Sean M. Maher on oil markets, Iran and the long path to normalisation

This transcript has been automatically generated and may contain errors or inaccuracies. It is provided for reference only and should not be considered a fully accurate record of the conversation.

Amrita

Hi. I'm super excited that Sean Maher is joining us today for is, forum. Sean and I have known each other for a very long time, but Sean has only, risen through the ranks at 66. Not only are you chief economist, but now you've also got the portfolio of heading up international relations. Super excited to have you because I think you will provide a perspective that all, all our clients, really want to understand because you are representing refinery, an asset, basically, it's a physical asset, right?

Amrita

It's not just about trading around it. Obviously you will be recording this at the end of March, when, again, things are extremely fluid in the Middle East, with the Iraq conflict. Even by the time this goes out, I mean, who knows who knows where we are? But really, the objective is, of course, we'll we'll talk a little bit about Iran, but talking about what does this mean for the medium term.

Amrita

Right. Sure. This is just another couple of weeks and there's going to be 50 years of stability, right? That means oil and gas prices are only going to go lower because we've never seen so much production before. Right? Right. But you are at the heart of this in terms of just genuinely saying, like, you are feeling, the tensions in the region with regards to product prices going up and you having to supply different regions.

Amrita

So just tell us about your views around how you're looking at this conflict. And really let's focus a little bit more on the medium term.

Sean

Sure. I think one of the things that's been, I think, most confusing about the dynamics going on is this notion that when the Strait reopens, that we're going to immediately go back to normal. And the reality is that when you look at transit times, when you look at inventories that have been drawn down, you know, Cod somewhere in the neighbourhood of 300 to 400 million barrels of store of inventories gone.

Sean

That just lends itself for a significantly longer duration. So kind of rule of thumb at this point, just because we're already nearly a month into it, is every day that this goes on, it's probably another month. And so I would say that and I think internally, what we're thinking is we are looking at least through the end of this year, if not into next year, for normalization around crude oil.

Sean

Higher freight rates, higher prices as countries are rebuilding inventories, if not bringing inventories to higher levels than they historically had. But then you've got products, right. So clean products is even more problematic because the refining kit globally was already running at high utilizations and running very well. So in order to rebuild the inventories that have been depleted, they're coupled with being able to satiate demand that comes back.

Sean

It's just going to take a lot longer to rebuild that. And natural gas is just unfortunately going to be a real problem for a long time with the fact that we've lost essentially 20% of global LNG and there just isn't a quick fix for that. So the I think that we're looking at something that's going to be structurally bring this market structurally higher for the better part of the next couple of years, and there is no quick fix.

Sean

And the the reality is that the, the US is pretty well positioned to weather this because we're going to be the logical, if not sole source of supply for a lot of these products. But we can't supply.

Amrita

All of them. Yeah, there's a couple of things I want to pull the thread on. Like, first and foremost, you said, crude normalization right till the end of the year. I mean, we're thinking look very similar. It might take a couple of months for the street to kind of normalize to an extent, even if it on base case now is end of April, it remains disrupted.

Amrita

And then, you know, it takes a little bit of time. But the disruption to production, right. It takes a while to bring everything back. And I think that's the thing that's been underappreciated. But the fact that you're saying that, you know, normalization from a crude flow point of view, freight, for instance. Right. Do you see US refiners because U.S. refiners also import a half a million barrels per day.

Amrita

Do you see any crude impact on the US refiners, or you think there's enough alternatives around because Asia's now pulling every.

Sean

Correct? Yes. So it's a great question. And you know fortunately I just Phillips 66 perspective. We have the majority of our product is coming from the Permian Basin or WCA. So I think less than one half of 1% of our barrels came from the Middle East. But the there is a lot of imports of crude, and they're coming from West Africa, they're coming from Guyana.

Sean

They're they're coming from the Middle East. And those prices are going to be elevated for some time. And I think your point about China pulling barrels, you know, when you think about the TMX, that what came online just a year plus ago, the some of those barrels were routed towards the US West Coast. Yeah. Now those barrels are now being pulled into China because the Chinese refining complex can run them.

