00:00So the trading that we're seeing when it comes to the energy markets, is it very reactionary?
00:06Do you feel like we've settled in at all on certain levels that might be with us for a while,
00:11even if the war ends tomorrow?
00:14Yeah, so we were just touching on that, right, how the back end of the curve has actually been surprisingly
00:20stable.
00:21And we have Brent hanging around $80 a barrel, which is actually pretty in line with our year-end forecast.
00:27But the front of the curve has had a very different type of behavior with the risk premium going up
00:32and down, up and down, depending on the headlines,
00:34depending on that market perception of how long this disruption is going to last.
00:39But how do you think about the destruction that we've seen in the region?
00:45We talked about, I'm just looking here at another story by our team, and it's the impact of the Iran
00:51war will continue for months,
00:52even after any deal to restore shipping through the strait, this according to the world's largest oil traders.
00:58I mean, the waterway, they say, some say flows through the waterway, may never return to normal.
01:04Like, is it going to be different, or we don't know yet?
01:07It is quite possible that some of the suppliers that used to rely on the strait very heavily might rely
01:14a little bit more on their pipelines.
01:16So we know that Saudi has their east-west pipeline that wasn't fully utilized before, and now it is.
01:22We know that the EOE could move some oil straight to Fujiara via pipeline, and maybe they will do more
01:29of that.
01:30So I think it's fair to expect that we'll see a little bit more of redirection via pipeline than we
01:35did previously.
01:36Will it make it more expensive?
01:38Not necessarily, but we don't know whether the total flow of oil out of the Persian Gulf is going to
01:45fully normalize.
01:46We assume that it will.
01:48Still, you have an impact on inventory levels, right?
01:51Already, if we look at visible global inventories today, we've already sort of eliminated half of all the builds we
02:00had seen last year.
02:02I'm looking at dated Brent, so physical oil, about $1 or $108 a barrel, versus being shy of just about
02:15$100 when you look at WTI right now, or Brent, rather, the international benchmark.
02:22That spread is getting closer and closer together.
02:25Is it typically, like, what's the typical spread on that versus what we've been seeing throughout this conflict?
02:32Because it's getting a lot of attention.
02:33It's a lot narrower normally, you're right.
02:36And I think when you have a supply disruption of this magnitude, how long it lasts can make a huge
02:43difference.
02:44So if you're thinking of data Brent that has that delivery within 30 days, call it, and you have an
02:50expectation that the disruption is going to impact that period,
02:54then data Brent, in particular, is going to price a lot higher than your June delivery prompt financial Brent.
03:01You had this note out earlier this month that said,
03:04in an adverse scenario where the ceasefire doesn't hold and the straight-up form of his reopening is postponed for
03:09a month,
03:09Brent could still average $100 a barrel in the fourth quarter.
03:13Carol mentioned, we were mentioning the vice president's trip on hold right now.
03:18That note was from a few weeks ago.
03:20Where are we in this adverse scenario?
03:22Yeah, it's a good question.
03:24So one thing has not changed.
03:27If you delay the reopening of the straight, you're hurting inventory levels more.
03:32So you should have higher year-end prices, yes.
03:35You're requiring a bigger utilization of strategic petroleum reserves.
03:39So that's also something you're going to have to replenish down the line more significantly.
03:44And you're incentivizing a bigger sort of structural risk premium embedded in the market.
03:51So all of those are reasons why the back-end should be higher the longer this drags.
03:56But to your point, some things have looked a little bit different versus what we expected over the past few
04:01weeks.
04:02Number one, we're seeing a smaller curtailment of oil production versus what we expected.
04:08And that's because a lot of these countries in the Gulf, they seem to have a little bit higher inventory
04:13capacity to keep pumping production out and storing it.
04:17And it matters because if they can store it as opposed to just shut it down, once the straight opens
04:23up, they can just send that back to the market.
04:26So it helps replenish inventories to a certain extent.
04:29So this is a little bit softer versus what we expected.
04:32The second factor that I would say is a little bit different is demand destruction that is proving to be
04:37higher than what we expected as well.
04:39And this, again, helps rebalance the market a little bit more with prices that don't need to be quite as
04:46high.
04:47So instead of thinking of an adverse scenario, let's say with flows restarting in the middle of May as opposed
04:54to the middle of April,
04:56instead of $110, $115, $100, maybe we could be a little bit lower, maybe between $90 and $100.
05:04So it will depend on all these factors combined.
05:07You know, it's interesting.
05:08I wanted to throw this into the mix.
