Getting to the Bottom of the Barrel: Understanding Volatile Oil Markets, with Helima Croft

Notable Quotes

• European dependence on energy from Russia: “Europeans are uniquely exposed to Russian energy. Germany is the case study for this, given the fact that they take about 34 percent of their oil imports from Russia, 32 percent of their natural gas, and around 50 percent of their hard coal imports. They have really serious economic exposure to Russian commodities. A number of powerful leaders in Germany have very strong, long-standing ties to Russian commodity corporations. Gerhard Schröder is the poster child for this, given his role on the boards of Nord Stream and Gazprom, and his involvement with Rosneft. The Germans are in a bind about how much they want to punish Russia, potentially putting themselves into a recession.” (10:18)
• Getting on board (or not) with Russian sanctions: “I was struck by the difference in the way Emirati officials were talking about the Russia conflict at the Global Energy Forum in Dubai. The United Arab Emirates’ oil minister Suhail Al Mazrouei said, ‘Look, we have no intention of asking Russia to leave OPEC.’ He also said that the world essentially should not be seeking to take any supply off-line; that we should be focused on affordability; and that if we were to go in for more serious energy sanctions on Russia, energy would become unaffordable. He also said something on the public stage which I thought was really interesting: that Western nations should not be sending weapons to Ukraine and prolonging this conflict. I thought that was a divergent message from what you hear in Western nations about how this conflict should be conducted, as Western nations are very focused on arming the Ukrainians. You have a major Middle Eastern oil producer saying, essentially, that’s not the right course of action.” (15:18)
• Strategies for maintaining energy stability: “The Saudis have said, ‘Look, we’re going to continue as planned with putting barrels on the market. We’re not going to blow up this OPEC+ arrangement right now.’ That’s why the United States had to announce the largest release from the Strategic Petroleum Reserve in history. There’s 180 million barrels—that’s going to add a million barrels per day for six months. The United States—the White House—made that decision, I think because they recognize that the traditional call that they place to Riyadh in a situation like this is going to be sent to voice mail right now.” (25:36)

Top of the Stack

• The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources by Javier Blas and Jack Farchy
• Syriana the movie
• Crude Volatility: The History and the Future of Boom-Bust Oil Prices by Robert McNally

The Full Transcript

Daniel Raimi: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future. I'm your host, Daniel Raimi. This week, we talked with Dr. Helima Croft, a managing director and the Head of Global Commodity Strategy and Middle East and North Africa Research at RBC Capital Markets. Helima is a leading oil market analyst. In today's episode, she'll help us understand what's happening in the volatile oil market. Our conversation ranges from Russia to Europe to China to Saudi Arabia to Texas and beyond. Helima will unpack how the Organization of the Petroleum Exporting Countries (OPEC), Ukraine, and the US government have responded to today's prices, and give us an inside view from her recent travels in the Middle East. Stay with us.

All right, Helima Croft from RBC Capital Markets. Thank you so much for joining us today on Resources Radio.

Helima Croft: Thank you for having me on.

Daniel Raimi: So, Helima, I've followed your work for quite a while, and I imagine many of our listeners have as well, but I don't know how you actually got interested in working on energy in the first place. Have you been interested in this stuff for a long time? Have you come to it in your professional career? What's the background of your story, getting into this stuff?

Helima Croft: Well, I did a PhD in economic history at Princeton, and I actually was covering a number of commodity-producing countries—Nigeria, Saudi Arabia—as part of my coursework. My first job out of my PhD program was at the CIA; I joined right after 9/11. I was part of a group looking at worldwide threats to oil disruption, and I was very focused on the West African oil-producing countries. We were tracking supply disruptions there, the consequences for global markets and for US foreign policy, particularly as we were heading into the Iraq War, when we had a Venezuelan oil disruption. So, energy security has really been something I've been focused on for 20 years.

Daniel Raimi: That's so fascinating. I did not know that. We won't ask you any state secrets or anything on today's episode.

We are going to talk today about energy markets, which everybody listening knows have been really tumultuous lately. There's been historic volatility. I'm hoping you can get us started with a little bit of historical perspective about this volatility that we've seen—not just in the last couple months, but over the last couple of years with COVID, especially in the oil and natural gas markets. When we think about the scale of volatility in both of those markets in recent years, is there precedent for what we've experienced? And if so, how would you characterize this moment compared with those previous moments?

