Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Tell.
Speaker 1: Michelle joining us on the phone as he always does.
Speaker 1: On next season for the Big Banks on Wall Street
Speaker 1: k b WCO. Tom, fantastic to catch up with you.
Speaker 1: Just walk us through the unprecedented environment we're working through
Speaker 1: right now with Wall Street's biggest names. Well, first of all,
Speaker 1: I've never seen a recession come this quickly in this
Speaker 1: hard so this is somewhat unprecedented. But I was just
Speaker 1: listening to your conversation just now, um, and you know
Speaker 1: there are going to be a couple of ways that
Speaker 1: that Wall Street is gonna interpret These are things, and
Speaker 1: you have to also understand I just saw them myself.
Speaker 1: We were looking for a three point nine billion dollar
Speaker 1: provision came in much higher. The question is does JP
Speaker 1: Morgan see something that makes them terribly more cautious or
Speaker 1: in some ways you could think that the company is
Speaker 1: enormously well capitalized, has a great top line of earnings
Speaker 1: and in some ways just go big, take a big provision,
Speaker 1: And in some ways there's going to be some folks
Speaker 1: to just use a non financial term. Are you ripping
Speaker 1: the band aid? Building a fortress balance sheet? This is
Speaker 1: your first quarter to do that since the virus arrived?
Speaker 1: And and was it was it more precautionary or was
Speaker 1: it in reaction to something that they believe is going
Speaker 1: to happen? And I think that's going to be what
Speaker 1: the streets looking for when we hear their eight thirty
Speaker 1: conference call today. So Tom, let's explore that further. I
Speaker 1: don't think anyone can tell us when we're going to reopen.
Speaker 1: Nobody can tell us when we're going to normalize. We
Speaker 1: can game out a series of things, though. We can
Speaker 1: work out what any individual company is preparing for. Are
Speaker 1: they preparing for a one months shutdown, a two months shutdown?
Speaker 1: As you look at the numbers this morning, Tom, what
Speaker 1: is that a bank preparing for? What kind of preparation
Speaker 1: are they taking for a duation that lost the quarter,
Speaker 1: two quarters slowdown that goes beyond that. So we were
Speaker 1: looking for a loan loss provision of four billion dollars
Speaker 1: in this quarter, and then and then increasing to something
Speaker 1: more like maybe let's say twelve billion dollars in the
Speaker 1: second quarter. So the question is how much of that
Speaker 1: first half low loss provisioning happened in the first quarter
Speaker 1: instead of in the second quarter. And I'll give you
Speaker 1: another dimension that's not actually embedded in this press release
Speaker 1: but should be talked about, which is what are the
Speaker 1: credit losses that are expected over the cycle. If we're
Speaker 1: going to do the global financial crisis again, then that
Speaker 1: would be a very high single digit like let's say
Speaker 1: you'd have eight percent of the loan portfolio would be
Speaker 1: would be charged off over a period of several years.
Speaker 1: We have been modeling something sort of maybe four percent
Speaker 1: for this cycle. If it turns out to be something
Speaker 1: more extended, then that I think that will change the
Speaker 1: dynamic a little bit because everything that we've modeled with
Speaker 1: more like a four percent, even up to a six
Speaker 1: percent is something that could be well handled by the
Speaker 1: capital base and the earnings power of the banks. And
Speaker 1: and so I think that's the framework. Because this new
Speaker 1: accounting provision, which is called CECIL, requires the banks to
Speaker 1: provide for their expected credit losses over the life of
Speaker 1: the loan that is very different than prior crisis where
Speaker 1: banks met the losses more real time, and so that's
Speaker 1: what the market has to understand. That's why I was
Speaker 1: thinking my earlier comment that is this kind of a
Speaker 1: go big moment for JP. Morgan ripped the band aid,
Speaker 1: take a bigger provision. Let's get out ahead of this
Speaker 1: because we're financially strong and we can or do they
Speaker 1: see something that's changed their opinion about the credit cycle
Speaker 1: over its entirety that we need to hear about. That's
Speaker 1: what I'm looking for, and we'll get more color hopefully
Speaker 1: on that at eight thirty Wall Street time when they
Speaker 1: do have their press conference. Tom. I'm wondering going forward
Speaker 1: whether you see this as a position of strength for
Speaker 1: the banks to act counter cyclically, as John was saying,
Speaker 1: and the idea with Betsy Gray sick of Morgan Stanley saying,
Speaker 1: they actually stand to benefit on the other side of
Speaker 1: this because they have these fortress balance sheets. Do you agree?
