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- [00:00]
Barclays Investment Bank Host
Bull or bear Trade or tariff. Future or fad? There's more than one side to every story. With the Flip side podcast from Barclays Investment bank, you'll hear two research analysts having a provocative debate on hot topics in business and markets. Listen to the Flip side on your favorite platform,
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Katie Martin
Pushkin foreign. You are not imagining it. The war in Iran is still going on, the Strait of Hormuz is still mostly blocked, and oil is still trading above $100 a barrel. This has now been going on for nearly three months. Nearly 80 countries have introduced some kind of emergency measures to protect their economies from higher energy prices. But the world is mostly merrily getting through its oil reserves. Today on the show, are we getting close to a tipping point? Do reserves hit a low point and send oil prices screaming higher? This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at FT Towers in London, where we have a long weekend ahead. And yes, people, the forecast is sunshine. Sun's out, guns out. The big man, Rob Armstrong is on his hole somewhere. But joining me in the studio in the depths of FT Towers, we have another big man, Malcolm Moore, the FT's energy editor. Regular listeners will recall that he knows which way is up on the Energy Beat. Malcolm, thank you for coming back on the show. We didn't put you off too much last time. Have you had any days off since we last did this at the start of April?
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Malcolm Moore
What a question. This is not the time for days off.
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Katie Martin
Yeah, it's tough out there in the Energy Beat, right? So look, you've been writing about this recently, this concept of a tipping point, because oil and gas reserves exist for a reason, right? It's for this sort of eventuality, right, where you can't get hold of this stuff and so you have some squirrel away, you know, down the back of the sofa kind of thing. How far through these reserves are we getting and how dangerous is that?
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Malcolm Moore
Well, I think I recall the last time I came on the show, I said that the energy market was, I think, tearing its hair out or exploding in some sort of drama. Confusion at the fact the rest of the world wasn't paying enough attention. I mean, wherever we were last time, whichever bit of hyperbole we were at, we're further along that curve now. So, yes, I mean, it's worth saying there are two types of reserves, right? So companies have a lot of reserves. They have 3 billion barrels more or less of oil in reserve. But it's not. I mean, we call Them reserves, they're not really reserves. This is basically what the system, a lot of it. I mean, obviously there's a margin, but a lot of it is what the system needs to operate, right? So pipelines, in order to work, they have to have oil in them, right? And, and refineries, in order to make gasoline, they need to have, you know, crude oil waiting to be turned into gasoline. So all of this stuff is just, you know, it's, it's, it's kind of
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Katie Martin
sloshing around the system, it's working capital.
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Malcolm Moore
It's not, it's not a, it's not a stockpile, it's just what you need to do your business. And then, and they're companies, right? So they don't want to hold stuff that they don't need. There's no profit in that. So they're required by governments to hold a certain amount, which is lucky because it's probably a little bit more than they would hold if it was up to them, but they don't have a huge margin. Now the other type of reserve are the government reserves, the most famous of which is the US Strategic Petroleum Reserve. And there's 1.2 billion barrels of that of which we have used 400 million or we will have used 400 million at some point over the summer. So that's good. But just very clearly companies have got a lot, but a lot of it's being used. Governments have less, but all of that is available right now. As the war continues, we're in the situation where we are using more than we have, right? Demand has not really fallen. In fact, it's summer, so demand is going to go up, right, because we
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Katie Martin
have like driving season in the States and because Europeans go on holiday on airplanes and, you know, and, and, and, and there's aircon in Europe that suddenly needs to like, really kick into gear and I mean, look, this might be a stupid question, so tell me if it is, but the reserves that we have, it's not like a car, right? You can drive your car until it literally runs out of petrol and then you can just point it down a hill and keep going.
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Malcolm Moore
Have you done that? I've actually sounded strangely familiar. Look in your eye Recalling a happy time.
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Katie Martin
It's a long story. But is the same true of these sorts of reserves? Can you run them down to zero or is there a level at which there's just not enough in the, in the pipes?
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Malcolm Moore
Yeah, you cannot run them down to zero. So for safety reasons, I think that the line is about 25% needs to be 25% full. The tanks need to be 25% full, otherwise they get clogged. You know, obviously, like any liquid, all the crud settles at the bottom of these tanks. You know, there are all sorts of operational problems. So A, we need those reserves to make the system work and B, the margin is even tighter because a lot of it is the buffer that needs to be there under all circumstances.
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Katie Martin
Right.
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Malcolm Moore
So, yes, we're getting to, you know, squeaky bum time. And the oil industry is jumping up and down and saying, hey, we have a real problem here, everybody. And you know, and people who trade in equities are just looking at the SpaceX IPO.