Helima Croft: If we just think back to the last two and a half years, we have experienced tremendous volatility, particularly in the oil markets. If you think about what happened with COVID, which was the largest collapse in demand that we've ever witnessed: During this collapse in demand, we actually had a price war between two of the largest oil-producing countries, Saudi Arabia and Russia, where they essentially flooded the oil market at the moment demand was collapsing. Then, we had to have this historic agreement between OPEC producing nations and non–OPEC producing nations, to really do the largest supply cut in history to stabilize the oil markets in 2020, because there was a concern that, essentially, US shale production was going out of business in that price environment. Donald Trump got very, very involved in brokering this big OPEC+ cut.

Now, we fast-forward to the situation we're in with, again, one of the world's largest oil and gas and commodity producers—Russia—involved in a war with Ukraine. And we have questions about what is going to be the impact in terms of potential Russian supply disruptions because of sanctions. We've had so much volatility driven by pandemics and geopolitics. We've had a significant amount of investment coming out of the oil and gas sector. So, we've had a tight fundamental backdrop this year as we are having this major geopolitical event, that's really roiling markets right now.

Daniel Raimi: Of the high prices that we're seeing in the oil markets today, how much of that would you attribute to the Russian invasion, and how much of it would you attribute to preexisting issues related to relatively low investment rates and tight supplies coming from other parts of the market?

Helima Croft: Just think where we were in February, before Russian troops crossed the border. We were already looking at oil prices in the 90s, predictions of triple-digit prices, simply because of the fact that you had this economic reopening as people got back on planes, they got in their cars and drove to work; people thinking about it as a post-COVID world, or when COVID becomes sort of endemic, and the uptick in economic activity not being matched by a significant uptick in global oil supply. Investment in the sector collapsed in 2020, and you have a situation now where a number of key oil-producing countries have struggled to raise output. As I mentioned before, we had this big OPEC decision to cut production. They are now putting barrels back onto the market in a coordinated fashion, but a number of those nations—Nigeria, Angola—they're struggling to reach their monthly OPEC production levels because of lack of investment.

And right now, we want to think about which countries are sitting out there in the world with spare capacity. And as we define spare capacity, that's the barrels that you can bring on in 30 days and keep on for 90 days. It's really only a couple countries right now that can actually surge production. Principally, Saudi Arabia is the one sitting on the most barrels right now. The United Arab Emirates (UAE) has a couple hundred thousand. But if we think about what is the spare capacity out there, when we think about the sovereign oil producers, we're probably talking about 2–2.4 million barrels that can be brought to this market relatively quickly. That's why there's this concern about Russia—because as countries continue to think about taking sanctions on Russian energy, there is growing concern that you may not have enough supply to fill this hole if we start to see very serious Russian supply disruptions.

Daniel Raimi: Yeah, that's great. Just to give people context who don't follow the oil markets closely, global oil demand is in the neighborhood of 100 million barrels per day. I think it's a little bit below that at the moment, but that's the order of magnitude that we're thinking about, globally here.

Let's talk about Russia for a moment. Government sanctions from the United States and self-sanctions from some major oil and gas companies have certainly affected Russian oil exports. But one thing that I'm not totally clear on is how much Russian oil has physically come off the market and how much is simply being exported to different destinations.

Helima Croft: This is a great question. This is something that is being challenging to get a handle on the full scale of Russian disruptions. Because as you mentioned, there has been this self-sanctioning process. As energy companies have cut their ties with Russia, Western energy companies, as you've seen—shipping firms, trading houses, banks—all say, "We're not going to be involved anymore in the Russian energy business." We have had reports that, potentially, a million or a million and a half barrels of Russian exports are not finding a home because of self-sanctioning.

But at the same time, if you look at some of these key important countries like India, we've seen them ramp up their Russian imports. Russian barrels are selling at a discount of around $30 a barrel. And so, for India, which is very focused on securing cheap energy supplies, Russia looks like an attractive partner. They also have a strong historic relationship with Russia, in terms of Russia being a major arms supplier to India. Russia has provided India support on issues like Kashmir. For India, the economics of taking Russian barrels right now is pretty strong, despite President Biden's requests that they desist from doing so. So, there are no indications yet that India is going to curtail the Russian purchases. We also have reports that Turkey is ramping up purchases of Russian crude.

