WEBVTT - Carlyle Group Chief Strategy Officer: Energy Pathways Jeffrey Currie Talks Global Energy Growth

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news onn session.

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<v Speaker 2>Low's is also what we're seeing within the commodity market

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<v Speaker 2>as well, oil getting slammed. That is similar to what

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<v Speaker 2>we saw back on August fifth. Joining us now for

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<v Speaker 2>more as Jeff Curry, chief Strategy Officer of Energy Pathways

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<v Speaker 2>over at Carlisle. Jeff, it's such a pleasure. Thank you

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<v Speaker 2>so much for staying up late for us. What is

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<v Speaker 2>seventy dollars WTI say to you about global growth?

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<v Speaker 3>It will definitely stimulate it relative to eighty five ninety,

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<v Speaker 3>But I think, yes, you're right, it's still sell off based.

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<v Speaker 4>Upon concerns around China.

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<v Speaker 3>But the data disappointment was at PMI that was expected

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<v Speaker 3>to be forty nine point five and came out at forty.

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<v Speaker 4>Nine point one.

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<v Speaker 3>Does that justify the oil market being at a record

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<v Speaker 3>short Absolutely not. No, I'm not going to argue Chinese

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<v Speaker 3>demand is robust in any shape or form, and yes

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<v Speaker 3>they have structural problems on the longer term outlook, but

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<v Speaker 3>by all means it's not a collapse that would justify

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<v Speaker 3>the market being as short today as it was in

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<v Speaker 3>the global financial crisis of eight. So you've got to

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<v Speaker 3>ask what's going on here. It's something far deeper than

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<v Speaker 3>a slow down in China, because when you look at

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<v Speaker 3>this market, fundamentally, inventories are low. The forward curve today,

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<v Speaker 3>even after the selloff, is backwardated in a very high

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<v Speaker 3>level of bagradation, which is consistent with a you know,

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<v Speaker 3>a very tight, fundamentally strong market. And then the third

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<v Speaker 3>issue is concerns around OPEK bringing on supply. They're bringing

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<v Speaker 3>on a small amount that is being completely compensated for

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<v Speaker 3>by decreases out of Cosic stand as well as IRAQ,

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<v Speaker 3>and given the credibility of OPAC recently, it's going to

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<v Speaker 3>be important that that credibilities maintained.

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<v Speaker 4>So I think these fears.

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<v Speaker 3>Need to be put in the context of what the

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<v Speaker 3>physical market looks like, which is relatively robust.

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<v Speaker 1>I'm curious, Jeff. I mean, as everyone tries to read

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<v Speaker 1>these economic tea leaves, obviously oil sends a signal, or

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<v Speaker 1>at least they think it sends a signal. Also, people

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<v Speaker 1>are trying to look for those signals coming out of copper,

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<v Speaker 1>and we're seeing a lot of weakness there for a

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<v Speaker 1>fifth straight session here. We're a far cry from those

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<v Speaker 1>days when people were calling for ten thousand or even

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<v Speaker 1>fifteen thousand, as one person called it. Maybe we get

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<v Speaker 1>there long term, but I wanted you to talk more

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<v Speaker 1>about the near term as exactly what's ailing that copper trade.

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<v Speaker 4>Well, I think you had two dynamics in China.

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<v Speaker 3>One, you had a very weak property market, and when

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<v Speaker 3>everybody was bullish on copper going back in May, the

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<v Speaker 3>offsetting force was that strong green cap back. So China

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<v Speaker 3>was subsidizing and beefing up the green capex investment evs,

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<v Speaker 3>solar panels, lithium batteries, and that strength with keeping strength

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<v Speaker 3>in copper demand, offsetting the weakness in the property demand.

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<v Speaker 3>What has happened since then, The US as well as

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<v Speaker 3>Europe have responded with tariffs on some of these EV goods,

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<v Speaker 3>slowing down that engine of growth for China.

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<v Speaker 4>And at the same time, the policy.

