00:00Jeff Curry of Carlyle writes in this, the cost of rebuilding and recovering from the Hormuz shock will be enormous
00:05and underscores the regime change towards physical assets.
00:09Jeff joins us now for more. Jeff, welcome to the program. It's always good to catch up with you, sir.
00:14Fluid environment, so allow me to go through the headline of the last five or ten minutes or so.
00:17One headline, one report coming from Iran that their energy assets have been struck.
00:21Now, I have limited information beyond that. But Jeff, from your standpoint, in the week since we last spoke, has
00:28this got worse or better?
00:31Worse. I like to call it molecular contagion. You know, last week we were talking about shortages in Singapore.
00:38You know, spices of jet fuel spiked to two hundred and thirty dollars a barrel this week.
00:42It's in Rotterdam. Rotterdam's two hundred and twenty dollars a barrel. Thailand, Philippines, New Zealand, Australia.
00:48So this thing's going intercontinental. And then, you know, so you look at Singapore, Rotterdam, the spread.
00:54There's no more price spread. There's no more spare barrels. There's no policy fix. And it's just physics at this
00:59point.
01:00I want to emphasize these are physical supply chains. And the idea of around financialization and the ability to print
01:07money doesn't apply here.
01:09And I think the title of that piece says it all. You can't print molecules.
01:12Jeff, with that in mind, where and how do you think we're underpricing this risk still in financial markets?
01:19That's the peculiar thing about this is that you look at the paper markets.
01:23They've entirely disconnected from the physical markets. Crude oil on an Oman basis, you know, on the other side of
01:31the strait,
01:31the side that's free, spiked to one hundred and seventy three dollars a barrel yesterday.
01:35Crude delivered in Asia is a blend of Dubai and Oman, which is trading somewhere around one thirty and one
01:43seventy.
01:44Today, this morning, they're one call it one twenty to one fifty.
01:47So you're delivering crude into Asia. It's somewhere around one hundred and thirty dollars a barrel.
01:52Product prices are spiraling above two hundred dollars a barrel.
01:56So the disconnect is between the paper market, which is sitting around one hundred and the physical market,
02:02which is showing a very different environment.
02:05Jeff, some people have speculated that's because of certain types of manipulation in the futures market.
02:10And that's the reason why you have seen this gap blow out. Do you think there's credence to that?
02:14You know, you could argue that Monday last week, you know, there was a mysterious 11 million barrel seller.
02:21I don't want to get into that. It's not enough to really change the dynamic.
02:24I think that the bigger factor that was likely driving WTI and Brent and staying lower is the price of
02:31Urals.
02:32Russian crude oil. It's rallied sixty five, seventy dollars a barrel once they took off the sanction.
02:37So WTI and Brent were the high cost barrels.
02:40The Russian was the cheap. What happened? You closed that gap.
02:42And now that you've closed that gap, you don't have any more spare barrels in the system.
02:46And this rest of the complex likely to start to rally.
02:49You know, I go back to the point that, you know, John started with is, you know, we're dealing with
02:54an enormous supply shock.
02:55By the way, the supply shock is almost equal to the demand shock during Covid.
02:59And we know what that did to global supply chains.
03:02So I think, you know, at one hundred dollars a barrel, this thing's mispriced.
03:06This thing against the physical market.
03:08There is a sense, though, that this time is a bit different than, say, the 1970s in terms of the
03:12world's reliance on oil,
03:14especially China, how much they diversified to electric vehicles, to nuclear energy and other places as well.
03:20How much do you think that that is going to be the growing trend to diversify the sources of energy
03:25in myriad ways beyond what we were doing,
03:28even during the so-called Green Revolution, as people try to avoid these types of shocks?
03:34Well, I absolutely argue that, you know, the the renewables, nuclear power are born out of the 1973 energy crisis.
03:44And this is going to unleash an enormous amount of investment into renewables, nuclear power and other localized energy sources.
03:52The problem, though, is we call this the new jewel order.
03:55The problem is that we haven't got to that transition where we have electrified everything, localized it.
04:01And the type of oil consumption that's left in the global economy is critical.
04:06And so if you pull those barrels out of the system, the rippling factor, the cascading effect through global supply
04:12change is going to be significant.
04:14You go from gas to urea, urea to fertilizers, fertilizers to the dinner table.
04:18Or you go from LPGs to synthetic fibers, synthetic fibers to cotton.
04:23You switch out of soybeans and corn into cotton.
04:26By the way, I think my the best sector to try to get value in right now would be agriculture
04:32because it hasn't priced it in.
04:33Jeff, when it comes to barrels coming off the market, this came from an industry consultant in terms of China.
04:39They're looking at potentially a drawdown in commercial and operational stockpiles amounting to as much as one million barrels a
04:45day.
04:46That can happen over the next four to six weeks.
04:48What would that mean for the price of crude?
04:51I think the key point is once you exhaust those inventories, there's nothing left.
04:57Think about it this way.
