Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordert. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app. Stephen Kirk of the
Speaker 2: Council on Foreign Relations right in the following, President Trump
Speaker 2: must get clear, verifiable constraints on a Rand's nuclear program
Speaker 2: and re establish freedom of navigation through the strain offormos,
Speaker 2: or it is a strategic defeat for the US. Stephen
Speaker 2: joins us now from more. Steve, welcome to the program.
Speaker 2: If I want to call Iran, who do I call
Speaker 2: right now? Who do I speak to?
Speaker 3: Well, that's a very good question. The report is that
Speaker 3: the United States was able to reach the speaker of
Speaker 3: Iran's parliament, who is quite powerful. He of course, has
Speaker 3: denied that any negotiations are going on. There's also some
Speaker 3: indication that the Egyptian Foreign Minister was able to reach
Speaker 3: people within the Islamic Revolutionary Guard Corps. They have also
Speaker 3: denied the fact that there are going to be negotiations,
Speaker 3: regardless of whether there are there aren't, it does seem
Speaker 3: that the President is in keeping with his timeline of
Speaker 3: four to six weeks looking for a way to wind
Speaker 3: this conflict down.
Speaker 4: Steven, you know these countries really well, especially when it
Speaker 4: comes to Egypt, Pakistan, I know, Turkey, you spent a
Speaker 4: lot of time. And who do you think could be
Speaker 4: a real viable intermediary right now between Tehran and Washington.
Speaker 3: Well, it seems that the Pakistanis are taking the lead
Speaker 3: with a lot of help from the Egyptians. The Egyptians
Speaker 3: have improved their relations with Pakistan. Pakistan has improved this
Speaker 3: relations with Iran, and the Egyptians have also improved their
Speaker 3: relations with Iran and the run up to this content.
Speaker 3: So those are the countries that seem to be playing
Speaker 3: the most behind the scenes role in trying to establish
Speaker 3: some type of communication between Washington and Tehran. But the
Speaker 3: Iranian position is we've been negotiating with Trump and twice
Speaker 3: in the middle of negotiations, he is taking military action.
Speaker 3: So there's going to be a tremendous amount of skepticism
Speaker 3: within Tehran about getting to the table. And as we've seen,
Speaker 3: the Iranians still have a lot of fight in them.
Speaker 3: There doesn't seem to be a lot of incentive on
Speaker 3: their part despite what the President is saying to engage
Speaker 3: in negotiations to bring this to an end.
Speaker 4: Picking up in our point that they want that the
Speaker 4: US needs to re establish the freedom of navigation in
Speaker 4: the Strait of Hormuz or it is a strategic failure.
Speaker 1: How do you perceive the.
Speaker 4: Strait of Hormus will be basically operate in the future,
Speaker 4: Because the President said yesterday is a little bit tongue
Speaker 4: in cheek, but he did say maybe me and Iatola
Speaker 4: will do it together.
Speaker 3: Yeah, this is a huge problem. The United States cannot
Speaker 3: come out of this war with the Iranian regime intact,
Speaker 3: the Iran's ability to fire on its neighbors, no clear
Speaker 3: verifiable limits on Iran's nuclear program, and the Iranians in
Speaker 3: control of the Strait of Remooves.
Speaker 1: That would be a worse.
Speaker 3: Position than the United States was in before the President
Speaker 3: started hostilities. On February twenty eighth. They're going to have
Speaker 3: to re establish freedom of navigation through the strait. That
Speaker 3: means that the Iranians will have no control over who
Speaker 3: goes through that waterway.
Speaker 4: Isn't that genie already out of the bottle. The Iranians
Speaker 4: have control it is.
Speaker 3: And it's going to be extremely difficult to put that
Speaker 3: genie back into the bottle. And it seems to me
Speaker 3: that the way to do that is going to be
Speaker 3: through military action. It's hard to imagine a negotiation given
Speaker 3: the position that the Iranians are in right now, where
Speaker 3: they have established essentially a new regime for passage through
Speaker 3: the Strait of Remoovese, that they're going to go back voluntarily.
Speaker 2: Stay with US, Multilanpex, saveillance coming up off to this,
Speaker 2: This is what the Department of Energy has got to
Speaker 2: say bad things right now. The US Energy Secretary Chris
Speaker 2: Right down playing the market impact of the war, urging
Speaker 2: energy companies to ramp up production.
Speaker 5: Marcus, do what markets do.
Speaker 6: Prices went up to send signals to everyone that can.