05:10I was looking for it.
05:10So forgive me.
05:11I was a little distracted.
05:12But there is a FT, Commodities Global Summit, going on today.
05:18And the head of LNG at Vittel said gas markets have seen a massive amount of demand destruction as the
05:24Middle East conflict cut supplies.
05:25And they say most of that came from consumers that could switch to coal.
05:28But some industrial gas consumers, including the fertilizer sector, were also forced to reduce production.
05:34went on to say that's not sustainable or you'll be transferring the energy crisis into a food crisis.
05:40So we are on borrowed time.
05:42Like, there are things that are going to be impacted the longer this goes on, right?
05:47You're right.
05:48Fertilizer production has suffered.
05:50In fact, right away, right after the start of the crisis, we saw India, Pakistan, Bangladesh, all of them saying
05:58we have had to curtail our natural gas supplies to fertilizer production.
06:02So this is already happening.
06:04And to your point, I think that the next shoe to drop, in our view, is manufacturing.
06:11Because when we think of chemical products, chemical products go into just about 95% of all manufactured products.
06:20And one of the biggest disruptions of this crisis has been NAFTA.
06:25NAFTA is the main feedstock that is utilizing producing chemical products.
06:30Right now, there is still inventory of NAFTA, of chemicals, and of manufactured goods.
06:35So we're not in that problem just now.
06:39But yes, the longer this drags, the bigger the risk to supply chains more broadly.
06:45Yeah, I feel like the great reveal of what can happen in these choke point crises.
06:52Well, I'm glad you mentioned choke point because that's certainly been a focus for us.
06:55And I think one thing that the world has learned is the power that Iran has over the Strait of
06:59Hormuz.
06:59Is there going to be some permanent risk premium on commodities because Iran has the power to close the strait?
07:09And it is now clear to the world that Iran wields this power?
07:14We think so.
07:15If you think, for example, about the oil market and all the spare capacity we're used to counting on, that
07:22spare capacity normally sits with Saudi Arabia, UAE, and Kuwait.
07:26But they need the strait to use it, so we can't necessarily count on it.
07:31Saudi has the east-west pipeline.
07:33Does that make a difference?
07:34It helps, but it's not large enough to be able to reroute all of their production.
07:39Wow.
07:40What does this do for renewables?
07:41Like, it's interesting, we've heard some different individuals talk about, you know, we are, you know, we know we are
07:48going to need all forms of power moving forward.
07:51And so even though certainly here in the U.S. there's been a pushback on renewables and alternative energy and
07:57green energy, that's not necessarily the case around the globe.
08:01But is it just a reminder in terms of what's going on that, yeah, we're going to need renewables and
08:06green energy as well, whether it's wind, solar, what have you?
08:09Yeah, I would say outside of the U.S., there will be a lot of regions questioning exactly that and
08:15thinking, hmm, we're short oil, we're short gas.
08:18What do we have or what can we build?
08:20And a lot of times the answer to that is we can build renewable generation capacity.
08:25And a lot of times the answer can be we have some coal, maybe we should produce a little more.
08:29By the way, this is exactly what China has done since they had their last electricity crisis in 2021.
08:35They vowed never to let that happen again and they started investing in coal production to be higher and higher
08:41and higher and they are building renewable generation capacity like crazy.
08:45So does that happen here in the U.S.?
08:47And look, it's a different crisis because we have access to natural gas here in the U.S., so we
08:52haven't necessarily seen power prices or electricity prices go up as a result of this.
08:57AI is a completely different story.
08:59But to Carol's point, does that happen here in the U.S., sort of like that China moment?
09:04So I would think of the U.S. in two different angles.
09:08From an energy perspective, I think because the AI story is very big here, yes, we need all of the
09:15above.
09:15So I think we will need renewables, more renewables in the U.S.
09:18I think we very much need natural gas.
09:20And I wish we could have more nuclear, but nuclear has proven to be a bit more difficult to be
09:26built on time and on budget.
09:28But I wish we could have all of that.
09:30We might need to delay some retirement of coal plants as well.
09:33It's all of the above.
09:35Separately from that, when I think, what are the commodities the U.S. is net short of?
09:40It's really not on the energy side.
09:42It's more on the metal side.
09:43So I think the government's initiative, okay, if we're going to tariff anything on the commodities universe, let's tariff steel,
09:50aluminum, so that maybe we can incentivize investment here.
09:54We are net short of these metals.
09:56So this does make sense when we think of Project Vault, when we think of these initiatives of shoring up
10:01the commodities we're short of.
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