Jeff Currie: Everything You Know About Oil Markets Is Wrong

0:10 Welcome back to another episode of the Oil Groundup podcast. I'm your host, Rory Johnston. A reminder to hit subscribe and leave us a review. Oil Groundup is distributed in partnership with the Clear Commodity Network at Clearcommodity.net and also the Oil and Gas Global Network, the leading podcast network for oil and gas. Our guest today is Jeff Curry, former and longtime head of commodity research at Goldman Sachs and now the wearer of many hats, including non-executive director of ABEX Markets, as well as chief strategy officer of energy pathways at Carlilele and a senior adviser to the firm's energy funds. Our conversation focused on the theory of and practice of oil price discovery. How commodities aren't typically anticipatory assets and how that has shaken out amidst our glut fear through horm shocked oil market. Jeff Curry, welcome to the oil groundup podcast. Thank you so much for joining us today.

1:04 >> It's great to be here. It's a pleasure. So you I've always wanted to take take part with one of these discussions with you, Rory. So it's it's a pleasure to be here. pleasure is entirely all mine. And for the vanishingly few listeners of oil ground up this long who don't know who you are or kind of where you come from, could you just give us a brief description of your background and kind of what you're doing these days?

1:27 >> Okay. Well, I was head of commodities research at Goldman essentially when the commodity business took off in the mid 90s all the way up until about three years ago. And for the last three years, I've been on board of Abex and I've been I was at Carlilele where I'm currently a senior advisor right now to their energy funds. I'm also on the board of board drilling left commodities. I'm also on the academic boards of University of Chicago's Energy Policy of Institute, Epic Energy Policy Institute of Chicago and their climate and growth initiatives. and I know I'm missing a few in there. oh, I pulse with Robert Freedelland and Blue Spark and I know there's another one I'm missing somewhere in there, but I so I apologize to somebody I forgot. But but I you know the one thing though I I will say that I spent my first 30 years at Goldman all on the macro side and in the last three years being at Carile and then on the boards of these companies I really learned a lot about the micro side. So if I can suggest to any of the listeners, make sure you you get exposure to both sides because I think it just it gives you a very good fundamental grounding and understanding, you know, all of these different markets to see it from the micro as well as the macro side.

2:54 >> So I really want to spend the bulk of this conversation on price discovery, price formation, something that I've heard you talk about for well over a decade now, since I've been in the industry. and I think what you know I think I have always understood the commodity market much as you have described it not anticipatory etc. And a lot of things over the past really two years have begun to shake my faith a little bit in these kind of core structural understandings of how these markets price themselves. So I want to go through a bunch of the episodes we've seen obviously centered on the hormuse crisis. But before we kind of get into any of the specifics, say this was back in January or heck even back, you know, precoid, how would you have described when when you say commodities are not anticipatory assets, what does that mean in terms of flat price, in terms of term structure or you know the shape of the futures curve, what do you mean when you say that? When I say that in in the absolute sense, the term structure is the one that is entirely a spot asset.

4:00 It cannot have any expectations put into it. And let me give you an example. Let's say I told you that Saudi Arabia was going to blow up in 6 months and we're going to lose all 10 million barrels per day. what would happen? People go out six months on the curve, buy it up, and it would be the biggest contango you ever seen. We take all of today's oil, move it into into six months out because the contango would be so big. what would that do? It create shortages today. The curve would flip back into backwardation and it wouldn't matter. It'd wash out. The curve has to price today's fundamentals, not tomorrow's. Doesn't mean that the backend can't. The back end should be a very slowm moving process driven by technology and you know underlying supply trends but the front end of the curve when it wiggles around just like we've seen with hormuz and the rest of it should be entirely devoid of any expectations and it should be entirely reflective of today's fundamentals and it really goes back to that simple point I've always said time spreads don't lie they cannot have any expectations embedded down because otherwise it would be taken out immediately. And so when we think about it, if you anchor the back end, all that movement and that rest of that curve in any commodity really needs to be reflective of today's fundamentals. And for those of you who don't follow these markets, I like to give the example of you, you know, understand backwardation. In the middle of the war, it was really backwardated.

5:33 Spot was up here and the back end was, you know, spot was $100 a barrel and the back end was somewhere around 70. Now, when we think about the shape of that curve, that backwardation is not that the price is going to go down, but rather it means you're willing to pay a premium to have that commodity today as opposed to tomorrow. And when we think about like oxygen, would anybody listening to this pay a premium to have oxygen tomorrow? No, because you're dead. you always have pay the premium to have oxygen today because it'll keep you alive. And that's the way you can think think about the backradation. Now the back end of the curve that's a whole different animal and that's more has to do with the companies. And the only time I've ever seen the back end move was the period between 2004 through let's say around 2007 or eight >> when you had basically flat curve at 100 120 bucks. It was crazy.

6:33 >> Yeah. And it stayed there until right around 2014. And then it repriced all within like seven or eight months. Just went boom straight down all the way around to 40. Stayed there and then repriced again during COVID that area back up into the like I guess it was it was around that 5055 range and then it repriced again. Now the one thing this would tie into, you know, that the the glut story and everything like that >> is the back end and this is a it cannot repric unless the entire industry reprices meaning that you got to have Exxon and the rest of them repric because that's the cost of capital of the entire industry. And I remember one time I was sitting there, people were, this was an 0405. The back end moved from 20 up to around 45. And everybody go, "Oh, it's you guys, you speculators with all of your, you know, Goldman Sachs commodity index making it go up." And I go, "No, it's impossible. You can't take a $450 billion market and move a $3 trillion industry." And then I started realizing, I go, that's absolutely true because the returns of the company didn't change.

7:46 You had to fill in all of that. So that you had trillions of dollars move into the space such that the company's cost of capital went up, the cost structures went up because he gave them money, they started spending. So the back end again is it is it you know there's some expectations and fundamentals in there. But is what I think about you know repricing everybody goes oh Curry you're insane can't go to 300 or 400 or 20 or whatever. It's just liquidity. I suck all the liquidity it can go to 20. If I dump a lot of liquidity it can go to 500. it can do whatever it wants to do.