Speaker 1: Produce more, please produce more.
Speaker 6: The prices have not risen high enough yet to drive
Speaker 6: meaningful demand destruction, but Americans and energy entrepreneurs around the
Speaker 6: world are in genius, so are things are being done.
Speaker 6: But these are mitigants of a of a situation that's temporary.
Speaker 2: So Brent is holding there one hundred dollars a barrel
Speaker 2: as uncertainty linkers around the conflict's outcome. Vicus to a
Speaker 2: Ada of Macquarie, writing, if the stratiformers remains effectively shut
Speaker 2: until the end of April, Brent could still reach one
Speaker 2: hundred and fifty dollars a barrel. Vecus joints it's now
Speaker 2: before more Vecus, welcome to the program. Can I start
Speaker 2: with this? What is your base case at the moment,
Speaker 2: and perhaps more importantly, what informs that base caps?
Speaker 7: Yeah, our base cases for Brent to revisit the one
Speaker 7: twenty range. You know, as you mentioned earlier, you know
Speaker 7: there is a big disconnect between the physical and the
Speaker 7: financial markets. We think that disconnect will close if the
Speaker 7: strait remains you know, largely shut. It's not completely shut,
Speaker 7: so we think one twenty maybe one twenty five is
Speaker 7: kind of the the most likely area that price will revisit.
Speaker 7: But to your other point, if the straight remains largely
Speaker 7: shut through April, you know, even if you get a
Speaker 7: single day resolution right like, hey, we're done, you won't
Speaker 7: get flows back to normal till May. By then, the
Speaker 7: amount of oil that didn't make it to refiners and
Speaker 7: petrochemical plants will have been so large that, you know,
Speaker 7: we think one fifty brent something that closes in on
Speaker 7: Oman pricing to Baio pricing. Some of the physical markets
Speaker 7: that you as mentioned are considerably above rent.
Speaker 5: We think that gap will have to close.
Speaker 4: That's the base case if the strait of Hermose opens
Speaker 4: in the short term. What happens if it doesn't open
Speaker 4: in the short term and countries like Saudi Arabia or
Speaker 4: the UAE also engage in a more material way in
Speaker 4: this conflict.
Speaker 7: Yeah, in that scenario, there are numerous mitigations that can
Speaker 7: come to the market to limit oil from going to
Speaker 7: two hundred on the futures market. You know, we've seen
Speaker 7: refined products go well above that already, but global strategic
Speaker 7: petroleum reserve releases we think could reach about three million
Speaker 7: barrels a day. The East West pipeline that crosses across
Speaker 7: Saudi Arabia to circumvent her moves.
Speaker 5: You know, that could do another three and a half.
Speaker 7: You know, you've got refining run cuts, which will then
Speaker 7: translate into even higher refined product prices, but it will
Speaker 7: alleviate some of the crude shortages. So there's a a
Speaker 7: bunch of big ones, right and OPEC also has about
Speaker 7: two hundred million of stores outside of the Middle East.
Speaker 5: They can use that.
Speaker 7: So we have If everything can come to the market
Speaker 7: in a timely way without all the normal bureaucratic friction,
Speaker 7: you can actually rebalance the market largely, not fully. You
Speaker 7: still are cutting refining runs, so that's a you know,
Speaker 7: Peter to pay Paul situation, But you can close that
Speaker 7: deficit from what we estimated about thirteen million a day,
Speaker 7: you can close it down to about three million, much
Speaker 7: more manageable. But you can't do that forever, right Like,
Speaker 7: even that has a time limit.
Speaker 4: The East West Pipeline, I'm glad you mentioned it. It's
Speaker 4: looking very prudent of Saudi Arabia to have invested billions
Speaker 4: of dollars of this to bring their crew to Yanboo,
Speaker 4: to the Red Sea. But individuals I'm talking about are
Speaker 4: putting higher probability now that the Houthis would get involved
Speaker 4: and cut some of that production off. Are you starting
Speaker 4: to bake some of that concern in.
Speaker 5: Absolutely. Yeah, we think that should be a big concern.
Speaker 7: You know, we think where it's where, where Yambu is,
Speaker 7: the pipeline route, all of it is at risk. And
Speaker 7: to your point that who these have in strangely quiet,
Speaker 7: The Red Sea issues have been strangely quiet. We don't
Speaker 7: know any reason why those cannot flare back up again
Speaker 7: and cause a real problem. So yeah, that's a and
Speaker 7: you know, if you knock that out in any in
Speaker 7: any manner, suddenly, you know, roughly six million, five and
Speaker 7: a half million a day of the mitigation around Hormuz
Speaker 7: would be gone, right, And then that's a whole different
Speaker 7: complexion to this market.
