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Amidst Volatility, Boring is Good

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/us-fed-interest-rates-inflation-earnings-consumer-sentiment on June 9, 2022.

US markets remained volatile and on a downward trend as inflation concerns heightened. With that, the US consumer is beginning to feel the pinch of rising food and energy prices. What then does this mean for earnings in the coming quarters and has this been priced in? Our CEO and founder, Tony Nash answers these questions.

Show Notes

WSN: BFM 89 nine is seven o’ six Thursday the 9 June. And of course you’re listening to the morning run. I Wong Shou Ning together with Philip See. Let’s have a quick recap on how good global markets closed yesterday.

PS: US markets closed in the red. The Dow was down .8% SMP 500 down 1.1%, Nasdaq down zero. 7%. Whereas over in Asia it’s been a mixed bag. The Nikki was up 1%, Hong Sang up 2.2%. China composite up zero 7%. I think on the back of China easing a bit on the tech regulatory concerns. However, in Southeast Asia, Singapore is down 0.2%. FBM KLCI also down.

WSN: .1% so for some analysis on what’s moving markets, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Please help us understand what is happening in US markets because it is another red day today. Why are markets so choppy this Thursday?

TN: I think people are awaiting the CPI print what’s going to happen with the inflation announcement because that number really helps to indicate if the Fed will accelerate their plans of tightening. So if the CPI runs hot, then we’ll see them accelerate potentially. If it comes in as expected, then they’ll stick with the plan that they’ve got.

PS: So the plan is to 50 basis point hikes. If you see it move higher, are you talking about it hitting 75 or like extending it for a third 4th hike?

TN: If it’s higher, we could potentially see it hit 75 maybe in June or July. But certainly we’re looking at another hike in September that’s probable right now and then maybe a 25 basis point in November. So let’s say we saw come in at nine or something like that for a developed economy like the US. These are people who normally look at inflation, 1%, one and a half percent. So 9% inflation is just something that people have not seen for a long time. And so this is really damaging to people. Wages are not very flexible here. And so I’m sure from the Malaysian perspective, you see that it’s damaging people here in the US and it actually is because wages are not as flexible here as they are in other parts of the world. So if we see CPI come in high, then you would see the set accelerate. If it comes in at eight, let’s say less than 9%, they’ll stick with the plan they have. If it comes in lower, say seven-ish they’ll still stick with the plan they have and continue to fight inflation to get it down around 2%, maybe sometime in Q1 in 2023 or something.

WSN: Okay. So let’s stay on the topic of the US economy now. Bloomberg runs a model, runs different models actually, and they say that there’s a 25% chance of recession in the next twelve months, but a 75% chance by 2023. Do you share the same view but.

TN: A 25% chance of a recession is just a hedge. Right? I mean, that’s just saying maybe it’ll happen.

WSN: It’s a chicken call Tony. It’s like being chicken.

TN: So when you look at what a recession, two months or two quarters. Sorry. Of negative growth. Right. Well, we had a negative quarter of growth in the US, and Q one of 22. Will we have a negative quarter of growth this year? Unlikely. Or this quarter? I mean, it’s unlikely because of the reasons for negative growth in Q one are not the same reasons they would be this year or this quarter. Sorry. So going forward, I don’t necessarily think we’ll have a recession, but I think it will feel like a recession to a lot of people because over the last year, year and a half, we’ve had higher overhiring in a lot of industries like technology, overhiring where companies have been afraid they wouldn’t be able to get the talent they need. So they overhire people. They’ve paid people a lot of money. So sectors like tech will likely continue laying people off. They’ve already started, but they’ll likely reassess their wages as well as they realize that they don’t need as many people as they hired. And of course, there will be other effects if tech start laying people off more broadly. So we’ve already seen housing housing in the US.

There is effectively no new mortgage applications going through on that in the US. So the Fed’s target for housing has kind of been achieved really quickly, actually. But it doesn’t necessarily mean there’s a recession. So things will feel like there’s a recession. But I’m not sure we’ll necessarily technically be in a recession.

PS: So let’s just build on your feelings, Tony, and translate this macro numbers to earnings. What is your expectation in terms of quarter two earnings? Do you expect them to be substantially weaker and how will that translate into equity markets?

TN: Absolutely, yes. Definitely substantially weaker. I mean, look at what happened to say, Walmart and Target a couple of weeks ago when they announced their earnings, they were way down. Why? Because they had way overbought inventory and they had bought the wrong inventory. Okay. So they’re paying for that now and they’re going to have to discount to get rid of that inventory. Right. I think people in a lot of industries because of supply chain issues, they’ve overbought things. And in the meantime, preferences and markets have moved on. So they’ve overbought things and they’re going to have to get rid of a lot of inventory. I think Target and Walmart got out there very early to be able to have their equity price hit hard early. But other companies will come out in second quarter and they’ll admit the same thing. So we’ll see margins really compressed. And because of that, we’ll start to see people announce more layoffs because again, during COVID, investors were very charitable to executive teams, meaning they were telling the executive, look, just stay open, just survive as a company, do whatever you have to. Right now, we’ve got markets that are normalizing.

Investors are being more scrutinizing as they should. They’re saying, look, markets are normalizing. You have to perform like an executive team should perform. You have to perform like a company should perform. So investors and markets are going to be harder on companies in Q two.

WSN: But Tony, does this then mean that when I look at the S&P 500 index, which is probably the broadest barometer of the US economy, it’s down 13 point 65% on the year to date basis. Can we expect further weakness or has this already been priced in?

TN: I don’t think it’s been priced in necessarily. I don’t necessarily think we’re going to see another 13% down, but we always hear that things are priced in. And then when events happen, we find out they’re not priced in. I don’t think it’s priced in. I think there’s more pain to come because people are realizing that they’re basically overpaying for the price of equity. Right. In a company. And so we’re going to see pressure put on valuations, and that’s going to hurt a lot, especially in tech. So we’ve already seen pressure put on valuations in tech. And you saw companies like Facebook who are just throwing off cash still and their valuation is compressed because people have just woken up and said, look, it shouldn’t be valued at that. Right. So we’re going to see that more and more, especially in tech, but also in other sectors.

WSN: So where should we hide, Tony? Will it still be in the commodity space? I mean, oil is up 2 and a half percent this morning.

TN: At where oil is. WCI is trading at 122 right now. Brent is north of that. So it’s possible that we see another 20% rise in crude, but it’s really thin air where it is now. So I think crude price really depends on the supply side. And so can OPEC pump more? Not much. Will things in Russia resolve? Maybe probably in third quarter or something like that. Right. So we really have to look at what are central banks doing? They’re trying to ratchet down demand. Right. And so if they can successfully ratchet down demand, then that will have an impact on true prices.

PS: Tony, I would love to get your view because you’ve seen a different vantage, especially in emerging markets, particularly Southeast Asia. If you saw recently WorldBank has scaled its forecast on global growth and has even highlighted the asphalt is very much vulnerable to stack flat, even recessionary pressures. What’s your view? What’s your advantage in terms of investment in EM markets, especially in Southeast Asia?

TN: Yeah, in Southeast Asia. I mean, look, in Southeast Asia, sadly, Myanmar is going to have the toughest time for the next year or two, right? I mean, we all know the political issues there. I love Myanmar, but it’s going to continue to have the toughest time, I think of the say more developed Southeast Asian countries. I think Thailand is going to continue to have a hard time Partly because of supply chain issues. It’s kind of intermediate point and if supply chains continue to stay strained and tourism continues to be relatively slow in Asia I think Thailand is going to continue to have a tough time. I think places like Malaysia, Philippines, Vietnam, I think they’re in a better position and I don’t know that you’ll necessarily get excessive gains in those markets But I think there’s more stability and more same maturity and leadership in those markets. So if I were to look to Southeast Asia on, say, a country play, that’s where I would look. I would be really careful to look at things like excessive consumption, these sorts of things. I think for the next year or so we’re going to be looking at real stables.

What do people need to live a really boring life because we’ve had this super exciting roller coaster for the past two years and we need to get back to normal and we need to look at what are people going to consume Just to have a normal day in, day out life.

PS: Boring life then.

WSN: Yeah, boring is good.

TN: I love that. Yeah, we all need a little more of that.

WSN: Thank you so much for your time. That was Tony Nash, CEO of Complete Intelligence, saying borrowing is good, we need to get back to normality which means that what investors should be focusing on Perhaps consumer staples Versus consumer discretionary and going back to core fundamentals. Looking at valuations, I think you hit.

PS: The nail on the head core fundamentals because I think investors have given companies the past throughout the pandemic most scrutiny now whether the question will be this will show dispersion and earnings variance between those high earners and low performers Will be a big question Mark as there’s more scrutiny about how you perform in this normal, boring time.

WSN: Stay tuned. That BFM 89.9.

Categories
QuickHit

Crude oil: New super cycle or continued price moderation? (Part 2)

This is the second part of the crude oil discussion with energy markets veteran Vandana Hari. Tony Nash asked if the political tensions in the Middle East will affect oil prices in this environment, and how soon can we see the effect in oil prices if the Iran agreement is made? She also discussed her views on the Texas shale industry and when can we see a bounce back, or if we’ll ever see one.

 

The first part of this discussion can be found here.

 

Vandana Hari is based in Singapore. She runs Vanda Insights and have been looking at the oil markets for about 25 years now. She launched Vanda Insights about five years ago. The company provides timely, credible, and succinct global oil markets, macro analysis, mostly through published reports.

 

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This QuickHit episode was recorded on May 19, 2021.

 

The views and opinions expressed in this Crude oil: New super cycle or continued price moderation? QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

VH: And then, of course, we have Iranian oil and we could talk about that separately. So there’s plenty of supply.

 

TN: Let’s move there. So let’s talk a little bit about the Middle East with. First of all, with the political risk around Israel Palestine. Is that really a factor? Does that really impact oil prices the way it would have maybe 20, 30 years ago?

 

VH: OK, so with regard to the Israeli-Palestinian conflict that we’ve seen flare up in recent days, the short answer is no. Oil, it’s not even a blip on the radar of the oil complex. Now, obviously that’s because those two countries are neither major producers or consumers of oil. It is also not affecting shipping, the kind of fear that was in the markets, for instance, when ships were attacked in the Strait of Hormuz or the Red Sea.