8:19 because you'll just get a huge macro repricing across the entire globe. Actually, I I may be rambling here, Roy, but please stop me. >> Go ahead and stop me. >> Oh, okay. So, because I Okay, so I agree with everything you've said structurally, but I mentioned at the beginning, there were a couple things that have started happening over the past year or two that I've had trouble explaining within this framework. And I would say that I still agree 100% that let's say prompt time spread. So first month or two they absolutely don't lie. And I think you know and we can talk about how very surprisingly four months into hormone they actually flipped into into contango briefly over the past couple weeks this mini glut like and I think the reason I don't doubt the mini glut is because again I don't think these term spread these time spreads lie. But I think one thing that we saw in the year or so prior to the crisis, we had and I know and we'll talk about the kind of whether or not this glut was going to happen or not, but I think there was overwhelmingly a consensus view that in 26 we were going to have a big oil glut that the combination of OPEC coming back and you know slower growth and everything else. and we saw this weird curve structure emerge so-called the smiley shaped curve where we had basically say 6 8 12 months at the front that were backwardated. and then you kind of had this broad contango you know whether it was a smiley face or a Nike swoosh or kind of you know that's the that was the shape we generally saw.

9:48 And when I look at that curve the thing that kind of kept coming to me was the front's not lined cuz in this period we are still tight. we were still drawing even if we had a paper kind of glut or surplus. China was hoovering it up for the SPR. Some of it was getting absorbed by oil and water with sanctions. Like the actual realized supply demand balance was clearly still in deficit because we still clearly had prompt, you know, backwardation. But then I had a hard time explaining the broad contango beyond saying the market thinks we're going to be drawing next year because again it's to your point it's not that the market was pricing where the price was going to be next year but it was price it to me it seemed like it was pricing that we were going to enter into a surplus that would require some kind of builds regardless of the actual flat price level.

10:38 >> Yeah. Can you talk through how you saw because like we've seen this term this this curve shape appear a couple times in the historical record typically around periods of transition but it was very very brief kind of like vanishingly brief. This lasted months almost a full year prior prior to co prior to hormuse. >> You talk me through what you were thinking through that curve and whether or not complicated your your commoder not anticipatory assets thesis. all I know is in 2020 2019 you know there was a 2017 we published these three investor rules on on commodities. One is time spreads don't lie. The other one is don't join the party till the party's already started. and people tried to join that party before the party ever started and they got destroyed. And I learned that lesson really hard. And it was and it was there was an OPEC cut and it was I think it was in November 15 or 16. It was November of 16 they cut. And I remember we all tried to price in the backwardation into February of 17.

11:52 that was my worst year ever, ever in commodities, trying to do the exact opposite of what the all those people did before and it ended in tears. In other words, and by the way, we wrote the Mia Culpa in June of 2017. Yeah, it was 2017. and we wrote the MIAPA and made the point, don't ever join the party before the party started because what happened is you had still had a surplus out on the front of that curve.

12:20 It was a contango and then it went into the backwardation and everybody were buying we we everybody's buying calls on February of 17 and all of this had the backradation I you know I got caught up into it and you know what would happen and the problem is is that as you tried to price that in that thing would roll prompt and came down the the trade worked it didn't work until the end of 17 and we went to 88 >> in 18 we went It it worked, but we were just far too early and we tried to price it in. But what happened was be also when you tried to price that in, you kept the the the situation prolonged it in terms of that front end kept it up.

13:06 You kept the contango and so when it rolled prompt, it was the most painful process. And you know, anybody with with my you know age handle probably remembers that incredibly well. It was, by the way, it was the single worst year in the history of Goldman Sachs commodity business. and I can guarantee you nobody, nobody at Goldman, we all learned that lesson so clearly. You do not join the party till the party started. And part of what was going on, people were trying to put on those contango trades and everything well before it ever started. and the the decimation that occurred in it was already occurring before the war ever started.

13:48 >> >> well and and they kept getting blown out because they because the cur the front of the curve stayed backwardated. So you know if you held it you kept getting swamped up the side. >> Yeah. And so that goes back to that whole point about you know these these are prompt markets. Don't try to fade them because by the way you can make those curves do whatever you want after about six months. It's just a supply and demand of paper.

14:09 >> Agreed. but it just goes back to the point, wait till the party started and then show up. Don't go to the party early. I made that mistake once in my life and I'll never make it again. And so what was I thinking? I go, "Yep, these people are going to learn that lesson. Don't join the party till the party started." So, and I think even cuz I I I agree. and even then, we hadn't seen this shape so pronounced in the past. Like do you think there's a difference in the markets cuz again like the market was wrong that we were going to get the contango in in 26 for obvious reasons in hindsight. We didn't know it in the past but you know now obviously that turned out to be incorrect to your point of like don't show up to the party early.

14:54 >> but it they still put enough pressure that we enough you know selling pressure on the belly of the curve to really pronounce that shape for guess we were saying months. Do you think that there's just a a greater I don't know like pjoratively like a greater hubris in the market that we have so much more data now? We have such a better view on the market like like is there just more conviction in these trades than there would have been historically?

15:18 >> 100% it's the data >> and it's it's it's the satellite data. It's the Keplers, the vortexes of the world that have created this confidence. And I think probably what it's done is it's people have lost the ability. They they're so wedded to the data that they've lost their ability to assess what's going on in terms of the big picture because at that point in time, by the way, part of the reason refining margins are absolutely screaming. You knew you there was no more refining capacity coming on. We're there. We're there. And if you looked into 27, there was no more upstream. there's nothing there's nothing behind that. So they were unwilling to even look at the factual data around the board. Now, here's the thing that bothers me about that data is the accuracy of it's terrible. You know, I I was with a trader that had a a a terminal and and it asked I think it was Bortex or maybe I think it was Kepler, tell us one terminal, tell us what the amount is in in these terminals. They couldn't come after three chances couldn't come within 20%. In a terminal in an OECD country and so we got people making these largecale bets on stuff that they they they don't look at. The bottom line is the data for that whole time period was telling you that glit never really existed. And also if you go okay you had extra ships out there. You had to have extra ships because you have two types of crew two types of payment systems two worlds of biper. So we live in a bilateral world, the China world and the US world. You need longer supply chains.

