Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Glad to welcome Ed Morris of Hartree Partners now on
Speaker 2: set here at seven thirty one, lex Ed, great to
Speaker 2: have you in the building today. How do you see
Speaker 2: this war in Iran when you look at past incidents
Speaker 2: of you know, war in the Gulf or the Arab
Speaker 2: oil embargo. I mean, we've had a number of hot
Speaker 2: points in the Middle East. Where does this rank?
Speaker 1: So rank somewhere in between. Certainly, this is the third
Speaker 1: Gulf war we've seen since nineteen ninety ninety one, straight
Speaker 1: to hor moves. Wasn't closed in the first one or
Speaker 1: the second one, and it wasn't even closed in the
Speaker 1: events of the early period of time in the seventies
Speaker 1: or even the Iranian Revolution. So this is pretty unique.
Speaker 1: So I put it more serious than anything we've seen
Speaker 1: since the early nineteen seventies.
Speaker 3: Does that mean that, even let's say this somehow resolves
Speaker 3: in a week time Trump or someone off, is it
Speaker 3: serious enough that we're going to have a fundamental rethink
Speaker 3: of the way energy flows and energy markets after this,
Speaker 3: much like after the air of oil embargo when the
Speaker 3: SBR came, like after COVID, after Ukraine when we rethoughted
Speaker 3: just exactly how energy markets are structured.
Speaker 1: So I think we should look and see what some
Speaker 1: major countries are doing, and we're doing even beforehand. China
Speaker 1: is energy dominant when you think of clean energy, and
Speaker 1: they have certainly decided, as being very dependent on flows,
Speaker 1: particularly from the Middle East, that they're going to double
Speaker 1: down on the clean energy scenario. Europe is already talking
Speaker 1: about going back to green energy targets. We'll see what
Speaker 1: happens in the US, but certainly there's been a kind
Speaker 1: of worldwide rethink about what to do in terms of dependence,
Speaker 1: and that includes emerging markets as well. It includes India certainly,
Speaker 1: as well as China and much of the Far East.
Speaker 2: We were playing some sound from the US Energy Secretary
Speaker 2: Chris Right on yesterday's Sunday Shows, and he was saying, look,
Speaker 2: this is a fear premium, that it's going to last
Speaker 2: a couple of weeks, but we're going to start getting
Speaker 2: shifts through the streets of hormus soon. He seemed pretty sanguine.
Speaker 2: Do you share his view that this could be relatively
Speaker 2: short lived?
Speaker 1: Well, I share his views that it could be relatively
Speaker 1: shortly we lived, but I'd say I would turn his
Speaker 1: remarks of a few weeks to a few months. And
Speaker 1: that's certainly the case if we look at the nitty
Speaker 1: gritty of the oil market and the gas market in particular.
Speaker 1: So we shouldn't forget that gas prices of skyrocket around
Speaker 1: the world because twenty percent of the world's available internationally
Speaker 1: derived natural gas comes from the UAE a little bit
Speaker 1: and Qatar an awful lot, and that's not going to
Speaker 1: be turned on for at least a month.
Speaker 2: And that's all priced in dollars, by the way, So
Speaker 2: it hurts them even worse than it hurts us.
Speaker 1: It absolutely is, yes, And on the dollar price, by
Speaker 1: the way, given what you've just talked about, with the
Speaker 1: increase in the value of the dollar globally, just adds
Speaker 1: insult to injury. It just makes the inflation for the
Speaker 1: rest of the world significantly higher than it otherwise might
Speaker 1: have been. But even the oil, it's not come back
Speaker 1: like overnight. They'll be testing, they'll see what happens, and
Speaker 1: we still have a big risk. Latently in the western
Speaker 1: side of the Arabian Peninsula, we have the Huthis and
Speaker 1: they have not activated yet, and they are a proxy
Speaker 1: still of Iran and we haven't seen a complete shutoff.
Speaker 1: You know, we've seen a shutoff. If people are arguing,
Speaker 1: is it ten million barrels a day or sixteen in
Speaker 1: either case is pretty large, but it can go to
Speaker 1: the full twenty coming out of the Middle East if
Speaker 1: we have a closure on the other side of the
Speaker 1: Arabian Peninsula.
Speaker 3: And there just feels to be a disconnect. I'm listening
Speaker 3: to you and other experts in this that are talking
Speaker 3: about the potential for this to stretch on and have
Speaker 3: very big implications. Then I look at what markets are doing.
