Speaker 1: Welcome to Trains.
Speaker 2: I'm Joel Webber and I'm Eric bel Chernas.
Speaker 3: Eric, we had plans for this episode, and then the
Speaker 3: situation in the Middle East, specifically around Iran, has continued
Speaker 3: to escalate, so we need to talk about energy.
Speaker 2: Yeah. Oil.
Speaker 4: What really got me thinking we should call an audible
Speaker 4: this week is USO. This is the oil ETF that
Speaker 4: has come back from the dead. Like three times, I
Speaker 4: swear I've written this thing off. Remember during COVID, it
Speaker 4: actually had futures that were about to go negative because
Speaker 4: nobody wanted oil reverse.
Speaker 2: Now you've got this things up.
Speaker 4: At least it was up twelve percent on this particular day,
Speaker 4: and before that I had gone forty percent in a month,
Speaker 4: and the volume was massive, twenty two billion dollars in
Speaker 4: a week, and it's been in the top five most
Speaker 4: traded ETF. So it's come out of its sort of
Speaker 4: grave to come back and take over. This is the
Speaker 4: kind of ETF that my friends from college will text
Speaker 4: me about, like, oh, I want to buy oil. USO
Speaker 4: looks like the one, and it's the ETF we really
Speaker 4: made the whole traffic light system on because it's holding
Speaker 4: futures and they roll and it can be hidden costs
Speaker 4: in there and people it's like a wolf in sheep's clothing.
Speaker 4: But when it goes up, man, it really works. I
Speaker 4: think we should go over that, and then also alternative
Speaker 4: ways to play energy, because if you don't want to
Speaker 4: mess with derivatives, you got to go to the equity market.
Speaker 2: So there's like XL XOP.
Speaker 4: So when you want to play oil or invest in oil,
Speaker 4: or feel like you want more exposure to it, this
Speaker 4: is a perfect thing to cover on this podcast because
Speaker 4: there's multiple options and each have their trade offs.
Speaker 3: You mentioned your traffic light system at Bloomberg Intelligence. What
Speaker 3: traffic light color are you giving this episode as we
Speaker 3: go into.
Speaker 4: It, it's kind of the whole spectrum because USO is
Speaker 4: read XL and XOP would be green, although XOP gets
Speaker 4: one mark for being not market cap weighted. But yeah,
Speaker 4: I'll flashing everything. Yeah, that's why this is complex investing
Speaker 4: in oil. The bottom line is if you think about
Speaker 4: the thing you want to invest in, say a barrel
Speaker 4: of oil, think to yourself how annoying would this be
Speaker 4: to actually invest in directly? You have the bio barrel
Speaker 4: of oil somewhere, put it in your backyard.
Speaker 2: It's toxic.
Speaker 4: The more annoying and exotic it sounds, the more you're
Speaker 4: gonna have to deal with some frictions or things you
Speaker 4: don't like, like costs, and that's the case here.
Speaker 3: So joining us to walk through these options. Vincent Piazza,
Speaker 3: who's the Bloomberg Intelligence Senior Industry analyst for energy, as
Speaker 3: well as James Seffert ETF analyst at Bloomberg Intelligence, this
Speaker 3: time on Train's the complexity of the oil trade.
Speaker 1: James Vince Welcome Atrians, Thank you, thanks for having me. James,
Speaker 1: I want to start with you.
Speaker 3: Can you break down why USO is, Like Eric said,
Speaker 3: it goes up and it comes down. What about how
Speaker 3: does this thing of structure that makes it so volatile
Speaker 3: like that?
Speaker 5: Yeah, I don't this wording is going to sound mean,
Speaker 5: but it's called the United States Oil Fund and Eric said,
Speaker 5: it's the It's one of the primary reasons we went
Speaker 5: with the traffically because it's kind of like a wolf
Speaker 5: in sheep's clothing, like United States Oil Fund. Like it
Speaker 5: just sounds like, oh, it just holds oil. It's simple,
Speaker 5: and it's so much more complex than that, because, as
Speaker 5: Eric said, you've got to roll futures. It tries to
Speaker 5: stay as much in the front month as it can.
