Speaker 1: Bloomberg Audio Studios, podcasts, radio news onn session.
Speaker 2: Low's is also what we're seeing within the commodity market
Speaker 2: as well, oil getting slammed. That is similar to what
Speaker 2: we saw back on August fifth. Joining us now for
Speaker 2: more as Jeff Curry, chief Strategy Officer of Energy Pathways
Speaker 2: over at Carlisle. Jeff, it's such a pleasure. Thank you
Speaker 2: so much for staying up late for us. What is
Speaker 2: seventy dollars WTI say to you about global growth?
Speaker 3: It will definitely stimulate it relative to eighty five ninety,
Speaker 3: But I think, yes, you're right, it's still sell off based.
Speaker 4: Upon concerns around China.
Speaker 3: But the data disappointment was at PMI that was expected
Speaker 3: to be forty nine point five and came out at forty.
Speaker 4: Nine point one.
Speaker 3: Does that justify the oil market being at a record
Speaker 3: short Absolutely not. No, I'm not going to argue Chinese
Speaker 3: demand is robust in any shape or form, and yes
Speaker 3: they have structural problems on the longer term outlook, but
Speaker 3: by all means it's not a collapse that would justify
Speaker 3: the market being as short today as it was in
Speaker 3: the global financial crisis of eight. So you've got to
Speaker 3: ask what's going on here. It's something far deeper than
Speaker 3: a slow down in China, because when you look at
Speaker 3: this market, fundamentally, inventories are low. The forward curve today,
Speaker 3: even after the selloff, is backwardated in a very high
Speaker 3: level of bagradation, which is consistent with a you know,
Speaker 3: a very tight, fundamentally strong market. And then the third
Speaker 3: issue is concerns around OPEK bringing on supply. They're bringing
Speaker 3: on a small amount that is being completely compensated for
Speaker 3: by decreases out of Cosic stand as well as IRAQ,
Speaker 3: and given the credibility of OPAC recently, it's going to
Speaker 3: be important that that credibilities maintained.
Speaker 4: So I think these fears.
Speaker 3: Need to be put in the context of what the
Speaker 3: physical market looks like, which is relatively robust.
Speaker 1: I'm curious, Jeff. I mean, as everyone tries to read
Speaker 1: these economic tea leaves, obviously oil sends a signal, or
Speaker 1: at least they think it sends a signal. Also, people
Speaker 1: are trying to look for those signals coming out of copper,
Speaker 1: and we're seeing a lot of weakness there for a
Speaker 1: fifth straight session here. We're a far cry from those
Speaker 1: days when people were calling for ten thousand or even
Speaker 1: fifteen thousand, as one person called it. Maybe we get
Speaker 1: there long term, but I wanted you to talk more
Speaker 1: about the near term as exactly what's ailing that copper trade.
Speaker 4: Well, I think you had two dynamics in China.
Speaker 3: One, you had a very weak property market, and when
Speaker 3: everybody was bullish on copper going back in May, the
Speaker 3: offsetting force was that strong green cap back. So China
Speaker 3: was subsidizing and beefing up the green capex investment evs,
Speaker 3: solar panels, lithium batteries, and that strength with keeping strength
Speaker 3: in copper demand, offsetting the weakness in the property demand.
Speaker 3: What has happened since then, The US as well as
Speaker 3: Europe have responded with tariffs on some of these EV goods,
Speaker 3: slowing down that engine of growth for China.
Speaker 4: And at the same time, the policy.
Speaker 3: Focused at propping up the property market has not come
Speaker 3: through as strongly as many people have thought, and so
Speaker 3: that weakness in the property market is currently dominating.
Speaker 4: So what does that mean to copper prices.
Speaker 3: It still has a floor based upon that strong structural
Speaker 3: supply story, but it has a cap on the upside
Speaker 3: based upon that weakness and demand. I would say, you know,
Speaker 3: eighty five hundred type on the bottom, ninety five hundred
Speaker 3: on the top until we start to see the policy
Speaker 3: begin to create some strength in China. But I want
Speaker 3: to emphasize China is not unraveling like a global financial
Speaker 3: crisis situation in any shape or form. You know, you
Speaker 3: look at you know, we Chat pay numbers, it shows
Speaker 3: consumption up about one percent.
Speaker 4: And yes, oil demand was a.
Speaker 3: Little bit weaker than what would the economics would suggest
Speaker 3: because you have trucks switching to LNG from diesel.
Speaker 4: When that's structural, that's priced in the market.
Speaker 3: So I want to emphasize, yes, it's weak, but it's
Speaker 3: nothing like the positioning.
Speaker 2: So let's get to the positioning part. You had a
Speaker 2: really interesting note out last week, Jeff, that talked about
Speaker 2: how oil being used in essence as a carry trade.
Speaker 2: I'm gonna pull a little quote from your piece. You say,
Speaker 2: with the rate cycle likely peaking, given recent data, we
Speaker 2: will see that the borrowing costs for oil will be
Speaker 2: relatively more expensive. And then you go on to say,
Speaker 2: hold only pull it up here forcing an unwind like
Speaker 2: it did with the end, which is likely cause fear
Speaker 2: short covering from both the financial and physical markets. Basically,
Speaker 2: you're saying, look, what you're we're seeing in the market
Speaker 2: is that oil has been used to buy other stuff,
Speaker 2: and when that on wines, that's going to be a
Speaker 2: sharp spike up. What do you see that everyone else
Speaker 2: is missing?
