1
00:00:02,400 --> 00:00:07,440
Speaker 1: Bloomberg Audio Studios, podcasts, radio news onn session.

2
00:00:07,440 --> 00:00:09,360
Speaker 2: Low's is also what we're seeing within the commodity market

3
00:00:09,400 --> 00:00:11,680
Speaker 2: as well, oil getting slammed. That is similar to what

4
00:00:11,720 --> 00:00:14,560
Speaker 2: we saw back on August fifth. Joining us now for

5
00:00:14,640 --> 00:00:18,000
Speaker 2: more as Jeff Curry, chief Strategy Officer of Energy Pathways

6
00:00:18,040 --> 00:00:21,040
Speaker 2: over at Carlisle. Jeff, it's such a pleasure. Thank you

7
00:00:21,079 --> 00:00:23,479
Speaker 2: so much for staying up late for us. What is

8
00:00:23,520 --> 00:00:26,640
Speaker 2: seventy dollars WTI say to you about global growth?

9
00:00:29,480 --> 00:00:33,720
Speaker 3: It will definitely stimulate it relative to eighty five ninety,

10
00:00:33,720 --> 00:00:38,680
Speaker 3: But I think, yes, you're right, it's still sell off based.

11
00:00:38,440 --> 00:00:40,440
Speaker 4: Upon concerns around China.

12
00:00:41,440 --> 00:00:46,480
Speaker 3: But the data disappointment was at PMI that was expected

13
00:00:46,520 --> 00:00:50,000
Speaker 3: to be forty nine point five and came out at forty.

14
00:00:49,760 --> 00:00:50,800
Speaker 4: Nine point one.

15
00:00:51,400 --> 00:00:55,160
Speaker 3: Does that justify the oil market being at a record

16
00:00:55,360 --> 00:00:59,440
Speaker 3: short Absolutely not. No, I'm not going to argue Chinese

17
00:00:59,440 --> 00:01:03,160
Speaker 3: demand is robust in any shape or form, and yes

18
00:01:03,280 --> 00:01:07,840
Speaker 3: they have structural problems on the longer term outlook, but

19
00:01:08,160 --> 00:01:11,480
Speaker 3: by all means it's not a collapse that would justify

20
00:01:11,560 --> 00:01:15,240
Speaker 3: the market being as short today as it was in

21
00:01:15,440 --> 00:01:19,440
Speaker 3: the global financial crisis of eight. So you've got to

22
00:01:19,520 --> 00:01:23,640
Speaker 3: ask what's going on here. It's something far deeper than

23
00:01:23,880 --> 00:01:26,840
Speaker 3: a slow down in China, because when you look at

24
00:01:26,840 --> 00:01:31,319
Speaker 3: this market, fundamentally, inventories are low. The forward curve today,

25
00:01:31,400 --> 00:01:34,600
Speaker 3: even after the selloff, is backwardated in a very high

26
00:01:34,680 --> 00:01:39,360
Speaker 3: level of bagradation, which is consistent with a you know,

27
00:01:39,480 --> 00:01:44,000
Speaker 3: a very tight, fundamentally strong market. And then the third

28
00:01:44,080 --> 00:01:48,800
Speaker 3: issue is concerns around OPEK bringing on supply. They're bringing

29
00:01:48,840 --> 00:01:52,480
Speaker 3: on a small amount that is being completely compensated for

30
00:01:52,680 --> 00:01:57,480
Speaker 3: by decreases out of Cosic stand as well as IRAQ,

31
00:01:58,240 --> 00:02:01,240
Speaker 3: and given the credibility of OPAC recently, it's going to

32
00:02:01,280 --> 00:02:03,520
Speaker 3: be important that that credibilities maintained.

33
00:02:03,920 --> 00:02:05,840
Speaker 4: So I think these fears.

34
00:02:05,720 --> 00:02:08,120
Speaker 3: Need to be put in the context of what the

35
00:02:08,160 --> 00:02:12,160
Speaker 3: physical market looks like, which is relatively robust.