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<v Speaker 3>Focused at propping up the property market has not come

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<v Speaker 3>through as strongly as many people have thought, and so

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<v Speaker 3>that weakness in the property market is currently dominating.

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<v Speaker 4>So what does that mean to copper prices.

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<v Speaker 3>It still has a floor based upon that strong structural

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<v Speaker 3>supply story, but it has a cap on the upside

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<v Speaker 3>based upon that weakness and demand. I would say, you know,

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<v Speaker 3>eighty five hundred type on the bottom, ninety five hundred

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<v Speaker 3>on the top until we start to see the policy

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<v Speaker 3>begin to create some strength in China. But I want

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<v Speaker 3>to emphasize China is not unraveling like a global financial

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<v Speaker 3>crisis situation in any shape or form. You know, you

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<v Speaker 3>look at you know, we Chat pay numbers, it shows

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<v Speaker 3>consumption up about one percent.

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<v Speaker 4>And yes, oil demand was a.

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<v Speaker 3>Little bit weaker than what would the economics would suggest

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<v Speaker 3>because you have trucks switching to LNG from diesel.

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<v Speaker 4>When that's structural, that's priced in the market.

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<v Speaker 3>So I want to emphasize, yes, it's weak, but it's

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<v Speaker 3>nothing like the positioning.

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<v Speaker 2>So let's get to the positioning part. You had a

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<v Speaker 2>really interesting note out last week, Jeff, that talked about

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<v Speaker 2>how oil being used in essence as a carry trade.

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<v Speaker 2>I'm gonna pull a little quote from your piece. You say,

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<v Speaker 2>with the rate cycle likely peaking, given recent data, we

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<v Speaker 2>will see that the borrowing costs for oil will be

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<v Speaker 2>relatively more expensive. And then you go on to say,

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<v Speaker 2>hold only pull it up here forcing an unwind like

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<v Speaker 2>it did with the end, which is likely cause fear

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<v Speaker 2>short covering from both the financial and physical markets. Basically,

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<v Speaker 2>you're saying, look, what you're we're seeing in the market

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<v Speaker 2>is that oil has been used to buy other stuff,

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<v Speaker 2>and when that on wines, that's going to be a

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<v Speaker 2>sharp spike up. What do you see that everyone else

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<v Speaker 2>is missing?

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<v Speaker 3>You see this not only in oil but some of

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<v Speaker 3>the other more capital intensive industries. What oil is more

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<v Speaker 3>volatile than most of the other sectors, so it has

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<v Speaker 3>an extra cost of holding it. We estimate that to

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<v Speaker 3>hold oil with a risk free return of five point

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<v Speaker 3>twenty five percent, which is where the money markets are

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<v Speaker 3>paying you right now, you need a return in excess

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<v Speaker 3>of fourteen point twenty five percent called fifteen percent. A

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<v Speaker 3>fifteen percent price move at a seventy five dollars price

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<v Speaker 3>level means somewhere around you know, ten or eleven dollars

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<v Speaker 3>a barrel, and then so your expectations have to be

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<v Speaker 3>for a big upward move before you're going to own it. Now,

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<v Speaker 3>with the sell off down to seventy three on a

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<v Speaker 3>brint basis, the probability of seeing that upside is now

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<v Speaker 3>much more likely. You're probably going to see investors pull

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<v Speaker 3>money out of the money markets and put.

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<v Speaker 4>It back into oil.

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<v Speaker 3>But when I talk about the borrowing costs and being

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<v Speaker 3>short oil, essentially by drawing down your inventories to very

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<v Speaker 3>low levels, leaving yourself very exposed to being short. If

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<v Speaker 3>something were to happen, like a demand surprise to the

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<v Speaker 3>upside or some type of supply shock, then the physical

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<v Speaker 3>guys that have to come in cover that short, which

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<v Speaker 3>means increase the demand for the physical barrels. And then

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<v Speaker 3>you look at the paper inventories you know, call it

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<v Speaker 3>working capital of physical oil, working capital of financial oil.

