Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.
Speaker 2: I'm Joe Wisenthal.
Speaker 3: And I'm Tracy Alloway.
Speaker 2: So, Tracy, you know, the war in Iran is primarily,
Speaker 2: at least from a commodity standpoint, being understood is like
Speaker 2: an oil shock. That's the number that most people are
Speaker 2: paying attentions the headline. Sure, but as we know from
Speaker 2: multiple episodes we've already done, it's not just an oil region.
Speaker 2: And of course we've been talking about fertilizer in one
Speaker 2: of our episodes. We did the episode on other sort
Speaker 2: of dry ball commodity shipping that's affected by the closure
Speaker 2: or the almost closure of the Strait of for Moves.
Speaker 2: There's plenty there. It's not just an oil story.
Speaker 3: Yeah. The one silver lining of all of this, I guess,
Speaker 3: is that we're all becoming commodities ex supply chain commodity
Speaker 3: experts and petrochemicals as well. I should just say we're
Speaker 3: recording this on March seventeenth, because who knows what's going
Speaker 3: to happen by the time this episode comes out. But
Speaker 3: one of the big headlines today is that Iran has
Speaker 3: just struck one of the big gas fields in the UAE, yes,
Speaker 3: which is the Shaw Field in the sort of empty
Speaker 3: quarter area, and it's on fire, so pretty dramatic footage,
Speaker 3: which definitely does tend to concentrate your mind on one
Speaker 3: particular commodity, which is gas.
Speaker 2: Well, there's sort of like two dimensions of the supply
Speaker 2: chain destruction, isn't there, Because there is the fact that
Speaker 2: for the most part, there are very few vessels going
Speaker 2: through the straight and Horn moves and people are sort
Speaker 2: of wondering when will that open again?
Speaker 4: Right?
Speaker 2: But then there's the other question of, as you just mentioned,
Speaker 2: there's a lot of damage to core infrastructure of various
Speaker 2: swords and so setting aside when the strait opens, how
Speaker 2: badly will the production infrastructure be impaired and how long
Speaker 2: will that go on? That's a sort of separate dimension
Speaker 2: besides just the passing of the ships, right, And.
Speaker 3: I think that gas in particular have these sort of
Speaker 3: geopolitical connotations. Even before the war with Iran, we're all
Speaker 3: used to thinking about, you know, big strategic pipelines, yeah,
Speaker 3: and thinking about potential disruptions to those. Back when Russia
Speaker 3: invaded Ukraine, there was obviously a European gas crisis, and
Speaker 3: so everyone's kind of worried about Europe once again. Yes,
Speaker 3: there's a lot to discuss totally.
Speaker 2: I saw a headline today also on the train here
Speaker 2: talk about how like Pakistan is very serious, like they
Speaker 2: have like a month of NED gas right now and
Speaker 2: they're heavily dependent on gas from the region. Of course,
Speaker 2: the fertilizer story, as we learned uria downstream from NED gas, etcetera. Anyway,
Speaker 2: last year, we did our live episode with one of
Speaker 2: our favorite commodities guests, Bob Racket, and I recall as
Speaker 2: we were walking out of the theater, I was like, Bob,
Speaker 2: we got to have you back on just for like
Speaker 2: an episode. Let's pick a commodity, and he said, let's
Speaker 2: talk about next time I'm on, let's talk about NED gas.
Speaker 1: Yeah.
Speaker 2: I was like, all right.
Speaker 3: And so so it turns out that now is the perfect.
Speaker 2: Time, the perfect time for the perfect guess. We are
Speaker 2: going to be speaking with Bob Brackett, Managing Director and
Speaker 2: senior research analyst covering North American oil and gas exploration
Speaker 2: and production and global metals and mining at Bernstein Research. So, Bob,
Speaker 2: thank you so much for coming back on a Law.
Speaker 4: Thanks for having me, Joe, thanks for having me. Tracy.
Speaker 2: When I said we should do an episode on one
Speaker 2: commodity at that time, why do your mind immediately go
Speaker 2: to ned gas? Was that the big story in your mind?
Speaker 4: So one, And I've told clients this, I am most
Speaker 4: useful when I am least loved. The problem with being
Speaker 4: a cyclical commodity analyst is everyone will ask me about
Speaker 4: whatever is the highest on the screen. Yeah, that's the
Speaker 4: thing that's going to be revert lower. The money has
Speaker 4: already been made there, and therefore you should be looking
Speaker 4: at the things that no one's really talking about. So
Speaker 4: I would argue today Henry Hubb us natural gas, not
Speaker 4: the LNG stuff that's shut in, not other commodity. Henry
Speaker 4: hub is unloved, okay, sitting at three dollars in MCF,
Speaker 4: while we have all of these underlying demand drivers in
Speaker 4: the US. So it's the forgotten molecule today.
Speaker 3: Forgot the forgotten line. But just broadly though, you were
Speaker 3: pretty spot on when it came to natgas, because I
Speaker 3: remember last year you turned bullish after like fifteen years
Speaker 3: of being bearished something like that. So I know you're
Speaker 3: too modest to say that you got that call correct,
Speaker 3: but directionally things seem to be going your way.
Speaker 2: Yeah.
Speaker 4: So I've been Bernstein covering the energy space, you know,
Speaker 4: nyon fifteen sixteen years, and for most of that time
Speaker 4: we've had these giant disruptions. First, we had shale gas,
Speaker 4: where the entire oil and gas complex was drilling and
Speaker 4: learning curves of how do you frack gas? How do
Speaker 4: you get it out? We drove the cost of shale
Speaker 4: gas out of three point fifty at mcf. And then
Speaker 4: shale oil comes along the way and just hands out,
Speaker 4: you know, gives away the associated gas from oil directed drilling,
Speaker 4: and so you've had a big chunk of the cost
Speaker 4: curve that doesn't really care what the price of gas is.
Speaker 4: It's a byproduct. Waha. Gas prices go negative at time
Speaker 4: to time, it doesn't slow down the oil drilling. And
Speaker 4: then finally you're starting to see the light where in
Speaker 4: the same way that the shale oil industry became well
Speaker 4: behaved kind of a twenty eighteen, the shale gas industry,
Speaker 4: and especially the Hainesville shale sitting down there on the
Speaker 4: border of Louisiana and Texas, starts to behave itself and
Speaker 4: in a world where you have these really strong structural
Speaker 4: demand drivers to the upside and you have discipline on
Speaker 4: the supply side. That's a nice time to come into
Speaker 4: a sector.
