Jeff Currie on the diesel pinch point, Hormuz, and equity "la la land"

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

The war is continuing, unfortunately. But good to have you back because I think we've spoken once since the U.S. Iran conflict broke out. I guess my first question has to be, have you been surprised by two things one, prices where they are today? Two, we've had this massive disconnect between physical. Even today. Traders are saying to me, guys, physical cargoes are trading at premiums versus financial.

Amrita

Yeah. Well what do you make of all of this?

Jeff

I think I can explain what's going on in the oil market. What I can't explain is what's going on in the equity market.

Amrita

Yeah. Yeah. True. That was going to be.

Jeff

The only one that I.

Amrita

Yeah. Yeah.

Jeff

Absolutely dumbfounded. And I, I did this Bloomberg interview this week and compared it to jaws. When that scene where they go the beaches are open and all the kids running out there, you can see the shark fin swimming around in the shoreline.

Amrita

Great analogy.

Jeff

Yeah. And I think you look at the draws that we had, you know, two weeks ago, 25 million barrels, you know, been doing this forever. If you got 25 million barrels in the middle of the shoulder months, and then it came out and then everybody's, oh, the AP showed another 25 million. Then the ones that came out, they were 11 million barrels.

Jeff

It was only 11 million barrels. Yeah. That's it's just the level of, I think complacency. And so, you know that that's the part I don't I just don't understand how people can just ignore the severity of what is coming their direction.

Amrita

So you think for oil, it's just a timing thing, like we just haven't hit the worst.

Jeff

Here's the way I think about oil. It's like there's a big difference. I mean, a deficit and a shortage. We're do deficit. Demand is above supply. We are drawing inventories. And so you're borrowing oil from the future right now. And you're going to do it until you hit tank minimum tank. You know I was I they're all out debating that banks are worried minimum.

Jeff

Oh I don't care is it. You know you know but all I know is distillate is in the US is 100. Here we are at 102. Yeah. And you're a 120 a few weeks ago. If you're 120 weeks or you're 1 or 2, you're going to be out and right as you go into the summer driving season. And I just don't see, you know, all this debate about where this is.

Jeff

I mean, maybe these people think that you can draw the full 100 million barrels. By way, even if you could put other 400 million barrels, you still would be out.

Amrita

Yeah. So let me okay, let's unpack a few things, because I have a few things to say about this. First and foremost, yes, a lot of people actually think you can draw down tanks to zero. I've had people come up to me and said, we have 8 billion barrels in stocks. I'm like, you do? No, you can't go down to zero first.

Amrita

Firstly, that 8 billion is like everything. So much of it 20% tank yields, infrastructure, build out whatever. But I do think I was doing these numbers. We'll publish it soon as well. Coming into the year, we probably had a bigger surplus than you know. We knew that the oil was there, but we calculated just at the start of the conflict.

Amrita

On the crude front, the market probably had 375 million barrels to of excess. Right. Everything that we, built last year, like February as well, we built. So that just gives you to your point. We are absolutely in a deficit, but we are not in a shortage, right? So I think that's the difference and probably end May early June.

Amrita

That inflection point is coming, right. So again to I, I guess the question is we did rally and then we came off. And that's why there's a sense of complacency. To your point, people are like we somehow have solved it. Like, well why do you think that's in the market? Like that's the bit I struggle with.

Jeff

Here's I called up a bunch of my friends in Asia, you know, with because, you know, Trump's on and off notice that he always cuts a deal every single time the ten year hits 4.4%. It's the interest rates that scare him and crude drives the break even. And so if he can keep crude under control, he keeps the interest rates under control.

Jeff

And that's the second biggest line item in the U.S. budget. So clearly that's his motivation. Now now I'd say these people in Asia I talked to, they all think that Trump runs the show that the United States is in the driver's seat. And you and I both know that is the case, by the way, the point is, actually, it was around March when I realized, you know, this is the hopeless cause is somebody put it to me, they go, have you ever looked at the other side?

Jeff

I think I said this last time, the other side of the street, you know, it looks like Afghanistan. There's caves in there. All you need is a guy with a rocket launcher and some drone sitting in there, and it's a hopeless case. You can, you know, there's no way you're going to force that thing open. Well, and which then leaves you with, you know, with the potential for a deal.

Jeff

But the US holds its ground on, on, you know, the nuclear, you know, in enrichment of uranium. And if I am, if I'm Iran, I want war reparations. Reparations. They, they bombed us. And the other thing to that that I don't think is you talk to people in the US, they all go, oh, yeah. Us is winning the social media war.

Jeff

And then if you talk to everybody outside of the US, Iran's winning the social media war. And I'm not going to say it here. I have a seven year old daughter that goes to school here in London. The stuff she comes back and tells me that she's hearing on the school ground, you know, it's unbelievable. And I don't think Americans in fact, I was with a group of Americans having dinner last night.