16:50 You couldn't use the Red Sea. There was a host of real reasons why you had that floating storage out there, but nobody actually seemed to actually focus on any of that. They've just focused on all the data came out and said this. And I think what's happened is people have lost the ability to assess anything other than look at it. Also, you know, I you know, I'm a big fan of, you know, I of electronic trading in many of these different markets because I, you know, I, you know, I I I in fact, I spent a lot of my time with with quants right now. And I liken it to like when Luke Skywalker and R2-D2 would fly the X-wing. R2-D2 flew it all the time. You know, you Luke Skywalker would only take it when, you know, when Darth Vader entered the the picture. But the point being the trench in that and he was going to go down into there. But the point being is R2-D2 could fly that thing a lot better than than Luke Skywalker could. And I think that you know that I'm a believer in quant trading and it's important here. The problem though is the quant key off of all the information flow, the sentiment.

17:58 In fact, if I were building a model to trade today, I would be trading off sentiment more than I would offs. And you're looking at oil today, which means, you know, right now and the government knows as everybody knows they just keep the sentiment and the headlines go in a certain direction the machines will do what they do also you you get the trend going where they're going so I was I surprised the way the market was trading during during that time period no you know in terms of but the question that I ask myself today is what what will cause it to to go to another pricing regime and by the way the pricing regime the revenge of the old economy or or whatever whatever you want to call it, was playing out from November of last year all the way up till April 8th.

18:43 >> you know, whether if it was in metals, oil, whatever, the revenge of the old economy was working great. And then on April 8th, it was a risk reversal of un, you know, the magnitude of it was unlike anything I've ever seen before. >> Let's actually stop there for a second because I want I want to split these two kind of horm pricing regimes in half for a second. So let's talk first about the kind of it happens. We have March and April. We have our upward spiral with these pronounced jagged kind of jawbone drops of10 $15 a barrel intraday on Monday morning. It was a always a fun way to start the week. but like we did actually we did spiral up to we didn't get up to $200, but we did get up to I think it was 144 an all-time high nominal on dated Brent and then a 20 to $25 physical deliverable premium on top of that. So, we had $170 crude in the North Sea. People were willing to pay it, you know, late March, early April.

19:40 >> Let's let's start there. Is that the way that you expected, you know, a hormuz crisis? Cuz again, you've we've all considered it a bajillion times prior to this. Is that how you pictured it going? >> You know, let's say we don't think know anything happens after April 8th. Yeah. Is that first chunk how you expected it to kind of roll out? >> Absolutely. I mean, it was just right over home plate. There was nothing about it. You know, the backwardation was an all-time high.

20:05 >> Yeah. A barrel in WTA prompt. It was crazy. >> By the way, people people are going, "Oh, Curry, when are you gonna liquidate your position?" By the way, I owned USO and BNO all the way through that. And by the way, I'm still up 40%. Why? Because the role you rolled into that backwardation. You're always liquidating every single month. And I want everybody to hear when you own a commodity, you can't hold it like an equity. You're forced to roll. And you're when you're rolling, you're selling at the peak and you're buying. So you're liquidating at the peak every single month. Every single month. Every single month. And it's commodities are unlike any other asset class on the planet Earth. You're long volatility. You're not short. Every other asset class is short ball. And it goes back to this whole point. You can't print molecules. You can't borrow from the future. Blah blah blah. So that you end up with that backwardation and the spikiness on the front. So to your point, absolutely. Everything was working as planned. The equities were playing out. The every you're getting the rotation. Tech was getting smashed.

21:05 It was textbook example. >> Okay. So then we get the ceasefire. It's April 8th. We see this massive kind of collapse particularly in term structure. and I think one thing I was wondering in hindsight was does this and again you know as we've seen we've kind of collapsed on flat price. We've collected term structure. We went deep into you know prompt contango briefly there. Is this how much of this was a pure sentiment drive and how much of this was a differentiated kind of risk pricing from markets between the kind of and we're going to get to this you know later in terms of inventory and the future glut. but like how much of this was the market tolerating a couple more months of deep deficits versus the upward spiral risk of upstream facility damage, you know, durable supply loss in the Middle East? Was there a difference in your mind in the way the market was pricing physical kind of deficit versus you know that still the ever mounting tail risk of like the true apocalypse scenario which is you know abcake gets wiped out they wake up res they wastura you know all of the facilities in the region kind of get devastated like how much what what is that balance in your mind >> yeah I I don't think commodities are pimple on the butt nobody ever cares about them what they care about is on tech tech and tech was pricing in higher you know so the feed the feedback into the broader market was higher oil leads to higher break even higher break evens higher nominals in your pounding tax that is the revenge of the old economy you were getting a shift in the cost of capital you moving from long duration to short duration everything looked fine and really what occurred after that was that's when the government and the rest of the thing that the the message was this is over with. Don't worry about it. Interest rates are going down. We're going to see, you know, an environment. The focus was so much on these summer capital raises that are behind us now. And at that point, the that you just saw it again, the macro flows here dominate everything else. And so when we look at the macro, it goes back to my point.

23:26 Liquidity is what's going to determine the price of oil. And by the way, it's not just the price of oil. I own a lot of that kind of stuff. All of that old economy stuff which one. There's none of it. There's none of it that's gone gone well. My wife goes, "Why do you own this stuff?" but the but the reality is that it was a liquidity suction like unlike anything I've ever seen before in my life. how how brutal >> that that rotation was back.

