Javier Blas: Rising oil prices don’t reflect physical availability, the energy crisis could escalate soon, and geographical proximity affects crisis response | Odd Lots

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Key takeaways

There is a significant disconnect between rising oil prices and the actual physical availability of oil.
Current oil price quotes may not accurately reflect real transactions due to supply chain issues.
The ongoing energy crisis has the potential to escalate significantly in the coming weeks.
The duration of an energy crisis is crucial in determining its overall impact on markets.
Geographical proximity to oil supply sources affects how quickly a crisis is felt in different regions.
In a severe crisis, some countries might face situations where oil cannot be obtained at any price.
Brent crude is not a true representation of the average global barrel of oil, especially for Middle Eastern oil.
Significant tension is observed in the market for refined products, particularly in Southeast Asia.
The disconnect between crude oil and refined product prices is due to lost production in both areas.
The refining market acts as a buffer between crude oil shortages and consumer demand, leading to extreme pricing.
Oil market dynamics during crises highlight the complexities of supply chain disruptions.
The geopolitical landscape can significantly impact oil supply routes and market stability.
Historical energy crises provide context for understanding current market conditions.

Guest intro

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities, based in London. He previously served as chief energy correspondent at Bloomberg News and commodities editor at the Financial Times. He co-authored The World for Sale, a book on the secretive world of energy and commodity trading.

The disconnect between oil prices and physical availability

There is a disconnect between the rising oil prices and the actual physical availability of oil.

— Javier Blas
The financial world and physical oil supply are not aligned, causing market confusion.
It feels also like there’s this disconnect between what’s going on in the financial world and what’s going on in the physical world which I don’t get.

— Javier Blas
Understanding the dynamics of oil pricing is crucial during crises.
Market prices often do not reflect the actual physical supply of oil.
The real issue on pricing is that while sellers and buyers can quote almost any price nothing is actually getting out of the gulf.

— Javier Blas
Supply chain issues make market discussions more academic than practical.
Misleading market quotes can obscure the true state of oil availability.

The potential escalation of the energy crisis

The current energy crisis could escalate significantly in the coming weeks.

— Javier Blas
Historical precedents show that energy crises can worsen over time.
The current crisis is still in its early stages compared to past events.
It’s bad and it could get really bad… give it a few more weeks and certainly we will get there.

— Javier Blas
The length of a crisis is critical in determining its impact.
We are still at it four years later… that was about eight months… at times we forget how long other crisis were.

— Javier Blas
Market reactions are influenced by the duration of an energy crisis.
Understanding past crises helps in assessing potential outcomes for the current situation.

Geographical impact on oil crisis response

Proximity to oil supply sources affects crisis response times.
The closer that you are to that location the more action you need to take because you typically depend more of that flow of oil coming from the Middle East.

— Javier Blas
Regions closer to supply sources feel the impact of disruptions earlier.
Geographical distance plays a role in oil transportation dynamics.
Countries near conflict zones may face more immediate supply challenges.
Understanding global oil supply dynamics is crucial for strategic planning.
The speed of crisis impact varies based on geographical factors.
Oil transportation routes are influenced by geopolitical tensions.

Extreme scenarios in oil supply disruptions

In severe crises, some countries may not obtain oil at any price.
In an absolutely full blown crisis where we have the strait of Hormuz closed for many months… we can get into a situation that no matter what you are offering for a barrel of oil no one is willing to sell.

— Javier Blas
Geopolitical instability can lead to extreme supply scenarios.
The closure of key supply routes can exacerbate crisis conditions.
Understanding geopolitical tensions is key to assessing supply risks.
Extreme scenarios highlight the vulnerabilities in global oil supply chains.
Strategic reserves may not suffice in prolonged crises.
Market stability is heavily influenced by geopolitical developments.

Limitations of Brent crude as a benchmark

Brent crude is not representative of the average global barrel of oil.
Brent is just effectively a short term for the average barrel in the world and it’s not really the average barrel that comes from the Middle East.

— Javier Blas
Different benchmarks exist for oil pricing based on geographical relevance.
The limitations of Brent highlight the need for diverse pricing metrics.
Middle Eastern oil is not accurately reflected in Brent pricing.
Understanding benchmark limitations is crucial for market analysis.
Regional differences in oil quality affect pricing benchmarks.
Accurate pricing requires consideration of multiple market factors.

Tensions in the refined products market

The price of refined products is where we are seeing significant tension in the market.

— Javier Blas
Southeast Asian markets are experiencing extreme refined product prices.
The disconnect between crude and refined prices indicates supply issues.
What matters really is the price of refined products and there actually we are beginning to see particularly in the east in the southeast Asian markets some very extreme prices.

— Javier Blas
Lost production in crude and refined products contributes to pricing tensions.
We have lost not only a lot of crude oil production but we have lost a significant chunk of refined production.

— Javier Blas
Understanding the dynamics of crude versus refined markets is crucial.
Market demand and supply chain disruptions drive refined product pricing.

The refining market’s role as a buffer

The refining wall is acting as a buffer in between crude oil that is not there and consumers that they have not yet realized that the crude oil is not there.

— Javier Blas
The refining market attempts to balance crude shortages and consumer demand.
Extreme pricing is a mechanism to reconcile supply and demand gaps.
The refining market dynamics highlight the impact of supply constraints.
The refined market is trying to basically get that two together and the way that it can only do it is by extreme pricing.

— Javier Blas
Understanding refining market mechanisms is key to analyzing oil industry trends.
The buffer role of refining markets is critical during supply disruptions.
Consumer awareness of crude shortages influences market dynamics.