic of the fact it has been able to cut demand. It's got sufficient storage for a very long time and its economy is doing just fine. Thank you. The. You know it would just seem to me that even if this goes on for another three months this idea that we're hitting tank bottom is that kind of. Of that's no it feels like that is not as stark as it is sort of, it was made out to be. And actually there is all this capacity and we could probably continue to muddle through for another six months. Is that a fair statement then? Secondly, is there a point at which all of it gets too painful or is the argument actually that other sources of play will continue to step up? And generally speaking, while oil will be a range higher, you don't expect to see these huge, huge step up.

[A]

So of course developments in various directions are possible. There is certain factors that put forward by the bulls and they're relatively convincing. So one is that oil demand will be much higher in the next three to four months than it was in the last three to four months. That is when there is this peak summer travel season, peak agricultural season as well, increasing consumption quite significantly. So that will make it more difficult for the market to remain balanced. But first we have to see the price signals on the product side. As I mentioned before, so far we are not seeing it, but that may of course change. The other factor is the storage tank levels. Tank the minimum operational levels. To start with, we are probably drawing global crude and product stocks across the board at a rate of somewhere between 4 to 5 million barrels per day. And of course this cannot go on forever. That's straightforward. Can it go on for another three months? I would tend to think probably yes, it can definitely go on for this another three months in China, in the US and for the rest of the world. It is interesting that yes, stocks have been falling, but they have not fallen below seasonal lows. For example, we have already seen last year. So last year nobody was going out and was screaming saying, look, storage levels are so low, there must be a huge problem. No? And we have seen that in Asia stock levels have been drawn down by about 10% below the seasonal norm. And if you would apply the same to the rest of the world, then I think to remember that was in about 100 million, 120 million barrels. That can be drawn again at a rate of, let's say 2 million barrels per day. That would be 60 days forward. That's two months. So generally speaking, I don't think that we will run into this minimum stock level situation anytime very soon. Let's say within two to three months. But I think in early autumn, late summer, that situation could change. Now that were the bull arguments. At the same time, there will be further constant adjustments in the market. The demand side will be worked on by many countries, at least to a certain extent. And I think more Important the Middle east export situation. I do think that there has been a trend emerging. So these extra exports we talked about from the uae, Kuwait, Iraq, the latter two having no alternatives, essential. I think it's likely that this flows trickling through will increase over time because ultimately, you know, at some point of time, why don't you just take the risk that they hit your vessel? Yeah, if that is what it requires to get some oil out and make some money. I mean, evidently Iraq will not want to go on like the current situation for you.

[B]

Yeah, I mean, mean, you know, again, this is, there's a bit of a divergence between the cargo owner, the ship owner and the poor crew on board, right?

[A]

Yes. And I think, you know, the important point is the oil that is still stuck in the Middle East Gulf since the beginning, that is very often on vessels operated by these big shipping pools, Western style low risk operators. So they don't take the risk. But the Iraqi government or the Kuwaiti government may at some point of time and that may already be happening. Say, okay, let's take the risk. Yeah, let's take our old, these tankers, fill them up and let's see whether the Iranians really try to stop it. So I do think that this is a possibility. And at the same time pipelines are being built and expanded. The Iraqis are exploring their options. There is certain volumes exported via trucks and so on. And the longer the current situation goes on, the more of this will happen. And I think more and more people are at least thinking of a scenario that this trade could be type of permanently blocked. That is not something that will actually reopen, at least not in a normal way as it was the case before. So you know, the producers in the region are increasingly preparing for that. And that's not, you know, there may not be drastic changes with one month or two, but I do think that there will be steady, steady adjustments.

[B]

Yeah, it's interesting that generally speaking massive stock market crashes happen sort of at the end of the summer. And as everyone's, you know, sort of the, the tank bottom scenarios you've outlined is if we carry on in the status quo is sort of, you know, maybe there's three months more. I don't know, I might be getting a bit woo woo and a bit pessimistic, but it feels like this September might be quite consequential with lots of, lots of things colliding at the same time, including what's going on in Russia and Ukraine and and so forth. So let's go to, I mean Obviously, Vortex's core capability in business is, is, is tracking the flows and tracking these cargoes and ships on the water. What is, what is happening there? You know, how are flows rerouting and can you give us some. I assume that. I don't know. Unless your ship is stuck on the wrong side of the Strait of Hormuz, generally speaking, you can make quite a lot of money at the moment if you've got a tanker that can whip around the coast because there's longer hauls to be done and fewer tankers free to move. Is that fair?