To me, the interesting question is going to be, Are we going to get to a situation where not only do key European countries that import lots of Russian oil, like Germany, decide that they're going to wind down those purchases—but is the United States going to take active measures to try to restrict key Asian countries from importing Russian barrels, essentially taking a page from what was done with Iran, by applying secondary sanctions. And it's secondary sanctions that would essentially say to a company like Reliance Industries in India, "You can continue to do business with US-regulated institutions and access US capital markets, or you can take Russian oil." We have not made that decision yet to go down that path.

I think the White House is reluctant to really restrict Russian oil exports at the moment—that there are heightened concerns about inflation. But if we see further atrocities in this war, if we have, God forbid, a chemical weapons attack in Ukraine, I do think there's going to be momentum to implement much more serious Iran-style sanctions on Russia.

Daniel Raimi: That's really interesting. It's worth thinking—and you noted this in your answer—that we're not just talking about India and China that are still buying Russian oil. It's Europe, as well. There's still a lot of barrels flowing to Europe.

Helima Croft: Absolutely. This has been the heart of the dilemma for Europeans. The Europeans are uniquely exposed to Russian energy.

Again, Germany is the case study for this, given the fact that they take about 34 percent of their oil imports from Russia, 32 percent of their natural gas from Russia, and around 50 percent of their hard coal imports come from Russia. They have really serious economic exposure to Russian commodities. A number of powerful leaders in Germany have very strong, long-standing ties to Russian commodity corporates. Gerhard Schröder is the poster child for this, given his role on the boards of Nord Stream and Gazprom, and his involvement with Rosneft. The Germans are in a bind about how much they want to punish Russia, potentially putting themselves into a recession. This is the heart of the dilemma for Europe. As they talk about the need to isolate Russia, they also are facing concerns about what would be the economic cost of doing so.

Daniel Raimi: Yeah. And Gerhard Schröder is the former prime minister of Germany—is that right?

Helima Croft: He's the former chancellor. Yes.

Daniel Raimi: Former chancellor. Okay. I’ve got to get my terminology straight here.

I could ask you so many more questions about Russia and Europe, but I'd like to ask you about the Middle East, because I know you've recently returned from a trip where you spent a couple weeks in the Middle East, talking with some of the major producers.

Can you give us a sense of how OPEC, as a unit, is responding to the higher prices that we're seeing in the market, and what some of the drivers are of the different responses? And also the different coalitions within OPEC and the disputes that are going on within that body.

Helima Croft: This is such a great question, because I think back to November of 2016, where you had this marriage between OPEC and Russia, and now we have this OPEC+ producer group that is cochaired by Russia. Russia and Saudi Arabia are the two cochairs of this massive producer organization.

There were real questions when the war commenced in February: Would Russia be able to retain its role within OPEC? Would OPEC be pressured by the United States to increase production beyond the 400,000-barrel-a-day monthly increase they've been doing since the summer? And right now, there are no indications that the key OPEC countries like Saudi Arabia and the UAE are prepared to break ranks with Russia. The Saudis have talked about wanting a new security partnership with the United States. Energy would be part of a broader conversation about the US role in helping Saudi Arabia, for example—safeguard key energy facilities from attacks by Houthis, potentially assisting the kingdom with the development of a civilian nuclear program.

The Saudis have raised concerns about the potential Iran deal—that it would not address Iran's behavior in the region. They would like to have a broader conversation with the United States, and they would like to know that the United States is going to be a reliable security partner before they do something on oil policy, which would essentially dismantle this OPEC+ arrangement that has been in place and largely functioning since 2016.

What's interesting to me is the other issue the Saudis are making as well, which is about spare capacity, which I just mentioned. They point to the fact that, in the run-up to the financial crisis in 2007, remember, we had oil basically go to $147 a barrel. In that run-up to that really high price point in 2007, we had OPEC actually increasing production. And then, traders would focus on the fact that. as OPEC increased production, that there was a really razor-thin, spare capacity buffer in the market.

