Jeff Currie – Is 2025 the year gas takes over?

This transcript has been automatically generated and may contain errors or inaccuracies. It is provided for reference only and should not be considered a fully accurate record of the conversation.

Amrita

Welcome back, Jeff.

Jeff

Great. Well, it's a pleasure to be here again. Been a while.

Amrita

Been a while. Now we have U.S. election results. We know exactly what has gone on. Still, a lot of, I would say, bearishness in the market because, weirdly, now a lot of people think Trump is actually going to be bad for or bearish for oil because of the drill baby drill slogan. Even if he were to sanction Iran, Chinese are not going to care. Or the fact that he's going to get guarantees from OPEC plus or force them to increase production before he turns the screws on Iran. I mean, the narrative just doesn't seem to shift. Where do you stand on that?

Jeff

I think people are grasping at narratives to try to explain price action. And by the way, you can't keep grasping at narratives to explain price action. Two years into it, something's fundamentally shifted. We can talk about the outlook for 2025 later, but I just don't buy into the bear story. I don't know if it's bullish, but is the price acting strange rather than fundamentals? Absolutely. Yes. I mean, everything we know is breaking down. The one I've been looking at is you look at break even inflation relative to oil. They disconnected, ten year relative oil. They disconnected. But is this mispricing unique to oil? Absolutely not. And I think that's the part that's missing. Let's turn to the equity market. Look at small caps. Midcaps. I'm on the board of board drilling, an absolutely phenomenal company. Has cash flow, it's got everything you can possibly imagine. Yet the stock price struggles. I have another board of another company and I make these points and I think this mispricing story is very common in the small cap equity space.

Amrita

Is it more in the energy small cap equity or you reckon it's everywhere?

Jeff

It's broad based. Look at the Russell 2000. So it's trillions of dollars, a market cap that's being impacted. Let's turn to the credit space. Look where high yield. At this point, high yield, investment grade and treasuries are almost all yielding the same right now.

Amrita

Which is very strange.

Jeff

I think the spread is high yield at around 7%. Investment grade at five. Treasury somewhere, 4.3, 4.5, I mean, crazy. You ask what's driving it. The answer I get on credit is you have it. It's kind of the same thing. Oh, the machines, the machines. Well, everybody, you've got big pension funds going, we're going to lock in 7% because it's the highest return we've seen. They keep buying it. You don't have flows or corporates coming in and issuing credit. So you get that problem. Then on the equity side they try to explain it with the algos.

So again I think what's going on in credit and what's going on in equities and what's going on in commodities is all the same thing. People grasping at narratives to try to explain something they just don't understand. Do I have an answer for it right now? No, I don't. But I do think, in oil there is the potential that LNG is now the marginal molecule on the planet Earth, and that oil won't behave the way that it has historically. Look at TTF and the break evens. They were correlated. Is that something? I'm not willing to go there, but I'm willing to throw it out. So, I wish I had an answer to your question, but I think looking at oil and getting, oh, the fundamentals are mispriced and, you know, the market, a bunch of idiots and, you know, I read all the stuff on Twitter and everybody's going back and forth. Just stop. At this point you got to ask yourself. It's not—we're all the ones trying to explain it, I think, that are the ignorant ones. The reality is there's something bigger going on here. If I really had to put my finger on it, I do think we came out, we went into Covid with passive being in the 40% of markets. We came out of Covid with it now at 60. Something tells me that's the place to look at what's going on here. But, yeah, even on equity, I didn't put in the concentration was that 40% of the S&P is in ten names. So everything is pricing irregularly. What's causing it, I think, is open to debate.

Amrita

Yeah. But I think the point you raised is actually very valid. Maybe it's a structural shift in who is trading this. And if it's a concentration amongst the passives, we're just going to get less active flows into the market and that impacts price discovery massively. The quant team here have done the analysis to show that even this year, the backwardation level that we had consistently should have made flat price trade at above $85. And we've been in the 70s, low 70s. So there's definitely a disconnect in the flows. Like you, I couldn't tell you what it is that makes that shift. But all we can say is that, yeah, the market has been short or just not interested more than anything else. There has to be a catalyst which really, really believes that, yes, this is the reason, and now you put money into it. Otherwise, we'd probably be in no man's land for a while.

Jeff

Yeah, I agree with that.

Amrita

Do you see Trump changing or being bearish or bullish—I mean whichever way—but do you see him being able to break this kind of rangebound activity either to the upside or downside in any way?

Jeff

Yeah, the one that I go back to, it's just like what is the biggest anomaly in all of these markets. It's that U.S. fiscal deficit and the strength in the dollar. Is that what's causing it? People are talking about parity with the euro again, and we're in the middle of a global expansion. That's the thing that, again, people in the energy space are, oh, it's so bearish. The global economy is humming along. There was no real big potholes we're about ready to run over the top of. Yet the dollar is sitting—people are talking about parity with the euro. That is equally mispriced.

