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Crude, on track at least for now for its steepest monthly decline since 2020. Optimism building for a resumption of traffic through the Strait of Hormuz as energy producers are highlighting the risk of an extended closure. Chevron's been warning, quote, 'We will start to see physical shortages.' The CEO, Mike Wirth, I'm very pleased to say joins us in the studio. Mike, it's good to see you.
Welcome back to the program, sir. I get this question a lot. You're the expert, help me answer it. Why is crude at 100, at 90, and not close to the 200 given the strait's been shut for 3 months?
You know, it's a little hard to explain. We really are seeing markets tighten, inventories draw, demand for products around the world still very strong. I think there's this belief, and we're experiencing it again the last few days, that the end is near, the conflict is nearly resolved, and flow through the strait will resume very quickly. And that has kept the back end of the curve lower than it might otherwise have been. I think in the psychology of the market has been this is closer to the end rather than the beginning.
But what about the physical world? When will inventories be at the very bottom?
Before long. We are steadily drawing inventories down on products, on crude, in locations around the world. I think June and July are going to be critical months, and you can see the trajectory of these inventories in the data, and it's concerning.
Do you see any physical shortages right now around the world?
We do see some in some Asian markets, and we've seen some rationing. We've seen work weeks adjusted, other demand measures imposed in some of the countries in Asia. You know, markets are very efficient at moving products and barrels to where they're needed, and we haven't reached a crisis point yet, but the inertia in the system is very, very strong and turning that is not easy.
One of the main sticking points the US has when it comes to negotiating with Iran is this idea of the tolling. Would Chevron consider paying a toll?
Do you know how people are paying a toll?
I've heard reports of people using cryptocurrency in various countries. I think the Treasury has come out this week and sanctioned the new authority that has been put in place to oversee transit through the strait. It went from a toll to a navigation fee to something else.
I can't say that I know enough about any of these things to say definitively, but look, freedom of navigation through international waterways is a very well-established principle and anything like this would begin to say that countries adjacent to an international waterway can charge some sort of a transit fee. There are many other places in the world where that principle could be applied and not just to energy products, but to all freight moving through the Straits of Malacca, the Bosphorus. Pick your choke point. And so that's not a principle I think that most countries in the world would find acceptable.
How far are we away from having pipelines that connect some of these countries to the mainland and their production without having to traverse the strait at all?
Well, there's a couple that exist now that you've talked about in Saudi and the UAE. The UAE sanctioned a project last year, which is about 50% complete to get more of their production over to Fujairah and outside of the strait. So I think you'll see more of that, Lisa. The one opportunity there is countries like Iraq and Kuwait that are deeper up in the Gulf don't have access to those pipelines. And for them, the route could be through the north and ultimately then into the Mediterranean, maybe through Turkey where we see a pipeline comes out of the Caspian Sea over into the Mediterranean in Turkey. And so I do think one of the responses to this will be infrastructure investments that will allow these energy flows to avoid the Strait of Hormuz. And that's underway now and I think you'll see that in the years that follow.
We started the conversation talking about why oil prices aren't higher and you're saying that we're getting close to breaking the bottoms of some of the inventory bins. And we were speaking just a moment ago with Alex Altman of Barclays who said we actually could see a glut of oil in 6 to 12 months time if there is a resolution here based on the production levels of so many different oil companies and countries. What's your take on that? Do you think that that's a feasible interpretation?
Well, history says that shortages tend to be followed by gluts and high prices send a signal and markets work. Consumers consume less, producers produce more in response to a price signal and there's a time lag in the way both of those manifest themselves in the market. And what has happened historically is about the time that the new supplies reach the market demand may have turned down through conservation measures, economic slowdown, maybe a recession and you can see those lines cross over and the price cycles down. It's why commodity markets are cyclical is they tend to overshoot and history says when we get into one of these situations that is somewhere out in the future.
What signal do you take from the futures curve? I'd love your reaction to that because so many people have pointed to the back end of the futures curve as a prediction of markets of where they think crude will be. How does an energy boss like yourself look at the futures curve?
Not very frequently. It's not something we use for planning purposes. We do a certain amount of hedging in our business on commercial activity where you will use futures, but we don't look at futures curve as a prediction of future price. We do our own fundamental analysis on demand, supply, technology, policy, economic growth, and arrive at our own scenarios. And we don't use a point forecast or a curve, we use a range of scenarios. Prices are hard to predict in these markets, and so we don't anchor on a single price, we use a range of prices.
What's fascinating is you were talking about how typically commodity markets tend to overshoot, and then you get the glut just as demand falls off. Are we overshooting? Because what I keep hearing is that we're not overshooting. Actually, oil prices and the futures curve is remarkably low, and people keep consuming, and frankly, people like yourself are not investing in more production right now. You're not increasing production dramatically to offset some of what's going on. So, is this time different in terms of the commodity cycle?
Well, first of all, we are increasing production. Our production will grow 7 to 10% this year, which is a lot in a world where demand is growing 1% on average. And so there is investment in growth. Is this time different? You know, people say that every time, and often find themselves regretting having said that. This time, the circumstances here are things we haven't seen before. 20% of the world's energy production cut off for now nearly 100 days. A billion barrels that is not in the market that otherwise would have been in the market is not something that we've seen before. So, that part of it is different. How commodity markets respond have a pattern that has been proven through different types of shocks to the system that is remarkably repeatable, maybe not perfectly predictable, but it is something that you have to bear in mind when you're in this business as you allocate capital and as you plan for your business. These patterns exist for a reason.
When you allocate capital, I want to ask you about Venezuela. When will you put fresh dollars into the country?
