Jeff Currie on oil bears, rate cuts, and gas demand from AI data centres

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. This is our monthly catch up. Well, you've also written some amazing pieces which have been talked about—even yesterday somebody said to me, I read Jeff's yield piece, it's so interesting. I was like, yeah, that's why we have Jeff on our board. I have a lot of things to discuss with you.

You and I were in Singapore together for Apic. I haven't seen a more bearish collection of traders. And then, you know, just generally the market. Last week, I mean, for me, we took about a week to get up to $75. And by the way, we were selling all the way through when Libya was offline.

I would have never bet on that happening. We took a whole week to come back, just about to 75. And then even though we didn't go up on Libya, Libya coming back, we still came back down. And then of course, we had the Saudi headlines from the PhD, which again, we've heard directly from the Saudi sources, they are not true. And we've published around that. Why is the market so bearish? Prompt inventories are so tight. But somehow people hate oil. I mean by hate I really mean hate oil.

Jeff

Well, I think they hated everything old economy until yesterday with the very large stimulus package coming out of China. But I think, you know, I've known this for years and I still don't listen to myself. Oil fundamentals, price curve, shape, capital flows, price level—price level has nothing to do with the underlying fundamental picture. Everything's a relative price.

And again, I know that. And I still try to think, oh, it's going to go up because of that. The only thing you can guarantee with tight fundamentals is the curve goes backwards.

Amrita

And it has been very...

Jeff

Backward, very backwards. And so the question is why is there no capital coming to this space? I think that there's a host of reasons. One is, when you look at the relative returns, there's a lot better places to put your money, which was that yield piece that I did a few weeks ago.

And you calculate that when you look at oil being a 30 vol market, and you look at, well, now the money markets have dropped from five and a quarter down to what, four and a quarter, three quarters. But still, you put that together with the volatility in oil, you need to have a return in excess of 14%.

And I don't care how bullish you are—even myself who's bullish—it's hard to conjure up a 14% return in oil, which means holding it is a difficult proposition. And as a result, they don't want to hold it, but they don't want to hold inventory. They don't want to hold the financial position. So think about working capital.

In fact, I had lunch yesterday with an individual that provides capital to consumers of oil—working capital to finance inventories. They don't want to finance it. They're not going to use their equity to do that. They would typically want to use somebody else's equity to do it, i.e. they borrow the money, but nobody's willing to post it.

And as a result, inventories are hard to hold, not only in oil but a lot of other markets, which actually begs the question: how de-stocked is the system across everything? A lot of people ask me about copper. Copper is back up. It's been the big mover of the China news. But everybody goes, what about those copper inventories? Where did the supply come from? Same story. You'd stocked everything. You look at mined production—it rolled over. Metal production means you take the concentrate, run it through the smelter—has gone up. Why? You'd de-stocked all the concentrate. You'd stocked the scrap. You put as much as you could into those units and turned it into metal.

Because what do you do at high interest rates? You want to create the supply. And so what we have seen across these different markets is get rid of any working capital you possibly can because it's too expensive to hold.

Amrita

But that is my struggle. I cannot see inventories building. Okay, yes, we built some in diesel and product markets. But crude stocks are so low. I was having a conversation yesterday when clearly a lot of traders are bearish. I get that. And they're like, oh, where do you see inventories? I was like, look, you can be bearish about next year's balances but don't come and tell me inventories aren't low—Cushing is at record lows. Everything is at record lows. But it's going to come to a head at some point, right? You cannot have no oil in tank and low prices, because I think the one thing the market hasn't realized at all, US production hasn't grown this year, and it's actually falling over in some basins.

And by the way, this strip for the most part of the year has been $80 on WTI. So it's not been 60. So if you can't grow at $80, something will have to give. You're drawing stocks as you say. And we don't have production. So when does this turn?

Jeff

Yeah, I think when we look at the environment going forward—again, you just price it through curve shape. You get tighter and tighter until somebody finally sees there's a return in this space and you can see capital go. But there's no guarantee that it's going to play out in price level. And going back to the point, it's all relative prices.

