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 Hordernt. Join us each day
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Speaker 2: Terminal and the Bloomberg Business app. The White House taking
Speaker 2: an oil and gas export band off the table as
Speaker 2: a way to bring down energy prices after the Vice
Speaker 2: President Jdvance met with oil executive Stephen Shork of the
Speaker 2: Short Group, writing, the Brent WTI spread will not narrow
Speaker 2: until one of two things happens. Homer's fully reopens or
Speaker 2: WTI stops pricing. In diplomatic optionality that never materializes. Neither
Speaker 2: is imminent. Stephen joins us now for more. Steven, welcome
Speaker 2: to the program. I want to get to your line
Speaker 2: in your research. The Brent WTI spread says everything diplomacy won't. Stephen,
Speaker 2: just build on.
Speaker 3: That yeah, absolutely, thank you.
Speaker 4: So the bread market is now the benchmark for the
Speaker 4: seaborn trade in oil, and this is the market that
Speaker 4: is pricing the conflict is pricing the war is pricing
Speaker 4: the shortages that we are seeing. If WTI market prices optionality,
Speaker 4: prices optimism.
Speaker 3: It's a landlocked contract.
Speaker 4: It's a futures contract, and like every futures contract, it
Speaker 4: derives its value from a physical asset. The physical asset
Speaker 4: and WTI is landlocked in the Oklahoma.
Speaker 3: It's a different type of crude oil.
Speaker 4: Brent is a similar crude oil, a price in the
Speaker 4: land basin barrels, and it's the benchmark for the seaborne trade.
Speaker 4: So every time we see a dubbish headline the war
Speaker 4: might be ending or there's an off ramp, that optimism
Speaker 4: gets priced into the Brent, the WTI contract, and that
Speaker 4: is the hope contract. The bread market is the real
Speaker 4: market that is pricing the real event what's going on.
Speaker 4: And that blowout in the spread that we've seen over
Speaker 4: the past week we can have tells you that this
Speaker 4: war is far from over because we are seeing a
Speaker 4: tremendous bid in Brent over that WTI contract.
Speaker 5: Steved I want to pick up on your point about
Speaker 5: what the WTI is pricing in about policy, the US
Speaker 5: government could do. So yesterday Secretary Right tweeted that there
Speaker 5: is going to be no export pan, but then I
Speaker 5: had a bunch of calls from people saying no export.
Speaker 3: Pan for now.
Speaker 5: Do you think it's something the US will keep in
Speaker 5: their back pocket in case prices continue to rise?
Speaker 3: Absolutely.
Speaker 4: Now, let's be clear, an export pan would be catastrophic
Speaker 4: for US oil production because all it would do is
Speaker 4: pent up more supply here in the United States of
Speaker 4: oil we don't necessarily use, so we don't have a
Speaker 4: use for it, so we're not going to burn it,
Speaker 4: so inventories will just build, and as those inventories build,
Speaker 4: there's no place for new production to go. So ultimately
Speaker 4: it's a catastrophic move for production. And I think it
Speaker 4: appears that the White House got that message, but you
Speaker 4: never know. It does make a nice headline, so we
Speaker 4: could potentially see it's a political tool, it's not an
Speaker 4: economic tool.
Speaker 3: So certainly there is that potential.
Speaker 4: And clearly with the way the Brent market has gone,
Speaker 4: we've gone from a five dollars premium Brent OVERWTI at
Speaker 4: the startup this week, so now it's upwards of thirteen
Speaker 4: to fourteen dollars, so we've tripled that premium.
Speaker 3: So clearly the.
Speaker 4: Market is skeptical that an export ban is not off
Speaker 4: of the table.
Speaker 5: Steven, do you even think Brent right now is pricing
Speaker 5: in really what is going on in the region. When
Speaker 5: you look at Oman futures, I think yesterday they blew
Speaker 5: past one hundred and seventy dollars a barrel that's more
Speaker 5: tied to the physical barrels right now that are moving
Speaker 5: in the Gulf. So is Brent even accurate?
