← The Master Investor Podcast with Wilfred Frost
The Master Investor Podcast with Wilfred Frost
Oil as a Weapon: Helima Croft on How Geopolitics Moves Markets
00:45:27
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- [00:00]
A
And so for President Trump, the idea of diminishing Chinese and Russian influence, I think, was part of the appeal to him for going in there, as well as the idea that essentially Venezuelan oil reserves, as they say, it's the biggest oil reserves in the world again. But this is not like having barrels in Saudi Arabia, where it's much easier to extract. These are difficult barrels to extract. But he liked the idea of, I think, having this resource that he felt he could sort of control. They've been massively building out their storage capabilities. But it's interesting when you talk to, I won't name them, but some of the very senior Trump administration officials, they have a view that China is stockpiling for strategic reasons. They are, you know, basically preparing for conflict with the United States. If you look at this year and you strip out all the geopolitics, you'd say, gosh, this does not look like a market that needs additional barrels. If we look out 12 months. But then all these other factors come into play. Let's say President Trump decides to use the armada that he has sent to the Middle east to target Iran. If we are entering a period of escalation, disruption, that's when you think about prices higher from here.
- [01:24]
B
Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by BNY Investments, Elseg and Interactive Brokers. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes. My guest today, Halima Croft, is perhaps the most plugged in person to global energy markets across the world. She's a former CIA agent, which I want to talk about in just a moment. She might not be able to talk about it in that much length to us. She's a member of the Council on Foreign Relations and principally she is the global head of commodity strategy, RBC Capital Markets. Halima, welcome to the Market Investor podcast.
- [02:21]
A
Thank you for having me. And you elevated me by calling me an agent. I was actually a CIA analyst.
- [02:27]
B
I'm both sound the same to me.
- [02:29]
A
Okay.
- [02:30]
B
I'm a thousand miles further away from being James Bond than you are to CIA American equivalent.
- [02:36]
A
Well, what's interesting, so I was an analyst and so we were responsible for essentially writing the newspaper for the president. Presidential daily briefing he gets every morning. We, we would do longer form pieces for senior policymakers. And so I was part of a group that was looking at worldwide threats to oil disruption.
- [02:55]
B
It's such an amazing setup because we're doing a deep dive in Venezuela and so much to get to. But again, more broadly on this, I mean, being a political geopolitical analyst is presumably pretty important to the sort of financial side, the commodity side of being an oil and commodities analyst.
- [03:14]
A
Well, I think it is, particularly when it comes to oil markets. Because if we think about the sort of geology of the oil patch, before we had the shale revolution, Western countries were very focused on their dependency on foreign suppliers. And so we were always having to focus in the United States on Middle Eastern supply, other emerging sources of supply, like in West Africa, the stands. And then when I started working in financial markets, again, before the shale revolution, if you want to think about oil prices, you had to think about spare capacity. So you always had to keep an eye on these big producing countries. Questions about how much oil do they have left in the tank? I think the shale revolution changed a lot of these dynamics because once you started getting this abundant source of supply in the United States, short cycle, so you did not have to wait years between getting the sort of barrels after you made the investment. I think it changed a lot about how investors thought about the oil market. They became less concerned about thin spare capacity. They thought about the United States providing ample volumes. And so I think both policymakers and some market participants kind of said, well, you know, I can focus on other parts of the oil market, but as we continue to see, geopolitics comes roaring back.
- [04:42]
B
It certainly does. But let's just dwell on that, that, that sort of historical moment. And how significant was it for you, the shale revolution? What year did it start? What did it really transform the domestic US Supply? And to what extent has it shaped.