I've thought about this this morning as I knew we had to talk about this. What's the only thing on the planet Earth that actually has an absolute price level? It's the US overall price indices. That's it. That's the only thing. There's a price level. Everything within that thing's relative. So when we ask ourselves, what are we doing? We're still sucking capital out of the system at a very slow pace. But now here's the point that happened. So let's say your scenario does occur and we get tight markets, prices spike. Then we could end up starting to see capital move back. But what will that do? That will end up being fed by the fact that you now have interest rates coming down, you have China—China does monetary stimulus. Plus it did fiscal stimulus. It did both. And it's got cash for clunkers. It's recapitalizing the bank. So you got capital moving in as we go into the fourth quarter. And then you have on the US side the rate cuts. By the way, the one thing that was kind of brilliant of what the Fed did is talk really dovish, but didn't do much on the front end because the forward rate markets did all the work for them.

You're down to what, 3.25 on the back end. So what does that do? That gets the system moving again. So your scenario—let's say it plays out in the fourth quarter just the exact same time. You get a lot of liquidity coming into the system. By the way, it's almost—I'm not going to say impossible—people talking about recession and all this bear talk, look at the US is running a 7% fiscal deficit. It's hard to have a recession. And that's why the labor numbers just continue to remain strong. So now you have strong US, China turning the corner, you got more liquidity out there. The market's likely going to finish this year much tighter. I mean, bottom line. But this week we drew 14 million barrels in the weekly stats.

Amrita

Yet we came off in price.

Jeff

Yeah, that's right. But I think also another point there is you look at the market, there's no discretionary players in this market. So you go out there and you try to talk this market down or up or whatever it might be, and there's nobody there to listen. The other point too, is that when we look at the players that are left in this market, it's mainly trend players or algos. So I think at this point, it's going to have to take something really big—a shock. It could be running out of oil or something happens in the Middle East and then people focus on it and it moves back. But I think the one other point on this, I think what's happening—what happened in Singapore—people look at the price action and they try to tell a story.

Yes. And so the story they tell is this big supply glut that's going to happen way out in the future. In fact, there was a term that we created in this—like 2006. We had long-term shortages create near-term surpluses. What happened was the back end of that curve went up, dragged it up to much higher levels, killed off demand, brought on supply, and you ended up with a surplus on the front end. Now it's the opposite for oil. It's long-term surpluses create near-term shortages. People are selling the back. Well, they don't trade the back end, but they're selling it in the tight. That's what they're saying about this glut. How can it materialize when prices are this low and you don't have any investment?

Amrita

So I have a couple of follow-up questions. The first one, since you talked about it, we have 1.5 million barrels per day of non-OPEC crude supply growth next year, right? Year on year. But I've been flagging this for the last month, saying, hey, okay. Yes, that's based on all the projects. Yes, we've put some decline rates in, etc. However, we'll be the first to admit we also had 1.1 million barrels per day this year and we are only tracking 400,000 barrels per day for the year now.

A lot of people, I think, had higher numbers than us. They've all had to revise it lower. So I'll be the first to say, yes, we've got 1.5. But the risks there squarely are to the downside. My upstream team here who do a lot of really detailed work are saying last year's outperformance was because in 2022, you had $100 oil prices that just gave that tailwind.

Now, last year in 2023, we actually averaged 82. And you saw Pemex, quarterly losses. I mean, Pemex is not a profitable business. It's always kind of small loss making—$14 billion at $80 Brent prices. What they're highlighting is that the cost of production is actually a lot higher than people think. I think the risk that this glut next year doesn't happen is really high. Do you have a view on this in terms of the supply side? Of course, Iran is also pumping as much as possible, US administration allowing that to happen ahead of elections.

Jeff

You know, another way to say your point—why did you get the outperformance in 2022? All you do is bring production back up to pre-COVID levels. It was really easy to do, in fact, that growth is not growth. It's recovery. All we did is by December of last year with US, you got to 13 million barrels per day. It's the exact same level that you were producing on the eve of Covid.

That's all we did—brought it all back. Have we grown above that pre-COVID level now? Maybe a couple hundred thousand barrels per day. When I look at next year, I go, what can we bank on coming? Guyana is going to come, Brazil is going to come, Canada is going to come. I'm not banking on the US, particularly given current prices and current drilling, and we haven't really seen anything. Then you look at the NGLs area as well. You can put them into these petchem plants, get diesel and naphtha and stuff out, or the equivalent to be the polyethylene. But the reality is you still need crude to blend with that. You can't just take NGLs and turn them into oil. Eventually the price will fall. The collapse—a lot of that just goes into petchems into China. So, I'm not a big believer that you're going to... And the other thing too is in the history of the modern oil market, there's only been two supply bear markets, one in 1986 and the other one in 2015.

It takes a willingness of a producer to commit suicide.