Speaker 1: I do? I mean, I I'll pick on City Group
Speaker 1: for a second, and I checked last night. At the
Speaker 1: end of two thousand and seven, City Group had two
Speaker 1: point six percent tangible common equity ratio. Today that numbers
Speaker 1: around seven and a half percent. So that's that's north,
Speaker 1: the two times that's north, the three times the capital
Speaker 1: base at the core of the balance sheet plus liquidity
Speaker 1: is far stronger. So I think this cycle, you know,
Speaker 1: it's gonna it's gonna to be tested. But but the
Speaker 1: banks are in a much better position to take charges
Speaker 1: and move forward. So but again, that doesn't mean if
Speaker 1: we get if we get a credit lost cycle like
Speaker 1: the global financial crisis, then things could change. John farre
Speaker 1: and Lisa Brown with with Thomas showed to Stephile KBW.
Speaker 1: My name is Tom Keane. I just wandered in off
Speaker 1: the question I got delayed. I was down Madison Avenues
Speaker 1: at JP Morgan setting up a Christmas Club account. I
Speaker 1: got a toaster at the end of December. If Christmas
Speaker 1: club account, Thomas showed, you know, you just alluded to
Speaker 1: the power of Fortress Diamond or Fortress balance sheet and
Speaker 1: all that. I get it. How many other banks, though,
Speaker 1: are like JP Morgan And the answer is not many.
Speaker 1: Is this going to be a big deal across five
Speaker 1: dred banks or six hundred banks, this new accounting provision
Speaker 1: given the pandemic shock that they're really gonna have the
Speaker 1: financial or balance sheet power that JP Morgan enjoys. Um, Look,
Speaker 1: I think JP Morgan is it's good that they go
Speaker 1: first generally, even though I think First Republic did just
Speaker 1: report also, but even though it's good done, they're a
Speaker 1: smaller regional bank but still in the SP five. But um,
Speaker 1: I think it's good that JP Morgan goes first because,
Speaker 1: like you said, they are a best in class balance
Speaker 1: sheet as well as profitability. I think that there are
Speaker 1: other banks that have about the same capital ratios as
Speaker 1: JP Morgan, I'd say, in the same league. What other
Speaker 1: banks don't have, tom is the pre tax pre provision
Speaker 1: earnings power, and that is what's really it's we call
Speaker 1: it the earning shield. So if you've got good levels
Speaker 1: of profitability, you know you typically it drives returns for
Speaker 1: your shareholders, but it also protects you in a downswing.
Speaker 1: JP Morgan has that, whereas there are other banks that
Speaker 1: just aren't as offittable is JP Morgan. And that's where
Speaker 1: the gap is wider, at least of the CFA definition
Speaker 1: for what Mr Michelle was just describing is called minting money. Yeah, well,
Speaker 1: minting money and and and consolidating money. And that's actually
Speaker 1: where I wanted to go because there is this feeling
Speaker 1: that the biggest banks will get bigger in this crisis,
Speaker 1: in this downturn, because they do have the wherewithal to
Speaker 1: withstand this and even benefit on the other side. Tom,
Speaker 1: how much do you see that happening. Oh, it's going
Speaker 1: to come because well, well I'm not a believer that
Speaker 1: the world's going to be turned upside down on the
Speaker 1: back side of this. But you know, one of the
Speaker 1: things we don't hear is complaints about people not able
Speaker 1: to move funds or because of all the digital access.
Speaker 1: So what this is. I think the studies that are
Speaker 1: going to be most interesting to read afterwards is what
Speaker 1: did bank customers do when they couldn't get to the bank.