Sean

And they're more than willing to pay for for access to those barrels, which is, you know, it's elevating and us, it's it's completely repositioning trade flows. So short answer question. Can you get the crude. Yes. What pressure you want exactly. And people are going to be willing to pay more just because product cracks are as high as they are.

Sean

But you, you you're going to run into to limits. And so not being exposed to that market I think is is a net benefit. And the just beyond just the access to crude. It's the freight rates. Right. We've seen freight rates elevating or rising over the course of the last year even going into the conflict. And that's just an aging fleet.

Sean

And you know, unfortunately, you know, our teams have been able to go out and actually secure more time charters to to help mitigate some of the offset of that. But the it took 6 to 9 months for freight rates to normalize post Russia-Ukraine. And this is far more extensive than that. And it crosses all products, all vehicle classes, whether it's crude clean products or LPG.

Amrita

I mean, I'll come back to I want to go to products as well. I'll come back to this. But I'm hearing Ian's is now trading dated Brant plus $30 to go to Asia, right. These are the things that I don't freight. Apparently we've run out of all the vlcc is that can carry the crude to Asia.

Amrita

Because the pull has been so much. We are seeing off from axis going through the Panama Canal like this is unheard of stuff. But again, equally, this is the biggest disruption in the history. Products wise, you said that, you know, it could take even longer. That's our view. For instance, and to your point on, there is no, excess refining capacity anywhere in the new capacity that was coming online.

Amrita

We think now it's probably going to get delayed because these were all in the east of Suez. So we if assuming the demand doesn't come off, which is a big if when you come on to that at the end, we think it might take us to the end of 2027, even if we manage to run a little bit extra because of the product hole that we are creating.

Amrita

Yeah. So you mentioned you write in saying that the US is insulated, but there's going to be pull on the US products internationally and domestically in the course. Right. So how do you guys balance that then.

Sean

Yeah. So going into going into the conflict we we saw incremental clean product yield right. So incremental clean product supply. So you've got crude capacity. You adjusted for clean product yield and you adjusted for time. Call it 300 or 400,000 barrels a day 2026 to 2524 1726. And demand we saw some in neighbourhoods. Yeah, 600 to 700,000 barrels a day for for incremental clean product.

Sean

The the so the market was already tight. Yeah. And we're already running at you know, high 90s clean product yield utilizations. And rule of thumb is every 50 basis point move in clean product yield utilization is about 25 buck 50 to the margin. So how do we manage that. How do we think about it. The the key is to make sure that you're up and running right.

Sean

Reliability and flexibility are critical right now. And so if you just want to make sure that your assets are running and able to deliver as much to the market as you can, because yes, Gulf Coast is going to now be pulling barrels into I mean, I've seen commentary about Gulf Coast going to Australia. That's that's a 40 day transition time.

Sean

Yeah, it's 15 days from Asia. So you just think about how these this market has got to readjust the the the impacts are are huge. The waiver of the Jones Act for 60 days. You know that is a net benefit with respect to being able to bring some product up into the northeast. Know there's four refineries in the northeast.

Sean

We've got Bay, which has the largest FCC, but the vast majority of the product that comes into that market is imported, whether it's on colonial or otherwise. And then the West Coast, now you're taking your product from you were taking product from Singapore and bringing it into the, you know, Southern California market. You're bringing it from, you know, the Bahamas.

Sean

And for around you're bringing it through through Panama. So the the answer is you're going to bring that product to the market. That's going to give you the highest netback. And I think the way that we're handling it and the way that we're thinking about it is, you know, we are going to take advantage of opportunities when they present themselves.

Sean

And that's the advantage of the footprint from the commercial side that we've been able to build out, where our teams can have a cargo going to light em and redeveloped it to Europe in the middle of the Atlantic. Yeah. So it's but you've got to be up and running. And that's where, you know, the execution is critical. Operational excellence is important.