[A]

I think the fewer tank argument, that's not really a relevant one because the amount of vessels stuck inside the Gulf, that's really small compared to the available fleet. But what is definitely important factor is the longer trade flow. That's in particularly the case for, for, for crude oil, where we have seen the supplies from the Americas increased by about 4 million barrels per day and about 3.5 million barrels per day went to the Asian market. So really long haul flows, and that is providing quite some ton mileage. And this is an important supporting factor for the, for the shipping industry, boosting freight rates. Of course, this constant uncertainty is always good for the shipping side and is always driving rates higher. We do wonder a little bit whether in all cases these high rates are justified, because what on the net basis simply remains is that the overall volumes of oil shipped around the world are shrinking. Also on the product side in particular, we see now relatively less flows from the west to the east and more of a local regionalization of product supplies. So that may weigh a little bit on the outlook for clean tankers. Yeah, the ability to increase refining runs, I think that's, that's very important. I think this is part of the solution. On the European side, for example, we have clear indications that the European refiners are running much higher than they used to to make up for the lost product supplies from the Middle East Gulf, the US refining system is running extremely high and is basically benefiting from their great feedstock situation, having all the domestic supplies available plus very high export margins. So these are crucial factors rebalancing it. And of course, at the margin they are, they're providing the one or other, I would say, extra shipping need and underpinning the shipping costs there.

[B]

Yeah, interesting. And just on that. So yes, there's high rates. The question about them being just justify because overall the amount of oil on ships is shrinking and that shrinkage is directly tied to the demand destruction or the disappeared demand that's happened or has that been an ongoing trend and this has accelerated it?

[A]

I think the crucial individual factor right now is this much lower imports from China. So that is clearly driven by this crisis and it's a short term phenomenon. But our data is generally suggesting that oil demand has probably not done as well already for the last one or two years compared to what is the general headline figures. We have for example, one concept to look at all the standard import ports. So basically ports all around the world that are only importing, not exporting, and the flows of gasoline, diesel, and gasoline in particular, to a low extent diesel into these ports have been trending lower over the last couple of years. Over the last year at least, especially for gasoline, jet has been trending up a little bit, but also not in the dramatic, in a particular dramatic way. So at least from this perspective of motor fuels, it's a bit difficult to see strong demand performance. A lot of that has come from increasing exports, exports of LPG from the US market to Asian buyers as well, feeding the petrochemical industry there, but partly of course replacing also local feedstocks. So yeah, to keep it simpler overall, I think there has already been an indication of slowing demand before the war. And of course the question is what the current situation does to the midterm demand outlook as well. I do think that there will be some lasting repercussions there in all likelihood.

[B]

Yeah. And I want to move on to that. But what you described, you were talking about your vortexa top import port indicator to give it a plug there. Right. Which is sort of giving, you know, I mean this is sort of the really fascinating moment that's kind of going on is kind of the, you know, you have this sort of the IEA slowly expanding out when they think there's going to be peak oil demand, you know, and, and delaying the, the energy transition forecast and so forth. At the same time, some of this data seems to think that it's already happened. Right. Like that, that we are. And, and the. Well, I'd like to comment on that. And then, yeah, this, the war, whilst it might be a shot in the arm for oil, you know, hydrocarbon producers today might actually be a huge accelerant to the energy transition. Well, I think that's definitely the case, but might be an accelerant to structural changes going on, particularly in China, certainly in Europe, that will destroy oil demand much faster than forecast.

[A]

Yes, I think so. I mean China has anyway been long on the path and they are now getting all the benefits from that. Yeah, I mean China looks Really very smart and strong in this crisis because they have been so well prepared. And if you look at it from a European perspective, you know, you had the key supplier, Russia, attacking a European country four years ago. Then you have a President Trump who is clearly not a particularly friend of Europe, and that is also questioned in the supply security from that side. And then you have the third big supplier to the region, the Middle east, being drawn into this conflict and now also dropping out as what has historically been an extremely reliant supplier, a stable supplier. So of course, I mean any policymaker or potentially even individuals not thinking about potential solutions to reduce the risks of this exposure. Yeah, I think it's relatively straightforward. And where it may make a difference, I think is also the rest of Asia that is hit clearly the hardest by this crisis. So all the other countries than China, I think they will look at what China has done right in context. And the good news for the oil industry is that probably these countries will decide to put much more oil on storage in the future than they used to be in the past. But the bad news for the oil industry is evidently that they will also look at what China has done in terms of electrification, diversification of energy resources, renewables, domestic supplies and so on.