Speaker 1: The reality is that they did what they did before
Speaker 1: the crisis, They used more digital and so banks that
Speaker 1: have the digital capabilities I think are going to really
Speaker 1: prove that they stood up really well for their clients.
Speaker 1: And I think banks that didn't have it are going
Speaker 1: to re examine it, and I think that could help
Speaker 1: cause fuel for consolidation. The other thing is on the
Speaker 1: back end of this, I expect that we're going to
Speaker 1: have near zero interest rates for a while and if
Speaker 1: you're a bank that is entirely spread dependent, meaning you
Speaker 1: don't have other businesses, it's going to put huge pressure
Speaker 1: on your earnings, and I think it could be a
Speaker 1: driver for consolidation. So I would expect there to be
Speaker 1: more consolidation on the back side of this. And I
Speaker 1: wanted to get to another top point Tom you mentioned earlier,
Speaker 1: which is not all banks will will perform equally here.
Speaker 1: There will be some banks that will underperform and will
Speaker 1: have bigger issues than others. So most of the time
Speaker 1: when I'm talking, I'm talking about broadly, but there will
Speaker 1: be a couple, I'm sure a couple of banks that
Speaker 1: have a harder time during this cycle. It's great to
Speaker 1: get views, especially in earning seas. It's Almo b w
Speaker 1: the c E wanking on JP Maulkin numbers. Laurie Kelvasin
Speaker 1: is in the trenches on this. She's at RBC does
Speaker 1: some wonderful work on the equity markets. Laurie to me,
Speaker 1: everybody's trying to get a bearing. They're trying to, you know,
Speaker 1: get to use the sailing illusion to get the keel set,
Speaker 1: get the sails set and move forward. How are you
Speaker 1: doing that? What are you using to establish a bearing forward?
Speaker 1: So you know, what I've told my team is that
Speaker 1: we are just going to keep moving the ball forward.
Speaker 1: We're going to keep running the numbers, and we're going
Speaker 1: to adjust as needed. But we're trying not to get
Speaker 1: too caught up in the headlines of the day. Um.
Speaker 1: We're really trying to think longer term to the extent
Speaker 1: that we can, and we're just trying to process new
Speaker 1: information as it comes in. Now. I've been very focused
Speaker 1: on things like my earnings model, not because I think
Speaker 1: I'm going to get it perfect right now, but because
Speaker 1: it helps me digesting in for nation as I come
Speaker 1: in to really understand, you know, what I know about
Speaker 1: this reporting season. I really need to understand what the
Speaker 1: hits are going to be to margins. That's something I
Speaker 1: have trouble modeling. If I don't go through the process
Speaker 1: and try to get my numbers as good as I can,
Speaker 1: I won't have that information that thought process ready to
Speaker 1: go as I'm trying to digest this info. So Lori,
Speaker 1: as you look at the new information as it comes
Speaker 1: in this morning, it's from JP Morgan and Wells Fargo,
Speaker 1: and I'm wondering what the lone loss provisions and any
Speaker 1: color that we may get within ten minutes time from
Speaker 1: Jamie Diamond of JP Morgan. How big of a hit
Speaker 1: are you sort of gleaning from the lone loss provisions, etcetera.
Speaker 1: Are you expecting to see sort of bleed out in
Speaker 1: main street going forward? Well, you know, we we One
Speaker 1: things we've talked about is the idea of collateral damage,
Speaker 1: and I think where the banks can be particularly helpful.
Speaker 1: To be honest, I'm not really so concerned about what
Speaker 1: they're one Q numbers look like. I'm concerned about what
Speaker 1: their read is on the economy, how they're handling their customers,
Speaker 1: how they're stepping up to really support this economy going
Speaker 1: forward on. That's really the kind of thing I'm going
Speaker 1: to be listening for. The Other thing, frankly, I'm going
Speaker 1: to be listening for is what companies, especially on the
Speaker 1: financial services side, are doing with their dividends. What we've
Speaker 1: seen the past few weeks is that companies are defending
Speaker 1: their dividends sacrificing their share buy backs. I need that
Speaker 1: dividend story to hold up to get retail investors back
Speaker 1: into the equity market. Well, long, let's talk about it.