Speaker 4: It's an excellent question, and you know I'm restent to
Speaker 4: say it's not, because then I've been saying, oh, the
Speaker 4: market is wrong. But to your point, we have a
Speaker 4: buibercated market, so the brand market is still an Atlantic
Speaker 4: basin market.
Speaker 3: That's where it's derived from.
Speaker 4: To your point that Oman and the Dubai future contracts
Speaker 4: which are linked more towards the Asian markets, that is
Speaker 4: really reflective of the shortage. So with the Bread Dubai
Speaker 4: or the Brent Oman, Brent steep discount to those markets
Speaker 4: is telling you is that we're looking at the Atlantic
Speaker 4: basin that is well supplied with oil.
Speaker 3: The problem is in.
Speaker 4: Asia where all that oil is still blockaded up in
Speaker 4: the Straight of Jomus. Those are so your refineries from
Speaker 4: India through Japan up through South Korea are bidding for
Speaker 4: that oil and hence why we're getting such a huge
Speaker 4: disconnect between the two markets. So the answer your question
Speaker 4: Brent Brent is certainly disconnected. It's more connected as we've said,
Speaker 4: relative to WTI. But actually the way the shortage is
Speaker 4: with the physical shortages represented in the Oman and Dubai
Speaker 4: markets clearly again that is another telltale that this war
Speaker 4: is far from being resolved in any sort of positive manner.
Speaker 2: And Stephen, that's the reality for Asian importers, buyers off
Speaker 2: that crude of that physical asset. Do you think this
Speaker 2: mark has taken too much comfort from the future's curve.
Speaker 4: It's really interesting and where we're really seeing the blowout.
Speaker 4: And to answer your question, I think the market is
Speaker 4: rather relaxed. Is if we look at the Brent do
Speaker 4: my market for instance, if we believe in market theory
Speaker 4: or in that curve, then we're looking at Brent trading
Speaker 4: at a thirty forty dollars discount to Dubai a sixty
Speaker 4: seventy dollars discount to Oman. So the question is when
Speaker 4: does or does the market catch up so that we'll
Speaker 4: take to Dubai market. Right now, we're trading out about
Speaker 4: a thirty five dollars discount Brent below Dubai. That's not
Speaker 4: supposed to happen. Dubai is an inferior quality oil. It
Speaker 4: trades at a discout to Brent. But that's not the case.
Speaker 4: But we know why. But we go two months out
Speaker 4: the Brent premium and we said Brent normally trades out
Speaker 4: of premium to Dubai is now trading out a life
Speaker 4: of contract high of nearly eight dollars of a barrel.
Speaker 4: So what the market, at least what the curve is
Speaker 4: telling us is that, yeah, there's.
Speaker 3: A real problem.
Speaker 4: There's a stranded barrels in the straight or hooves.
Speaker 3: They're not going out.
Speaker 4: Therefore, Dubai trades at a massive premium to Brent. We're
Speaker 4: going out two months that premium reverses now to a
Speaker 4: significant discount. So the market, if you believe in term
Speaker 4: structure or in the forward curve of pricing theory, is
Speaker 4: telling us, yeah, we've got a real problem in the
Speaker 4: spot market. By the time we roll into summer, there's
Speaker 4: going to be some sort of exit in this war
Speaker 4: remains to be seen. We're not seeing it in the
Speaker 4: product markets, for instance. So another question now is the
Speaker 4: diesel market. The crack spread of the margin between diesel
Speaker 4: prices and oil prices in the Golf Coast is almost
Speaker 4: seventy dollars a barrel.
Speaker 3: That so one of two things are going to happen.
Speaker 4: Oil WTS is going to have to catch up to
Speaker 4: where product prices are. A product price is going to
Speaker 4: crash because of demand destruction. And now we're talking about
Speaker 4: significant economic contraction. But the here and the now is
Speaker 4: that the spread is telling us significant shortage in the
Speaker 4: spot market prompt month, but going for two months out
Speaker 4: we should start.
