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The HC Commodities Podcast
The Iran War: the view from CERA Week with Nick Kumleben
00:47:11
As the Iran War entered its fourth week, Houston hosted S&P Global's CERA Week. Where leaders from across the energy & natural resources sector mingle with policy wonks, think tankers and senior government officials from around the world. This CERA Week was as noticeable for its last minute absences, doom-scrolling, braves faces and some swagger both from big oil and big clean tech. Nick Kumbleben of Greenmantle gives us his take on the vibe and key discussion points.
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Foreign.
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Welcome to the HC Commodities Podcast, a podcast dedicated to the commodities sector and the people within it. I'm your host, Paul Chapman. This podcast is produced by HC Group, a global search firm dedicated to the commodities sector. Nick, welcome to the show. This is a little bit of a first because this is my first one in in person in my office. Still don't have the cameras on, don't know how to edit video. But welcome to my office in Houston. You're here for ciraweek, which is a unique opportunity to get you in to talk about the last four days of what you've been experiencing and listening and talking about there within with discretion. And for those you know, I think what makes Seroweek quite unique is that it draws together the whole world of energy and natural resources and governments, certainly the U.S. government, and so keen to kind of get your insight on what you're hearing around some specific questions on Iran. But I guess just before, just before we dig in, like, what is right now, what is the general sentiment there? Is it sort of fear, greed, somewhere in between, sort of.
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Well, Paul, it's fear or greed, depending on who you're talking to. If you've got perils, if you've got barrels, molecules or tons of metal to sell. Greed's a pretty good way of putting it. But there's also a lot of fear out there, both from governments and from people who are rapidly looking to find new sources of supply or to figure out what they're going to do from an offtake perspective as the disruption in the Middle east continues. There's also a lot of fear about where the conflict goes from here and whether it gets worth or whether it gets better in the near term.
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B
Yeah, it seems like we're in a little bit of a kind of a holding pattern in that for the most part, there was obviously lots of oil on the water and that actually mirrored other stocks around the world. The economy wasn't so humming and then kind of stretched that, you know, just talking to an aluminum executive. There's enough sort of, there was caustic Stodor for three weeks or Bauxite for four weeks in the region. And, and so there's some sense that we haven't really seen what's happening yet. And that's kind of mirrored across lots of articles and discussions. But we're getting to the end of that period and we are going to see that collision of sort of the financial markets and the physical markets, or indeed just the physical reality is starting to hit. And I guess. Was there any Discussion on that duration piece, as you and I discussed last time, there's this sort of key requirement around trying to understand and divine what infrastructure has actually been damaged. Is there any greater clarity coming from that community about kind of what is actually going on in the region or is there sort of. There's quite a bit of an information deficit coming out around certain key assets and stuff. I mean, did you get a sense that people are very clear about the state of what's on the ground?
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A
And no, there are pretty broad range of opinions out there and I think the reason for that is what we discussed last time around the binary nature of the path of the conflict from here and maybe despite the unique quality of Sarah week, this year's version was a week or two too soon because there's a significant portion of market participants who believe the President when he says we're close to a peace plan and the disruptions in the Strait and across the broader region are going to be a relatively short lived phenomenon. And we can draw down on those stocks you mentioned we can solve some of the near term supply problems through Strategic Petroleum reserve releases and then refill them later down the line. And then there are other people who think that that's not going to be an option. You had Jeff Curry on recently making the point that you can't print molecules. And if you look at the scale of the supply disruption, if we do have a protracted war, things are going to break not just in market pricing terms as we've seen with some of the wild swings over the last week or two, but in terms of supplies started already with with diesel supply in some far flung areas. We had for instance an Australian mining company reporting a lack of fuel supply and pausing operations. There are concerns around jet fuel though with everything going on in the tsa, given the government shutdown, demand may be falling there for other reasons.
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Yeah, that's the other reason for a little bit more sparsely populated. There's some people sat glued to their desks managing crucial risks, others not wanting to braid tsa.
