So the world is talking about the conflict in the Strait of Hormuz, but it's really not about that. We do believe it's about three overlapping, shockwaves that the world is feeling right now.

Three Overlapping Supply Shocks

One, Russia-Ukraine war that stopped preventing heavy barrels and refining feedstocks from flowing to the West, Europe and the US, and that redirected those flows into the East, China, Asia and other markets in Asia.

Certainly, the Strait of Hormuz incredible short shockwave that the world never thought it could happen. And that supply shock took even more medium sour barrels out of the market, much more impactful, five, six times more impactful than the Russian supply shock.

And the third one is the fact that China stopped exporting important commodities and products into the Asian markets. And now Asia is starving for jet fuel, diesel and others.

So the importance of these three shocks is not one, it's just not the Strait, but the overlap of the three of them together that is creating the impact on the commodity markets that we're seeing today. And that we certainly believe it's here to stay for much longer because these three shocks will stay for a while, they won't go away in days or weeks.

There is not a circuit breaker here. There is not a switch we can click on and turn it on and go and pull some barrels out of other parts of the world,

The Missing Barrel Problem

Russian barrels have been sanctioned. So, the West part of the world did stop having access to those barrels. And those barrels start flowing east, primarily into China, India, and other parts of Asia. And now on top of that, we have the conflict in the Gulf and most of the barrels there are primarily medium sour barrels. And both the Russian heavies and the and Middle East medium sours, they're very important barrels for the refineries globally.

The world doesn't have enough of this medium sour to heavy barrels now. And the refineries have been upgrading and spending vast amounts of capital preparing their plants to take most of this crude and refineries right now globally don't have access to one of the most important crude molecules in the world.

Diesel & Jet Fuel Crisis One of the reasons that medium sours, heavy crudes are so important in the world, is that they allow these refineries to produce higher amounts of diesel and jet fuel. And that is why now the world and the cracks for diesel and jet fuel are just so high. It's because we don't have 1) enough crude, and then 2) we don't have the right crude so that these refineries can maximize their utilization to maximize the yields of diesel and jet fuel in the world.

Together, China has stopped exports that we talked about as a supply shock that has created a supply shock on the product side. So now not only we don't have the right crude to maximize the yields of diesel and jet fuel, we also don't have the help of China exporting their products into the Asian markets and partially Europe too.

And now that turned diesel and jet fuel into a very high demand, two products in very, very high demand. So we expect that for some of the countries, we're talking about weeks, not years of jet fuel inventory.

Why Resolution ≠ Restoration

So now it brings us to a very important point, which is everybody's talking about a resolution of the conflict in the straits. It would fix all this. And we don't believe that's the case.

And the reason why we don't is, one, we already touched. Flows are being redirected right now. Russia products and crude that used to go to the West and Europe are now going into Asia and starving the West. And then two, we do believe that the SPRs, for example, energy security is going to become a critical thematic in the world.

The fact that the Strait of Hormuz was closed is an important event because until it happened, it was always something that the world didn't put very high probability that would happen. But now that it happened, it creates, an additional risk in the markets. And freight, vessel freight will go up because crossing the strait doesn't come with the same security that it had a month ago, insurance rates will also go up. So the price of commodities flowing through the strait will increase.

Brent vs Guld Medium Sour: A Growing Pricing Disconnect

De-globalization is an important concept that deserves a discussion and addressing. We're now talking about Brent and a crude like Dubai/Oman having much more importance than what it had a month ago. You may say, but Dubai/Oman crude is an illiquid crude compared to Brent. But this still deserves the question with, will the world bring liquidity into that market?

We have the West dependent on going turning into Canada for heavy crude and We do believe that will play a very important in positive impact in Canadian energy companies because they have every crude and it's a crude in high demand. We do believe still in the West, Venezuela is now going to be playing an even more important role and an acceleration path for growing the production there will be very important for the Western hemisphere.

And so there is that separation, East and West. We'll see that for products, diesel and jet fuels staying in Asia. And we're depending much more on the US refining capacity to produce those products, diesel and jet fuel, going forward to the Western atmosphere and even to help and support Europe.

The Energy Winners Emerging Now

So we do believe the winners in terms of sectors out of all this will be certainly number one refining. The refiners both in the East and the West will benefit from this because there will be a lack one of products for some time to come and that demand will be there.

And the Canadian energy sector, it's in a perfect zip code to supply the type of crude that these refineries need in the West. You should also look at companies that are playing a leading role in Venezuela and US companies, but we have a couple of Europeans integrated. So the integrated energy space will benefit from a role that they can play in Venezuela to ramp up that production and allow the market to access more heavy barrels that most likely will stay in the West and come to the US.

But also an important sector that the world is not talking about is petrochemicals. We are positive on petrochemicals in a petrochemical recovery. I don't think we're going to see that in the next quarter or two, but we probably start seeing that towards the end of the year.

So something very important that needs addressing too is we tend to talk a lot about resources and reserves. But this is not about reserves in the ground. This is about the ability countries and companies have to flow those resources and access different markets.

The ability to flow resources is just critical. It's not the barrel in the ground, it's the barrel that can move.