Speaker 5: Typically we can get into what happened when oil went negative,
Speaker 5: which is going to be interesting to what's going on today,
Speaker 5: but it it it can change exactly what it's holding
Speaker 5: and when when when oil went negative, things drastically change
Speaker 5: exactly how the ETF was working. But what ends up
Speaker 5: happening is even if you think oil is going to
Speaker 5: go up over a certain time period, that's not what
Speaker 5: you're investing in. Everyone when oil went negative would would
Speaker 5: have taken the bet that oil was going to go
Speaker 5: up from here. But you can't just make that bet
Speaker 5: in the markets, because the markets are smarter than that.
Speaker 5: They know that oil is likely to go up. In
Speaker 5: these contracts end every month. You need to trade each contract,
Speaker 5: so and if you're on the front month, you either
Speaker 5: got to get out of that contract or you have
Speaker 5: to take the delivery of the oil. And all of
Speaker 5: this just gets very complicated. So exactly why we're going
Speaker 5: to call this complexity of the oil trade.
Speaker 4: And let me just paint a visual. If you're picturing
Speaker 4: futures right April, May, June, July, it goes out like.
Speaker 2: A year picture.
Speaker 4: The curve typically slopes up, so like as you roll
Speaker 4: from like April to May, you pay a little more
Speaker 4: for the next month. That is called roll costs. And
Speaker 4: this curve isn't in the state of contango. Now if
Speaker 4: everyone wants oil in an instant, the curve goes the
Speaker 4: opposite direction, so you actually pay less when you roll.
Speaker 4: That's where it's're at right now and USO obviously this
Speaker 4: is a good time to use it. But normally that
Speaker 4: roll costs when it's in a state of contango could
Speaker 4: be anywhere from ten to thirty percent a year. So
Speaker 4: you could make a call that oil is going to
Speaker 4: go up in January and it goes up forty percent
Speaker 4: or thirty percent, and you basically are flat because of
Speaker 4: all the roll costs. That's why this is a wolf
Speaker 4: in sheep's clothing. But because it does hold the near
Speaker 4: months right the month's closest to the actual barrel of oil,
Speaker 4: it does have a lot of sensitivity to the price today,
Speaker 4: so it does move very sensitively, and that's why the
Speaker 4: trading crowd likes it so decent trading tool, bad long
Speaker 4: term holding. Vince as an energy expert at BI, I
Speaker 4: know you cover the equities. Is that a fair assessment
Speaker 4: of the future's market in your opinion?
Speaker 6: That is the I couldn't have said it any better.
Speaker 6: That is the perfect way of describing the difference between
Speaker 6: a tnentango setup versus a backwardation, which is what we
Speaker 6: have today. And because of the volatility, and also keep
Speaker 6: in mind at the back end is fairly illiquid, so
Speaker 6: the front end is more liquid. There's much more volume
Speaker 6: on the front end of the curve the back end.
Speaker 6: Because of that ill liquidity or the less liquidity relative liquidity,
Speaker 6: you could see very very sharp changes in the underlying
Speaker 6: price of those contracts.
Speaker 3: Okay, So, Vince, one of the things that I wanted
Speaker 3: to talk to you about was not that long ago,
Speaker 3: like weeks, it seemed like the world was in an
Speaker 3: oil glut, like there was more oil on ships than
Speaker 3: ever before. The price had been dropping. We were talking
Speaker 3: fifty dollars a barrel. Now it's like the reverse. How
Speaker 3: sensitive is the oil market to just disruptions and why
Speaker 3: is that?
Speaker 1: So?
Speaker 6: We have several significant choke points in the world, and
Speaker 6: the Shadehorn moves is probably one of the more significant
Speaker 6: choke points. Roughly twenty percent of LNG roughly eighteen nineteen
Speaker 6: called twenty million barrels of crude run through that particular
Speaker 6: very narrow passage, So a delay in transporting those molecules
Speaker 6: has a significant ripple effect across several other of the
Speaker 6: choke points. That choke point, that very narrow choke point
Speaker 6: marries European supply, European capacity with Asian demand, so Middle
Speaker 6: Eastern supply running through that up to Europe down to Asia.
Speaker 6: That's a very significant choke point that could have considerable
Speaker 6: impact on balances, both in the short term and also
Speaker 6: in the long term.
Speaker 4: One more follow Vince, because you're following this very closely
Speaker 4: and from a like you're looking at the investment side
Speaker 4: of it.
Speaker 2: How long can this last?
Speaker 4: Like is this something that it just seems like they're
Speaker 4: going to try to get the choke point opened as
Speaker 4: fast as possible. I mean, I'm sure, I'm sure that
Speaker 4: the pressure, especially if it hits you know, a price
Speaker 4: of gallon of gas, is going to be intense. So
Speaker 4: is this something that could last for a long time,
Speaker 4: or like I guess in this trade, is it kind
Speaker 4: of like one of those things that could reverse pretty quickly.