Speaker 2: Amazing perfect setup. One more sort of setup question. I
Speaker 2: was sort of thinking about this on the way in,
Speaker 2: Like when I think about oil, you know, there's various
Speaker 2: grades of oil, and there's various prices, but basically there's
Speaker 2: one global price of oil, and everything trades it a
Speaker 2: little bit of a spread to that, depending a little
Speaker 2: bit on geography, and depending a little bit on grade
Speaker 2: and light, sweet and heavy tower whatever it is my impression,
Speaker 2: and tell me if I'm wrong. Is that with gas,
Speaker 2: the story is like there's one type of gas, but
Speaker 2: there is absolutely not one global market because the exact
Speaker 2: flip side of oil, the supply chain is just so
Speaker 2: radically fractured.
Speaker 4: Yeah, if you think about it, VLCC, very large crude carrier,
Speaker 4: holds two million barrels of oil, and oil today's hundred
Speaker 4: bucks a barrel. I couldn't have said that three four
Speaker 4: weeks ago, and the movement, the cost of moving that
Speaker 4: halfway across the world a few bucks of barrel. So
Speaker 4: for a couple percent, I can take my product delivered
Speaker 4: to you wherever you want, anywhere you go to LNG.
Speaker 4: The cost of getting shale gas out of the Marcellus
Speaker 4: from two miles down and two miles out through the
Speaker 4: fractures is less than a dollar. Then it's a couple
Speaker 4: bucks to get it to market Henry Hub through pipelines.
Speaker 4: If I want to ship it, cost me two and
Speaker 4: a half bucks to liquefy it, another buck and a
Speaker 4: half to put it on a vessel, send it somewhere
Speaker 4: and then regas it. And so eighty ninety percent of
Speaker 4: the cost of gas is in the movement. Wow. And
Speaker 4: so in that world, all right, you've got a law
Speaker 4: of one price for oil, right because the relative value
Speaker 4: of the cargo versus the shipping's trivial. With gas, it's
Speaker 4: all the game of distance and markets, and therefore there
Speaker 4: is no one price.
Speaker 3: So can you maybe just situate us on Iran's place
Speaker 3: in the sort of I guess gas complex of the world,
Speaker 3: because you know, we think about it as a commodities player,
Speaker 3: but a sort of unreliable commodities player in some respects.
Speaker 3: You never know what's going to get sanctioned. And NAT gas,
Speaker 3: as we all know, tends to be kind of volatile
Speaker 3: in and of itself. So what exactly is Iran's role
Speaker 3: in this particular complex.
Speaker 4: So we're looking at the largest gas field on the
Speaker 4: planet and the Qataris call it Northfield, and that extends
Speaker 4: into Iranian territory where it's kind of parts. But you've
Speaker 4: got something that the numbers get huge, but we think
Speaker 4: about it. T CF of gas is a huge amount
Speaker 4: of gas AF So think of a LNG vessel can
Speaker 4: hold somewhere the big ones the q max is coming
Speaker 4: out Katar could be six bcf billion cubic feet to
Speaker 4: medium one would be four bcf, got it, And so
Speaker 4: a TCF would be.
Speaker 3: Two hundred four bcf. Would be a really good boy band. Nay, yeah, sorry,
Speaker 3: go ahead, I interrupted.
Speaker 2: I wouldn't have gone there, but yes, BCF.
Speaker 4: Right, good Haynesville, Well, a good marcellis well might produce
Speaker 4: over its life twenty BCF. It could load for four
Speaker 4: five cargoes of LNG. So take that times one thousand,
Speaker 4: and that's the scale of the field of Northfield. And
Speaker 4: it's a gas field that also produces a lot of
Speaker 4: condensate associated and so it's a massive money maker. It
Speaker 4: sits west of the straight before Moose right, and so
Speaker 4: all of the LNG coming out of the Gulf except
Speaker 4: Oman is sort of trapped west of the Strait of Hormus.
Speaker 2: Wait, just to be clear, that field is Qatar and
Speaker 2: Oronic goes into both.
Speaker 4: Its giant structure, largest gas structure on the planet, and
Speaker 4: it's shared geologically, it's shared operationally. It's absolutely not shared,
Speaker 4: but yes, operationally, it's all operationally. The North Field, what
Speaker 4: the Kataris are called Northfield, comes back to Qatar, gets
Speaker 4: liquefied there, loaded ships east out through the Strait of
Speaker 4: horm moves typically goes to Asia.
Speaker 2: This is what I was gonna ask, so again, because
Speaker 2: it's so fractured, where is it all Asia? Like, where's
Speaker 2: that gas going? And who's it competing with? What's that market?
Speaker 4: So the global LNG market's about five hundred million tons
Speaker 4: per animal, and the units that will kill you, we're
Speaker 4: going to be converting between a million. It's the minute
Speaker 4: it gets on a vessel and becomes a ton for
Speaker 4: whatever reason. Huh. And so out of that, you know Qatar.
Speaker 4: The three powerhouses of l and G are Qatar, the US,
Speaker 4: and Australia. The Qataris have the lowest cost field. The
Speaker 4: condensate pays for the field they could get. They're never
Speaker 4: going to they could give away the gas, and they
Speaker 4: sign these really long term contracts you know, around the world,
Speaker 4: but a lot into Asia. The US is the other powerhouse.
Speaker 4: It doesn't sign long term contracts. So if you went
Speaker 4: back in time, and let's say you're a Japanese utility
Speaker 4: and you're sitting on an island and you need something
Speaker 4: to burn to spinnatervine and generate electricity, you're sort of indifferent.
Speaker 4: I got to bring a vessel in, I could bring
Speaker 4: a cargo of crude, bring the fuel oil, some diesel
Speaker 4: or gas, and so I'm sort of indifferent. I'll pay
Speaker 4: roughly the same price for all of those. And so
Speaker 4: for half a century we've always had oil linked contracts
Speaker 4: for LG. So when we think about JKM, they're often
Speaker 4: linked to a crude cocktail price in Japan. The US
Speaker 4: comes along and breaks that and says, you know what,
Speaker 4: just pay me TTF. I'll take Henry Hub. I'll buy
Speaker 4: Henry Hub off of this flooded market in the US,
Speaker 4: liquefy it on the Gulf coast. Mostly, I'll send it
Speaker 4: to where you want, and a bunch of merchants will
Speaker 4: capture that arm and so it's a completely different pricing.
