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- [00:01]
IBM Representative
The thing about AI for business, it may not automatically fit the way your business works. At IBM, we've seen this firsthand. But by embedding AI across hr, IT and procurement processes, we've reduced costs by millions, slash repetitive tasks, and freed thousands of hours for strategic work. Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM,
- [00:33]
Podcast Narrator
Bloomberg Audio Studios Podcasts Radio News
- [00:38]
Host (731Lex)
Glad to welcome Ed Morris of Hartree Partners, now on set here at 731Lex. Ed, great to have you in the in the building today. How do you see this war in Iran? When you look at past incidents of, you know, war in the Gulf or the Arab oil embargo, I mean, we've had a number of hot points in the Middle East.
- [01:00]
Ed Morris
Where does this rank so ranks somewhere in between, certainly. This is the third Gulf War we've seen since 1990. 91. Strait of Hormuz wasn't closed in the first one or the second one, and it wasn't even closed in the events of the earlier period of time, the 70s or even the Iranian revolution. So this is pretty unique. So I put it more serious than anything we've seen since the early 1970s.
- [01:25]
Co-host/Interviewer
Does that mean that even, let's say this somehow resolves in a week time Trump or someone backs off? Is it serious enough that we're going to have fundamental rethink of the way energy flows in the energy markets after this, much like after the Arab oil embargo when the SBIR came, like after Covid, after Ukraine, when we rethought just exactly how energy markets are structured.
- [01:46]
Ed Morris
So I think we should look and see what some major countries are doing and we're doing even beforehand. China is energy dominant when you think of clean energy, and they have certainly decided as being very dependent on flows, particularly from the Middle east, that they're going to double down on the clean energy scenario. Europe is already talking about going back to green energy targets. We'll see what happens in the US but certainly there's been a kind of worldwide rethink about what to do in terms of dependence, and that includes emerging markets as well. It includes India, certainly, as well as China and much of the Far East.
- [02:22]
Host (731Lex)
We were playing some sound from the energy US Energy Secretary Chris Wright on yesterday's Sunday shows, and he was saying, look, this is a fear premium that's going to last a couple of weeks, but we're going to start getting shifts through the Straits of Hormuz soon he seemed pretty sanguine. Do you share share his view that this could be relatively short lived?
- [02:40]
Ed Morris
Well, I share his views that it could be relatively shortly lived. But I'd say I would turn his remarks of a few weeks to a few months. And that's certainly the case if we look at the nitty gritty of the oil market and the gas market in particular. So we shouldn't forget that gas prices have skyrocketed around the world because 20% of the world's available internationally derived natural gas comes from the UAE a little bit and Qatar an awful lot. And that's not going to be turned on for at least a month.
- [03:10]
Host (731Lex)
And that's all priced in dollars, by the way. So it hurts them even worse than it hurts us.
- [03:13]
Ed Morris
It absolutely is, yes. And the dollar price, by the way, given what you've just talked about with the increase in the value of the dollar globally just adds insult to injury. It just makes the inflation for the rest of the world significantly higher than it otherwise might have been. But even the oil is not going to come back like overnight. They'll be testing though. We'll see what happens. And we still have a big risk latently in the western side of, of the Arabian Peninsula we have the Houthis and they have not activated yet. And they are a proxy still of Iran. And we haven't seen a complete shut off. You know, we've seen a shut off that people are arguing is it is a 10 million barrels a day or 16 in either case. It's pretty large, but it can go to the full 20 coming out of the Middle east if we have a closure on the other side of the Arabian Peninsula.
- [04:01]
Co-host/Interviewer
And there just feels to be a disconnect. I'm listening to you and other experts in this that are talking about the potential for this to stretch on and have very big implications. Then I look at what markets are doing. I mean, the backwardation suggests that oil prices resume something close to normal pretty relatively soon. Are we being sanguine about the risk that this could stretch on and have much higher oil prices to come?
- [04:23]
Ed Morris
I think we're being a little bit too sanguine. The futures curve doesn't tell you very much. It tells you that we've had a spike in the medium in the interim. It tells you that backwardation is increased. So there's just not a lot of liquidity in the market. And the fact that 10 year prices have not changed very much doesn't tell you what's really going to happen in the Next few years. I wouldn't use that as a predictor. I'd say that's a reflection of where macro funds are placing their short term cash.
- [04:52]
Host (731Lex)
We have seen a big spike in prices at the pump and I thought it was interesting in reading your research that the product prices rise faster than the underlying crude, for example. Why is that and how do you expect to see gas prices go? Because I mean, this chart doesn't do justice to what we've seen on, on the price at the pump. It's the highest in either Trump term.
- [05:16]
Ed Morris
Yes, I've seen prices coming from, you know, the lower $3 range to the mid $3 range. There's been a, what, 15, 16% increase in the price of gasoline. If you look at crude oil, where was crude oil trading two weeks ago? Brent was trading at around 70. It even fell below to 6,869 and it's now at 103. WTI was trading at 65, 64, 63 and it's now at 102, 103. That's a double increase from what we've seen in gasoline. So we've seen a very slow reaction, so to speak, on the gasoline side that's due to a whole bunch of factors including you deliver out of, out of, out of what you have from storage and the like. But we're seeing a curtailment on the product side. We've seen the big curtailment out of the Middle East. The Middle east, while they're exporting 16 million barrels a day or so through the strait of Hormuz. 2 million of that is product. And we've seen that product, which largely goes into Asia, having a dramatic impact on jet fuel prices in Asia, on gasoline prices in Asia, on diesel, diesel, diesel prices in Asia. So, and that's much more than the 15% increase we've seen in the US so the US is a laggard. And if we see what's happening in the rest of the world, it tells you that we're going to see $4 at the pump more freak, more sooner than we otherwise.