Speaker 3: To see some sort of resolution. At least that's how
Speaker 3: the market.
Speaker 4: That's what the foward curve is suggesting to the globe.
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: The US and Israel working to calm crude markets, both
Speaker 2: countries vowing to avoid targeting Iran's energy infrastructure. Following retaliatory
Speaker 2: attacks across the Middle East. The fuel and oil spies
Speaker 2: spike general Robert Welsh of Academy Securities, writing, the conflict
Speaker 2: is transitioning to a war of attrition. There is no
Speaker 2: clear checkmate scenario. General Welsh joins us now for more General,
Speaker 2: welcome to the program sir, Are you suggesting this war
Speaker 2: has entered a new, more enduring phase.
Speaker 6: Good morning, John Jonathan, Thanks for having me today. You know,
Speaker 6: the war changes as time goes on, and what we're
Speaker 6: seeing now is from a perspective, it is going into
Speaker 6: a little bit more of a war of attrition. There's
Speaker 6: military sets that we've talked about in the past and
Speaker 6: what the US military in the Israelis is trying to
Speaker 6: take out. They're systematically doing that. They're very successful from
Speaker 6: a military standpoint. But as we see that the nature
Speaker 6: of conflict is really a clash of wills, and that
Speaker 6: clash of wills is going on now between both the US,
Speaker 6: Israelis and Iran. And Iran has to say so in
Speaker 6: this and what we're seeing from Iran is they're taking
Speaker 6: a very asymmetric approach to this, and their asymmetric approach
Speaker 6: is number one. Their objective is the regime to remain.
Speaker 6: But we're now seeing what's changing a little bit in
Speaker 6: that is they're also looking at cost imposition on the
Speaker 6: US and Israelis and also the golf partners in the
Speaker 6: rest of the world. So that cost imposition now is changing,
Speaker 6: and we see those attacks now becoming more prevalent on
Speaker 6: infrastructure in the Persian Gulf, and we're seeing it more
Speaker 6: and more taking place. And that's that costant position that
Speaker 6: they're now parting to put to make it so painful
Speaker 6: that the US, the Israelis, and the world community want
Speaker 6: to get out of this situation.
Speaker 5: General, we do have the United States sending a second
Speaker 5: amphibious assault ship to the Middle East. Can you walk
Speaker 5: us through what these highly trained marines could potentially be
Speaker 5: used for in the region.
Speaker 3: Sure.
Speaker 6: I think as you look at the combatant Commander Admiral
Speaker 6: Cooper in the Central Command, he wants to have as
Speaker 6: many capabilities.
Speaker 3: In his hands as he can use as possible.
Speaker 6: Is the planning takes place, we see what we call
Speaker 6: branches and sequels. As things start to change on the battlefield,
Speaker 6: then different branches and plans come into play. Having a
Speaker 6: marine amphibious group with a Navy amphibious ready group with
Speaker 6: it marine amphibious unit, that capability brings it's a toolbox
Speaker 6: in its own which adds to the toolbox that he has,
Speaker 6: and it brings many capabilities that comes to bear. It's
Speaker 6: got a reinforced infantry battalion with plenty of fire's capability
Speaker 6: or attack capabilities. It has a full range of aviation
Speaker 6: assets from attack helos, heavy transport helos with the H
Speaker 6: fifty three's, it's got the MV twenty two's with our
Speaker 6: rotor assaults support aircraft that can go out long ranges
Speaker 6: and do raid type missions or insert missions. And then
Speaker 6: it's got F thirty five's on board two that can
Speaker 6: provide the close air support that.
Speaker 3: The team would need.
Speaker 6: But in this case, they'd be inserting themselves into a
Speaker 6: very large joint operation where there's many capabilities that the
Speaker 6: Centcom commander has to be able to fit this tool
Speaker 6: into his toolbox and be able to use it as
Speaker 6: he sees fit. So some of the missions you could
Speaker 6: see you talked about carg Island, there could be raids
Speaker 6: there going into the if there were any indications that
Speaker 6: we'd go into than nuclear sites to try to hold those.
