Overview of Rory Johnston on How Oil Could Surge to Over $200 a Barrel
Episode: Odd Lots (Bloomberg) — Hosts: Joe Weisenthal & Tracy Alloway — Guest: Rory Johnston (founder, Commodity Context; University of Toronto)
Recorded March 9. The episode examines the rapid oil-price surge after strikes in the Middle East, why product markets (jet fuel, diesel) have spiked ahead of crude, whether prices could reach $200+/bbl, and the policy and geopolitical dynamics that could amplify or relieve the shock.
Key takeaways
- The market is facing a uniquely severe physical supply shock centered on the potential closure of the Strait of Hormuz — historically the most consequential single risk for oil flows.
- Products (jet fuel, diesel) are already experiencing extreme price spikes because refiners are cutting run rates to avoid running out of feedstock; that preemptive behavior can amplify shortages quickly.
- If flows through the Strait remain shut for weeks, the world could face a supply gap equivalent to the peak COVID demand loss (c.20 million b/d). That magnitude could push prices far above current levels — Rory cites scenarios where $200+/bbl is plausible if the disruption persists.
- Strategic Petroleum Reserve (SPR) releases are politically fraught and logistically limited; even large releases can’t fully substitute for lost physical flow or immediate refinery feedstock needs.
- Policies like export bans or price controls intended to blunt domestic pump pain risk creating domestic shortages and longer-term distortions.
- A major near-term geopolitical consequence: Russia is structurally better positioned to supply incremental barrels and could reassert itself as a swing producer, altering geopolitics and sanction dynamics.
Context (what moved prices so fast)
- Brent rose from roughly $72/bbl the weekend before the strike to about $100/bbl within ~10 days.
- Singapore jet fuel briefly traded above $200/bbl; product markets in Asia saw immediate, extreme responses.
- The core problem: inability to route ~20 million b/d through Hormuz is not easily solved by market arbitrage (it’s a physical choke point).
Why product prices moved before crude (refinery dynamics)
- Refineries buy crude and produce gasoline, diesel, jet fuel — each product has its own supply/demand.
- The worst-case for refiners is running out of crude feed; restarting refineries after a shutdown is costly and slow.
- To preserve runway, refiners (especially in Asia) proactively cut run rates to stretch inventories → immediate drop in product availability → product crack spreads surge (jet fuel spiked most because inventories were thin and airline demand is concentrated).
- Crude inventories take longer to reflect the physical loss (cargoes already en route), so product markets can lead the pain.
The $200+ /bbl logic (how that number becomes plausible)
- If the Strait remains effectively closed, buyers will keep bidding prices higher until either:
- demand is forced away (widespread demand destruction), or
- risky and expensive ways of moving oil (ship insurance, escorts, reroutes) become economic.
- Rory’s reasoning: a prolonged, large physical gap requires extreme price signals to reallocate barrels globally — the longer it lasts, the higher the price required to rebalance supply and demand.
- Historical analog: even in prior “tanker wars” the strait never fully stopped; this full stoppage scenario pushes the system into uncharted territory.
SPRs, policy options, and pitfalls
- SPR releases can blunt price spikes but:
- Global SPR capacity and flow rates can’t fully make up for a 20 m b/d stoppage.
- Political reluctance and prior criticism of SPR use have constrained willingness to release at scale.
- Proposed responses include coordinated release, waivers for buying Russian crude, or (more controversially) export bans and price controls.
- Risks of export bans/price fixing:
- Short-term domestic pump relief could lead to storage overflows, forced production cuts, refinery shutdowns, and eventual domestic scarcity.
- Regional crude quality/flow mismatches mean exports feed other regions and are not trivially replaceable.
OPEC, Russia, and global supply reallocation
- Spare capacity largely sits on the “wrong side” of the Strait (Iraq, Kuwait, Saudi, UAE) — much of it is directly impacted.
- Russia (and buyers like India/China) may increase role as de facto swing supplier; recent policy changes/waivers could bring Russian barrels back to market or redistribute them politically.
- That shift reintroduces political leverage to Russia and could realign energy geopolitics.
Demand destruction and distributional impacts
- Demand destruction may not show up uniformly:
- Wealthier countries/consumers can absorb high prices longer; lower-income countries and industries will be cut off first.
- Prolonged high prices can pull the global economy into recession, producing broader demand losses.
- Airline and transport sectors are vulnerable; bankruptcies and rerouting of supply chains are possible.
Risks and longer-term implications
- Short-term: severe fuel-price spikes, refinery slowdowns, uneven regional shortages (especially in poorer nations).
- Medium-term: realignment of energy trading flows, greater Russian leverage, potential for protectionist policies (export bans) that can worsen global shortages.
- Geopolitical risk: escalation beyond targeted strikes could widen the conflict, prolong closures, and deepen systemic disruption.
What to watch (actionable indicators)
- Strait of Hormuz status and reports of shipping/pipeline damage or military operations.
- Iraqi, Kuwaiti, UAE, Saudi production and shut-in announcements (Iraq already reported >3 m b/d shut-ins).
- Asian refinery run rates and product inventories (Singapore jet fuel prices / crack spreads).
- IEA/G7 coordinated SPR release announcements and the size/flow rate of any releases.
- U.S. policy moves: SPR release, export-ban talk, price-control proposals.
- Russian export volumes, sanctions waivers, and India/China buying patterns.
Notable quotes
- Rory Johnston: “This is the mother of all supply risks.”
- Rory on pricing: “We will need to forcibly kind of adjust the market to that level of demand… That’s why 200-plus is at least… the longer this goes on, the higher we go.”
Bottom line
This is a physical, systemic oil shock tied to a chokepoint (Strait of Hormuz) rather than a normal supply disruption. The shock’s real-time mechanics — stranded crude, collapsing refinery runs, exploding product spreads — make it both faster-acting and harder to fix than many prior events. If the closure persists weeks to months, extreme price outcomes (well above $150–$200/bbl as a conceptual range) and severe global economic and geopolitical fallout become plausible. The near-term trajectory hinges on whether the flow is restored, the scale and coordination of SPR releases, and political moves (export bans, sanctions waivers) that reallocate supply.