Speaker 3: You see this not only in oil but some of
Speaker 3: the other more capital intensive industries. What oil is more
Speaker 3: volatile than most of the other sectors, so it has
Speaker 3: an extra cost of holding it. We estimate that to
Speaker 3: hold oil with a risk free return of five point
Speaker 3: twenty five percent, which is where the money markets are
Speaker 3: paying you right now, you need a return in excess
Speaker 3: of fourteen point twenty five percent called fifteen percent. A
Speaker 3: fifteen percent price move at a seventy five dollars price
Speaker 3: level means somewhere around you know, ten or eleven dollars
Speaker 3: a barrel, and then so your expectations have to be
Speaker 3: for a big upward move before you're going to own it. Now,
Speaker 3: with the sell off down to seventy three on a
Speaker 3: brint basis, the probability of seeing that upside is now
Speaker 3: much more likely. You're probably going to see investors pull
Speaker 3: money out of the money markets and put.
Speaker 4: It back into oil.
Speaker 3: But when I talk about the borrowing costs and being
Speaker 3: short oil, essentially by drawing down your inventories to very
Speaker 3: low levels, leaving yourself very exposed to being short. If
Speaker 3: something were to happen, like a demand surprise to the
Speaker 3: upside or some type of supply shock, then the physical
Speaker 3: guys that have to come in cover that short, which
Speaker 3: means increase the demand for the physical barrels. And then
Speaker 3: you look at the paper inventories you know, call it
Speaker 3: working capital of physical oil, working capital of financial oil.
Speaker 4: They're also short the financial oil.
Speaker 3: And so when we look at the market today, you
Speaker 3: have you know, record shorts against really low inventories that
Speaker 3: historically doesn't happen. The only explanation for that is people
Speaker 3: are taking money out of this market, taking working capital
Speaker 3: out of this market, and putting it into higher returning endeavors.
Speaker 3: Now with the pullback, you're likely to see some of
Speaker 3: that money come back in.
Speaker 4: You'll race back.
Speaker 3: Part of the reason why we've seen the market go
Speaker 3: from you know, seventy three up to like ninety two,
Speaker 3: back to seventy three up to ninety two is the
Speaker 3: investor's got to be pretty comfortable they see a return
Speaker 3: in the oil market that's greater than what they can
Speaker 3: see elsewhere.
Speaker 4: So what.
Speaker 1: So what happens Jeff in a couple of weeks time
Speaker 1: when the FED, as most people presume, begins to cut rates,
Speaker 1: Does that change that trade?
Speaker 4: Well, I think you can. There's an orderly unwine.
Speaker 3: In a disorderly unwine, the FED cut is expected. You know,
Speaker 3: if they were to be much greater or something like,
Speaker 3: it's probably going to be a very orderly process. As
Speaker 3: we move back to lower risk free rates of return
Speaker 3: or think.
Speaker 4: About the cost of capital holding oil.
Speaker 3: In the financial as well as the physical, where that's
Speaker 3: going to begin and begin to unwind.
Speaker 4: Here's another point too, is to take is that the.
Speaker 3: FED is a global central bank with a low mandate,
Speaker 3: meaning it's policy effects the world. In many of those
Speaker 3: places like China, Europe of Japan, they're very capital intensive,
Speaker 3: and as the US lowers the rates and lowers that
Speaker 3: cost to capital for a lot of those capital intensive
Speaker 3: sectors around the world, there's going to be a lot
Speaker 3: more leverage in those parts of the world where you're
Speaker 3: going to see the uptake in oil is in particular,
Speaker 3: one of those industries. It's very capital intensive and very
Speaker 3: global in nature, so you should start to see a bigger,
Speaker 3: more stronger improvement in the oil market than you would
Speaker 3: see in other sectors.
Speaker 2: You also write your note, Jeff, how this circles back
Speaker 2: to the US fiscal deficit.
Speaker 4: How does it do that?
Speaker 3: Because when we think about the fiscal deficit at seven percent,
Speaker 3: it's near it's a record peacetime non receptionary fiscal deficit.
Speaker 3: That means when the Fed had to raise rates to
Speaker 3: slow down growth, they had to raise it a lot
Speaker 3: higher because it was going against that seven percent fiscal deficits.
Speaker 4: So the interest rates.
Speaker 3: Got too high for the rest of the world, particularly
Speaker 3: the oil industry, is slowing it down. And you think
Speaker 3: about OPAK. It was responding to that weakness.
Speaker 4: It was seen globally because of those pressures.
Speaker 3: And again when we think about as they lower rates,
Speaker 3: that leverage to the other part of the world will
Speaker 3: begin to increase and allow OPAK to be able to
Speaker 3: put those barrels on the market.
Speaker 1: Interesting, all right, all right, Jeff, got to leave it there.
Speaker 1: Great to talk to you. Great to catch up Jeff Curry.
Speaker 1: He's now the chief strategy officer over at Energy Pathways
Speaker 1: at Carlisle