Speaker 3: I mean, the backwardation suggests that oil prices resume something
Speaker 3: close to normal pretty relatively soon. Are we being sanguine
Speaker 3: about the risk that this could stretch on and have
Speaker 3: much higher oil prices to come?
Speaker 1: I think we're being a little bit too sanguine. The
Speaker 1: futures curve doesn't tell you very much. It tells you
Speaker 1: that we've had a spike in the medium in the
Speaker 1: inter it tells you that bagradation has increased, so there's
Speaker 1: just not a lot of liquidity in the market, and
Speaker 1: the fact that ten year prices have not changed very much.
Speaker 1: It doesn't tell you what's really going to happen in
Speaker 1: the next few years. So I wouldn't use that as
Speaker 1: a predictor. I'd say that's a reflection of where macro
Speaker 1: funds are placing their short term cash.
Speaker 2: We have seen a big spike in prices at the pump,
Speaker 2: and I thought it was interesting in reading your research
Speaker 2: that the product prices rise faster than the underlying crude
Speaker 2: for example, why is that and how do you expect
Speaker 2: to see gas prices go because I mean, this chart
Speaker 2: doesn't do justice to what we've seen on the price
Speaker 2: at the pump. It's the highest in either Trump term.
Speaker 1: Yeah, so I've seen prices coming from the lower three
Speaker 1: dollars range to the mid three dollars range. There's been
Speaker 1: a what fifteen sixteen percent increase in the price of gasoline.
Speaker 1: If you look at crude oil, where was crude oil
Speaker 1: trading two weeks go. Brent was trading at around seventy
Speaker 1: it even fell below to sixty eight sixty nine and
Speaker 1: it's now at one hundred and three. And WTI was
Speaker 1: trading at sixty five, sixty four, sixty three and it's
Speaker 1: now at one hundred and two, one hundred and three.
Speaker 1: That's a double increase from what we've seen in gasoline.
Speaker 1: So we've seen a very slow reaction, so to speak,
Speaker 1: on the gasoline side. That's due to a whole bunch
Speaker 1: of factors, including you deliver out of what you have
Speaker 1: from storage in the light. But we're seeing a curtailment
Speaker 1: on the product side. We've seen the big curtailment out
Speaker 1: of the Middle East. The Middle East, while they're exporting
Speaker 1: sixteen million barrels a day or so through the Strait
Speaker 1: of Hormuz, two million of that is product, and we've
Speaker 1: seen that product, which largely goes into Asia, having a
Speaker 1: dramatic impact on jet fuel prices in Asia, on gasoline
Speaker 1: prices in Asia, on diesel diesel diesel prices in Asia.
Speaker 1: And that's much more than the fifteen percent increase seen
Speaker 1: in the US. So the US is a lagrate and
Speaker 1: if we see what's happening in the rest of the world,
Speaker 1: it tells you that we're going to see four dollars
Speaker 1: at the pump more more sooner than we.
Speaker 2: Otherwise well ed, what does it mean that IMAX catches
Speaker 2: up to Brent? I thought it was interesting the other
Speaker 2: day I looked at a WTI quote and I thought
Speaker 2: it was a mistake in the graphics that it was
Speaker 2: actually Brent, because usually there's a five dollars gap between
Speaker 2: the two. I'm you know, rounding, But now we're at
Speaker 2: the same level.
Speaker 1: Well, don't forget that there's more crude coming out of
Speaker 1: the United States than there is at a northwest Europe,
Speaker 1: and the US has available incremental crew that can be
Speaker 1: bid up. We don't have restrictions on exports. So we're
Speaker 1: seeing the demand for WTI related crewde skyrocketing in a
Speaker 1: way that makes it get closer to where Brent has
Speaker 1: been trading. We're seeing more ban in Dubai at a
Speaker 1: ten dollars increment even above where Brent is trading. So
Speaker 1: that tells you that the world pricing is sorting itself out.
Speaker 3: So for one O two on bront right now and
Speaker 3: not sort of this out saying that your calls about
Speaker 3: a fifty percent chance likelihood that we see a rise
Speaker 3: of fifty percent in prices, What does that scenario look like,
Speaker 3: how do we get there and how long does that
Speaker 3: price elevated price? Last?
Speaker 1: Well, one scenario is one I just mentioned. The houthis
Speaker 1: get to work and we see the western part of
Speaker 1: the middle in the Arabian Peninsula also shut off. That's
Speaker 1: twenty million a day. We're not going to see the
Speaker 1: battlefield ending pretty soon. We're going to see at least
Speaker 1: two good weeks. I suspect of continued bombing of energy
Speaker 1: infrastructure in Iran and in the western part of the Gulf.
