Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Slationary pressures. But let's begin with a focus on the
Speaker 2: oil markets.
Speaker 1: Now.
Speaker 2: Prices have rallied since late last year and escalating tensions
Speaker 2: in the Middle East. Some analysts say that one hundred
Speaker 2: dollars a barrel is back on the cards. While joining
Speaker 2: us now I'm delighted is Jeff Curry, chief strategy officer
Speaker 2: of the Energy Pathways at Carlisle, a former head of
Speaker 2: Kamanti's research at Golden Sachs. I mean, you understand, welcome
Speaker 2: to the program. Great, Jeff, you understand these Kamanities really
Speaker 2: like no one else. I want to get your thoughts
Speaker 2: on oil off the highs. Does that reflect the fact
Speaker 2: that traders are less worried about the Middle East and
Speaker 2: has escalating conflict or is it supplying demand issues?
Speaker 3: Well, obviously if you look at the pullback recently, we're
Speaker 3: back to the levels before the events of what happened
Speaker 3: between Iran and Israel a week and a half ago.
Speaker 3: But more importantly, everything's off. Commodities are going through a
Speaker 3: consolidation period. You know, we were beginning to price in
Speaker 3: equities every thing. This idea of rates being higher for longer.
Speaker 3: But let me remind everybody we're talking about rates being
Speaker 3: higher for longer because growth is so good. I mean,
Speaker 3: I just the things you just went over just now,
Speaker 3: private sector activity in Europe the highest level in the year.
Speaker 3: We're seeing a reacceleration of growth across the board. And
Speaker 3: so when I think about what's going on oil specifically
Speaker 3: in commodities and they I'll put bitcoin in there, and
Speaker 3: all the physical assets is they're going through a consolidation period.
Speaker 3: These assets, these physical assets are tied to underlying growth
Speaker 3: and inflationary pressures. In the bottom line, retail sales was
Speaker 3: smashing that we saw that. You know last week, you
Speaker 3: have unemployment still at very low levels, CPI surprise to
Speaker 3: the upside, Chinese manufacturing beginning to accelerate, Europe, Germany accelerate,
Speaker 3: and the list goes on.
Speaker 4: This is classic late cycle expansion that you and I
Speaker 4: were talking about three months ago.
Speaker 2: So what you're telling me is that there's a shift
Speaker 2: basically in the supply demand equation.
Speaker 1: Is that right?
Speaker 3: Well, I wouldn't say it's so much a shift today
Speaker 3: as it was when we were talking three months ago.
Speaker 3: What we went through in twenty twenty two and twenty
Speaker 3: twenty three is your classic mid cycle pause. The economy
Speaker 3: adjusts to the higher rates and the higher energy and
Speaker 3: commodity prices. It went through that adjustment, manufacturing slowed down.
Speaker 4: Now we're coming out of it.
Speaker 3: And is this thing any different than a previous cycles.
Speaker 4: No?
Speaker 2: But Jeff, if you look at so the rates expectations
Speaker 2: for the FED right higher for longer, and I know
Speaker 2: this is because growth is wrong, but does it have
Speaker 2: a harmful effect on commodities at all?
Speaker 3: Look, well, this is why why I'm always why you
Speaker 3: want to own commodities in this environment, because if the rate,
Speaker 3: if you don't have a situation in which you're raising
Speaker 3: rates because of strong underlying growth, means commodities are going higher,
Speaker 3: and that's what's going to force their hand to raise rates.
Speaker 3: And if they do cut rates, you're adding more liquidity
Speaker 3: into the system, which means higher commodities. So commodities are
Speaker 3: a win win in this situation. That's why they nearly
Speaker 3: always outperform all other asset classes in this environment.
Speaker 2: But I'm looking at the IA they're predicting for the
Speaker 2: slow down and oil demand growth next year, it's just
Speaker 2: one point one million barrels a day. Right, as we
Speaker 2: get closer to peak demand, do you agree with process.
Speaker 3: By the way, when we look at late cycle commodities,
Speaker 3: there's a really important point. It's not the growth that matters,
Speaker 3: it's the level that matters.
Speaker 4: And why do I say that.
Speaker 3: Is because as the level of commodity demand goes up,
Speaker 3: it stresses the underlying supply level.
Speaker 4: So yes, the growth rates are going to slow.