Speaker 6: We've got very highly trained special operations forces that can
Speaker 6: do those missions. But you'd probably need a conventional force
Speaker 6: to go in that the Marine Expigracery Unit can provide
Speaker 6: to go in and provide some of that security along
Speaker 6: with many of the joint assets that would be on
Speaker 6: top of that providing air superiority.
Speaker 5: How vulnerable will they be though in a narrow corridor.
Speaker 6: I think what you're seeing right now is why the
Speaker 6: US Navy is not operating inside the Straits because those
Speaker 6: conditions have not been set by the Joint Force to
Speaker 6: be able to bring Navy ships in there. Yet the
Speaker 6: Navy would rather stand off than stand inside there where
Speaker 6: there are much more risks. So the threats to the Navy,
Speaker 6: both from drones, missiles, and fast attack craft has to
Speaker 6: be taken down more before you start to see them entering.
Speaker 6: So this is a phase campaign based on conditions, and
Speaker 6: what we've seen recently start to really play out is
Speaker 6: as the air superority has been gained, the US has
Speaker 6: now brought in capabilities like the A ten aircraft, which
Speaker 6: you start and operated at a very low altitude, can
Speaker 6: see targets and take out small targets like the fast
Speaker 6: attack boats or where they've got missile sites hidden along
Speaker 6: with these attack aircraft they're in so they're bringing much
Speaker 6: more capabilities in there than are for that type of mission.
Speaker 6: The septic conditions for navy aircraft could come.
Speaker 2: In stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: The conflict in the Middle East pushing global bond the
Speaker 2: attire as central bank's way, increasing inflationary risk. Terry Weiseman
Speaker 2: of Macquarie Rights and the ottomate cost of the war
Speaker 2: is unknown, but bond traders aren't taking any chances. Terry
Speaker 2: Johns is now for more its Terry Carnic twkerd boarding
Speaker 2: Terry Watson I said, what's going on? What kind of
Speaker 2: a question is that in daylight today? See whatd ride
Speaker 2: it's been in the old bond market. What's your reaction
Speaker 2: to the most same, particularly at the front end of
Speaker 2: the cave.
Speaker 1: Well, the front end of the curve is responding to policy,
Speaker 1: of course, John, it's you know what we wrote on
Speaker 1: March fourth, actually just a few days after the war began,
Speaker 1: was that central banks were going to respond to this
Speaker 1: war and to the implications having for oil prices in
Speaker 1: a hawkish fashion. Now that might not have been obvious
Speaker 1: on March fourth, right, you know, in terms of crisis
Speaker 1: and certainly in terms of high oil prices, we've also
Speaker 1: seen historically higher unemployment. We've seen recessions in some cases.
Speaker 1: But I felt that these central banks would have been
Speaker 1: felt burned by what had happened in twenty twenty two
Speaker 1: and twenty twenty three, and that they weren't going to
Speaker 1: take any chances. So it's not just the bond traders
Speaker 1: are not taking any chances here. The central banks aren't
Speaker 1: taking any chances as well, certainly not through their rhetoric.
Speaker 1: And that's why the front end of the curves moved up,
Speaker 1: and that's why you've seen these very wide swings in
Speaker 1: the last few days in the money markets. Projection of
Speaker 1: where central bank policy rates are going to be at
Speaker 1: the end of this day.
Speaker 2: I can tell you as well, because the consensus view
Speaker 2: coming into these central bank meetings is they would look
Speaker 2: through this shock chair and power effectively said it's not
Speaker 2: that simple. And the takeaway from the ECP and the
Speaker 2: bays they might actually hike in the next several months.
Speaker 1: Sure, and keep in mind there's something going on here
Speaker 1: besides just the increase in oil prices and its transmission
Speaker 1: to CPI, for example, Because if it was just that
Speaker 1: it might not be that big a deal because in
Speaker 1: many of these industrialized countries, you know, the energy products
Speaker 1: are not that large a component of the CPI basket.
