Oil Above $100 a Barrel ‘Extraordinarily High’ Odds: Jeff Currie | The Pulse Commodities Special

Oil Above $100 a Barrel ‘Extraordinarily High’ Odds: Jeff Currie | The Pulse Commodities Special

Now, energy and commodity markets have
been volatile over the past few years.
Against the backdrop of higher for
longer rates.
The economic slowdown in China and two
wars on the global stage.
Well, in just a moment, we’ll be joined
by commodities veteran Jeff Crew for a
deep dive look at what’s happening in
the sector and what’s coming next.
And then a little bit later in the show.
We’ll also look at commodities and
inflationary pressures.
But let’s begin with a focus on the oil
markets now.
Prices have rallied since late last year
on escalating tensions in the Middle
East.
Some analysts say that $100 a barrel is
back on the cards.
Well, joining us now I’m delighted is
Jeff Curry, chief strategy officer,
energy of Energy Pathways at Carlisle, a
former head of commodities research at
Goldman Sachs.
I mean, you understand.
Welcome to the program.
Great.
Jeff, you understand this component is
really like no one else.
I want to get your thoughts on oil off
the highs.
Does that reflect the fact that traders
are less worried about the Middle East
and as the escalating conflict?
Or is it supply and demand issues?
Well, obviously, if you look at the
pullback recently, we’re back to levels
before the events of what happened
between Iran and Israel a week and a
half ago.
But more importantly, everything’s off.
Commodities are going through a
consolidation period.
You know, we were beginning to price in
equities, everything this idea of rates
being higher for longer.
But let me remind everybody, we’re
talking about rates being higher for
longer because growth is so good.
I mean, just the things you just went
over just now, private sector activity
in Europe, the highest level in a year,
We’re seeing a reacceleration of growth
across the board.
And so when I think about what’s going
on oil specifically in commodities and
the I’ll put Bitcoin in there and all
the physical assets is they’re going
through a consolidation period.
These assets, these physical assets are
tied to underlying growth and
inflationary pressures in the bottom
line.
Retail sales smashing that we saw, you
know, last week.
You have unemployment still at very low
levels.
CPI surprise to the upside.
Chinese manufacturing beginning to
accelerate.
Europe, Germany accelerate.
And the list goes on.
This is classic late cycle expansion
that you and I were talking about three
months ago.
So what you’re telling me is that
there’s a shift basically in the supply
demand equation.
Is that right?
Well, I would I wouldn’t say it’s so
much a shift today as it was when we
were talking three months ago.
What we went through in 2022 and 2023 is
your classic mid-cycle pause.
The economy adjusts to the higher rates
and the higher energy and commodity
prices.
It went through that adjustment.
Manufacturing slowed down.
Now we’re coming out of it.
And is this thing any different than the
previous cycles now?
But Jeff, if you look at the rates,
expectations for the Fed rate higher for
longer.
And I know this is because growth is
wrong, but does it have a harmful effect
on commodities at all?
Look, my point that this is why why am I
always why you want to own commodities
in this environment?
Because if the rate if you don’t have a
situation in which you’re you’re raising
rates because of strong underlying
growth means commodities are going
higher.
And that’s what’s going to force their
hand to raise rates.
And if they do cut rates, you’re adding
more liquidity into the system, which
means higher commodities.
So commodities are a win win in this
situation.
That’s why they nearly always outperform
all other asset classes in this
environment.
But I’m looking at the IEA.
They’re predicting further slowdown in
oil demand growth next year.
It’s just 1.1 million barrels a day,
right as we get closer to peak demand.
Do you agree with that assessment?
By the way, when we look at late cycle
commodities, here’s a really important
point.
It’s not the growth that matters.
It’s the level that matters.
And why do I say that?
Because as the level of commodity demand
goes up, it stresses the underlying
supply level.
So, yes, the growth rates are going to
slow.
Right.
And that’s what you have in a late.
But the level continue to grow stresses
the system puts upward pressure on
prices.
So that and by the way, the equities
which are tied to growth rates, they
begin to come down.
So this is what I always argue over and
over with commodities, they are tied to
the level of activity while financial
markets are tied to the growth rates of
activity, which is why you get the
outperformance.