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A
Yeah, exactly. And where we are today is that the paper barrels are doing a pretty good job along with the SPR barrels of making up some of these supply disruptions in terms of how the market is pricing assets in the very near term in that front part of the curve, that's not a sustainable dynamic. If we look at for instance, liftings out of the Middle east this month, they are running at the levels you would expect from the kind of supply disruption that is happening today. Half or below of prior month's levels in cumulative terms, although we're only towards the middle of the month and that reflects summary routing. It also reflects the difficulty of getting ships through the strait. And those that are going today are small in number and small in volume beyond the Iranian crude. But if we, if we think of this as a de escalation ladder in terms of molecules and volumes, you've got SPR releases, you've got releasing oil on water, you've got demand flexibility where it exists. We're rapidly exhausting the options to make up the supply shortfall even before you think of where stocks are in a year's time as a result of this. So the short term levers have been pulled. That was fairly clear from some of the conversations this week. For instance, the US Government line has largely been we'll think about all the production we can squeeze out of Alaska and Venezuela at higher prices. Operators who spent time in those parts of the world will appreciate they're not near term fixes and certainly for those who are looking to make up for prior sources of supply aren't going to be given much comfort by that. So we've gone quite a long way down the list of short term fixes and we're going to get into some of the serious imbalances in coming weeks and months. Unless, of course, the war resolves itself.
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B
Yeah. And that is where and this is sort of a difficult question to phrase, but it's one of grip as your Second World War Army General Liv Dore. Liv Dore was fired by and this idea that and the question at root is one of does the Trump administration have a grip of the strategy of this war and, and the possible outcomes of this war and in the command seat when it comes to decisions about this war and all of those things are going to be compromised by obviously the enemy has a vote. Obviously in this case you've got a key ally that is also not necessarily with the same goals and outcomes and trying to sort of sidestep the political and the prior a priori guess you might have about this Trump administration. But it would seem that let's say in that binary nature one would have been okay. Trump himself may not have a particular grip, but his people do. And he's essentially being what he says is reflective of the truth of what is going on. On the other hand, side of the equation is that actually there isn't a grip and there's not necessarily a clarity about the strategy and whatever particular plan that might be. And I'm trying to sort of Pass my words, because I don't want to put you in a difficult situation, but is there a sense now that people are more willing to talk about the latter scenario and what that actually means for their business? In other words, behind closed doors, a little bit more or perhaps even less behind closed doors, a little bit more of a willingness to sort of say, well, actually, we're very concerned that the US Administration is not demonstrating its time worn capacity to be very efficient, highly intelligent. It's now come up. Yeah, I know that's a very difficult question.
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No, I get where you're going, Paul. The way I would think about this is that the administration has written some big checks in terms of its ability to bring Iran to its knees in the near term, militarily, in terms of its ability to strong arm the Iranian regime through American military dominance into agreeing a deal with a number of conditions that are extremely onerous for the survival of the Iranian regime, for Iran's future offensive capability, and for its ability to use the Strait of Hormuz and the broader Middle east as an economic hostage. And we're still in the period where we don't know whether those checks will be cashed yet, but if you play this out a week or two weeks longer and negotiations are still ongoing, the Strait is still closed and you don't have a meeting of the minds which you hope the Iranian regime would have learned to do this kind of thing on zoom, given the last few weeks they've had. You don't have that actual agreement to return to something looking like normalcy, then the checks bounce and then the market has to discount anything that comes out of the administration on the timeline of the war and price in a much, much worse scenario. And we've seen this to a degree. The hard thing about Trump, for people who like to say that he tacos or that he never tacos, is that actually he's quite capable of both, depending on what he thinks.
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Quite mercurial.