Speaker 3: Yeah, and that's what will happen late, but the level
Speaker 3: could continue to grow. Stresses the system puts upward pressures
Speaker 3: on prices. So that and by the way, the equities,
Speaker 3: which are tied to growth rates, they begin to come down.
Speaker 3: So this is what I always argue over and over
Speaker 3: with commodities. They are tied to the level of activity,
Speaker 3: while financial markets are tied to the growth rates of activity,
Speaker 3: which is why you get the outperformance.
Speaker 1: Opek plus has kept supply tights. Yes, is this about
Speaker 1: the backfire?
Speaker 3: No, when we look at where you know that plus.
Speaker 3: First of all, everybody's talking about all the spare capacity
Speaker 3: in the system. It sits in Saudi Arabia, in UAE,
Speaker 3: that's it. And they have more market power today than
Speaker 3: they've ever had because of a lack of investment in
Speaker 3: many of the different non OPEC countries.
Speaker 4: And yes, you're going to respond back that, you.
Speaker 3: Know, rapid growth in the US, but that compared to
Speaker 3: what's going on more broadly, it's relatively small. And then
Speaker 3: I think the other issue that gives them market power
Speaker 3: is that you have in elastic demand because we've taken
Speaker 3: out all the low hanging fruit, so that so that
Speaker 3: group that sits on that spare capacity has more market
Speaker 3: power today than they have had since the existence of OPEC.
Speaker 1: So does oil. You know, is it eighty dollars or
Speaker 1: one hundred? Next we were far.
Speaker 3: Closer to one hundred. I'm not in the forecasting business anymore. Wow,
Speaker 3: we're going to hit one hundred. By the way, the
Speaker 3: one thing I learned in all my time, I'm looking
Speaker 3: at these commodities trade the wings. This thing's gonna when
Speaker 3: it goes, it goes, and when it drops, it drops.
Speaker 3: And you've been doing this as long as I have,
Speaker 3: you know, so the odds of this thing going over
Speaker 3: one hundred or extraordinarily high. The question is how high
Speaker 3: can you get before you start to see OPEK begin
Speaker 3: to adjust the system.
Speaker 4: By the way, I want to say this and This
Speaker 4: is just history.
Speaker 3: In the forty years of OPEK history and where we
Speaker 3: are in the cycle. Never has OPEK ever been able
Speaker 3: to bring on supply as we go into the final
Speaker 3: stretches of an economic expansion and tame the oil price.
Speaker 4: What happens go back? Were they able to do it
Speaker 4: in twenty eighteen.
Speaker 3: No, we got up to eighty eight dollars a barrow,
Speaker 3: and then we had the waivers on Iran. We could
Speaker 3: talk about that later. That's a very similar risk here.
Speaker 3: But I think it works to the upside this time
Speaker 3: around seven eight and then you can go back to
Speaker 3: one two thousand. I can keep going back all the
Speaker 3: way back to the distance they never because here's the point.
Speaker 3: If the rise in production misses by just.
Speaker 4: Five days, what are you gonna do. You're gonna get backgradation.
Speaker 3: You got to get that pinpoint, that accuracy, which is
Speaker 3: all by the way, If there was a group in
Speaker 3: OPEC that could actually get this right this time around,
Speaker 3: you know, I will say this, You know that this
Speaker 3: leadership can get it right. But again I'm gonna say
Speaker 3: you missed by five days, because think about what happens.
Speaker 3: We know that tankers out there in the Gulf wherever
Speaker 3: it is, it's coming into the refinery.
Speaker 4: I don't have crew today.
Speaker 3: I'm short by Let's say my inventories are five days,
Speaker 3: it's going to be six days late.
Speaker 4: I got a problem.
Speaker 3: I'm buying crued and the backwardation goes up. Also on
Speaker 3: the back gradation, another point, I want to emphasize. Everybody's
Speaker 3: talking about backgradation as an indication of a political risk.
Speaker 3: For geopolitical risk premium, it can't be. I always say
Speaker 3: time spreads don't lie. They tell you this market is tight.
Speaker 3: And another point, the market went off the board in backwardation.
Speaker 3: That means there's no investors in it. It's all physical.
Speaker 3: You really have a tight market here.