Speaker 6: So the analog here that we have. The closest analog
Speaker 6: is twenty twenty two Russia Ukraine where Brent. Let's use
Speaker 6: Brent right. Brent is considered the global seaborn benchmark. Yeah,
Speaker 6: So we had Brent in February of twenty twenty two,
Speaker 6: spike to a peak in March and retrace by early
Speaker 6: two Q So it retraced that gain, that peak of
Speaker 6: flee from ninety to eighty to one twenty and then
Speaker 6: back down again to a ninety handle some time in April.
Speaker 6: So it retraced very quickly. Now, in the case of
Speaker 6: the Strait of Hormuz and Iran in general, we want
Speaker 6: to look at three things. Right, I call it a delay,
Speaker 6: I call it disruption and destruction. Delay is the hydrocarbons
Speaker 6: get to their destination a few days later, we're not here.
Speaker 6: Disruption is I shut down a well, I shut down
Speaker 6: capacity because I fear that these barrels, these molecules can't
Speaker 6: get to their final destination. That's where we are now.
Speaker 6: The destruction phase, where all bets are off global economies
Speaker 6: are severely impacted, is if assets are taken off the
Speaker 6: chessboard because of destruction, so that there is significant capital
Speaker 6: that needs to be invested to bring these facilities and
Speaker 6: bring this back up to snuff. So supply chain delays,
Speaker 6: maritime logistical delays, those are days. We're now in the
Speaker 6: case where we could see significant barrels off the market
Speaker 6: for significant periods of time, causing a collapse of the
Speaker 6: global economy. Because we're staring at you know, not long
Speaker 6: ago it was one hundred and twenty being bid before
Speaker 6: the US market opened. We're staring at over one hundred dollars.
Speaker 6: That volatility is significant.
Speaker 4: Let's say you know, we were college roommates. This is
Speaker 4: a cruise story, and I text you and I say,
Speaker 4: n listen, I'm not selling my Vanguard funds, but I
Speaker 4: want a little piece of this oil action. I want
Speaker 4: to make sure that I'm participating in all this craziness.
Speaker 4: I was looking at USO, but I don't know. I
Speaker 4: know you cover the stocks. What should I do? How
Speaker 4: would you answer that question to them?
Speaker 1: You can start with this is not investment advice.
Speaker 6: Yeah, yeah, yeah, yeah, yeah, yeah, yeah, No, definitely that's true.
Speaker 4: I'm not trying to because we can't give investment advice.
Speaker 4: But I guess maybe as somebody who knows as much
Speaker 4: as you, just be interested to hear what you would
Speaker 4: say in terms of just somebody who wants to get
Speaker 4: more exposure to this market.
Speaker 6: Yeah. So if you think about from a broader perspective,
Speaker 6: you have the ETF complex. The xl E is probably
Speaker 6: the broadest, the most liquid, the cheapest form of exposure
Speaker 6: across the equity energy space. But that exposure encompasses not
Speaker 6: only the upstream but also the downstream the extream components,
Speaker 6: so it gives you what I call the energy value chain.
Speaker 3: So you you like that vehicle as just like a
Speaker 3: proxy for.
Speaker 6: The energy exactly exactly because within within that ETF as
Speaker 6: both James and Eric No. Three names make up the
Speaker 6: bulk of that exposure. And those are the integrateds. You
Speaker 6: have Exxon, Chevron, and you have what I call a
Speaker 6: mega independent like Conicgo. They make up the bulk of
Speaker 6: that exposure. So they have exposure across not only the
Speaker 6: upstream side of the business so the extractives right the EMPs,
Speaker 6: but also have downstream downstream refining and also petrech chemicals.