Speaker 4: It's much more of a spot market than these big,
Speaker 4: heavily contracted Katari volumes. And so now you know, Asia
Speaker 4: is running around saying I got forced majeur out of Katar.
Speaker 4: I don't have this. I gotta go burn something else
Speaker 4: and maybe I'll burn somebody else's LNG. But if not,
Speaker 4: I'll burn coal, I'll burn fuel, oil, diesel. I need electrons.
Speaker 3: So speaking of arbing the price, So with so many
Speaker 3: different pricing benchmarks and now this dislocation, are you seeing
Speaker 3: any weird like price movements that people are starting to
Speaker 3: look at and take advantage of.
Speaker 4: We're still well under what happened when Russia invaded Ukraine?
Speaker 4: Huh So, certainly europe prices and we could call them
Speaker 4: another alphabet soup TTF or MVP, but TTF so a
Speaker 4: price into the Netherlands has not gotten to nearly the
Speaker 4: levels it did in Russia Ukraine. Some of that is
Speaker 4: it always felt. I remember in the end of twenty
Speaker 4: twenty one, people were wondering why europe gas prices were
Speaker 4: so high, and they're like, oh, those Russians are terrible.
Speaker 4: They don't know how to maintain production. In fact, they
Speaker 4: were just sort of slowly dialing down the gas in
Speaker 4: order to tighten the market. And then you invade in
Speaker 4: winter February peak demand. You know, now we're entering the
Speaker 4: shoulder season in the spring and in the fall, it's
Speaker 4: beautiful outside in the northern hemisphere, and people don't need
Speaker 4: that same amount of gas, and so shoulder season is
Speaker 4: normally a terrible price for gas. So that sort of helps.
Speaker 4: And what also helps is, you know, to a certain degree,
Speaker 4: Europe has weaned itself off Russian gas and it feels
Speaker 4: like it has more options. We'll see how the things
Speaker 4: turn when we get toward the summer.
Speaker 2: Let's talk about you know, one of the stories in
Speaker 2: the US has been the rise of LG exports. Obviously
Speaker 2: the export terminals, Like how much has that scaled up?
Speaker 2: But you know, today in twenty twenty six, how much
Speaker 2: more are we exporting versus what we were in say
Speaker 2: twenty sixteen or twenty twenty one, prior to the invasion
Speaker 2: of Ukraine. And what is the how much capacity is
Speaker 2: going to come online in the coming years.
Speaker 4: Yeah, so if we wound back the clock. There's an
Speaker 4: interesting historic anecdote that's coming soon. So right now Qatar
Speaker 4: is not selling LNG. However, there is an LNG terminal
Speaker 4: called Golden Pass. It's thirty percent x on seventy percent Katar.
Speaker 4: It sits in Texas, it's loading now, and so in
Speaker 4: March it might be that the next cargo that Qatar
Speaker 4: sells is a Texas cargo, not a Qatari cargo. And
Speaker 4: that's because this Golden Pass terminal was an import terminal. Right,
Speaker 4: so if you go back far enough before shale gas,
Speaker 4: the strategy in the US was the US is going
Speaker 4: to run out of gas. It's going to get priced
Speaker 4: off of the price of diesel. Right, I'm going to
Speaker 4: run out of gas, have to need electricity, I'm going
Speaker 4: to go burn diesel. And so everyone had their favorite strategy.
Speaker 4: I'm going to build an import terminal and I'll bring
Speaker 4: in Katari gas or choose your favorite gas and that'll
Speaker 4: save my energy bill. And then Shelle Gas completely destroyed
Speaker 4: that strategy. But along the way, Excellent Mobile and Katar
Speaker 4: had this import terminal and they just flipped the switch
Speaker 4: and said, well, instead of being a regas terminal, let's
Speaker 4: make it an LNG terminal, and so that is loading
Speaker 4: as we speak. It'll start to sell cargoes as early
Speaker 4: as this month and right now that's Katar gas is
Speaker 4: only source of revenue until things get fixed in the
Speaker 4: Middle East.
Speaker 3: So, speaking of shale, one of the legacies of the
Speaker 3: shale boom is that a lot of energy companies got
Speaker 3: very nervous about over expansion and ramping up supply. In
Speaker 3: a situation like this, what's your gut check on how
Speaker 3: fast LNG producers can really ramp things up, both logistically
Speaker 3: and then just in terms of their sheer willingness and
Speaker 3: I guess in the face of their shareholders.
Speaker 4: So the gestation period of a shale gas well, if
Speaker 4: you're super quick, might be two three quarters. Realistically, the
Speaker 4: gestation period and of course these aren't gestational periods of
Speaker 4: an LNG facility is four years. Wow. So if we
Speaker 4: anniversary what happened four years ago? Russia invades Ukraine? What
Speaker 4: was the theme that started this year? Oh, there's going
Speaker 4: to be an energy glut in twenty twenty six and
Speaker 4: twenty twenty seven, and many an incorrect analyst hand raised
Speaker 4: you know, I was written about the approaching ler g glut. Right,
Speaker 4: this event has changed that logic. And so the reason
Speaker 4: there was a glut this year is because four years
Speaker 4: ago everyone ran out and said, I need LNG, I
Speaker 4: need the cavalry. Quick call the cavalry. How long is
Speaker 4: it going to take? Right? Four years? And so the
Speaker 4: answer is LNG facilities, once built, run full. Right, there's
Speaker 4: an ability to de bottleneck and run above nameplate. But
Speaker 4: basically there is no spare capacity. To a certain degree,
Speaker 4: we had Opek with a bit of spare capacity that
Speaker 4: they released in the first second week of the war.
Speaker 4: There is no equivalent on energy. Every cargo would have
Speaker 4: gotten delivered anyway. So there's no flex in the system
Speaker 4: and the system takes two years to fix.
Speaker 2: So one of the stories that after Russia's invasion of
Speaker 2: Ukraine was that, well, this is going to be a
Speaker 2: boon to US gas and we're going to ship them.
