Flex Capacitor
While nobody was looking, China harmonized global hydrocarbon fungibility.
“Stay committed to your decisions, but stay flexible in your approach.” – Tony Robbins
It’s been more than 100 days since oil was supposed to spike over $150 or even $200 a barrel. And yet, as we take pen to paper, front-month West Texas Intermediate (WTI) is struggling to catch a bid above $80. All this while the market digests whether yet another peace deal exists or whether Lucy will swipe the football away yet again, robbing those convinced that only price manipulation stands in the way of their rightful oil gains. The online debate between the price-as-truth and calamity-around-the-corner crowds rages on, seemingly without end.
Our friend JJ Johnston, writer of Market Vibes, is a leading advocate of the idea that price is the final arbiter, with narrative floating downstream of it. Johnston brought his five decades of commodities trading experience to Maggie Lake’s excellent podcast The Market House late last week, and the full behind-the-paywall listen is worth the price of admission. While we don’t agree on all things, Johnston is always a trove of colorfully pertinent words and phrases, and two of his observations really resonated:
“Money is bored with misinformation, and it is not validating anything that is going on [online] in terms of prices.”
“You just can’t push the river. The market is a very natural force. You can dam it up here and there, a little bit, but everything is going to go to its level.”
Johnston is right on both counts: Markets are ignoring the hair-pulling panic on Twitter/X, and prices are deserving of respect. The open questions are why the market came to this conclusion so early and what it reveals about the long-term arc of energy prices. The day after his appearance on Lake’s show, Reuters was out with a bombshell report that seemed to validate Johnston’s well-honed instincts (emphasis added):
“Since the start of the Iran war and Tehran’s announcement that the Strait of Hormuz was ‘closed,’ the market has grappled to put a figure on lost crude supply and to predict the price of oil. Initial calculations were simple: add up all non-Iranian Gulf crude oil exports, some 12 million to 15 million barrels a day, and you easily have the biggest crisis in history…
But the figure could be closer to 5 to 6 million barrels per day, sources at two major trading companies said, citing internal calculations based on producers finding ways to keep cargoes moving. Iraqi exports currently stand 2.5 to 3.0 million barrels per day below normal, Kuwait’s are down by some 1.5 million, Saudi Arabia and the UAE by some 0.5 million each, according to calculations by one of the sources.”
This fresh, lower assessment of lost supply completes a mental model we have been working on internally by fully nullifying the market-manipulation hypothesis—something we never bought into as a meaningful explanation for observable prices.
Absent severe further escalation of the conflict and assuming an eventual return to some degree of normalcy, our model predicts that China has just pressure-tested a strategy that has accomplished the seemingly impossible: Despite consuming far more oil than it produces, the country has largely insulated itself—and, by extension, everyone else—from the worst effects of extreme oil supply shocks.
Let’s explore how this came to be and what it means for energy markets in the years ahead.