23:56 >> And by the way, that that let's go with the the SpaceX IPO is the single most it was almost looking like that. Now you look back at at at I wonder if like the US gave the Iranians like some of the SpaceX IPO because it was do you know that all it had to do was stay above that the the the IPO price for five of the first 10 consecutive days that it traded which is thatou was assigned almost the exact same day as as the as the as the the SpaceX IPO and they're just like hold it on keep it up keep it they keep the oil down. and so I when I you know look at this it was more if there was one point that was being it was calming the markets on the equity side and by the way the the amount of leverage and that that tech equity and everything but the minute you've cleared you you finished into June you got the July 4th the funeral all of it out of the way boom we're right back to the same place we've done before you ask me where I'm surprised is why today it won't respond.

25:04 Because if you were scared back in April, by the way, the the peak on oil actually is also when when Trump went to Beijing. Actually, if you really put it down, they just that it spiked around there in that 115 120 between April 8th and there and then it just went straight down after that. And but but that's when it became clear that you know you had the the the massive equity capital raises the US 4th of July, the Iranian funeral, blah blah blah. Nobody wants any of that stuff interrupted. U but now it's behind us and right now I'm confused. I don't understand why the market won't >> You're in good company. I am also very confused because I think you know and over the weekend we saw you know this last week has been you know definitively the most violent most kind of you know torpid for theou was signed announced a month ago. I just wanted to read you because I just always good to time stamp. So we are 10:30 a.m. Eastern on July 13th 2026 and you know 15 minutes ago Donald Trump tweeted trade of Hormuz is open will remain open with or without Iran. We are reinstating the Iranian blockade. So named because it is only stopping Iran ships or customers from entering or leaving. It goes on to say that they will they will be the guardian of the straight of Hormuz.

26:26 and as a matter of fairness, of course, will be reimbursed at a rate of 20% on all cargo shipped, which is steeply higher, I should note, than the $2 million for a VLC that Tyron was was using was musing a couple weeks ago. okay. Talk about and I'm going to have a lot more of the price discovery questions, but obviously with everything that's happening and and when we had set this this this call up, it actually seemed like things were calming down a little bit, still deeply unstable, but we weren't back in this kind of flare up. Talk to me right now because again, I agree. if you know, we're not we're at the worst period right now in many ways since, you know, early April.

27:04 so why are we not seeing prices respond? But I was in New York a couple weeks ago chatting with a bunch of traders and you know the one thing that they all told me it was a unanimous kind of you know comment which was you know all of our models have never been more bullish but all of our risk tolerance all of our risk limits have basically been you know 90 95% down because they all got beaten up you know extensively through that earlier period. How much of this is like are are commodities like is this entire market just being driven by macro right now or like commodities folks kind of like in the corner kind of licking wounds being like I hope this is over soon because I want to go back to my models working like how much does this explain >> by the by the way that the last thing any government ever wants is investors in commodities and I learned my lesson that in no way it was Christine Lagard She was finance minister of France. Her whole goal was get us all out of there. US Congress wanted us out of there and you know, in fact, it was Christine Lagard. You guys are starving people to death, I think was her comment back in '08. by driving up the price of commodities. In my way, she succeeded. They they don't people don't own any agriculture commodities, particularly in Europe anymore. and Trump wants them out. They're affordability questions. By the way, I don't I the arguments I made back in the 2000s, I still stand by that. Yeah, you can get a spike by the investors coming in, but ultimately the sellers come in and it re equivalates and then you're back into something that's fundamental fair value. That's and that if anything, what happens is the investors buy it and give you a slower trajectory up to some repricing of the fundamental picture.

28:49 Bring in the supply and you re That's why future markets exist. But the problem is policy makers don't like it. Now I will argue that Scott Bessen is you know he understands these markets incredibly well. and if you create volatility they will leave the investors. And by the way you look at the longs and the shorts in this market you know it's it's pretty consistent with the type of volatility that you're seeing. People are gone. They don't you know if you if you you know volat this is one of the arguments I made about also why I'm so bullish longer term on commodities. The higher the ball the lower the investment. The lower the investment the higher the ball. It's a vicious cycle. It just gets worse and worse and worse. So it's no surprise to me that these investors have backed off.

29:38 And by the way I'm looking at this. In fact I was just on a call with a with who I think is one of the best oil traders out there. He said I've never been this bullish. because this time there's no taco for Trump. He can talk like this. There is no taco. Yeah. >> And by the way, the Iranians, they're they're there's nothing going to stop him. I mean, the bottom line, whether if it's Trump or Putin, they're both in a escalation trap. I know. Read Robert P.

30:03 I'm a huge fan of Robert P's work. and the escalation trap, you can't go back to your your constituency and tell him you cut such a bad deal. So, you're forced to escalate. You escalate until you can't escalate anymore and you go back. That's the track. You just keep going back and forth, back and forth. And ultimately, by the way, with LBJ in Vietnam, it was finally the the the the Democrats who took him out in the end.

30:30 and so, you know, whether you know Russia's in one, the US is in one now. so you know is this going to be you know you know his ability the inventories are lower the situation is tighter you know refining margins the other point too we haven't talked about is if I were an alien and came down on this planet earth and didn't know anything about it I'd say hey we're out of refining capacity front we're going to we're going to get refining sites I promise >> but the bottom line is that I think you know going back to your broader question the volatility is what's going to so I thought there's no way these these current politicians are going to repeat what we saw in '08 and just force you out of these markets but they are they are by creating the volatility is scaring people from making the investments and then the investors leave and that creates lower prices until by the way in this picture I used to always have it was Gerald Ford with onion futures he he banned it and you look at onion futures when he got the investors out they would do this and then straight up. Yeah. Also, coal, coal in 2008, Newcastle coal, no investors. It went like this straight up. While WTI had investors, it just went, it went all the way up there. You got the investment and it came off and it had no volatility because that's why you want the investors in there. But the problem is all these policy makers think the investors are creating the problem. No, the problem is there, which by the way goes back how what's the endgame for this? It's just like coal in 20 Newcastle coal in 2008. go back and look at it straight up.

