Podcast: Talkin’ Oil Markets with Andy Lebow and Edward Meir June 21, 2019

I think given what you know, given what’s transpired and what may transpire, which, uh, at, at this point is uncertain. But, uh, any time there’s a chance for a act for military action in the golf, you know, that that could be serious. Now I have to say that I’ve been covering the Strait of Hormuz for, I’d say 40 years now. Uh, we’ve been talking about it since, uh, September 22nd, 1980 when the Iran Iraq war, uh, began and you know, it every now and then or cyclical Lee, I think it comes into a, comes into play obviously with the geo political developments. The Strait of Hormuz is a strangle, is what the, the US government calls a choke point through which 21 million barrels a day of petroleum petroleum liquids flow through as well as a quarter of the world’s liquid natural gas flows through. Now, can the Strait of Hormuz be close? Not that that’s unlikely. And, uh, I think when we talk about the Strait of Hormuz being closed, it’s really, it’s really more of, um, it’s really not the straight is going to be Hormuz, but this straight is going to be closed.

But it could be that there’s going to be some wider or some other types of military action that we saw in the, in the Gulf of Oman back in, uh, during the ran Iraq war in the 1980s, there was a tanker war where both the Iran and Iraq tack a tanker is tax shipping in either the golf of Oman or, or in the straighter for Moose. The U s navy eventually formed convoys to, to, um, bring the, the, uh, to accompany the ships through the, uh, through the Straits. And you know, we, we did lose that there were barrels lost, but I think you have to look at, obviously in the Persian Gulf and you just have to look at a map and you’ll see Saudi Arabia, the UAE, Oman, Yemen is not a, a, is no longer a big producer, but clearly there’s a potential for something to happen.

Uh, and to widen this, uh, this conflict and the market, uh, obviously has, uh, you know, as I said before, uh, is reacting as as well. It should. However, you know, what’s also important besides the, the potential for widening conflict here is that the fundamentals and in my opinion, uh, we’re not quite as uh, as bad as say a $50, a $50 Wti. In fact, as we move ahead and look at, uh, look at third quarter, the fundamentals are actually look, looked much better. We should be as, as we move into a, as we move into a three Q and looking at the demand for, um, looking at demand for OPEC crude and where OPEC is producing a, it looks like there’s going to be a short fall. Now, it looked like there was going to be a shortfall in, in second quarter. But what happened is us runs, we’re a much lower than than had been anticipated and as a result, US inventories grew.

Crude inventories grew significantly of the second quarter. Total inventories have grown, nearly have grown by about point 85 million barrels a day during the second for let’s say a million barrels a day in the, uh, in the second quarter. So as a result, we, we thought that builds would be about half that owe it to a low runs and some software, some software demand numbers coming in. As a result, inventories have built the other. There’s also been a, a big built in natural gas liquids sewing to the record production of natural gas. So we saw this filled in the US globally, probably less so, but that clearly what was one of the other bearish factors in the market coming off as well as the, the trade war and fear about the fear about demand being, uh, being hit in second hand in second quarter, third quarter and into a fourth quarter.

But I think the market got way ahead of itself way ahead of itself because demand being hit, we’re talking about growth of, uh, most of the, most of the a analysts and the, um, and most of, uh, the consultants we’re looking for growth. Say 1.2, 1.3 million barrels a day this year. That’s around where we were, you know, 1.3. Uh, we have curved that to to 1.1 1.0 to 1.1 and one around 200,000 barrels a day where everyone else has, has also has also cut their estimate by 200,000 barrels a day. Well, Saudi production is down from uh, November by half a million barrels a day and oh, pet production continues to decline. So we’re taking that 200,000 barrels a day and just magnifying it or the market did into a, a c to a big move down and given where the balances are a, or looking for a third quarter, certainly in my opinion, was wasn’t justified.

However, uh, there was also a massive long position that got liquidated and not surprisingly as this long physician has finally been dated, uh, Wti for instance, has gone from like 15 longs to 15. The one long two shorts on the big SPEC. It’s now like three to one. It’s actually below where the averages are right now. So, not surprisingly as this, as this physician is liquidated, of course the market, it’s time for the market to rally. So they got over done on the downside. Uh, and, and on the upside here, uh, you know, we obviously don’t know what’s going to happen in the Persian Golf, but, uh, certainly there, there could be a lot more upside depending on, uh, depending on what does happen. There’s also an OPEC meeting coming up the g 20, which I know Ed is going to be talking about, uh, is coming up.

