The Big Story: Oil is back above US$100. What does it mean for Singaporeans?

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Speaker A: Welcome to the Big Story. I'm Hong Bin Jeong. Oil prices have surged back above US$100 a barrel after a series of attacks disrupted key energy and shipping routes in the Middle East. A drone strike has shut down Saudi Arabia's EAS west pipeline, a key route that allows the world's largest oil exporter to move its crude without going through the Strait of Hormuz. Its loss threatens up to 4% of global oil supply. At the same time, vessels have come under attack in the Strait of Hormuz, while tensions are also growing around Bab El Mandeb, another critical route for global oil shipments. So how serious are these disruptions? Could we be heading towards a much bigger shock to global energy and shipping costs? And closer to home, what could this mean for Singapore consumers if oil prices remain elevated? Well, joining us now to share more is Mukesh Sadev, who's a founder and CEO of X Analysts. Hi Mukesh, welcome back to the show.

Speaker B: Thank you.

Speaker A: Thank you so much for joining us. Well, Mukesh, why are oil markets reacting so strongly to these latest attacks?

Speaker B: I guess the number one thing is that when the crisis happened first time in March, there were a lot of alternatives and options available like the stock drawdowns and demand was strong. Those options, the east west pipeline, the increase in the flows from outside the Middle east regions buffered some of the impact. And also the China was not an active or a strong buyer through the crisis. So that is why the oil price despite this huge crisis, didn't go much higher. Now we are in a trajectory where the main demand season of summer in the US Is almost over. The seasonal demand is yet to spike in the Asia and the winter in the Europe. And this east west pip, which was a main bypass, is somehow not working. That is why the oil prices have reacted. If this really goes long, then we will not stay probably at 107 and this could go. And there are a lot of commentators who have been talking of a $121 $45 oil price. My view is that we might not go there because now there is an activity in the Middle east led by Iran and Oman to find some solution. We have seen in these six months that we don't sustain. Bullish, bullish, bullish, bullish headlines always. There is something that comes and calms the market and US is very Much worried about the treasury yields. So US will do something to calm the markets. So fundamentally speaking, this pipeline is a big thing and the prices should have gone to much higher level. But there are other factors at play, which is the fear of some, let's say peace or calm down. That's why it's not reaching to those levels yet.

Speaker A: Okay, well, given the latest developments, are we looking at a temporary spike in oil prices or are we en route to a global energy crisis then?

Speaker B: Well, we are in a global energy crisis. But uh, the interesting thing is that the prices are not doing what they were doing before. I give you an example. Before the shale revolution started in the US, before 2014, we were in $140 per barrel oil price for many, many years. Right. It was not one year. So are we in that kind of a state at this point of time? My answer is no, because this has driven a war and it can resolve any time and things can go bad. That was driven by OPEC sort of cuts. So we don't have a very big group which is holding the oil back. We are in a war like situation. And despite the war like situation, we have all seen that there is a significant leakage happening from the Hormuz itself. And the very fact that now the Houthis are attacking in the Red Sea, this pipeline kind of gives me a signal that Iran's grip on Hormuz is already quite weak. That is why about 9 million barrels, 10 million barrels of oil is already sort of, you know, leaking from that part. And because their grip is weak, that is why they have activated the Houthis to do something in the Red Sea to put pressure. So this leakage, Hongbin, uh, is a key and micro provide some buffers to the situation.

Speaker A: Understood? Well, I mean this comes as uh, Saudi Arabia shut its 1,200 kilometer east west pipeline after it was hit by drones launched from Iraq. Now I believe the pipeline has become particularly important during this conflict because it allowed Saudi Arabia to move oil to the Red Sea and export it without having to rely on the Strait of Hormuz, as you mentioned earlier in our conversation. But how important has this pipeline been as an alternative to or mes? And just how significant is the closure of this pipeline for global oil markets?

Speaker B: There are two parts. One, this pipeline was very important for a big refinery in the Red Sea, Zizan Refinery, which was recently attacked three times a, uh, 400,000 barrels per day refinery. And if you ask me, product is more important than the crude these days because the diesel cracks have touched $9,000 per barrel. So the bigger deal is that that refinery, if it would have come back online, it needs crude oil and that crude oil comes from this pipeline. So first big loss is a uh, refinery which could have added almost 200 to 50,000 barrels per day of diesel back to the market, is not going to get crude easily. The crude used to come from in the past, from the Babel Mandeb upwards and that is already choked. Now the east west pipeline was the second bypass to get crude to the refinery. Now that is also damaged. So I think that to me hung wind is a much bigger challenge and that's why the diesel prices would have probably already an uptick at this point of time. The second part is the crude part, mhm, which is a much bigger part. And the crude has only one option to leave the Suez Canal. And we all know the Suez Canal cannot take the very large crude carriers. So there are other constraints in also evacuating the crude from there. So pipeline is one thing, but then there are other constraints which might emerge in the system.