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Yeah, he's quite mercurial. And he is very strategic. He's very capable of looking at how a situation shifts and playing it to advantage. I think two good examples here, in very different senses, are Russia and Venezuela. We've had many, many false dawns, not just in the first part of the administration, but throughout, regarding a potential ceasefire between Russia and Ukraine, some of which were relatively favorable to Russia, some were relatively favorable to Ukraine. But as we saw with the attacks on Primorsk this week, that war is certainly still ongoing and doesn't seem much closer to ending than it has been at any point since Trump re entered office. If we look back at the campaign rhetoric that was supposed to be over in the very near term. On the other hand, if we look at, for instance, what Trump said about Iran in June before the bombing of Fordo and Isfahan, he carried his word out. If we look at what Trump did in Venezuela, carried his word out, I don't know.
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B
I find it Trump being very strategic, I would agree, but strategic, I would argue, in terms of his own desired outcomes from a political standpoint, which are not necessarily coinciding with the, the good of the broader nation state. Right. Or the broader administration. So that I think you can be absolutely reliant on Trump doing what is in the best interests of himself and his administration and his legacy. The problem is that that is quite a moving feast, a moving goal that, that doesn't, doesn't give any dependency to how to tackle this both at a political level, at an economic level, at a business level. And I think you're right. I mean, I do think it's salient that the market is currently priced at sort of plus 30% or something, which means it's generally thinking that the pain is quite a lot, that this will find a resolution and that pain is aligned to political pain for the the Republican Party and therefore all interests are aligned in this ending. Now we go back to our initial discussion around that duration that and the more stuff gets broke and the longer this goes on, stocks get depleted, they're almost probably out already or doing so and there's no more levers. And then stuff gets, you know, the pain is coming, come what may. That's the Jeff Curry argument. But the pain would be significantly more if actually suddenly global markets felt that the solution to this crisis did not sit with the Americans. It sit in the sat in the hands of Iranians and sits in the hands of the Israelis. And bearing in mind if you're now on your sort of fourth level of leadership in Iran, what stroke do those individuals actually have to fight again to control, to have grip themselves? I mean, to me it just, you know, it seems that people I would, I'm just sort of fascinated by the idea that there's sort of a general sort of sanguinity in the market and whether actually with the boardroom door closes and there's a hell of a lot of concern about where the administration is taking the US and what it means for global businesses.
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So let's start on the tactical there and then we'll broaden that question out. If we take the president, at face value, one of the goals of this war was regime change, and the US has accomplished that. But it's not clear that's actually a good thing for the stability of the
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region has not changed regime.
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I think that's. That's an open question, depending on who you think is actually running the show in Iran.
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Yeah.
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We still haven't seen Moshtafa Khamenei. We don't know what state he's in. And two months ago, a scholar of Iran would have told you that the people who are now making decisions and now, both from a public facing perspective and internally leading the regime were among the more hardline camps. So perhaps you can make the argument you've had regime change in a negative sense for stability in the region. You can also make the argument that the cost of this war has become a lot clearer to the administration, not just in terms of the oil price and what it means for inflation and rate cuts, but also in terms of the polling. I mean, Trump is now. Trump now has a worse approval rating on the economy than Biden did at any point of his four years in office. Yeah.
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And bearing in mind he was voted out because of the economy.
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Yes. So there's a risk of rerunning some of those same mistakes.
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Well, especially as the problem the Biden administration made was trying to tell everyone it felt it was good. What are you complaining about? Which. Which has parallels today.
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The inflation will continue until morale improves. Exactly. That didn't work very well for the last administration. And I think this administration has learned some lessons from that in the sense of saying that the war is going to be short and that there are reasons to think that. There are reasons to think that this is a short, temporary shock coming at a time when at least U.S. crude inventories were relatively healthy. But all that's dependent on it actually being short. And if you don't think the US Is in control of this from an Iranian perspective, you're still selling roughly. You're still exporting roughly 2 million barrels a day. Your oil and water has just been released from sanctions At a lot higher
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price than it was prior.
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Exactly. At a lot higher price than it was prior.
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Dare I say it's a lot. Yeah. The optics aren't as good. Are worse than turning up with 400 million on the pallet at the point back of a C17 Globemaster or whatever it was. Yeah.
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Well, as a man who thinks a lot about trading P. Ls, you can do the math there.