- [04:55]
A
Well, you know what I think is very interesting, I saw the kind of test case for this. So I remember during the, again the Arab Spring where we started to have disruptions in places like Libya, concerns about other oil producing countries potentially having disruption. I felt like that was almost like the kind of peak geopolitics moment. And then we had this decision that came, an OPEC decision that came on November in 2014, and it was actually Thanksgiving Day. And OPEC made the decision because we already were having US production coming on. We already were in the days of the shale revolution, but we didn't know at what price shale needed to continue. The shale producers needed to keep producing. And OPEC made the decision in November not to cut production. And I remember when they made the decision not to cut and you saw prices really start going down. But really, I think caught a lot of oil producers off guard because I was later told that their view was that shale would have a break even in the 70s, that it was expensive, that basically you could do this experiment and basically of not cutting production and that shale would break maybe six months in. And they were not anticipating the sort of resiliency of U.S. shale production that their experiment is in terms of not putting in a price floor, seeing prices just collapse and shale kept going. I think that really changed our thought process. And I remember going to subsequent OPEC meetings, but the big one then in November, a year and a half later, when they basically made the decision in 2016 that enough was enough, that basically, yes, shale was declining, but also their revenue was being hugely impacted by the fall in prices, that they had basically allowed this massive buildup of oil inventory. And so I was at that fateful meeting where the OPEC producers decided to join up with the Russians. And remember, if you think about the Cold War, some of us are so old, we remember like the headed days of the 80s. You had the Russians and the Saudis on the opposite ends of the Cold War. And then you had this decision in November or 2016 where essentially OPEC and the Russians joined together to manage the market. And I'll never forget one really smart observer said to me in Vienna, this was a shotgun marriage driven by shale that essentially for the OPEC producers, they had to basically do a deal with their historic adversary in Moscow and these other non OPEC producers to get control back of the oil market. Mm.
- [07:58]
B
So it's so interesting, obviously some of those shale producers suffered because they were over leveraged, but it transformed the US market overall. I'm really interested on this point though, about the sort of break even price and where it is today. Because on one level you look at President Trump and he's obviously desperate to get prices down for the consumer. At another level, where is the flaw where he doesn't want to punish the.
- [08:24]
A
Companies is such a great question. Because I feel like there has been a sort of evolution in how President Trump thinks about the oil market. Because President Trump, I think when he thinks about OPEC, he thinks about the 1970s, the gas lines, he thinks about what it did to President Carter in terms of his political misfortunes and the first Trump administration. Initially he was very, very anti opec. But I will never forget because I was in Vienna in March when we had that fateful meeting in March 2020 where the Russians and Saudis could not reach an agreement. And you know, the Saudi oil minister, his real Highness Prince Abdelaziz, I can tell you I had been in Saudi Arabia early on, like, you know, early early February 2020, and he was deeply concerned. He said, we don't know about the extent of demand destruction from this virus, but it could be worse than SARS and we need another production cut. And. And the Russians were like, no, you had no agreement. Biggest demand collapse in history, starting with. Because we're in the early days of COVID and this price war began in the midst of the COVID demand collapse. And you had the Russians and the Saudis and everybody put every barrel they could on the market and prices were collapsing. And as soon as I landed back in New York, my phone was blowing up from shale executives saying, president, President Trump better get these Russians and Saudis back together or the American energy dominance story dies. Because President Trump initially couldn't decide falling price is good for the US consumer or do I need to save shale. And in March, April 2020, he decided to save shale. And he was the one who became the architect in April of the biggest OPEC production cut in history. They cut over 7 million barrels. And it was an amazing moment where President Trump really kind of took control temporarily of this producer group to save us shale producers. And you fast forward to where we are now and it's really clear that for President Trump, the lower the better. And I think that for shale producers this has become a kind of a challenge for the industry because on the one hand, they love his deregulatory agenda. They love the fact that he will permit anything. They love the fact that very early on he signaled that he was going to rescind the kind of Biden freezes on LNG export permitting pauses. Like they think it is much better environment on the regulatory front. And yet President Trump's desire for $50 oil does not really meet their medium term objectives. Like they can certainly survive another year with WTI prices in the 50s, but it's not an environment where they grow or whether they thrive. And so I think that has been the interesting challenge for these executives is that there's no signal that he's willing to provide price support. And I think what also was interesting is I attended the National Petroleum Council, I'm a member of that organization and it's advisory group to the Secretary of Energy and was so interesting we had our meeting in December and Secretary Wright gave this really interesting speech where he talked about low energy prices being key to the entire Trump agenda when it comes to reshoring American jobs, when it comes to his view of an American manufacturing revival winning the AI race with China. And, and so I do think it's gone beyond simply saying that this is a nice thing to have for US Drivers. He now has an entire economic strategy based on lower energy prices. And that I think poses more challenges for producers because you have to then wonder at what price would he step in if lower prices are a cornerstone of the entire economic agenda?