Speaker 2: Are we shipping a lot more energy to Europe than that?
Speaker 4: And so we go back to this phase where Golden
Speaker 4: Pass was an import terminal. Yeah, and then we got
Speaker 4: to about and so think of US overall gas supply
Speaker 4: demand as about one hundred and twenty bcf a day.
Speaker 4: A couple of years ago, ten percent of that would
Speaker 4: have been lergy exports. Okay, today we just were getting
Speaker 4: close to twenty b it'll be twenty percent, and so
Speaker 4: over the next out to twenty thirty will just be
Speaker 4: adding multiple bcf a day, and so it is the
Speaker 4: fastest growing part of US gas demand.
Speaker 2: One of the controversies with export terminals, as you mentioned,
Speaker 2: not that long ago, we're absolutely swimming in free gas,
Speaker 2: and it was this concern that, well, if you start
Speaker 2: exporting it, it raises the domestic price because then you
Speaker 2: don't have these gluts anymore. Has the rise of LNG
Speaker 2: exports meaningfully raised the price of domestic gas consumption?
Speaker 4: I wish that's the EENP investor. That's the dream of
Speaker 4: all the MP investors. You know, we're sitting here entering
Speaker 4: the shoulder season in Henry hubs three dollars, it got
Speaker 4: to five, It got to six during the winter where
Speaker 4: the seasonal dam and end was the highest. There is
Speaker 4: no strong evidence that that extra ten going to twenty
Speaker 4: percent of the demand wedge has changed price. Right, What
Speaker 4: changes price is where supply equals demand, And up until now,
Speaker 4: the supply side has been perfectly willing to hand the
Speaker 4: market as much gas as the world wants the US
Speaker 4: once it's three point fifty. I think we think that's changed.
Speaker 4: I think that's changed. I think you know, ultimately, certainly
Speaker 4: on shale oil, we're approaching a world where oil, your
Speaker 4: shale oil inventory five to ten years from now looks
Speaker 4: pretty lean. You're starting to see oil and gas companies say, well,
Speaker 4: what do we do in a post shale world? Shale
Speaker 4: oil world?
Speaker 2: What can we do?
Speaker 4: We can go international, right, so you've got you can
Speaker 4: go to the Middle East, and certainly there are people
Speaker 4: there looking for shale oil and were conventional oil like
Speaker 4: the Shaw gas field. Today people are looking at M
Speaker 4: and A, I'll just acquire my partners. Some people are
Speaker 4: looking at gas. But yeah, there is a sense that
Speaker 4: it is a It's always been a finite resource. It
Speaker 4: had been a growing resource, and one where this learning
Speaker 4: curve had taken cost out every year. You know, that
Speaker 4: chapter has kind of passed, and now it's a world
Speaker 4: if you're in a planning cycle of five to ten
Speaker 4: years and you look out five to ten years, you've
Speaker 4: got to go replace that stuff.
Speaker 3: How elastic is demand for something like nat gas? Because
Speaker 3: I'm used to thinking about it as someone with a
Speaker 3: house in the northeast and something that I have to
Speaker 3: buy every year unless I actually get really good at
Speaker 3: chopping firewood or something like that. But I imagine there
Speaker 3: must be some marginal source of demand that actually depends
Speaker 3: on the price.
Speaker 4: So there's the demand for that which gas gives you,
Speaker 4: which electricity, and so there's substitution. So one thing to
Speaker 4: watch is bubbling behind the scenes. Global thermal coal prices
Speaker 4: are starting to take off. They're up thirty percent year
Speaker 4: to date. What happened when Russian invaded Ukraine, Europe bought
Speaker 4: every LNG cargo they could, sucked it all the way
Speaker 4: into Europe. Asia was left saying, well, we're short electricity,
Speaker 4: let's go burn some more coal, let's consume more. And
Speaker 4: so thermal coal price is back in Russia Ukraine three
Speaker 4: hundred bucks a ton. I started the year a one
Speaker 4: hundred bucks a ton. We're up to one thirty. And
Speaker 4: so there's always going to be there's some demand destruction.
Speaker 4: But you know, people really like electricity, air conditioning and
Speaker 4: the things that it gives, and so the answer is
Speaker 4: you'll start to look for certainly coal is an obvious place,
Speaker 4: and then eventually some demand destruction, but that's a kind
Speaker 4: of much higher levels.
Speaker 2: Do you have a read on Tracy is mentioned in
Speaker 2: the beginning setting Outside the straight and hoorm move, it's
Speaker 2: just pure infrastructure destruction. Do you have a read on
Speaker 2: how much Katari production is going to be impaired? And
Speaker 2: the medium to long term here.
Speaker 4: So we know LNG terminals have a bit of momentum
Speaker 4: associated with them, and we've got pretty good experience on
Speaker 4: the Gulf coast where hurricanes come through, you bring down
Speaker 4: your LNG facility and you bring it back up. Same
Speaker 4: with oil platforms in the Gulf of America, Gulf of Mexico.
Speaker 4: Hurricane comes through, you shut in, you come back. And
Speaker 4: so in general, oil and gas assets are built. They're
Speaker 4: built for turnarounds, right, They're built to go down and
Speaker 4: come back up, especially when you can plan ahead. So
Speaker 4: you'll get whipsaws on the order of weeks. And so
Speaker 4: if this is over in weeks, right, we'll kind of
Speaker 4: have a big wedge of a month of chaos that'll
Speaker 4: filter through the economy. And if it goes on for
Speaker 4: months and months, it's something like if we talk about
Speaker 4: the Big three L and G, the US kutar in Australia.
Speaker 4: They're kind of each a fifth of fifth a fifth
Speaker 4: of global supply, So something like twenty percent of the
Speaker 4: L and G would be knocked out and that needs
Speaker 4: a lot of coal to replace, or a lot of
Speaker 4: demand destruction.
Speaker 3: So just on this point, I think commodity markets in
Speaker 3: particular are very used to fading Middle East flare ups
Speaker 3: very quickly. Is there any reason to believe that this
Speaker 3: time is going to be different? You have, you know,
Speaker 3: decades of experience in this space. Does it feel different
Speaker 3: to you.
Speaker 4: As a geologist and not a geo politician? I'm not sure.