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<v Speaker 4>They're also short the financial oil.

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<v Speaker 3>And so when we look at the market today, you

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<v Speaker 3>have you know, record shorts against really low inventories that

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<v Speaker 3>historically doesn't happen. The only explanation for that is people

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<v Speaker 3>are taking money out of this market, taking working capital

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<v Speaker 3>out of this market, and putting it into higher returning endeavors.

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<v Speaker 3>Now with the pullback, you're likely to see some of

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<v Speaker 3>that money come back in.

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<v Speaker 4>You'll race back.

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<v Speaker 3>Part of the reason why we've seen the market go

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<v Speaker 3>from you know, seventy three up to like ninety two,

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<v Speaker 3>back to seventy three up to ninety two is the

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<v Speaker 3>investor's got to be pretty comfortable they see a return

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<v Speaker 3>in the oil market that's greater than what they can

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<v Speaker 3>see elsewhere.

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<v Speaker 4>So what.

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<v Speaker 1>So what happens Jeff in a couple of weeks time

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<v Speaker 1>when the FED, as most people presume, begins to cut rates,

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<v Speaker 1>Does that change that trade?

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<v Speaker 4>Well, I think you can. There's an orderly unwine.

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<v Speaker 3>In a disorderly unwine, the FED cut is expected. You know,

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<v Speaker 3>if they were to be much greater or something like,

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<v Speaker 3>it's probably going to be a very orderly process. As

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<v Speaker 3>we move back to lower risk free rates of return

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<v Speaker 3>or think.

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<v Speaker 4>About the cost of capital holding oil.

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<v Speaker 3>In the financial as well as the physical, where that's

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<v Speaker 3>going to begin and begin to unwind.

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<v Speaker 4>Here's another point too, is to take is that the.

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<v Speaker 3>FED is a global central bank with a low mandate,

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<v Speaker 3>meaning it's policy effects the world. In many of those

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<v Speaker 3>places like China, Europe of Japan, they're very capital intensive,

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<v Speaker 3>and as the US lowers the rates and lowers that

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<v Speaker 3>cost to capital for a lot of those capital intensive

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<v Speaker 3>sectors around the world, there's going to be a lot

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<v Speaker 3>more leverage in those parts of the world where you're

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<v Speaker 3>going to see the uptake in oil is in particular,

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<v Speaker 3>one of those industries. It's very capital intensive and very

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<v Speaker 3>global in nature, so you should start to see a bigger,

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<v Speaker 3>more stronger improvement in the oil market than you would

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<v Speaker 3>see in other sectors.

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<v Speaker 2>You also write your note, Jeff, how this circles back

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<v Speaker 2>to the US fiscal deficit.

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<v Speaker 4>How does it do that?

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<v Speaker 3>Because when we think about the fiscal deficit at seven percent,

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<v Speaker 3>it's near it's a record peacetime non receptionary fiscal deficit.

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<v Speaker 3>That means when the Fed had to raise rates to

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<v Speaker 3>slow down growth, they had to raise it a lot

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<v Speaker 3>higher because it was going against that seven percent fiscal deficits.

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<v Speaker 4>So the interest rates.

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<v Speaker 3>Got too high for the rest of the world, particularly

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<v Speaker 3>the oil industry, is slowing it down. And you think

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<v Speaker 3>about OPAK. It was responding to that weakness.

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<v Speaker 4>It was seen globally because of those pressures.

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<v Speaker 3>And again when we think about as they lower rates,

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<v Speaker 3>that leverage to the other part of the world will

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<v Speaker 3>begin to increase and allow OPAK to be able to

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<v Speaker 3>put those barrels on the market.

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<v Speaker 1>Interesting, all right, all right, Jeff, got to leave it there.

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<v Speaker 1>Great to talk to you. Great to catch up Jeff Curry.

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<v Speaker 1>He's now the chief strategy officer over at Energy Pathways

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<v Speaker 1>at Carlisle