OPEC plus has kept supply tight.
Yes.
Is this about to backfire?
No.
When we look at where you know, well,
first of all, everybody’s talking about
all the spare capacity in the system.
It sits in Saudi Arabia and UAE.
That’s it.
And they have more market power today
than they’ve ever had because of a lack
of investment in many of the different
non-OPEC countries.
And yes, you’re trying to respond back
that, you know, rapid growth in the US,
but that then compare to what’s going on
more broadly.
It’s relatively small.
And then I think the other issue that
gives them market power is that you have
inelastic demand because we’ve taken out
all the low hanging fruit.
So that so that group that sits on that
spare cap.
Our city has more market power today
than they have had since the existence
of OPEC.
So does oil.
You know, is it $80 or 100 next?
We’re far closer to 100.
I’m not in the forecasting business any
more because what are we going to hit
100?
By the way, the one thing I learned in
all my time of looking at these
commodities trade, the wings, this
thing’s going to when it goes, it goes.
And when it drops, it drops.
And I know you’ve been doing this as
long as I have, you know.
So the odds of this thing going over 100
or extraordinarily high.
The question is, how high can you get
before you start to see OPEC begin to
adjust the system?
By the way, I want to say this and this
is just history.
In the 40 years of OPEC history and
where we are in the cycle.
Never has OPEC ever been able to bring
on supply as we go into the final
stretches of a economic expansion and
tame the oil price.
What happens is go back.
Were they able to do it in 2018?
No, we got up to $88 a barrel and then
we had the waivers on Iran.
We could talk about that later.
That’s a very similar risk here.
But I think it works to the upside this
time around.
0708 And then you can go back to oh one,
2000.
I can keep going back all the way back
to the existence.
They never because here’s the point.
If the rise in production misses by just
five days, what are you going to do?
You’re going to get backwardation.
You have to get that pinpoint that
accuracy, which is obvious.
By the way, if there was a group in OPEC
that could actually get this right this
time around, you know, I would say this,
that this leadership can get it right.
But again, I’m going to say you missed
by five days because think about what
happens.
We know that tankers out there in the
Gulf, wherever it is, it’s coming in to
the refinery.
I don’t have crew today.
I’m short buy well, let’s say my
inventories are five days.
It’s going to be six days late.
I got a problem.
I’m buying crude and the backwardation
goes up.
Also on the backwardation.
Another point I want to emphasize,
everybody is talking about backwardation
is an indication of a political risk,
geopolitical risk premium.
It can’t be.
I always say time spreads don’t lie.
I tell you, this market is tight.
And another point, the market went off
the board in backwardation.
That means there’s no investors in it.
It’s all physical.
You really have a tight market here,
just tight market plus geopolitical
risk.
So let’s talk about Iran.
I mean, could this actually fly through
the roof if something happens?
Oh, absolutely.
Because, I mean, the market unprepared,
priced in The market is unprepared.
But we look at more broadly, I don’t
care if it’s energy, equities, energy,
commodities or more like it, there’s not
a large investor participation.
And also money today chases trends.
They don’t make bets, they don’t trade.
And so there’s no real trend here.
By the way, when it started trading,
look at look at copper, copper over shot
the fundamentals near-term, they’ll
trade that trend.
But when we look at more broadly, most
of the discretionary money can’t sit
there and hold the position of
geopolitical risk premium betting for
the thing that said, there is activity
and out of the money options, you know,
you go up to that 150 $200 range.
People are buying it because they’re
hedging geopolitical risk, inflation
risk and equity risk type premiums.
So there is that activity, but it’s
relatively small and it’s located in the
in the options markets.
Jeff, I think J.P.
Morgan saying that it’s time for a
reality check on the energy transition.
It’s slow, costly and not rewarding for
investors.
I mean, is that how we should see it?
Well, I think we’re going through that
reality check right now and people are
making reassessing it.
Yeah, but when we look at the returns in
the green sector, there’s two things
that are driving it.
One is there’s a hangover from the big
spike we had in 2022.
Let’s remember that when everything
exploded in 2022, coal production went
up the size of Saudi Arabia.