Speaker 2: Again, because I think we're all thankful we're not there
Speaker 2: this morning, and hopefully we don't experience that in the
Speaker 2: coming days and weeks, because what we hear a lot
Speaker 2: about on this program is that even after this war
Speaker 2: has resolved itself, that from here we will have structurally
Speaker 2: high demand through stockpiling. The countries will become conditioned to
Speaker 2: avoid this situation happening to them again, that particularly the
Speaker 2: nations in Asia, the big oil importers, like what we've
Speaker 2: experienced with China will see our swear. Do you see
Speaker 2: that increase in structural demand a regime shift following this experience?
Speaker 5: We do, we do? We think this will.
Speaker 7: You know, if this didn't send the signal, then nothing
Speaker 7: would have to any country saying hey we need ninety
Speaker 7: days inside our own borders, right or whatever day they picked,
Speaker 7: But that nineties are typical, and now China looks extremely
Speaker 7: prudent in doing what they did. I know there are
Speaker 7: a lot of theories about, you know, are they doing
Speaker 7: it for an eventual Taiwan? But what they said is, look,
Speaker 7: we've imported an enormous amount of oil and as far
Speaker 7: away we have a fragile supply chain. We need the
Speaker 7: extra storage, right, And it looks very prudent today. I
Speaker 7: think everybody will follow.
Speaker 2: That model because I know this is difficult to put
Speaker 2: a number on, but what kind of premium does that introduce?
Speaker 2: What kind of new flaw does that introduce for this
Speaker 2: market for the time ping.
Speaker 7: Yeah, you know, we think it could add all lsequel
Speaker 7: about half a million a day of extra demand as
Speaker 7: countries refill and add new spr storage. You can translate
Speaker 7: that to somewhere between five and seven dollars a barrel
Speaker 7: to what your previous base case might have been. So
Speaker 7: that would move us, you know, kind of into the
Speaker 7: mid sixties instead of the high fifties low sixties.
Speaker 4: But does that mean this is for the rest of
Speaker 4: the world barring the United States?
Speaker 7: Yeah, yeah, you know, we think you know, there might
Speaker 7: be aggregation as well, right, where countries decide to have
Speaker 7: like a joint storage between themselves, right, so they don't
Speaker 7: necessarily all have to build new tanks in every single country.
Speaker 5: But there's a cooperation in the US.
Speaker 7: You know, we we're at four hundred million, four hundred
Speaker 7: and twenty million. We're a net exporter but of a
Speaker 7: petroleum so technically we don't need anything by that normal
Speaker 7: rule of thumb.
Speaker 5: But there again it would be improved.
Speaker 7: Right, we probably should be around the five hundred million
Speaker 7: range at all times.
Speaker 2: Stay with US mult Bloomberg surveillance coming up after this,
Speaker 2: Emily Rodent of John Hancock Investments right in the following.
Speaker 2: We are trying to minimize geopolitics as an asset allocation input,
Speaker 2: especially now with talks moving markets so significantly. One thing
Speaker 2: we're sure of is that sentiment can change on a dime.
Speaker 2: Emily joins us now for more. Emily, welcome to the program.
Speaker 2: How avoidable is some of that at the moment.
Speaker 8: It's so tricky right now, John, I mean my heart
Speaker 8: sank when I saw it was going to be on
Speaker 8: the show this morning. Only kidding, but it's just so
Speaker 8: difficult to determine what's going to happen next in this market.
Speaker 8: You know, yesterday we're watching really mixed messages across asset classes.
Speaker 8: You have you know, the dollar declining, You've got gaset's surging.
Speaker 8: It's back to the momentum darlings of the past twelve
Speaker 8: months or so. European banks, the costs be and meanwhile
Speaker 8: bonds are telling you a different story that the war
Speaker 8: is still going to be ongoing, with yields remaining elevated here.
Speaker 8: So we're trying to control the things that we can
Speaker 8: control in this environment, and we're looking for opportunities and
Speaker 8: areas that have great earnings growth prospects. We're looking for income,
Speaker 8: We're trying to find things on sale. We're looking for
Speaker 8: diversifiers and portfolios in a world where the macro environment
Speaker 8: just remains sort of dazed and confused.
Speaker 2: Well, bonds are on sale, and I know you like
Speaker 2: the bond market coming into this. You like it more
Speaker 2: now we do?
