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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: Terminal and the Bloomberg Business App. Dan Pickering of Pickering
Speaker 2: Energy Partners writing, if the US just stops, then Iran
Speaker 2: holds the keys to chaos by threatening future straight shutdowns.
Speaker 2: This would create a perpetual risk premium on oil prices.
Speaker 2: Dan joins us now for more, Dan, welcome to the program.
Speaker 2: Let's build on that last line. It's important. Do you
Speaker 2: think this is regime change for the price accrude.
Speaker 3: It's certainly putting a lower floor in on crude.
Speaker 4: And it really does depend, as and Maria is.
Speaker 3: Saying, it depends on things that are very difficult to
Speaker 3: understand and predict. And so if we end the war
Speaker 3: in Iran, without some sort of definitive action that controls
Speaker 3: the straits of horror moves, there's going to be a
Speaker 3: higher price to crew.
Speaker 4: Is it going to be triple digits?
Speaker 3: Not necessarily, but it will certainly not go as long
Speaker 3: as it's been recently.
Speaker 2: And we've watched the domino's fall over the past two
Speaker 2: weeks as the energy couldn't move through the straighter for
Speaker 2: most production start at being come and now we're in
Speaker 2: a different phase. They're finding workarounds. First there was the pipeline,
Speaker 2: the East West pipeline in Saudi Arabia, and now there's
Speaker 2: other workarounds too. What face are we in at the moment?
Speaker 3: Yeah, as the market titans, everyone looks for alternatives. Sooner
Speaker 3: or later, you can't tweak around the margin, and the
Speaker 3: problem remains. Fifteen percent of global supply is offline. You
Speaker 3: draw down inventories, you try to reroute pipelines, but that's
Speaker 3: just too much oil to work around. And so at
Speaker 3: some point point, and that point is is months, not quarters.
Speaker 3: At some point price is going to have to solve
Speaker 3: the supply demand equation, and that price isn't isn't where
Speaker 3: we're at today with WTI near one hundred, it's going
Speaker 3: to be twenty or thirty percent higher.
Speaker 1: So what is.
Speaker 5: The oil market right now pricing in given the fact
Speaker 5: that there is a high likelihood that this conflict is
Speaker 5: going to go on for at least another couple of weeks.
Speaker 3: Yeah, I think in a couple of weeks, I stop
Speaker 3: looking at the front month or the near term spot
Speaker 3: prices because those are wildly volatile and move with newsflow.
Speaker 3: I look out to the twenty twenty seven and twenty
Speaker 3: twenty eight crude futures, which have moved from call it
Speaker 3: sixty dollars a barrel WTI up into the sort of
Speaker 3: high sixties, low seventies. That tells me that the market's decided.
Speaker 3: There's five to ten dollars longer term premium that's coming
Speaker 3: in because of potentially how this situation winds up.
Speaker 1: There are two.
Speaker 5: Schools of thought dan On one hand, some people say
Speaker 5: there will be a longer, high, long term price simply
Speaker 5: because it'll be hoarding and a premium on some of
Speaker 5: these physical goods. Other people say that if the short
Speaker 5: term situation of the short term conflict does get worse,
Speaker 5: escalates and creates really high energy prices that actually on
Speaker 5: drive prices down incredibly low on the back end of
Speaker 5: this conflict. Where do you stand on that?
Speaker 3: Yeah, the issue of the higher it goes, the more
Speaker 3: demand destruction you have, the longer it takes to recover
Speaker 3: from that. So the higher it goes potentially the lower
Speaker 3: it falls. Where I stand on this is that it
Speaker 3: is all about the duration.
Speaker 4: If the straits are closed for six.
Speaker 3: Months, we're going to have one hundred and twenty five
Speaker 3: dollars oil for quite a period of time. We're going
Speaker 3: to have economic issues, probably a recession. If we solve
Speaker 3: this in the next couple of weeks, we probably come
Speaker 3: back down to the seventies, Gasoline prices come back down
Speaker 3: to reasonable levels, and we're sort of back to a
Speaker 3: new normal where gasoline and oil are a little bit
Speaker 3: more expensive, but not dramatically more expensive.