By the way.
That’s how much coal we added in that
environment.
Gas prices went negative in Europe and
you know, us and WiMAX, natural gas and
power prices reached an all time low,
what, six weeks ago.
That’s creating a headwind to the
sector.
And by the way, cause because we ramped
up coal production.
The second factor that’s had a big
impact on this is China.
What is China doing about their property
market problem?
They’re rotating growth into
manufacturing of green CapEx goods and
they’re pushing them on to the global
market.
And by the way, the returns aren’t that
great, which is the problem that the
equity market has had in China.
But I think the key key message here is
there’s two drivers of that weakness.
One, a hangover from that spike in 2022.
And what China is currently doing.
Both of these are temporary.
Now, longer term, there is a story here
and temporary, a couple of years or
temporary five, ten years.
By the way, it’s been temporary for two
and a half years.
If you look at the peak, you know, in
fact, by the way, that report, Kristian,
that I thought was was phenomenal.
But yeah, you know, he has a chart in
there.
Yeah, this has been going on for two and
a half years.
It’s not something that just cropped up
in the last couple of days.
So you know that we’re going through
that rough patch.
But I think the longer term outlook is
still very positive for the sector.
Okay.
We’ll talk about that longer term
outlook.
Jeff, thank you so much.
Jeff Currie from Carlisle stays with us
for a look at some of the broader
commodity themes and sectors, including
also the rally in gold and metals.
This is Bloomberg.
Welcome back to our deep dive on the
energy and commodity sector.
We’ve looked at oil.
Let’s now talk about the gold and
metals.
Now the index of all six base metals on
the LME has gained more than 13% this
month.
On a better global manufacturing
outlook, investors remain cautious on
future moves by the Fed.
Meanwhile, gold extended losses after
its biggest daily decline in almost two
years following a stunning rally in the
Haven asset.
Now let’s bring back Jeff Currie from
Carlyle.
Jeff, I want to talk to you about
copper.
What is gold right now, by the way?
Gold is a mystery.
I’m not going to say I got to, you know,
and understand it, because if you look
at the drivers, fundamentally, usually
what drives higher gold are lower real
rates or a weaker dollar.
What are we actually seeing?
We’re seeing higher real rates and a
stronger dollar.
And typically gold goes down that when
we look at it, clearly there is a
mysterious buyer out there.
You can see it in the physical premia.
It’s most likely coming through Dubai.
You see it in the OTC market.
Historically, when we see that and you
get the data three or four months down
the road, you find out it was an
emerging market, you know, probably
unlikely.
Russia, if they just dig up their gold,
put it into the central bank because it
got so much underneath the ground.
But, you know, you know, is it China, Is
it India or somebody like that who does
what is this, a play against treasuries
or trying not to buy Treasury?
Or could it be implied?
I would argue that it’s probably an
inflationary hedge.
I want to emphasize gold traded like
this in the 1970s.
So what we’re seeing here in this
dynamic is not completely unfamiliar
territory.
You just got to go back for decades to
see a period similar to this.
So I would argue, you know, you and you
and you look at Bitcoin, too, both of
them are, you know, the strongest
performers out there.
You know, I argue they’re pricing in
inflation risk.
But the other thing both are pricing in
is liquidity problems.
Liquidity risk, particularly in the
financial markets which which have come
to fruition or it’s something that
they’re just to get back to.
You know, what they like to say is
bitcoin’s a measure of liquidity out
there.
And, you know, part of the reason, the
volatility you’ve seen across the space,
not only in commodities but in financial
markets, you know, liquidity still
remains low.
Dave talked about about copper.
So it’s had quite a strong run.
I think it’s right on the cusp of
$10,000 a tonne.
We talked about the energy transition.
I mean, is this a signal that we could
be there?
I know you said, you know, we’ve been
waiting for two years and a half.
Yeah, yeah.
Hadn’t time it.
You know, I by the way, I want to point
out we got bullish on corn in 2006 off
of the biofuel story.
Coyne didn’t perform until 2012, but it
went straight up, by the way.
But copper typically trades like a stair
step, and we just went through one of
the stair steps.