Amrita

But I think what you've also done a B 66 is not just the on the refining, the downstream side, but because you've set up that ability on the operational and trading side right, to be able to manage that. I think that that really puts you in a very, very privileged position.

Sean

I think. So I think it's like it gave us it gave us a little bit of insight with respect to the freight market and being able to do that. I mean, we we were one of the, I think first to actually have long term tenders and to India that announcement in February. And so we've already got that presence in the global market.

Sean

We've already got some familiarity. Like we're still building and expanding that. But the the call on us hydrocarbons, it doesn't really matter what it is. But liquid hydrocarbons natural gas is only going to go up. Even when this normalizes. India is not going to feel comfortable taking 80% of its LPG from the Middle East anymore. Yeah, you're not going to be as heavily reliant on Chinese naphtha.

Sean

You're going to or Middle Eastern. Excuse me. Yeah. So the the call on on our system is going to be significant. However we have bottlenecks. Yeah. And the logistical bottlenecks are real. And it's defined as export capacity and and and crude oil. We're already, you know, close to if not at peak crude oil exports. I think there's a lot of commentary about how you can get another half million barrels a day or a million barrels a day, but you've been a Houston ship channel.

Sean

You know what happens when there's fog delays, the timing of the logistics of being able to make that perfect transition.

Amrita

Day after day after.

Sean

Day? Yeah, I mean, you can do that for a week, but you're not going to be able to do that for a month or two months. Right. But so it's the same thing with LPG. The US already exports 2.1 2.2 million barrels a day, 800,000 barrels a day, more than than the Middle East. But you're not going to be able to take that significantly higher without a lot more takeaway capacity.

Sean

So the the end net effect is prices are going to be higher. And the call on that US molecule is going to be greater. And it is a we've talked about this right. This is a global market. So we're very fortunate in the fact that we've got access to supply. And we're very fortunate that the supply and the production is here.

Sean

So we're going to have a net benefit with respect to, you know, transit and freight and differentials if you will. But we're still going to we're still part of the global ecosystem.

Amrita

And I think that's the almost the most critical point. Like it's we've kind of made at what you are saying is that there is a difference between because the US is flush with energy, there shouldn't be any shortages. But that doesn't mean you don't have to pay a higher price because it's a global market. It's an integrated market.

Amrita

So I've been thinking about this. Look at Asia, right. We've had bans, product export bans from China. India just now today came out and put a tariff on exports. So that's going to I mean yes, Reliance's export refinery is probably exempt from what we understand. But still that's going to be, you know, nobody's going to want to export.

Amrita

Thailand's doing this. Korea is the one I'm watching because they've so far capped exports. But if they if they run out of crude that can go down in West Coast is completely exposed to that. So from your point of view, your Gulf Coast molecules will get pulled into the West Coast if that happens, quite a lot in Europe.

Amrita

Get starved. We are already counting diversions to Africa because Africa, we used to get a lot of diesel from the Middle East. Right. So there's already a fight happening. And then suddenly Latin America is going to be like, what about us? So yes, it puts you in a very, very fortunate position. But that doesn't mean the price isn't going up.

Amrita

And I think that's the distinction to make over here.

Sean

Yeah. And that's one of the things that, you know, you hear people talk about well the strait will reopen, it normalizes. And it's that's just not the reality and the dynamics that we're experiencing. You've been in this industry a long time. I've been in this industry a long time. We've all thought about the Strait of Hormuz closing. Right.

Sean

It's always been this black swan narrative. So to actually watch it play out real time is surreal. Yeah. And the the scope and order of magnitude of what the recovery from this is, is significant. And you're redefining global trade flows. You are redefining the economics. You're going to accelerate rationalizations. And so market Europe is extremely exposed to this, whether it's from crude pricing.

Sean

So feedstock costs are going up and turf is going to remain elevated for an extended period of time, which is going to further disadvantage. You know, that complex. And then you've got the you've got the petrochemical complex, right. That all of these things are structurally.

Sean

Breaking the system and we'll we'll recover. Right. I mean, but it's.