Speaker A: With this loss of the pipeline, it threatens up to 4% of global oil supply. So help us understand the numbers here. Just how significant is losing that 4% of the global oil supply now that the pipeline is closed?

Speaker B: Very significant. I mean it's very hard to put the numbers at this point of time because this pipeline can be utilized at multiple levels. I can give you in the August, Saudi was able to, you know, in some of the weeks able to even push 6 million barrels of oil through that pipeline system. In the past Saudi was pumping around, you know, 7, 8 million barrels per day. So this pipeline had helped them a lot in recovering a lot of the losses from the Hormuz. So this pipeline is indeed a very big deal. I think the most important question is that pipelines are very long and they may have damaged a certain part of the pipeline and possibly these repairs can be done. And I think those assessments have not yet sort of come out. But if the Iranian and the Gulf countries are meeting tomorrow or maybe in a few days to, you know, find some solution, this attack might actually bring the resolution to the whole crisis even faster. And once that happens, I don't think that this pipeline repair will be a very long drown repair. Pipelines can be repaired faster compared to many other assets, so things can come back faster as well.

Speaker A: Well, meanwhile, the Houthis have tightened their control around Bob El Mandeb, um, as you've mentioned earlier in our conversation as well, which handles around 4 to 5% of global oil supply in recent months. So when you put all of this together, how much more serious does the situation become?

Speaker B: So let's first put numbers on Hormuz. I think there are a lot of numbers being put. 9, 10. I think it's a fact that about 6 million barrels per day of crude and about 4 million barrels per day of products. Almost 10 million barrels per day is not yet coming out. And the total number pre war was somewhere around 24 million barrels of crude end products roughly. So we are probably at 14. So there is already a 10 now on top. If you add the Babel Mandeb situation and the east west pipeline, I think the numbers are just sort of staggering. And the bigger problem is that US was able to provide buffer by US and other countries by drawing the stocks in the US to very low levels. But the US is also reaching a tipping point where the diesel prices in the US have touched $6 a gallon. So US also cannot bring any rescue easily. That is why US is now asking Ukraine not to attack the refineries in Russia at this point of time, because U.S. has also run out of its options. So to me, at this point of time, this price tells me that there might be something coming in form of resolution and hope is still priced in this price. What we are seeing is not pricing the full entire panic which should be there given the size of the news. I think this price is already discounting and sort of pricing some hope of resolution in the next few days.

Speaker A: Okay, well then, if the Saudi pipeline remains offline and these attacks on shipping continue, what is the next escalation point for the oil market?

Speaker B: Excellent question. I believe this whole thing boils down to US and China. And Xi Jinping is probably going to Washington in the next 10 days or so. Venezuela, Iran and Russia were the three main pillars of China, sort of an oil system. And Venezuela obviously is absolutely out of hands of China. Iran is also getting out of hand of China. So the next escalation is almost all about Russia. Now there is an interesting thing which I can share. Possibly it is very hard to predict why Houthis are activated now. The only numbers I can put is that the Russian barrels were flowing at a very high level from Babel Mandev. There was a time in July or so when the Bab Al Mandev was almost 5 million barrels per day. 2.5 million barrels per day for Russia, 2.5 million barrels per day for Saudi Arabia. When Ukraine attacked all the ports for Russia, the Russian flows already declined. And that is why I Get a, uh, sense that maybe Iran told Houthis not to act in Red Sea because it will not only damage the Saudi flows, but it will damage the Russian flows. Now the Russian flows were already damaged because of the Ukrainian attacks. So the danger or damage to Russia was not that high. That is why I believe now the Iranians have activated, probably the Houthis. Given the way the Houthis have marched forward. Hongwin, I believe that the way they are trying to capture the islands, it is possible that they may be laying the groundwork for selective flow of Russian barrels through the system while blocking the Saudi barrels. So I think the next big point of escalation indeed is Russia. And at this point of time, we don't know whether us will go that route. But other than that, I don't see any more, uh, hotspot in the world where things can go wrong after Venezuela. Iran, I think is now Russia.

Speaker A: Okay, well, do you anticipate oil prices to rise even further in the coming days?