Speaker 1: I think what central banks are worried about are the
Speaker 1: so called second order effects, whereby if you do get
Speaker 1: an increase in inflation, let's say by half a percent
Speaker 1: or three quarters of a percent, it becomes sticky because
Speaker 1: it becomes embedded inflation expectations. It then becomes embedded in
Speaker 1: wage demands, and you don't have just the impulse from
Speaker 1: the original increase in oil prices, but you have a
Speaker 1: propagation of inflation expectations that causes more inflation. That's why
Speaker 1: they're trying to nip this in the bud right now,
Speaker 1: admitedly through their rhetoric at first. But if they have
Speaker 1: to raise rates, they.
Speaker 3: Will raise rates.
Speaker 5: Can we talk about the cost of this war?
Speaker 3: Sure?
Speaker 5: To day, I believe you said it's one to two
Speaker 5: billion dollars. Now you have the Pentagon asking Congress for
Speaker 5: two hundred billion. Are we going to see movement on
Speaker 5: the long end of the year old curve because of this?
Speaker 1: I think the long end of the curves have moved
Speaker 1: up for three reasons, and one of them is clearly
Speaker 1: the fiscal implications. But let's talk about the first two reasons.
Speaker 1: The first reason, the most important reason, I think, is
Speaker 1: just higher inflation. When you have higher inflation, nominal assets,
Speaker 1: nominal paying coupon assets like long term bonds just seem
Speaker 1: all of a sudden less attractive. And we know that's
Speaker 1: the case because break evens these in these markets have
Speaker 1: gone up inflation break evens that is telling you that
Speaker 1: the market itself is expecting more long term inflation. People
Speaker 1: have been fleeing into the inflation protected products. They've been
Speaker 1: fleeing out, relatively speaking of the nominal products. So yields
Speaker 1: are going up on the long end of the US
Speaker 1: Treasury curve and in the long end of the curves
Speaker 1: in Europe. The other issue here, of course, is that
Speaker 1: central banks are tightening, and that makes it more expensive
Speaker 1: to carry a position in long bond you're financing at
Speaker 1: a higher rate. It becomes less attractive to do that
Speaker 1: you sell off the long bond. And the third reason
Speaker 1: is the one you've just highlighted, which is that there
Speaker 1: might be more issuance. Why, because there's a cost to
Speaker 1: managing and running a war and I've seen reports suggesting
Speaker 1: it's one to two billion dollars per day is the
Speaker 1: cost of the US right now. So obviously, if this
Speaker 1: becomes a long war, it could start to impinge on
Speaker 1: the outlook for death.
Speaker 2: So we've got about forty five seconds left. Where a
Speaker 2: guests earlier on the programmer said some value would opened
Speaker 2: up at the front end of the curve, the barter
Speaker 2: hike is simply too high yields of three where fat
Speaker 2: funds are right now, can't push it much further, and
Speaker 2: if they do hike over the next two years, they
Speaker 2: may well cut in response to those hikes further down
Speaker 2: the road. Where do you think value has opened up
Speaker 2: across the curve?
Speaker 1: Look, I think it's not just a question of where
Speaker 1: on the curve, but maybe where. Internationally we have seen major,
Speaker 1: very aggressive swings. Let's say in where the market expects
Speaker 1: the ECB to be at the end of the year,
Speaker 1: three hikes, for example, is priced, and currently two or
Speaker 1: three from the BOE. I think there the market may
Speaker 1: have overreacted. In the market may be anticipating that this
Speaker 1: war will take will last longer than it might actually do.
Speaker 3: So, and of course if.
Speaker 1: It doesn't and if it ends somewhat sooner, you're going
Speaker 1: to see those violent reactions in the front end come
Speaker 1: back down. So if I were looking for value in
Speaker 1: the short in the short end of the curve, it's
Speaker 1: not so much we're on the curve six months, twelve months,
Speaker 1: eighteen months. It's internationally. I think some markets have simply
Speaker 1: reacted more than others, and now might be where the
Speaker 1: value is.
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