Speaker 1: How vulnerable do you think those dividends are if this
Speaker 1: lockdown goes on for let's say, through May into June.
Speaker 1: So as we have looked back over the press releases,
Speaker 1: the eight k's, and the early reporters that have come
Speaker 1: in since March fifteenth, and we pick March fifteenth because
Speaker 1: that's the day a lot of the banks came in
Speaker 1: and cut their their buy backs. Um, what we keep
Speaker 1: seeing is and is the idea that this crisis will
Speaker 1: be transitory. I haven't been counting how many times I've
Speaker 1: read the word transitory, but it keeps popping up, and
Speaker 1: we see that in the context of some of those
Speaker 1: companies who have been defending their dividends. So my sense
Speaker 1: is that as long as this crisis is viewed as
Speaker 1: is something that's going to last a quarter or two,
Speaker 1: not really bleed into the second half of this year,
Speaker 1: not really bleed into next year, I think the company
Speaker 1: these are going to be comfortable trying to ride this
Speaker 1: out and keep those dividends intact. If it looks like
Speaker 1: this is going to be a longer bleed, then I
Speaker 1: think we have to worry. So there's a new information
Speaker 1: on the earning side, which we're getting with progressive speed
Speaker 1: over this week and next. And then there's the positioning
Speaker 1: that John is referring to earlier in this idea that
Speaker 1: there does seem to be a capitulation with the Bank
Speaker 1: of America Fund Manager survey coming out and saying that
Speaker 1: there is extreme investor pessimism, the highest cash allocation, that
Speaker 1: highest cash levels since nine eleven two and one. Do
Speaker 1: you think that that's enough to provide a floor to
Speaker 1: valuations or does this mean that perhaps people could get
Speaker 1: surprised on the downside. Yeah, so I think that when
Speaker 1: you're looking at any of these sentiment indicate there's whether
Speaker 1: it's their survey, my survey, or some of the weekly
Speaker 1: staffs that come out, you have to look at the
Speaker 1: preponderance of the evidence cash levels going from five point
Speaker 1: one to five point nine. Frankly, that doesn't tell me
Speaker 1: all that much, and it flies in the face of
Speaker 1: everything that my clients have been telling me since this
Speaker 1: crisis began, which is that they have been looking for
Speaker 1: opportunities to upgrade their portfolio by names would have been
Speaker 1: on their shopping lift, and our trading desk has been busy.
Speaker 1: So you know, I hear that I don't know exactly
Speaker 1: who they're talking to or who they're surveying. But I'll
Speaker 1: tell you it doesn't jive with what my conversations have been.
Speaker 1: It also doesn't jive with what my investor servey that
Speaker 1: I took at the end of March showed, which had
Speaker 1: fifty eight percent of those who responded were bulls, and
Speaker 1: that's the highest level of bullishness we've seen in three years.
Speaker 1: That's more instance with my conversations. Now, other things we've
Speaker 1: looked at our the CFTC data on US equity future
Speaker 1: positioning and the a AII bears. Those did show that
Speaker 1: levels of bearishness and pessimism were achieved, but not the
Speaker 1: most extreme levels that we've seen in the past decade.
Speaker 1: So CFTC never got back to the lows on equity
Speaker 1: future positioning and a AII bears topped out of ground.
Speaker 1: It got back to seventy percent in the financial crisis.