32:07 >> Onion futures when Gerald Ford first the straight up. because it has no capability to anticipate the pothole. You're driving down. Oh, I see the pothole over here. Let's drive around the pothole. no, you're just going to go straight into the pothole. And so, you know, I think that it's unfortunate that the policy makers are are are are like this, but I guess it's not a surprise. And I was probably a little naive to think that they would. It it's a different reaction function. By the way, the Chinese do this, too. They don't like investors in these markets, which actually begs the question, why did they choose this as a career to go into affordability markets? because affordability markets make it really difficult to be a fundamental analyst, >> but they're just so darn interesting and and they most of the time make a lot of sense. So like when you talk about and you've talked about these like the job owning, the injection of these kind of VAR shocks, could you explain for our listeners what that means like the actual like the actual technical side of why an explosion in volatility why when you were saying best knows how these markets work. So you could you explain for the audience like why that works?

33:17 You you you want to hear the lecture I get from my wife when she looks at the statement from our >> exactly >> the volat nobody likes volatility they want predictability. actually a really a good way to understanding it was the IMF put out this report talking about how the US is equally as corrupt as Nigeria. Now, the difference was that the US had predictability and corruption. Let's say if you're like in New York and you're building an apartment, you got to pay the asbestos guy to go take the asbesto out. You know, it's 25K or whatever it is.

33:56 >> And but it's predictable and you know where it's going to be. In Nigeria, you don't know who's going to hit you up or how much it's going to be. So, why does the the Nigerian economy suffers? Because the uncertainty and the volatility, nobody likes that. They like the predictability of knowing what is going to be the cost of X Y and Z. So your point about talking to a bunch of oil traders in in New York was hey you know they they you know the the the the risk managers are going I don't care how bullish the fundamentals are. Yeah I agree it's a 95%. I mean everybody has been gotten their their wings clipped.

34:36 and ultimately, you know, that uncertain, I guess the best way to say it, volatility discourages investment because you cannot predict the future. It's too uncertain. Yeah, Roy, you and I have been around these markets long. I'm really comfortable in being long. I can I can withstand this because I've been around it long enough and seen it. And by the way, the anybody who's going to trade commodities, you need to have 30 40% draw downs. It's just a fact of life. But you try to tell a risk manager you're going to have a 30 or 40% draw down. They're going to know no way. And also a lot of the of the the strategies like multistrats, you know, they just truncate the ball. They just take off the sides of the of the distribution.

35:19 That's how they maintain those relatively high returns is by truncating the outcomes. You'll never get a blowout year out of a multistrat, nor you're going to get a bad year out of them. Now the problem with commodities is once you start going from 75 to 125 and you know boom boom boom boom boom you know people don't have the stomach for it and by the way the what we always said why that you know the that Goldman business in the 2000s did so incredibly well is that the the positions were so illquid you could never get out. So when everybody got really fearful go, oh my god, what's going on? What's going on?

35:59 You're down 30 40%, you couldn't pull the plug. You bought the view because you based upon fundamentals and the volatility was irrelevant. And I think that so so I think the sum to summarize is it's the predictability is lost when you have a high ball and investors don't like the inability to predict. >> Yeah. So when we were talking about kind of everyone's models are bullish and I think there's this question of you know this might be a forward you know forward supply demand balance which lots of debate about but I think there's also this question of you know what's what's fair value for commodity prices for oil prices based typically on regressions against inventories inventories are low prices are high and backwardation is strong particularly if you're drawing quickly that you know the pace of that delta typically drives the kind of you know shape or kind of intensity of the backwardation or contango and the level of those inventories kind of determines the overall level of the of the curve give or take at least at the front. one thing we've seen through this crisis, and I think again we've now drawn down, you know, a billion barrels of of kind of crude from the system, whether or not that's pure commercial inventories or whatever's going on in China or oil and water, we're down a lot of oil and commercial inventories in visible OED tanks are very, very low. a level so low that you would expect prices to be a decent chunk higher. One of the things that I've been wondering and this goes back to this are commodity markets anticipatory my my core kind of question I ask myself in the morning right you know every morning right now is has there been a short circuiting of the normal kind of relation because like I think I always think about this asymmetry between backwardation and contango that contango to a degree you know when you have some contango you have to pay for some storage deeper contango more expensive storage you know you super contango 2016 2020 you get like the super tanker trades and floating storage plays there's a cost curve there that makes sense there isn't the same explicit cost curve on backwardation it's more on draw down incentive kind of opportunity cost of holding but I it feels like at least in my mind that there's more play in what's fair value backwardation than what's fair play in in contango is there this weird scenario right now where again everyone generally expects X that there's going to be some kind of glut next year, assuming Hormuz goes back to normal. Gigantic assumption, but assuming everything goes back to normal, UAE maxes, etc., etc., etc., we get the glut that we were supposed to have this year, next year, but maybe even bigger.

38:39 Our when we have really, really low inventories historically, typically when we get into a low inventory position, the forward view on fundamentals is usually pretty bad, too. That we don't have this. It's very rare to have a scenario where like we get really really low but we we know next year is going to be a big surplus and we're going to operationalize and fill those tanks. How much of that is playing into it right now that you know low inventories are not seen as much of a problem because well we're actually going to need that tank space next year other you know otherwise we'd be in a much bigger problem like how much does this play into again going back to that hubris or kind of overconfidence in markets now versus say even 5 years ago.

39:19 Well, I I think part of it, you know, normally you would argue is you take positioning over fundamentals. Just take like OTC positioning, put them on top of fundamentals. They're highly correlated. And that the the speculator is the one who transmits price discovery. It takes that information and turns it into a price. that so is the relationship between price and fundamentals broken down or the relationship between investor and fundamentals or broke well I mean you and I think one way they think another you know it's it's yeah actually you know I I think part of it is is that the analysts today and given their client base and the shortterm nature they don't care about the longer term story and so they're focused more on explaining where prices are today. You got a you got the mini glut bottom line you have a mini glide.

