00:00I want to start with this idea of the equity market going back to levels that it was pretty much
00:05at the S&P 500 before the start of this war.
00:08Yet oil prices are so much higher than they were before the start of the war.
00:13Is this a floor or do you think, you know, in the next few months we could see once again
00:1860, 65 dollars a barrel again?
00:21No, I don't. I do think this is a problem.
00:24That is to say the resumption of flows through the state of Hamus and the peripheral damage that we've seen
00:29for infrastructure, particularly around the Gulf nations.
00:33That's not going to be solved. Now, what we're looking at here is a market that has, let's borrow the
00:39term irrational exuberance.
00:40They want to believe this war is going to be over. And perhaps it is.
00:44And I hope it is. And I hope there's a positive resolution.
00:47But what we don't have a resolution to is the amount of damage to infrastructure that's been inflicted upon the
00:54market.
00:54So we're looking at the futures markets.
00:57And these are contracts that are derived from a physical market.
01:02But there is a massive disconnect now between the physical market and the futures market that you just referenced.
01:08So, for instance, non-mixed WTI, yes, is trading about $95 a barrel, to your point correctly.
01:15That's 50 percent higher than where it was in February.
01:17But when we look at the actual physical market, we're still trading.
01:21Well, one blend of North Sea crude oil is trading at a $40 premium to where the screen is trading.
01:29So the futures market are pressing in some kind of hope.
01:34And hope is not a trading plan.
01:35The physical market is telling us that we are a long way from seeing any sort of resolution, that is
01:40to say, a resumption in prices going back to where they were prior to the conflict.
01:45You mentioned physical infrastructure, so I want to dig into that a little bit.
01:48We just spoke about the Strait of Hormuz and that being a choke point.
01:51Let's say the Strait of Hormuz does resume normal traffic, what, 120 roughly ships a day moving through it at
01:58some point in the near future.
01:59Is that enough to bring prices down or is the damage of physical infrastructure creating this floor until that physical
02:09infrastructure is fixed?
02:11It's more so an issue in the natural gas market than it is the oil market.
02:15So let's and we'll see that, you know, let's say we do get that resumption with the infrastructure.
02:22We're still at least one quarter away from seeing any sort of return to a normalization, as it were.
02:28Now, that's a concern because what happened in this disruption occurred beginning towards the end of the first quarter.
02:35This is the weakest part of the calendar for demand for crude oil.
02:40Refineries in Europe, in the United States and through the Middle East, they go into what's called turnarounds or their
02:44maintenance season.
02:45So they ramp down operations to get ready for the summer peak season.
02:51So demand from the only people that actually consumed crude oil, the refiner, was at its lowest point of the
02:57year.
02:58We're now well into the second quarter transitioning into the summer where demand is going to spike.
03:03So even if, best of all worlds, we get a resumption to flows, there's still going to be a lag.
03:10And that lag is going to run up against the demand that is about to hit the market over the
03:14next month, month and a half.
03:16So we are looking at a very volatile summer coming in.
03:20Now, the natural gas market, and when the natural gas market, we're talking about not only just gas to heat
03:26our homes and for our stovetops, but the knock-on to what we're seeing in the fertilizer market, because natural
03:32gas is such a big price driver in fertilizers and urea and helium and so forth.
03:38And we were talking about 20% of the world's LNG capacity has been sidelined, and it's going to remain
03:45sidelined over the next three to five years with hit to Qatar.
03:49We're looking at a knock-on inflation mechanism that is, well, we are watching history in real time right now,
03:57because the entire global natural gas market has been turned on its head.
04:00And it's not going to return to anything before what it was like prior to the conflict.
04:05Yeah, some of the Qataris I've been talking to have said that's going to be a minimum of three years
04:08before they can get that LNG network back up to current levels of productions.
04:12Of course, that also impacts other things like helium production.
04:14But before we move off oil, I do want to go back to something you were talking about, and that's
04:19seeing the surge right ahead of summer demand for oil.
04:23Everybody's trying to travel. Everybody's trying to do things. That takes oil.
04:26So where are you going to see the downstream effects, and where are normal people going to see this impact
04:31them the most?
04:32Well, we're going to see, of course, at the pump at this point.
04:35And right now, when we look at what we saw in the rise in the wholesale market, and a significant
04:42rise, more than $1 a gallon, more like $1.10 a gallon, I should say.
04:48Statistically, there's about an 87% pass-through of what we see that hits to the wholesale level that come
04:53down to the retail level.