Speaker 4: I'm the perfect guest that answer. What the market is
Speaker 4: saying is that we're returning to normal, right and so
Speaker 4: and yeah, so the is the market right or wrong?
Speaker 4: I have a few sign posts, and so one of
Speaker 4: the ones I'll use oil as an example. When you
Speaker 4: take the price of oil and you add in the crackspread, right,
Speaker 4: which is effectively what does the consumer pay for diesel,
Speaker 4: for gasoline, et cetera. When the cost of that gets
Speaker 4: to seven percent of global GDP, right, the world says
Speaker 4: that's too much and you stop using it. And that's
Speaker 4: where we got in twenty twenty two Right today, that'd
Speaker 4: be about one hundred and twenty dollars crude. Call it
Speaker 4: about a sixty dollars crackspread. So on my screen, I
Speaker 4: can show you oil never works a year forward when
Speaker 4: the cost of oil is six percent of GDP, And so.
Speaker 2: That's kind of that right now.
Speaker 4: So today we're one hundred plus forty, So crackspreads are
Speaker 4: around fort and these things are moving by the minute.
Speaker 4: But yeah, call it about one hundred and forty. So
Speaker 4: we're not quite there, but there would be an exit
Speaker 4: alarm ringing if we did get to kind of one
Speaker 4: eighty crewde plus crackspreads. And then you'd say, I don't
Speaker 4: need to be a g politician. I just know every
Speaker 4: time this has happened, the global economy has gone blah.
Speaker 2: It's private. Geopolitics is a fake field, isn't it. No,
Speaker 2: I don't know about that, but geology, feel sorry, I
Speaker 2: think geology is more of a science than geopolitics. Right, Well,
Speaker 2: anyone can fake being a geopolitical expert.
Speaker 4: Geology doesn't change when you talk about it, but geopolitics changes. Yeah,
Speaker 4: we talk about it. So the experimental influences the experiments.
Speaker 2: You know, here's something I've wondered about you know again
Speaker 2: that GUS there's not a global market. But with the
Speaker 2: rise of L and G, have global markets become somewhat
Speaker 2: more correlated over time? Are we trending towards a global
Speaker 2: price of gas?
Speaker 4: Yes? And in fact, if you think of the role
Speaker 4: the Saudi Ramco plays, and when they're setting their official
Speaker 4: selling prices, they will look east and they'll look west,
Speaker 4: and they'll see what are Atlantic basin prices for oil
Speaker 4: and what are Pacific basin and they're not going to
Speaker 4: let anybody arm them away, right, So kind of they
Speaker 4: help set a law of one price. The kataris that
Speaker 4: not only are sort of a fifth of LERG today,
Speaker 4: but growing right, serve two markets. They can look east
Speaker 4: and they can look west, and so the idea would
Speaker 4: be we used to have ja Ham, you'd have an
Speaker 4: energy market over here, and you'd have TTF over here.
Speaker 4: The Katari's role in the market is to say, no
Speaker 4: one's going to arm me. We're smarter, We've got more
Speaker 4: customers than anybody. And they were going to kind of
Speaker 4: link the price of energy in Europe to the one
Speaker 4: in Asia. So we have kind of the law of
Speaker 4: one seaborn price of gas, and then you can compete
Speaker 4: against that, and then I can say, Okay, if I
Speaker 4: build an import terminal here and the shipping is this
Speaker 4: much and the liquefaction regases this much, I can do
Speaker 4: this project.
Speaker 3: What's actually going on with Russian energy in Europe? Because
Speaker 3: you hear these very different stories. One is they're phasing
Speaker 3: out Russian imports, and then the other story is, well,
Speaker 3: Russian imports are at a record high.
Speaker 4: If Russian crude is getting a free pass on this conflict,
Speaker 4: then Russian energy will likely get a free pass. And
Speaker 4: so yeah, the answer is the longer this conflict takes right,
Speaker 4: if you are a buyer, and who are the big
Speaker 4: buyers of LERG Right, think about Europe and they're buying
Speaker 4: it for electricity, Think about Japan, Korea, Taiwan and China.
Speaker 4: And one of the strategies is diversity of supply is
Speaker 4: security of supply? Right, That's kind of been a mantra
Speaker 4: when you look at the various utilities, and that's been
Speaker 4: proven absolutely correct. If anyone said, well, the Kataris are
Speaker 4: giving me the best deal, I'm going to be one
Speaker 4: hundred percent linked to them, that was a terrible in
Speaker 4: hindsight choice and so diversity of supply means Russia has
Speaker 4: boatloads of gas, They've got pipeloads of gas. Now they've
Speaker 4: got a customer that they're not friendly with anymore, and
Speaker 4: so their ability to build LNG and eventually right. The
Speaker 4: problem with the pipeline is it goes from point A
Speaker 4: to point B, and so it is a marriage between
Speaker 4: the person putting stuff in one end of the pipe
Speaker 4: and the person taking stuff.
Speaker 2: Out of the other end.
Speaker 4: You can't move that pipe. The beauty of LNG is
Speaker 4: you don't have to get married. You can kind of
Speaker 4: have lots of customers with benefits.
Speaker 2: You mentioned that, and I remember these stories Ukraine after
Speaker 2: the invasion of Ukraine and Europe going around and trying
Speaker 2: to buy every LERG tanker that it could on the market,
Speaker 2: and that there were poorer countries that essentially just got
Speaker 2: shut out. What was the next chapter there? What happened?
Speaker 2: What did they do?
Speaker 4: Yeah, And so the challenge is there's probably there are
Speaker 4: two tons of demand for every LNG cargo, right, so
Speaker 4: there are twice as many tons of regas as there
Speaker 4: are liquefaction. And the way to think about that is
Speaker 4: a liquefaction terminal costs one thousand dollars a ton, and
Speaker 4: the ones in the Gulf Coast are big, ten million tons,
Speaker 4: so you're spending ten billion dollars for this terminal. Regas
Speaker 4: terminals are a tenth of that cost. So you invest
Speaker 4: in liquefaction exactly. So the supplier does the liquefaction, the
Speaker 4: buyer does the regas. So you can build regas terminals
Speaker 4: as an option, so you and therefore there are twice
Speaker 4: as many options. And so when the market is tight,
Speaker 4: you can have two people fighting for every cargo, which
Speaker 4: brings us back to the person that pays the most
Speaker 4: gets it. And then the answer is you need another
Speaker 4: form of source of electricity, and it's developing economies are
Speaker 4: generally going to have access to coal, right, They'll have
Speaker 4: coal and power plants and that's going to be their choice. Right,
Speaker 4: So yeah, the second place in fighting for an LERG
Speaker 4: CARYO is to go buy a coal.
