Fact Check: Oil Inventory Depletion and Global Energy Market Analysis

So, now let's go back to the refining capacity. You were talking about how these refiners are just

you know, they're jamming. They're running on all eight cylinders to the point where they're loading up the ships

and the ships can't go anywhere. So, it it's almost similar to where we were during COVID where you've got all this

oil and it's just piling up and nobody knows what to do with it. So, is that impacting the supply-demand

imbalance, let's say, that's filtering through to the price. Could that be one of the reasons or what I'm trying to say

here? Could that be one of the reasons why oil itself isn't trading at, let's say, $200 a barrel

because you've got a lack of of demand coming from these refiners due to the fact that they just can't refine any

more because it's just piling up? >> I don't have evidence it's piling up yet, at least globally. Maybe maybe some

local pile-ups, um but I'd have to search for them. So, the oldest chart in economics is price, supply, and

demand, right? So, you got your little curve and demand goes like this and it meets supply and that's the price and

and if the price is too low, well, demand will be too high, right? And conversely, if the price is too high,

demand will be low. So, right now, I'm going to say this, the price of oil is too low. And I know this because when we

look at global stockpiles of oil, it's just trundling down and down and down and down like this. So, why are supplies

going down? Well, because demand is too high relative to supplies. What does that mean? Means the price is too low.

We're still short about 3 billion barrels ish, maybe 3 and 1/2 by now, that hasn't been produced, didn't come

out of the Gulf. Yes, flows are returning, but we're still in a giant deficit

around that. Even to the extent that we have, George, seen, you know, increase in resumption of flows, which is a very

good thing. We're still watching week after week after week

global onshore and also floating inventories are just going down and down and down. Um and so that suggests to me

that we're still short uh 4 to 5 million barrels a day, which would put that That's way better than 20, okay, but

that would put it as literally as as the largest energy shock in our lifetimes. Uh just that little bit. The oil

market's super tight, super inelastic. Tiny bit too much like we had during COVID, they shut down airplanes and you

know, traveling wasn't happening. So, we just suddenly we're swimming in oil and that cratered oil famously to what?

Minus 40 a barrel for a moment there or two. >> 38, yeah.

>> Yeah. Um and that was because it was just this little temporary mismatch, you know? And in 2008, the reason it went up

is because for five out of six quarters we had a little bit more demand than supply. Not a lot, like 300,000, 400,000

barrels a day, but it was enough to start eating into above-ground inventories and that made the whole

market nervous back then. Now, I don't even know what territory we're in cuz we're way below those

levels. We we haven't seen inventory levels this low on my charts that, you know, I'm looking at either 10 or 20

years of data and it's like, "Well, we haven't been here in 20 years." Um and by the way, the economy was a lot

smaller 20 years ago. So, physical inventories are are drawn down, doesn't seem to be causing a lot of alarm yet,

but I think it's going to at some point unless something changes here. So, either demand has to fall, which could

be economic contraction, recession, that could be it. Or the price has got to go up.

One of those two things has to happen here. >> Who are your buyers for crude oil?

Because I mean, I'm no expert in this at all. That's why I've got you here. But it is right off the top of my head, it

would be like, "Okay, you've got governments cuz they want to fill up their SPR and you've got refiners."

Are there Who else buys oil other than those two guys? >> No, that that's kind of it. Those are

your big buyers. If you include the military as part of the government, they're they're pretty big bar. Um you

know. >> Okay, but if we if we have the refine if we have half the refiners offline,

then wouldn't that put a massive dent in demand? >> Well, in Russia,

>> You see what >> yes. Mhm.

In Russia, yes. >> Okay, so that could that So it I I get it. There's there's multiple variables

here and it might go down in Russia, but it would go up somewhere else. But you you see where I'm going with

that. Is is is that I I just don't know how I would reconcile that with what you're saying in the inventories being

depleted? >> Because there's still not enough coming out of the ground relative to the

consumption that's still happening around the world. Even with the wreck refiner So when Russia loses a bunch of

refineries, it doesn't stop consuming diesel and gasoline. It starts importing it. It

starts getting it from somewhere else. Um there's The one non-negotiable substance for any country is how much of

that finished product you have available to you. You don't just shrug and go, "Well, we're not going to have any

flights this week, I guess." You know, you just don't do that. So everybody's going to do what they do. And by the

way, George, there hasn't been any meaningful demand destruction. You look at the The best data I got on demand is

usually it's just the flight tracker, right? How many flights this year worldwide this week compared to last

year? Because at least that's tracked obsessively, you know? And uh it and we

have good data on that. And flights this year are up slightly over last year. You know? Uh it just tells me that that

we're not we're not at demand destruction there. Anecdotally, driving around, I can tell you I'm not seeing a

lot of demand destruction yet, you know? COVID, I saw demand destruction. Empty highways, like we were in the movie I Am

Legend. Yeah, that was obvious. I don't see it right now. >> Is is there a max capacity for each one

of these refiner I assume there has to be, right? They can only produce so much.