 

But having said that, generally the oil market is keeping an eye on how that region, the tensions have been escalating. The Iranian and Arab tensions have been escalating. We have seen more attacks over the past few months. It seems to have died down a little bit recently, but more attacks from by the Houthi rebels just managing to miss white facilities in Saudi Arabia. So, yes, it is an area of concern. But somehow the oil market, maybe because there is enough oil available against demand, but the oil market has sort of almost gotten into this pattern of, that’s a knee jerk reaction. Every time, it looks like a supply might be affected from that region. But the oil complex has just been generally reluctant to price in on a sustained basis of geopolitical fear premium.

 

TN: Yeah, I can see that. That’s very evident. With the JCPOA, with the Iran agreement, how much of a factor would that be to supplies and over what timeframe would it be a factor? Would it be an immediate factor? Would it be something in six months time from if an agreement is made?

 

VH: We know the indirect talks that have been going on between the US and Iranians the past few weeks, and then there’s been a bit of confusing signals as well in terms of news emanating earlier this week. We had a Russian diplomat say that, oh, it’s on the verge of a breakthrough and then retracted so it doesn’t help the oil market of anybody as opposed to have that adding to the confusion. The oil market has made its calculations.

 

First of all, Iranian oil production as well as exports have been edging up. That’s a fact. Now, obviously, there’s no clearly transparent data, but there’s plenty of ship tracking companies, all of which have very clear evidence that there’s more oil going into China.

 

So to some extent, you could argue that crude prices today have factored in a little bit of extra Iranian oil coming back into the market. Just to remind our viewers that it never went down to zero. There was always Iranian in oil flowing into and we’ll not go into the details of that. But basically it’s sort of bypassing the US sanctions. So the question now is how much more Iranian oil can come into the market and when it could come into the market?

 

And I would add a third point to that is that what will OPEC+ do to that if it ends up pressuring prices? So how much more oil could come into the market? An estimated 1.2 million barrels per day additional oil could come if the sanctions are removed. When it could come back into the market? I’m no more privy to what’s going on behind closed doors in the discussions than the next person. But my personal feeling from reading what’s coming out of these talks is that it’s a very complex set of issues.

 

There’s a lot of politics going on when people come out and say, oh, we’ve made progress and so on. But it’s a complex web. It’s multilayered. I personally don’t expect sanctions to be removed before next month’s Iranian elections. So sometime this year, yes. But not right away.

 

And here’s the point I would make as well, is that I don’t think OPEC-non OPEC alliance will sit on their hands and see, especially if crude starts spiraling downwards with the Iranian oil more than Iranian oil coming back into the market. I think they will make adjustments accordingly. If the market can absorb it without a big hit to oil prices, well then good, you know, which is what was the case with Libya last year. But if it can’t, I think they’ll just redistribute that sort of cut back a little bit more or taper less basically. So either way, I don’t see that putting a huge downward pressure on crude.

 

TN: I’m in Texas and so we haven’t really seen a lot of new capacity come online with the with the Texas plays over the past few months as prices have risen. So what will it take for Texas to kind of install new rigs or re-open rigs and get things moving here? What are you looking for and what do you think the magic number is? I mean, if it hasn’t been hit already? What do you think needs to happen for Texas to kind of reopen some of these fields?

 

VH: Yes, we saw oil rigs across the US, which is a very crucial measurement of the activity in the shale patch, especially. We saw that number crash last year. And I look at the fracturing fleet count as well, which tells you exactly how much oil is being drilled out of those wells. But not just how many wells are being drilled. So both of those have been creeping up from from the crash of last year. I think since about August last year, they they have been moving up. But if you compare year on year still, that the total rig count is just half of the levels before Covid last year. Overall, US oil production and shale is the lion’s share of it has dropped from about nearly 13 million barrels per day to about 11. Two million barrels per day of capacity has basically disappeared from the shale patch.

 

And for OPEC, as well as for the oil market, I think it’s a key area to keep an eye on because we have seen in the previous boom and bust cycles and oil price up and down cycles, that shale was very quick to respond to oil price recovery. I think the story is very, very different this time. There’s a few influencing key factors, which are all pulling in the same direction.

 

So first of all, on a very sort of global level, we know that generally, funding is drying up in fossil fuels. OK, so that’s a baseline. That’s affecting conventional fuel. It’s affecting shale equally. The second is that we see and this has been an ongoing trend over the past few years, more and more majors have made inroads into majors are now independent players still produce the majority of the tight oil from the US shale. But the majors have become quite significant players as well. And almost every major that you tune into is saying that we are going to be very, very cautious in… We’d rather return money. We’d rather pay down debt, cash discipline, essentially. We would rather return money to our shareholders than invest in just growth at any cost. That’s happening.

 

When it comes to independence. I think they’re going their own ways, basically. You can’t say all independents have the same philosophy. But again, when I listen to the major independent players, they pretty much are also into cost discipline strategy. If you aren’t, are going to just have a tough time, far tougher time than than the previous down cycles in getting funding. So we generally see that funding for the shale sector is also starting to dry up.

 

I suppose banks and lenders and shareholders probably just seen enough of that, how sales fortunes go up and down. If you’re a long term investor, it’s not really an area of stability. So all of these put together to lead me to conclude that the EIA thinks shale production will creep up a little bit this year. But of course, compared with 2019, they’ll still remain low. It’s predicting quite a big bounce back in ’22. But I’m not that sure about it. I have a feeling that it’s probably going to sort of plateau from here on.

 

TN: OK. Really interesting. So it sounds like kind of that marginal barrel that would come from shale to be honest, isn’t really that necessary right now given the cost that it would take to reopen the rig. Is that fair to say?

 

VH: Yeah. And then you have to remember that the OPEC is sitting on that marginal barrel of supply as well. And that has to come back into the market. And you have to see prices supported, let’s say WTI, well above sixty dollars. And then ask yourself that have any of these, the three conditions that I outlined earlier changed substantially enough for shale to go into a boom again? So I think the answer is pretty clear.

Categories
QuickHit

Crude oil: New super cycle or continued price moderation? (Part 1)

Energy markets expert Vandana Hari is back on QuickHit to talk about crude oil. Brent is nearly at the $70 psychological mark and is also a 2-year high. However, demand has not picked up to the pre-Covid levels. Vandana explained what happened here and what to look forward to in the coming year. Also, is crude experiencing supply chain bottlenecks like in lumber and other commodities and how oil demand will pick up around the world?

 

Vandana Hari is based in Singapore. She runs Vanda Insights and have been looking at the oil markets for about 25 years now. The majority of those were with Platts. She launched Vanda Insights about five years ago. The company provides timely, credible, and succinct global oil markets, macro analysis, mostly through published reports. They are also available for ad hoc consultations and research papers.

 

💌 Subscribe to CI Newsletter and gain AI-driven intelligence.

📺 Subscribe to our Youtube Channel.

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📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

 

This QuickHit episode was recorded on May 19, 2021.

 

The views and opinions expressed in this Crude oil: New super cycle or continued price moderation? QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: I want to talk about crude oil, because if we looked a year ago and we saw where crude oil prices were a year ago because of the Covid shock and we look at where crude is today, it’s something like two-year highs or something like that today. And we still have kind of five or six million barrels, we’re consuming about five or six million barrels less per day than we were pre-Covid. Is that about right?

 

VH: Yeah, absolutely. So we have had a Brent flood with the $70 per barrel psychological mark, it has not been able to vault it in terms of, you know, in the oil markets, we tend to look at go-buy settlements. So we’re talking about ICE Brent Futures failing to settle above 70 dollars a barrel? But it has settled a couple of times so far this year, just below, which was two-year highs.

 

And the man on the street, as you quite rightly point out, does end up wondering. And I’m sure people at the pump in the US looking at three dollars a gallon prices that hang on like the global demand is yet to return anywhere close to pre Covid. So why are prices going to two-year highs?

 

So two fundamental reasons. If you talk about supply and demand in the oil markets, the first one is the OPEC – Non OPEC Alliance is still holding back a substantial amounts of oil from the markets. If you hark back to last year when they came together in this unprecedented cutback, almost 10 million barrels of oil per day, cumulative within that group, they said they’re going to leave it in the ground because of the demand destruction.

 

Now, starting January this year, they have begun to so-called “taper.” Yes, people borrowed that as well in the oil market. All over the place. Yeah. So they’re tapering. But they’re doing it very, very cautiously.

 

So where do we stand now? They are still holding back almost six and a half million barrels per day. So basically two thirds of the oil that they took out of the market last year is still, they’re still keeping it under the ground. So that’s one main reason.

 

The second one is a bit, of course, demand has been picking up as countries and globally, if you look at it, I mean, we can talk about individual countries, but globally, you know, the world is starting to cautiously emerge out of Covid-related restrictions.

 

Economies are doing better. So oil consumption is moving up. But but some of, it’s not entirely that. I would say some of the the buoyancy in crude of late, and especially when it was, you know, Brent was a two-year highs, is because of a forward looking demand optimism. And when it comes to that, I think it’s very, very closely connected or I would say almost entirely focused on the reopening of the U.S. economy.

 

TN: OK, so. So this is a forward looking optimism, is it? I know into other areas, like, for example, lumber, which has been there’s been a lot of buzz about lumber inflation is because of the sawmills and with other, say, commodities, there have been processing issues and with, you know, meat and these sorts of things that have been kind of processing issues and bottlenecks in the supply chain. But with crude oil to petrol, it’s not, it’s not the same. Refineries are doing just fine. Is that, is that fair to say?

 

VH: That’s a very good point, Tony, to to just kind of unpick a little bit. Because what happens is when you hear talk of super cycles, commodities, bull run, and then, of course, we have a lot of indexes and people trade those indexes, commodity index, we tend to lump together, you know, commodities all the way from copper and tin, lumber and corn all the way to crude oil and gasoline and gas oil and so on.

 

But, you know, here’s what. You know. We could spend hours talking about this. But, but just very quickly to dissect it, I would say look at it in terms of you have commodities. And I would sort of lump metals and to some extent agricultural commodities in this one Group A and Group B.