Speaker 6: Dan, what's the gap right now between the physical market
Speaker 6: and the futures market, Because I'm looking at Oman and
Speaker 6: Dubai crude and they're fifty five sixty dollars higher than
Speaker 6: we're brent Is trading.
Speaker 3: Yeah, if you have to own the physical barrels, you
Speaker 3: are paying a significant premium over the financial markets to
Speaker 3: get them. I think the financial markets ten times bigger
Speaker 3: than the physical markets. So financial markets pricing where you
Speaker 3: can trade paper barrels, if you are trying to get
Speaker 3: a barrel in the Middle East, you're paying more. Same
Speaker 3: story with jet fuel and other products. So there are
Speaker 3: signs of physical supply tightness that is not being reflected
Speaker 3: in the financial markets. That has happened historically as well,
Speaker 3: so it's not unusual, but it does say that the
Speaker 3: physical market quite tight.
Speaker 6: If we have a prolonged shut or the Iranians continue
Speaker 6: to control and not allow most vessels to go through
Speaker 6: the Strait of Hormuz for a prolonged period of time,
Speaker 6: well the physical market or the future market rather catch
Speaker 6: up to the physical market.
Speaker 3: It'll certainly, it'll certainly drag the financial markets higher. You're
Speaker 3: right now, you're pricing out demand in isolated instances with
Speaker 3: that one hundred and fifty dollars crew in the Middle East,
Speaker 3: for instance.
Speaker 4: On the physical market.
Speaker 3: The financial market's going to move up to the same
Speaker 3: spot and pull basically prices worldwide that direction. And if
Speaker 3: that happens, then we will start to see, you know,
Speaker 3: we will price out the five, ten, fifteen million barrels
Speaker 3: a day that we are not able to get through
Speaker 3: the straits.
Speaker 2: Then what would happen if Iron turned around and said
Speaker 2: any vessel with a Chinese flag on top can come through,
Speaker 2: no problem with that changes things materially.
Speaker 3: I think what we'd see is we'd see a lot
Speaker 3: of Chinese flag vessels moving through the Straits, and I
Speaker 3: mean the market suffision will move quickly to have China
Speaker 3: be the source of shipping through the Straits.
Speaker 4: But I do think we'd see near term prices drop.
Speaker 3: And I'm a believer that when this conflict in regardless
Speaker 3: of how it ends, near term prices come down.
Speaker 4: Because more oil will flow.
Speaker 3: So, whether it's Chinese tankers, a US flotilla, protection, regime change, etc.
Speaker 3: However it ends, prices come down, more oil through the straits,
Speaker 3: prices come down.
Speaker 4: The question is come down to what.
Speaker 2: Well, Dan, this is what I'm trying to work out though,
Speaker 2: where's the pressure point and who holds the case. And
Speaker 2: ultimately it feels like the pressure point is going to
Speaker 2: be in China. It's not going to be here in
Speaker 2: the United States. And they hold the case they can
Speaker 2: get the Iranians to come around. Now, am I reading
Speaker 2: it wrong or other people reading it wrong? Isra path
Speaker 2: there to reopen things.
Speaker 3: Yeah, so China and India both approached to Iran and said,
Speaker 3: let us take tankers through the straits. That's another gambit
Speaker 3: in the strategy. The question is how long does that
Speaker 3: last or does the US allow that?
Speaker 4: Ultimately?
Speaker 3: Are you going to feel comfortable with Iran in charge
Speaker 3: of the straits and allowing some vessels to come.
Speaker 4: Through but not all?
Speaker 3: Do we wind up with this uncertainty premium that creeps
Speaker 3: into the market even if barrels do start to flow
Speaker 3: to Asia.
Speaker 2: Stay with us. More Bloomberg Surveillance coming up after this.
Speaker 1: It's the latest.
Speaker 2: This morning, the Federal Reserve said to deliver a rate
Speaker 2: decision and new set of projections while facing triple digit
Speaker 2: crude prices. Neil Data of Rnmack writing, we're on track
Speaker 2: for three poor core inflation prints in a row ahead
Speaker 2: of a shock to oil markets. I think it's more
Speaker 2: likely that a cut is are raised altogether. Neil joins
Speaker 2: us Now for more, Neil welcome, was looking forward to this,
Speaker 2: So let's go from the top two pm Eastern time
Speaker 2: projections drop.