36
00:02:12,919 --> 00:02:15,560
Speaker 1: I'm curious, Jeff. I mean, as everyone tries to read

37
00:02:15,600 --> 00:02:18,200
Speaker 1: these economic tea leaves, obviously oil sends a signal, or

38
00:02:18,200 --> 00:02:20,880
Speaker 1: at least they think it sends a signal. Also, people

39
00:02:20,880 --> 00:02:22,760
Speaker 1: are trying to look for those signals coming out of copper,

40
00:02:22,800 --> 00:02:24,720
Speaker 1: and we're seeing a lot of weakness there for a

41
00:02:24,760 --> 00:02:27,320
Speaker 1: fifth straight session here. We're a far cry from those

42
00:02:27,400 --> 00:02:29,560
Speaker 1: days when people were calling for ten thousand or even

43
00:02:29,639 --> 00:02:32,680
Speaker 1: fifteen thousand, as one person called it. Maybe we get

44
00:02:32,720 --> 00:02:34,920
Speaker 1: there long term, but I wanted you to talk more

45
00:02:34,919 --> 00:02:38,480
Speaker 1: about the near term as exactly what's ailing that copper trade.

46
00:02:39,520 --> 00:02:43,080
Speaker 4: Well, I think you had two dynamics in China.

47
00:02:43,200 --> 00:02:46,959
Speaker 3: One, you had a very weak property market, and when

48
00:02:47,000 --> 00:02:51,919
Speaker 3: everybody was bullish on copper going back in May, the

49
00:02:52,080 --> 00:02:56,960
Speaker 3: offsetting force was that strong green cap back. So China

50
00:02:57,000 --> 00:03:02,280
Speaker 3: was subsidizing and beefing up the green capex investment evs,

51
00:03:02,280 --> 00:03:07,600
Speaker 3: solar panels, lithium batteries, and that strength with keeping strength

52
00:03:07,760 --> 00:03:11,440
Speaker 3: in copper demand, offsetting the weakness in the property demand.

53
00:03:11,760 --> 00:03:15,760
Speaker 3: What has happened since then, The US as well as

54
00:03:15,800 --> 00:03:19,120
Speaker 3: Europe have responded with tariffs on some of these EV goods,

55
00:03:19,160 --> 00:03:21,840
Speaker 3: slowing down that engine of growth for China.

56
00:03:22,240 --> 00:03:24,520
Speaker 4: And at the same time, the policy.

57
00:03:24,160 --> 00:03:28,560
Speaker 3: Focused at propping up the property market has not come

58
00:03:28,600 --> 00:03:31,080
Speaker 3: through as strongly as many people have thought, and so

59
00:03:31,160 --> 00:03:34,120
Speaker 3: that weakness in the property market is currently dominating.

60
00:03:34,400 --> 00:03:37,680
Speaker 4: So what does that mean to copper prices.

61
00:03:37,840 --> 00:03:41,080
Speaker 3: It still has a floor based upon that strong structural

62
00:03:41,120 --> 00:03:44,560
Speaker 3: supply story, but it has a cap on the upside

63
00:03:44,600 --> 00:03:48,160
Speaker 3: based upon that weakness and demand. I would say, you know,

64
00:03:48,280 --> 00:03:51,440
Speaker 3: eighty five hundred type on the bottom, ninety five hundred

65
00:03:51,480 --> 00:03:54,520
Speaker 3: on the top until we start to see the policy

66
00:03:54,640 --> 00:03:57,120
Speaker 3: begin to create some strength in China. But I want

67
00:03:57,160 --> 00:04:02,400
Speaker 3: to emphasize China is not unraveling like a global financial

68
00:04:02,480 --> 00:04:05,600
Speaker 3: crisis situation in any shape or form. You know, you

69
00:04:05,680 --> 00:04:08,240
Speaker 3: look at you know, we Chat pay numbers, it shows

70
00:04:08,440 --> 00:04:10,240
Speaker 3: consumption up about one percent.