Speaker 2: Jeff type market plus do you political risks? So let's
Speaker 2: talk about her on I mean, could this actually fly
Speaker 2: through the roof if something happens.
Speaker 4: Oh? Absolutely, because I mean the market doesn't prepared.
Speaker 1: Priced in the market is unprepared.
Speaker 3: But we look at more broadly, I don't care if
Speaker 3: it's energy equities, Energy commodities are more like it. There's
Speaker 3: not a large investor participation. And also money today chases trends.
Speaker 3: They don't make bets, they don't trade, and.
Speaker 4: So there's no real trend here.
Speaker 3: By the way, when it started trading, a look at copper,
Speaker 3: copper overshot the fundamentals near term, they'll trade that trend.
Speaker 3: But when we look at more broadly, most of the
Speaker 3: discretionary money can't sit there and hold a position of
Speaker 3: geol political risk premium betting. For the thing that said,
Speaker 3: there is activity and out of the money options and
Speaker 3: you go up to that one fifty two dollars range.
Speaker 3: People are buying it because they're heading geopolitical risk, inflation risk,
Speaker 3: and you know equity risk type premiums. So there is activity,
Speaker 3: but it's relatively small and it's located in the options markets.
Speaker 2: Jeff, I think Jpmorrian is saying that it's time for
Speaker 2: a reality check on the energy transition. It's slow, costly,
Speaker 2: and not rewarding for investors.
Speaker 1: I mean, is that how we should see it?
Speaker 3: Well, I think we're going through that reality check right
Speaker 3: now and people are making reassessing it. When we look
Speaker 3: at the returns in the green sector, there's two things
Speaker 3: that are driving it. One, there's a hangover from the
Speaker 3: big spike we had in twenty twenty two. Let's remember
Speaker 3: that when everything exploded in twenty twenty two, coal production
Speaker 3: went up the size of Saudi Arabia, by the way,
Speaker 3: that's how much coal we added in that environment. Gas
Speaker 3: prices went negative in Europe and you know US n
Speaker 3: imax natural gas and power prices reached an all time.
Speaker 4: Low what's six weeks ago.
Speaker 3: That's creating a headwind to the sector. And by the way,
Speaker 3: cause because we ramped up coal production. The second factor
Speaker 3: that's had a big impact on this is China.
Speaker 4: What is China doing.
Speaker 3: About their property market problem. They're rotating growth into manufacturing
Speaker 3: of green capex goods and they're pushing them onto the
Speaker 3: global market. And by the way, the returns aren't that great,
Speaker 3: which is the problem that the equity market has had
Speaker 3: in China. But I think the key key message here
Speaker 3: is there there's two drivers of that weakness.
Speaker 4: One a hangover from that spike.
Speaker 3: In twenty twenty two in what China is currently doing.
Speaker 3: Both of these are temporary, you know, longer term there
Speaker 3: is a story here.
Speaker 1: And temporary a couple of years or temporary ten years.
Speaker 4: By way, it's been temporary for two and a half years.
Speaker 4: If you look at the.
Speaker 3: Peak, you know, you know, in fact, by the way
Speaker 3: that report Christian did I thought was phenomenal, but you
Speaker 3: know he has a chart in there.
Speaker 4: Ye.
Speaker 3: This has been going on for two and a half years.
Speaker 3: It's not something just cropped up in the last couple
Speaker 3: of days. So you know that we're going through that
Speaker 3: rough patch. But I think the longer term outlook is
Speaker 3: still very positive for the sector.
Speaker 2: Okay, we'll talk about that longer term outlook, could Jeff?
Speaker 2: Thank you so mu Jeff Curry from Carlisle stays with
Speaker 2: us for a look at some of the broader Kamaniti
Speaker 2: themes and sectors, including also the rating.
Speaker 1: Gold and medals. This is Bloomberg.
Speaker 2: Welcome back to our deep dive from the energy and
Speaker 2: commanity sector.
Speaker 1: We've looked at oil. Let's now talk about the routing
Speaker 1: golden medals.
Speaker 2: Now, the index of all six base metals on the
Speaker 2: LME has gained more than thirteen percent this month on
Speaker 2: a better global manufacturing outlook, Investors will remain cautious on
Speaker 2: future moves by the Fed. Meanwhile, gold extending losses after
Speaker 2: its biggest daily decline in almost two years following a
Speaker 2: stunning rally in the haven asset. Now let's bring back
Speaker 2: Jeff Curry from Carl, Jeff, I want to talk to
Speaker 2: you about copper gold.