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Katie Martin
Yeah. Stock markets, like, lol, whatever. I'm glad you called it squeaky bum time because that's a phrase that I use quite a lot. And Rob is pretty much convinced that I made it up. I did not. Anyway, so, yeah, these stressed out people in energy markets are saying the world needs to wake up to this possibility that unless we get a really dramatic turnaround of the situation in the Strait of Hormuz, then we're going to get towards the danger zone in these reserves. I guess one of the one thing here is that there are different ways of measuring the oil price, as you know. Well, Malcolm, and one way that we do this is that there's what we call the spot price. So there's the, the price that it costs to buy a barrel of oil today. Pretty much that's what it means. But then you can also arrange effectively to buy barrels of oil in future. And so there is a price of oil today, but there's a price for what that oil will cost in one month, two month, three. Two months, three months, six months in future. So, Malcolm, sometimes we like to call this charts on the radio. Tell me what a chart of oil futures looks like.
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Malcolm Moore
Okay, so price is now $110 a barrel. That's for oil for delivery next month. Right. You go one month along. So coming along, you're going to go down to, let's say 100 and then down to 90, then down to 80. So what you're looking at is a very steep drop and then gently sloping into the distance because the further out you go, there's less liquidity. People are not trading a lot of those contracts. And also because who knows what the future holds. So like there's just less price action over there. So at the top, very steep. And, and what that steepness tells you is give me oil now, I need oil right now. Please give me oil, I'm willing to pay anything for it. And then, and then it tails away. And that's telling you, I don't know whether I'm going to need oil in two months. Maybe I don't need so much three months. I'm still, I'm less willing to pay for oil in three months. That's what the steepness tailing away tells you.
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Katie Martin
So sort of today's oil price is a line that heads up and to the right and the futures curve is a line that heads down and to the right.
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Malcolm Moore
Exactly right.
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Katie Martin
Charts on the radio, people. And that futures curve is saying, what's everyone worried about? Like the, the price of this thing is coming down. We think that the oil price is going to come down. So you've got the energy people tearing out their hair saying, hell world, hell world, be afraid. This thing could go to $180 in a straight line. And you've got this futures curve saying, I think this is going to be fine. Make that make sense.
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Malcolm Moore
Yeah, it's a problem and it's a big problem because politicians and all sorts of people are looking at the futures curve and saying we don't need to worry. You know, the price in a few months time is $80 a barrel, $90 a barrel. We can live with $90 a barrel. That was a normal price for oil not so long ago. Okay, they're misunderstanding what that curve actually means.
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Katie Martin
Do you mean to tell me that politicians are failing to understand something in financial markets?
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Malcolm Moore
It's not just politicians, Katie. It's, you know, because there is nothing else that tells you what the future is going to look like. Everybody looks at that. Companies build it into their forecasts, central banks use it as a sort of, oh, neutral. This is a neutral thing. We don't have to make our own forecast about the future of energy. We're just going to take this, what the market says. But let me just explain what that curve does or what that market is. If you're an oil company and you're going to be pumping oil out of the ground in six months time, you would like to know today before you make the decision on whether to invest in a new oil field, how much you're going to get for your oil in six months time and if you're a buyer of oil, you're a refinery and you want, you know, you're going to need crude in six months time to turn it into fuel. You also need to know what sort of price you're going to pay because, hey, you'd rather fix it today than just take a chance that in six months time it was something different. That allows everybody to do their financial planning, Right? So it's a hedging tool. It's basically you can take the risk out of the system. You can say today the most I'm willing to pay or the most I'm willing to, you know, the least I'm willing to accept for my oil in the future is $80 a barrel. Right? That doesn't mean that in six months time it's going to be $80 a barrel. Because actually when we get there, we can see that the curve has a terrible track record of predicting prices. The curve always just gently slopes into the future. Right? Because you know, that's what people do when they're trying to hedge their risk. That's what risk hedging curves look like. But when we get to the future, it's usually totally different situation.
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Katie Martin
Is there an element here where oil producers and oil refiners and people who are actually involved in the oil business are one set of people who are active in the futures market and then there's a whole other set of people who are active in the futures market who are speculators and hedge funds. And are they the people that are helping at least to pull this futures price down lower than you can argue it should be?
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Malcolm Moore
No, I don't think so. I mean, again, I don't think anybody in the market is trying to actually predict what the price is. They're simply trying to settle at a level where both sides are happy and can make money. And the financial players are there to absorb the risk from, you know, the physical players, the refineries and the oil producers. So essentially the oil companies and the refineries are transferring their risk to people who know how to manage risk. Right. Financial players. And financial players are taking a cut and saying, we're willing to, you know, we're willing to think that this is probably going to be around here. I mean, it helps make the market run efficiently. So I don't think they're, they're distorting where the price is. I just think that people think it's a crystal ball. That's not its purpose. Its purpose is to deliver certainty today for people who are trying to make their plans so they don't have to worry about what the future price is.
