Why Oil Prices Are Headed Lower, Not Higher w/ JJ (Alyosha) | For The Record

[00:00:00]Hi everyone. Welcome to the Market House. For this episode of For the Record, I sat down with John Johnston, author of the Aliocha Substack. If you've been reading JJ's Market Vibes, you know he has a lot to say on the misinformation and false narratives he sees circulating around. For him, price is the truth, and what the charts are telling him is very different than what he's reading online. We sat down to discuss.

[00:00:23]>> Hey JJ, how are you?

[00:00:25]>> I'm good. I'm good.

[00:00:26]>> Good. So, we haven't chatted in a little bit. So, I'm really curious to see what you think about the current environment because we have a ton going on.

[00:00:38]And one of the things I love about your Substack is that you keep us all honest, right? You call it like you see it, uh and you say what you think. You you're you're sort of not afraid to break from the crowd if you think there's a there's sort of, you know, a sort of false narrative out there. And one of the things you pointed out recently is that there is an enormous amount of misinformation that's all over the place on platforms like X and everywhere else because there's so much pay-to-play, buy your likes, all that kind of stuff. So, when you look across the markets, what do you think investors are getting wrong, or where are you most focused these days?

[00:01:16]>> Uh well, just looking at market prices, right? Which is my my muse.

[00:01:22]Uh There are two two big things happening. One is one is the thing that's not happening, and that's oil.

[00:01:32]You know, there's a bonfire of of people's hair, but there's just not a lot of, you know, low volume, falling open interest, uh tremendous amount of of uh energy is put put into the idea that we're we're going to run out of oil, and we're going to run out of oil really quickly. So, I I I push back very, very hard on that.

[00:02:02]Um and the other thing that I think is is very important is the effect that AI already has on equities and some of the bigger capital markets.

[00:02:15]So, you know, I always ask myself whenever I trade, I like like who's on the other side of my trade, right? So, I have a pretty good idea if I'm trading crude who's on the other side of it.

[00:02:23]It's some dude in in Houston or a hedgie or you know, maybe an oil desk at at one of the major center banks, but you know, oil is is a is still very much a human market. It It It can be algorithmically modeled for CTA stuff like box to box, you know.

[00:02:44]If If the system wants crude, you know, it'll it'll just be a constant presence of acquisition, but the you know, we have you know, a hell We have front running you know, episodic front running going on. I think the Fed kind of plugged that hole. He found out who it is and he called him and he said, "Look, you know, stop it." And so, we haven't seen any oil at all.

[00:03:06]Uh Um Gold is really, you know, I traded all my life, so I and silver, so I have a good understanding of what it's messaging and it's Gold is just not excited at all about some of the of of the uh hyperbolic uh noise going on because there's really frankly not a lot going on.

[00:03:30]You know, uh I It's uh Look at me.

[00:03:34]Gold is balanced to sound responsive to almost everything that we hear coming from the straight out of the White House news.

[00:03:40]What happened, you know, when when uh you know, Trump attacked Iran, I guess, on March 1 or February 28th.

[00:03:47]Uh Gold went down.

[00:03:49]Immediately. That night.

[00:03:52]And it fell fell 500 bucks in the next 2 days, you know.

[00:03:58]Um the bond market, which has never gone down in a war since 1950, it's always been you know, a safe haven responsive, went down.

[00:04:09]Uh be I I I'll take a guess at that later on. I'll just kind of like uh sketch out the landscape.

[00:04:18]And um the stock market, you know, uh retreated reluctantly in March. Uh but you know, it got bored with that.

[00:04:29]And around, I guess April 3rd, it just went up.

[00:04:33]Said, "Yeah, okay.

[00:04:34]You know, you guys, you know, you have your little pity party or or, you know, panic and thing. Uh we're buy we're buying stocks today. And boy, are we buying stocks.

[00:04:44]And you know, so we had a vertical rally for about 2 weeks where, you know, you said to hold your nose and buy. Just put your head down and get something, you know, cuz every day it was So, when I saw that, I thought, "Okay, you know, real money uh money is money is bored with, you know, uh misinformation and it's not validating anything that's going on in terms of prices.

