00:00U.S. officials say the Strait of Hormuz is open to all vessels seeking safe transit.
00:04That is despite Iran saying that waterway is now closed.
00:08Here to discuss what that means for key goods and commodities as they try to get through that
00:12strait is Bloomberg Intelligence Senior Commodities Strategist Mike McGlone. All right,
00:17Mike, one country says the strait is open, one country says the strait is closed.
00:21What are the markets saying? Well, the market is kind of believing the U.S.
00:26and kind of pushing back in the rhetoric from Iran. And even if it does, they do close it up
00:31significantly. We've proved that what the sentiment was is 20 percent of global supply turned out to
00:37be 10 percent or less because of invention and necessity. People found ways around through
00:43pipelines. The key theme for me is what will take to get crude oil to stay above $80 a barrel.
00:48$80 a
00:49barrel was significant because it was last year's high versus its normal propensity to head towards
00:54its cost of production, the world's largest producer, which is around $55 a barrel in the
00:59U.S. So I think it's more likely to head lower. But the key thing that's happening in crude oil
01:03is we
01:03have a significant bifurcation between the actual price of crude oil, which I think is going to head
01:07lower, and the price of gasoline and diesel, what we call distillates at the pump. And that word we use
01:13for that is the crack spread, the spread between what actually is refined from crude and what the
01:19underlines foundation of crude is. And the crack spreads have reached the highest almost ever,
01:23but very similar to what we got in 2022, which marked a peak in price, and then everything rolled
01:28over back lower. Christina, who doesn't like the crack spread right now, is one president,
01:33Donald Trump. He's still furious about the price of gas relative to the price of oil.
01:37A very basic question for you here, Mike. Look, oil is so much less than it was at its wartime
01:43peak,
01:44and I'm curious why that's the case. It seems to me that the level of confusion
01:48and uncertainty may have subsided a little bit here. But as we pointed out,
01:52there were dueling narratives about the state of the strait. There's still a lot of uncertainty
01:55about the path forward for this war. Why then are oil prices still as low as they are relative to
02:00where they were at the start of this conflict? Well, David, I really enjoyed pointing out some
02:04of the things I did in 2022, and the foundation of this country, and Adam Smith, and the high-priced
02:10cure, and the invisible hand. And that's what we really accelerated, is the price-making status
02:17in crude oil shifted to the Western Hemisphere, with U.S. in the middle. We used to be the largest
02:21importer. Now we're one of the largest exporters. That's what shifted. And if you include Canada,
02:27we're approaching a surplus of crude oil liquid fuel supply next year of 8 million barrels a day.
02:32And a lot of that, what happened is we just accelerated that process of more supply coming
02:37from the Western Hemisphere, from Canada, down to Argentina, and OPEC becoming more and more
02:42redundant. So it accelerated that process. Also, and I always look over at the latest estimates
02:46for the Department of Energy for U.S. gasoline demand. It's declining. Yet prices have spiked.
02:53So this is a classic cycle of commodities. Typically what happens in crude oil, let's just look at it.
02:57It's been in a 20-year range. We're right at the bell curve of that range, right around $71 a
03:02barrel.
03:03We just pumped up the upper end. We accelerated, accelerated more supply, decreased demand. We'll
03:08probably get ahead towards the lower end. So by the end of the year, I'm making a call that crude
03:12oil
03:12is going to be below 50, maybe even 40. And one key thing, exactly, one key theme for that is
03:17almost
03:18always bottoms when the stock market goes down a little bit. We usually get a pickup on stock market
03:22volatility for midterm election years. And it's, you know, so that to me is a key thing to look
03:27forward to the second half of the year. And the bottom line is, what does the leader of the largest
03:32energy producer, net exporter, someone who initiated this one-ran need for the midterms? He needs
03:37lower energy prices. I fully expect that to happen. I've written this down, Christina,
03:40McGlone's call, 40 to 50. It is. He wrote a blue highlighter, so you know it's real.
03:45I do want to ask what the role of reserves is playing in this pricing, because I've seen
03:49some very complicated charts. There seems to be a bit of a debate about how much
03:52that has been keeping the price more palatable despite these disruptions.
03:56The U.S. strategic petroleum reserve is at a 20-year low. And then demand from China has really
04:02dropped off. And the thinking is that they are also drawing on reserves. What is the status of those
04:05reserves? Do you expect that to continue throughout the end of the year? Or do you think this will be
04:08replaced at some point with just taking supply from where it comes?
04:12Well, I'm glad you went there, because reserves are significant. Remember, the U.S. strategic
04:16petroleum reserve was started in 1974 by President Ford to cover 90 days of net imports. I just pointed
04:22out we have a surplus of exports. So we don't really need it anymore, except for things like hurricanes
04:27and what just happened. And the key thing, Hunter, who really needs reserves is China. What we found
04:32out, what didn't really make a lot of sense last year, is why crude oil, their demand stayed steady
04:37around 11 million barrels a day. Yet their 10-year yields were collapsing, showing economy that's
04:42really in deflation. We found out that China built up some of the best reserves and biggest
04:46in history. And they need to. They're a net importer. The lessons I've learned in commodities
04:50is Chinese are the best traders. Prices are up. They sell. Prices go down. They buy. And I fully
04:56expect that cycle to go lower. But the thing that we learned is China has a pretty significant
05:00surplus reserves. And by the way, EVs in China are cheap, and it's over 60% of sales now.
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