Speaker 1: What changes?
Speaker 7: Well, I mean, I don't think that the feder will
Speaker 7: be as dubbish as they have been if you judge
Speaker 7: it based on the summary of economic projections. I mean,
Speaker 7: if you just think about this in terms of mark
Speaker 7: to market and you're a forecaster, it's more obvious that
Speaker 7: they need to revise up their core forecast. I mean
Speaker 7: core PCE is basically tracking above three percent as of
Speaker 7: this meeting, and they expect it to go to two
Speaker 7: and a half percent by the end of the year.
Speaker 7: In order to hit that bogie, you basically need core
Speaker 7: inflation prints I think around two tenths of a percent
Speaker 7: for the rest of the year. That's a pretty pretty
Speaker 7: tall order all things considered. I mean, we haven't even
Speaker 7: seen the flow through of energy into core inflation, and
Speaker 7: some of that will bleed it. Not a lot, but
Speaker 7: that's going to happen. And so you know, if you're
Speaker 7: looking at this objectively, I think you just have to
Speaker 7: say it's much more likely that they'll be revising up
Speaker 7: core PC inflation. It could be as much as three
Speaker 7: tenths then revising up the unemployment rate estimate, which basically
Speaker 7: stays at four point four percent. So you put that
Speaker 7: into a simple tailor rule model, John, and you know,
Speaker 7: I think thirty basis points higher on CORNFLA. That's probably
Speaker 7: good for enough of them to take a rate cut
Speaker 7: off the table.
Speaker 5: No, you've been pounding the table about the labor market
Speaker 5: and saying that it is much weaker than people are
Speaker 5: currently giving it credit for, or lacking the credit of.
Speaker 5: I'm just wondering, what do you think the consequence of
Speaker 5: a FED remaining on hold is for the economy.
Speaker 4: Well, it's not good.
Speaker 1: It's not good.
Speaker 7: I mean, it reinforces the downside risk of the job market.
Speaker 7: You know, ultimately, if the unemployment rate is going up
Speaker 7: and the FED isn't easing and you know, providing some
Speaker 7: kind of shock absorber to that, it just reinforces the
Speaker 7: upside risk to the unemployment rate.
Speaker 5: Do you think that it increases chance of recession this year,
Speaker 5: which ultimately no one is really pricing in.
Speaker 7: Yeah, I mean I think that the risk of recession
Speaker 7: is higher than the markets believe. Of course, I've said
Speaker 7: that for some time now. But you know, look, at
Speaker 7: the end of the day, the economy is not in
Speaker 7: the same place it was in twenty twenty two, which
Speaker 7: is why drawing parallels to that period I think are misplaced.
Speaker 7: I mean, back then, the labor markets are wrong. Real
Speaker 7: incomes were rising today, that's not the case. Real incomes,
Speaker 7: not of transfers, are running basically half of a percent
Speaker 7: over the last year. And that was true even before
Speaker 7: this latest inflation shot. Of course, back then, we had
Speaker 7: a massive pile of excess savings that consumers were able
Speaker 7: to draw down. Again, that's not the case today. The
Speaker 7: savings rate, if anything, has already been drawn down. I mean,
Speaker 7: that's one of the reasons why consumer spending has been
Speaker 7: as strong as it has been over the last twelve
Speaker 7: months or so. And even then, consumption has been slowing
Speaker 7: despite that drawdown in savings. So I think that the
Speaker 7: consumer here is on, you know, not as strong footing
Speaker 7: as was the case a few years ago. And you know,
Speaker 7: it's encouraging to see oil prices moderate somewhat today, but
Speaker 7: ultimately we're on a glidepath nationally to four dollars a
Speaker 7: gallon gasoline. I mean, that's that's likely to happen at
Speaker 7: some point next week or two. So that provides some
Speaker 7: sticker shock, I think to consumers. And you know, one
Speaker 7: thing we're not talking about, we're not talking about tax
Speaker 7: refunds anymore. So a lot of the enthusiasm that people
Speaker 7: had going into the year, I think has been effectively
Speaker 7: neutered as a result of this.