- [12:44]
B
Well, this is going to feed into lots of the geopolitical questions in a moment, but before we do that, what's your overall take on demand, before we kind of come to that supply question? Do you buy into the huge, huge need for energy that many people talk about, whether it's because of AI specifically or other things? What's that outlook for you?
- [13:03]
A
Well, I think what is interesting is you have the International Energy Agency in Paris, which had come out a couple of years ago and said essentially no need for investment in traditional fossil fuels, now having to kind of walk back that analysis. And I do think, certainly when we look at the data center build out there is, if you want to look at the bull case for natural gas, like that is the bull case for natural gas. Because if you look at the US Strategy, when you talk to senior officials in the Trump administration, they will tell you that the AI race will be determined on who wins the baseload power race. And the United States strategy is almost entirely based on nuclear. I mean, nuclear and natural gas. So that is so different than when you want to think about China, which is basically like, yes, natural gas is important, but we're also doing wind, solar, hydro, coal. The US Again, it's natural gas in the lead with a little bit of nuclear. But we've essentially said when it comes to renewables, that is not part of the mix that we're looking to when we think about the air race. So I do think like, when you think about natural gas, like that is the kind of medium term bull case for natural gas demand? So I think that is the question, though, ultimately, when you go back to the sort of geopolitics and the AI races, can you win the AI race if you're basically saying we're going with one primary energy feedstock with a backup on nuclear versus a country that is truly going all of the above when it comes to energy?
- [14:54]
B
This episode of the Master Investor podcast is brought to you by lseg, the leading global financial markets infrastructure, infrastructure data and analytics provider. To learn More about how ELSEG connects businesses, investors and markets worldwide, visit elseg.com. Let's talk about Venezuela first. I mean, clearly with this desire to get prices down and have as abundant energy, one can leap to a conclusion for why you'd go into Venezuela. Is it as simple as that or.
- [15:31]
A
I think it's not as simple as that. I think that the reasons that we are going in have evolved over time. It a little bit reminds me of the run up to the Iraq war in the sense that I think there were different stakeholders in the administration that had different reasons for wanting to go in. And I do think that if you look at somebody like Secretary of State Marco Rubio, who importantly is also National Security Advisor, which means that he now sits in the White House and has more extensive West Wing walk in privileges, you could say that Marco Rubio's. A lot of his political career has been based on Cuba politics and the idea that the United States should prioritize the overthrow of the Cuban regime. And many people say that Venezuela is an extension of Cuba policy. And because Venezuela historically, particularly under Hugo Chavez, when we had the kind of heyday still of Venezuelan production before it went into like sharp and steady decline, his Bolivarian revolution was about using the proceeds of oil exports to fund political allies in the region when it came to Cuba, with the provision of outright barrels to Cuba, helping to keep the lights on in Cuba. And so for Marco Rubio, he really does want to sever the financial link between Venezuela and Cuba in the hopes that potentially you get some type of different regime emerging in Cuba. The question is if that is your goal. And others talked about drug trafficking, migration, I think that was an issue for Stephen Miller. If the revitalization of the Venezuelan oil sector was not your sort of principal leading goal, but something that's kind of nice to have something that might pay for development there, but not a really origin story goal later became the justification. What is the commitment of the United States to providing the necessary capital, security, technical assistance to revitalize a sector that's been on a multi decade decline. And we started this conversation with the oil strike and I think that was kind of a seminal moment for Venezuela because prior to Hugo Chavez Pedaviza, the national oil company of Venezuela was one of the premier national companies in the world. I mean, the technical competence there was extraordinary.