Speaker B: Look, the data and the number crunching tells that oil prices generally do not like the 70 to $90 per barrel range. If you look at the history, either they want to go below 70 or oil prices tends to stay above 90. The 70 to is a very unstable range and that's the range we have seen the oil prices. And that tells me that when market is directionless, it stays in that 70 to $90 per barrel range and reacts to the headlines. At this point of time, I suspect that if the east west pipeline doesn't come online, if there is no resolution, and if Russia becomes the next big target because its refineries are, uh, continuously being damaged and also crude is being damaged, then yes, I guess, you know, 140, 120, 130. We can just put numbers in the air. All I can say is the higher prices is the only outcome. And because we have lost the buffers in terms of stocks that also add that any small news of problem, uh, will escalate the oil prices. The only question I think remaining now in everybody's mind is what is the oil price number needed for demand destruction? And a lot of people talk about, uh, 150, $200 per barrel. Well, the diesel is somewhere around that number already. But we haven't seen huge demand destruction by the countries. Actually what we have seen is countries have panicked and they have even bought more of the demand from a, uh, security point of view. But maybe we are going to that stage where there might be more demand response that's needed to bring the prices down, but 140 to sustain for many, many days. That's where I don't in my view is uh, unlikely.

Speaker A: Understood. I mean oil prices have already risen about 8% in a week and you know, we're seeing it now above US$100 a barrel for the first time since July. Now how exposed are we to another sustained rise in oil prices? We as in all of the consumers?

Speaker B: I think if you look at the oil price macro geopolitics, as I said, it's US and China. If US and China get a deal done and I am hearing some form of that, they are trying to find some truce because some of the US trade truce expires also very soon and ultimately US China find a way out of the market because US needs to get out of the market. China is also suffering quite a lot. And now both of the countries may start to see that if they don't end the crisis, it is not going to damage one country versus the other. It is going to damage both countries equally. That is where my hope comes, that they might come and do a deal and prevent a very long sustained price rally. But if US and China don't come cut any deal and the Middle east also is unable to find a solution, then Hongbin, yes, we are in this oil price 100 plus world for quite some time. And remember, the consumers don't put crude oil into their cars and into their consumption. It is the products made from the crude oil, the diesel, petrol, the plastics and everything. And because we have already disruption of the refineries and the petrochemical plants, just having crude back will not be sufficient. We need those machines, we need those plants to also come back and operate. Then only the prices of the products can come down, Crude prices can come down, but not the product prices in my view anytime soon. And let's put, you know, when I say anytime soon, we are talking at least a six months sustained challenge on bringing back the products to the market. The crude can come back faster, but that is not sufficient.

Speaker A: So could we see another round of higher petrol and electricity prices even here in Singapore?

Speaker B: Uh, I think so. The short answer is absolutely yes. Mhm. The only question always is, as we have seen Hangbill in the past 10 days of high oil price. And then comes the big news. The market still reacts to what happens and the tweets that come out of the Washington. Right, one big tweet, one big meeting. The oil price also can correct. But overall, yes, I would say that being prepared is better than trying to predict the markets and whether this is a temporary, whether we might get a resolution, whether the peace comes. My view is that the government, the companies, the organization, the people, everybody needs to act and prepare as if this is a much bigger and a structural problem. I think we have been now, you know, living in this space of thinking it's over, it's over, it's over is almost now six months. So at this point of time, some response in price or restrictions from the government needs to happen to as a part of the preparation for very unpredictable oil market.

Speaker A: So I mean, you mentioned that we need to prepare. How should Singapore prepare for this next potential wave of price increases and should the government be looking at further support measures now or is it too early, uh, to intervene? Given how uncertain the oil price outlook

Speaker B: is, my view is that there is enough evidence to act now. It's not that the war was in three weeks or four weeks and there is hope, I think given the asset damage that is now already happening. And also the buffers in countries like Japan and US and Europe, they have drained the stocks. And also it's not just Singapore, but there are many other countries and I live in Australia. And so far the strategy here has been to buy ourselves out of the crisis, which makes things expensive for other countries. So all the rich countries probably can buy themselves out of the crisis. So at this point of time, there is no need to wait any longer but to put in a six months to a one year strategy and consider that this is a structural disruption, consider that this is not resolved. Even if it resolves, I think those strategies will pay off and some measures should come. And of course some measure has to be on the supply side and some measure has to be definitely on the demand side. On the supply side. I think Singapore doesn't have much options but to probably do deals and you know, government to government deals or some, some kind of, you know, special arrangements to secure the barrels. Singapore in some ways is advantage is being a big trading hub compared to all the other countries because a lot of oil flows through Singapore. So I guess Singapore might do okay. But there are a lot of other countries in Asia Pacific, especially India. Um, it will be quite a big challenge because India is also losing, uh, one big part of its oil system which comes from Russia. Singapore doesn't have those kind of huge demand challenges as some of the other countries have. So I believe Singapore is little bit in a better shape.

Speaker A: All right, well, some great insights from you there. Thank you so much, Mukesh, for joining us today.

Speaker B: Thank you.

Speaker A: Thank you. That was Mukesh Sadev, who is the founder and CEO of Xanalyst. This has been the big story with me, Hong Bin Jeong. For more conversations and podcasts, visit MoneyFM893SG.