 

So as I mentioned earlier, Group B, which is which is oil. Well, crude oil and refined products, to a large extent, the prices are being propped up by OPEC, plus keeping supply locked out of the markets. It’s very different from, as you mentioned, what’s happening in metals and ags and these kind of commodities where it just can’t be helped. So there’s supply chain issues, this production issues all the way from from Chile, where copper production all the way to even here in Malaysia, you know, palm oil, because workers are unable to return fully. Or in terms of even the the packaging, the storage and the delivery of it. So I think there’s a major difference there.

 

Now, the commonality here is, of course, all of these are seeing demand rebound. You know, that I agree as a commonality. Demand is rebounding. But I think it’s very important to remember. And why is it why is this distinction important is that you could argue that, well, if demand continues to sort of go gangbusters in terms of copper, tin, lumber, it will, for the foreseeable future, meet against supply constriction. So you cannot.

 

So accordingly, you can assess what might be the prices of these commodities going forward. They may remain elevated, but it would be wrong, I think, to sort of draw a parallel between that and oil, because in oil, I do believe OPEC non-OPEC are waiting. In fact, I don’t think they can hold their horses any longer, waiting to start putting that oil back into the market. So, you know, keep that distinction in mind.

 

TN: So there’s an enthusiasm there. So let’s say we do see demand kind of come back gradually, say, in the U.S., a little bit slower in, say, Europe. But China is moving along well and say Southeast Asia, east Asia is coming along well. The supply from the OPEC countries will come on accordingly. Is that fair to say?

 

VH: Absolutely. And when you talk about demand, again, I think there’s a sort of a bias in the crude futures markets, which tend to be the leading the direction for the oil complex in general, including the Fiscal markets, is that there’s definitely a bias to looking towards what’s hot right now, at least looking towards what’s happening in the US and getting carried away a little bit. Because when you look at the US, it’s a completely positive picture, right?

 

You base that, you see things around, you see how people are just kind of moving away. You’re removing mask mandates, people are traveling. And, of course, we’re getting a lot of data as well. The footfall in your airports. The other thing about the US is you have good data, right. Daily, weekly data. So that continues to prop up the market. But if you just cast your eye, take a few steps back, look at the globe as a whole. And, you know, sitting here in Asia, I can shed some light about what’s happening here.

 

No country is opening its borders in Asia, OK? People are, for leisure. If people are even not even able to travel to meet their family, you know, unless it’s in times of emergency, unfortunately. So nobody’s traveling. The borders are sealed very, very tight.

 

There is an air bubble, travel bubble between New Zealand and Australia. But, you know, nobody’s bothering to even check what that’s doing to jet demand. What do you think it will imagine? You imagine it will do.

 

And then you have Europe in between, which is, yes, again, it is reopening very cautiously, though. We’ve had the UK Prime Minister, Boris Johnson, cautioning that the travel plans for the Brits might be in disarray because of this so-called Indian variant. I don’t like to use that term, but this virus more transmissible virus variant. So it’s a very patchy recovery. It’s a very mixed picture, which is why I’m not that bullish about global oil demand rebound as a whole. You know, at least the so-called summer boom that people are talking about.

 

TN: Do you do you see this kind of trading in a range for the next, say, three or four or five months or something? Demand come, supply come, demand come, supply comes something like that.

 

So there’s not too much of a shortfall for market needs as kind of opening up accelerates?

 

VH: Very much so. I think, first of all, unfortunately, I mean, as individuals, of course, we like to be positive and optimistic. But with an analyst hat on, we need to look at data. We need to use logic. We need to overlay that with our experience of this pandemic, the past one and a half years.

 

Somehow, we’ve had a few false dawns, unfortunately, during this pandemic. We’ve seen that right from the start. When you remember the first summer, 2020 summer, some people said, oh, the heat and all that, the virus will just die away.

 

So, again, I think we need to be very, very cautious. I do think, unfortunately, that this variance and as you and I were discussing off air earlier, this is the nature of the virus. So I think there’s going to be a lot of stop, start, stop, start. The other thing I see happening is that it’s almost like, I imagine the virus sort of it’s moving around. And even if you look at India now, it’s just gone down in the worst hit states of Maharashtra and Delhi. But now it’s sort of moved into the rural area.

 

So I think sort of, unfortunately, is going to happen globally as well. The other important thing to keep in mind is, is vaccinations, of course, is very, very uneven. You know, the ratio of vaccinated people in each country so far, the pace at which the vaccinations are going and, you know, not to mention the countries, the poorer, the lower income countries.

 

So we’re probably going to see, you know, maybe a bit of start. Stop. Definitely. I don’t think we’re going to see national boundaries opening up to travel any time soon. And then exactly as you pointed out, we have this OPEC oil and then, of course, we have Iranian oil and we can talk about that separately. So there’s plenty of supply.

 

TN: So let’s talk a little bit about, let’s talk a little bit about the Middle East with, you know, first of all, with political risk around Israel Palestine. Is that really a factor? Does that, does that really impact oil prices the way it would have maybe 20, 30 years ago?

Categories
Podcasts

Cold Front on Oil Prices?

Tony Nash is back in the Morning Run, hosted by BFM 89.9, as he points out the crude oil price and how long to expect the rally, considering factors like weather, demand, and supply. Tony also mentioned about a potential pullback and snap and how you can better be prepared for it. Should you continue buying tech stocks or move elsewhere? Also, they discussed crops and where the prices are going this year.

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/cold-front-on-oil-prices on February 18, 2021.

 

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BFM Description

 

Tony Nash from Complete Intelligence, from freezing Texas, shares with us the current supply constraints in the US impacting oil prices in the short- and medium-term.

 

Produced by: Mike Gong

 

Presented by: Philip See, Wong Shou Ning

 

 

Show Notes

 

WSN: For some color on where global markets are heading, we have in the line with us Tony Nash, CEO of Complete Intelligence. Tony, are you freezing out there in Texas?

 

TN: Yes, we are. We haven’t had it this cold air for decades. So it’s it’s been a really interesting week.

 

WSN: That has had an impact on oil prices. Bloomberg showing Brent crude at $64 per barrel, WTI at $61 per barrel. So how badly impacted our energy markets at the moment? Where do you think oil prices are going?

 

TN: A lot of this is very short term. What you’re not seeing that the traders really pay attention to right now is that a lot of refineries are closed because of weather and they’re starting to close for annual maintenance. There’s this presumption that there’s a demand pull, which we’re not really seeing from anywhere in the world right now, and that the winter storm issues will pull energy prices. But again, the fact is the refineries that would take this stuff are closed. We expect this to be short lived. This is an extension of a crude price rally that we saw that we expected to come in Jan, it’s lasted into February and we really don’t expect this to have a lot of legs to it.

 

PS: What do you think the outlook looks like then for the mid-term like quarter to quarter three?

 

TN: We would see 10 to 20 percent off of this price? We don’t necessarily think that this is a sustainable level short of some sort of supply cuts. But the weather in Texas, for example, we’re going to be kind of in normal weather ranges in two days. What we’ve seen this week and the close down, as we’ve seen this week, it’ll take people a couple of days, maybe a week at most to get things back on line. So this perceived supply shortage will be back on line fairly soon.

 

WSN: How about yields on U.S. 10 year bonds? Because they’ve hit a new high one year high. What what is that trying to tell this? What a market try to tell us?

 

TN: U.S. is trying to raise money and they’re willing to pay more for it. I think that is is really it. I think there is a growing fear that equity markets are as high as they’ll get. We’ve started to see more of that tension come in into chatter over the last few days. People are willing to pay to get out of markets, to park their money in debt.

 

So I’m sure it helps the U.S. as they’re raising more money for stimulus and for operations. But as we creep up to four thousand, that is just unimaginable for a lot of people. And it’s not as if we are doing better as an economy than we were in 2019 or the first quarter of 2020. This is built on stimulus, as we’ve talked about before. It’s built on central bank activity.

 

And you can only stretch that so far before things have to snap. We’ll see some of these things that are at double and triple and quadruple kind of the standard multiples. And P is the only way to measure this stuff. But we’ll see things that are really, really stretched, snap into a more reasonable region. But it’ll happen any time tomorrow, three weeks from now, a month from now, whatever. It’ll just happen. It’ll happen any time. And it’s best to be prepared for it.

 

PS: So are you expecting some pullback eventually? Right. What is the tipping point where investors will essentially do that exodus or flock to U.S. Treasuries then?

 

TN: One of the tipping points is going to be the resolution of stimulus. I’ve been saying for weeks that stimulus will not be what the administration wants it to be. There are such high expectations put on that stimulus right now and they’re not going to get it. They’ll get a lot of it, but they’re not going to get all of it. Expectations are sky high. And when it doesn’t hit, I think that will be one of the catalysts.

 

But there are other things like when the crude price starts to fall because this supply constraint isn’t there anymore. These sorts of things, these things add up and then they snowball and and then you start to see markets really, really take a dove. We’re not necessarily calling for a 2008 generational type of decline in markets. It’s just a bit of a pullback so that people can just say, “OK, wait a minute, let’s check, take stock how businesses are doing. Take a look at our investments and our allocation and then reallocate.” That’s really what it’s about.

 

WSN: Where would you relocate to and what are the safe haven assets? Because almost every asset class on a year to date basis is up. Right. And maybe except for Google, which is down six percent on the year today.

 

TN: What you’re likely going to see is a pretty serious rotation out of technology where people have focused on because of the work from home activities. This may not be immediate, but I think you’ll see a rotation out of a lot of the work from home stuff as people start real life again and you’ll see people move into. This is not really my the basis of our outlook. But you may see more of a regional move into things like tourism.

 

These things have just taken real hits. A lot of them have had speculative rises, some of the cruise lines. But some of them are still way down. All of this depends on gradual normalization. But I can tell you, Americans are really tired of being locked in, really tired of not socializing. And some of these things are going to have to start up again.

 

PS: What about not all out commodities then, like agriculture and precious metals?