40:18 Hit the front end. Explain it that way. >> And I don't think there's any there's no assessment of what the longer term fundamental picture really is. I mean, let's take all those equity analysts. What do they do in 27? by the way, you can throw a dart at a dart board at this point and probably be just as right. So where is the confidence coming from that that you're you're going to have this mega glut in I I am a little bit baffled by that by taking they're taking China at these lower levels extrapolating forward you know the you know the the burst in production out of out of Brazil and can by the way that that Canadian Brazilian production was just the same story I had for decades and decades. it just it backs it backs up and finally comes on but there's really got going to be anything behind it but I think it it comes from that but the failure is not in the markets the failure is in the investors and their positioning so again it goes back to liquidity if there's you ask me if anything I've learned in my all my decades of doing this liquidity drives everything and the liquidity is very bearish right now and it's not that much they also remember is the amount in in US equities. If you ask me if there's something mispriced here, it's US equities or just in La La Land. and so that the in amount of of debt that sits behind it is even more worrisome.

41:50 and by the way, the last thing you want is oil prices going up because interest rates go up and it kills it. But you know looking at the the question is why you know so what little capital that is in this space is very bearish and the in the level of confidence is the part I don't understand and I think it just goes back to they're unwilling to look forward and also the other thing that DoddFrank did is it killed off all the liquidity out of the the forward contract. So these markets are just sitting here focused on the very very near term without taking any assessment of what the forward looks. So if you go okay another way I'm rambling here so but I think the best way to summarize what I'm trying to say is that the forwardlooking nature of the market was telegraphed through the investor. The investor today has no appetite to think past three to four weeks. Therefore these markets are just pricing today.

42:49 >> Yeah. So now we're going to get to the now we're going to get to the refining side because I think that while crude has become you know as come under pressure you know you got that you were processing a bit of this mini glut you know some term you had some kind of term structure weakness and prices I think Brent fell you know very close or briefly into the high 60s even which again four months after Hormuz you know you had told me this a year ago I would have told you you were a crazy person but let let alone this is where we are but meanwhile you know product prices continue to march higher and one of the things that when people talked about back in even March and April when I Barry publicly was wrong about crude oil kind of creing towards 200 I I still think we got pretty close with the 170 in North Sea but clearly we didn't get as high as I expected things settled down earlier but one question I always had at the time and one thing I was never that confident in was demand destruction the necessary the reason we were talking about such high prices was that we were going to need to fundamentally price demand destruction, but that crude doesn't actually typically price demand destruction. It's the products that actually, you know, each product, each industry has its own kind of pressure points. and I was never that confident on what the split between, say, you know, if you had $400 diesel. how much of that was $200 crude and $200 crack spread or $300 crack spread and $100 crude? Like that I was never that confident on because I was never quite sure how that balance would work itself out out exactly.

44:17 Now we find ourselves where I'm staring at my screen right now. We have $79 Brent, which is actually up about 10 bucks a barrel on the week. but we also have $78 New York Harbor diesel crack spreads. You know, these are staggering. These are roughly as high as we saw at the peak of the crisis, just below the peak of the crisis in 22, kind of the peak of that summer. And we're kind of and on a seasonal and on a seasonal basis we're at all-time highs on crack spreads for both Arbob gasoline and kind of New York Harbor diesel. So the way I've been talking about this is like we have the situation where like let's say you had 100 barrels of supply on upstream and 100 barrels of kind of consumer demand but we only have 90 or 80 units of refining capacity in the middle. So now we have the situation where we have a weak crude market because we don't have enough crude consumers because the refiner is the bottleneck and we have ultra kind of mega tight refined products.

45:18 >> Talk to me about how because this is some of it's hormuz we're still feeling the ripple effects both refinery loss in in in the Gulf you know we didn't have any offsets for refined products. China's still out of the market generally might be coming back in now, but obviously the massive kind of Russian bear in this is the you know massive wave of you know hugely successful attacks of the Ukrainians drone attacks against Russian refinery.

45:43 So like talk to me about how you're seeing this play out on the refined product side and whether or not you know even if we did get a spiral back into broader war in the Middle East. Do you think this would mainly manifest in crude or do you think it would just entirely express itself in products if that bottleneck is still in the kind of refining space? >> If this doesn't manifest itself in crude, oh my god, do we have a problem?

46:11 and hopefully it does. Am I kind, you know, I I I sit there and I go, what if it doesn't? and you really I mean we know that refining capacity was severely constrained going into this. >> Yep. >> And you know that you've taken out what 3 million barrels per day out of Russia. We don't know who's extended the damage. By the way, looking at those pictures, you know, the the the amount of damages. And also what I found shocking here was normally Trump has a cow, you know, when when Zillinsky goes in and blows one of those refineries up, the Americans didn't say anything this time. And by the way, they couldn't have been hitting them without American assistance. So, has the administration just gone?

47:00 >> Yeah, I don't know. Well, they think they can just talk down the pump prices or maybe this freedom fuel will just fix everything. >> Yeah, whatever. I own a lot of I own a lot of those companies and that talk of By the way, I've been doing this for so long, I've never seen European oil companies outperform US oil companies. But with this talk of DOJ price fixing, the Europeans are, thank God I got them in my portfolio right now. It's usually the Europeans doing, you know, pro, you know, windfall profit tax or something like that. But but the reality of this is you lost two to three. By the way, with China, everybody, oh, it's a mystery. No, China just cut the runs.

47:35 That's all they did. They cut runs and then they cut the exports of the products. So, I don't think there's any mystery there, but there's no way they can maintain it. So, they got to come back. And my understanding is they're coming back now. >> and also people go, why don't they come back with the margins? They're on a they're in a committed energy security national alert right now. They're not like, "Hey, the margins are great. Let's crank it back up. Can we get the crew to turn turn them back online again?" And so, and by the way, the people never experienced it. They drew down the product prices. They have price controls internally. The rest of the world had to feel it because China was a big exporter of transportation fuels.