- [18:01]
B
Is it really?
- [18:02]
A
Oh, extraordinary. Venezuela was producing one point, you know, close to 3.5 million barrels a day. We're lucky on any given day if they're producing 800,000 and that oil strike was such an important moment because Hugo Chavez decided that that the oil workers were a source of opposition to his regime. The United States had dabbled in a little coup plotting there and he'd become incredibly paranoid about sources of opposition that might be externally funded. He sees this oil strike, he sees collapsing production and he basically says, I am going to take control of Pedviza and I'm going to turn it into an organ of the state. And 20,000 PEDESA employees are fired overnight. And then you had thousands of other Petavasa employees saying, I'm not going to stay here. I'm not going to become part of the Bolivarian Revolution, I'm not going to become an ATM for the Venezuelan military. So I'm going to go to Canada, I'm going to go to Kuwait, I'm going to go to the United States, I'm going to leave Venezuela. And so the national oil company really was hollowed out. And not only did you lose manpower, they didn't invest in, in equipment, they didn't invest in, you know, keeping the wells going. And so you started to have this really atrophying of Venezuelan production. And so because it is a multi decade decline, the amount of money and capacity building that it's going to be required to get Venezuela and the oil sector back up on his feet is extraordinary. And I talk about that December meeting of the National Petroleum Council. A lot of oil executives are there for that. So you can have interesting sideline conversations. And they were saying it's going to cost to grow Venezuelan production just by a million additional barrels. It's going to cost $10 billion a year. And then you need to deal with the security issue. Who's going to deal with the colectivo? It's basically a paramilitary force. These guys ride around on their motorcycles. They report up into the very feared Interior Minister Cabello, who's going to deal with them. Who's going to deal with like rewriting contract terms there, who's going to basically fix the electricity grid? Like this is an enormous undertaking. If we really have a goal of really turning around Petavasa, you can probably get a couple hundred thousand barrels though out of Petavasa in terms of new production. Just by bringing in diluents in order, it gets a very, very heavy product. To basically be able to get a couple hundred thousand additional barrels. You bring in diluents, you do some minimal improvements in the security sector, some potential new investments in the grid. But to get an additional million barrels a day, you're Talking about the2030s and a lot of capital.
- [21:00]
B
So if the driving theme is geopolitical for going in, is there a middle ground point, which is about the oil being priced in dollars or not? Is that a factor that you see in, or I guess put another way that China and Russia were getting their claws in too much?
- [21:18]
A
I think that is about, and I think it is important to look at President Trump's national security strategy that came out in December because it's such a clear articulation of his hemispheric strategy. The idea, we wrote a piece calling it Monroe 2.0. He calls it the Dunro Doctrine. But the idea that the United States should be the dominant player in the Western Hemisphere. And Venezuela was seen as a outpost of first Chinese influence because they were a principal taker of Venezuelan barrels, had given billions in loans, part of the whole way China does their dealings with commodity producing countries. Essentially oil for basically Chinese investment infrastructure or minerals for Chinese investment in infrastructure. So that was like the original Chinese entry point was this sort of oil for investment trade with China. But then you had increasing Russian influence there. There was a period where multiple floors of the Petavasa Towers and Caracas were occupied by Rosneft employees. And so for President Trump, the idea of getting, you know, or diminishing Chinese and Russian influence, I think was part of the appeal to him for going in there, as well as the idea that essentially Venezuelan oil reserves, they say it's the biggest oil reserves in the world again, but this is not like having barrels in Saudi Arabia, where it's much easier to extract. These are difficult barrels to extract. But he likes the idea of essentially having these barrels that can be brought to US Gulf coast refiners, which run on a heavier barrel, not the sort of lighter barrels that shale produces. He liked the idea of, I think, having this resource that he felt he could sort of control. So I do think it appealed. There was a clear economic argument, But I do think, and that's how you get to Greenland, this idea that you want to be the dominant player in the hemisphere.