 

TN: We had some real pressure. And part of the reason of that pressure was because there was a perception that a lot of the Chinese corn crop didn’t come in last year. But a lot of the drought was outside of that zone. Some of that pressure was alleviated.

 

But still, we’re seeing some pressure on wheat right now in the U.S. It really all depends on how much the current cold snap impacts the output later in the year or the ability to plant. Right now it’s not terrible.

 

Until we start seeing real demand come back in entertaining and in consumption and these sorts of things, we’re not going to see a major demand pull on food because people are already buying their standard cook at home type of things right now as they’ve rebuilt their behaviors over the last year. We’ll see that change. But unless we see a drought or unless we see an issue in a high consumption part of the world, we’re not necessarily going to see a boom in those places.

 

WSN: All right. Thank you for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his views on global markets and saying that, hey, oil prices are going to come under pressure probably in the next two to three months, because this is not really driven by real demand, is just probably weather patterns which are going to normalize anyway in Texas in a few days.

 

PS: He also made a point about oil, where this, I think, a slight surge in prices is actually a short term because supply is going to get back on quite soon.

 

WSN: Yeah, but other interesting news is actually the ongoing saga of big tech versus Australia, because it looks like Facebook has defied Australia’s push to make big pay for news by banning the sharing of content on its platform in the country. And this is the most far reaching restriction is ever placed on any publisher in any part of the world.

 

PS: So the extreme step to remove Australian news came as Google separately struck a global deal with Rupert Murdoch’s News Corp diffusing a long running dispute between the two companies. The dramatically different approaches could mark a pivotal moment for the media industry, which had hoped Australia’s tough regulatory approach would help reset its terms of trade with Google and Facebook worldwide.

 

WSN: So the moves by Google and Facebook came on the day Australia begin debating laws that would force big online platforms to license news. Now Facebook’s action will have a global impact. Under the provisions, news from Australian publishers will be blocked on the platform for all Facebook users, regardless of where they are based. The Australian government said it will continue to engage with Facebook. Press ahead with legislating the code, Canberra also warned that withdrawing news from Facebook’s platform in Australia could dent its credibility with users.

While this is quite big stuff. Actually, yes.

 

PS: Yes. I mean, Australia wasn’t the first country to, you know, get into this spat. I think you really was in having discussions. And France and Spain already had deals with a lot of with Google and Facebook with respect to media purchase. But it’s a question about publishers.

 

WSN: Yeah, I mean, at the end of the day, right. We do know media companies are suffering. Right. Álex has come under pressure. Subscriber growth has come down. How a media company is going to generate the revenue. So in the past, all these big tech companies, the argument was that they got to earn super normal above what is the what super normal profits without paying the likes of the media companies because they were using these media companies content to their benefit.

 

So some countries like Australia and even if you try to kind of diffuse the situation and have, I suppose maybe in their mind, a fairer playing field. But the Google deal nonetheless, if you look at it, the Google deal with News Corp announced on Wednesday goes beyond the Australian market, extending to Murdoch’s titles such as The Wall Street Journal and The New York Post in the U.S. and The Times and the Sun in the UK. No other news publisher has reached a single deal with Google across multiple countries.

 

Now, critics say the deal would benefit News Corp. rather than the rest of the news industry.

 

PS: Yes, well, we’ve been talking about the price. And since you looking at Google’s valuation, I suspect Google’s to be the winner because they have just really this unique access to this quality content. So. So why not?

 

WSN: Well, they’ve pledged so far to spend one billion over the years on buying news content and reach agreements with publishers in about a dozen countries.

 

But we’ll be watching this space because we do a media outlet.

 

But up next, we’ll be discussing the recently announced national unity blueprint. Stay tuned for that. BFM eighty nine point nine.

 

Thank you for listening to this podcast. To find full great interviews, go to PFM Goodbye or find us on iTunes, BFM eighty nine point nine. That is the station.

 

Categories
Podcasts

Rotating Permanently into Cyclicals

In this Morning Run BFM episode, Tony Nash shares his views where equities are heading now that the 2020 Election has concluded. Will the new administration reverse China policies by Trump? Also, what is the implication to the world exports with a weaker USD and stronger CNY? Lastly on oil: what is its future? Will the rally continue? Does it have enough support?

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/rotating-permanently-into-cyclicals on January 7, 2021.

 

❗️ Check out more of our insights in featured in the CI Newsletter and QuickHit interviews with experts.

❗️ Discover how Complete Intelligence can help your company be more profitable with AI and ML technologies. Book a demo here.

 

BFM Description

 

With a blue wave in Georgia, what does this mean for the US economy and equity market? Tony Nash, CEO of Complete Intelligence, tells us that the rotational play is now here to stay while giving us his view on oil prices.

 

Produced by: Mike Gong

 

Presented by: Lyn Mak, Wong Shou Ning

 

 

Show Notes

 

WSN: Joining us on the line for his take on where markets are headed is Tony Nash, CEO of Complete Intelligence. Equity and currency markets were waiting for the Georgia election results, which have just come out. Given that outcome, where the Democrats have won, where do you see U.S. equities heading?

 

TN: We don’t see major upside for U.S. equities without significant short-term intervention by the Fed or by some stimulus or infrastructure package. Given where Congress is, I’m not sure that there would be the ability to get much through Congress so it would have to come from the Fed. It’s possible, but we see more the hard assets like gold and commodities. And then you see crypto currencies rising pretty fast as well. But the risk really with equities is to the downside more than to the upside.

 

WSN: But if we just look at last night’s flows, there was some rotation into cyclicals like banks and small caps with less fund flow into big tech, perhaps over concerns of increased litigation action against them. Do you think this will change into a more long-term kind of rotation?

 

TN: We’ve expected that for some time. That rotation is long overdue. But the Fed have enabled tech and crypto to have a longer run. That rotation has been put off a bit. So if now is the time, great. We would definitely welcome it. We’re just overexposed in certain sectors.

 

WSN: And meanwhile, last night, US 10-year treasuries top two percent. What does that tell us?

 

TN: The U.S. is having a harder time raising money? They need to pay a little bit more to get money. I don’t necessarily think it’s a harbinger of inflation. Although it’s possible with a weaker dollar. I would say higher import prices. Chinese yuan on the run, strengthening. You may have higher import prices, but people have been warning about inflation for years now and we just have not seen it register. I think it just means that that the U.S. Treasury has to pay more to raise money.

 

WSN: And with Biden coming in on January 20th as the next US president, I would like to see a reversal of Trump’s more adversarial policies with China?

 

TN: Biden will be very accommodating to China. I think you’ll see different parts of the House and the Senate not be happy about it. But he’ll be absolutely extremely accommodating. More accommodating than Obama was.

 

WSN: What impact do you think that might have on the U.S. economy? Because in the past there was some shift into more U.S. based manufacturing. Will that then reverse?

 

TN: With the USMCA, the NAFTA number two agreement, I think there’s more incentive for companies to have facilities in the NAFTA zone. China obviously is more expensive and with an appreciating CNY, that makes it more difficult to invest while you get less for your money in China. China is becoming an increasingly hard sell. That has been the case since 2017, 2018. It’s not going to turn back. Until there is a reciprocal and enforceable investment agreement in place with China, I think China is where it is. I don’t think you would see a mad rush of direct investment going to China.

 

WSN: What are your views in terms of where the U.S. dollar is hitting? Because you just mentioned that the Yen is likely to appreciate?

 

TN: It already has. The Chinese officials are becoming a little bit nervous about how strong CNY has become because it’ll put a real damper on their their ability to export. You have the Euro versus CNY weakening. You have the Dollar versus CNY weakening. It’s coming to a point where it could be somewhat problematic for China. So they will push to weaken their currency, maybe not immediately, but say in first quarter. As you see more stability, post Brexit with the new normal Europe. As you see more stability in the US with the new administration, I think you’ll see a bit of relative strengthening of those two currencies versus CNY.

 

WSN: And shifting our attention to one of the commodities: oil. Yesterday, Saudi Arabia’s cutting oil output while Russia is increasing theirs. What’s the rationale for this? And OPEC members then divide it on production quotas?

 

TN: OPEC members may verbally agree to things. Whether or not they comply with that has been a burden for OPEC for decades. So what they all want is more volume export and the prices is the real issue.

 

So I think there’s an intention to present mixed messages so that there’s uncertainty in the market so that we see Brent price that’s sustainably above 50 dollars. That is is good for OPEC. That’s good for some of the producers like Malaysia and Texas where I live. I think consumers, we don’t necessarily to expect to see a sustainably strong oil price because we don’t necessarily expect to see a dramatic recovery in 2021. But we don’t expect to see a dramatic recovery that would spike oil prices up to 70, 80 dollars.

 

WSN: Do you expect oil prices to be where it is, which is currently around 50 U.S. dollars per barrel for WTI?

 

TN: For six plus months, we’ve expected a spike in January. And we’ve been telling people since July, August that we would see a spike in oil prices in January. And this is exactly what our artificial intelligence platform has told us for quite a long time. So we’re seeing what we’ve expected. We’ve also expected a fall going into February. Like I said, this is great. This is very much in line with what we thought would happen. But we expect there to be some downside to this and downward pressure within the next 30 to 60 days.

 

WSN: All right. Thank you for your time. That was Tony Nesh, CEO of Complete Intelligence, giving us his views on where markets are heading. And it seems like it’s not surprising that there’s a bit of a market correction or at least a market rotational flow out of tech, which valuations have kind of hit all time high and some rotation into the cyclicals like banks and small caps. But I think his views on oil are pretty interesting that it’s you know, we are going to see maybe a bit of downside from here.

 

What will he take? Reasoning?

 

LM: I think his comments about particularly what we can expect out of a Biden administration were quite interesting because commentators now kind of are kind of split over how they believe Joe Biden will kind of stack up compared to Barack Obama once he is inaugurated as president of the U.S. And the idea of Joe Biden being more accommodating than Obama, particularly with Trump also still continuing his crackdowns on China. It’s almost enough to give you whiplash, isn’t it? Because once January 20 is rolls around, how much of Trump’s measures will be rolled back?

 

I mean, only recently he’s just signed an executive order as well, banning several Chinese payment apps over security concerns. So this affects eight payment apps and it’s supposed to take an IT take effect in 45 days after Trump has left office.