Speaker 1: What is gold? Right now?
Speaker 4: By the way, gold is a mystery.
Speaker 3: I'm i going to say I got it, you know,
Speaker 3: and understand it because if you look at the drivers fundamentally,
Speaker 3: usually what drives higher gold are lower reel rates or
Speaker 3: a weaker dollar.
Speaker 4: What are we actually seeing. We're seeing higher real rates.
Speaker 3: And a stronger dollar, and typically gold goes down that
Speaker 3: when we look at it, clearly there's a mysterious buyer
Speaker 3: out there. You can see it in the physical premia.
Speaker 3: It's most likely coming through Dubai. You see it in
Speaker 3: the OTC market. Historically, when we see that and you
Speaker 3: get the data three or four months down the road,
Speaker 3: you find out it was an emerging market. You know,
Speaker 3: probably unlikely Russia is they just dig up their goal
Speaker 3: put it into the central bank because they got so
Speaker 3: much underneath the ground. But you know, you know, is
Speaker 3: it China, is it India or somebody like that?
Speaker 2: Who knows what fly Is this a play against treasuries
Speaker 2: or trying not to buy treasury or could it be complexe.
Speaker 4: I would argue it's probably an inflationary hedge.
Speaker 3: I want to emphasize gold traded like this in the
Speaker 3: nineteen seventies, So what we're seeing here in this dynamic
Speaker 3: is not completely unfamiliar territory. You just got to go
Speaker 3: back four decades to see a period similar to this.
Speaker 3: So I would argue, you know, and you and you
Speaker 3: look at bitcoin too. Both of them are, you know,
Speaker 3: the strongest performers out there. I argue they're pricing in
Speaker 3: inflation risk. But the other thing both they're pricing in
Speaker 3: is liquidity problems. Liquidity risk, particularly in the financial markets, Yeah.
Speaker 2: Which which have come to fruition, or it's something that
Speaker 2: they're just happy.
Speaker 3: You know, one thing I can say, it's bitcoins a
Speaker 3: measure of liquidity out there. And you know, part of
Speaker 3: the reason the volatility you've seen across the space, not
Speaker 3: only in commodities, but in financial markets.
Speaker 4: You know, liquidity still remains low.
Speaker 2: Deeff talking to me about copper, so it's had quite
Speaker 2: a strong run. I think it's right on the cost
Speaker 2: of ten thousand dollars a ton. We talked about the
Speaker 2: energy transition. I mean, is this a signal that we
Speaker 2: could be there? I know you said, you know, we've
Speaker 2: been waiting for two years and a half.
Speaker 1: Yeah, yeah, had time it.
Speaker 2: You know.
Speaker 3: By the way, I want to point out, we got
Speaker 3: bullish on corn in two thousand and six off of
Speaker 3: the biofuel story. Corn didn't perform till twenty twelve, but
Speaker 3: it went straight up, by the way. But copper typically
Speaker 3: trades like a stair step, and we just went through
Speaker 3: one of the stairsteps. So now the difference between copper
Speaker 3: and oil oil has bagradation.
Speaker 4: That's telling you it's fundamentally tight on the front end.
Speaker 3: And again I'm going to emphasize it off the board
Speaker 3: and back gradation. There's no investors going off the board
Speaker 3: and back gradation. In copper, we're a little bit of
Speaker 3: contango on the front end, which is telling you it's
Speaker 3: pricing medium to longer term stories.
Speaker 4: So yes, you've.
Speaker 3: Had the upward draft of everything under this higher for longer.
Speaker 3: You know, grows surprise that we're dealing with. I'm not
Speaker 3: going to call it a surprise. It's your typical lates.
Speaker 1: You call it, not others.
Speaker 3: But in terms of thinking about what copper and the
Speaker 3: metals are pricing, it's pricing a more medium, longer term story,
Speaker 3: which brings us back to the whole question around energy transition,
Speaker 3: because you know, we've all been making the argument, you know,
Speaker 3: going back, copper is the new oil, and stand by
Speaker 3: that that that view. Because we're going to electrify everything,
Speaker 3: you're gonna need need the copper to do it.