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Well, this is that going back to that structural volatility. Right. The idea that I find it fascinating that the last two years have been a little bit slower, a little bit less volatile, but this is brought back with stark relief. The other two Ds in my 3D equation of digitization, decarbonization and deglobalization. Deglobalization is stark and involves all of that policy volatility, but also decarbonization. Again, as you say, I'm sure they are relieved there's lots of LNG to buy, but you'd rather make your own energy locally and be unencumbered from some of these global supply chains.
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I do. And I think, Paul, the market does a pretty good job of telling you what's happening in the near term.
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You're doing a lovely segue for my next question, but keep going.
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Some of the biggest winners of the last couple weeks in the market have been the Chinese battery makers. These market caps are surging and that's a very good reason. If we look back at 2022, who were the winners in the near term? Coal, obviously it was a great thing for US lng. But in the medium term, that drive for energy security meant scaling renewables, transmission and batteries alongside looking at domestic hydrocarbon as a backup not just in Europe but also in Asia.
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Yeah, this is energy security or supply chain security writ large. It's the energy transition minus its green credentials achieving the same outcome for the most part. It's also in the case of every one of those metals rebuilding of strategic supply and the rest of it. So it's a very good story for commodities. The one challenge there though is all of this is predicated on a free market economy, on it not being so de. Globalized that you don't have global free trade and also that people trust those pricing signals. And you can tell where my segue is going, which is when a half a billion dollar trade goes on oil on, on whenever it was 15 minutes before an announcement on a Monday. That's obviously very lucrative to the person that knew that insider information and sue me if I'm wrong on that, but generally the market sentiment is that it was inside information, allegedly. And all those good words. If that becomes a. If there is a porous information flow, I'm not so naive as to think there wasn't some porosity in it in the history of governments around the world. But if suddenly that pricing signal, if those key functioning markets aren't operating or not trusted in, that's in a very different world for the ability for commodity traders and for market participants to be able to effectively manage prices, manage volatility and hedge and all the rest of it.
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Right.
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I mean, to me that seems quite a. Perhaps one of the most significant events that's happened so far.
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It seems pretty clear that we've top ticked both globalization and commodities and the symmetry of information between market participants. And both of those peaks probably took place at some point in the last five years. If you look at the trade numbers, probably just before Russia, Ukraine or perhaps just before COVID And if you look at the symmetry or fairness of information in the market, roughly around then as well. There have always been informational advantages in the market. Those who have physical assets, those who have physical trading books and so on and so forth. But it's clear that there are now gradations of insiders in the market and it's not clear that private actors are on that first rung on the totem pole, let's put it that way.
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Yeah, but what I mean, you were there at Sarawi. Did that ring around the floors like a bit of an alarm bell?
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Certainly a lot of concern around market integrity. I think what.
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I mean, let's cascade it forwards. If my contract is based on WTI and I'm making this up, but I can suddenly claim that it's no longer a valid benchmark because of this egregious act that's then proven or something and I can get out of my. It does have. If you think about most things in the world at some point are priced to oil markets, I might be massively naive.
- [21:49]
A
No, look, I think you're making a fair point. And we've seen a little bit of this with the dollar, right? In terms of emerging markets, central banks shifting away from the dollar, that's not because people think the treasury market is rigged. That's because of concerns around the severity of sanctions reserves and a preference for gold. But this kind of fracturing system, in terms of. If we saw the fracturing we've seen in some of the currencies move into the commodity markets, that does present a problem for a couple reasons. One, purely from a liquidity and trading perspective, it's not a good thing. Two, from an effectiveness of economic.
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What you mean by that is obviously trading commodities in yuan or whatever it might be, and suddenly you're taking one large global pot into a fractured small number of pots and therefore the liquidity goes down.
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A
Right. And one of the mechanisms suggested for ships to get through the Strait of Hormuz was paying. You want denominated cargoes. China has pushed a number of the major metals exporters to price in Yuan. China launched a yuan linked LNG contract that sanctioned crude, although there's less sanctioned crude after changes in Venezuela is Yuan denominated. Certainly Brazil has moved to denominating some of its agricultural exports to China and Yuan. So what you have is a challenger in terms of the denomination and thus the location of the commodity trade. But you also have a decreasing effectiveness for the US to try and constrain Chinese actions in the future in the way that the west was able to use economic deterrence against Russia.
