00:00Dan Streuven at Goldman Sachs writing, any hypothetical restriction to the exports of U.S. refined products would likely increase
00:06product prices in Europe versus the U.S.
00:09Dan joins us now for more. Dan, good morning.
00:11Morning.
00:11You've modelled this kind of stuff. What does it mean for domestic prices? Let's start there. What would it mean
00:15in the short and medium term?
00:18Yeah, so I think domestic prices, especially in the U.S. Gulf Coast, places like Texas and Louisiana, would very
00:24likely come down because you have more supply.
00:27There are four questions, however, to ask. One, how confident can we be that prices also drop in places that
00:34are net importers, such as the U.S. Gulf Coast and the West Coast?
00:39Presumably, some of the barrels should get there as well. So probably the answer is prices come down there as
00:45well, but probably more slowly and less so.
00:48The second question is, if this is a temporary measure, is there a value in storing the barrels and just
00:55waiting to resell them at higher prices once the export ban is lifted?
01:00And if so, does that limit the downside pressure on prices?
01:02Third, is this negative for refinery production, including for gasoline?
01:08And of course, gasoline prices are critical for consumers as well.
01:12The president might try to leverage the Defense Production Act to limit the negative pressure on refinery production and forth.
01:19Are there other tools in the policy toolkit available to reduce diesel prices, whether it is energy ceasefires in Russia,
01:27Ukraine, the Middle East,
01:28or asking European partners to release diesel strategic petroleum reserves?
01:33Do you think we get four? You said number four. Do you think we get number four?
01:38It feels like the diesel prices are at such a high level and that we're so close to the midterms
01:43that something is likely going to happen.
01:46But which of those policy options is just very difficult to predict?
01:49There's a lot of pressure right now, though, for the president to act when it comes to the embargo because
01:52of especially some of the senior people who are calling for it.
01:55If he were to act and do that, or Congress has to come back and do that, what would be
02:01the most opportune time to get prices as low as they could right before people go out and vote?
02:07I think early voting has started in some states.
02:11So yesterday.
02:12So, yeah, we do think if significant change is happening in energy policy, whether it's product export restrictions, a Mid
02:18-East deal, a Russia-Ukraine energy ceasefire,
02:21the time to do it is probably now or in the next few days at most weeks.
02:25Can you explain that if we were to have an embargo on diesel, what exactly is that going to be
02:30for gasoline prices?
02:32Yeah, so if it's only a ban on diesel exports, then pretty quickly U.S. diesel storage would fill up.
02:42And therefore, all the things equal, lower diesel prices would incentivize refiners to reduce their production.
02:48And because gasoline and diesel are usually produced together as a bundle with some flexibility, it would like to reduce
02:55the availability of gasoline.
02:57And then unless you couple it with a restriction in product exports of gasoline, gasoline supply available in the U
03:03.S. would decline and prices would rise.
03:05So these are pretty complicated policies where it's very important to think about, you know, do you do it across
03:10products?
03:11Do you do a ban or a quota?
03:13What's the horizon?
03:14Do you combine it with other measures incentivizing refiners to keep producing?
03:18So it's fairly complicated.
03:19And so the comment from Secretary Besant to study this seems appropriate.
03:24It's another word.
03:25Study it for...
03:26Diplomatic, Dan.
03:27A chunk of time ahead of the midterms.
03:29The midterms happen and then, oh, yeah, guess what?
03:30We're not going to do it.
03:31I am wondering, let's say nothing changes.
03:33And let's say they do not cause...
03:34They don't enact any kind of ban.
03:37How high would diesel prices go, given how significantly they've been rising over the past couple of weeks?
03:43Yeah, so diesel margins are already at record high.
03:47Our base case is for some moderation in diesel prices.
03:50But we do think that the risk of escalation in the Middle East is pretty high.
03:55In part because we are measuring, estimating that 80% of pre-war Gulf oil export volumes are back.
04:04The dark flows, the ship-to-ship transfers are working.
04:08And from an Iranian perspective, this limits the upside pressure on prices and therefore might incentivize further energy infrastructure escalation.
04:19And if that happens, diesel prices could rise even further.
04:22Although we're already seeing significant demand destruction and refiners switching really hard to diesel.
04:27Where are you seeing the most demand destruction?
04:29Because it seems like from an economic activity standpoint in the United States, you're not seeing it so much here.
04:34No, the most in China.
04:36With limited damage to economic activity because of the incredible ability to switch to power, coal and de-stock, very
04:43high crude stock inventories.
04:45To some extent in Europe, diesel demand in Europe is quite weak.
04:48But U.S. demand, especially gasoline demand, is incredibly resilient, consistent with the broader resilience of the U.S. economy.
04:54Can we finish on the weather?
04:56Which might sound crazy, but how lucky are we that hurricane season has been quiet so far?
05:00Very lucky.
05:02It's not completely over yet.
05:03And we're also very focused on El Nino, which could cause some significant supply downside across many agricultural markets.
05:11It's not completely over yet.