 

WSN: Yeah, and what’s interesting is these eight p.m. apps are very well known to include the likes of ADP, Tencent, Cucu and even WeChat P now in the executive order, said that these apps captures swaths of information, including sensitive, personally identifiable information and private information. Now, how much of this an impact will have is unclear, since it’s understood that the usage of these apps outside of China remains limited. For example, the ALP has roughly one billion users, but they are mostly in China.

 

However, it does have deals with merchants in the U.S. such as Walgreens, and claims to work with more than two hundred and fifty overseas partners. Now, separately, the New York Stock Exchange has made another U-turn on its earlier U-turn to delist three Chinese telecom companies, which be. Going round and round and round, yeah, it’s like a mini roundabout now, so and these three companies are China Mobile, China Telecom and China Unicom.

 

LM: So the NYSE first announced that it would delist the companies on New Year’s Eve before changing course four days later. And the delisting complies with Trump’s executive order banning investment in Chinese companies with purported ties to the military. So the exchange said its latest decision is based on new specific guidance received on Tuesday provided by the Treasury Department. Treasury Secretary Steve Mnuchin reportedly called the NYSE president, Stacie Cunningham, to voice his displeasure with the decision to allow these three companies to remain on the big board.

 

WSN: Well, I think this story will just get the plot will get thicker and thicker, and whether the roundabout will get bigger and bigger, we’ll just have to find out. But up next, we ask the question, what can you do to attract more foreign direct investment for us? Ross, the senior economist with Mark, will be joining us for that discussion. Stay tuned for that BFM eighty nine point nine.

 

Categories
Podcasts

IPO Season Has US Investors Agog, Again

Tony Nash is back in the BFM podcast to break down what´s happening in the US Market with IPOs like Doordash and AirBNB selling at a higher price than expected. What´s up with the tech stocks? It´s obviously IPO season, and what should investors do. Should they buy? Also discussed is the current oil price rally to the high 40s. What is the expectation or forecast for oil in the last month of 2020 and the first quarter of 2021 for oil?

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/ipo-season-has-us-investors-agog-again on December 10, 2020.

 

 

BFM Description

 

Produced by: Mike Gong

 

Presented by: Khoo Hsu Chuang, Wong Shou Ning

 

It’s IPO season again in America and Doordash is first out the, well, door with a pop and wallop, while Airbnb is next, also with a higher price range, like Doordash. Which of the debutantes will be a Buy and which a Sell? And whither oil prices?

 

 

Tony Nash, the CEO of Complete Intelligence, discusses.

 

 

Show Notes

 

 

WSN: On global markets, we got to the line with us tonight, the chief executive of Complete Intelligence to break it down for us. Tony, thanks for talking to us. Nasdaq closed in the red after a 10-day rally. What’s your view? Is this just a technical correction?

 

TN: Well, Nasdaq still up 36 percent year to date. Things are still pretty good with tech stocks. But it’s been a lot of retail investors so far this year focused on fang stocks. Part of this decline today may be related to the stimulus talks. There are a number of other things involved, but if there is more stimulus, we may see more investment, especially in tech stocks. If you remember, the tech rally started in Q2 of this year really on people investing via Robin Hood in small increments. There were other institutional and retail investors, but Robin Hood investors really led to a lot of the run ups in these tech stocks.

 

KHC: And I want to pivot this conversation to an IPO, which is closed last night. So Doordash it debuted with an 80 percent jump to close at $189 from an IPO price of 102. Does that make you a buyer?

 

TN: It makes me a wait-and-see-er. Tech stocks have done really well. Stocks like Palantir are up 200 percent or something since their IPO. A lot of people are looking at those as an opportunity, which is quite possible. But tech IPOs tend to settle shortly after. We saw this with Palantir for a few weeks after the IPO. It declined, then it meandered. And then it really only started coming up over the past couple of weeks.

 

Doordash seems to have risen very quickly. I think it’s really on hopes, unfortunately, that a lot of the work-from-home stuff continues. Without work-from-home orders or stay-at-home orders, it’s really hard to see Doordash continuing at these levels. I think with a somewhat normal return or return to normal, people start going out again. Some of the people would at least rather go out than order in.

 

KHC: The other IPO is Airbnb, which is supposed to be priced later today. Is this a name you’re excited about?

 

TN: Sure I am. What’s interesting about Airbnb is it’s been very resilient with Covid. We’ve seen long-term rentals via Airbnb. We’ve seen people travel using Airbnb. When travel starts up again in a big way, they benefit as well. So it’s a really interesting name for me. It depends on what were the prices and where it goes. But on the face of it, it’s a very interesting name.

 

WSN: Yeah, it really is IPO season, isn’t it, Tony? I mean, what’s driving the liquidity? Is it still a retail market, institutional or a bit of both?

 

TN: A lot of it is retail. The retail investors are looking for the quick upside. People are trying to close out the year with as much juice as they can. I think a lot of the institutions were in very early. They take quick profits and then they just wait and see what happens. But if you look at the distribution, the allocation of some of these recently IPO tech companies, it’s a lot of retail investors.

 

KHC: With virus cases rising in the states, it’s almost certain that the FDA will authorize the emergency use of the vaccine today. So this brings back the question, do you think that the stimulus package that everyone is waiting or expecting, will they still be in the quantum of 908 billion or would it actually be downsized?

 

TN: I think it’ll be around the current level. The problem is, this is something that should have happened two months ago. And you’ve seen over the past two months, the U.S. economy really start to stall and sputter out. The employment picture is looking grimmer. The demand picture is looking a bit grimmer. If the U.S. wanted to keep things moving at the pace it had been in Q3, it really should have happened in late October. But it didn’t for political reasons.

 

And I think it’s really critical for these guys to come out with something before Christmas. The politicians look really stingy, like the real economy doesn’t affect them, which is true. And if they come out with something, they have the likelihood of looking like heroes before Christmas. So this is likely political theater so that they can build up some drama for a last minute agreement before the Christmas holiday.

 

WSN: Sliding over to oil, Tony, with crude inventories starting to build up, can prices break through the fifty dollar resistance level, do you think? And what are the catalysts needed to carry it across the threshold?

 

TN: Yeah, we think they can. So we’ve seen inventories build up. You know, they built up 15 million barrels over the past week, which is quite a lot well ahead of expectations. But, you know, we’ve expected oil to cross the 50 dollar mark in January, late December or in January. When we started saying this a few months ago, people really pushed back on this. We said we saw a spike in January in the crude price. And so we still believe that. NYNEX crude is trading at forty seven dollars right now. So even with the supply glut right now, we’re still seeing a forty seven dollar WTI price. So we think we’ll see high 40s, low 50s by January. Brent, of course, will be slightly higher than that. So we think breaking through fifty dollars is quite likely, especially at the start of Q1.

 

WSN: Hey, Tony, thanks so much for your time with us. Tony Nash, the chief executive of Complete Intelligence. And just to make a couple of remarks. And while we just discussed with him. The higher oil prices go, obviously the better it is for Malaysia because we are generally an oil country. West Texas is at 46, 47 right now is about 49 dollars, definitely, too.

 

He also talked about the Doordash  and how he’s waiting to see Doordash. The numbers are not huge. They’ve only got like five million subscribers and they charged off the food guys 30 percent commissions to just deliver the stuff.

 

WSN: It’s not like they’ve had a choppy fiscal quarterly performance some months at some quarters up, some quarters down. And, you know what is so it’s so frothy. I mean, they nearly double the reference price on IPO day itself, already increased from two bucks, 100 to close 182 crazy, crazy days.

 

KHC: Well, I think, you know, at the end of the day, what is causing this one is that tech seems to be, you know, the darling darling on Wall Street. That’s when the second is that that clearly there still is a lot of cheap money flowing everywhere and nowhere to go.

 

WSN: Yeah, of course. Tony was talking about the Robinho traders, right?

 

KHC: Yeah. So as long as interest rates remain close to zero, I think people are willing to watch. And I used the funds, all investors, you know, regardless of whatever valuation. So it doesn’t really matter what your valuations are anymore. Exactly. So even like for Airbnb, you don´t even talk about earnings, you’re talking about price to sales because there is no earnings.

 

WSN: OK, well, talking about tech Facebook, right. The U.S. Federal Trade Commission in 46 states, 46 states, that’s just fall short of the full 50 complimented America. They’ve all brought antitrust cases against Facebook and accusing the company of using the social media dominance to crush competition. They’re calling for penalties that include a forced breakup and they are accusing Facebook of conducting a years long course of anti-competitive conduct.

 

KHC: Well, in particular, the FTC highlighted the acquisitions of Instagram in 2012 and WhatsApp in 2014 as designed to neutralize any competition, because the argument is that they are a monopoly and they cut off services to squeeze rival developers. So the FTC said it was seeking a permanent injunction in federal court that could potentially require Facebook to unwind its Instagram and WhatsApp acquisitions. Now, if I looked I remember correctly this morning, Facebook closed down, I think, close to two point six percent based on this news. So it doesn’t seem like, you know, markets are really concerned about this. Or maybe the point is any dispute with the government takes forever and ever and ever so maybe for the moment, I think people are just shrugging it off.

Categories
QuickHit Visual (Videos)

QuickHit: There are a quarter billion barrels of oil headed to China right now

Co-Founder of TankerTrackers.com Samir Madani joins us for this week’s QuickHit episode where he talked about where the oil is coming and going, explained the volatility around oil and VLCCs, and if China has the capacity to store the quarter billion barrels of oil that they are buying on the cheap.

 

TankerTrackers.com is a service that Sam started with a couple of friends from four years ago. They track tankers that carry crude oil and gas condensates, to give the moms and pops of this world a heads up on what’s happening in the oil flow situation. The company aims to deviate from the black-and-white narrative in mass media to show the world the grey area that oil is not always the cause of war.