Amrita

Going to take over.

Sean

Yeah, exactly. And so when you start thinking about don't want to be all woe is me. And so I mean it, it is going to be something that we're going to have to adjust to longer term. The the world is going to continue to grow, but people are going to rethink how they manage inventories, how they manage supplies and where that's coming from.

Amrita

So on that, right? I've been thinking about this. Do you get a scenario where inventories keep going up because people choose to hold more inventory, but prices are also higher? Or the fact that I think what's going to happen is the historical correlation between inventories and structure is going to break down where we are still backward dated, but people just want to hold inventory because after what's just.

Sean

Happened, I think, I think at least for for some period of time, I mean, people have a tendency to forget. So, you know, whether that's for three years, five years, I don't know. But I do think that you're going to end up with a higher inventory balance across the system. I mean, just think about what happened when the street closed.

Sean

Countries in Southeast Asia were going into force majeure and rationing production within days. Yeah. That's not that's not sustainable. And that's something where they're going to look back and say, this is something that I need to do differently on a on a go forward basis.

Amrita

And you think you've kind of hinted at this, but you think Americans, and particularly the US, benefits on a more like thematic structural basis as well because investment money will they versus the Middle East. You think that that money now comes and gets allocated in the US?

Sean

I think so because and you know, I've been at Philips for the better part of a couple of years, probably two and a half years at this point, you know, 15 years plus or minus on the buy side, ten years on the sell side. One of the things that I found really fascinating about the 2020 Covid period was this, this anti energy narrative.

Sean

Yeah. But the reality of having access to some of the longest reserve life, lowest cost basins in the world and the infrastructure, the the pipelines, the connectivity to take that, that product, that feedstock and turn it into the usable product that the market and global economy demands for growth. So, you know, whether it's gasoline, diesel, jet fuel, LPG is like so the the value inherent in that is only going up.

Sean

And I think that the world is kind of realising that the this is a an industry that really does drive global economic growth. And it's it's kind of funny when we're building out data centres for AI. Well, how how are all of those materials getting for northern Mississippi? They're going on diesel trucks. Yeah. Right. And so like the the lifeblood of global economic growth will continue to be liquid hydrocarbons.

Sean

And you need the facilities to transport process refine and and ship it. And again we're well endowed with between Permian you know WCS it to to help facilitate and enable that economic growth.

Amrita

Yeah. I mean I'll do a quick segue there because I want to give you credit for the fact that you talked about the demand, like just the fact that it's going to be a liquid hydrocarbons will continue to grow. You and I have had conversations about, I think there were a couple, even just a few years ago.

Amrita

Right. Peak demand theories out there. All right. Gasoline. And you were like, this is nonsense. Which is exactly how it's turned out to be. Yeah. I've never seen you that vocal about a topic, but, but equally a.

Sean

Tendency to do.

Amrita

No, but I think you were absolutely spot on. I think people just the frenzy around EVs, etc. had gone up quite a lot. So, it just talk me through, you know, what made you so confident that those numbers were wrong would be also, do you worry now with, look, we're going to have higher prices for a while, right?

Amrita

Do you think we go back to a period where, you know, renewables becomes something that people just end up kind of going towards?

Sean

Yeah. So my view on it all along was energy demand is going up. Right. There's 7 billion people in the world that don't have access to the resources that we do in the US, where we consume 21 barrels per person per year of crude oil. Right. In India it's 1.3 barrels per person per year. And that economy is growing at 7%.

Sean

We're growing it too.

Amrita

Yes, you can imagine.

Sean

So we need all of it. The, the the dynamic that I see today. And I saw back then was this race to adopt new technologies when they're subsidised, doesn't inherently hold water when those subsidies go away. Absolutely. And that's exactly what we've seen, whether it's in the US or in the different countries in Europe, went to China. Whenever you've taken away subsidies, sales fall off a cliff.

Sean

And frankly, the there's a place for electric vehicles, but it it's not. They're also extremely expensive outside of China. And so it becomes a luxury product. But I think that the other thing, the other dynamic that people had not appreciated or really haven't thought about is the US, Europe and China have been in contraction, for the last two and a half years.