Every time OPEC added barrels, traders said, "Well, wait a second. If there is actually a supply disruption in a place like Nigeria, where there are militants attacking oil facilities, who can put more barrels on the market to make up for that, if OPEC is essentially already surged output?" What the Saudis are saying is, given that we do not know the trajectory of this conflict with Russia, we don't know the full extent of the Russian losses, because we could be looking at far more serious sanctions. If we were to use our firepower now, what would we have at our disposal if the crisis gets worse? Could we essentially lose control of the market? The Saudis, I think, really are concerned about this issue of not using your spare capacity now, when you don't know what's coming.

The other country in the equation, which I think is very interesting though on the oil side, is the UAE. I was struck by the difference in the way Emirati officials were talking about the Russia conflict at the Global Energy Forum in Dubai. UAE’s oil minister Suhail Al Mazrouei said, "Look, we have no intention of asking Russia to leave OPEC." He also said that the world essentially should not be seeking to take any supply off-line; that we should be focused on affordability; and that if we were to go in for more serious energy sanctions on Russia, energy would become unaffordable.

He also said something which I thought was really interesting, where he said on the public stage that Western nations should not be sending weapons to Ukraine and prolonging this conflict. I thought that was a very divergent message than you hear in Western nations, obviously, about how this conflict should be conducted, as Western nations are very focused on arming the Ukrainians. You have a major Middle Eastern oil producer saying, essentially, that's not the right course of action.

The UAE, they're basically saying, "Look, we want the conflict to end," but they're not publicly breaking ranks with Putin, either.

Daniel Raimi: Mm-hmm. That's fascinating. Just one point of clarification for listeners who aren't oil nerds like us and don't know all the OPEC members by heart: The OPEC members are Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, UAE, and Venezuela. And then, this “plus” group that's led by Russia. But I think it also includes a couple other Eurasian countries—is that right?

Helima Croft: Right. Interestingly, it includes countries like Kazakhstan and Colombia, as well. It's a much larger and more fulsome producer group. Mexico is in there, as well. What I think is interesting when we talk about some of the other producers is, we're actually seeing (besides the Russia situation right now) that several other important OPEC+ countries are facing production issues, as well, which is also exacerbating this precarious global-supply picture. So, for example, Libya is having more unrest in its oil-producing region.

We've had a number of ports and oil fields closed by armed protestors in the Eastern region, we've lost around 550,000 barrels of Libyan exports, which could potentially expand to a million barrels. Kazakhstan has had problems with one of its largest pipelines, a CPC [Caspian Pipeline Consortium] pipeline, which carries 1.2 million barrels a day of oil through that pipeline. That pipeline has essentially been off-line since March. We are also facing a situation where, because we already have a very tight supply situation, we now have the potential loss of significant Russian volumes. Additional supply outages from countries like Libya and Kazakhstan will only fuel further concerns about a high oil price.

Daniel Raimi: Yeah, that's so interesting. And Mexico and Colombia, as well, having their own production issues for a variety of complex reasons. There was a note that you wrote to RBC clients recently that focused on a recurring question that I think comes from an old Pete Seeger song, which is, “Which Side Are You On?” Can you tell us what that question refers to in the context of OPEC and why it's important for this discussion?

Helima Croft: I was struck by that, as I mentioned. I spent two weeks in the region at the end of March, and that became the soundtrack of the trip. For example, when we were in Saudi Arabia, as we were landing, there was a series of new Houthi attacks on key Saudi energy facilities. The ministry of foreign affairs had taken the rare step of actually warning that Saudi production was at risk. The refrain from the Saudi officials was like, "Look, you're asking us to increase production. And we're seeing our facilities attacked by cruise missiles and drones. We know Iran is sponsoring the Houthis, and it's some of their equipment that's being used. United States, if you want our oil, which side are you on in terms of our security interests?"