- [23:19]
B
Really interesting. In Greenland, we might spend too long on. But I want to go next to Iran.
- [23:24]
A
Yes.
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B
And your assessment of, you know, we're all wondering what he could and should and might do based on just purely the politics of it all and the brutal kind of repression of protesters. But when you see such a significant buildup of military assets, people talk about this armada making its way there. What do you think might happen?
- [23:44]
A
Well, I think what's interesting is, like, we really thought they were going into Venezuela when there was such a massive buildup of US Forces on off the coast of Venezuela, when we were targeting those drug boats in Venezuela, it was very clear to a lot of people in Washington middle of December that this was either going to be a killer capture exercise involving Nicolas Maduro. Iran. There had been a view at least in mid December that President Trump was kind of done with Iran. If again, if you look at the national security strategy, very focused on hemisphere influence. But then when it got to the Middle east, it basically said the Middle east is important, but not as important as it used to be because we have so much production of oil in the United States and we have revitalized our ties with our key Gulf allies and we had a 12 day war against Iran and we did significant damage to the nuclear program. It looked like President Trump was kind of ready to turn the page on Iran until you had the visit of Israeli Prime Minister Netanyahu to Mar A Largo on New Year's Eve. And he gave this speech from Mar a Lago and I actually happened to be in Palm beach for Christmas break. So it was like, you cannot really get away from work. And he gave this speech where he talked about the protesters, saying that depending on how the regime treated protesters, the US Might have to go back into Iran. Also talked about the missile program as well. And we thought that was fascinating because there have been so many protests in Iran, really large scale protests. And this was really the first time an American president said we may militarily intervene depending on how they treat a domestic uprising. And we thought this is really interesting because we've deployed so many assets already to off the coast of South America. Can we also do a significant military operation now in the Middle East? Like can you do everything everywhere all at once? And what is the actual end game when it comes to Iran? Like, if we intervene because of a domestic situation, who are we picking to take charge? Like, clearly, when it came to Venezuela, we did a deal with Delsey Rodriguez, basically saying, if you are willing to help us when it comes to the oil sector, meet some of our core objectives and not undermine us, we will largely keep military inc in Venezuela in place. If you think about Iran, if we're going in to aid the demonstrators, sure, we could take out the very old supreme leader of Iran, but are we going to keep irgc, the Revolutionary Guard Inc. In place to do we have the kind of viable opposition that we are going to get behind? Can you do that based on airstrikes alone? So I think it Became a really interesting conversation about what are the end game objectives. And now we have been ramping up our presence there. And it seems that the administration in Washington may be a bit split between those who do want another round of kinetic action in Iran and those who seem to be potentially advocating for giving diplomacy one more shot. Like can you get significant concessions where the Iranians maybe say, we're not going to enrich uranium anymore, we will forego ballistic missiles. Like trying to see at this moment where the regime has faced significant protest, where they faced a pretty brutal US Air campaign and Israeli air campaign over the summer. Whether you can get a deal that off ramps this crisis for now at least, when it comes to U.S. involvement, I think we'll know in the next days or weeks.
- [27:31]
B
I guess the quick follow up on that is if there is some kind of intervention, what does it do to oil prices?