 

Follow Tony on Twitter: https://twitter.com/TonyNashNerd

Follow Sam on Twitter: https://twitter.com/Samir_Madani

Check out the CI Futures platform to forecast currencies, commodities, and equity indices: https://www.completeintel.com/ci-futures/

 

***This QuickHit episode was recorded on September 2, 2020.

Last week’s QuickHit was with political economic consultant Albert Marko where he explained about this “perceived recovery” and the artificial market.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Crude oil and trade have a lot to do with economic health globally. We’ve just gone through COVID. We’ve gone through a lot of government-mandated closures and there’s been quite a lot of discussion about the rate at which economies are coming back. You see this every day, right? You see the crude trade, you see international trade. How do things look from your perspective?

 

SM: What we’ve noticed is that since January to now, exports have (except the USA) fell from 19 million barrels a day in exports to around 14 million barrels a day. 4.5 million barrels a day in drop between January and now. That’s a lot. That’s 120 million barrels a month, which is not shipped out now.

 

We see immense amount of barrels heading over to China because they are buying on the cheap. We saw around a quarter billion barrels of oil headed towards China right now. And of that quarter billion, half of it is already in their Anchorage area. They have over 100 million barrels that are just floating and waiting to get on to shore.

 

The reason for this is because of the flooding in China, which slows down consumption of gasoline. But it picks up consumption of diesel for the heavy machines that are going to move on the land and so on.

 

Refinery runs worldwide right now are much lower than the year on year because of the fact that gasoline consumption is down.

 

What I’m waiting for in the EIA report is not how much inventory has been removed or added, but the refinery runs. How much gasoline is being created out of the food processing? So I’m waiting for a moving average because you shouldn’t rely on the weekly numbers. You should look for the moving average. Wait for that number to cross 15 million barrels per day. That’s my threshold to say that the U.S. economy and the whole thing is coming back roaring again. So because there’s only a small window between 15 and 18 and around 17.5, 18 when it was actually at peak. So I’m very positive that we’ll come across 15 probably in the new year for sure.

 

TN: In the new year. So Q1, you think things are coming back?

 

SM: Definitely. Definitely.

 

TN: Brent is in the mid 40s now. We see both Brent and WTI climbing slowly through the end of the year. Our view is that pricing will tick up in Q1 and then we see it trailing off a little bit later in the year. But we really do see a build through Q1. So it’s good. Thank you for confirming what we’re seeing.

 

You’re saying China’s got a quarter billion barrels in Anchorage and in transit, right? What’s their storage capacity? Is their storage capacity in excess of that, or will this stuff stay in floating storage?

 

SM: We did an actual manual survey. We went to storage farm of the storage farm with satellite imagery. And as compared to 2 years ago, you will actually see on Google Earth around 250 to 300 million barrels more than what it had. We have day-fresh images from Planet Labs and we were able to go in and see that year on year, China has the ability to add around a quarter billion barrels of free space. This is a drag and drop method with the standard size storage tanks of 100,000 cubic meters, which is 620,000 barrels. They just drop farms and you see just a whole new farm will pop up.

 

Since the consumption is down, there’s no pressure for them to do more. But we saw around 1.4 billion barrels of space and 1.1 billion barrels of occupancy. That was two years ago.

 

TN: Two years ago. It just seems like there’s so much supply and burning off that supply is still a challenge. We spoke with somebody from the Panama Canal about a month ago when she was talking about how LNG was redirected from the US to China to Europe or something. Are you still seeing redirection of shipments? Or are we back to almost normal trade patterns?

 

SM: In crude oil, we actually see a dog-eat-dog situation going on right now. For instance, Venezuela’s exports are down. It’s a toilet flush. It went down to a quarter million barrels a day now in our latest report. We’re using visual confirmation and I’ve never seen the number that low out of Venezuela. But here we are, we’re under 300 thousand for sure. For the average this year, it was around over half a million barrels a day.

 

But now lately, what happened is it just completely plummeted. A lot of the exports are going just to other countries so that they can bring in gasoline in exchange. It’s a barter.

 

What happens is, because they are shipping heavy sour crude oil, somebody else is going to eat their lunch. China wants to import that. India wants to import that. A lot of other countries in the Far East, they have heavy sour because they need the asphalt, they need the diesel. Why? Because they’re expanding their infrastructure.

 

What happened is that Iran started sending off a lot of the heavy sour lately. I noticed a lot of barrels heading out over that way. They’re getting assistance from other fleets from outside the country. The Chinese refiners and so on, they are dispatching vessels to pick up the oil. It’s not just the national running tanker company that’s delivering the oil.

 

TN: I’m really interested in that Iran-China trade lane. And you covered that a lot. With the circumvention of different agreements and embargoes, I see a lot of coverage of that. Do you see a growing dependence on Iranian oil out of China or does that seem to be declining? Do you see a diversity of suppliers? Of course, China has never had a single supplier. But do you see a growing number of suppliers and a growing dependence, say on Iranian crude? Or is it the other way around? Is Iran becoming increasingly dependent on China as an export market?

 

SM: Iran is growing more dependent on China because they’ve had four decades to prepare the whole Plan B for sanctions and so on. So they’ve really polished it up. They’ve smoothened out all the rough edges when it comes to sanctions so they know what they’re doing. But now, when I see how many barrels are leaving the country, and they look at the ratios of where it’s being sent, yes, they do send a lot to Syria, but it’s no more than usually around 100,000 barrels a day.

 

Once in March, a saw over a quarter million barrels a day. That’s because they have so much production going on in Iran and so little storage space. They have to get rid of it. And they are shipping a lot. So the current media narrative is that they’re exporting about somewhere between 70,000 and 200,000 barrels a day. That’s because those factories are only using AIS data, which is automatically picked up by systems. But what we do is the visual confirmation with satellite imagery, and we see around three to five times that. Somewhere between 600 and a million. And 600,000 barrels a day, that’s a lot. That’s 30 million barrels a month.

 

And so they have to get rid of these barrels because if they don’t, their production will have to drop even more to a point where they can’t revive those mature oil wells. It’s very costly to kick them back into action once sanctions do get listed.

 

And with the virus, what they do is they consume a lot domestically. They make it very cheap. And, because they’ve got to get rid of it, they store as much as they can. If they ran out of storage space on land, they put it on the vessel and they put on many vessels.

 

But now I’ve seen that the floating storage has dropped and shipped out a lot. China is the big buyer and there’s so many ways to deliver it to China. You can either go straight or you can meet another vessel halfway in the Strait of Malacca and so it’s a ship to ship transfer.

 

So, yes, Iran is more dependent on China than vice versa. And China does report their barrels is coming in from whoever the last port call was. So it’ll be Malaysia, it’ll be Indonesia, or someplace in between. It’s not coming in as Iranian anymore. Although in the latest monthly report, they had to show something, because this was obviously direct.

 

TN: You mentioned floating storage and VLCC market and it’s gone from a quarter million dollars a day back in April to like 6,000 dollars a day now. What happened there and why is that price just collapsed?

 

SM: It just deflated so rapidly. That thing was so much more volatile than Bitcoin back in 2017, 2016. The first thing you heard was the sanctions scare, the volume type of fleets back when, it’s almost a year ago or so. And so the Dalian Tanker Fleet was a large fleet or VLCC supertankers. 2 million dollars a piece and about 40 of them. So that created a scare hype in the market that there’ll be a shortage of vessels which were allowed to go to certain ports or most ports.

 

What happened was that the US, they used that as a means to improve the negotiation when it comes to the Phase 1 Trade Deal. And so they loosened up on those waivers, and eventually that was the main issue.

 

Then came the floating storage situation as a result of COVID and then that spike the price again. After that, it has come down quite a lot. So that’s moving a lot of oil back in Q2. And then it just quickly plummeted because Saudi just went from over 9 million barrels a day down to 6. That killed off the demand.

 

We saw occupancy of the VLCCs go from more than 50% down to early 40s. And these are 802 operating VLCCs worldwide, 600 something Suezmas and 1,053 Aframax. It’s a lot of barrel space out there available still today. So obviously, the prices have dropped.

Categories
Podcasts

US economy suffers sharpest contraction in decades

Tony Nash joins the BBC Business Matters to discuss the US economy contraction, Federal government’s cash subsidy, the upcoming US election and Trump’s issue on postal ballots, lithium batteries and electric vehicles, and Eid al-Adha.

 

This podcast first and originally appeared in BBC Business Matters at  https://www.bbc.co.uk/sounds/play/w172x18vhgd3z2p

 

BBC Notes

Official data shows that the world’s biggest economy contracted by 9.5% in three months. That’s worse than at any point since the US government started keeping quarterly records in 1947. We hear from Professor Tara Sinclair, an economist at George Washington University. Black Lives Matter protests have added to a continuing backlash against brands selling skin-whitening creams in South Asia; Nikhil Inamdar reports from Mumbai on an industry under threat. We talk to listener, Elizabeth Pendleton, in Colorado Springs about the unemployment picture in Colorado. The BBC’s Ed Butler reports on the world’s biggest lithium deposit; it’s in Bolivia and is worth billions of dollars to a world scrambling to reduce its reliance on carbon. Plus, we’re joined throughout the programme by Tony Nash, co-founder and Chief Economist at Complete Intelligence in Houston, Texas and from Lahore in Pakistan, Mehmal Safraz, co-founder of The Current PK.

 

Show Notes

 

BBC: Talk about Houston for us.

 

TN: Just on my block, I have 6 houses for sale. If that tells you anything about the oil and gas down turn as a result of COVID, we really are starting to see some action on the real estate side. It is a seasonal thing partly because of summer. But we are the epicenter of epicenter of oil and gas. And the oil and gas went to receptical in May. We’re still seeing the after-shock of that even though we’re back above $40 for WTI and Brent. Something interesting is that I’m speaking recently with somebody from Panama Canal today and they were telling me about the volume in trade and what they’ve seen. They’ve reflected what Samara said and that things kept slowing down until June and then in July, they’ve started to come back. I really thought that April and May was the worst of it, but things kept declining into June, which was really difficult.

 

BBC: And that shipping, of course, is a crucial indicator, because we can track not just what China is doing, what US is doing. We can follow everybody’s trade globally by watching those boats.