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B
Every time you use economic deterrence, a sanction, as we had a guest on a while ago talking about the Russian sanctions, they take a long time to work but once you deploy them, people are starting to work out how to get around them, right?
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That's right.
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So they are a double. They are time limited and have a peak effectiveness, so to speak.
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The way someone who worked on Russia sanctions explained to me once was sanctions are inherently a depreciating asset. And that's true at the individual sanction level because markets find workaround. But I think what we're seeing is it's also true at a macro level. The share of global oil under sanctions is at the highest in recorded history. Chris Miller, who's also been on the POD and I have done some work on this for AEI and that can actually reduce the effectiveness of sanctions which depend on this globalized traded, transparent market in some. And that's really scary if you think about the next geopolitical crisis. And it's hard to see this as the last one.
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B
Yeah. Is there? So, and this is, this goes really to the heart of your work with Sunil and Greenmantle in general. You know, while this is going on, you have Pakistan and Afghanistan kicking off. That's a terrible colloquial phrase. Pakistan and Afghanistan going, you know, starting to have cross border conflict of growing severity. You know, you have Thailand and Malaysia, you know, having, I mean, in other words, there's a series of cascading. This is inevitably drawing Russia in on Iran side. It's inevitably cascading from Iran's other proxies into Lebanon into Yemen. I mean, this is, and it looks much more like World War I than World War II in that you would look back and everyone would have a good case to blame the other for starting it. Right. And you wouldn't quite know if Israel was Serbia. And you know, there's lots of analogies there. Is there? I mean, to me, I look at it and it it feels very scary because there's so many points of uncertainty and so many nonlinear effects. When you again, sort of, do you think, was there any talk of that in Sarah? Was there any. Do you think the world is somewhat discounting that? Or in the quiet sort of think tanks out there, are they starting to math how this gets to a much wider conflict?
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A
It's a great question, Paul. And I like the World War I analogy that you put out there for a number of reasons. You have two competing great powers, you have a number of conflicts interwoven with
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B
alliances that may or may not have been fit for that purpose. Right. Trying to draw in NATO is a completely different reason for its existence versus very great similarities to the great game that was being played in the late 19th century that these alliances somehow got dusted off and enacted on in late summer 1914. To stretch my history muscles for a moment.
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A
Exactly right. And look, this would have taken a very, very different tone, this being the discussions at saraweek if, say, Trump and Xi had fully canceled their meeting instead of agreeing to delay it. Right. So if we were in a world where suddenly the many conflicts, and specifically in this case the Iran war, had meant there wasn't potential for US China rapprochement, if those channels of communications had been closed off and there wasn't a positive story to tell about the relationship between the two superpowers that exist in the world today, then there would be a very, very different level of concern on the geopolitical side in the market. Then you'd have to start doing things like saying, okay, does NATO bend or does it break? And we got evidence over the last few weeks of some of the Danish plans to salt the fields in Greenland. Had the US Actually done anything? So questions around NATO are fair game. And we've also seen, I think, what you can call a pretty lukewarm at best, European response to the war in Iran. So these alliances are being tested in not quite a sandbox, but a lower level conflict today. And I think most people who think about this in the big picture have an eye to any potential US China conflict and what that would look like. That's when this really does get quite scary. Not just from a perspective of troops, of assets, of interceptors and defenses, but also of alliances.
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B
Do you think that China has been relatively, and in fact for a period particularly quiet around Taiwan as a sign of de escalation?
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A
Not really. We've seen some of the same rhetoric about China's SPR and China's gas being a potential solution for Taiwan's energy security and that Taiwan would be more energy secure were it to reunify with mainland China. Which seems an unlikely PR strategy, but certainly fits some of the points that China has been making. From a Chinese perspective, you look at it two ways. On the one hand, a crisis in the Middle east from an energy supply perspective is not a good thing. But China is the country that has done that, has taken the most serious tack on building up its strategic reserves.