Amrita

So, so on that, since you bring it up, we've seen the FT article, which talked about $100 oil prices being abandoned, which we know is not the target. But also they're going for market share. What's your take on it?

Jeff

If you were to fight a price war, 2015, you're taking on behemoths that run this market now. In 2015, 100% of US shale was done by a bunch of small independents. Today, 30% of it's done by BP and—or by Exxon and Chevron. Then, what about the CapEx in Guyana? Again, it's Chevron now and Exxon, and it was 2014 CapEx. What about Brazil? Petrobras. So do you really want to take on those both if you're Aramco? Probably not. You can go, oh, what about Kazakhstan and Iraq? But then again, Kazakhstan—Chevron again. So there's no small little players to be taking out anymore.

How did—the argument of what we called the new oil order back in 2014–2015 was predicated on the supply curve being perfectly elastic. It was a competitive market. The supply curve is not perfectly elastic, but Chevron, Exxon and a bunch of other dominant firms—it's an oligopolistic-type structure. Price wars don't work in that world. So I'm not—I'm never going to say never, but I just don't see that happening.

Amrita

And I completely agree. And I would say my conversations with leaders of OPEC are very much aligned with that. I don't know why the price war term was even used. I think the message they are saying is those who can't voluntarily can't be taken advantage of. The people who need to comply need to comply. If not, they will bring back production as planned. That's the message. And they really do believe the compensation plans, if carried out, mostly offset what the others are bringing back. That's why they did it. I think the market really needs to understand there's a big nuance. This is not a price war—people going to 12 million barrels per day like Saudi Arabia. This is just saying incrementally we are bringing some barrels back.

But I think part of the reason why the market is spooked is they are also bearish about demand, which was another question I wanted to ask you. How important is China's—I don't want to say U-turn, but it is a bit of a turn, right? They've not been doing much. And then suddenly this week—I actually think the Fed made it happen because if the Fed wasn't going to move, they have been late in this cycle. No emerging market can move then because it creates inflation. I think that's the thing the market's missing. This is a big catalyst that allows all the central banks—I think it's kind of important to know.

Jeff

The core reason they couldn't move until the US moved is capital flight. I know everybody says, oh, you can't get capital out there with capital controls. Also remember, commodities are the way they get around the absolute rule. So that created that incentive to keep—you have 5.25 and 1.7 in China. So you take the swap now. So you've gone from 5.25 with no cuts. Now you're somewhere, I think, 3.75 average on the swap versus 1.7. That gives them a lot of room to cut. And they can then also, without creating a devaluation of the currency, capital flight. By the way, on the capital flight, you look at the money market even in the US, people can take out like 50,000, walk across the border, put into a JPMorgan account. There's a lot of ways to get the money out of there. The other big way is through oil and copper and commodities. So that's a serious risk for China. I agree it was the US that did it first, but how real is it? I think it's very real—the unemployment they just can't afford.

Amrita

And you told me that in Singapore, you know, you're like, that's going to be the thing to watch.

Jeff

Yeah. So, is it a bazooka? No, a bazooka would have been 6.5 trillion to 7 trillion. Let's put it somewhere around 2 to 2.5 trillion. So it's like a shotgun. But the fact they haven't used a shotgun yet, which also—the US goes down more, they can do more after that. So I think this is a real turning core. That piece that we published on EA Forum really was all about that. The emerging markets are much more highly levered to US rates. So the US rates coming down, this is, I think, a significant turning point. Let's go to the argument—oh, it's all it's going to do is stabilise the property market. 100% agree.

But the engine of growth is the green CapEx. They're not going to stop on the green CapEx. What is the Achilles heel for China? It's their net short energy. They're going to keep producing this stuff, whether there's a market for it or not. That's another thing, but it also gives employment.

By the way, I got the numbers on the production capacity there days before I did this talk. They can produce 36 million EVs right now, the market somewhere around 17 million each year. They can produce 52 million cars in total. Put it in perspective: the US is 16, Europe is 14. The numbers inside China is about 25 million market. What are they doing? Why are they doing this? They have an 85% market share in lithium batteries. They bundle the drive trains with the batteries and then force it upon the Germans. Actually, there's one thing—and these economists, I think, are missing, they're getting bearish—they're all like, well, look at OECD industrial production. It's down. It means China and India are going to get killed. There's no export market. I think what they're missing—it's down because the Chinese are pushing them out. We're going through another round of onshoring and things like autos and things of that nature. They're going to power ahead. So what does that mean for global commodity demand? It's still going to be robust. I don't see it changing. I think in China, we're going to start that recovery as long as you can keep the property market stable. Our economist at Carlyle, Jason Thomas, made a great point yesterday to me. He made the point that it is miraculous what China has done to maintain the growth they have in a collapse of a property market that large. The official numbers are 30%. Let's say it's 50%. We know what happens in the United States when you get a 30 to 50% collapse in the property markets—it's a catastrophe.