Speaker 6: So that provides you with the value chain exposure. As
Speaker 6: you get more granular and you think about the EMP space,
Speaker 6: the XOP is an area that that we've discussed in
Speaker 6: the past. But the XOP or the US Oil and
Speaker 6: Gas e M P ETF, which I think is I EO,
Speaker 6: they're not pure proxies for the upstream exposure because they
Speaker 6: too have much more broader exposure to the downstream and
Speaker 6: also some LNG components. Really, when you think about the
Speaker 6: exposure and what tends to do well in instances like this,
Speaker 6: it tends to be that downstream side, right, because as
Speaker 6: prices go up, the refiner's reprice to the consumer at
Speaker 6: the retail level the gas and diesel that go into
Speaker 6: on road vehicles, and so that price tends to come
Speaker 6: across pretty instantly. But when price is revert at the
Speaker 6: wholesale level at the crude level, prices at the pump
Speaker 6: don't correlate as quickly. So in the refining space, in
Speaker 6: the downstream space, you have probably one of my favorite
Speaker 6: ticker symbols of all time. C R a K. You
Speaker 6: guys can pronounce it for me.
Speaker 4: Vince wrote a which is basically an introduction to stocks.
Speaker 4: Usually he wrote one for xl E and in it
Speaker 4: I'm reading it and I could tell he he loves
Speaker 4: crack Joel, because I'm like I'm like, Vince, why don't
Speaker 4: you just why don't you just say you love crack
Speaker 4: in the headline.
Speaker 2: I mean, that's really what's going on here.
Speaker 1: Okay, So talk to us about about the ETF crack. Vince.
Speaker 6: Yeah, So it provides you with pure play downstream exposure.
Speaker 6: When I mean downstream exposure, the upstream side are the
Speaker 6: companies that extract the hydrocarbon. The downstream the refiners are
Speaker 6: the companies that refine the product, the raw material, the
Speaker 6: feedstock into the things that we use. So the gasoline
Speaker 6: and diesel that cars and trucks and vans used in
Speaker 6: there every day. Now, as spreads widen, there is an
Speaker 6: outside its profitability that ends up in the hands of
Speaker 6: the refining companies and most likely for longer, even after
Speaker 6: the price reverts. So it is a pure play exposure
Speaker 6: to the downstream. The reasoning being that you have margin
Speaker 6: expansion and higher profitability for longer as this crisis persists
Speaker 6: for longer, you also most likely have what I would
Speaker 6: call a geopolitical risk premium that remains in the commodity
Speaker 6: for longer as well.
Speaker 3: Eric, to bring in just a little bit of flows
Speaker 3: and comp between the ETFs, we've talked about so far,
Speaker 3: like what's the action look like for this suite of
Speaker 3: ETFs in the energy space.
Speaker 4: Yeah, so he went over I think four of the
Speaker 4: big ones, maybe five, but XALE is the king. It
Speaker 4: sounds like from what Vince is saying and what I
Speaker 4: would you know.
Speaker 2: Also, Echo is like.
Speaker 4: You can't really get too hurt with XL. It holds
Speaker 4: a lot of stocks, it's diversified. The only thing is
Speaker 4: just it's not going to have the sensitivity to short
Speaker 4: term moves and oil Like if you look over the
Speaker 4: short term, USO is blowing away XL in the past
Speaker 4: like week or month, but XLE is up like one
Speaker 4: hundred and sixty eight percent in the past ten years
Speaker 4: something like that, and USO is like down. So it's
Speaker 4: that rolling of the futures that makes USO almost like
Speaker 4: a hot potato. You cannot hold it for longer, We'll
Speaker 4: just eat you alive. XLE you can hold for longer.
Speaker 4: So I think that's the main takeaway. And then x
Speaker 4: XCS they're going to have like more specific parts of
Speaker 4: the oil industry, so it's like almost like a subsector.
Speaker 1: Like a specific niche bet.
Speaker 4: But if we look at this year, the number one
Speaker 4: ETF by flows as xl E with five billion. Number
Speaker 4: two isn't even a billion.
Speaker 2: I funny.
Speaker 4: Number two is u ur a uranium jool even though
Speaker 4: that's t energy. Vd XOP is fourth. Oi H is
Speaker 4: another one. So I guess you know this is part
Speaker 4: of the dilemma. I'm want to go to James on USO. James,
Speaker 4: obviously holding these equity ETFs is monitored. You know, That's
Speaker 4: why these equity tfs get a green lightner system. They're diversified,
Speaker 4: they hold equities. They have obviously some sensitivity to oil,
Speaker 4: but not like USO. Now, can you go over USO
Speaker 4: a little bit here? It came out in like twenty
Speaker 4: years ago. It rolls futures, and then during COVID futures
Speaker 4: were about to go negative, and I think it had
Speaker 4: to like it was going to owe people money or something,
Speaker 4: so it had to like switch strategy to holding all
Speaker 4: of these different futures across the curve so that it
Speaker 4: wasn't like just holding the near month. And then I
Speaker 4: guess it switched back. Can you go through the story
Speaker 4: of USO, because honestly I wrote it off I thought
Speaker 4: it had become neutered by holding all these months, which
Speaker 4: gives it less teeth and less sensitivity to oil. But
Speaker 4: I guess it went back to its front month exposure.