Uh, Trump’s meeting with the Chinese leader. So the, as I said in the introduction, there’s a lot of cross carts going on. Furthermore, last night there was a massive fire at a, the, at the pes Gerard Point, which is in Philadelphia, a massive fire at that refinery. That refinery is 330,000 barrels a day. Uh, it does so far that we don’t know what the damages, but a it from early reports, look, it looks pretty serious now. 330,000 barrels a day is a 25% of pad one refining capacity. So that could be a big blow. Uh, and, and also could change a lot of the balances. That would be good. Obviously for us refiners, not in the, in pad one and certainly good for European refiners. Uh, if this refinery is down for any, uh, any length of time and it appears, just look at the pictures like, uh, like it, it will be, and not surprisingly, uh, gasoline went, has, has gone cray, you know, gasoline rallied significantly overnight as, uh, as well as well it should have.

So, you know, that that is, uh, certainly something to watch that, uh, just happened overnight. So a conflagration here or the east coast and a possible conflagration in the Persian Gulf and, uh, you know, again, it just shows, it just shows her trading oil is oil is all about geopolitical, uh, infrastructure, uh, the macro, the global macro. And I think it’s why it makes oil so interesting and, uh, such a great commodity to follow for, for all these years. He even talking about the straighter for nuclear moves again, 40 years later is, you know, Israel Israeli something. Um, Andy, speaking of infrastructure, can I chime at this point?

Sure. He, uh, Houston Chronicle has been doing numerous articles on the number of infrastructure changes that are going to change the global balance. And in probably the next 24 months, there’s seven different projects to help take some of the tremendous us crude production and get it ready for export. And Phillips 66 had a good explanation of how this is going to be done. They’re going to build two offshored boys and it’s called a single boy, Maureen, or a single point moring 27 miles east of Port Aransas, which is just south of us here in Houston. It’ll be fed by two underwater, 30 inch crude pipelines and that terminal would be able to handle what the industry calls a VLCC are very large crude carrier. And each one of these crude carriers is 250,000 deadweight tons and holds 2 million barrels. So think of 2 million barrels a day. We need a VLCC to offtake from one of those spms every day if we have 2 million barrels a day of exports.

And then I said, well, how big is the ship? So I went on and I search thanks to Mr Google, what’s the biggest cruise ship out there? And it’s the Royal Caribbean symphony in the seas. It’s also about 225,000 dead weights to tons, but it’s a little more interesting and it carries 5,500 people has 24 pools or water slides and a version of central park, which is a little more interesting than a VLCC, but there’s one of the symphony of the seas. And right now there’s 70 new builds of the LCCs in ship yards around the world. So I think what’s going to happen here, again, infrastructure and a little bit more of the global dynamic, you’re going to see a big change by the mid of minimal of 2021.

And we need that. We need this infrastructure because us for the auction continues to, uh, continues to grow, thankfully. And this just shows the chef, you know, you talk about it just shows the shift and the and the global dynamics. Uh, and what, what, what we’re able to do a on what we’re able to do with, um, our production, our exports and our policy quote unquote policies. But it certainly has, has changed things. A, the u s becoming a net export or which it will by 2020, 20, 21 versus when we were, when we were a, a major importer. Okay. I think that’s, I think that’s enough for, for oil for, for a bit. I’m going to turn it over to a Ed Meir to talk, uh, talk metals.

Thanks Andy. Before go. I’m just curious what, what is your take now as to where we go price wise and what do you think will happen? I mean, uh, I know it’s hard to, you know, get into all these, all the presidents had and what they ran his are doing. But what do you think will play out if, if, for example, the states has a limited strike, you know, just sort of hitting a radar installation with no casualties or something like that. Something Limited. What I mean packed use it using Babel or has that been, I don’t think it’s been, I don’t really, that may have been discounted, but let’s, let’s look at the ramifications. Yeah. We could have a limited strike and then uranians ramp up action against the Saudis. The Saudis are already asking for, they need more protection for the, for their oil facilities or something happens in and to the UAE or Oman. So, you know, obviously the market is, uh, unlikely to go down if, if we see more, uh, you know, if we see further action against the Saudis and things get, uh, and things get heated up and that’s the risk really is that you draw other actors into what looked to be a limited, you know, limited strike and, you know, the next thing you know, you know, the, the, the Saudis are involved or um, you know, the, the, or the other Persian Gulf producers. Obviously Israel is, is in the, is in the neighborhood. So, uh, you know, it’s a, it’s a, it’s a very dangerous situation. The other thing I failed, I did not mention is, uh, insurance rates obviously have spiked. You know what? I think it’s the highest, it’s the highest and decades, I think. Uh, I don’t have the exact, the exact year, but insurance rates for voyages into the Persian Gulf of a, of really spot really spikes. So there’s bound to be some dislocation.