04:54So currently, what we're right now is in a position of two factors.
04:59You have, of course, the war hit that is adding a significant hit to the pump for the consumer.
05:06And then we're also now in the midst of the transition to a different type of gasoline.
05:12The gasoline we put in our cars in the months of June, July, August is not the same gasoline you
05:17put in in January, February, or March.
05:18So that gasoline, summer grade, we'll call it, comes at a premium because it's a much harder blend of gasoline
05:26to manufacture.
05:27So we normally get a $0.17 to $0.20 increase at the pump just for that seasonal shift.
05:35Now, you add about $0.80, $0.90 pass-through of what we're seeing in the war premium, we're looking
05:40at $1.10, $1.20 additional hit.
05:43So right now, national gasoline prices, AAA, I think right around $4.14.
05:50We modeled it three weeks ago on the pass-through, the typical pass-through you see three to five weeks
05:57after a significant spike.
05:58We modeled our prices between $4.17 and $4.20 national average.
06:03Now, that's an assumption that prices remain here, but I don't think they're going to remain here.
06:11So the knock-on to the consumer will certainly be higher, more towards, and I wouldn't be surprised if we
06:19go and challenge the $5 premium.
06:21Wow.
06:22Great.
06:22That we saw three years ago.
06:24So what you're telling me is I need to find a nice walkable summer vacation plan.
06:28Well, just stay in New York the whole time.
06:30Yeah, yeah.
06:31That's what you can do.
06:31Exactly.
06:32Hey, Stephen.
06:33I'm here in Philly.
06:33I can't walk to the Jersey Shore, so I'm going to have to drive.
06:36All right, all right.
06:37Hey, Stephen, one thing that commodities traders like to talk about is the cure for high prices is high prices.
06:42You know, when prices move higher, other producers come in to profit from that.
06:47Have we started to see that when it comes to drilling in the United States or production in the United
06:52States?
06:52Is this enough for American producers to do what the president wants them to do, and that's drill, baby, drill?
07:00Yeah, certainly.
07:01Well, you know, interestingly enough, when oil was at $60, $65 a barrel, we were seeing record U.S. production.
07:07I was quite perplexed by that.
07:10Right now at $95, $100 a barrel, we'll call it, certainly prices are high enough.
07:15Now, they're high enough, but are they going to remain high?
07:19Right, and that's the issue.
07:21We are seeing some hints, particularly when we look at the CFTC data, their commitment to traders reports.
07:28When we look at the disaggregated portion of that report that serves as a proxy for E&P hedgers, then
07:37we're seeing a significant amount of futures markets sold forward.
07:42So what we can say with confidence is that E&P producers are selling this conflict.
07:48Now, the question is, are they selling it?
07:50And then they're going to meet that with future production, which would be the implication.
07:54We have to – that remains to be seen.
07:56But typically, the knockout is you'd want to see months of a new pricing regime that we are in rather
08:03than just a kind of a short-lived, okay, this is a market, a futures market that is trading with
08:08every whim, every social media post that comes out there.
08:13That's not a fundamental physical plan right now.
08:16So we do know that is – again, I'll reiterate that a lot of oil has been sold forward by
08:23the producer class.
08:24Now, that could be a speculative hedge.
08:26It could be, but it's not.
08:28So the likelihood is we will start to see production ramp up to meet this.
08:33But the question is, can we get that production from where it is to where it needs to be in
08:38the amount of time that we need?
08:40And that is – the answer to that is no.
08:43So from a longer-term perspective, we might see – the indications are there.
08:47But will it make enough of a difference to impact price without other factors being addressed for this summer?
08:54Unlikely, no.
08:55Stephen, very quickly, we've only got about 30 seconds left.
08:57I do want you to talk about fertilizer.
09:00You say it's not tight.
09:01It's breaking.
09:02Helium, how that's going to impact AI expansion.
09:04What are the big red flags that are most concerning outside of oil?
09:08So right now, for the natural gas market, of course, is fertilizer and what this means for food inflation.
09:15So our two biggest components, as Thomas Sowell said, inflation is not a problem if you don't have to eat
09:20or turn your lights on because food and energy are excluded from the official CPI numbers.
09:26So that is the hit that we are going to see.
09:29We're seeing it front-loaded in the energy complex.
09:32And if this persists, and it will, we'll see at food inflation down the road more fertilizer, higher prices to
09:41put the seed in the ground, higher price to get the seed out of the ground, higher for your kitchen
09:46table.
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