[00:05:13]You know, so >> That's so interesting. So, do you think that So, let When you say money is bored with misinformation, do you think that the uh commentary that we're in a danger zone, a red zone in June, that all of the cushions that were put in place around the strait are kind of run out, and you know, the rubber's going to hit the road, and we're going to see these shortages everywhere. You don't buy that. You don't think that we are in a in a kind of crisis, even if it's a little bit delayed around, and that the market's too optimistic about Iran. You You think it's done.

[00:05:48]>> Well, a couple of points, you know, with the cap prices markets and so forth, you know, when we had the war spike in Ukraine, uh we had uh we had pretty thin inventories.

[00:06:00]And uh you know, prices went up. It was election year.

[00:06:04]So, Biden sold some, you know, uh he sold about the same amount that we're going to we're going to dispose of and I'll I'll I'd like to you know, articulate the huge difference between what Biden sold oil is what he did, you know, he just he said, "Hey, it's my authority to do this.

[00:06:23]We're going to sell 180 million barrels." And he sold it, right? So, while he was selling selling uh OPEC was cutting barrels.

[00:06:31]>> Mhm.

[00:06:32]>> The same time. They I think it was their first tranche of like 2 million or something like that. So, those two things were kind of offsetting.

[00:06:39]Um so, when this happened, uh coming into 2026, you know, global global inventories, commercial and official, were really high.

[00:06:50]Um the EIA estimated them in late January, early February at about 8.2 billion barrels.

[00:06:57]And, you know, that's a big round number and it's been kicked around a lot because a lot of people don't understand it and it's really boring for a guy like me to like, you know, you know, imagine to try to talk about that at a cocktail party.

[00:07:11]>> [laughter] >> Let me tell you what's really going on with global oil supply.

[00:07:15]>> Yeah, and a lot of people, you know, I I um I don't baby my readers at all.

[00:07:20]I write it in a professional way, I think. I would try to, you know, I'm sometimes a little little snarky or I you know, I get a bit of an attitude about about stuff, but it's generally, you know, uh in inventories were high.

[00:07:36]Uh I you know, I think Trump knew that when he when he decided to attack in February, Um um uh America has become an energy fortress, the largest producer, explorer, refiner, with a a massively well-managed uh industry. Some of the best management of any companies anywhere in the world are right here in in Houston, in Texas, in Louisiana.

[00:08:11]Uh and uh they really know what they're doing. So, you know, prices went up. I think Jamie Dimon or someone at JP Morgan made a point on on March 2nd that uh closing the strait is going to take oil to 120.

[00:08:27]And lo and behold, they closed the strait and it went to 120. But, the entire move, the war move, the you know, apart from the lead-up where, you know, there were leaks and people got long, the entire move, high to low, occurred in 24 hours.

[00:08:44]And, you know, when it got up there, I think I'm not sure what happened. You know, you get a vertical spike like that, responsive selling, margin liquidation, blah blah blah, but it went right back down to 100, where it stayed, actually below 100, for the duration.

[00:09:03]And um throughout that time, you know, people are saying, "That's it. We're We're screwed." and everything like that. So, on March 12th, you know, I kind of bought into it. I thought, "Hey, you know, I've been doing this all my life.

[00:09:16]They shut the strait." Uh should hit the fan, right? You know? Although, I did not buy it. Something in my hackles told me this don't feel right. Don't sniff right, you know? And I I I've traded the the the big squeeze in '08. I've traded the the the uh the first war, the 1990 uh Desert Storm War. You know, I was in a pit that day. I I know what markets feel like when they when they want to go higher. It's never felt like it wanted to go higher. It still doesn't feel like it wants to go higher.

[00:09:54]And uh so I wrote a piece called uh How to Open the Strait, which I just said, "Hey, stop bombing these guys, you know.

[00:10:02]The people of Iran are not guilty, you know. It's the IRGC. And they're they're just a Praetorian Guard.

[00:10:08]And they don't care how many people die.

[00:10:09]They're like style Stalin in a way, you know. 20 million, so what? Save Russia, great, you know. Same thing for them.