Speaker 6: Well, Neil, in some states we're ready above four. In
Speaker 6: the president's own Florida, we're at three ninety three when
Speaker 6: it comes to a gallon of gasoline. You said going
Speaker 6: into the weekend, the two core pillars of trumpnomics are
Speaker 6: rising equity prices and low energy prices. Are we at
Speaker 6: risk of losing both of these at this moment?
Speaker 7: Well, I mean I think we're losing the f I
Speaker 7: mean for households.
Speaker 1: Of course.
Speaker 7: The main issue is that, you know, even though America
Speaker 7: is a large energy producer, now the money doesn't recycle
Speaker 7: back into the economy quickly, so consumers will spend less
Speaker 7: than oil producers will spend more, at least in the
Speaker 7: short run. So I think that's something that people need
Speaker 7: to think about here, is that, you know, the sort
Speaker 7: of the els city of the spending. It's not like
Speaker 7: oil producers are going to take their new found income
Speaker 7: windfall and go out and spend it in a bunch
Speaker 7: of mining rigs.
Speaker 4: I mean, in fact, to.
Speaker 7: The extent that people are saying this is going to
Speaker 7: be transitory, they may be less inclined to do that.
Speaker 7: So I think the growth shock is actually that much
Speaker 7: more material, at least upfront. But with respect to equities,
Speaker 7: you know, look, equities are hanging in there. I mean,
Speaker 7: there's some there was probably some anxiety before all this.
Speaker 7: So even if you get a quick resolution to this,
Speaker 7: I mean, I don't think we're sort of like raging
Speaker 7: back to new highs. But for now, I mean, the
Speaker 7: stock market is you know, for lack of a better phrase,
Speaker 7: trusting in Trump.
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: Here's the latest this morning, Israel claiming the elimination of
Speaker 2: another top a round in a fish, the US ramping
Speaker 2: up efforts to reopen the strata for most, dropping five
Speaker 2: thousand pounds bunker busters on Iranian missile sites. Seth Jones
Speaker 2: csis with this to say, writing, the brutal truth is
Speaker 2: that while the US military may succeed in degrading Iranian capabilities,
Speaker 2: it has dug itself a large hull in responding to
Speaker 2: other global conflicts. Seth joints are now for more.
Speaker 1: Seth, good morning, good morning.
Speaker 2: Where and how is this making the US more vulnerable?
Speaker 5: Well?
Speaker 8: I think the reality as the US's own national defense
Speaker 8: strategy and national security strategy. Note that the US priorities
Speaker 8: are elsewhere in the world, China in particular, but also
Speaker 8: the US notes Latin America is an ongoing war in
Speaker 8: Ukraine with the Russians right now, and the US is
Speaker 8: already running low. It was already low before this war started,
Speaker 8: on key stock piles of both offensive long range munitions
Speaker 8: like the JAZZM and the Tomahawk, and also on defensive
Speaker 8: munitions for Patriot and THAD. So as those stockpiles run low,
Speaker 8: there's a big question. With the Chinese pretty active in
Speaker 8: the Taiwan Straits in the South China, see how much
Speaker 8: the US is going to have left in its bins
Speaker 8: for the future.
Speaker 6: Lots of reporting too as well, that China is keenly
Speaker 6: focused on this to understand how the US military works.
Speaker 6: What are they learning from our offensive right now on the.
Speaker 8: Gulf, Well, I think they are seeing, to be clear,
Speaker 8: they are seeing a US and an Israeli military that
Speaker 8: are superb but precisions strike.
Speaker 1: They are also superb at air defense.
Speaker 8: I mean we are shooting down a large number of
Speaker 8: Iranian drones.
Speaker 1: Cruise missiles, ballistic missiles.
Speaker 8: We're also striking with precision the leadership command of control bases.
Speaker 8: But you also see the limitations of the US military.
Speaker 8: It's stockpiles of munitions, and you also see that asymmetric
Speaker 8: challenges that the US faced in Iraq and Afghanistan.
Speaker 1: We're seeing now in the Strait of Hormuz, which is
Speaker 1: the threat of minds.