So, but we look at this and you go, okay, what could he possibly change that would shift this? I think one is he gets some weakness in the dollar. There's different ways he could go about that with, you know, if you want to be a preferred trader with the U.S. as a trading partner, you have to help contribute to a weaker dollar or something like that. That could be something. But let's not forget, to get rid of that fiscal deficit, let's call it $2 trillion, that's going to be a painful process.

Amrita

But then how do you reconcile that, given his policies are what? Trade, the tariffs and deportation and just generally like tax cuts, won't they all actually lead to even a stronger dollar and the fiscal deficit getting even worse?

Jeff

Yeah. That's the baseline view. But let's take the—you know, I like, as you and I were talking about before we even started this, you look at a lot of these policies that Trump is proposing. They're just a continuation of what was going on. You were talking about deportations of immigrants. Actually, Obama had numbers similar to what Trump's talking about. He had something like 3 million during his first term, which is pretty close to the 4 million they're talking about in Trump 2.0. Whether or not these numbers materialise. But I think the key point is, I like to point out Trump made the world more green than Biden. You know why? During Trump, you had low oil prices and low interest rates, more investment in green, solar and wind because of low interest rates and less investment in oil. What did you get under Biden? You had high oil prices and high interest rates. So you had less investment in green and more in oil. In fact, Biden oversaw the largest expansion in U.S. oil production probably ever seen in the history of mankind. Is that repeatable going forward? Probably not. But what it tells you is the macro variables are more important than the policy. Where are they heading now? I like to point out the two things that Trump cannot control, despite controlling the House, the Senate and the Supreme Court: he can't control physics and he can't control the bond market. The bond market, I think, is the one that creates the most confusion right now.

Amrita

Yeah. So then let's kind of fast forward, right? Pretty much a month away for the new year. So given we've really talked about the mispricing and I think Trump potentially could exacerbate that or on either side, from your standpoint, from Carlyle's standpoint, where do you see the biggest mispricing next year across all asset classes? And where would you guys kind of go in in terms of picking up either assets or companies? What would you say? Where are we with that?

Jeff

Well, I think when we look at where prices are right now, I'd be buyer of green assets. They've been the ones that have been hit the hardest more recently, and everybody's, oh, rah rah rah brown right now. But, as I just said, Biden just created the biggest expansion in Brown and Green suffered tremendously under his administration. So, I'd probably argue the value is looking at green assets right now. But I think bringing it back to oil, the electrification is going to continue. If we go to electrification and it sits at the centre, I really think, let's go back to that point I was saying before that TTF is the one that's looking the most normal right now. TTF is the global benchmark for natural gas. Are we at that point where we have crossed that Rubicon, where natural gas is that marginal molecule? I think about 2025, that's being on where I'm going to keep my eye on. I remember we wrote a report back in like 99, 2000 and it was titled something like, "The Stone Age ended long before you ran out of stones." Back then, peak oil meant peak oil supply. We made the argument, oh, the world's going to shift to gas. You remember at Calpine, everybody was gas, gas, gas. Here we're all focused on peak oil meaning demand. Have we made that transition to gas? It's snuck up on us a lot faster than we thought.

You have—you write about—the Chinese shifting to gas and trucking and everything else and using gas, trucking it in for data centres. Is that marginal molecule there? When we think about the world going forward, is oil going to be relegated to something like coal and natural gas is going to be the one driving everything? Is next year going to be that year where that transition happens? I think that's a very likely scenario.

Amrita

That's very interesting. Obviously, medium term and long term outlook, we do think renewables is the quickest growing on a percentage basis. But gas is by far the biggest growth story on an outright volume basis, right for us. But it doesn't mean oil doesn't grow. But the growth is obviously slowing. Like you said, continues to grow for the next several years really. Well, one trend that we are seeing, which is very interesting, is electric car sales are starting to slow down. That's where we've seen that big burst. Even in China, the EV sales growth rates are slowing down. Europe, European demand, oil demand has really surprised us to the upside because EV sales are slowing down and hybrids are picking up. So I wonder, to your point, there is this element where I think gas is going to become more and more important, but then you've also got this thing where the narrative has been peak oil demand. The investment slows down, but then there's a bit of a catch up on the oil side as well. So it's interesting how it kind of plays out between the two. Also because LNG, we have a huge wave of projects coming online from late 25, 26 onwards. So how do you think the relative value plays out?