Sean

So the largest economies in the world are in a contract, are in contraction mode. So is demand weak because there's we're moving to these, these new products or as demand weak because economic growth, economic growth is anemic. Right? I mean, the the the delta in terms of Chinese economic growth in 2030 relative to 2019 and 20, $24 trillion, right?

Sean

That's the fourth largest economy in the world that went away because of, yeah, because of Covid. So, I just I was of the view that the adoption of these new technologies was, was interesting, but it was constrained from a, from a capital perspective. And your people also, you were always very sober about this. So I, I always appreciate it.

Sean

But there are a lot of groups out there, organisations, firms that were had hockey stick type, adoption curves for, for everything. And I'd say, well, what on what basis. On what basis? Well, it's just because that's what policy mandates are. But we can see policy mandates will change. And you've got governments that are burdened with that. And so that that starts to become a real issue in terms of this adoption.

Sean

But you know, we think today and you know, Kevin Mitchell, our CFO, loves to give me a hard time because I keep kicking the demand curve to the right. But, I mean, even year on year, we see our gasoline demand forecast, throughout our long range plan is up 500,000 barrels a day through the end of the forecast period, simply because even we've taken down our EV adoption, which was already below everyone else.

Sean

And the shift to hybrids like gasoline demand in Europe last year was up 4%. And people are looking for what's the most economic way to have transport that's reliable and efficient. And the the the fleet is getting older. Right. That it's just it's hard to see how we how we get there. Your question to do we go back to it.

Sean

Well, I think that there's going to be a bunch of people who are looking to buy a car right now and they're going to say gasoline prices are $5. I'm going to go buy an EV. Okay. Well, electricity prices have gone up by in some markets, 30% year over year. The trajectory for electricity prices in the US and globally is not lower.

Sean

And we have infrastructure issues. All of this manufacturing, all this data centres, all the AI is is predicated on electricity demand growing. And if you go back over the course of the last 30 years, yes, there's volatility in gasoline prices. But they're lower today than.

Amrita

They were 30 years. Absolutely on a inflation adjusted basis.

Sean

And so if I'm buying and if I'm buying an EV I'm basically saying I'm okay with my electricity bill going up, you know, 10% a year for, you know, the life of my car. And I think that's a challenge.

Amrita

And I think the point to make tying this together is exactly right. I think we forgot or people often forget affordability is at the at the heart of this because people tend to talk about, you know, the environmental impacts and everything else but affordability. Ultimately, for every person, regardless of whether they're an emerging market or not, is what drives decision making, right?

Amrita

That's that's effectively the point. But since we are on the topic of demand, are you worried about a recession?

Sean

Yeah. It's. Yes. Yeah. We I think that you have to be when you think about the potential extension of this conflict, and I think that we're at a point right now where if we are able to come to some sort of resolution where the street does start to reopen in the next three months, you know, you're probably going to lose, you know, one percentage point on an annualised basis in global GDP.

Sean

And that that's a that's a problem. But we'll we'll recover from that if this goes on for another six months. And you are talking about a true global recession or.

Amrita

A stagflation potentially.

Sean

Or stagflation. And, and that's where, nobody wants to get there. Right. And it does. It's not good for any industry. But the the is something that we are we are front and centre is front centre in our mind. And we're we're paying a lot of attention to we're not there yet. No, we're not seeing demand destruction. We are certainly running the scenarios of what it looks like if prices down.

Sean

But there's a it's a it's an interesting dichotomy or divergence right now where there's a lot of conversation about concern about demand. Yeah. When you look at the data, purchases are still going high. Right? So people aren't acting as they're speaking. And unfortunately part of that is everyone likes to think that, oh, the street will reopen tomorrow. It will be it will be solved.

Sean

And we just have a I think we've all gotten very accustomed to it's the immediacy effect. Yes. And that's, that's, that's where the I get nervous as we think about the future.