- [06:40]
Host (731Lex)
Ed, what does it mean that NYMEX catches up to Brent? I thought it was interesting the other day I looked at a WTI quote and I, I thought it was a mistake in the graphics that it was actually Brent because usually there's a $5 gap between the two. I'm, you know, rounding, but now we're at the same level.
- [06:58]
Ed Morris
Well, don't forget that there's more crude coming out of the United States than there is out of north northwest Europe. And, and the US has available incremental crude. It can be bid up. We don't have restrictions on exports. So we're seeing the demand for WTI related crude skyrocketing in a way that makes it get closer to where Brent has been trading. We're seeing Merban and dubai at a $10 increment even above where Brent is trading. So that, that, that tells you that the world pricing is sorting itself out.
- [07:31]
Co-host/Interviewer
So for at 102 on Brent right now, Ed, Matt started this out saying that your calls about a 50% chance likelihood that we see a rise of 50% in prices. What is that scenario look like? How do we get there and how long does that price elevate elevated price last.
- [07:46]
Ed Morris
Well, well one scenario is one I just mentioned. The Houthis get to work. And we see the western part of the Middle, the Arabian Peninsula also shut off. That's 20 million a day. We're not going to see the battlefield ending pretty soon. We're going to see at least two good weeks, I suspect of continued bombing of energy infrastructure in Iran and in the western part of the Gulf. The Iranians are not slowing down as far as I can tell. We're going to see inevitably if there are some ships trying to get through the Strait of Hormuz, we'll see those being attacked and we'll see tankers being attacked. We have to remember that Iran has just reaffirmed the hard line approach by putting in place the son of the former supreme leader. And they had a big debate about that. It was a week long debate. Which way are they going to go? And they chose the hard line way. So they're there for an existential threat and they're going to fight for the existential survival of the regime.
- [08:49]
Host (731Lex)
I want to actually zero in on that because you talked about that in your notes. We could have seen Iran after the Ayatollah if he had been led to die of natural causes. Right. Go with a more, I guess, reformist supreme leader. But it seems as if this attack by Israel and the US has at least, you know, helped to push them towards a more hardline leader. So I wonder, what do you think were the justifications for this war? We haven't heard much from the administration in the way of an official, you know, line of why we did this.
- [09:29]
Ed Morris
Well, that's the interesting question of why did we do this? And we did it for all of the reasons I suspect that we've heard from the White House. We've done it because that regime has been a threat and it's been a threat to the economies of the part of the world for a while. It's been a threat to Saudi Arabia, it's been a threat to the uae. The bombings that came in when Abcake was hit in 2019 was not an accident. It came from Iran. The proxy attacks come from Iran. So there's been that threat for a long time. Yes, there was regime change in the minds of some people, including the president. He said it too often for you to not believe that regime change was certainly there.
- [10:13]
Host (731Lex)
In this case, it's pretty much worse than what we had.
- [10:17]
Ed Morris
Well, considering the regime we expected. We expected, I suspect they expected. I didn't expect it. They expected this to be over in a couple of days and that certainly didn't happen.
- [10:26]
Co-host/Interviewer
Well, so it's the president at the same time who's been making this push for affordability. And you've advised presidents before, you'd advise government, you've advised governments. We have finance ministers of the G7 meeting right now discussing a possible release reserves of oil. The US is surely trying to figure out how to stem some of the issues to what would you be advising governments at the moment to try to mitigate some of the price rises?
- [10:49]
Ed Morris
Well, I think they're doing what they have to do. The governments that have better control than the US government does on local electricity prices is, you know, is keeping the weight of the increase in the hands of utilities, many of which are public sector anyway. The US doesn't have that privilege exactly. We have very independent regulatory agencies for power generation. And power prices are certainly going to go up. So the affordability issue can only be met to a certain extent by the risk of releasing strategic stocks. And we're seeing what's going to happen in the next hour. I Suspect what the G7 are going to decide. They're talking about big numbers, talking about 3 to 400 million barrels of a release, which is bigger than the release after Russian invasion of Ukraine, which was a very large release to say the least. And that didn't stop prices from going up because it takes a while to redeploy oil when you have some of the, you know, the major oil path sanctioned immediately after that Russian attack. So it's going to be a while. I think it'll be a good month or two before we see the weight of strategic stocks coming in the market. The release will obviously cause the market to fall, but how long that will last is another matter.
- [12:12]
Co-host/Interviewer
And we should hear from them in about 15 minutes time after that readout. Ed, it's such an honor and a joy to have you on. Ed Morris of Hartree Partners Partners the
- [12:20]
IBM Representative
thing about AI for business, it may not automatically fit the way your business works. At IBM, we've seen this firsthand. But by embedding AI across hr, IT and procurement processes, we've reduced costs by millions, slashed repetitive tasks, and freed thousands of hours for strategic work. Now we're helping companies get smarter by putting AI where it actually pays off. Deep in the work that moves the business lets create smarter business.
- [12:49]
Podcast Narrator
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