Speaker 5: Yeah, that's exactly right. So what happened Oil went negative
Speaker 5: or was going negative. Things were going bad because the
Speaker 5: government the world was shut down due to COVID And
Speaker 5: what ended up happening really there was a few big drivers. One,
Speaker 5: they were heavily in the front month and second month contracts,
Speaker 5: which is what this product does, and they were not
Speaker 5: doing well. The other problem was the ETF was this
Speaker 5: was a case sometimes ETF's like there are a fish
Speaker 5: that gets too big for the pond that they're in,
Speaker 5: and in this case, USO owned like well over thirty
Speaker 5: percent of the contracts with the open interests of the
Speaker 5: futures that were getting exposure to the oil contracts. It
Speaker 5: was basically the tail wagging the dog, and the SEC
Speaker 5: was getting concerned, the CFTC was getting concerned. They had
Speaker 5: to go in and break, like bake the rules that
Speaker 5: they basically had and are in their perspectives saying what
Speaker 5: the fund would do, because all of a sudden, you
Speaker 5: have all this money in this fund that's holding this
Speaker 5: contract and it's all gonna flow out because it rolls
Speaker 5: to the next month contract like it's set to keep rolling,
Speaker 5: and all of a sudden, you're gonna have a ton
Speaker 5: of money pour out towards the end of this contract.
Speaker 5: It's already heading negative, so they're gonna dump more of
Speaker 5: these contracts onto the market as it's negative. ETF can't
Speaker 5: go negative. All these problems were happening. So what they
Speaker 5: did is, as you said, they went to all these
Speaker 5: other months. They went out twelve months essentially, so they
Speaker 5: went from we have high octane exposure to what's going
Speaker 5: on in oil right now, to we own the entire curve. Essentially,
Speaker 5: we own the curve out one year and so one
Speaker 5: a lot of investors who were trying to bet on
Speaker 5: oil rebounding all of a sudden didn't have a bet
Speaker 5: on oil rebounding because they were just bet across the curve.
Speaker 5: And the funny thing is the Unit US Commodity Funds
Speaker 5: actually has another fund that does this already. It's called
Speaker 5: USL and it holds the twelve month contracts. So essentially
Speaker 5: the USO started mirroring its it's sibling of USL, and
Speaker 5: it wasn't great. It took a few years. But in
Speaker 5: twenty twenty three, I believe they started moving back from
Speaker 5: the twelve month contracts just to the front two months,
Speaker 5: and I yeah, so this all happened. It was kind
Speaker 5: of crazy in twenty twenty three time range, but they
Speaker 5: got back. By January twenty twenty four, they were in
Speaker 5: the front and second month contracts.
Speaker 3: Okay, So change in strategy there. That brings us back
Speaker 3: to basically being like this thing was originally right. So
Speaker 3: we'll be curious to see how this one plays out
Speaker 3: since it's so volatile.
Speaker 4: Yeah, I mean, looking you're to date, USO's up fifty
Speaker 4: seven percent, UNL is up two percent. So but if
Speaker 4: you went back, UNL would have probably gone down less.
Speaker 4: It also doesn't have as much role costs. But honestly,
Speaker 4: here's my take. If you're looking for quick sensitivity and
Speaker 4: a short term trade, I mean, USO will do the job,
Speaker 4: but you can't hold it. You just you can't hold
Speaker 4: two things long term. You can't hold anything that rolls futures,
Speaker 4: and you can't hold anything has leverage.
Speaker 2: You have to treat it like a chainsaw.
Speaker 1: Or juggling the chainsaw.
Speaker 2: Yes, XL XOP.
Speaker 4: These are diversified ETFs that you can sort of bolt
Speaker 4: onto your portfolio as if you're you know, one of
Speaker 4: long term overweight to this sector.
Speaker 3: I notice you didn't mention crack when I asked you about,
Speaker 3: you know, Tom Screen, but you want.