Speaker 3: I'm going to change the subject slightly in the grand
Speaker 3: tradition of us interviewing Bob, I'm just going to throw
Speaker 3: out a random commodity, so anyone who came to our
Speaker 3: live show last year will know we had a segment
Speaker 3: with Bob where we just had the audience basically throw
Speaker 3: out random things and ask him to talknoledgeably on each
Speaker 3: of them for five minutes. So I'm going to do
Speaker 3: the same right now with sulfur and sulfuric acid. And
Speaker 3: the reason I ask is because you know, I was
Speaker 3: in Nabu Dhabi for a while and I remember Adnock,
Speaker 3: the big energy giant over there, striking some off take
Speaker 3: deals for its sulfur, and I was very used to
Speaker 3: thinking of sulfur as a byproducts of crude oil, like
Speaker 3: this thing that is kind of useless. But to my surprise,
Speaker 3: it turns out it is in fact very useful because
Speaker 3: you can make sulfuric acid out of it, and sulfuric
Speaker 3: acid is needed for things like etching of microchips. So
Speaker 3: I'm very curious what's happening to sulfur right now.
Speaker 4: Yeah, So the craziest thing happening to sulfur right now
Speaker 4: is this Shaw gas field in UAE is on fire.
Speaker 4: That gas field, twenty five percent of the gas is
Speaker 4: htwos right. This is a they call it a sour
Speaker 4: gas field. In the old days, if you ever went
Speaker 4: out to a well site that was H two s right,
Speaker 4: Joe would have to shave because the equipment to cover
Speaker 4: you need protective.
Speaker 2: Dear, you would have to shave too.
Speaker 3: Right, to shave, this is the whole oil well killed.
Speaker 4: It would take you longer to shave than me. And
Speaker 4: so you could always see the folks coming back from
Speaker 4: a sour gas field because they'd gone clean shaven. And
Speaker 4: so here we have one of the largest sources of
Speaker 4: H twos. And also it's about ten percent CO two.
Speaker 4: Hopefully it's controlled, but that's an environmental, huge safety risk, right,
Speaker 4: So that's that's worrying. Now, sulfur in general is not
Speaker 4: scarce at all. We got sulfur all over the place.
Speaker 4: This field produces sulfur. You can see if you ever
Speaker 4: go to western Kazakhstan the big Tengi's chevrel field, right,
Speaker 4: big piles of sulfur. Also, so every copper smelter in
Speaker 4: the world generates sulfur because you'll take a mineral, you'll
Speaker 4: take something like a calcupyrite, kind of the copper version
Speaker 4: of fools gold, and it's a copper sulfide. And so
Speaker 4: if you ever visited a smelter, you got this big
Speaker 4: tower where you're in the old days, you just burn
Speaker 4: off the sulfur dioxide. You make the tower tall enough
Speaker 4: so that that acid rain spreads across a large area,
Speaker 4: or you can capture the sulfur. So around the world today,
Speaker 4: copper smelters lose money, right You don't make money running
Speaker 4: a copper smelter. They call them treatment charges refining charges.
Speaker 4: They're kind of zero and they're sometimes negative. So a
Speaker 4: copper smelter will ring me up as a copper minor
Speaker 4: and say I want your copper concentrate. You can take
Speaker 4: that copper concentrate and normally you'll get the precious metals
Speaker 4: out of it. So I'll squeeze all the gold out
Speaker 4: of your copper ore and I'll make some money. Or
Speaker 4: I'll get an efficiency uplift. I'll pay for ninety five
Speaker 4: percent conversion and I'll squeeze them out. The other product
Speaker 4: I get is sulfuric acid. So right now copper smelters
Speaker 4: are looking and saying, hey, we're getting a revenue stream
Speaker 4: off of sulfuric acid. Most sulfur is going to go
Speaker 4: into agriculture. So if you've ammonium sulfate, for example, is
Speaker 4: an explosive but it's also a great fertilizer. And so
Speaker 4: for example, if you in Kazakhstan, the leading producer of uranium,
Speaker 4: uses sulfuric acid in the operations, they compete with agriculture,
Speaker 4: and so when the market is tight sulfuric acid, you
Speaker 4: might say, hey, I got to let the people make
Speaker 4: in food win, so you can have areas where your
Speaker 4: short sulfuric acid. We're taking sulfur off of the market.
Speaker 4: It's pretty abundant, and there will be sources, and there
Speaker 4: are lots and lots of copper smelters that can help
Speaker 4: convert it. So we'll find a way. So it's not
Speaker 4: clear to me that we've run out of sulfur. I
Speaker 4: think it's the fifth most abundant element in the crust.
Speaker 3: I love asking let's just do this.
Speaker 2: Yeah, I know you basically know all commodity. But you're
Speaker 2: not a soft sky, right, didn't you like carrying? Yeah,
Speaker 2: so you're.
Speaker 4: Not things that were once Yeah, if it comes from
Speaker 4: the earth, I'm more comfortable.
Speaker 2: Than if it were right the things that are grown, Yes,
Speaker 2: from the earth. Got it. When we think about particularly
Speaker 2: the war right now, and we've obviously oil and gas
Speaker 2: and solve further. Any what else do we bee watching?
Speaker 2: Any other weird I think I thought there was a
Speaker 2: good headline in Bloomberg about zinc prices have served, but
Speaker 2: anything else going up into the right these days.
Speaker 4: Yeah, So if you think about aluminum's one. So if
Speaker 4: you went back to when Russian invaded Ukraine, everyone went
Speaker 4: and said, okay, what portion of which element does Russia produce?
Speaker 4: And at the time a lot of nickel out of Russia,
Speaker 4: a lot of PGMs, platinum group metals and plati imprimed,
Speaker 4: and so people were like, oh, we're gonna run into
Speaker 4: those things. You know this time around the Middle East
Speaker 4: from a mining perspective, doesn't mine a lot west of
Speaker 4: the Straits of Horror moves, but they process a lot.