71
00:04:11,040 --> 00:04:12,720
Speaker 4: And yes, oil demand was a.

72
00:04:12,600 --> 00:04:16,640
Speaker 3: Little bit weaker than what would the economics would suggest

73
00:04:16,680 --> 00:04:21,440
Speaker 3: because you have trucks switching to LNG from diesel.

74
00:04:21,240 --> 00:04:23,400
Speaker 4: When that's structural, that's priced in the market.

75
00:04:23,440 --> 00:04:26,040
Speaker 3: So I want to emphasize, yes, it's weak, but it's

76
00:04:26,080 --> 00:04:27,760
Speaker 3: nothing like the positioning.

77
00:04:28,640 --> 00:04:31,000
Speaker 2: So let's get to the positioning part. You had a

78
00:04:31,040 --> 00:04:34,400
Speaker 2: really interesting note out last week, Jeff, that talked about

79
00:04:34,520 --> 00:04:37,320
Speaker 2: how oil being used in essence as a carry trade.

80
00:04:37,360 --> 00:04:39,880
Speaker 2: I'm gonna pull a little quote from your piece. You say,

81
00:04:40,040 --> 00:04:43,400
Speaker 2: with the rate cycle likely peaking, given recent data, we

82
00:04:43,440 --> 00:04:46,200
Speaker 2: will see that the borrowing costs for oil will be

83
00:04:46,279 --> 00:04:50,640
Speaker 2: relatively more expensive. And then you go on to say,

84
00:04:50,720 --> 00:04:53,040
Speaker 2: hold only pull it up here forcing an unwind like

85
00:04:53,080 --> 00:04:55,239
Speaker 2: it did with the end, which is likely cause fear

86
00:04:55,279 --> 00:04:58,800
Speaker 2: short covering from both the financial and physical markets. Basically,

87
00:04:58,800 --> 00:05:00,920
Speaker 2: you're saying, look, what you're we're seeing in the market

88
00:05:01,000 --> 00:05:04,720
Speaker 2: is that oil has been used to buy other stuff,

89
00:05:04,720 --> 00:05:06,440
Speaker 2: and when that on wines, that's going to be a

90
00:05:06,480 --> 00:05:08,320
Speaker 2: sharp spike up. What do you see that everyone else

91
00:05:08,360 --> 00:05:08,760
Speaker 2: is missing?

92
00:05:11,000 --> 00:05:14,480
Speaker 3: You see this not only in oil but some of

93
00:05:14,520 --> 00:05:19,000
Speaker 3: the other more capital intensive industries. What oil is more

94
00:05:19,080 --> 00:05:22,279
Speaker 3: volatile than most of the other sectors, so it has

95
00:05:22,320 --> 00:05:25,560
Speaker 3: an extra cost of holding it. We estimate that to

96
00:05:25,839 --> 00:05:29,400
Speaker 3: hold oil with a risk free return of five point

97
00:05:29,440 --> 00:05:31,920
Speaker 3: twenty five percent, which is where the money markets are

98
00:05:31,960 --> 00:05:34,839
Speaker 3: paying you right now, you need a return in excess

99
00:05:35,040 --> 00:05:39,440
Speaker 3: of fourteen point twenty five percent called fifteen percent. A

100
00:05:39,480 --> 00:05:43,440
Speaker 3: fifteen percent price move at a seventy five dollars price

101
00:05:43,560 --> 00:05:47,120
Speaker 3: level means somewhere around you know, ten or eleven dollars

102
00:05:47,120 --> 00:05:49,720
Speaker 3: a barrel, and then so your expectations have to be

103
00:05:49,800 --> 00:05:53,039
Speaker 3: for a big upward move before you're going to own it. Now,

104
00:05:53,080 --> 00:05:55,479
Speaker 3: with the sell off down to seventy three on a

105
00:05:55,480 --> 00:05:59,080
Speaker 3: brint basis, the probability of seeing that upside is now

106
00:05:59,240 --> 00:06:02,120
Speaker 3: much more likely. You're probably going to see investors pull

107
00:06:02,200 --> 00:06:04,479
Speaker 3: money out of the money markets and put.

