00:00Max, before we get to your different calls on the different commodities, I want to get from you
00:04what you heard in the news conference that President Trump just hosted that moves your markets.
00:12Sure. I think one thing that I took away from it is that the two sides are still very far
00:17apart
00:18and that supports higher oil. So we think oil and energy prices more broadly are going to keep
00:24moving up. We think oil is on its way to 120 per stop and in the bull case scenario up
00:30to 150 on Brent.
00:32OK. So Brent has already hit a high of almost 120 on March 9th but it came back down. What
00:37is preventing oil
00:38from moving to that higher end of your forecast at the moment because it's gotten there but it has kind
00:46of
00:46like seen that as a ceiling. Sure. Yeah. Look I think it's moving with the news flow and the market's
00:53trying to figure
00:53out how long this is going to last. It's already priced to some degree around a month month and a
00:58half shock. And you know we're trading up and down as the expectations rise and fall about the length
01:06and like the duration of this shock. You say you're very concerned about the possibility of a 1970s type
01:12energy shock. Walk us through how you see us getting there. Sure. So what we've done is we've had a
01:19look
01:19at the all in so the consumption weighted product prices across the all the different products you
01:26get from crude oil. We've looked at that price and compared it to all global inventories over the last
01:3120 years. And at the recent loss rates we think about 13 14 million barrels a day. If you continued
01:39that loss rate through the end of June you would get inventories down to levels consistent with what we
01:45saw back in mid 2008 and back in 2011 2012 where we saw all in prices. So that's not the
01:52Brent price but
01:53it's Brent plus all the various different product premiums consumption where they're getting up to
01:58$200 200 220 that would be consistent with with that kind of inventory losses over the next three months
02:06or so. Yeah. And that's that's pretty much one of the paths that you get there. Obviously you could have
02:12smaller losses for a longer period and you reach the same conclusion. But why we compare it to the 1970s
02:18is
02:19what we've done is a lot of work on expenditure. So if you take that oil price at 200 the
02:24world would be
02:25spending about seven to eight percent of GDP on crude oil and products. And that is the last time we
02:32saw
02:33that was mid 2008 and prior to that was 1979. So is the energy shock going to be felt more
02:39in those oil
02:39importer countries. For instance Asia as opposed to the U.S. which is a net oil exporter.
02:47Yeah agreed. I think Europe and a number of Asian countries look highly exposed to this not just on the
02:55oil side but
02:55also gas and to some degree coal. I was just having a look at the diesel markets today. And you
03:02know some countries
03:03are really big importers of diesel and the importers particularly from the Strait of Hormuz or from countries
03:09that refine crews from the Strait of Hormuz and then export. And there's a couple yeah there's a couple of
03:15countries that look like they're they've got some problems with that at the moment. Again you are in
03:20London so you quote the global benchmark Brent. How does this all play out for U.S. oil prices for
03:26WTI for
03:27instance given that the U.S. is a net oil exporter. The U.S. is the world's biggest energy producer
03:32and at
03:33this point there is plenty of supply here in the United States. Yeah it look it doesn't look as bad
03:39in terms of the economic impact. I mean I'm very much focused on the commodities themselves but
03:44the the gas prices have gone down in the U.S. since the start of the conflict. You know front
03:50month
03:50Henry hub. TI hasn't gone up anywhere near as much as Brent. Maybe that's a bit of exaggeration. It
03:57hasn't gone up as much as Brent. There's a good 14-15 dollar gap to Brent and that was normally
04:02three
04:02dollars. So there's some kind of resilience there. There's obviously the offset with the U.S. being a
04:08big producer. But you know one thing we had noticed is we we did this kind of energy expenditure or
04:15spending of each country each region on on oil and we noticed that the kind of increasing costs
04:22as a share of GDP globally are about two percent around two trillion dollars since the start of
04:27this year. Big increase. But in the U.S. it's only one percent of GDP or one trillion oh sorry
04:33one
04:34percent of GDP for the U.S. which kind of reflects as well that the U.S. is just less
04:39exposed to this
04:40shock in part because its GDP is much stronger or its intensity of oil use as a share of GDP
04:47is much
04:47lower than on average in the rest of the world. So put this all together Max how do you trade
04:53a
04:531970s type energy shock particularly one that will be more felt overseas than here in the U.S.