Speaker 4: So smelters are basically an aluminum People talk about illuminum
Speaker 4: as solid electricity. Most of the costs to make aluminum
Speaker 4: is electricity to me in the smelter. And so therefore
Speaker 4: you put aluminum smelters where you have cheap energy, and
Speaker 4: so we have some of the certainly in Bahrain, we've
Speaker 4: got these very large aluminum smelters running off cheap local
Speaker 4: feedstock natural gas. And you've seen aluminum price take off.
Speaker 4: As a result, zinc smelters are similar, not quite as
Speaker 4: energy intensive, and so to the extent that the Middle
Speaker 4: East was both a local and a global source of
Speaker 4: cheap energy, and so those that invested locally are seeing
Speaker 4: some of those consequences.
Speaker 3: All those zinc bar tops in danger. Why did that
Speaker 3: become a thing?
Speaker 2: Is zinc bar time?
Speaker 1: Yeah?
Speaker 3: Is this not a thing in America? In London, it
Speaker 3: used to be like if a bar had a zinc
Speaker 3: bar top, it was like a thing.
Speaker 2: It was like a nice class Yeah it was.
Speaker 3: Yeah, And I never really understood why people were really
Speaker 3: into zinc bar tops. But maybe we can start ripping
Speaker 3: them mountain converting.
Speaker 4: Yeah.
Speaker 2: Well, yeah, you know, whether we're talking about domestic American
Speaker 2: gas or whether we're talking about oil, et cetera. I'm curious,
Speaker 2: like over the last year since Liberation Day, one of
Speaker 2: the stories, Tracy and I were up in Alaska. We
Speaker 2: were at a little manufacture of oil Country tubular goods
Speaker 2: and they were talking about, you know, the fluctuating price
Speaker 2: of steel and how this was creating all kinds of issues.
Speaker 2: What has been the effect in terms of domestic energy
Speaker 2: infrastructure from the tariffs and just the sheer cost of
Speaker 2: you know, building out the infrastructure.
Speaker 4: For the most part, energy has been somewhat exempt from
Speaker 4: the tariffs. Okay, the metal, so what did we have.
Speaker 4: We had aluminum tariffs in the US, and we'd steal tariffs.
Speaker 4: We've had this threat of copper tariffs that I think
Speaker 4: is distorting copper price. The oil patch, the gas patch,
Speaker 4: the energy patch mostly been left alone. Okay, so that
Speaker 4: flow through of things like the domestic content of steel
Speaker 4: that's shown up. But yeah, to first order, if you
Speaker 4: think about how the oil industry set their budgets this year,
Speaker 4: it wasn't based it wasn't a factor. It was based
Speaker 4: on what was the price of oil on their screen
Speaker 4: when we started the year.
Speaker 3: Actually related to this, one of the things we heard
Speaker 3: from the Trump administration coming in was that they were
Speaker 3: going to be very energy friendly, you know, friendly to
Speaker 3: all the molecules, whether it's coal or gas or whatever.
Speaker 3: Have we actually seen policies that have helped those industries.
Speaker 3: Do people feel good about it right now?
Speaker 4: I would argue bombing Iran is a pro oil price policy.
Speaker 3: Took a year and okay, but domestic policies, I guess there's.
Speaker 4: This tension between you know the fact that, you know,
Speaker 4: one of Trump's mantra seems to be low oil price.
Speaker 4: Low gasoline prices extremely sensitive to that, and at the
Speaker 4: same time you sort of pro the oil industry. That's
Speaker 4: a very narrow path to tread. Yeah, right, the oil
Speaker 4: industry makes money when oil prices are reasonable.
Speaker 2: Now.
Speaker 4: Now, I would argue that a good mid cycle price
Speaker 4: of oil seventy five dollars eighty dollars, right, and that's
Speaker 4: where marginal producers can turn. We haven't really had that,
Speaker 4: right and undisturbed. We haven't had that since Trump took
Speaker 4: office or much before. We've been bouncing, you know, below
Speaker 4: seventy five. We've had a glut. The shale industry has
Speaker 4: been remarkably resilient, right amidst sixty dollars oil. We haven't
Speaker 4: seen shale oil give up very much, and Opek has
Speaker 4: been adding barrels to the market. Am it's kind of
Speaker 4: tepid demand. So we've kind of been under mid cycle
Speaker 4: prices for oil through most of the Trump administration. You know,
Speaker 4: Biden posts the solution in Russia Ukraine. So yeah, there
Speaker 4: is no policy. So the question is how do you
Speaker 4: get somebody to drill more in Texas, and you know,
Speaker 4: first and foremost it's the returns. Right, So clarity of
Speaker 4: policy permitting has improved. You'll hear folks in the oil
Speaker 4: patch say, right, some of the time you would spend
Speaker 4: to get things approved permitted has improved, But that hasn't changed. Right,
Speaker 4: the input, which is how many rigs are running, hearts rings,
Speaker 4: you know, how many frags spread throughout there.
Speaker 2: One of the big themes you know of the last
Speaker 2: several years kind of since we've been doing the podcast,
Speaker 2: but really since COVID has been one thing after another
Speaker 2: that encourages basically every country in the world to think
Speaker 2: about sovereignty, resource security, and so forth. And so obviously
Speaker 2: COVID major impetus to like make sure you have stuff,
Speaker 2: then the trade war, then Ukraine now that war and
Speaker 2: Iran et cetera. Like big structurally when you think about,
Speaker 2: I guess the last six years. Now, are we going
Speaker 2: to be living with the ramifications of this six year
Speaker 2: period for years? In terms of global commodity markets.
Speaker 4: So if you went back to the First World Second World,
Speaker 4: you had the West and you had the Soviet Union,
Speaker 4: and you had sort of two complete supply chains of
Speaker 4: all the commodities. Right, there were Soviet smelters and there
Speaker 4: were Western smelters, and there was just a lot of
Speaker 4: redundant capacity. Then you sort of got into the nineties
Speaker 4: and you have the collapse of the Soviet Union and
Speaker 4: you had at the same time, I am the China rose.