Speaker 4: To talk about there's also frack. You want to like
Speaker 4: siblings crack and crack. So yeah, I mean, look, crack
Speaker 4: is a very specific oil refiners. Vince's case is good
Speaker 4: to me because you you can go out and speculate
Speaker 4: and try to drill the oil, but you have to
Speaker 4: refine it. So the refiners are kind of like in
Speaker 4: a sweet spot of like you have to come through
Speaker 4: us anyway, and that's a good spot to be in.
Speaker 4: I guess it just depends on and also, I think
Speaker 4: the more you get to subsector ETFs outside of xl E,
Speaker 4: the more you are not overlapping your regular portfolio because
Speaker 4: a lot of people own VOO and a lot of
Speaker 4: XL's top holdings are in VOO already or IVV or SPY.
Speaker 4: The more you go to subsectors, the more you're getting
Speaker 4: unique exposure that we call portfolio completion. So I think
Speaker 4: crack is a you know, a good novel choice for
Speaker 4: something that's like, you know, not the obvious one. We
Speaker 4: try to do that when we write our notes too,
Speaker 4: is like here's the big one, here's the cheapest one,
Speaker 4: and here's sort of like a wild card you might
Speaker 4: not have thought of.
Speaker 3: Okay, another wild card that I wanted to bring.
Speaker 1: Up, the Breakwater ETF.
Speaker 2: Yeah, talk about that one.
Speaker 3: Yeah, because Vin, you know, Vince, we're talking about stuff
Speaker 3: that's industry specific. But then there's gonna be the stuff
Speaker 3: that's sort of like peripheral.
Speaker 2: Right, so on the I didn't even know this existed.
Speaker 4: Sometimes, I you know, there's forty eight hundred.
Speaker 1: I was, you got to know these.
Speaker 4: So this is called the Breakwave Tanker Shipping ETF.
Speaker 1: Oh it said breakwater, Breakwave, breakwave.
Speaker 4: Yeah, and the ticker is be WET. And the day
Speaker 4: after the Iran do you.
Speaker 1: Know this one? Do you know what it holds? No?
Speaker 1: He says no, James, you know, of course, you know?
Speaker 5: Well he was I do know, now, Yeah, okay, I
Speaker 5: knew what be dry was, but I didn't know what
Speaker 5: the UT was until this till the last couple of weeks.
Speaker 4: The day after the Iran strikes, which would be Monday,
Speaker 4: the second of March, it went up twenty eight percent.
Speaker 4: That is insane for a non leveraged DTF. I mean
Speaker 4: that is unbelievable. One day, Chang, Yeah, it went up
Speaker 4: more than USO, went up more than anything I could see.
Speaker 2: It was perfectly positioned. Okay, what does it hold.
Speaker 4: It basically holds these tanker futures that are linked to
Speaker 4: shipping oil from the Middle East to Asia and Europe.
Speaker 4: So I'm like, this is it's like they literally made
Speaker 4: it for this situation. It's a little dark thinking something's
Speaker 4: going to benefit from war. I don't want to go
Speaker 4: too heavy into this, but this was custom made for this.
Speaker 4: Now it is so crazy sounding. Though the volume was
Speaker 4: nowhere near what we saw in USO, it did trade
Speaker 4: about fifteen million dollars, which is pretty good for a
Speaker 4: real exotic ETF like this, But the average Joe Degen
Speaker 4: is going to use us so this is just probably
Speaker 4: even a little too crazy for them. James, what can
Speaker 4: you tell us about this that we might not know?
Speaker 5: You hit most of it. I mean, the way to
Speaker 5: think about this is its futures contracts. So like you said,
Speaker 5: on shipping to Europe, Middle East, it's really basically the
Speaker 5: futures contracts on those actual tankers, think those massive, massive
Speaker 5: ships that are holding the oil and whatever other hydrocarbons
Speaker 5: as Fins talked about. And then the flip side, the
Speaker 5: bee dry one was one that we talked a lot
Speaker 5: about with Russia and Ukraine, and that's going to be
Speaker 5: holding you know, dry goods, whether that's commodities like agriculture
Speaker 5: and mining materials and things like that. So they're kind
Speaker 5: of like twins or same side, different sides of the
Speaker 5: same coin. But b wet is these futures contracts on
Speaker 5: these massive shipping oil tankers, most of which are sitting
Speaker 5: right now in that canal waiting to go by in
Speaker 5: the strait of her moves.
Speaker 4: And by the way, you know this idea that like polymarkets,
Speaker 4: like oh all these degens can bet onto it's too crazy.