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Katie Martin
So the frazzled energy pointy heads who you speak to, they.
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Malcolm Moore
That's very mean. I say I don't have pointy heads.
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Katie Martin
I say this with love. So they're looking at the futures curve which says six months from now the oil price is going to be about $80 a barrel. Today it's about 100, $606 a barrel by when I last looked at a screen. If we do hit this kind of sudden stop, if you like, where we, where we really do like hit the buffers on what's left in the reserves. Worst case scenario, what's the most plausible worst case scenario you've heard for where the benchmark price goes?
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Malcolm Moore
I mean, I've heard all sorts of prices, right. But most of them congregate around the 200 a barrel mark. And the reason for that is, is, you know, if we remember, the all time record for a barrel of oil was just over $140 and that was about 14 years ago. So actually in today's terms, in real terms, the spot price is still not
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Katie Martin
that high, not too bad.
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Malcolm Moore
But on the other side of the ledger, nobody really knows what happens when oil goes above a certain level in terms of demand. Nobody knows whether people really just say actually I'm going to stop driving now or I'm going to stop flying or like nobody knows how quickly demand collapses. Lots of people have tried to model it. It's very difficult to model, it's very, very tricky. So people are unwilling to say mad things like, oh, $400 oil, partly because people have said mad things like that before and then had egg on their face.
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Katie Martin
Right, yeah, okay.
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Malcolm Moore
But also because above 200, who knows how quickly demand disappears.
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Katie Martin
Let me ask you about something very important which is summer holidays.
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Malcolm Moore
Ah, yes.
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Katie Martin
First of all, will I be able to go on an aeroplane to my summer holidays in July?
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Malcolm Moore
So I've heard different things. But to reassure you, all of the airlines say yes, well, they will, they
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Katie Martin
would, wouldn't they though?
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Malcolm Moore
Well, they have forward bought their oil, so all their jet fuel, rather they've bought it, they've paid a price for it. Now obviously there's an interesting question of whether actually it shows up or not and is delivered. But let's assume that people delivering commodities are going to deliver to rich places first. Sure, you should be okay,
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Katie Martin
but there were lots of warnings, particularly around the European airline industry early on in this crisis that lads, this is bad, we're going to run out of the stuff. There's going to be people's holidays canceled. The heat has really come off that. And certainly the message from the UK government is don't worry, it's all going to be okay. Malcolm, is it all going to be
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Malcolm Moore
okay, Well, I think that the, the, if you, if you want to give credit to anyone, then you're going to have to say God bless America, because America is shipping so much jet fuel to Europe at the moment. I think it's shipping half of all the jet fuel that's coming into Europe is coming from the US Right now.
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Katie Martin
I've always liked Americans.
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Malcolm Moore
So you have to say, if you can go on your summer holidays, you know who to thank, as long as
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Katie Martin
Rob doesn't take any credit for this. Now, no one knows what's going on with Iran. Obviously, no one knows what's going on with the Strait of Hormuz, but we did have a fairly reasonable drop in the oil price. I think it was yesterday, which is Wednesday, because of this news that there were two supertankers full of Iraqi oil on its way to China that, that managed to pass through the Strait and didn't. Didn't get blown up.
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Malcolm Moore
Yeah.
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Katie Martin
So are people feeling a tiny bit more confident that maybe the ships can start heading through?
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Malcolm Moore
There was definitely a sense yesterday that something had changed. Now, obviously, we're going to need to see more evidence of this.
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Katie Martin
Yeah, two ships isn't going to cut
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Malcolm Moore
it, but essentially what is looking like is happening is, I mean, it's three ships is the good news. So the Korean one as well.
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Katie Martin
Okay.
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Malcolm Moore
But, you know, and that's a lot. That's 6 million barrels of oil. That's the largest volume of oil that's passed through the straits since the war began. So that is good. And that's what got everybody excited also, because after the Xi Trump summit, they thought, oh, maybe there's a deal that's been worked out.
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Katie Martin
Maybe China and us.
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Malcolm Moore
But also Iran has now set up what it calls the Persian Gulf Strait Authority, which is their new and potentially highly lucrative body to manage traffic through the Strait of Hormuz. Now, we don't know, again, how that is working. We don't really know whether ship operators are paying or not paying note. It is illegal because that's sanctioned. So most people say they're not paying. We don't know whether countries are doing deals. So, you know, Pakistan does a deal directly with Iran and everybody, you know, we don't know all of that, but what we can see is that people seem to be edging towards a new sort of status quo where maybe some ships can come out. Right. And so maybe that door is opening. And there are a lot of maybes here, but if that door is opening, how many ships can get out? And what does that Mean for flows. And can we detach the whole Strait of Hormuz business from the whole are we at war with Iran business?