- [27:36]
A
Depends on how the Iranians respond. Think about over the summer, think about if we had sat down 10 years ago and said the Israelis and the United States are going to be bombing the Iranian nuclear sites. I mean, certainly if we'd had this conversation in 2010, oil would be through the roof. But the fact is, is that the Iranians chose only to retaliate when it came to Israel's domestic energy infrastructure. They did not target anything regionally. In sharp Contrast, frankly to 2019. Like I remember in 2019 after we zeroed out exemptions from importers of Iranian oil and the then Foreign Minister Javed Zarif was in New York making the rounds at several New York think tanks because at that point we had a regime that we considered more reformist in Iran. And so officials in that regime would travel to the United States. And I'll never forget then Foreign Minister Javed Zarif in 2019 said, if we can't sell our oil, no one's gonna be able to sell our oil in the region. And you had like attacks on tankers off the coast of uae, you had pipelines attack and then you had Saudi Arabia's ABCAKE facility, world's largest oil processing facility, hit by a combination of drones and cruise missiles, taking half of Saudi's production off temporarily. So if you fast forward to this last summer, there was concern, could the Iranians retaliate? Like at least how they did in 2019, like what if they hit a major oil facility? What if they hit a tanker in the Straits of Hormuz? That could be really impactful for oil prices. But the Iranians did not donate attack like that. And their main response outside of targeting Israel, was to do an attack on the US Base in Qatar. But they telegraphed that in advance. So a lot of market participants were like, okay, the scenario we all feared happened. We've had no regional oil supply disruptions. I'm going to turn the page and, and focus on other issues. I'm going to focus on will we have too much oil on the market? What does demand look like? But at this moment, right now, I think a lot of market participants are thinking that maybe the Iranians with their back against the wall, if we go into Iran again, if we were to do a regime change operation, if we were to, you know, either capture or kill the Supreme Leader of Iran, that the regime may respond differently, that they may take a page from 2019 and hit a tanker in the Straits of Hormuz, that they might hit some regional energy facilities to raise the costs economically for the United States. So, again, I think a lot's going to hinge on what we do, what we target. Some have suggested maybe we target Revolutionary Guard bases because the regime has been able to use the Revolutionary Guard to put down the demonstrators. There are no real indications right now that they are disobeying any orders to brutally crush the protests there. So some have suggested the United States may target those bases, force the Iranians to rely the government to rely more heavily on the army, because that's seen as a more broad section of Iranians are in the army. Maybe they would not comply with orders. But if there was an attack on a base, base, for example, would the Iranians respond with something more symbolic? But again, if the Supreme Leader is targeted, there is a concern that the Iranian response would be much more formidable when it comes to regional assets.
- [31:18]
B
Flip side of all of that. What if there's a peace deal, fair or unfair, between Russia and Ukraine? What does that do to global.
- [31:26]
A
I love these questions. I think it's an interesting question on what are the terms of the peace? Because you could have a ceasefire that satisfies American concerns and you could see a removal of American sanctions. But the question is, would it lead to Europe deciding that they want to basically go back to dependency on Russian energy supplies? And I think that is where sometimes the market misses things. Like, the Europeans have been very clear that they are no longer going to go back to being dependent on Russian oil and gas, that they are very focused on alternative sources of supply. Like, even if the war ends tomorrow, they do not want to go back to that position of dependency. But the Russians, you know what we hear about the negotiations. They've been very focused on the idea of getting their market share back. And so I think it's going to be a question about what would even satisfy the Russians if they're not going to get access back to their primary market. So I could see a situation where you would get some type of deal, but it's not clear it's going to lead to unlocking Russian oil and gas exports in a way that I think many market participants believe. I think there is a view out there that if President Trump concludes a deal that essentially we wind back the clock to pre invasion and, and Russian energy is flowing unencumbered. I don't think that's the case.
- [32:55]
B
That's really interesting. I agree. I don't think that. Well, I'm not even sure people have got that far to analyzing it yet because there's sort of more pertinent issues.
- [33:02]
A
But I think, as you know, for Europeans, a lot of these countries believe that Russia's territorial ambitions do not end with Ukraine and they see the threat much more as an existential issue.
- [33:15]
B
I agree. I think politically pretty impossible for the next three, four years, who knows, in five or 10 to go back to significantly those gas imports. This podcast is sponsored by Interactive Brokers. Building wealth starts with the right broker and Interactive Brokers helps you reach your goals with powerful tools, global market access, low costs and unmatched financial strength. That's why the best informed investors choose IBKR. Learn more at ibkr.com masterinvestor. Hi everyone, Wilf here. I hope you're enjoying this particular episode of the Master Investor podcast. If you haven't done so already, please do hit follow or subscribe to the podcast as a whole and subscribe. And another little ask, please do give us a five star review and leave a comment in the comments box. That would be very much appreciated. But for now, back to this particular episode. Interested to finish off the geopolitical around the world, you touched on China's amazing diversification of its energy sources over the last decade. We've also talked on this podcast quite a lot about how much they're stockpiling gold from the central bank side. You were telling me before. So they're also, which I hadn't been aware of, really seriously stockpiling oil as well.