05:00Sure. So I mean one of the ways is to just be long commodities but specifically oil. There's still a
05:08lot of
05:09upside in the near term in oil if this continues. The other way is to look to buy the dip
05:15in gold.
05:16So I say look to buy the dip and the reason is because gold has been selling off alongside equities
05:23particularly EM and European equities over the last couple of weeks and we expect that to continue
05:29over the next couple of weeks. But once you've had the kind of real flush in retail and momentum
05:34and institutional buying in gold alongside a potential equity sell-off which would happen
05:39if we had a 1970s oil shock in that world once you've had that gold move lower another big move
05:45lower then we'd be really you know aggressively bullish on gold and other hard assets like aluminium
05:51and copper. Is there a specific catalyst you think that would turn gold from what seems to be a risk
05:57asset at the moment back to a haven asset. Well I mean I think yeah look I'm not sure if
06:08it's a particular
06:08thing but the it depends on which path you're looking at I guess. I'm not sure it would really be
06:16a big
06:17kind of flush out of positioning of trades that have been related to momentum and
06:25that that kind of thing. When that's when you know that's gone then you know you're around the lows
06:32but it could also have already bottomed right. So if this you know in the scenario that this
06:37conflict ends very quickly over the next week or two then we've probably seen the low in gold
06:43already. That's what so where we're confident is six 12 months time that things like gold copper
06:48and aluminium will be higher than where they are today. But in the near term it can really go either
06:52way. Right right right. The near term is where the confusion lies. What do you make of the argument
06:57by some people that this oil surge is likely to be brief. I mean it's all over the place at
07:03the moment but
07:03the U.S. being the world's biggest energy producer being a net exporter of crude oil and natural gas
07:09and with the midterm election coming up here in the U.S. in November we know President Trump will
07:14want lower oil prices this year. How much do you buy that argument? I mean I buy that it's it's
07:21it's
07:22true and you know it's certainly even our base case that this if this continues the shock is so big
07:28that it simply kind of must be solved and that's why it's most people's base case that it is solved
07:35and if you just look at kind of the monetary value of this you know we were spending two and
07:41a half
07:41trillion a year on gold sorry on oil globally at the start of this year we're now four and a
07:46half
07:46trillion. If it goes on we could be spending seven or eight trillion dollars annualized within a couple
07:51of months. I mean that's a six trillion dollar or five or six trillion dollar delta versus the
07:57kind of price that Iran is asking for in terms of payments on Hormuz flows which are in the
08:04vicinity of 50 to 100 billion dollars. And so I think you can see why people think that eventually
08:11one way or another militarily or diplomatically that the two sides asks come together.
08:19When investors fret about oil and inflation the comparison is always inevitably the 1970s. We just
08:25discussed that ourselves and if things are not as bad as the 1970s then there's this temptation to say
08:30well then perhaps things will be fine at the end of the day. What are the what are people at
08:34risk of
08:35missing out on when they envision only these binary outcomes? Yeah I mean one thing I noticed is you
08:42know going back and kind of reading as much as I could in the last few weeks about 1970s is
08:46back then
08:47you had kind of you had quite strong growth and you had very low debt levels and in a way
08:54that's quite
08:55scary because it means that to some degree you know we are you know we didn't have the baby we
09:02don't we
09:03have the opposite of the baby boomer boom that they had back then and the growth that we had back
09:08then.
09:08And yeah it's and we have very very high debt levels relative to back then. So if this continues you
09:15know
09:15perhaps the system is less able to withstand this kind of inflationary shock if all the central banks are
09:22raising rates and government debt goes up and things like that. So yeah I mean certainly sitting here
09:27looking at my spreadsheets and things like that it all looks very scary.
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