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Katie Martin
Okay, speaking of things being detached and attached, she says, shuffling her paper, we have a story today saying that ships trapped in the Gulf are accumulating barnacles, algae and jellyfish because they're just trapped in this warm water, going nowhere. And that's the sort of thing that barnacles and jellyfish like. Anyway, there are mechanical problems that can come as a result of this. Are barnacles the next big, like, macroeconomic risk that we need to worry about? How. How worried are you about barnacles?
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Malcolm Moore
I'm going to preface my answer by saying I know absolutely nothing about the effect of barnacles on the dragon of giant oil tankers. This is not a subject that I have researched even with a casual Google search.
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Katie Martin
Right.
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Malcolm Moore
With no disrespect to this story, I am short barnacles.
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Katie Martin
You can't be long or short yet. That has to wait.
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Malcolm Moore
Sorry, I'm short barnacles. I've seen a supertanker. These are not small things. I've seen barnacles. These are very small things.
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Katie Martin
Yeah, but you get a lot of barnacles.
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Malcolm Moore
Are a lot of barnacles going to eat a supertanker? I don't think so.
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Katie Martin
Oil tankers are very big. But if you get enough barnacles, surely there could be a problem?
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Malcolm Moore
I am willing to say that, yes. I expect that the more barnacles you have, the slower you would move through the water and indeed that that could be a problem if you're trying to outrun the IRGC through the Strait of Hormuz. So, yes, I'm not going to minimize that these small sea creatures could present a threat to global oil markets.
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Katie Martin
But are you simultaneously saying this isn't necessarily the biggest issue in the Strait of Hormuz at the moment?
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Malcolm Moore
I'm still going to go with the missiles and the speedboats and the mines being a more important issue than the barnacles.
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Katie Martin
We will check back on this prediction at a later date. Maybe we could send the barnacles to attach themselves to the mines and this whole problem will go away.
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Malcolm Moore
I mean, you're going to leave mines in those waters. They're going to be jellyfish, they're going to be barnacles. I mean, Iran's got to think about that.
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Katie Martin
Jellyfish experts, please get in touch unhedged.com. but Malcolm, we're going to come back in just one sec with long, short, and you're not allowed to say barnacles, okay?
- [19:48]
Barclays Investment Bank Host
From globalization to innovation sustainability to market volatility, there's always more than one side to a story. Explore different perspectives on today's most important business and economic issues with the Flipside podcast from Barclays Investment Bank. Hear two research analysts in a lively debate and get insights from every angle. To further inform your view, listen to the Flipside on your favorite platform.
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Katie Martin
Alrighty. Now it is time for long Short, where we go long a thing we love or short a thing we hate? Malcolm Moore, what are you saying?
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Malcolm Moore
I am going long black and white crisp packets. I don't know whether you've seen this, but in Japan, where they love crisp packets and they love plastic packaging of all kinds, some companies, and I don't know whether this is a marketing stunt or not, but they've said that because of the energy crisis, they don't have the colored inks to be able to paint their gaudy plastic packets in the way they wish. And so they've turned them grayscale. And as a result, I am envisioning Japanese shoppers lost in the aisles unable to tell the difference between flavors, probably buying all sorts of terrible flavor combinations for their kids which would be immediately rejected and lead to tantrums. And I am 100% there to watch that spectacle.
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Katie Martin
Yeah, I think this sounds good. I am long lower value human capital. You are almost certainly aware of the story this week where the Standard Chartered chief executive, Bill Winters, he said to journalists that they're looking at sweeping layoffs, thousands of people to replace quotes, in some cases lower value human capital. This went down like a cup of cold sick. And he's had to follow how to
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Malcolm Moore
make your staff happy.
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Katie Martin
Hello, I'm paid £13 million a year and I'm going to fire 8,000 people. But some of them are lower value human capital. Anyway, he's trying to make nicey nice afterwards, but this just feels like one of those comments that it doesn't. It doesn't sound good, does it?
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Malcolm Moore
Feels like could go viral.
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Katie Martin
Could go viral. Malcolm Moore, you are higher value human capital. Thank you so much for coming on the show, listeners. We will be back in your ears on Tuesday. I hope you have a lovely long weekend if you get one between now and then. So listen up then. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forehead. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Greta Cohn and Natalie Sadler FT Premium subscribers can get the Unhedged newsletter for free and a 30 day free trial is available to everyone else. Just go to ft.com unhedgedoffer I'm Katie Martin. Thanks for listening.
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Malcolm Moore
Sam.