- [29:36]
B
Not just of oil, tungsten, I mean across the critical minerals it also owns the processing. It is much more robust or anti fragile in that pure sense. In the sense it comes out better relatively speaking than most other nations and probably is quite happy to sit there and watch the the us, as President Trump said yesterday, fire however many missiles it took to take down 100 missiles against the USS Gerald Ford. I doubt the military particularly wanted that information out there. But again, spending very expensive missiles and two years worth of stock in the first hundred hours is pretty significant and probably from a geopolitical standpoint is something the geopolitical rivals are happy to let continue.
- [30:28]
A
You've got one superpower that dominates in the field of atoms and another that dominates in the field of bits, if you'll accept that framing of the world. And outside of hydrocarbon molecules, the US's dominance, both in economic terms and in strategic terms, is more in the world of BITS technology. And China has done a really, really successful job of locking up supply chains, not just in metals, as you say, but across the supply chain from agriculture to energy. And I think what we're seeing is that wars are still fought primarily in the domain of atoms.
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B
Yeah. Yes. Or at least the visible wars. Although there's, there's certainly some concerns and obviously Iran is no slouch when it comes to their cyber capabilities. When you look at that piece, when you look at the energy ags and metals sectors more broadly, is there any sense at the moment about each of them face immediate impacts, near term impacts, potentially catastrophic impacts? Is there any sense from kind of when you look at geopolitical volatility is an easier way of asking. This is ag somewhat being this ag story seems to be one of the ones that seems to potentially have the biggest fat tails attached to it. And to plant. You're also dealing with biology here. Planting is right now then the fertilizer is needed right now. Planting is right now in the the Northern hemisphere. Is there any sense of how worried the ag trading house the growers are on this one? Because if you look back at the hour of Spring, if there's no food, then stuff really hits the fan locally.
- [32:27]
A
Yeah. And that's I think one of the really, really concerning parts that because when people think of the Middle east and the Strait of Hormuz at a very high level, they think, think about molecules of oil and perhaps LNG if they're a little more informed. The AGS picture is very, very scary. What we saw in 2022 when you had six months of blockages out of the Black Sea when prices rose, that's an end product.
- [32:55]
B
And you can solve for that through that's fair price. Right. I mean there's less grain prices go up. We're talking about, I mean. Well, again, you tell me. If the stuff doesn't get planted, yields are down significantly everywhere at all times because it's an input that's not available. You could have quite a dramatic output input effect.
- [33:18]
A
Right. And as the saying guys, famines are always and everywhere. A man made phenomenon.
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B
Yes. Yeah.
- [33:25]
A
And we certainly will see food supply stress around the world. There's a degree of substitution potential. It tends to be the worst concentrated in the poorest countries such that it doesn't get a lot of media attention
- [33:36]
B
who also aren't going to be getting any energy at the same time. I mean already this is a crisis that's going from east to west already. The lines at the pumps in the Philippines, in the global south. And unfortunately this isn't the US Media in particular. I guess my access media is showing meetings in the Oval Office and reactions to prominent lawmakers dying and all the rest of it or sort of civil servants and so forth. We aren't, I don't know. That's, you know, that is a slow moving crisis that's already happening right now in energy and it seems like that could be compounded dramatically by food at a time when the world has no stocks and capacity to go and support.
- [34:25]
A
Yeah. And outside of China, there aren't the kind of SPRs that have helped to plug the oil supply gap in the very near term. Not only because of the nature of soft commodities, but also because of the delayed impact of a shock like this. As you say, we don't know how bad the damage is yet and we can only forecast what it looks like. But it's extremely concerning and it's something where we don't have those short term levers to pull quite as well to make up for a supply shock.