 

TN: That’s right. And this is not a market failure. This was governments pulling the plug on economies and we say that personal consumption fell by 25% in the first quarter. But it’s no surprise because nobody can get out of their house because restaurants were closed, etc. On one hand these are shocking numbers, but on the other hand they are not shocking numbers when states and local governments pull hte plug on economies and people cannot get out, then this really isn’t a surprise. To be honest, I’m surprised that more data isn’t as bad or worse than the US because there were harsher lockdowns in a lot of other countries. I don’t understand it on some level.

 

BBC: In Houston, are we rising predictably to debate as the president proposes another idea by tweet?

 

TN: It’s more about his objection to postal ballots than it is about election day because there is a recent study done by CBS News in the US looking at potential fraud around election ballots and they found that something like 3% of them didn’t even arrive to the person and then fraudelent ballots that looked like what they’ve sent out, could have been sent similarly. I think what Trump is doing is trying to get the discussion going about fraud around postal ballots more than moving the election.

 

BBC: Has it always been a relatively tiny minority voting by post apart from those early voting?

 

TN: Well he said, and he said this several times. He doesn’t have an issue with what’s called absentee balloting, which is a slightly different process. But with mass postal balloting, there are several states like Oregon that do mass postal balloting. But fraud in US elections has become a very big concern. In the last election, ballots were found in the back of people’s cars. There was a rental car that was returned with ballots in it. Fraud in US elections has become a very big concern and I think Trump is voicing that concern a lot of people.

 

BBC: In Texas, dig into the nitty gritty of the state level.

 

TN: What ends tomorrow in the US is Americans are getting $600 a week additional from the Federal government on top of the state funds, unemployment funds, that they get, which are lower, like $350 a week. The $600 a week is extraordinary. I know people who don’t even make that much money when they are working fulltime, who are getting $600 a week. But at the local level, the problem is, you have the state and local governments who are closing things down. But it’s actually the Feds who have had to pay more money and it’s a lot of money to help make up for the economic decisions that were made at the state and local level. This is really where, through the whole COVID thing, and I said this many, many times to people, the state and local governments don’t have the resources to pay back for the decisions taht they’ve made. The decisions are made at the lower level. But it’s really only the Fed who has the money to provide this level of income to allow the economy to keep moving forward.

 

TN: Obviously, the environment is a big concern. But I think the payoff is also a big concern. It really all depends on how quickly the battery industry grows. If the payback isn’t there, it’s like looking at the Tarzans in Canada. Relatively expensive way to pull up oil, but oil now is too cheap for the Tarzans to function. If they pull it out in a very expensive way, the question really is not just environmental sustainability but economic sustainability as well.

 

BBC: I take your point on the environment, but compared to some of the alternatives. What I thought I knew in places like the Democratic Republic of Congo had the lithium mines, which is the other resource to be tapped, leading to headlines a couple of years ago in Financial Times, “Congo child labor in you electric car”, makes up that whole sector really problematic.

 

TN: Absolutely. Look, if it’s a better way, it’s great. I mean, the problem then is the supply chains and figuring out how to get it to market, which those are never easy. But if it’s a better way, more humane, then great.

 

BBC: Were you surprised by the little footnote in the report that it’s China that has the downstream value chain sewn up.

 

TN: No, not at all. China has a very high profile electric car program. And really a lot of subsidies for electric vehicles. So that actually doesn’t surprise me at all. It is the largest market.

 

BBC: And this is why the developments happen, right? Because I read recently, I probably get the numbers slightly wrong, but it said there’s a new battery coming that can run something like a million miles over 16 years instead of a couple of hundred thousand miles in 5 years.

 

TN: Yeah. But people will get bored by their car by then. People want to sell their car after a couple hundred thousand miles. If it can change hands multiple times, great.

 

BBC: This is something not widely celebrated in the US, but certainly a lot of Muslims in the US will bring this extremely to heart today.

 

TN: Absolutely. And Houston is the most diverse city in the US, so we’ve got a very large Moslem population in Houston. I have friends in Austin who are celebrating, so it’s definitely all around here.

Categories
Podcasts

How long can the bull run?

Now that the bull run has started, Tony Nash CEO and Founder of Complete Intelligence joins BFM 89.9 in another global markets discussion. What’s behind this rally and will it be sustained? They also discuss OPEC, the Brent price and its future, Europe’s fiscal stimulus, the ECB, and the resumption of trade war between the U.S. and China.

 

Listen to the podcast on BFM: The Business Station.

 

BFM Description:

On the back of an emerging bull run in Asia and the U.S., we reach out to Tony Nash, CEO of Complete Intelligence, for his thoughts on whether or not this momentum can be maintained, oil prices, as well as the ECB’s bond purchase programme.

 

Produced by: Michael Gong

 

Presented by: Wong Shou Ning, Lyn Mak

 

 

Show Notes

 

 

BFM: U.S. stocks extended their rally into the eighth straight day as investors clung to optimism for quick recovery from the pandemic. So the Dow Jones closed up 2.1 percent. The S&P 500 closed up 1.8 percent, and NASDAQ was up 0.8 percent. In fact, NASDAQ in the intraday trading did touch an all-time high. It’s as if COVID-19 never happened.

 

Meanwhile, Asia also had a very good run. Nikkei 225 closed at 1.3 percent. Shanghai was barely up, though. It was flat at 0.1 percent. Hang Seng was up 1.4 percent. Singapore was the big surprise here. We talked about it yesterday. The banking stocks were up and this caused the Straits Times Index to go up by 3.4 percent. Meanwhile, on the FBMKLCI, our market was up 2.1 percent. Also on the back of banking stocks, public bank RHP saw almost a pulping double-digit gains.

 

Pandemic? What pandemic? Never happened.

 

So this morning, for more insight into global markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Thanks very much for joining us this morning, Tony.

 

Now, equities have recently exhibited strong bullish momentum in both Asia and the U.S.. What’s behind this rally? And is it sustainable?

 

TN: I think a lot of it is the monetary policy expectations and the stimulus expectations washing through. It’s a lot of hope around activity in the summer, say, for crude prices, driving and consumption. There’s an expectation that there’s been some pent up consumption because of COVID. Some of this is coming back. It’s key to know that the U.S. markets are still 10 percent below where they were pre-COVID, 10 percent or more. So it’s not completely as if things never happened, but it has come back relatively quickly. The S&P, for example, was at around 2300. So we’ve climbed about 700 points in the S&P 500 since the nadir of COVID.

 

BFM: I always ask our commentators this, and I’m going to ask you also. Why the disconnect between what is happening on Main Street versus what’s happening on Wall Street.

 

TN: There’s an expectation that most publicly traded companies are going to pack as much bad news into Q2 as possible. And so they’re just throwing the kitchen sink into Q2. So that should mean pretty clear sailing for the rest of the year, assuming that it is 2020 and all. So anything can happen. But assuming that there isn’t another major catastrophe, things should be pretty clear for the rest of the year if every- and anything that could go wrong goes into Q2 data.

 

BFM: Brent has also erased some of its recent gains and is back below the $40 a barrel mark with the OPEC meeting now in doubt. What do you think oil prices will be heading?

 

TN: Our view is that things have been pretty range traded. We don’t see things going up to, say, $50 anytime soon. It’s possible. But we’ve expected things to stay pretty range traded until probably August or so.

 

We’re going to see daily rises and we’re going to see falls. But prices have come back a little bit on some drawdowns we’ve seen in storage and expectations around driving. Although, It’s not a perfect substitution for flying. And those volumes will still be down until we start to see people get back on planes. And until we start to see commuters back on their daily drives, we really don’t expect to see things come back above, say, $50 for Brent.

 

BFM: Shifting to Europe. The ECB is expected to expand its bond repurchase program this Thursday. So they’ve got a currency 750 billion euros outlay. Is that enough or do you think they need to increase it?

 

TN: It’s not enough. But I don’t know that Europe really has the financial wherewithal to do much more. They are not a fiscal union. And so they’re really having to contort their mandate to make sure that they can do this. This is really pushing Europe and the ECB and the concept of a quasi-fiscal union under the E.U. is putting real pressure on that.

 

So the limits of the monetary, not fiscal union are really pressed. And when you look at things like the insolvencies we saw in Greece and Italy and other places in southern Europe over the last 10 years, places like Germany are just tired of fiscal stimulus of other countries in the EU.

 

BFM: And if you look at the equity markets in Europe, that’s been also the lag out. Do you think there’s any opportunities there or is it a similar situation whereby the corporates there are going to not perform up to par?

 

TN: No, we don’t think they’ll perform up to par. Until we see countries beyond Germany really lift some of these lockdowns in a big way, it’s going to be really slow going. It’s strange how we’ve seen these protests really go against the lockdown. We may actually see some of these countries rip the Band-Aid off, because if you have tens of thousands or hundreds of thousands of protesters out there, it may be a situation where you can just say, “Well, lockdown’s over,” and you may start to see consumption patterns come back to normal. That would be a good thing for markets. That would be a good thing for companies. But European companies, especially European banks, remain troubled. And I think this crisis has really forced those banks to look in the mirror. And if markets are functioning well, then we’ll start to see some consequences, particularly for European banks.

 

BFM: Thank you very much for speaking with us this morning, Tony. And that was Tony Nash, CEO of Complete Intelligence.

 

He made some comments there about Brent crude, which he doesn’t really expect to come above the fifty dollars per barrel mark until perhaps we see planes start flying again. But the Trump administration has just made an announcement to that effect, saying that they are suspending passenger flights to the U.S. by Chinese airlines effective June 16th.

 

So the U.S. government said in a statement that it was responding to the failure of the Chinese government to allow U.S. carriers to fly to and from China. Now, this hasn’t, of course, been good for the tensions that have already been flaring between the two countries over the handling of COVID-19, as well as the treatment of Hong Kong.

 

China recently paused some agriculture imports after Trump threatened to limit the policy exemptions that allow America to treat Hong Kong differently than the mainland.

 

And that was done. The global economy was cheering and it looks like they’ve started fighting again. I think I’m just curious, what else is there to fight over? Because there’s been soybeans, beef, pork imports, corn, and now airlines.

 

U.S. airlines did see a bit of a share surge amidst the broader market rally and signs that travel demand is starting to rebound. Boeing was up 13 percent at one point after a report from IATA indicated that recovery was underway for global airlines.