Jeff

Let's start with your point about hybrids being the dominant favoured car right now. A hybrid is your best hedge. Yes, it can do electric. Electricity can do electrons. It can do molecules. You're good to go. You don't have any range problems. It's energy security at its finest. We look at the investment in renewables around the world. This is why we're going to do this energy transition because it's not being motivated for environmental reasons. It's being motivated for energy security reasons. You look at who's done it the fastest: China, second Europe, and the US. Actually, if you look at it, US renewable installation relative to demand, it's gone up a tiny bit. By the way, the Chinese have already surpassed. If you look at it relative to supply in the US, it's gone down. That's my point. Biden made the world browner, not greener. So when we look at the motivations for green, I don't want to call it green and brown. I think it's time to get rid of that arbitrary colour line between the two and just go, hey, it's joules. It's energy. When we look at a hybrid, it's your best hedge. I think what people are going to be focused on is give me an energy joule and an ability to consume it so I can diversify my risk.

Then we go, okay, what molecule or what electron is the one that is the most flexible across everything? It's going to go back to being gas. Which means, is gas that marginal molecule that's going to price inflation, price everything? We know that oil used to price.

Amrita

And we've seen that this year—metals did it for a bit, I think gas did it last year as well. So it's definitely no longer just oil that used to do it. It's kind of other commodities coming in and out.

Jeff

Yeah, absolutely. Well, if you take yourself out of the commodities—green, brown, like you said, get rid of the lines—what about other asset classes? What do you think are things to watch out for for next year, whether it be bonds, equities, credit?

Jeff

Let's go back to the small cap problem that I was referring to. That's the one I think that is more interesting here. Again, it's kind of that mispricing where you have the big cap large equity markets, they're basically—it's indexation and correlation. That's the point where I think we were talking about it last month, we did this. I think that trend is going to become more dominant. I'm sitting in a private equity shop and watching this over the last 8 or 9 months, the one thing I've convinced myself is public markets are going to be passive and private markets are going to be active. I think that we're going to see more and more companies delist into the private space.

When we look at total amount of capital in the private space, it's like 80% global capital, it's way bigger than public. I was thinking about this just recently—how long have public markets really been? Is there a pretty, you know, a very small amount, you know, and in fact, I like to point out when I started Goldman in 95, 96, there really was no commodity markets. We just started the CG G7 trade. Because pre-71, there were no markets. Pre-Reagan there were no rates markets. So were these publicly traded markets just a brief history in time that were associated with this globalization trend? As we moved to a more de-globalized world, more localized, where electricity and things like that are important, we moved to a predominance of private markets.

I'm a fundamental, active investor type sitting in a private equity shop. Is that going to be the trend going forward? I actually tend to think it will be—that the public markets will be dominated by the passive players, and they're going to be big and they're going to be indexed in. So let's go back to that $3 trillion in market cap sitting in these small and mid-caps that include a lot of energy names, metals names. Is that space going to find a new home? I think we're going to be into that transition happening. The other thing I think that's going to come out of all of this is an emphasis on liquidity. To get that liquidity, is it paying dividends and things of that nature? We're at one of those—that's why I think about is, stop fighting the fight on oil. Is it bearish? Is it bullish? But focus on what's going on here because it's something that's way bigger than just what's going on in oil.

Amrita

And maybe what you just said we could link it back to earlier, saying like you were saying that the public sector and the public money—effectively you've had in the public space concentration, right? Like say 8 to 10 big names, passives. But maybe it's the combination of that and more companies just going private. So I think maybe that—and we've seen that in the oil space, in the shale space as well, just de-listing and just taking it private and you don't have the shareholder pressures etc. either. Maybe that is one of the big thematic things. We've probably just seen the start of it.

Jeff

Absolutely.

Amrita

And maybe that becomes a really important thing to appreciate and understand is that if more and more just money is becoming private, then the way they allocate capital is very different, and they may choose to not allocate capital for a while because they're like, okay, we're better off just not allocating, whereas if it's public money, then it doesn't. There's an element where you have to invest and you need to show returns and so on.

Jeff

Yeah. It goes to the public markets have put too much of an emphasis on short term results and not enough buy and hold and focus on creating shareholder value in the long term, which I think is the point you're getting to in the end. You think about oil, it's not—it's focused on the fact that oil could not price in a war premium. By the way, it did in the option market. But couldn't do it in futures.

Amrita

Exactly. But couldn't do it in futures.

Jeff

So it tells you it wasn't that people didn't believe that there was a high probability of something happening. They did. But they expressed it through options, which by the way I view options as being insurance contracts. Nobody was willing to buy the futures, to put it, because they won't buy and hold. I think that goes—it goes to equities, it goes to everything. That fundamental shift is, and I think a lot of it has to do with the structure of who's providing the funding. It's too short term in nature and needs to become more long term.