And then, we went to Doha for the Doha Forum. One of the opening speakers at the Doha Forum in Qatar was Ukraine's President Zelensky. And you had Ukraine’s deputy foreign minister there on stage, and they were issuing this clarion call to Middle Eastern producers to increase their production. They were really framing this in incredibly moral terms, in terms of, "Look, every barrel that Russia can bring to the market is adding billions of dollars, collectively, to Putin's war machine. And we have to defund that machine." So, they were really saying to the regional players, please help us out in terms of whatever you can do, in terms of additional oil and gas supplies.

The sheer fact that the Qataris had those speakers on the stage at their most important security conference, I thought was very telling. But certainly in the sidelines of the conference, you also heard concerns—you know, Qatar is a major exporter of liquified natural gas—that there isn't a lot of spare gas out there to surge into Europe, to displace Russian piped gas.

They said, "Look, we're going to do what we can in terms of not diverting the supplies that we're already sending to Europe, but Europe takes up 15 percent of Qatar's LNG [liquid natural gas]." And they're saying, "Look, we don't have that much more to give, because the rest of our gas goes to Asia under long-term contracts. So, think carefully about the sanctions you're looking to impose on Russia, and think carefully about whether countries like Germany can deal with the economic fallout from those sanctions."

Then, as I said, we went to the UAE, and it was just, to me, so striking, the public tone that Emirati officials were taking again: don't disrupt Russian oil exports, don't supply weapons to Ukraine. Then, you had at the Global Energy Forum, which is sponsored by the Atlantic Council, you had again, Ukrainian officials there, like the CEO of the big Ukrainian energy conglomerate DTEK.

He again said, "Look, we absolutely need to go for energy sanctions, because Vladimir Putin is getting about a billion dollars a day in revenue from oil and gas sales. You have to cut this off." And you had the former foreign minister of Spain on stage with him, saying, "Look, we cannot afford in Europe to cut off these energy imports right now. We don't have alternative suppliers; give us time." And the CEO of this Ukrainian company said, "Time is not on our side. Every barrel of Russian oil is a bullet in the head of a Ukrainian baby." It was so stark, the way they framed this issue around energy. And to me, that's why “Which Side Are You On” really was ringing in my ears those two weeks.

Daniel Raimi: Yeah, absolutely. So let's cross the Atlantic now and think about the United States for just a couple minutes. There's been a lot of speculation about whether and to what extent US oil production will be able to respond to the high prices that we've seen recently. I think, to my eye and to some other folks who I've heard from, the US response has been maybe surprisingly slow, given the high prices. The rig count has not increased as quickly as some may have expected. What's your view on the potential future for US production, if oil prices remain at their elevated levels in the $100-per-barrel range?

Helima Croft: We expect US production to grow by over a million barrels a day this year, but the issue about the United States (and we saw this so many times) is that shale is not Superman. When you have a major supply disruption, the United States does not sit on spare capacity. We are not central bankers of oil. If you have a major disruption in the market, you have to place the call, the country that sits on spare capacity, and again, can bring on oil in 30 days and keep it on for 90. That call has to be made to Riyadh. That is why you've had, starting in August, frankly, when Jake Sullivan, the national security advisor, was asking for more OPEC barrels because they were concerned about prices at that point. But that's why you've seen this intensified push with the White House, sending delegations of US officials to Riyadh to press the case for more barrels.

Yes, the United States will grow, but it takes about six months from when a rig gets put to work until you start to see additional barrels. So, yes, the United States will grow, but that production is going to be coming more at the tail end of the year. It's not going to immediately address the supply disruption from Russia. The shale industry is also facing the cost-inflation pressures that we see everywhere. Frac sand is expensive, crews are expensive—getting people who had left the sector in 2020 during the downturn and took other jobs, getting them to come back to working in the oil and gas industry. Their response is going to come, but it's not ever going to be the immediate fix with the supply problem.

What we've seen is, the Saudis have said, "Look, we're going to continue as planned with putting barrels on the market. We're not going to blow up this OPEC+ arrangement right now." That's why the United States had to announce the largest release from the Strategic Petroleum Reserve in history. There's 180 million barrels—that's going to add an additional million barrels per day for six months.

The United States—the White House—made that decision, I think because they recognize that the traditional call that they place to Riyadh in a situation like this is going to be sent to voice mail right now. The US producers are going to grow, but not as quickly as needed. The release from the Strategic Petroleum Reserve was a way to try to calm the markets and put supply on, because they didn't have a lot of better options out there.