Speaker 1: So I will say at best, you know, I think
Speaker 1: that the sentiment picture is a bit mixed, but you know,
Speaker 1: my work just really doesn't jive with that via a survey,
Speaker 1: I got any other questions, laur Kelvicina, We don't know
Speaker 1: the time, but this has been brilliant. I'm gonna break
Speaker 1: the rule here. J Bryson is a wonderful economist with
Speaker 1: a big broader view of course with Wells Fargo. But
Speaker 1: I'm gonna go narrow right now, Jay, and I'm gonna
Speaker 1: go forward to tomorrow, and arguably the first real look
Speaker 1: we have besides horrific claims at this new American economy,
Speaker 1: and that is a look at retail sales. Wells Fargo,
Speaker 1: with the heritage of John Sylvia, is wonderful at parsing
Speaker 1: retail America. What do you see right now, Well, it's
Speaker 1: kind of a mixed bag, tom I mean, you know,
Speaker 1: on you know, we know that things like restaurants and
Speaker 1: hotels and things of that nature, all that very very
Speaker 1: weak um. On the other hand, Uh, there's gonna be
Speaker 1: a parcel offset, and I want to stress only parcel um.
Speaker 1: You know, people serves to grocery stores and warehouses and
Speaker 1: things like that to stock up in in um in March,
Speaker 1: and so tomorrow's tomorrow will probably be a come on,
Speaker 1: somewhat of a mixed bagage should be a big negative number.
Speaker 1: But you know when when when we look at April,
Speaker 1: when those numbers print a month from now I think
Speaker 1: that's going to be even you know, weaker as well. Jay,
Speaker 1: there's also a question, I mean, looking past retail sales.
Speaker 1: The big number this week is Thursday, where we get
Speaker 1: the next jobless claimed number. I am still absolutely dumb
Speaker 1: struck that nearly one in ten Americans has lost their
Speaker 1: job in the past three weeks. And I'm wondering what
Speaker 1: you're expecting in terms of Thursday's number and how quickly
Speaker 1: those jobs come back, given the fact that we are
Speaker 1: seeing destruction that cannot be replaced when it comes to
Speaker 1: going to restaurants, are going to hotels. Yeah, so last
Speaker 1: week it was the number of six point six million.
Speaker 1: I don't think we're gonna get quite that bad, although
Speaker 1: it's gonna it'll be another in the millions. Um, you know,
Speaker 1: our guests here is when it's all said and done,
Speaker 1: you're gonna look, you're looking at somewhere north of twenty
Speaker 1: million people who who will will be losing their jobs,
Speaker 1: you know, and in you know, these these weeks, Um here,
Speaker 1: how fast does it come back? And that you know,
Speaker 1: it really depends on how quickly that the economy opens
Speaker 1: back up again. And that's really that's the virus's schedule,
Speaker 1: as Dr Fauci would would say, here and and and
Speaker 1: so we'll see what happens there. You know, all these
Speaker 1: programs have been put into place by the federal government,
Speaker 1: by the Federal Reserve. It's acting as a bridge to
Speaker 1: get not all, but many businesses from where they were
Speaker 1: in February March to some time afterwards sometime late spring,
Speaker 1: early summer. And so some businesses you know who are
Speaker 1: still you know intact um maybe they're not. The restaurants
Speaker 1: that aren't aren't open right now, but they will come back.
Speaker 1: And you know, I think there's going to be a
Speaker 1: pent up demand among people to go out and socialize
Speaker 1: and things of that nature. You know, that said, we're
Speaker 1: not going back to February come September. The unemployment rate
Speaker 1: is not going back to three point five um this year. Um.
Speaker 1: You know, our forecast goes out to the end of
Speaker 1: next year and we still have the unemployment rate north
Speaker 1: of six percent next year. You know, some of these
Speaker 1: jobs that have been lost will be lost you know, forever. Um,
Speaker 1: not all of them, but um, you know, some of
Speaker 1: them will will be lost forever. Jay. For a lot
Speaker 1: of our audience, they hear repeatedly, all of these different
Speaker 1: forecasts coming from different places, including the IMF and yourself,
Speaker 1: a Wells farco. Can you help me understand the basic
Speaker 1: assumptions that underpin your forecast? What are the basic assumptions
Speaker 1: around when an economy like the United States starts to
Speaker 1: reopen again? Right? Okay, So our assumptions are we assume
Speaker 1: that the economy is going to start to slowly reopen
Speaker 1: late spring, early summer. So let's call it, you know,
Speaker 1: sometimes the end of next month, um, you know, into
Speaker 1: into June. We also assume crucial me that um and
Speaker 1: let me let me back up. One of the reasons
Speaker 1: that we assume that is that we get you know,
Speaker 1: we flatten the curve, that we get control of this thing.