 

So looks like we’re going to be watching that space as well, quite closely.

Categories
QuickHit Visual (Videos)

QuickHit: There’s no going back for O&G sector jobs

In this week’s QuickHit episode, we have Vandana Hari, CEO and founder of Vanda Insights. She has 25 years of experience in the oil and gas and we asked what she expects to see happening in the near future. Will the oil industry recover, and when? Will bankruptcies and layoffs in big oil firms continue? And what can these companies and the government do to prevent the worst from happening?

 

We also discussed the oil and gas industry in the previous QuickHit episode on what companies can do right now to win post-COVID.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Today we’re joined by Vandana Hari of Vanda Insights. She is one of the top energy market experts in the world. Can you tell us a little bit about your firm and what you do?

 

VH: I have been looking at the oil markets for 25 years now. I started my firm Vanda Insights, which provides global oil markets macro analysis about 4 years ago. Prior to that, I worked with Platts, which is a very well-known name in energy commodities. I looked at the pricing of crude, refined products and various other energy commodities. I covered news and analysis.

 

TN: Great. So it’s obvious why you’re here. Crude markets are in crisis. The big, big question is how long are we in this kind of sub $20, sub $30 zone? Generally, what’s your expectation for the length of that super depressed pricing?

 

VH: It’s certainly not going to be a v-shaped recovery. As we speak Brent, a benchmark crude, is trading around $22 to $23 a barrel. US WTI, another benchmark, is trading around $12 or $13 dollars a barrel. Now where do I see these going?

 

As we look out into May, and I’m taking into consideration a couple of factors there. One is that we are starting to see gradual reopening of the economy in Europe, the worst-hit countries Italy, Spain, France, Germany, and then we have the US and as we were discussing offline, Texas is looking to reopen. Some of the other US states are going to reopen as well. The oil markets will have a very close eye on these re-openings because they have the answer to demand revival. We are coming out of an unforeseen, unprecedented trough in global oil demand close to 30%–30 million barrels per day–of global oil demand has been destroyed. How does this go into May?

 

I’m expecting a very extremely slow gradual revival. There may be a bit of an impetus and upward boost to oil prices from a gradual reopening. Nothing like what we are seeing in the stock markets, though. I think that’s where stocks and stock markets and oil are going to decouple and have already started to decouple from what I can see.

 

The other element is going to be supply. So OPEC and non-OPEC alliance of 23 members. 20 out of those 23 have committed to reducing production collectively by about 9.7 million barrels per day for May and June. Now typically, that sort of an announcement, which happened back on the 12th of April would have in itself boosted oil prices. But this one didn’t. Now clearly it is seen as too little too late. Nonetheless, it will start mopping up some surplus. It’s just that it will again be very slow in giving any sort of positive signals to oil because remember, oil has to work through nearly three months of oversupply and an overhang. So the glut is going to take its time to disappear.

 

TN: It’s a demand problem, right? It’s a supply problem, but you do have lack of demand from the government shutdowns, and then there is supply continuing to come online. All of this issue, it makes me wonder bout the shale companies. I’m curious about shale and kind of privately held independent oil companies. But I also want to learn a little bit about NOCs, the national oil companies. If you don’t mind telling us, what is your view on shale? And how do you expect the NOC’s to fare after this? Do you think they’ll thrive? Do you think they’ll cut the fat? Do you think they’ll change at all, or do you think they’ll just continue to lumber along as they have for the past whatever 70 years?

 

VH: The one characteristic of this crisis is that the pain in the oil sector is being felt and will continue to be felt across the spectrum, all the way, from oil production to refining to logistics. And we can talk about logistics in a little bit as well, because that’s doing quite well now because of storage demand.

 

However, the pain is going to be felt all the way down to refining and retail. It’s also going to be spread across geographies. It’s going to be spread across the size and nature of companies, whether you are an oil major or an independent or an NOC.

 

Let’s talk about shale first. It’s not just the OPEC, non-OPEC enforced mandated cuts, but I am expecting to see major decline starting to happen in North America, in Brazil and perhaps in other places like the North Sea as well. What happens in the US is going to be key because it’s the biggest oil producer, thanks to the shale boom. Shale contributes nearly 80% of US oil production. What happens to shale is also going to hold the key to US energy independence in the future.

 

I also look at a couple of very key metrics in the shale patch. One is the weekly rig count that I monitor from Baker Hughes. The other one is a weekly count of the fracturing fleet. So in the hydraulic fracturing, it is far more jaw-dropping decline in numbers that have seen. 70% drop in the frat fleets currently versus the start of this year.

 

What all of that tells me, and we’ve done some number crunching of our own, is we expect to see close to a million barrels per day of decline in June going up to 2 million barrels per day in July. That’s something that the oil market is not quite factoring in yet. Let’s remember that shale bounced back phenomenally after the 2014-16 downturn. That’s the impression that the market has. That shale may be down on its knees, but it will bounce back. But this time, I think it’s going to be very, very different. It’s going to be nothing like a bounce back.

 

As far as national oil companies are concerned, I look at them quite closely sitting here in Asia, they are a breed in themselves. A lot of them are lumbering giants, very slow to change. Most of them are directly controlled by the government or have majority state ownership.

 

Now, one of the things that I have noticed that is going in favor of the NOC’s, especially in Asia–countries like India, China, even places in Southeast Asia–is that they have a captive, domestic, fast-growing market. These NOCs also tend to be vertically integrated, so and more often than not, Asia is a net importer of crude. They have giant refining operations and relatively less upstream or oil and gas production operations.

 

Refining is also getting hit in the current downturn. What we see refiners doing, which includes these NOCs of course, are they’re cutting back out. Port refining margins are terrible. They have gone into negative for a lot of the major products. How will the NOCs survive this? I think they come out of this with a great deal of financial strain. We have to see to what extent they get government support. Some of the NOCs, unfortunately, especially in countries like Indonesia, also struggle with fuel subsidies. So those might fare even worse in the recovery mode. Overall, I think another transition that’s going to take hold for NOCs is the investment in technology: to be more efficient whether you’re producing or refining or retailing oil. And to be more environmentally-friendly with products.

 

TN: Do you think they’ll be more productive? Do you think they’ll invest in technology? Just across the board with oil and gas companies in general. Do you think they’ll actually invest in productivity or do you think they’ll just kind of hold their breath and buckle down like they have always done? Can they afford to do that this time?

 

VH: So when it comes to technology, specifically for cleaner energy, it tends to be driven more by regulation than by market forces or by just companies one day waking up and deciding “Hey, I’m going to be more environmentally friendly.” It just doesn’t happen that way, and that’s certainly true for NOCs. I think oil majors are under a slightly different kind of dynamic. We’ve seen, for instance, only in recent weeks, BP and Shell double-down on their commitment towards greener, cleaner energy. Of course, their feet are being held to the fire by their shareholders.

 

NOCs are in a very different environment. I think a lot will depend on to what extent governments in Asia re-commit themselves to the Paris Agreement, and are part of the global drive towards cleaner energy. We have seen in recent years visible, tangible air pollution has been a major concern in cities all the way from Delhi to Beijing.

 

TN: As we as we stop under COVID, you know, air quality has improved dramatically, right?

 

VH: Yes indeed. You have to think when people go back to the new normal, and they are out and about and the pollution levels increase, what will that do in terms of pressure on these companies? So overall, I think the pressure from the environment will remain, to adopt new technologies, to move towards cleaner fuels.

 

Pressure from oil prices to be more efficient may be the case for NOCs. I see that a little bit less, and they’ll have to just pick and choose basically, right? But your big question, where does the money come from? I think that remains a major, major issue. Will they be able to raise money? So we’ve seen in the latest crisis, a few oil companies that are well-regarded, oil majors have tapped banks and raised loans. What I would personally love to see is for these NOCs to come out there a little more aggressively, because after all, they will be back in favor, thanks to the captive market. So I’d love to see them raise money with bonds, bank loans, or whatever, because they will need money from outside. There certainly won’t be enough to dip into their pockets.

 

TN: Yeah. The national accounts from any of these countries can’t really handle it. So that’s a great point.

 

We’re running long, but I don’t want to stop this conversation. So normally, I’d cut this off. But let me ask you one last question, okay? I live in Houston, Texas, and oil and gas town. We’ve seen some layoffs. But we actually haven’t seen a lot yet. You don’t live here so, you know, you can give us an unbiased view of the energy sector. What do you expect, and it’s not just Houston, of course, it’s the energy sector globally. Are we at the midpoint of energy layoffs, are we early, are we late? I mean, how bad do you expect it to get?

 

VH: I think we are probably at the beginning of it. So we have started seeing bankruptcies in the shale sector. Well, to be clear, the bankruptcies in the shale sector accelerated even in 2019. Shareholders and lenders have been becoming disenchanted with the sector for a while. But I do expect bankruptcies to set a record unfortunately in 2020, perhaps spilling over into 2021 as well.

 

But when I look at the US energy sector, I’m also paying attention to a lot of news about the US government making a lot of noise about wanting to help the energy sector. So whether it be, opening up the Strategic Petroleum Reserve, allowing producers to store oil there or to giving them loans from the Fed’s Main Street Lending program. All of that, remains to be seen, and we’ve heard some ideas about banning or putting tariffs on OPEC crude and so on, which probably won’t happen. But I think some of these other measures will happen.

 

My concern is that for most companies, it will probably be too little too late. So I do expect a huge consolidation, and unfortunately a lot of layoffs. People will just have to reinvent themselves, learn new skills, because there may be no going back to oil sector jobs.

 

TN: I think you’re right. I think it’s a generational change. I think it’s a really tough time, and you know these people, it’s nothing they deserve, it’s nothing they’ve even done. But it’s just a very tough global situation where supply outweighs demand. It’s that simple.

 

So Vandana, this has been amazing. I haven’t done any of these interviews that are this long. I’m so grateful to get this much of your time. Thanks you and I’m hoping maybe we can revisit with you in a few months see where things are and take stock of what the future holds?

 

VH: It’s been my pleasure, Tony and I’d love to do this again and thank you to our viewers who’ve stayed with us all the way to the end. I hope it has been worth it.