WEBVTT - Jeff Currie Talks AI Boom and Commodities

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news under Savannahs.

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<v Speaker 2>This morning, AI meekes the physical world.

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<v Speaker 3>Memory is one of the main areas of constraint right

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<v Speaker 3>now because there's not enough physical cleanroom space to put

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<v Speaker 3>the tools in place to build all the memory we

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<v Speaker 3>need for AI.

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<v Speaker 1>Months ago, the big concern.

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<v Speaker 3>Was that we wouldn't have enough demand. Now if we're

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<v Speaker 3>getting to a point where we don't have enough supply,

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<v Speaker 3>what that means is there's more duration to the good news.

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<v Speaker 3>We can't be in a bubble if we don't have

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<v Speaker 3>enough capacity to supply all of demand right now.

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<v Speaker 2>So here's the laces. This morning, the CEO Dave mostly

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<v Speaker 2>issuing a warning for the AI buildout, mostly telling a

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<v Speaker 2>JP Morgan conference that building new factories would take too long.

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<v Speaker 2>The comments wank on memory and hardware makers after plunging

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<v Speaker 2>in Monday session, Jeff Curry of Abak's Markets writing capital

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<v Speaker 2>has chased the AI trade while ignoring the physical assets

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<v Speaker 2>it requires to run assets that have quietly become the

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<v Speaker 2>best forming asset class of the decade. Jeff joins us

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<v Speaker 2>now for more. Jeff, welcome to the program. Be excited

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<v Speaker 2>to catch up with you. Seth then we need to

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<v Speaker 2>take a giant step back and think about the mining

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<v Speaker 2>bust post China boom. We need to think about the

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<v Speaker 2>shale bust of a decade ago and why that's set

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<v Speaker 2>the stage for this period of what you call capex starvation.

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<v Speaker 2>Just where around we and why?

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<v Speaker 4>Well, when you look at history, going back to the

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<v Speaker 4>entire posts where our era, there's two sectors that lead

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<v Speaker 4>the equity market. One is energy, the other's tech. If

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<v Speaker 4>you can't turn on the lights, nothing happens. If you

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<v Speaker 4>can't innovate, you never progress, and that's what you see.

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<v Speaker 1>So we go back.

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<v Speaker 4>Tech was a leadership in the nineties all the way

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<v Speaker 4>up to two thousand and two, then we transitioned into

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<v Speaker 4>energy two thousand and two to twenty fourteen.

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<v Speaker 1>Fourteen to now has been technology.

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<v Speaker 4>And the way you think about it is in those

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<v Speaker 4>periods when energy lead and commodities lead, you build over

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<v Speaker 4>capacity that lowers the overall price. Inflation gets low and

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<v Speaker 4>stable interest rates drop and investors chase duration, which is

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<v Speaker 4>growth stories tech.

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<v Speaker 1>And the rest of it.

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<v Speaker 4>But eventually you run out out of energy, run out

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<v Speaker 4>of commodity capacity, and that's where we are today with

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<v Speaker 4>this geopolitical event, it just pulled forward. Now, you know, Jonathan,

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<v Speaker 4>we've been on here talking about the revenge of the

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<v Speaker 4>old economy over and over and over, this rotation out

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<v Speaker 4>of tech into hard assets that was already underway before

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<v Speaker 4>this happened.

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<v Speaker 1>What this did is just accelerated.

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<v Speaker 2>As you know, Jeff, discipline is really hardened some of

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<v Speaker 2>these C suites. What will it actually take to break

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<v Speaker 2>out of this CAPEX starvation phase that we're currently in

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<v Speaker 2>and do you see us breaking out of it anytime soon?

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<v Speaker 4>Higher prices, higher returns. But the ultimately you ask what

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<v Speaker 4>creates that huge upward trend in prices that you saw

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<v Speaker 4>in the seventies and you saw on the two thousands.