04:58You have demand up here, supply down here.
05:01Once those inventories are exhausted, boom, you have to bring demand down in line with supply.
05:06And to do that, you're going to need prices far higher than where we are right now.
05:10I like to do the mirror image of COVID.
05:12Let's go back to COVID.
05:13It was the exact opposite.
05:15You had a situation which you had demand up here and the other way you had supply up here and
05:21demand down here.
05:22And so what happened?
05:23The demand collapsed.
05:25Eventually, you filled all the inventory capacity in the world and you had to bring supply down in demand immediately.
05:30What did that require?
05:32A minus thirty seven dollar a barrel price to create that rebalancing of supply and demand.
05:37Now we have the exact opposite environment.
05:40So just imagine what it's going to do to require that reduction in demand to bring it in line with
05:45supply if it took a minus thirty seven dollar price to create that rebalancing back in 2020.
05:51So, Jeff, I'm going to ask you the question.
05:52What would it take?
05:53What's the opposite?
05:56I mean, I stick to the same answer I gave you last week.
05:59You get long, buckle your seatbelt and hang on for the ride.
06:03We'll know when we start to get to that point where the system starts to rebalancing.
06:06But I want to emphasize, don't underestimate the type of volatility.
06:10If you take European gas in 2022, we saw Russia cut it.
06:15And by the way, the market ignored it in June of 2022.
06:18By August and September, you were at three, four hundred dollars a barrel.
06:22Do you know where prices were in December of that year after you destroyed so much demand?
06:27They went negative.
06:28So I'm not going to say oil is going negative.
06:31But what I'm trying to tell you is it's going to be a really bumpy ride.
06:34You've seen no evidence of demand destruction that rebalanced this market yet.
06:38So we haven't even really started the rebalancing process yet.
06:41So the upside here, I would argue, is substantial.
06:44Again, we want to be long.
06:45And I look at the market.
06:46It's shorting energy stocks and getting long everything else that is short energy.
06:50I think you're picking up pennies in front of the steamroller right now.
06:53Jeff, we buckled up.
06:54That's why we have you on again this week.
06:56Can you give us a range of how high the prices could go?
06:59I know you don't want to give us an exact definition of where you think Brent oil is going to
07:04hit.
07:04But give us a range of when you say get long.
07:06I mean, how long are we talking?
07:08But look at Oman's already traded at one hundred and seventy three dollars a barrel.
07:13Jet fuel in Rotterdam is two hundred and twenty dollars a barrel.
07:16In Singapore, it was two hundred and thirty dollars a barrel.
07:19And we haven't started the rebalancing process.
07:22All we have seen is what happened.
07:23Places like Thailand and China hit export bans that then create ripple on effects and shortages.
07:28Then you have the hoarding that begins to take place.
07:31You're eight dollar a gallon gasoline in Los Angeles right now.
07:34So, you know, the upside here again, I don't want to speculate on how high.
07:38But you've already witnessed something like one hundred and seventy three in the physical market.
07:42So that's my point here.
07:43There is a massive disconnect between the physical world in the paper world.
07:48And the paper world includes the financial world.
07:50You know, I like to point out in it was in January of twenty twenty when covid hit.
07:54I remember I was looking at the what was going on in China.
07:58It was the second largest economy in the world.
08:01Just shut down. Stock market rallies.
08:03Oil is hanging in.
08:04They're not selling off.
08:05And I'm going, guys, we got to get short this thing.
08:07You can't hit the global economy with a shock of that magnitude and not expect bad things to happen.
08:13And we have the exact mirror image of the same similar size shock hitting the world right now.
08:18And the market on the paper and financial side is not keying off the signals that it's providing at this
08:24point in time.
08:24So, Jeff, at some point it gets real for the market.
08:27And with covid, it was when the northern Italian cities started to shut down.
08:31There was a sense that this was getting real.
08:33That it was spreading beyond China.
08:34It was hitting Europe and could hit the U.S. as well.
08:36What makes this get real?
08:38What closes the gap between physical and paper markets?
08:42I think it has to be visual images of real shortages in the United States and in Europe.
08:51Now, the U.S. will be hard, particularly if they do export controls on that.
08:56Europe will likely be the first one they can.
08:57And I think the implication here is the U.S. believes it's safe because of energy dominance.
09:02And this is the point I made it last week.
09:03From an equity market perspective, that equity market in the United States is a global market.
09:09All of those Mag 7 companies earn their earnings in Europe and Asia and all over the world.
09:14So when this energy crisis begins to hit places like Europe, it's going to impact the earnings of those companies
09:19that sit inside the U.S.
09:20because the U.S. equity market is not a U.S. domestic market.
09:25It's global.
09:25So we don't feel the impact.
09:27And I think that if the Americans are going to feel it first on the wealth impact before they'll ever
09:31feel it in the at the income cash flow level.
09:33The Europeans, unfortunately, they're likely to feel it at both sides relatively soon.
09:38So we don't know.
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