Speaker 1: If that doesn't happen, then the rest of the forecast
Speaker 1: justus falls apart. But you know, so we assume it
Speaker 1: slowly starts to open up late spring, early summer, and
Speaker 1: then crucially, we're also assuming it doesn't come back in
Speaker 1: a quote meaningful way later this year. And again, if
Speaker 1: that's incorrect, then the rest of the forecast kind of
Speaker 1: kind of falls apart. And you know, John, Frankly, it's
Speaker 1: a lot of this is guesswork at this point, and
Speaker 1: educated guesswork, but it's guesswork. We we just don't have
Speaker 1: a road map here. We've never seen anything like a
Speaker 1: sudden stop too, and not only the United States economy
Speaker 1: but to the global economy. So we're all kind of
Speaker 1: flying blind when it comes to forecasting. So J just
Speaker 1: sort of picking up on the I M F forecast.
Speaker 1: With the worst recession since the Great Depression, how is
Speaker 1: it that we do see another depression given the fact
Speaker 1: that that bounce back looks less and less likely the
Speaker 1: longer this drags on. So I think my sense is
Speaker 1: talk about a Great Depression, I think that's a little
Speaker 1: bit overblown. I mean, the recession of nineteen twenty nine
Speaker 1: nineteen thirty turned into the Great Depression because of an
Speaker 1: utter failure of policy. The Federal Reserve did not do
Speaker 1: its job as lender of last resort um, and so
Speaker 1: the banking system collapsed in the early nineteen thirties, credit
Speaker 1: dried up, and and you know, hundreds of thousands, of
Speaker 1: not billions, of businesses went out of business, and that's
Speaker 1: how you got the Great Depression. Plus the fact that
Speaker 1: fiscal policy didn't really turn stimulative until nineteen thirty four
Speaker 1: with you know, the some of the New Deal sort
Speaker 1: of programs. This time around, policy has been very proactive,
Speaker 1: right The Federal Reserve has just opened up the tabs
Speaker 1: to keep all sorts of different financial markets liquefied. UH
Speaker 1: Fiscal policy has also turned very, very stimulated. The banking
Speaker 1: system today is much better capitalized than than it's certainly
Speaker 1: in my lifetime and probably back there in the Great
Speaker 1: Depression or in the nineteen twenties. And so I think
Speaker 1: the way you potentially could get to a great depression
Speaker 1: is if this virus comes roaring back again in the fall,
Speaker 1: not only in the United States but in the rest
Speaker 1: of the world, and then all these measures we put
Speaker 1: in place up to now, Um, you guys got to
Speaker 1: do it all. Jay is a job at Amazon, A
Speaker 1: real job, I mean is an economist. When you look
Speaker 1: at a hundred thousand jobs created, and I believe yesterday
Speaker 1: Basis and Company, so they're gonna go out and find
Speaker 1: another seventy five thousand warm bodies to do the Amazon thing.
Speaker 1: Are those quote unquote good jobs. Well, I'm not gonna
Speaker 1: opine on whether they're quote good jobs or not. I mean,
Speaker 1: I I don't know about how much they're getting paid
Speaker 1: in the benefits and things of that nature. But you know,
Speaker 1: they are create they are creating income, They are creating
Speaker 1: a service for people. Um. And whether or not people
Speaker 1: decided to buy goods online via Amazon or at their
Speaker 1: local retailer. You know, in some sense, I don't really care.
Speaker 1: It's it's it's a job. It creates income, um, it
Speaker 1: creates value in the economy. So um. You know, again,
Speaker 1: I don't know anything about the level of wages and
Speaker 1: benefits that those jobs pay, but yeah, they're they're they're
Speaker 1: certainly jobs with you always sposed to hear from me,
Speaker 1: ja ja. We always refer to as the acting chief economists.