- [34:56]
B
Yeah. And is there any sense where your clients, they're thinking about which commodities or which regions and which commodities are most likely to start getting these export bans on them. Right. So. Or be subject to policy switches. So let's for example, say biofuels, right. As a key example, you suddenly have a global food crunch at the same time as potentially a products crunch. That would seem pretty high on the sort of policy volatility scale. Likewise seeing sort of a particular refinery in a certain part of the global south, that nation just decides they're no longer on the part of the free market. Right. I mean, India, for example, has obviously had export controls in rice. I mean, that is that molecular contagion that Jeff Curry spoke about. Kind of keen to get your views there.
- [35:55]
A
Yeah, and look, I got to speak about that one in a purely personal capacity, but you make a couple of really good points. The first one is markets like biofuels that are fundamentally creations of policy choices are the first thing to look at. The second one, I think is what decisions have been made or what market realities make geographies or places extremely vulnerable. If you look for instance, at Australia and Indonesia, two countries that are hugely dependent upon the import not just of oil, but of refined products for both commercial and policy reasons, in a world of escalating export bans, in a world of concern around refinery throughputs, in the world of potential shutdowns, you look at those countries who have perhaps been the most credulous of the sanctity of the global trading system. They are the ones who are at risk. And there are many more examples beyond the two I have just framed. It's also interesting to look at the reasons how and why the US is so insulated from the much lower energy intensity of GDP to the status as a next exporter of petroleum products. Obviously there are significant imports and exports within that balance. But I think it's easy for us to sit here in Houston paying relatively low gas prices and with stable supply and look at the WTI and the Brent price and say, okay, maybe this is a dog that didn't bark. That is not going to be the case over the next 12 months. And it's certainly not going to be the case everywhere in the world.
- [37:47]
B
Yeah, yeah. And then final question. This all brings us kind of full circle back to this idea of like there's some duration. And duration is probably a proxy for damage done. Right. You know, long period of kind of a quasi armistice to go back to the First World War, you know, and. But not much damage being done. The odd kind of, you know, attack on here or there, God forbid. But really, actually, I think people are talking about well, there's a duration element in terms of stocks being used up for sure. Right. Secondary, there's a duration element in damage done to infrastructure that can't be repaired. Is there anyone, when you're again stomping the halls of Sarah and in your closed door meetings, is there any dates being spoken about in terms of we're in this sort of four weeks, but God, come April 15th, if it's not, it's done by then we're in a different world because those stocks have run out or because certain market gates have happened. What is any sense of what timing means to your average oil exec or commodity trader out there?
- [39:06]
A
What I think the oil traders and the commodity execs understand that is poorly reflected in the mainstream discourse and maybe the case also in terms of the policy discourse is just how long after flows restart through the Strait of Hormuz this takes to get things going again. Kuwait has been briefing publicly that this is a multi month process to restart
- [39:29]
B
production because you've got ships all over the world stuck. I mean it's a massive coordination effort just to kind of restart everything, I guess, which is why we're not thinking
- [39:39]
A
about that at the wellhead level. Right. And Qatar's said it may take years. I think up to five years was the latest guideline.
- [39:47]
B
To fix the lng.
- [39:48]
A
Right, to fix the lng. But there are much shorter timelines. But timelines that are far from tomorrow in terms of getting the roughly 10 million barrels per day of Middle east supply that has gone offline back up and running such that it can fill the empty tankers that are theoretically waiting at the ports. And whether that capacity does come back at its pre war levels, given the complexity of operating some of these fields is unclear.
- [40:17]
B
Yeah. And. Well, the answer is probably not for a very long time. Right. Not least because everything's going to be at a higher price, whatever that risk premium looks like 20% or whatever it is. Right. Then actually that's going to be reflected in the demand and supply.
- [40:32]
A
And we were all sitting here on January 1st talking about an oversupply and the scale of global overcapacity and spare capacity, which was all concentrated in the Gulf.
- [40:45]
B
Yes. Is there some kind of rule of thumb you've heard out there that it's sort of for every week shut it's in a couple of weeks.