[B]

Is there anything. I mean, I found this an absolutely fascinating analysis. You know, when you're sort of, as you say, you know, it's busy, long days for you at the moment and my sympathies, but obviously, you know, crucial to, to your client's success. You know what, what one or two things do you think are really consequential going forwards that kind of like we should all be looking out for, you know, is, I mean, are there any sort of. I'm sort of fascinating by kind of like the one or two things we aren't thinking about that really kind of matter?

[A]

Yeah, it's a bit the question of time horison as well in the short term due to this crisis in the Middle East. What I would really look at is the price signals from the product side. Is there any shortage on products emerging? That has clearly been the case immediately after the war started. But these signals have disappeared. So for any type of seasonal upside in summer demand being reflected in a market tight as you need to see this in gasoline or diesel cracks, otherwise it will not happen. Of course it makes sense to look at the stock changes and yeah, I've been amazed again and again every single week how little global stocks have been drawn. And at the same time, I know from the past that's not guaranteed will remain the same down the line. Yeah, perhaps we have a significant acceleration of observable stock draws and that would change the picture in the market very quickly and otherwise. Yeah, I would clearly look at crude price signals to see whether China comes back to the spot market because this massive absence that is materializing right now, of course there is no guarantee that this will go on forever. So the question is basically at what level of domestic stock draws will Chinese decision makers give the guidance to the crude companies to go back into the market and buy barrels? Because once, and if that happens, it will be significant catalyst for, for, for higher prices.

[B]

Yeah, and, and I find that fascinating because obviously, as you said stated earlier, they have lots, we're assuming they have lots and lots of, of stock available based on historical buying. And, and how, how easy is it, as you know, Western analysts to actually visibly see, or you mentioned it was quite difficult, but just to put a pin in it, to actually see whether they are drawing on their own inventories.

[A]

Look, the huge majority of stocks in China is in floating roof tanks and with satellite imagery you can see how full they are. And these tanks have simply not drawn down. That's a fact. What is less clear is how much underground storage is China having, how much storage capacity they have that are not in this floating roof storage tanks. An important question of course is also how is the picture looking on product side? How much products do they have in storage and how much has that been drawn down? So it's, it's a mix of things that can be observed and the things that can only be guessed at or implied. But overall, the, the data we have at hand at Vortexa on global onshore inventories all across the world, about 120 countries, and all the oil flows on the seaborne perspective give you really a good, very close to real time insight into what is actually going on in the market right now and what is changing. In particular, what is changing over the last week, last two weeks, and a key change over the last two, three weeks is this significant increase in exports from the Middle East Gulf, from the uae, Kuwait and Iraq.

[B]

Yeah, yeah. And there's no way that the Chinese could make those floating roofs not, not sink as expected, is there?

[A]

I'm not really aware that there is a plausible. I have been thinking about it as well, to be honest, when I was scratching my head on the data, but I'm not aware that there is a plausible way how you can do that. You can convert them into a fixed roof tank. But then again, this is not Something you do in days or weeks, that's a longer term term project. So I do trust this data and I think it's. And the fact, as I mentioned before, all this flexibility they have in the domestic energy system, also cutting back product exports, running refineries lower and so on, makes it a credible overall picture.

[B]

Yeah. Well, David, what a pleasure to have you on. When should people contact you? When should people use Vortex's data? Data?

[A]

Yeah, whenever they want to know what's going on in the global oil and gas market. And evidently that I think is important for many use cases. I think there is a lot of interesting insights in our data that goes actually beyond the core uses of the industry players that want to track the vessels individually, the cargoes, individuals, the storage tanks individuals. This aggregation of our data data into this macro time series that are good demand and supply indicators. I think there is really a lot of value in that.

[B]

Fascinating. Okay, well David, hopefully we'll have you back on and over the summer in that very consequential September and you know, get it, get another take from you. But real pleasure to have you back on. I'll put links to Vortexa in the show notes and yeah, you know, well, this story isn't over.

[A]

Yeah, thanks Paul for having me. It was a great pleasure. Looking forward to the next opportunity. Thank you.

[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. Com.