Speaker 1: Can you tell your manager that if they aren't getting
Speaker 1: this done soon, we're just gonna start calling me the
Speaker 1: chief economists at Wells Falco Talent. They've got a month. Yeah,
Speaker 1: I'll say, I'll send the t on the tape of
Speaker 1: this to him, John, I did. I looked at the
Speaker 1: Amazon job. I believe it's seventeen dollars an hour, which
Speaker 1: is thirty five dollars. You're sort of like a run, right,
Speaker 1: And these are the people that we now say are essential.
Speaker 1: So if we're gonna call them essential. Now. I think
Speaker 1: that after this fight, I need to come back and say, well,
Speaker 1: you guys think essential, let's start seeing some of that money.
Speaker 1: Harry Chow and Durion with us who bmp Perry bout
Speaker 1: with truly decades of exposure, Harry, what is the symbolism
Speaker 1: of Western Canada hardesty closing under four dollars a barrel yesterday,
Speaker 1: right on the cusp of a record low. What is
Speaker 1: the symbolism of that in this conundrum of tanks up
Speaker 1: to the rim? I mean, what is that signal to
Speaker 1: a guy like you. Well, certainly signals that dropped in
Speaker 1: the US refinding activity, especially in the Mid Continent, dropped
Speaker 1: in US refinding activity on a Gulf coast. These are
Speaker 1: really the hard lands of US refining, and it's just
Speaker 1: the broader reflection of a big decline and demand for
Speaker 1: oil products unless we end up with these prices of
Speaker 1: oil that are severely discounted to the benchmarks in the
Speaker 1: case of regional markets like Canada, Harry, I'm struggling to
Speaker 1: understand the path forward. The idea that these production cuts
Speaker 1: that were agreed upon, you know, for put of enforcement
Speaker 1: and compliance to the side these cuts that were agreed upon,
Speaker 1: almost ten million barrels a day in production cuts. They're
Speaker 1: set to go into effect on May one. A lot
Speaker 1: of people say that they probably won't go into effect
Speaker 1: until June, just because of barrels that have already been
Speaker 1: sold in the futures market for May. How much does
Speaker 1: this actually change the equation when it comes to much
Speaker 1: lower oil prices in the very near future. Well, I
Speaker 1: think that's a really valid point between the time of uh,
Speaker 1: you know, intending an agreeing production cut and the physical
Speaker 1: implementation of that. It's going to take some time. So
Speaker 1: even as these cuts are for effective made the first
Speaker 1: it's not going to be till later that we see
Speaker 1: reductions happening. So this is why that gets the market,
Speaker 1: especially at the front of the curve, is being extremely
Speaker 1: cautious because we're not really addressing the demand decline through
Speaker 1: these cuts in the very short term. So it's only
Speaker 1: going to be, you know, by the end of the
Speaker 1: year that we're really going to see effect of these cuts,
Speaker 1: especially when we have a demand that has been locked down,
Speaker 1: unleashed with the progressive lifting of continent measures and other
Speaker 1: social distancing. Harry, I'm looking right now was Texas prices
Speaker 1: at one dollar ninety two cents a barrel, plus or
Speaker 1: minus a few cents here there. I was looking at
Speaker 1: projections saying that of us shall companies will go bankrupt
Speaker 1: if prices don't get back up to three dollars a
Speaker 1: barrel or beyond in the near future. How likely is
Speaker 1: it that those projections are going to come to pass? Well,
Speaker 1: I guess two things to consider there. A certain number
Speaker 1: of these companies are actually hedged for their production, but
Speaker 1: those that are not, probably the smaller players, will face difficulties.
Speaker 1: Typically the break even oil price in the Permian base
Speaker 1: and the drives US shales supply growth that break even
Speaker 1: prices closer to forty dollars, So I guess that's one
Speaker 1: of the aspects. The other thing, of course, is the
Speaker 1: banks that do fund a lot of these highly leveraged companies.