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<v Speaker 4>It's once investors take capital out of tech, dump it

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<v Speaker 4>into commodities, they begin to spend and then you get

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<v Speaker 4>cost inflation. The PPI it came out last week at

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<v Speaker 4>five point one percent, is telling you you're already seeing

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<v Speaker 4>signs of it, combined with a huge supply shock that

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<v Speaker 4>you're seeing in the Middle East. So in you know,

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<v Speaker 4>in terms of thinking about you know where we are

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<v Speaker 4>on that we are just in the i'd say the

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<v Speaker 4>bottom of the first inning of the supercycle. Despite the fact,

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<v Speaker 4>commodities are the best before I mean asset class this decade,

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<v Speaker 4>so you're already six years into it in terms of pricing,

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<v Speaker 4>and when we think about the forward you've probably got

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<v Speaker 4>another decade to twelve years left.

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<v Speaker 1>Just looking at.

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<v Speaker 2>History, Jeff is impletant. Let's just compare what's happening with

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<v Speaker 2>tank then. So I imagine you think as capital intensity

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<v Speaker 2>picks up, compacts intensity picks up of the tech plans,

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<v Speaker 2>we get a rerating, and then you get the rotation

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<v Speaker 2>into the more energy sensitive parts of the market, the

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<v Speaker 2>mining sector, the energy sector. We're not seeing that equal

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<v Speaker 2>and opposite. Moved on fact, Jeff, those particular parts of

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<v Speaker 2>the market have lengthd so far. That's interesting to me

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<v Speaker 2>that the energy names haven't done much at the moment.

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<v Speaker 4>What gives I think there right now there is no

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<v Speaker 4>concern about the supply of energy in commodities, even with

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<v Speaker 4>the largest supply shock the world has ever seen, two

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<v Speaker 4>x what we saw in the nineteen seventies. And I

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<v Speaker 4>think there's three reasons why they're not concerned. One, we're

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<v Speaker 4>in the middle of the shoulder months.

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<v Speaker 1>This is the.

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<v Speaker 4>Weakest demand that goes down and then back up. We're

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<v Speaker 4>in that weakest demand part of the entire year right now,

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<v Speaker 4>so there's no stress on the system. The second reason is,

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<v Speaker 4>right now, we're in a deficit, meaning that demands up

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<v Speaker 4>here supplies down here, we're drawing inventories. Once you exhaust inventories, boom,

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<v Speaker 4>you have to push demand down in line with supply.

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<v Speaker 4>That's when the shortage hits. That's when the pain hits,

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<v Speaker 4>and that's when prices go nonlinear. The third point I

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<v Speaker 4>want to talk about is that every policy maker, macro forecaster,

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<v Speaker 4>central banker, tech promoter is telling you right now there

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<v Speaker 4>is no problem. Every commodity ceo, commodity trader, anybody who

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<v Speaker 4>gets there dirty is telling you you have a problem.

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<v Speaker 4>You have seen this movie before, back in twenty twenty,

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<v Speaker 4>twenty twenty one, when remember infletion is transitory, and then

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<v Speaker 4>you know a few months later, boom, you hit the wall.

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<v Speaker 4>And you know, we went to double digit inflation. And

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<v Speaker 4>I think you're seeing the same dynamic here, you know.

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<v Speaker 4>I you know one last point though, Carter in nineteen

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<v Speaker 4>seventy seven made a fatal mistake.

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<v Speaker 1>It was the sweater speech.

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<v Speaker 4>It was, you know, February nineteen seventy seventy is a

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<v Speaker 4>sweater kind of like this went out was Burgher and

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<v Speaker 4>told everybody turn your thermosats down, and then prices of

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<v Speaker 4>commodities explode. And I think every policy maker has learned

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<v Speaker 4>from that. You know, you don't want to create fear.

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<v Speaker 4>My job is you know, if I was advising the

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<v Speaker 4>president telling him to do the exact same thing, keep

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<v Speaker 4>everybody calm.

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<v Speaker 1>But my job is telling you how to make money.

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<v Speaker 4>And you know, at this point, right now, this is

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<v Speaker 4>really serious.

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<v Speaker 1>Yeah.

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<v Speaker 5>Trump definitely doesn't want to come out, especially with the

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<v Speaker 5>ninety five degree weather, saying don't put your air conditioners on.