Speaker 1: The Ranians are not slowing down as far as I
Speaker 1: can tell. We're going to see inevitably, if there are
Speaker 1: some ships trying to get through to the Strait of Hormoves,
Speaker 1: we'll see those being attacked, and we'll see tankers being attacked.
Speaker 1: We have to remember that Iran has just reaffirmed the
Speaker 1: hardline approach by putting in place the son of the
Speaker 1: form of Supreme Leader. And they had a big debate
Speaker 1: about that. It was a week long debate which way
Speaker 1: are they going to go? And they chose the hard
Speaker 1: line way. So they're there for an existential threat and
Speaker 1: they're going to fight for the existential survival of the regime.
Speaker 2: I want to actually zero in on that because you
Speaker 2: talked about that in your notes. We could have seen
Speaker 2: Iran after the Ayahtola if he had been let to
Speaker 2: die of natural causes. Right, go with a more I guess,
Speaker 2: reformist supreme leader. But it seems as if this attack
Speaker 2: by Israel and the US has at least, you know,
Speaker 2: helped to push them towards a more hard line leader.
Speaker 2: So I wonder what do you think were the justifications
Speaker 2: for this war. We haven't heard much from the administration
Speaker 2: in the way of an official, you know, line of
Speaker 2: why we did this.
Speaker 1: Well, that's the the interesting question of why did we
Speaker 1: do this? And we did it for all of the
Speaker 1: reasons I suspect that we've heard from the White House.
Speaker 1: We've done it because that regime has been a threat
Speaker 1: and it's been a threat to the economies of the
Speaker 1: part of the world for a while. It's been a
Speaker 1: threat to Saudi Arabia, it's been a threat to the UAE.
Speaker 1: The bombings that came in when ABCAK was hit in
Speaker 1: twenty nineteen was not an accident. It came from Iran.
Speaker 1: The proxy attacks come from Iran. So there's been that
Speaker 1: threat for a long time. Yes, there was regime change
Speaker 1: in the minds of some people, including the President. He
Speaker 1: said it too often for you to not believe their
Speaker 1: regime change was certainly there.
Speaker 2: In this case, it's pretty much worse than what we had.
Speaker 1: Well original we expected, we expected, I suspect they expected.
Speaker 1: I didn't expect it. They expected this to be over
Speaker 1: in a couple of days, and that certainly didn't happen.
Speaker 3: Well, so it's a president at the same time who's
Speaker 3: been making this push for affordability at you advised presidents
Speaker 3: before you'd advised government, you've advised governments. We have finance
Speaker 3: leader ministers of the G seven meeting right now discussing
Speaker 3: a possible release reserves of oil. The US is surely
Speaker 3: trying to figure out how to stem some of the issues.
Speaker 3: To what would you be advising governments at the moment
Speaker 3: to try to mitigate some of the price rises.
Speaker 1: Well, I think they're doing what they have to do.
Speaker 1: The governments that have better control than the US government
Speaker 1: does on local electricity prices, is, you know, is keeping
Speaker 1: the weight of the increase in the hands of utilities,
Speaker 1: many of which are public sector anyway, the US doesn't
Speaker 1: have that privilege exactly. We have very independent regulatory agencies
Speaker 1: for power generation, and power prices are certainly going to
Speaker 1: go up. So the affordability issue can only be met
Speaker 1: to a certain extent by the risk of releasing strategic stocks,
Speaker 1: and we're seeing what's going to happen in the next hour.
Speaker 1: I suspect on what the G seven are going to decide.
Speaker 1: They're talking about big numbers, talking about three to four
Speaker 1: hundred million barrels of a release, which is bigger than
Speaker 1: the release after Russian invasion of Ukraine, which was a
Speaker 1: very large release to say the lease, and that didn't
Speaker 1: stop prices from going up because it takes a while
Speaker 1: to redeploy oil when you have some of the you know,
Speaker 1: the major oil pass sanctioned immediately after that Russian attack,
Speaker 1: So it's going to be a while. I think it'll
Speaker 1: be a good month or two before we see the
Speaker 1: weight of strategic stocks coming in the market. The release
Speaker 1: will obviously cause the market to fall, but how long
Speaker 1: that will last is another matter.
Speaker 3: And we should hear from them in about fifteen minutes
Speaker 3: time after that readout ed. It's such an honor and
Speaker 3: a joy to have you on. Ed Morris of Hard
Speaker 3: Tree Partners