All right, well, thank you for that. I’ll just say a few words, not too long on our markets, the metals markets, the main highlight this week has been gold, which has gotten to a six year high. We’re currently at just under $1,400 an ounce and you know, four months it was a, you know, watching gold was like watching paint dry. It was just not doing anything except just flat lining, pretty much in a, in a, in a within $150 range for the past two and a half years. But we finally broke out of that range in just 24 hours, which was quite remarkable. And of course the reason is partly the tensions in the golf, uh, uh, but more importantly has been this wave of global easing by the central banks, uh, led by the Fed of course this past week. And also just prior to the Fed meeting, the ECB saying that it’s going to be, uh, you know, looking at further easing if warranted.

And the Bank of Japan saying the same thing. In addition, you had three or four other central banks all lowering their rates, uh, this past month. So really you’re seeing an across the board move, uh, towards easier money. And that’s what’s really been driving the, the gold market. Interesting. On the European credit markets, there is a chart which we’ll put in our research. Practically all the European bond markets are now negative except except for the UK and the US. Uh, well the US isn’t in Europe obviously, but if you look at the global picture, most of the bond markets across the world, mainly in Europe and in Japan are negative except for a little pockets of the 15 year and the third year. So it’s, it’s quite a conundrum the ECB and other central banks have when they fit one day, literally cannot move rates any lower.

And in fact there, you know, they’ll go into negative territory as they have. So the question is, are we going that, that same path, you know, are we going to, in the event of a really serious slump, uh, here in the u s which I don’t think we’ll get, but you never know. Are we heading towards towards zero or negative as well? Other than that, base metals have not been doing very much. They’ve been obviously moving higher with everything else, but they’d been a relative laggard and are in fact down today because of a variety of reasons. Mainly, you know, the Chinese macro numbers again have been pretty disappointing. We’ve got weak PMI numbers as well this week. Uh, but I think the really the focus for the base metals is on the g 20 summit later this weekend. The talk is that, I mean the consensus view is that president Trump and g will agree to resume the negotiations.

That I think is a reasonable scenario. I don’t think either of them or we’ll walk out of the meeting or anything like that in a half a, I think they will agree to restart the talks, but I don’t think we will get a really effective agreement, uh, from all this because the issues are so complicated that I, I don’t think you can put it in, in an accord, let alone enforce it. So I think that’s a problem. The U s and the Chinese face as they proceed down this very, very complicated, uh, uh, situation. But at least Mexico is out of the way. We had a brief scare with the Mexican tariffs that came and went. Nafta. Part two seems to be getting ratified. The Mexicans put it through. The Canadians are going to put it through shortly. And I think there is some appetite here in the u s you also get it passed.

So at least start that part of it is looking good. The, the key, the key thing now is, you know, settling things with, with, with the Chinese and if, if the markets get a sense that there is some progress there, we could see the base metals rally a little bit going into the week after next. That’s it for me. If any guys, and if you guys have any comments, additions, I have a question. Sure. How much, let’s talk. Let’s talk about price on gold. Yeah. Um, how much more upside you think there? That’s a good question. Um, um, I’m looking at the charts now. I think, you know, uh, we could, you know, again, it depends on how, how things develop in the, in the Persian Golf. From my experience, these geopolitical events kind of have a one shot impact, you know, if they don’t get worse, a rally cons tends to usually fizzle.

So gold likes to see continuous upheaval for it to move higher. So we, we, uh, with that caveat, I think, uh, uh, 1450 looks to be a good chart point. Uh, some people were saying 1500 this week. Um, but the, the key thing is technically the, the, uh, the charts look really bullish. You know, you have a lot of ETFs buying coming in. I think it’s been the most in six months. Uh, the breakout is clearly evident. So we may be pausing here and in the event of an of another skirmish or retaliation by the u s uh, I think we could, we could probably move up another 50 to $100 over the short term.

Okay. That’s good move.

Yeah. Well, finally, I mean, yeah. Uh, it’s been, uh, it’s been really, really very, keep in mind, we were at 1800, uh, uh, six years ago, so we’re, we’re certainly, we still have a lot of ground to cover. So you know, uh, but you, you kind of get complacent because it’s been such a rose you tight range that throwing a number like 1500 seems a huge, but it certainly is doable. Okay. Thanks Ed. Marty, any anything else?

No, that was really helpful and I kind of wondered what was going to happen to gold with all the geopolitical unrest since normally it’s been tied to financial markets now it seems like it’s got two things pushing it up. Yes.