48:13 >> Y >> and so that that could cost you lost the 3 million barrels per day out of out three out of out of China, three out of the Middle East, and three out of Russia. to the point that Russia's importing product from India right now >> and jet fuel from Japan. I was like these are like crazy things. >> It is insane actually. But ultimately China will bring that refining capacity back online. The profits are too big.

48:43 They'll chase it. >> So do you think this is something where like because again I think that like maybe hormuz could heal itself eventually maybe and we get some product back there. Eventually, China, I agree, will come back and we saw that even in the winter of 2223 where they, you know, you saw the rise in export quotas that allowed the kind of teapotss to swing and particularly in the distillates and kind of help address some of that bubble that had built up or that frothiness that built up middle distlate cracks then and I think that would be something yeah that would kind of help address that balance between crude and products.

49:18 Again, the other thing the thing and you you you mentioned earlier this idea that like the market is very very bad at thinking through the forward implications and I think in fairness like I I can't think of a time where like the fog of war even 6 12 months out has ever been thicker. Like I have no idea what next year is going to look like. I can come up with a couple scenarios but I don't know.

49:37 >> yeah. >> The other thing I think about with this example that we've seen in Ukraine and Russia is the I would have like this is something that's just so new, the vulnerability of these fixed assets. And you you've talked about the revenge of the old economy. Imagine the old economy where it's like, oh yeah, all of a sudden a belligerent 2700 kilometers away can bomb your facility with drones. and you can't really do anything about it. Like the best you can do is like hang some nets above your oil refinery.

50:10 >> like the whole system just feels so much more precarious now that >> By the way, I I was shocked that the economists went out and did the MIAPA on this. By the way, I think they pick out the dead pan bottom on it. But I >> I think they I think they they double took the bottom. Yeah. >> Yeah. But but the but the reality is how can you be saying this is over with when you have a mega energy crisis in something that's more serious than crude and we don't know even what the in whether and here's the other point that I think gets lost is if which is why Trump is going to have to be aggressive about taking back the straight is because ultimately who's China's number or who's India's number one supporter or Iran's number one supporter it's China so China controls the strait China controls controls the straight. China controls he has 20 million barrels but refining capacity that against the US is 17 but it controls processing of every single commodity out there. Now you're going to let them control the straight.

51:08 So they control all the world's critical minerals the atoms they control all the world's molecules. They control the chips if they take Taiwan. And so then with India they control the world's calories. So they control everything that's important physically on the planet earth. How can you let that happen? And so I yeah I'm a little shocked to your point here is we're just getting going. I mean this is just the same this is you know I go back we made this the super cycled call back in you know October of 2020 and core of it was del deg delization the story just gets stronger and stronger after every iteration and people by the way do you know the best performing asset class this decade is commods because people forget every one of those spikes you're banking it in silver and gold and oil and refined products diesel all of it you're banking it and so that you know is this thing just you know, it's just part of the bigger process here or bigger scenario. And the more the longer it goes, the more exposed you are. And then once they crank it up on oil, you know what, how much refined product do they have? And you know, is this thing even close to being over with? and also the the other thing too, it's pretty clear too that, you know, you had military of the ships that went into the Gulf, they weren't VLCC's going in there to get oil. They were container ships banking military hardware in there. You know, it's like, guys, this is you see the pictures this morning of, you know, missiles with game over USA on it. You know, it's just like, guys, this is just getting going. and so when you think about your point about the risk, whether if it's in oil and copper and chips and food, whatever it might be, I think it's just getting higher and higher. But I think the key point here is you're underinvested to begin with. Really low inventory across the board. It just leaves you more exposed.

53:04 The volat and you're at your point about going all the way up to 140 and coming down to 69. This is this always happens in these these types of events and it's going to turn around spike again. Boom. Boom. That's what there's nothing about this that's just a nice steady upward trend. And you know you go back and look at European natural gas in 21 and 22. How many times did you see it come back? And oh, this is over with. and then people ignored it. Oh, Russia just cut all. Oh, wait. Nordstream 2 just blew up. Oh, don't worry about it. And then boom, it absolutely exploded into 22.

53:41 so yeah, I I just calling this thing over and done and not being worried about, you know, the future of it, I think is missing the broader picture here. Even and I think also like this idea that if you had asked me prior to this year what's the probability that the straight of hor moves is closed for any durable period of time I would have said like sub 1%. Like vanishingly small always something we talk about as like the the you know the thought experiment risk to kind of stress test the first year you know analyst or whatever really just stress them out. but it was never something we talked about as like a real thing. Now, it feels like going forward, sure, even if we get it open now. Going forward, it feels like there's a 10 20% risk on any given year going forward that we're going to see disruptions to the straight. And even if people always like, well, the strait's a decaying strategic asset that, you know, Saudi and the Imradis and all the rest of the Gulf are going to work really hard to build pipeline capacity reroute.

54:38 All probably true, but it also doesn't one not going to happen overnight, particularly for Iraq and Kuwait. And two, even on top of that, we like we know that while Iran is the easiest kind of like spigot to kind of twist and turn in hormuz, it can still obviously threaten all the upstream facilities that feed these pipelines. You know, Fuera was hit multiple times through this war and is the outlet of all the Emirati pipes. So like how do you even think about like going forward the the forward risk to supply because this is this is the other thing that I have been someone I actually had a bit of like a bearish bias prior to this generally that I I was an analyst that was born in the kind of 20 2014 collapse and the shale revolution everything else I'm someone who has my entire career shorted the idea of political risk premiums that when we mean political risk premium it's like it's a probabilistic assumption probability waiting that you get some kind of supply loss but we've actually already had the supply loss we still are having the supply it's no longer political risk and I think forward political risk is just ab ab you know abnormally astronomically high relative to what we've ever seen before and it's something that like I can no longer in good faith just like short political risk anymore because it just does different things now between Hormuz between Ukraine and Russia's refineries between whatever is happening in China.