So, everybody should be going, wow, this is great. You guys got through something that should have been absolutely brutal.

Amrita

No, and I think the earlier point you make for me is almost the more important point. Of course the China thing is important. But US rate cuts—because again, like you're saying, everybody's like, oh, it wouldn't be a—it's now a soft landing instead of a hard landing in the US. The US rate cuts isn't about commodity demand in the US. It's about what it does to emerging markets. And China is a big part of that. I know China isn't an emerging market anymore. But again, what it allows Asian central banks to do. I think that's where potentially demand—look, we've only got a million barrels per day of demand growth next year, year on year. We could easily see, like our economists are saying, the tailwind from a US Fed cut of about 100 basis points is about 250,000 barrels per day of additional demand, with China and Latin America being the biggest beneficiaries of that.

So that suddenly is not as bearish. I think the reason I go back to the OPEC point—the reason the market is bearish is they're saying OPEC will not be able to bring all of these barrels back without collapsing the price. Why? Because demand is weak and non-OPEC supply is so strong. I think both of those could be right, but I just think there's a lot of factors to think they may not be right. So I think that's partly the thing.

Okay, coming up on time. So you sounded a little bit bearish because you were saying price levels—you know, you can't control that. Is Jeff Curry really bearish?

Jeff

No, no, no, no.

Amrita

But how do I ask that question...

Jeff

No, I think you're going to get the liquidity back. The bottom line, the reason why I just stick to the supercycle thesis in copper is going right back towards the new highs again, is we are structurally short energy at an epic level as we look out. At the same time, we've got a transition. Where are you going to get all this? You look at the IEA and their net zero assumption. They have this big decline in demand—15% between now and 2050. And they have all that coming out of the OECD countries. That assumption is absurd. When we look at data centre demand, it's just going to explode over the course of the next 15 to 20 years. That's going to drive demand growth in the global north and then the global south. Here's a stat for you for India: United States lifetime emissions, 440 gigatons; Europe, 320; China, 280. Where is India? 65. They're looking at that. Let's say 300 is the benchmark to become a rich country. They're going to do that and they're going to go, you better make room for us. That means you've got a transition—get the carbon out of the North. At the same time, you have to accommodate strong demand growth coming out of the South. So you put that together...

I think I'm going to—I don't know the exact quote, but I love—somebody made a point to me the other day: we're short a Europe. When you look out and that kind of shortage again, and then you look at the investment, it's not there. If everybody's going to the big, there's a big glut. So my point is the capital has to come back to this space.

Amrita

And the big glut is because the capital was there 5 to 10 years ago. And so we are seeing that now. But there is no new capital going in now. So if you've got a medium-term horizon—absolutely.

Jeff

And you think about that whole AI—without the energy there is no AI story.

Amrita

Yeah, 100%. And I think this to me is—some very few but long-term investor clients of ours, right? They are the ones who are highlighting this thing. Just the sheer volume of gas demand. And I do agree—you can argue about coal, even oil. But the scenario for natural gas—how do you have natural gas demand falling, given what we are seeing in that AI data centre space?

Jeff

I think the most critical thing with AI is it has to be reliable power. Why are they restarting Three Mile Island in the US? You look at the number of nukes being recommissioned around the world because it's the most reliable green energy source, and they made a commitment to be green. Well, if you made a commitment to be green, renewables have the intermittency problem. You either have to have really expensive batteries and trust the technology, because by the way, you have just any type of intermittency on these things, you've got a problem. That's why nukes are in such high demand. The companies like Vistra, Constellation that have the nukes are just—they're like the darling stocks to the equity market. Means you're going to have to have gas in that mix. The estimates are 60% of the demand for data centres is going to have to come from gas.

Amrita

No. Well thank you, Jeff. Great. And the good news is we will have some of these topics debated at the conference, including energy demand, and we've managed to get somebody senior from the IEA so we can get some...

Jeff

I'm looking forward to it.

Amrita

...good discussions going. So, yeah, looking forward to that.

Jeff

Yeah. Well, thanks. Thanks again for that.

Amrita

Thank you again.