- [40:54]
A
There's only a rule of thumb, Paul, if you think that the current market prices and the front month prices that people are looking at are an effective barometer of the state of play in the market and in the physical market. I would probably argue that's not the case right now because as the market prices in a significant probability of the US essentially suing for peace, you can't really tease out the remainder of the duration on the remainder scenario, which is the scenario that this war continues on. And in some of these contracts you're pricing off purely financial benchmarks. It's not as if there's oil going out of Dubai at scale today, for instance. So it's difficult to create a rule of thumb. I think the best one I've heard is Jeff Curry's contagion thesis and the nature of contagion, if you think about it in terms of the financial history sense of contagion is that you actually don't know whether problems are going to show up next. You just have pretty high confidence that the problem's going to create a cascading failure.
- [42:07]
B
Yeah, well, when we first spoke obviously we mentioned private credit as another sort of smoldering issue out there. A function of it had its problems pre existing as you pointed out, but credit does not like a crisis and freezes. We're already seeing redemptions. Being the question that was asked at the time was one of is this a source of contagion as well? The answer was it's probably quite limited to. To investors that can lose that money. I don't know about that still. I mean I think there's a lot of banks who have been part of levering up those credit funds that have been to get the returns that they've been getting. And as we speak Jefferies are entertaining a bid from Sumitomo and there's just a lot going. There's a lot going on that sort of gives give pause. And once again though then you kind of you. You feel a bit of a fool when the s and P500 goes up the next day.
- [43:14]
A
Yeah, and those financial contagion concerns are real. I mean if you try and envisage a world over the last call it five years with such a different attitude from one of the. From Middle Eastern sovereign wealth funds who have been the anchor LPs of a lot of things. Not just Softbank but also some of the recent rounds in the AI companies, significant exposure to private markets. There are different ways in which this feeds through into broader financial markets, whether it's a bank or whether it's a private credit fund struggling to meet redemptions. It doesn't seem like there are any flashing red lights quite yet, but the nature of a crisis like this is you don't know until you do.
- [44:06]
B
No, if I've got my history correct, it was around springtime 2008 when Bear Stearns was acquired by JP Morgan. It might have been 2007 and the market. Am I getting it right? It might have been, yes. It was in the springtime and The S&P 500 continued to climb up until about August or September, mid September, Hurricane Ike, when it was happening in Houston. I was here when, when obviously all hell broke loose and Lehman collapsed. So I guess first thing to say is these things typically take a long time to, to play themselves out in, in some of these, some of these indicators we definitely, you and I are going to go for a pint and continue our discussion. But did that come up in saraweek at all? There is a signi private equity or very private credit private equity of being very big players, particularly in the energy transition. Was that sort of a stalking the conference halls as you were?
- [45:13]
A
To a degree. I mean there was more talk of. There was more talk from one trading house to another of who's doing well and who's doing poorly as you can imagine, at such a volatile time. I think in the private.
- [45:24]
B
And that changes, by the way, daily. So people might have come full of confidence and been currently boarding a private plane back to Europe with slightly less.
- [45:33]
A
But anyway. Yeah, exactly. Look on the private credit side, the difficulty here is disentangling the software story from the broader underwriting story. Like if you look at, if you look at Jefferies and the reason or one of the major reasons that their stock price has been struggling in recent months, it's the first brands exposure, broader concerns about underwriting standards. But if you look at some of the big private credit names, people think they've extended loans to software companies that don't need to exist in the age of artificial intelligence. So you've got a couple different threats here, all of which are valid in their own sense in Jamie Dimon's cockroach framing. Yeah, yeah, there are quite a few cockroaches around, but any one of them can give you a fright.
- [46:22]
B
Yeah, yeah, yeah. Fascinating. Well, thanks for, thanks for coming by. We're going to go for a pint and yeah, let's actually hope that the administration does have grip and that this will get resolved because again, I think when you start thinking, as you say, there are tons of cockroaches and quite a few can give you a fight if you're in the wrong area. And it seems like this might be one of those occasions. Thank you for listening. To find out more about HC Group, our global offices and our expertise in search within the commodities sector, please visit www.hcgroup.global.