Daniel Raimi: Yeah. That's fascinating. You've alluded to this, but can you give us a little bit more detail on why that call is going to voice mail right now, from the White House to Riyadh? There are multiple factors, but can you give us some of the big ones?

Helima Croft: Certainly. The relationship between Riyadh and Washington was strong during the Trump administration. You think about the relationship between Jared Kushner and Crown Prince Mohammed bin Salman—it was reportedly very strong. On the campaign trail, then-candidate Biden made several statements about essentially having a serious reset in the US-Saudi relationship, and not in a way that would be [amenable] to friendship. It would basically be saying, "Look," (I think he actually said) "We're going to make Saudi Arabia a pariah on the campaign trail."

Now, you've had this situation where they've had to walk that back and make, again, these significant appeals to the Saudis. And the Saudis are saying, "Look, you know what? While the media focuses on this issue of, will President Biden call the Saudi Crown Prince Mohammed bin Salman?"—who is essentially running the country already—they're saying, "Look, it is not just about a phone call. It's about the fact that we used to have this strong security partnership with Washington. And we would like that partnership restored before we can have this conversation about disrupting a production arrangement that has held pretty well since 2016."

Daniel Raimi: That's so interesting. How much of the tension might also be chalked up to the ongoing efforts of the Biden administration to bring the United States back into the Iran deal?

Helima Croft: Oh, yeah. This was, again, when they talk about a security partnership, I think part of the reason why they're looking for a security partnership is that they have concerns that the nuclear negotiations with Iran are going to be very narrow and not address the core security concerns, which is Iran’s sponsorship of armed groups in the region. It's frankly not just the Saudis that are saying this; we heard other officials at the Global Energy Forum saying, "Look, while the West focuses on the nuclear threat, for us, the biggest concern is Iran's sponsorship of militias throughout the region that destabilize a variety of governments." So, the Saudis, the Emiratis, and obviously the Israelis have expressed concern about a deal that would leave Iran able to fund these groups, sponsor these groups, and not address what they see as a core security concern. I think Iran hovers over everything in these conversations about a security partnership.

Daniel Raimi: Yeah. Fascinating, well Helima Croft of RBC Capital Markets, we've been talking for almost thirty minutes, but it's felt like five minutes. It's been such a fascinating and fast-paced conversation.

I want to go, now, to the last question that we ask all of our guests who come on the show to recommend something that you've read or watched or heard. And I want to just put a quick plug in for a book that keeps coming to mind as you've been speaking, which is from a few years back—it's Bob McNally's Crude Volatility.

Helima Croft: Oh, he's amazing. I cannot recommend Bob McNally higher. He's the best. I actually traveled with him a lot in the first couple months of 2020, that very fateful OPEC meeting where you had the Russians and the Saudis fail to agree. He's an extraordinary market analyst.

I also strongly recommend Javier Blas's The World For Sale, which looks at the role of commodity trading houses in the market. And as we think about, now, Russian oil—the role of the big trading houses and moving this product—I think it’s going to be increasingly under the spotlight.

But the last thing I would say, I think it's always worth revisiting, is a movie that thinks about energy in the Middle East and politics. I think it's always worth it, when you want to watch something at home—I always recommend looking up Syriana, and just going back and thinking about the tangled security energy picture that it tells.

Daniel Raimi: That's great. Yeah. I remember I watched Syriana a long time ago, and I haven't revisited it. So maybe that'll be on my weekend viewing list.

Helima Croft: It's really worth revisiting.

Daniel Raimi: Yeah, cool. And you get to look at George Clooney for 90 minutes.

Helima Croft: Right? Not so bad.

Daniel Raimi: Not so bad. Awesome. Well, Helima Croft from RBC, once again, thank you so much for coming on Resources Radio and helping us understand the fascinating and complex world of the oil market.

Helima Croft: Thank you so much for having me.

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Resources Radio is a podcast from Resources for the Future (RFF). RFF is an independent, nonprofit research institution in Washington, DC. Our mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. The views expressed on this podcast are solely those of the podcast guests and may differ from those of RFF experts, its officers or its directors. RFF does not take positions on specific legislative proposals.

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