108
00:06:04,320 --> 00:06:05,320
Speaker 4: It back into oil.

109
00:06:05,360 --> 00:06:08,799
Speaker 3: But when I talk about the borrowing costs and being

110
00:06:08,960 --> 00:06:12,840
Speaker 3: short oil, essentially by drawing down your inventories to very

111
00:06:12,880 --> 00:06:18,039
Speaker 3: low levels, leaving yourself very exposed to being short. If

112
00:06:18,040 --> 00:06:20,360
Speaker 3: something were to happen, like a demand surprise to the

113
00:06:20,480 --> 00:06:23,839
Speaker 3: upside or some type of supply shock, then the physical

114
00:06:23,880 --> 00:06:26,440
Speaker 3: guys that have to come in cover that short, which

115
00:06:26,560 --> 00:06:29,680
Speaker 3: means increase the demand for the physical barrels. And then

116
00:06:29,720 --> 00:06:32,719
Speaker 3: you look at the paper inventories you know, call it

117
00:06:32,800 --> 00:06:37,200
Speaker 3: working capital of physical oil, working capital of financial oil.

118
00:06:37,320 --> 00:06:39,200
Speaker 4: They're also short the financial oil.

119
00:06:39,279 --> 00:06:41,680
Speaker 3: And so when we look at the market today, you

120
00:06:41,800 --> 00:06:45,880
Speaker 3: have you know, record shorts against really low inventories that

121
00:06:46,320 --> 00:06:50,839
Speaker 3: historically doesn't happen. The only explanation for that is people

122
00:06:50,880 --> 00:06:54,560
Speaker 3: are taking money out of this market, taking working capital

123
00:06:54,839 --> 00:06:58,280
Speaker 3: out of this market, and putting it into higher returning endeavors.

124
00:06:58,600 --> 00:07:01,200
Speaker 3: Now with the pullback, you're likely to see some of

125
00:07:01,240 --> 00:07:02,200
Speaker 3: that money come back in.

126
00:07:02,320 --> 00:07:03,080
Speaker 4: You'll race back.

127
00:07:03,560 --> 00:07:05,440
Speaker 3: Part of the reason why we've seen the market go

128
00:07:05,560 --> 00:07:08,720
Speaker 3: from you know, seventy three up to like ninety two,

129
00:07:08,880 --> 00:07:11,440
Speaker 3: back to seventy three up to ninety two is the

130
00:07:11,560 --> 00:07:14,280
Speaker 3: investor's got to be pretty comfortable they see a return

131
00:07:14,720 --> 00:07:16,840
Speaker 3: in the oil market that's greater than what they can

132
00:07:16,840 --> 00:07:17,800
Speaker 3: see elsewhere.

133
00:07:17,880 --> 00:07:18,200
Speaker 4: So what.

134
00:07:19,840 --> 00:07:22,200
Speaker 1: So what happens Jeff in a couple of weeks time

135
00:07:22,280 --> 00:07:25,520
Speaker 1: when the FED, as most people presume, begins to cut rates,

136
00:07:25,560 --> 00:07:26,920
Speaker 1: Does that change that trade?

137
00:07:28,040 --> 00:07:30,920
Speaker 4: Well, I think you can. There's an orderly unwine.

138
00:07:31,040 --> 00:07:36,040
Speaker 3: In a disorderly unwine, the FED cut is expected. You know,

139
00:07:36,080 --> 00:07:37,840
Speaker 3: if they were to be much greater or something like,

140
00:07:38,000 --> 00:07:40,280
Speaker 3: it's probably going to be a very orderly process. As

141
00:07:40,320 --> 00:07:44,320
Speaker 3: we move back to lower risk free rates of return

142
00:07:45,000 --> 00:07:45,520
Speaker 3: or think.

143
00:07:45,320 --> 00:07:47,800
Speaker 4: About the cost of capital holding oil.