56:03 Like this is just massive tectonic stuff that we've never seen these markets before. Not really. At least >> not that not since the kind of big upsets in the kind of 70s, 80s, etc. >> Like how do you think about the ability to like even even parameterize like how do you even perform some kind of like scaffolding around this risk calculus going forward because the markets are going to need to price it to some degree eventually begrudgingly or not.

56:27 I I stick by my by my saying, get long, buckle your seat belt, and hang on for the ride. And by the way, that strategyy's worked great. in fact, so far, again, if you just owned oil by rolling front month, you're up just at the be I think you're up like 44% year to date. It's not a bad trade. Find out. Actually, I think SpaceX done better, but I get I I will take all the bets.

56:51 Which one's done the best at the end of this year? I'm pretty sure I know which one's going to do best at the end of this year because it's just the the reality is come on, we China's backing Iran. Russia's backing Iran. Does Russia want this to end? Does China want this to end? Absolutely not. they want the US beaten, downtrodded, and by the way, they're just going in there and doing it again. and this time around you can be rest assured that the Iranians are locked and loaded and ready to do this again. All with Russian military hardware as well as with you know, Chinese whatever it might be. You know, the last time it was all surveillance.

57:33 Who knows what it is this time around? Chinese drones. and you know, it's like when Trump went out to Beijing, I Trump Putin went the day the week after and came back with a 17,000page document. what did Trump come back with? you know, so you got to really wonder what the motives are here. And it's just like, you know, there's a reason why Iran's called the graveyard of empires. Don't go in there. And it's just, you know, the the do do the Russians, the the Chinese, you know, it's the you put the bricks. The way I liken this, and the I live here in Europe, and the Europeans don't seem to get this. This is this is bricks versus the G7. They're tired. They're tired. The West has been pushing these people around for 400 years. They're done with it. and they're not going to roll over easily.

58:20 And they're now in a position where they really got them. And by the way, you all of you live in North America complain about your governments over there. You live over here. It's like the day Ross Leon was taken down, it was Kier Starmer and Mark Carney taking a jog in and in and and in in in the park in Hyde Park. And there was not one emergency ministerial meeting. They just completely un unaware of what's the severity. And you know we it's think about with what Ukraine is doing with Russia and how Russia's responding with much more heavier artillery on on Ukraine and to think that these things what's going on Ukraine is not tied to what's going on in Iran. The other important point here is milit military call it war kit 1.0 know, which was artificial muscle oil, which is war plananes and ships and everything, those refuelers. Well, that stuff's not doing too well against, you know, war kit 2.0, which is drones and AI and whether if it's the Ukrainians with the Russians or the Iranians with the Americans. So, to think that this thing just doesn't get muddier and muddier as we go forward.

59:33 And then we haven't even brought in you know what were our three criteria for being bullish commodities. One was delobalization the war on free trade. And by the way it started with Iraq won in 1991 was you had the fall of the Soviet Union and you had George Bush senior who went into Iraq came with 10,000 body bags used 147 of them. The thing was over. Wow. The Americans were super powerful. Russia had fallen and that's when the globalization started that's created all the income inequality. It ends with Iran was the exact opposite. China exerted its dominance and the US is not doing too well. It's not it's just the two those are the two book ends that globalization is over. So deg globalization and I think it's just going to it's going to be building out new supply chains, you know, new military. you're going to have to have energy security. The list goes on and on. The second one was electrification. We called it decarbonization back in in 2020, but we're going to electrify the world. And if anything was straight or hormones, it's going to turbocharge it. Think about all the commodities you need to electrify the world. and then the the third one was income inequality.

60:49 I don't even want in fact I'm just going to quote Paul Tudtor Jones who just basically said that you know what's going on you know he called Elon Musk the the French Revolution moment whatever you want to call it these people are going to get more angry and more angry you know you know UK was was my home you can see it there too it's all over the place the income inequality and and by the way the only way you deal with that is through debasement you just keep pumping money into the system to keep everybody happy until you run out of money. At the same time, you're building out your in your your military to fight deglobalization. So, do I stand by those three things? Absolutely, 100%.

61:31 And I think it's going to get worse. By the way, one last point about batteries. This is where if you're asking for an investment, what did we learn from this war? Was those big refuelers, those planes and those ships, they were they were sitting duck for these AI drones. And so now everybody's realizing you got to get rid of the oil. You got to have batteries, battery, batteries. And so, you know, I like to point out to all the greenies out there, who created all the green tech? It was the military. But if it's nuclear power, you know, solar, wind, all of it was created by the military. Military's got its focus on batteries. And batteries are the only missing link to have a fully renewable nuclearpowered grid. And so right now there all guns are focused on let's get that battery small and compact where no drone can get it get you. So you know we're we're moving really quickly in very very different directions than we were three four years ago.

62:27 >> Certainly I think that's probably a a good place to end it for today. And again I'm I'm hope hopefully going to have you back on the future because we could do a whole episode on China which we didn't talk about extensively in this conversation. but I really want to thank you so much for coming on, Jeeoff. And before I let you go, are there any things that you want our audience to look out for from you or look out for in the market? You know, give give some give some folks some, some things to look at post.

62:50 >> I I I I just want to make sure everybody understands that when you own commodities, you are long the ball. You're not long and upward trending. Everybody goes, Curry, you go to your positions. I was out every single month on the roll. And that you, it's not like an equity. your your short ball. or a bond market, your short ball. everything you know in commodities is upside down. and so that when you think about you know looking at the environment right now, own something like the rolling front month. In fact, if I were you, own like the like the Bloomberg petroleum index that has you know gasoline, diesel, oil all in that thing. And that thing just is going to reset every single month. it just rolls and rolls and rolls and ultimately all I can tell you is the volatility is going to be absolutely explosive. So own an investment vehicle that pays you when the volatility explodes.

63:49 >> Awesome. And we'll leave it there. Jeff, thank you so much for joining us today. This I love this conversation. >> Thanks, Rory. It was a pleasure.