>> Yep. And they can only produce so much for so long, which is a a nuance to this story. The United States refiners have

been running flat out. They're about 96 97% capacity. Some of them are running over 100% if you can believe it. There's

a nameplate capacity, but they're doing everything they can to just get every barrel through. And so they've also um

really held off on their typical maintenance. So there's a lot of maintenance you have to do on these

things, right? Pipes wear out, pumps wear out. You've got, you know, catalytic beds that have to be replaced.

There's things you have to do. Um and so they've been holding that off as long as possible to just keep everything going

as much as possible. Now, what happens if you do that long enough, if they don't start getting to their

maintenance and willingly taking their their plant their refiners offline to do the maintenance, we're going to start

seeing them catch on fire. Um that's what happens when you push past your maintenance cycle on these things. They

tend to rupture, leak, and catch on fire. >> Mhm.

Wow. Okay. So you've given me a a lot to uh think about. As always with whether it's commodities, especially the

oil energy, uh whether it's FX, uh whatever it's it's a lot more complex

than most people tend to understand. >> [laughter]

>> Well, I'm worried how this is going to spill over into I mean you had your finger on it for me that it's if there's

a if there's a dark horse candidate to be the thing to get this party started, it's going to be Japan.

Right? We've all been there. >> Okay, yeah, explain. What what how why is that on your radar?

>> Well, because, you know, obviously they're they're they've been way over their

their monetary and and fiscal skis for a long time, right? And and they've just been printing and doing all this stuff,

right? So then their yields start to blow out. And I was really surprised that that the BOJ seemed to be powerless

even though I thought they were the the the JGB market. I thought they I didn't know any there were any other

players out there that could stand against the the Bank of Japan, but um we watched everything from the two to the

40-year just blow out. And then they started having trouble with their currency starting to weaken pretty

strongly. Had to intervene at their intervene. I think we had what, four interventions so far?

>> Yeah. >> Um and then you have this whole war gets started right on top of all this. Now,

again, Japan 100% importer, so roughly speaking, they're going to be spending 80 to 100% more for product this year

than they would have, you know, last year. How do they pay for that?

Got to buy it with something. And to the extent they have to, you know, use dollars to to affect that transaction,

now they've got to sell treasuries or sell yen to They got to raise dollars. And so eventually I think that, you

know, watching those yields get away from them, watching these spikes and and these wild gyrations in their currency

tells me that I think the Bank of Japan is up against that limit, which is like, pick one, guys and gals.

Save the currency, save the bonds. That's That's the decision they're going to have to make here at some point.

If they blow out their yen, woo, that's that could get That could get spicy quick.

>> I have a slightly different view. Obviously, I agree with everything that you're said as far as what the outcomes

have been. But number one, whenever I try to think about a bond market or a

sovereign debt market in terms of what's happening with the interest rates, whether it's Germany, France, you know,

that's been in the news quite a bit lately, or to your point, what's happening in Japan,

I always start by asking the question, what's happening to nominal GDP? Because if nominal GDP is going up and

going up very quickly, that would be growth and inflation expectations are increasing.

And so if the interest rates are going up along with nominal GDP or catching up to nominal GDP, and therefore

longer-term growth and inflation expectations [clears throat] are increasing, then it would completely and

totally explain why interest rates are going up, and it really has nothing to do with debt and deficits.

It has everything to do with the real risk that you have in holding a sovereign bond, which is inflation. And

growth to a certain extent. The growth is more so a function of opportunity cost, right? For for banks and whatnot.

So if you look at Japan, let's say, and look at their nominal GDP

and then look at the interest rates. Yeah, okay. I mean, it makes sense. And then what

you do is you look at I always like to look at Australia because it's kind of a a major currency and their debt to GDP

is pretty low. It's about 50% or maybe 51%. And I was doing a video the other day where I looked at Japan, Australia,

and the United States because Japan is like 230, 250 percent debt to GDP. You got the United

States kind of in the middle, maybe 100 to 120 depending on how you measure it. And then you got Australia at 50%. And

if you look at their nominal GDP and then if you look at the the movement of their interest rates over the last year,

very similar. Very, very, very similar. So that would lead you to the I mean, you're a

scientist even more than I am. And so that lead you to the conclusion that hey, maybe this is about really growth

and inflation expectation. And unfortunately, it doesn't really have anything to do

with debt and deficits. So no matter how many JGBs are on the balance sheet of the BOJ, but they own 60% of the market.

If inflation expectations are going to go up, rates are are going to go up regardless.

You know, another thing on that note, Chris, is if you look at QE1, 2, and 3 in the United States,

uh interest rates actually went up. Uh they didn't go down. And they went up because growth and

inflation expectations at the time increased because everyone thought that QE would would actually be uh

inflationary. So anyway, that's kind of how I look at those sovereign bond markets.