144
00:07:47,560 --> 00:07:50,360
Speaker 3: In the financial as well as the physical, where that's

145
00:07:50,400 --> 00:07:52,280
Speaker 3: going to begin and begin to unwind.

146
00:07:52,520 --> 00:07:55,880
Speaker 4: Here's another point too, is to take is that the.

147
00:07:55,760 --> 00:08:00,680
Speaker 3: FED is a global central bank with a low mandate,

148
00:08:00,800 --> 00:08:04,120
Speaker 3: meaning it's policy effects the world. In many of those

149
00:08:04,160 --> 00:08:09,840
Speaker 3: places like China, Europe of Japan, they're very capital intensive,

150
00:08:10,080 --> 00:08:13,000
Speaker 3: and as the US lowers the rates and lowers that

151
00:08:13,120 --> 00:08:15,680
Speaker 3: cost to capital for a lot of those capital intensive

152
00:08:15,960 --> 00:08:17,960
Speaker 3: sectors around the world, there's going to be a lot

153
00:08:18,000 --> 00:08:20,920
Speaker 3: more leverage in those parts of the world where you're

154
00:08:20,960 --> 00:08:23,400
Speaker 3: going to see the uptake in oil is in particular,

155
00:08:23,440 --> 00:08:27,160
Speaker 3: one of those industries. It's very capital intensive and very

156
00:08:27,280 --> 00:08:30,320
Speaker 3: global in nature, so you should start to see a bigger,

157
00:08:30,680 --> 00:08:33,680
Speaker 3: more stronger improvement in the oil market than you would

158
00:08:33,679 --> 00:08:34,920
Speaker 3: see in other sectors.

159
00:08:35,080 --> 00:08:37,240
Speaker 2: You also write your note, Jeff, how this circles back

160
00:08:37,240 --> 00:08:38,920
Speaker 2: to the US fiscal deficit.

161
00:08:39,200 --> 00:08:39,959
Speaker 4: How does it do that?

162
00:08:41,240 --> 00:08:45,559
Speaker 3: Because when we think about the fiscal deficit at seven percent,

163
00:08:45,720 --> 00:08:51,400
Speaker 3: it's near it's a record peacetime non receptionary fiscal deficit.

164
00:08:51,840 --> 00:08:55,680
Speaker 3: That means when the Fed had to raise rates to

165
00:08:55,679 --> 00:08:57,560
Speaker 3: slow down growth, they had to raise it a lot

166
00:08:57,640 --> 00:09:01,960
Speaker 3: higher because it was going against that seven percent fiscal deficits.

167
00:09:02,000 --> 00:09:03,400
Speaker 4: So the interest rates.

168
00:09:03,200 --> 00:09:06,240
Speaker 3: Got too high for the rest of the world, particularly

169
00:09:06,280 --> 00:09:08,480
Speaker 3: the oil industry, is slowing it down. And you think

170
00:09:08,520 --> 00:09:12,040
Speaker 3: about OPAK. It was responding to that weakness.

171
00:09:12,080 --> 00:09:15,400
Speaker 4: It was seen globally because of those pressures.

172
00:09:15,440 --> 00:09:18,160
Speaker 3: And again when we think about as they lower rates,

173
00:09:18,200 --> 00:09:20,600
Speaker 3: that leverage to the other part of the world will

174
00:09:20,679 --> 00:09:23,960
Speaker 3: begin to increase and allow OPAK to be able to

175
00:09:24,000 --> 00:09:25,440
Speaker 3: put those barrels on the market.

176
00:09:26,520 --> 00:09:29,319
Speaker 1: Interesting, all right, all right, Jeff, got to leave it there.

177
00:09:29,440 --> 00:09:31,480
Speaker 1: Great to talk to you. Great to catch up Jeff Curry.

178
00:09:31,640 --> 00:09:35,520
Speaker 1: He's now the chief strategy officer over at Energy Pathways

179
00:09:35,520 --> 00:09:36,280
Speaker 1: at Carlisle