Speaker 4: You were lucky enough, so the China supercycle, the China
Speaker 4: demand supercycle, came at a point in time where you
Speaker 4: had all of this excess capacity undermanaged. So all you
Speaker 4: needed was a bit of capitalism applied to Soviet assets
Speaker 4: and that was sort of the only reason China could
Speaker 4: feed on consuming half of the world's copper or and
Speaker 4: half of the world's deal and half of the world's
Speaker 4: et cetera. Now we're almost flipping that and say, well,
Speaker 4: you know what, China has a bunch of rare earth processing,
Speaker 4: but now Japan and Malaysia will have it. Now the
Speaker 4: US is going to have it, and tariffs on copper, well,
Speaker 4: the US needs to be self sufficient in copper. So
Speaker 4: we're entering sort of this long cycle of globalization where
Speaker 4: are we going to recapitalize the end of globalization and
Speaker 4: we're going to go out and build two smelters in
Speaker 4: or five or however we're going to divide the planet.
Speaker 4: It's very capital intensive, it's inefficient, it would be powerful
Speaker 4: for it's inflationary. Yeah, and then someday in the next
Speaker 4: cycle we release it, all right. So yeah, So that's
Speaker 4: again a geopoliticians view, like his globalization over If if
Speaker 4: a geopolitician convinces you of that, then there's gonna be
Speaker 4: a lot of assets. Yeah, that's a big economy.
Speaker 2: All right. I have one that tiny question, Tracey is
Speaker 2: gonna love it?
Speaker 4: Do you?
Speaker 2: Land Man?
Speaker 4: I have watched. I tend to binge watch when I
Speaker 4: get a chance, So I binge watched the first season.
Speaker 4: I have not binge watched the second.
Speaker 2: Does it feel realistic to you?
Speaker 1: Is that.
Speaker 4: My lived experience has very little?
Speaker 2: Okay?
Speaker 4: Yeah? Versus Landmann.
Speaker 3: I would just like to say a significant portion of
Speaker 3: my life right now is listening to.
Speaker 2: Talk about the show. I love land Man so much anyway.
Speaker 4: Bob Brackley, land Man is the Moby Dick of our times.
Speaker 2: Bob Brackett, thank you so much for coming back on olods.
Speaker 2: Always a true true pleasure.
Speaker 4: Thank you so much.
Speaker 3: Joe, Thanks for things so much, Bob. That was great,
Speaker 3: as always yeah.
Speaker 2: God, I love talking to Bob so much. One thing
Speaker 2: with a lot of Energy episodes is that and I've
Speaker 2: mentioned it, we both mentioned it. Energy math is not
Speaker 2: intuitive to me, you know, like I have a very
Speaker 2: hard time conceptualizing like what is a billion cubic feed
Speaker 2: or whatever. But in that gas, especially with all the
Speaker 2: conversions that happened between the liquefaction, and it's like, I
Speaker 2: find it, really.
Speaker 3: It's really hard. No, I sympathize. I was one of
Speaker 3: those like toddlers that was trying to stick like triangle
Speaker 3: pieces into round holes. Yeah, I've always struggled to sort
Speaker 3: of visualize shapes and sizes.
Speaker 4: So absolutely the word cells and we're yeah.
Speaker 3: That's exactly it. But there is a bunch of stuff
Speaker 3: that stood out from that episode. One thing I should
Speaker 3: just clarify because I don't mean to make light of,
Speaker 3: you know. I asked about the Trump administration being energy friendly,
Speaker 3: yeah to domestic US energy producers, and Bob was like, well,
Speaker 3: the war is very friendly, and I kind of waved
Speaker 3: it off, like it is a huge giveaway to US energy.
Speaker 3: And you know, Isabella Weber, another Great Odd Lots guest,
Speaker 3: had a paper about like where the value of these
Speaker 3: higher oil prices actually flows to and it's all the
Speaker 3: US energy comes.
Speaker 2: Trump said himself. Yeah, maybe in one of his truth
Speaker 2: social posts something like that, he's like, we're actually going
Speaker 2: to make more money. Yeah, you know, because most people
Speaker 2: are not oil producers. Most people are oil consumers rights,
Speaker 2: and so people are not happy that gas prices, but
Speaker 2: you like sort of spun it. He's not, Look, we're
Speaker 2: gonna make a lot of money because we're a net
Speaker 2: oil exporter and energy exporter now between LNG and crude.
Speaker 2: So yes, clearly domestic energy has benefited, obviously benefiting you know,
Speaker 2: a wave that it's riding because obviously the demand for
Speaker 2: LNG after the invasion of Ukraine. That's just that's a
Speaker 2: very big story.
Speaker 4: Yeah.
Speaker 3: And I also think this brings us back to the
Speaker 3: episode were recorded on the impact of the Strait of
Speaker 3: Horror Moon's closure on China's Yeah, and this idea that well,
Speaker 3: the more disruptions to commodity supply you have like this,
Speaker 3: the more you have governments sort of worried about choke
Speaker 3: points materializing, the more you're going to see a hasten
Speaker 3: shift to renewables that might be to more immune from
Speaker 3: these types of disruptions.
Speaker 2: I hadn't appreciated at all until Bob said it at
Speaker 2: the very end that you know, like when we think
Speaker 2: of the early two thousands, you know, the commodity super
Speaker 2: cycle driven by China. But then for the first several
Speaker 2: years of Chin Chinese opening up, they really benefited from
Speaker 2: the fact that there was just a glut of capacity
Speaker 2: that the combining of Bloo, which I hadn't really thought
Speaker 2: about at all. That is, like, from an economic perspective,
Speaker 2: there was a lot of capacity to supply China with
Speaker 2: raw commodities, particularly in the mid nineties, simply due to
Speaker 2: the fact that you know, as you said, apply a
Speaker 2: little bit of capitalism to those Soviet assets and suddenly
Speaker 2: you have a lot of production broad online. The nineties
Speaker 2: were a special time. Everything was just working out peak humanity,
Speaker 2: peak humanity, I already believe. So all right, shall we.
Speaker 3: Leave it there.
Speaker 2: Let's leave it there.
Speaker 3: This has been another episode of the Odd Lots podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Jill Wisenthal. You can follow me at the
Speaker 2: Stalwart follow or producers Carmen Rodriguez at Carman Ermann dash
Speaker 2: Ol Bennett at dashbot and kel Brooks at Kilbrooks. And
Speaker 2: for more odd Laws content, go to Bloomberg dot com
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