Oil Gains as Middle East, Russia Hostilities Imperil Flows

0:02 Bloomberg Audio Studios. Podcasts.

0:05 Radio.

0:06 News. You're listening to Bloomberg Business Week with Carol Masser and Tim Stenevek on Bloomberg Radio. One thing we were talking about yesterday at almost this exact time, maybe a little later, was an Iran-backed Houthi rebel attack on Saudi Aramco's headquarters.

0:28 We were.

0:29 We were. And interestingly enough, I didn't see oil move that much in the last 24 hours.

0:33 No.

0:34 And we know Aramco, massive. Like, I just think about how many years we were counting down to it.

0:38 That IPO?

0:39 The IPO.

0:39 And it's just been such a focus. It's crucial in terms of global energy markets. But it also, I don't know, you do wonder what is the lasting impact on global energy markets and what really was impacted and what do we know?

0:54 Yeah, this latest just adding to an escalation in Iranian attacks on tankers in the Strait of Hormuz. It's threatening a rebound in Gulf supply. West Texas Intermediate rose more than 1.6% earlier in the session. Right now, it's just about 1% to $ 95 a barrel. Brent up to $ 106 a barrel. I want to bring in Rob Barnett, Senior Energy Analyst for Bloomberg Intelligence. He joins us from Jacksonville, Florida. Rob, always good to check in with you. Taking together the hostilities in the Middle East and trying to understand how close things are to getting back to quote-unquote normal, if ever we are, after yesterday's, what, fair to call it an escalation?

1:34 Well, I think that the damage that you're referring to is just an office building. The real upside risk for oil is if the attacks start to seriously impair production, refining, or exports.

1:54 The Houthis, at least.

1:55 So far, haven't knocked out Saudi production, not in a serious way. But they are threatening routes that get that oil to market. One of the messages we've been reiterating with our clients is that Energy security isn't just about where you drill, but how reliably you can deliver.

2:19 So was that then read as kind of a warning shot from the Houthis?

2:25 Like, we know how to get to, but is that how.

2:29 It's seen and it's just a reminder? And maybe also a reminder that this thing is just going to go on even longer?

2:36 Most of the....

2:39 Oil price gyrations you've seen since the start of the year really relate to the geopolitical risk premium that's being reflected in the market. So much of your theory on the oil market today has to come down to how you see this wider conflict in the Middle East today. region either resolving or not resolving. When we run our fair value model for oil, we get a price that's much lower than what we're seeing on the screen today.

3:15 So I think the fundamentals actually could paint a bearish picture if you could get the conflict resolved. Because right now the conflict is keeping barrels off the market. You get those barrels back onto the market, there's plenty of oil.

3:30 How do we get the barrels back onto the market?

3:34 We've got to wave a wand and find a path to peace in the Middle East, it seems, right?

3:41 I think the U.S.

3:42 Has really put the world into a difficult position by kicking off the conflict. And the one saving grace is that compared with the oil shocks of the 1970s, at least today, there are– alternatives. The economy is much larger. We are less dependent on oil to drive every aspect of the economy. If you look to China, EV sales, electric vehicle sales are roaring. You look to Europe, you're seeing EVs and plug-in hybrids do quite well. So consumers are trying to find alternatives and especially with prices where they are too, there's a lot of incentive to get that oil to market. So despite all the headlines you're seeing, we've actually seen during the month of September that transits through the Strait of Hormuz we're actually approaching the pre-conflict levels.

4:46 So there's a lot of economic incentive to get the oil to the market, and it's just a matter of whether you can do that safely or not.

4:55 And all things being.

4:56 Equal, I think most parties would probably want to see this conflict resolved.

5:01 You know, it's interesting.

5:02 I was thinking about a documentary I did a few years ago, and it was about higher oil prices in the U.S. and how we were talking about I think it was the second Bush administration about introducing more ethanol. And we wanted to use corn-based ethanol and what it would do in terms of lowering prices.

5:21 And I went to Brazil.

5:22 And the 1970s oil crisis hit them so badly because they, at the time, imported something like 80%.

5:29 Of their petroleum. So they moved to sugar-based ethanol.

5:33 And I guess I think about these moments in time.