Amrita

And I think the other issue is a bit like you said, the Asia's already doing it. There's rationing going on right now as we speak. It's just that it it's not hitting the West, and it probably won't kill me because of the time lags associated with it. But, you know, when I think about this trade and if I'm thinking about the fact that, it's not just oil, it's not just products, it's on gas, fertilizers.

Amrita

Right? Chemicals. I do worry about just the burden of energy across the supply chain. I guess the Hormuz carries and what that does to to the economy. And it's funny you mentioned that, you know, we've this is the black swan event. We've all been I was lucky enough to sit down and chat with Mark, your CEO, last week.

Amrita

And I asked Mark this question. Mark, you've been in this industry for long enough. You know, people keep talking about the Hormuz, like why this has been everybody's nightmares. Why are we surprised? Why are we not prepared? I mean, literally when he said it's one of those black swans, you talk about it all the time, but you never think it's going to happen.

Amrita

Right? And that's exactly why. Like, it's so out there. And that's why I really like I couldn't agree more with you that people are just like, because, you know, it's so hard to even fathom we are here. It's like it's got to get resolved. It's going to be open tomorrow, right? But that's almost thinking about it backwards, right?

Amrita

Just because you don't think it's good for the economy doesn't mean it's not going to happen, correct? Yeah. No. So, I'm conscious of time. But I'm going to still ask you, like, kind of last thoughts, right? In terms of we are genuinely in a crisis, right? In terms of where things are different countries will feel differently.

Amrita

That's fine. But for the for the medium term, like, how are you guys going to be like, are you going to reduce your long term numbers or the scenarios? Oh, I mean, you know, full disclosure, we've actually paused our long term update right now because you can't you just can't come up with, do you know what three different scenarios of what happens?

Amrita

But maybe just around what are the key things we should be watching for. Right. Like whether it's supply, whether it's demand, how the industry changes over that over time. Because this is to your point, will completely redefine how we look back or on trade flows, on investments. And it probably will take us a lot longer to recover than, you know, all of us, I think.

Sean

So it's a great question what to watch because there's so many variables out there. And so the first thing that you're going to look at is the manufacturing data, right? And you're going to look at how countries are, look, stimulating their economies or attempting to reinvigorate their economies. You mentioned India earlier. And again, conjunction with the adding the excise tax.

Sean

They also cut the local tax. Yeah. That, that, that consumers are paying. So you're going to you're going to watch the manufacturing data. We're going to watch freight rates. You're going to watch does the fleet start to normalize. And I think when you start to see freight rates come down, then you can feel that there's some normality returning to the system.

Sean

And you can that's your glide path of of returning to normal. But right now the variables and the scenarios we were running, I'm running scenario models where, you know, our forward curve over the next couple of years on margins is ridiculous, right?

Amrita

Well, margins have to roll up right now. Right.

Sean

Yeah. And but you know, to to how extreme this event is. So take kind of seven commodities that we cover and look at. This has been the 99th percentile move higher in one month for the seven seven months that were that we're talking about in history, you've never had all seven move this much in the same month.

Amrita

And can you tell us what do seven.

Sean

Yeah. So it's WTI. It's Brant Rbob diesel naphtha propane and natural gas. Wow.

Amrita

Yeah.

Sean

Yeah. So wow it's this is this is something that is going to completely reshape the energy industry and go for basis. And I think that the importance of that that US ecosystem, the US hydrocarbons, we we're very fortunate to be able to to provide that energy and improve, you know, those lives globally. But it's going to be a big call.

Amrita

Yeah. Well thank you, Sean. I think, you know, the things we've talked about, I think we're going to all look back. This is going to be one of those conversations where what.

Sean

Happened.

Amrita

What happened in between. But still, I think this is exactly what we will need to look for, right? The normalization and what happens. Because to your point, we are in unprecedented times, and it is going to completely redefine how we look back and look at the industry going forward as well. So thank you so much. I know how busy you are, so inspiring the times.

Amrita

Thank you so much, I appreciate it.

Sean

Thank you, thank you.