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<v Speaker 5>But Jeff, you say that at this moment, supply is

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<v Speaker 5>ever more strain. Yet bread can barely hold on to

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<v Speaker 5>one ten.

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<v Speaker 4>You have that seasonal weakness right now. You're not in

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<v Speaker 4>a shortage. But another really important point here is because

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<v Speaker 4>nobody is buying the energy companies in the back end

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<v Speaker 4>of that forward curve is anchored to the cost of

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<v Speaker 4>capital of those companies.

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<v Speaker 1>It is too low.

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<v Speaker 4>And you know, I call this the biggest asymmetric trade

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<v Speaker 4>in modern finance and historical terms.

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<v Speaker 1>Why when you look.

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<v Speaker 4>At the free cash flow yield of the oil companies,

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<v Speaker 4>they're fifteen point five percent.

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<v Speaker 1>The hyperscalers are zero.

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<v Speaker 4>Let me say that again, fifteen point five percent, you know,

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<v Speaker 4>free cash flow yield for the oil companies, zero percent

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<v Speaker 4>for the hyperscalers. We call those oil companies the munificent seven.

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<v Speaker 4>What does munificent mean? Giving you lavish gifts? And at

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<v Speaker 4>fifteen point five percent free cash flow yield, I'd call

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<v Speaker 4>that a lavish gift.

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<v Speaker 5>And that when it comes to supply and demand. You

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<v Speaker 5>mentioned this, it's going to get rough when inventories are

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<v Speaker 5>drawn down. When will we hit tank bottoms?

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<v Speaker 4>In your analysis, it depends on where you are in

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<v Speaker 4>the world and what products. Some products you're you're already there,

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<v Speaker 4>like motor oil in the US. And by the way,

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<v Speaker 4>motor oil in the US is critical because you couldn't

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<v Speaker 4>even turn on your car without motor oil. Even if

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<v Speaker 4>you had gasoline items like sulfuric acid, you're out.

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<v Speaker 1>What does that cause? That's why copper hit an all time.

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<v Speaker 4>High last week, because you need the sulfuric acid to

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<v Speaker 4>produce copper. But when we think about diesel, jet fuel, gasoline,

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<v Speaker 4>those parts.

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<v Speaker 1>Of the world, jet fuel, you're there.

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<v Speaker 4>We would expect to see here in Europe diesel and

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<v Speaker 4>jet fuel run into very serious problems by the end

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<v Speaker 4>of this month, the United States gasoline by July. And

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<v Speaker 4>at that point is when you start to get to

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<v Speaker 4>that nonlinear part and see prices go higher. But I

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<v Speaker 4>want to emphasize when we look at the spread between

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<v Speaker 4>spot prices.

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<v Speaker 1>In the back end, this spread is never been higher.

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<v Speaker 4>And everybody goes, oh, we had you know, prices were

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<v Speaker 4>at one twenty two in the Russian invasion. By the way,

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<v Speaker 4>the back end of the curve was ten dollars lower.

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<v Speaker 4>And then everybody goes, you know, we saw one forty

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<v Speaker 4>seven in two thousand and eight. By the way, the

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<v Speaker 4>back end was like one forty one forty seven. For

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<v Speaker 4>what is miss priced here right now is the back

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<v Speaker 4>end of the oil sitting somewhere around seventy seventy five.

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<v Speaker 4>This is a long term problem. The cost structure is

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<v Speaker 4>going to go up. There is no spare capacity left.

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<v Speaker 4>It's going to take a long time to re establish it.

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<v Speaker 4>We need to reprice that market. That's going to reprice

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<v Speaker 4>the munificent seven. That's why I tend to think the

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<v Speaker 4>trade here, you know, just looking at pure economics has

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<v Speaker 4>the most upside to actually own these oil companies.

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<v Speaker 2>Jeff Carry. Find up Jeff when you're next in ten

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<v Speaker 2>you need to co host the program with us. Yes,

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<v Speaker 2>looking forward to that. Jeff Carry that of Abex Commodity

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<v Speaker 2>Exchange over in London,