[00:10:16]So I said, "Just back off, go out uh a little bit into the Arabian Sea off of Oman between there and Pakistan and put a couple carriers out there and blockade the strait.

[00:10:27]Hermetically seal it. Nothing in, nothing out. Open or closed. Have a nice day."

[00:10:33]So 5 weeks later, guess what they did.

[00:10:36]They did exactly that. And they did it with the same legal sanction authorities that the United States Navy has the right to interdict on the high seas any ship that it thinks is carrying sanctions um cargo.

[00:10:52]This worked beautifully.

[00:10:54]Um So now we're at stalemate. I don't know.

[00:11:01]Um What's happening with with with oil in in reality is is uh there's still a tremendous amount of oil in reserve.

[00:11:12]Um what they say, you know, we're going to hit tank bottom, the JPM uh piece that came out on April 30th, The Illusion of Plenty, where they said we're going to hit tank bottom, you know, by July, actually. And now they've extended it to August, then they extended it to September.

[00:11:27]Uh Jeff Currie, who was saying, you know, "Oh, it's going to happen."

[00:11:32]Now, he's saying September. So, if you push it forward, you still have, you know, the joystick of the narrative that, you know, the fear porn. Anyway, um the reality is is the 3 billion of of the 8.2 billion is is downstream uh of of crude. And crude has no value until it's refined, right? It's just It's just dirty coke.

[00:11:58]So, that's 3 billion that's in in the secondary tertiary supplies. So, you got to get it to the refinery first. The five and a half billion of that, there's 3 billion of of commercial stuff. And, you know, that's life.

[00:12:15]Uh people don't hold a lot of oil if they're in the business because it's cuz it's it's expensive, right? So, you you couldn't keep as much oil as you need. And And the the reserves, which are here, Korea, uh uh China, Japan, a little bit in Europe, um other places if you scatter them out, but those are the big names. About 2 and 1/2 billion barrels, right?

[00:12:42]So, that oil is sequestered in fault-like circumstances, readily deployable because it's break-the-glass type stuff, right? And the only uh the only uh part of that that's been drawn sat down so far is 1/4 million barrels, of which the United States represents half. Stop me if I'm being wonky.

[00:13:05]>> Yeah, no, I So, I'm I'm I'm listening to all this and and this is like the, you know, this is the problem with living in a sort of, you know, uh a tweet-driven world or a thumbnail on YouTube, is that everybody wants to, you know, they don't want to explain the intricacies of these markets that actually like the math math matters. And so, you're you're describing a situation where there are supplies that can be deployed that this is this is more of an elastic market and if I'm if I'm going to think about where you're going with this is that you think supplies can last longer than the Iranian Republican Guard can hold out with the straight closed.

[00:13:42]>> Oh, they can easily if we want them to.

[00:13:45]If we want them to. So remember, I'm old. I've been trading oil all my life.

[00:13:50]So I I'm used to this stuff.

[00:13:52]>> why you have spidey senses that tell you these things.

[00:13:55]>> Yeah, don't buy ash. You know, uh So you know, like recently uh ExxonMobil had its senior exec uh certainly not uh you know, the higher echelons are they're posting pieces saying, "Hey, we're going to run out of oil."

[00:14:09]>> That's exactly what I was going to say.

[00:14:10]This is what's feeding some of the other side of that, right?

[00:14:13]>> Exxon for 6 years. I covered ICBC and I I I you know, in China.

[00:14:18]So and I know after watching, you know, OPEC and Russia all these years, these guys want high prices. They've been desperate for high prices. A year ago in May uh uh Diamondback was was writing and it you know, oil companies usually don't don't engage in the public. They are not interested in shaping narratives, right?

[00:14:42]They want a margin between the cost of their oil, transporting it safely to a refinery, creating products to serve demand, which is pulling on them every time you pull into a gas station or turn on your heat or something like that. It's demand pull. Like any energy, if you don't ask for it, you don't get it, right? So this is really what what the industry wants, but they also like, you know, Diamondback came out and they said, "Hey, look.