- [34:48]
A
Right. They've been massively building out their storage capabilities and this has been one of the interesting debates in the oil market. Like the super bears will say we're going to have a wall of crude because China is driven by commercial considerations when it comes to their purchases. But it's interesting when you talk to, I won't name them, but some of the very senior Trump administration officials who have an interesting oversight over global energy issues, like Mesa on the National Security Council, they have a view that China is stockpiling for strategic reasons. And when you talk to these officials, they'll say, well, they're continuing to make these really big strategic purchases because they're concerned about disruption globally to supply, but also that they are basically preparing for conflict with the United States. And even when you hear Chinese executive speak, I was in Abu Dhabi, I can talk about this because he was speaking on the record. They had the chairman of CNPC speaking in Abu Dhabi again, a major supplier to China. And the chairman of CNPC said, China plays a very important stabilizing role in the market. We stabilize the market for our suppliers. And I was thinking, wow, is that the implicit conversation about the Chinese signaling that they're putting in something of a floor when it comes to the demand floor for their producers, which would align with why they would be purchasing for strategic reasons? And I've continued to hear from national company heads and in the Middle east that have been a lot more sanguine and comfortable, I think, with the demand outlook than some of the big traders saying, like, look, Chinese demand is holding in there and we continue to be told by our Chinese customers not to cut allocations. So I do think it's really important when we think about China to think about, like, why are they making these purchases? I think there's so many things we can think about when it comes to China in terms of are they best placed if the US Position is correct, that whoever wins the battle for baseload power wins the AI revolution, how far ahead is China? Because they're basically doing everything when it comes to every resource, they're basically resource agnostic when it comes to powering their data centers. But also I think the interesting question is if that official was right when he said they're preparing for conflict with the United States, has this new Trump doctrine which says essentially we control our hemisphere. If you are Vladimir Putin, if you are the Chinese leadership, are you like, yes, I would like to go back to the world of a Yalta conference. Like, essentially, if the United States dominates its hemisphere, Vladimir Putin probably wants to dominate, as we talked about before, his hemisphere. And then if you are thinking about China, what is the read through for Taiwan as well? I mean, does the theory that we've outlined in terms of why we need to be in Venezuela or potentially have Greenland. How does that fit with the Chinese view of like why they should have Taiwan?
- [38:07]
B
Well, it's a very interesting, interesting thought. Stockpiling oil as well as gold for that potential step. Sum it all up for us Halima, because we haven't got that much long left. No. What is, what is the outlook for energy prices on a 1 and 3?
- [38:22]
A
So I think this is such a great question because I always like to say path dependent. If we were in a period of quiet geopolitics, I always think about the, we talk about what was a quiet period. It was like probably the 90s. But if we were in a period where we weren't thinking about great power competition, if we were not thinking about supply disruption, you could take a step back and say this market looks pretty well supplied. US production hit highs again last year. You had OPEC making the decision to bring forward production. If you look at this year and you strip out all the geopolitics, you'd say gosh, you know what? WTI prices high 50s, mid to high 50s. Brent prices low 60s. This does not look like a market that needs a additional barrels. If we look out 12 months. But then all these other factors come into play and then that's why we think about where we are like today when we think about oil prices. And then we have to say, let's say President Trump decides to use the armada that he has sent to the Middle east to target Iran and we do see something become more significant there in terms of regional disruption. Where are the additional barrels? The US drew down its Strategic Petroleum Reserve by half in the early days of the Russia Ukraine war. The Saudis and OPEC were very generous in terms of putting additional barrels on the market last year. Is there a lot left in the tank right now in terms of additional barrels they could bring on if there was a disruption?
- [40:05]
B
No.