So now the difference between copper and
oil, oil has backwardation.
That’s telling you it’s fundamentally
tight on the front end.
And again, I’m going to emphasize it
went off the board in backwardation.
There’s no investors going off the board
in backwardation in copper.
Well, a little bit of contango on the
front end, which is telling you it’s
pricing medium to longer term stories.
So, yes, you’ve had the upward draft of
everything under this higher for longer,
you know, gross surprise that we’re
dealing with.
I’m not going to call it a surprise.
It’s your typical late what you called
it.
Yeah, but not others.
But but in terms of thinking about what
copper in the metals are, pricing is
pricing a more medium, longer term
story?
Which brings us back to the whole
question around energy transition,
because now we’ve all been making the
argument in going back copper is the new
oil.
I stand by that that that view because
we’re going to electrify everything.
You’re going to need the copper to do
it.
And so most likely it’s price in that
end.
But even they’re like oil that’s going
through a consolidation period because
the price got ahead of the fundamentals.
But longer term, absolutely believer in
that.
And by the way, underlying demand for
copper, despite the weakness in the
property market in China, is still
healthy.
Because think about what we were just
talking about, all of those cap green
CapEx goods in China that are being
subsidized.
And then you have all the investment
that’s occurring in the West and it
really starts to accelerate in 26 and 27
if you have the energy transition and
you have.
So as we use AI, our mobile phones get
more complicated.
We’re also going to be, you know, using
some of the rare earths or even some of
the things that you you follow very
close some of these metals, like how do
you see that complex.
Oh, I is chips in copper and what are
the chips.
Gallium and germanium.
So it is basically critical metals and
copper.
So you know, you know in the that is the
bottleneck to really be able to make the
investment in in in I in fact you know
if it goes well I and energy are the two
most investable themes.
Well energy’s more investable than I
because you need the energy to get to
the I in here’s a stat for you one GPU
one of the Nvidia GPUs consumes as much
electricity as the average American
household.
Now that’s going to start building
enormous data centers.
You could be up to 100 megawatts off of,
you know, the demand out there.
So, you know, this is significant.
And, you know, I really believe when we
think about the forward demand or the
structural story, it’s more bullish
today post this AI boom that we’ve seen
over the last 12 months than it was 18
months ago.
But after decades of underinvestment, is
there now danger that they’re
overinvesting and actually we’ll have
too much of it?
Absolutely not.
And by the way, here’s a point is, you
know, people say to me, oh, look at all
the investment in in green energy and
I’m going to cite a number, I think it
was 2.3 trillion in the numbers that,
Christine, you know, in that report he
did.
You know, when you look at the need, you
know, like I know Goldman put out a
number somewhere around between 15 and
$20 trillion this decade alone.
You’re not even scratching the surface
of how much investment we actually need
to be able to achieve this.
So I stand by the underinvestment
thesis.
And also, remember, Green represents
somewhere around 18% of the overall
energy.
Brown represents 82%.
And we have not been investing that.
We’re underinvested.
And that’s really the core of the
supercycle story or the revenge of the
old economy is that lack of investment.
Finally, I mean, I could speak to you
for another 3 hours, but I know you do
have business to do gasoline prices in
the U.S.
I mean, are they critical in the US
election year?
Absolutely, yes.
And, you know, when you look at what are
the most important issues facing voters,
particularly in the US, the dominant one
is the economy and inflation.
And by the way, the one thing nobody’s
been talking about that is in that aid
bill, that $95 billion aid bill, more
sanctions on Iran around vessels
refining and how they handle the Iranian
crude.
I would say the one way out waivers and
remember, we started this 2018 with the
Trump deal.
So waivers will be able to manage it as
you go into that election.
So interesting.
Jeff, thank you so much as always for
giving us a little bit of your time.
Jeff Curry there, chief strategy officer
of Energy Pathways at Carlyle.

A deep dive on the energy and commodity markets with Carlyle’s Jeff Currie. We explore what’s driving the recent volatility, and what’s coming next. Currie tells The Pulse’s Francine Lacqua that commodities are a “win-win” for investors even if interest rates remain high, and that oil markets are “genuinely tight.”
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