Speaker 4: And so most likely it's pricing that in.
Speaker 3: But even there, like oil, that's going through a consolidation
Speaker 3: period because the price got ahead of the fundamentals. But
Speaker 3: longer term, absolutely believer in that. And by the way,
Speaker 3: underlying demand for copper, despite the weakness in the property
Speaker 3: market in China, is still healthy because think about what
Speaker 3: we were just talking about, all of those green CAPEX
Speaker 3: goods in China that are being subsidized, and then you
Speaker 3: have all the investment that's occurring in the West and
Speaker 3: it really starts to accelerate in twenty six and twenty seven.
Speaker 1: If you have the energy transition and you have AI.
Speaker 2: So as we use AI, our mobile phones get more complicated,
Speaker 2: we're also going to be you know, using some of
Speaker 2: the rare earths or even some of the things that
Speaker 2: you follow very close, some of these metals, like how
Speaker 2: do you see that complex.
Speaker 3: All AI is chips and copper, and what are the
Speaker 3: chips gallium and germanium so it is basically critical.
Speaker 4: Metals and copper.
Speaker 3: So you know, you know it's in the that is
Speaker 3: the bottleneck to really be able to make the investment
Speaker 3: in in AI. In fact, you know everybody goes well,
Speaker 3: AI and energy are the two most investible themes. Well,
Speaker 3: energy is more investible than AI because you need the
Speaker 3: energy to get to the AI.
Speaker 4: Here's a stat for you.
Speaker 3: One GPU, one of the Vidio GPUs, consumes as much
Speaker 3: electricity as the average American household. Now let's go start
Speaker 3: building enormous data centers. You could be up to one
Speaker 3: hundred megawatts of for you know the demand out there,
Speaker 3: So you know this is significant. And you know, I
Speaker 3: really believe when we think about the forward demand or
Speaker 3: the structural story, it's more bullish today post this AI
Speaker 3: boom that we've seen over the last twelve months than
Speaker 3: it was eighteen months ago.
Speaker 2: But after decades of under investment, is there now danger
Speaker 2: that they're over investing and actually we'll have too much
Speaker 2: of it?
Speaker 4: Absolutely not. And by the way, here's the point is.
Speaker 3: You know people say to me, oh, look at all
Speaker 3: the investment in green energy, and I'm going to cite
Speaker 3: a number. I think it was two point three trillion
Speaker 3: in the numbers that Christian you know, in that report
Speaker 3: he did. You know, when you look at the need,
Speaker 3: you know, like I know, Goldman put out a number
Speaker 3: somewhere around between fifteen and twenty trillion dollars this decade alone,
Speaker 3: You're not even scratching the surface of how much investment
Speaker 3: we actually need to be able to achieve this. So
Speaker 3: I stand by the under investment thesis. And also remember
Speaker 3: greening represents somewhere around eighteen percent of the overall energy.
Speaker 3: Brown represents eighty two percent, and we have not been
Speaker 3: investing that we're under invested. And that's really the core
Speaker 3: of the supercycle story or the revenge of the old economy,
Speaker 3: is that lack of investment.
Speaker 2: Finally, I mean I can speak to you for those
Speaker 2: three hours, but I know you do have business to do.
Speaker 2: Gasoline prices in the US are they critical in the
Speaker 2: US election year?
Speaker 4: Absolutely? Yes.
Speaker 3: And you know, when you look at what are the
Speaker 3: most important issues facing voters, particularly in the US, the
Speaker 3: dominant one is the economy and inflation.
Speaker 4: And by the way, the.
Speaker 3: One thing nobody's been talking about that is in that
Speaker 3: aid bill at ninety five billion dollars, Aid bill more
Speaker 3: sanctions on Iran around vessels, refining and how they handle
Speaker 3: the Iranian crewd I would say, the one way out
Speaker 3: waivers and remember.
Speaker 4: We started this twenty eighteen. What a Trump.
Speaker 3: So Waivers will be able to manage it as you
Speaker 3: go into that election.
Speaker 2: So interesting, Jeff, thank you so much, as always for
Speaker 2: giving us a little bit of your time. Jeff Curry,
Speaker 2: there's chief strategy officer of Energy Pathways at Carlisle