- [40:06]
A
So again it's what path we go down. If we go down a de escalatory path, we, we will revert back to basically looking at the fundamentals and say well supplied. If we are entering a period of escalation disruption, that's when you think about prices higher from here.
- [40:26]
B
Really, really interesting. So much again on the geopolitics, one quick sort of wild card question. Do you think a lot of, I mean we talked about wind, solar's had big advances, obviously nuclear. Do you think about the chances of nuclear fusion? Or we heard Jeremy Grantham on this podcast talk about geothermal or do you think about a new oil discovery that we haven't come across yet? How much do you weigh up those?
- [40:51]
A
I think what is so interesting is the context of what comes next in terms of policy, because so many of these technologies depend on government support. And when we had a different administration in Washington before the Russian invasion of Ukraine, the focus really was on the transition and really giving government assistance to the energy transition. But I think there are combination of the Russian invasion of Ukraine, the concerns about a winter of discontent, President Trump really focusing on traditional oil and gas. And you can see what's happened into wind in the United States. The policy support for these technologies has pulled back. And so the question is, what are we sitting here talking about two years from now? Like what or three years from now? What will be the focus of Western capitals? Will we revert back to focusing on the transition support for these different types of energy like the new energies? I will tell you, the Chinese are focused on that. And that same CNPC executive talked about the stabilizing role they play in the oil markets, but also said, we are very focused on the new energies here.
- [42:02]
B
We're sort of sadly stuck with doing neither. But there we go. That's a debate for another day. Wrapping things up, please. I want to come back to you specifically, and I was thinking about this earlier. To what extent do you think CIA analysts make great financial analysts or vice versa? Who is more likely to transfer to the other profession more successfully?
- [42:26]
A
So I can. I think it's what you cover in terms of, you know, your role in finance or the agency. I certainly bump into a number of people that I used to work with. Some of my favorite people to call when I want to try to like whiteboard something is to call somebody I used to work with who might be at an oil company, now might be another financial institution, just to have this kind of sense of like, how do you see the world? I will say that more than anything, it taught you to question your assumptions. You talk about Ray Dalio I think the idea of trying to figure out where you're really weak, where are my analytic lapses? What am I not seeing? Where is my bias coming into that? That was something that the agency really forced you to think about, really thinking about. Where are you imposing your worldview on somebody else? Really trying to find your analytic blind spots.
- [43:23]
B
I love that, absolutely love that. I need to take note of it as well myself. And just finally, Halima, we ask everyone on this podcast for advice for our listeners, trying to help them have an edge. So when it comes to oil and gas commodities more broadly and kind of trying to assess that particular market. What is your, your overall piece of advice for us?
- [43:45]
A
Well, I always again, I try to get away from mirroring. I always think that was like the biggest analytic mistake. They always told us, the agencies, when you thought that like somebody else saw the world the way you did. So I try to read as much as I can in terms of like the press from the countries that I cover. I try to really follow the influencers, the thought leaders in the regions of the world that produce the commodities that I try to forecast.
- [44:12]
B
Halima, it's been such a pleasure catching.
- [44:14]
A
Thank you for having me.
- [44:16]
B
It's particularly a treat in person and to see you after so long and it was a really fascinating conversation and an amazing time to have you. Thank you so much for joining us.
- [44:25]
A
Us hope to be back one day.
- [44:26]
B
Certainly will be. We look forward to it. That was Halima Croft from the RBC from RBC Capital Markets. Up next on the Master Investor Podcast, we'll be joined by the CEO of ARM holdings, perhaps Britain's most important company, Rene Haas. So do stay tuned for that one, but for now, our thanks to Halima.
- [44:43]
A
Thank you.
- [44:45]
B
The Master Investor Podcast is sponsored by BNY Investments, LSEG and Interactive Brokers. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show Notes this podcast is produced by Paradine Productions and Master Investor limited In association with Birdline Media. If you've enjoyed the show, please do subscribe on YouTube or click follow on your podcast platform and you'll be automatically notified each time a new episode drops.