Amrita

I think that's exactly right, that if you're being forced to—and probably, I mean, even throughout the shale boom period, we've seen, right, the whole focus has been returns right now, rather than kind of thinking about, and even for the bigger companies, how the shareholders are pressurising them saying, no, no, you must give us returns this year, next year, rather than taking that 20-year view, which used to be the case, saying, okay, then a CEO is incentivised to create shareholder value over the medium term through investment decisions. I don't think anybody's getting paid in the public markets for doing that right now. Maybe we've just uncovered what the issue is right now. It's that with the money moving to private markets, it means that again, and I think maybe the hurdle to get that private money coming in to say, oil or whichever sector, maybe it's higher than in the public markets. I think that's where it'll be interesting—when the fundamentals are really, really compelling, I reckon that private money will come, but it really needs to be compelling, not when you've got a lot of spare capacity in oil, etc., etc.

Jeff

Yeah. When we look at most of the private money that goes into the likes of private equity shops, most of it comes from long term liabilities, you know, in pensions and endowments, and the relative size—you take the big mega funds on the private equity, they're calling AUM somewhere in that 500 to 700 range. When you look at the—it's billion—but you look at like the BlackRock's and the Russell, I mean these guys are managing $1,213 trillion on the relative side. So somehow you've got to get some of that money away. But it makes sense because if the public guys are all focused on passive positions and most of it's momentum, you need scale. The smaller groups are going to be, by definition, if they're active, they're going to be much smaller in scale. But I think there has to be a way to get more of that capital moved in to solve some of these fundamental problems.

Amrita

Because otherwise you get mispricing like we started. So if we've come full circle, yeah, we're running up against time. So final words of 2025. I know you said you'd buy green assets right now. And small caps as well. Anything else that really kind of things to watch out for?

Jeff

Just commenting on the outlook, this bear story that everybody has bought into as being supply driven—I think it's really hard to make a demand driven bear market right now. As I go back over and over, supply bear markets are super rare. One in 1986 and another one in 2015. Both occurred after decades of large investment. Both of them involved Saudi Arabia aggressively going after U.S. shale players or other U.S. names. There's not been the big investment boom. I don't know who they're going after. If people believe in the story, that bear story is contingent on something that is a very, very rare occurrence in these markets.

We were talking last time about looking at non-OPEC revisions on supply growth. They just keep getting chopped down. I think the latest on the IEA is us at what, 251 or something like that. It's just like, give it up. No, no, it's chicken.

Amrita

They don't want to—I mean, you'd be surprised, Jeff. I think the median surplus estimate of all investment banks, I kind of went through some of the numbers that you get through Bloomberg and Reuters and stuff. It's 1.1 million barrels per day. There are some outliers of some agencies, etc., that are like close to two. I'm just a bit like, how do you even get to those numbers with the risks to Iranian production or exports, non-OPEC having continuously disappointed this year? But I think there's an inherent belief that non-OPEC would be growing by like, I don't know, 2 million barrels per day and that OPEC will flood the market because the narrative is that, oh, Saudi Arabia is tired of the cheaters and whatever else. However much we push back against that doesn't seem to really work.

Jeff

Yeah. But I think, probably the best note to conclude—I'm still a big believer in the revenge of the old economy. We're not investing. Bottom line, I don't care if it's electrons, molecules, oil, gas.

Amrita

Like you said, it's joules.

Jeff

Joules. We're just—we're inadequately prepared for what we're likely to see going forward because where did the current, I guess, excess production come from? Investment decades ago. Where? Guyana, Brazil. You look at Iran, Russia, Venezuela—all of that is, they were freebies and you're asked what comes after that starts a big question mark. Then we look at all the gas in the LNG and the bear story in LNG. But the reality is, where did that displacement of demand come from in places like China? Coal. There is a limit on how much coal the world's willing to burn just from an air pollution perspective.

So I think, again, these bear stories are missing the bigger point. Returns are inadequate. Capital is inadequate in this space. Look at any picture of commodities relative to equities or long run returns in equities versus commodities. I'm still an absolute believer in this space. It's been a rough last 18 months. I'm not going to fight the tape on oil prices anymore. But what is the avenue—how you're going to invest in this space? Is it private? Is it public? Is it oil? Is it the companies? That is to be debated, but somehow, some way you need to get capital in this space.

Amrita

Fantastic. Great place to end. Firstly, I will say thank you so much. It's been fantastic. This is the first year we've collaborated and it's been enjoyable and hopefully for many more years to come. I'm sure we'll get back in the new year. I am pretty sure there would have things that have moved on in the next couple of weeks, to see where we end up in the new year. I completely agree with you. I think how you invest is different, but there needs to be some allocation into this space, given the kind of broader needs of the world as energy demand grows.

Jeff

Exactly.

Amrita

Thank you Jeff. Great thanks and happy New Year in advance.

Jeff

All the best.

Amrita

Thank you.