Speaker 8: I mean, we would you look at opportunities where yields
Speaker 8: are backing up as an opportunity to lean in. Obviously,
Speaker 8: the myopic focus here is on energy prices and the
Speaker 8: potential impact to inflation, but we're focusing on the old adage.
Speaker 8: The cure for higher oil prices is higher oil prices,
Speaker 8: and what I mean by that is that it will
Speaker 8: likely lead to demand destruction. We're hearing from Asian economies
Speaker 8: that there's hoarding of oil resources there. People are being
Speaker 8: told not to go to work. We're seeing it impacted
Speaker 8: in airline prices. I was hoping for a vacation coming
Speaker 8: up here and those prices aren't looking good.
Speaker 1: So at some point people are going.
Speaker 8: To pull back in terms of demand as oil prices
Speaker 8: move higher.
Speaker 1: Here.
Speaker 8: The other element, John that we're watching is the bigger
Speaker 8: components of inflation, which we think are significant, especially around.
Speaker 1: Shelter or howsing.
Speaker 8: Nillo has home prices up zero percent year over year.
Speaker 8: Rental prices are down about one and a half percent
Speaker 8: year over year. We think that transmission into headline inflation
Speaker 8: and core inflation readings. There is going to be significant,
Speaker 8: and it could be enough to overcome any potential inflationary
Speaker 8: impact we see here from commodity prices. For that reason,
Speaker 8: we think eventually that bonds are going to our bond
Speaker 8: investors will kind of wake up and smell that disinflation coming.
Speaker 8: But for now, we're just continuing to see more volatility
Speaker 8: on the rate side.
Speaker 2: Everything kind of just heard Emily was an argument for
Speaker 2: lower growth. It was a big argument for much lower growth,
Speaker 2: reflected in your call to buy the bond market. Now,
Speaker 2: this is where the stock market starts to get interesting.
Speaker 2: What's going to keep earnings insulated as you put a
Speaker 2: big bet on lower growth.
Speaker 8: Yeah, you know, we're not saying that growth is falling
Speaker 8: off a cliff, but we're seeing it in places like
Speaker 8: the labor market.
Speaker 1: It's not great. We had six negative jobs reports.
Speaker 8: The labor market you know, is you know, holding in
Speaker 8: as it relates to things like initial claims.
Speaker 1: It's not terrible, but it's.
Speaker 8: Just difficult to see accelerating economic growth in this in
Speaker 8: you know, with a jobless backdrop.
Speaker 1: So we want to be really mindful of that.
Speaker 8: It's a key reason we still like quality in a
Speaker 8: decelerating growth environment.
Speaker 1: Quality sectors. Quality stocks should hold up better.
Speaker 8: Things like looking at return on equity, looking at cash balances,
Speaker 8: free cash flow, companies that can really maintain that earnings
Speaker 8: growth prospect even in the despite despite slowing growth. And
Speaker 8: that's not what we're seeing get rewarded in this market.
Speaker 8: It's been about lower quality. It's been about technical as
Speaker 8: momentum sentiment sort of driving these riskier parts.
Speaker 1: Of the market.
Speaker 8: And we want to trim into that strength and think
Speaker 8: about redeploying assets into more defensive parts of the market
Speaker 8: and higher quality areas. We're looking at areas like infrastructure
Speaker 8: related equities, utilities, you know, even alternative type strategies that
Speaker 8: can do well in that slow and growth environment.
Speaker 4: Emily, when you mentioned the fact that when it comes
Speaker 4: to the energy market, the cure is going to be
Speaker 4: potentially demand destruction, do you have prices in mind about
Speaker 4: how high prices we need to go until that we
Speaker 4: actually see that demand destruction.
Speaker 8: Yeah, that's the question of the day. You know, I
Speaker 8: look back at history in two thousand and eight and
Speaker 8: twenty twenty two were the last time is that we
Speaker 8: saw significant spikes and oil prices. It's right around one
Speaker 8: hundred and twenty eight dollars a barrel that we've seen
Speaker 8: that demand destruction set in.
Speaker 1: You know, we're not there yet, but you know, certainly the.
Speaker 8: War escalating could potentially bring us there. That's sort of
Speaker 8: the general price point that we'd be looking at.
Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best
Speaker 2: in markets, economics, angiopolitics. You can watch the show live
Speaker 2: on Bloomberg TV weekday mornings from six am to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify, or
Speaker 2: anywhere else you listen, and as always, on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app