Speaker 4: I mean the honestly this future is called Middle East
Speaker 4: Gulf to China.
Speaker 2: I'm sorry. The institutional world is pretty degen.
Speaker 4: When it comes to betting on stuff. I didn't even
Speaker 4: know there were futures.
Speaker 5: I mean a lot of it is like they're using
Speaker 5: it for hedging purposes, like a lot of these ships.
Speaker 5: One of the huge things that happened is like their
Speaker 5: war insurance stopped, and basically because anybody who's offering that
Speaker 5: insurance can give a notice of like a certain days
Speaker 5: beforehand and they can pick up insurance again and then
Speaker 5: they have to pay more for it. So war insurance
Speaker 5: now is like five x what it used to be
Speaker 5: just before everything happened here. So all these things are
Speaker 5: just hedging insurance. It's this is all it is, and
Speaker 5: you can everything is financialized.
Speaker 2: Vince. I know Vince.
Speaker 4: I work with him a lot, and his out is
Speaker 4: filled with earnings calls, like literally from like six am
Speaker 4: to like six pm of all these energy companies. So
Speaker 4: you clearly have your ear to the ground in terms
Speaker 4: of what they're talking about. What do they think of
Speaker 4: something like this, Like if you're in the energy industry,
Speaker 4: is good, bad, and different?
Speaker 2: What's the vibe there?
Speaker 6: So I can tell you from our conversations with the
Speaker 6: management teams that they look at this with a great
Speaker 6: deal of caution, right, because you're now at a point
Speaker 6: where you're in the realm of demand destruction and that
Speaker 6: is very bad. Okay, when you sell a product whose
Speaker 6: price is so high that it reduces the amount of
Speaker 6: consumption or it creates that inflationary pressure across the value chain.
Speaker 6: That's bad when you think about prices along this curve. Right,
Speaker 6: we've seen the front end of this curve pop. The
Speaker 6: back end of the curve, let's call it the second
Speaker 6: half of the year, that's averaging somewhere around eighty bucks
Speaker 6: or so. What you're likely to see from operators over
Speaker 6: the course of call the next earning season is layering
Speaker 6: on additional hedges. And what's a hedge. It's risk protection.
Speaker 6: I am selling my output forward, I am receiving a price,
Speaker 6: a confirmed price. It creates transparency for me, it creates
Speaker 6: cash flow, It protects my drilling program. Okay, and I
Speaker 6: think that's what the operators are looking for because the
Speaker 6: investor base, what you all have told them is I
Speaker 6: do not want to see production. I do not want
Speaker 6: to see capital being invested to grow output. What I
Speaker 6: want is the return of free cash flow. What I
Speaker 6: want to see is better balance sheets. So the operators
Speaker 6: have right size, there are balance sheets in this environment.
Speaker 6: Since twenty twenty two, they've gotten their financial leverage down.
Speaker 6: Free cash flow is relatively robust now, and so you're
Speaker 6: seeing distributions. You're seeing distributions of what we consider based
Speaker 6: it ends, and on top of that supplemental distributions, so
Speaker 6: the capital is coming back to the investors. That's what
Speaker 6: you all have said. You all wanted, we don't want
Speaker 6: a production So I do not see any I shouldn't
Speaker 6: say any. I would be surprised if we were to
Speaker 6: see an acceleration of production growth in this environment. What
Speaker 6: I will see, what is likely to occur, is an
Speaker 6: increase in the amount of hedging over the year twenty
Speaker 6: twenty six because of a way not only the front
Speaker 6: of the curve has responded, but also the back end
Speaker 6: of the curve, most recently, granting these operators an opportunity
Speaker 6: to slap some additional hedges on, protect their chilling programs,
Speaker 6: and grant them some incremental free cash flow to give
Speaker 6: back to all of you.
Speaker 3: A hedge feels like the perfect way to end this episode.
Speaker 3: Thanks James, thanks so much for.
Speaker 7: Your time, Thank you, thank you for having me, Thanks
Speaker 7: for listening to trillions.
Speaker 3: Until next time. You can find us on the Bloomberg Terminal,
Speaker 3: Bloomberg dot com, Apple Podcasts, Spotify.
Speaker 1: Or wherever else you'd like to listen. Good love to
Speaker 1: hear from you.
Speaker 3: Hit us up on social I'm at Joel Weber Show
Speaker 3: He's at Eric Balcino's Trillions is produced by Magnus Hendrickson