Speaker 1: The question is what are they going to do? And
Speaker 1: I think that we're going to probably see, especially in
Speaker 1: these extraordinary times, is that banks will probably want to
Speaker 1: at least try to keep on board some of these
Speaker 1: companies restructured debt and and and try to wait till
Speaker 1: the end of the year when the oil prices rise
Speaker 1: let's explore this question a bit further, because I think
Speaker 1: it's really important, Harry, what Lisa asked. We've been reflecting
Speaker 1: on cutting supply, cutting output in places like Sally Arabia, Russia,
Speaker 1: and nolsewhere we've not been thinking about taking out capacity.
Speaker 1: Even when this economy normalizes, these things won't pick up again.
Speaker 1: Your thoughts on that taking out supply versus taking out
Speaker 1: actual capacity in the United States? M Well, I think
Speaker 1: the answer really interesting question because when you look at
Speaker 1: now the expectations for market driven declines in production and
Speaker 1: possible shut ins, there are two things to consider, conventional
Speaker 1: production and what would be short cycle non conventional US
Speaker 1: shale production. Because if you think of a place like
Speaker 1: Canada or Brazil, shutting down production is extremely costly, whereas
Speaker 1: uh in contrast, in the US, I guess that the
Speaker 1: oil market is what economists would call more contestable. You
Speaker 1: could get in and out at a lower costs, you
Speaker 1: don't have as much sunk capital in it. So I
Speaker 1: would think that you know, if you do have shut
Speaker 1: ins and conventional production around the world, that may be
Speaker 1: more difficult to bring that capacity back in, whereas in
Speaker 1: the US just the very nature of US shale law,
Speaker 1: it could bounce back rapidly. Now, folks, a dumb surveillance
Speaker 1: question of the day. I'll ask it, Harry. When we
Speaker 1: say people cheat, what do they actually do? I mean
Speaker 1: when great cheats? Are the United States cheats? When you
Speaker 1: hear that phrase, what's it mean in the oil world?
Speaker 1: But I think really the the optics of cheating are
Speaker 1: down to the fact that trying to measure that country's
Speaker 1: production and see whether or not that country has been
Speaker 1: reducing production in relation to a reference level or baseline
Speaker 1: level that has been decided during meetings such as the
Speaker 1: Old Plus meetings. It's hard to say that the US
Speaker 1: cheats because in effect, you're not mandating a cut for
Speaker 1: US producers. The cuts will be market driven. So it's
Speaker 1: not a question of cheating here. It's a question of
Speaker 1: economics and whether or not, you know, companies are responding
Speaker 1: to those economics flashing caps for example, and so on.
Speaker 1: So the cheating aspect is really an issue of optics
Speaker 1: relative to measuring a country's production versus what it's I mean,
Speaker 1: this is important. Lesa asked the brilliant question. John asked,
Speaker 1: almost as brilliant question. I'll follow up with the dumb question,
Speaker 1: which is which is just simple, what do you predict
Speaker 1: on a price per barrel of all this? We're twenty
Speaker 1: two dollars was Texas Intermediate? You said forty dollars? Is
Speaker 1: where they click in what happens between twenty two and forty. Well,
Speaker 1: again we're back to which companies actually have had some
Speaker 1: of their production this year, and of course they would
Speaker 1: have hedged that at prices closer to fifty five or
Speaker 1: fifty dollars on a w t I basis, But there
Speaker 1: are going to be a number of small shale players
Speaker 1: that will suffer, and some of them will and he'd
Speaker 1: have to close down. So in that respect, we will
Speaker 1: have both declients and production motivated by the fact that
Speaker 1: there's a lot less capex, so you're not going to
Speaker 1: be drilling to sustain your production as much. And then
Speaker 1: there's gonna be the the economics of the smaller companies
Speaker 1: that may force their their closure. So these are the
Speaker 1: two dynamics in the case of US shale. Hi Henry
Speaker 1: was quite scay thoughts on this program, Harry Child and
Speaker 1: go in that BMP paraplehead of Commodity Research, thanks for
Speaker 1: listening to the Bloomberg Surveillance Podcast. Subscribe and listen to
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