Speaker 8: It's not a big conventional force that the Iranians have,
Speaker 8: but it's those asymmetric challenges that do pose the throat.
Speaker 6: You touched on it when you're talking about the Chinese
Speaker 6: vessels that are in the Taiwan Strait. Would this be
Speaker 6: an opportune time for Shijiping to do something when it
Speaker 6: comes to Taiwan.
Speaker 1: It's possible. Anything is possible.
Speaker 8: The big challenge for the Chinese at this very moment
Speaker 8: is they have obliterated their leadership within the last two
Speaker 8: to three years. They've gotten rid of over one hundred
Speaker 8: senior PLA People's Liberation Army officials, including of their top committee,
Speaker 8: the CMC. So the Chinese are not really in a
Speaker 8: position from all levels, the strategic down to the tactical
Speaker 8: level operators to make a move at this point.
Speaker 1: But we do see them. I was up in an aircraft.
Speaker 8: US Navy P eight in the South China Sea last year.
Speaker 1: The Chinese are everywhere.
Speaker 8: They're conducting exercises on a regular basis around the Taiwan
Speaker 8: Strait to simulate a blockade, so they're certainly thinking about
Speaker 8: it that I don't think now was the ideal time
Speaker 8: for them, just because of what they've done.
Speaker 5: There's a question about just the munitions and what type
Speaker 5: of re sources the United States has. There's also a
Speaker 5: question of alliances and where they lie. How do you
Speaker 5: see them really shifting in the wake of, and perhaps
Speaker 5: accelerated by this war in Iran?
Speaker 1: So I mean on the alliance structure.
Speaker 8: I've talked to a couple of senior European defense officials,
Speaker 8: including Minister of Defense the other day of one of
Speaker 8: the US's NATO allies. I think the challenge they were
Speaker 8: never briefed on this war to begin with. They were
Speaker 8: asked once the US struggled along those lines to come in.
Speaker 8: The same was true with the US allies in Japan,
Speaker 8: South Korea, Australia, all of which have been hesitant to
Speaker 8: jump into the war that the US in Israel started.
Speaker 1: So I think the US position.
Speaker 8: With some of these allies has been very transactional recently,
Speaker 8: and I think at some point there has to be
Speaker 8: an effort to bring them, bring them more closely together.
Speaker 8: But they are very concerned, the ones in Asia about
Speaker 8: the growth of the Chinese, and the ones in Europe
Speaker 8: very concerned about the Russian military.
Speaker 2: Just to finish on China, have we the US and
Speaker 2: I think about Chinese capabilities in places like around in
Speaker 2: places like Venezuela, and deficiency specifically, I.
Speaker 1: Mean on the Chinese side.
Speaker 8: The realities, the Chinese have not fought a war since
Speaker 8: the nineteen seventies, and they weren't particularly effective. But what
Speaker 8: they have done is they've provided components to the Russians
Speaker 8: in the war in Ukraine. They've also provided components in
Speaker 8: various types of assistance, including intelligence to the Iranians, not
Speaker 8: just now what over the last several years, including to
Speaker 8: some of Iran's partner forces, including the HOHO this in Yemen.
Speaker 8: So they've also put contractors and intelligence officials on the
Speaker 8: ground to learn how to conduct these kinds of war.
Speaker 1: So they are taking notes.
Speaker 2: How flawed is that experience though given how clean the
Speaker 2: operation was in a place like Venezuela. We've had all
Speaker 2: things like they've got the defense systems that were sell
Speaker 2: to them by the Chinese, and ultimately none of it
Speaker 2: stood up against US capability.
Speaker 8: I mean, it really shows in some ways actually, and
Speaker 8: I know there had been there have been some comments
Speaker 8: last year about the expense of say the F thirty
Speaker 8: five stealth aircraft, which is.
Speaker 1: In the billions of dollars.
Speaker 8: But the benefit of a fifth generation stealth aircraft that
Speaker 8: Lockeed Martin.
Speaker 1: Makes is that it's hard for radar to see it.
Speaker 8: So one of the things I think that even those
Speaker 8: Chinese and Russian air defense systems are finding out is
Speaker 8: that a fifth generation and the US is now working
Speaker 8: on a sixth generation aircraft, they are tough to see.
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