[00:15:11]We're not drilling down here at 60, right? Uh you know, we'll we'll run our businesses because we're paid to produce oil, but we're not going to, you know, waste CapEx on on making it worse. Uh we're pursue preserve our capital and uh be prepared for opportunities they come, you know, as the year goes on. I think that they spoke pretty much for the for for the Texas guys.

[00:15:37]Uh There's a difference between smaller operators and I don't want to say they're small, they're very important.

[00:15:43]Um and and and big more majors like like Exxon who are double the size of CVX.

[00:15:50]So, you you know, like Venus, Earth, Mercury. Uh And they they think differently, but uh their senses of understanding what what oil is like and what it does and what it requires, you know, today to find it find it and bring it to market is is can particularly here in the United States where, you know, we have such a high level of expertise. It can be done not in weeks, but in months and a lot of it has been done. So, we have drilled and completed wells and they understand what those mean.

[00:16:26]They're kind of like, you know, they're they're not SPR, but they're available to develop particularly as as you have $100 oil. So, if you know, uh I have a lot of smart subscribers who are, you know, I get input from them and they're in the game.

[00:16:44]And rig count has been going up and rigs are not just like, you know, one hole in the ground, right? They're multi-well platform pads.

[00:16:54]So, you know, if rig count count goes up 20, you probably have 60 wells, right?

[00:16:59]And if they if they're if the properties are known, they're going to be productive or profitable at this area.

[00:17:06]So, you know, you you see those things moving and um >> So, it's quick to it's it's it's it's oil that can be can it's not being counted right now, but it's there and and will be able to be brought to market quickly if need be.

[00:17:22]>> We're doing it. We're doing it.

[00:17:24]Yeah.

[00:17:26]Yeah.

[00:17:26]>> So, it just it just occurred to me when you said this because that the the oil it and tell me if I'm wrong in what in understanding what you're saying, when the oil's executives said that and I think it was a couple, it that really got people nervous. But but if you think about it, they they want oil high, but they don't want it so high that it's going to kill demand.

[00:17:45]>> Absolutely correct.

[00:17:46]>> If if it was a real crisis, they would not be saying that because they would be sort of driving it into the area where it would they need it in that sweet spot. So, if they see that oil was drifting lower, it would make sense for them to say, "Oh, wait a minute. We don't have enough." You know, like sort of put some upward pressure or keep it slightly higher. I don't think they'd actually say that if it was an outright legitimate crisis.

[00:18:09]>> So, on March 10th, 10 days into the war, Amin Nasser, who is the CEO of Aramco, was on earnings call and he said, and I pretty much could quote this cuz I've written it a few times.

[00:18:25]Um global oil reserves are at 5-year lows.

[00:18:30]So, when I read that, I didn't I wasn't on the call. I had no interest in getting on a I would never buy Aramco stock. When I read that, I immediately got my pick and shovel and went right after, you know, every piece of data that could possibly support that kind of statement because I I knew I was part of, you know, the baggage I carry in my head every day writing about oil, that we had 8.2 billion barrels according to the EIA, which I think is pretty close to biblical gospel.

[00:19:04]You know, they they uh they survey regularly. They uh the people in the community uh the industry must report. It's compulsory.

[00:19:17]Uh they're subject to audits. If there's any sense that they're fiddling around with their data or anything, they're subject to fines. And then it's it's it's a hardball what's happening type of figures.

[00:19:30]Um at any rate, so the colder high was like 9 billion. So we're 800 million below.

[00:19:36]And you know what happened in COVID, right? Oil went down to like minus 50.

[00:19:40]So, you know, like I said, we had a lot of we had a lot of oil going into this. So when I heard him say that, liar, liar.

[00:19:50]Liar, liar, liar, right?

[00:19:52]>> Yeah.

[00:19:53]Having someone who knows the oil market as well as JJ run the numbers and come up with a vastly different conclusion than some industry executives and investment banks, I'm here for that all day long. In part two of our conversation, JJ shares his thoughts on gold, the AI trade, and advice for navigating what could be a turbulent summer. I hope you'll consider becoming a Market House subscriber. Your support makes these conversations possible.