5:35 These crises... whether it's, you know, that cause us to shift dramatically longer term. Is this crisis, whether it's China, I mean, the U.S. is a little bit insulated because we've become so oil-sufficient.

5:51 Is it going to change how the world thinks about petroleum? Is this the thing that says, yeah, we've got to embrace alternative even more than we have because this just can't happen again?

6:03 Well, the short answer is yes, but maybe not quite in the way you're thinking. Every attack is basically a sales pitch for Texas, Alberta, Caracas.

6:15 We are seeing a reordering of.

6:18 The global oil supply chain, and we are expecting a rise of production out of the U.S. and the Americas generally. You know, I was just doing a little bit of history reading. This is the IEA's World Energy Outlook from 2010.

6:41 And I was just looking back.

6:42 He held it up for those listening. It's not light reading.

6:45 No.

6:45 It's not a beach read.

6:47 It's also 16 years old. So why is that important that you did that?

6:52 Well, I was curious at the time to see what was the professional view? What was the consensus opinion on where oil prices were going to be? The lowest oil price scenario for the year 2025 at that time was $ 130 a barrel, nominal. So we're actually below where professional forecasters would have pegged things 16 years ago.

7:21 Where were we with fracking then? That's right.

7:25 The industry has proven time and time again to be quite resilient in And so the things that you are going to see now is I think you are going to see this tradeoff. The barrels of oil that are in the Middle East, they're the low-cost barrels. But the reliable barrels are probably increasingly going to be seen in places like the U.S. or Canada or Latin America writ large.

7:55 So you're going to see more investment there while at the same time you're seeing China– and other countries go all in on alternatives. So I think you're going to see a little bit of an all of the above strategy, but oil is going to be in the picture for some time to come.

8:13 When you think about, you know, you talked about your oil estimates, Rob, and how it would actually get rid of this war, they would be much lower. But realistically, how are you thinking about how much longer this war goes on? I know that's a geopolitical thing, and who knows, and we've all had kind of these false expectations that we're close to an end, and then we have to backtrack.

8:33 But I am just curious what your thinking is about an end to this conflict, this war.

8:40 It's quite interesting.

8:41 Pretty much all the professional watchers of energy markets, oil markets, at the start of this conflict said one of two things. They said the conflict has to end quickly or oil prices are going to the moon. And if the conflict does end quickly, then we'll see a normalization of prices. The very interesting thing is the conflict has endured and oil prices have been growing. relatively tame and resilient despite everything happening. I think we generally encourage our clients to think in a scenario framework, our baseline or base case scenario is what we would describe as a frozen conflict.

9:28 So it's not an active war, but it is something like we're experiencing now where. You get some positive signals for a few days, then you get a drone strike and you have to reassess. This probably feels like what we could be in for a while. I think the optimistic case is that we do find some path to peace and normalization. And of course, if there is an escalation where we go back into an active complexion, prices could go much higher than where we are today.

10:02 We're speaking with Rob Barnett, Bloomberg Intelligence Senior Energy Analyst, one of my favorite games to play. Rob, is where in the world is Rob Barnett? Because I feel like over the past few years, I've interviewed you from Miami, from Jacksonville, from Washington, D.C., from New York, from London.

10:19 What am I leaving off here?

10:21 We did Seattle one time as well.

10:24 But all that to show that you are constantly on the road, in some cases living abroad, to get an understanding of these global energy markets.

10:34 Absolutely.

10:35 I did seven years in London as well. So that was also part of the mix.

10:40 I wanted to ask you, are you at the dog pound though right now? Did I hear a dog in the background?

10:48 I think you might've heard my miniature poodle. His name's Fonzie. He doesn't understand. You go on a TV or radio program. He's supposed to be quiet. He must have seen a squirrel out the window or something.

11:01 Hey, as long as he knows the difference between WTI and Brent, that's all I care about.

11:05 And it sounds like he probably does. Tell Fonzie thanks for letting us invade your space. Rob Burnett, you are incredible. Senior Energy Analyst for Bloomberg Intelligence.

11:15 We love Rob Burnett.

11:17 Where is he today?

11:17 He's in Jacksonville today.

11:19 Where in the world is Rob Burnett?

11:21 It's perfect.

11:21 That's a good one.

11:22 Check out Rob's research, the entire team's research on the Bloomberg Terminal.