Jeff

They don't understand that. And I think that at the core is a complete misunderstanding of the dynamics at play here. And I would say I don't think they they think that it's a it was never about missiles being thrown, no direction. It was all about once they closed the strait. One thing I found quite humorous that came out this morning was Trump goes.

Jeff

My only goal is to open the strait. It was open two months ago. I'm. So is that your only goal now? Yeah. I mean.

Amrita

Because again, to your point, the goalposts have had to move, right?

Jeff

Yeah. They've moved.

Amrita

But the point you're raising on Treasury is so important. We've seen that. Right. The two things we know that really matter are the equity market. We've come back to that because I've had clients say to me, oh, what's your most, you know, conviction trade. And I always say there's a few in the oil side, but the real conviction is surely shouldn't you be buying puts on the S&P right.

Amrita

I joke about that. But it's the equity market in the ten year. And every time the ten year is around that about 4.4 you were saying 4.5 of notice. Suddenly there's PE stocks and then it doesn't go anywhere. Right. But let's play that out. Like what if it does go to 4647. Like what happens to the USA.

Amrita

Does he then get forced to do a deal. Because to your point and I just got back from the Middle East. It was unbelievable how pessimistic the region is about when this reopens. Like, this is not going to reopen anytime soon and it's not going to be a smooth reopening either.

Jeff

Yeah. I and but also the with Trump we have is that you take like you know all of the big sovereign wealth funds in Qatar UAE and Saudi that's who's going to pay for that $700 billion of I cap back. So and then you got the Space-x IPO. You put all of this stuff together. Where's all the money going to come from this.

Jeff

Where's the money going to come from the on the credit side. And I think that aspect, you know is is missing as well. But I don't think if I'm Iran, you know, I'm all I know is I've been bombed three times in the last how many years? You know, the deals have not been struck in my favor.

Jeff

I want war reparations. Yeah, I want I want to do tolls. I don't think this is going to be I you know, I've said from day one that I don't never thought this is going to be an easy process. And, you know, I like to look at, you know, the, the Red sea where we're sitting here two years, they bomb the hoodies, who are a lot poorer than the Iranians.

Jeff

And you've you're still down 75% of traffic in the Red sea. And the only reason, you know, you have any cooperation right now with, oil flowing out of Yanbu in the Red sea is because they're Chinese flagged vessels. Yeah. So I don't I don't see how this thing changes substantially. It's going to, you know, I, you know, I don't, you know, the I don't want to get into the geopolitics, but yeah, I, I, I am and if you look at what China did over the weekend with orders 834 and 835, they're going on, they're going to be getting aggressive and they're going on the offense, not the defense.

Amrita

And so this is fascinating right. Because Trump and she are meeting and.

Jeff

Maybe.

Amrita

Maybe maybe they.

Jeff

I think at what one pm the York time tonight we find out.

Amrita

You find out. Yeah I think that's fair. The question is and you literally said this, if I'm speaking with people in the US, they absolutely think U.S. is insulated from everything U.S. is winning. Because to be fair, U.S. exports are up massively. Recruit products, chemicals, everything.

Jeff

Not stuff. First time since 1943, the U.S. was a net exporter of crude. The week before last. Yeah. Since 1943. That was basically when Bretton Woods was signed. So, you know, at this point and they all think that they're, they're long, crude, they're not long crude, they're short crude, and they're exporting their spray, their commercial barrels away.

Jeff

If I, you know, if I'm an American looking at this. So I built all this for strategic reasons and we're exporting it to the rest of the world because of a problem we've created out there.

Amrita

I think that's the challenge I face talking to. I mean, look, when you're speaking with the majors, with the refiners, they completely get it. But when you're talking to the hedge funds, the macro guys, they're like, exactly like you said. Well, we were exporting 6 million barrels per day. I was like, you do realize in two months time your own refiners will not have enough crude to run.

Amrita

Yes. We think tank bottoms in the US Gulf Coast is, you know, 200 million barrels. If you get below 220, you're already in, like, pretty kind of tricky situation. We're not that far away. Right. So so I think that's the bit that's why I'm struggling with it because everybody's like, oh, but we have enough to balance. But somehow we keep drawing inventory.

Amrita

So we are basically saying that we need to get to tank bottoms before this market actually wakes up and says, okay, there is an outright shortage.

Jeff

Yeah, yeah, I think you have to get the outright shortage. And then maybe but but still, it's like the banks are still, oh, 15 two weeks from now, it's everything's going to be okay. And you got, you know, you know, like my old shop out there talking May 15th, June 15th, it's always two weeks. Everything. Two more weeks.

Jeff

Everything's going to be okay. No, it's not going to be a okay. And two weeks even if it was you know, as you and I were talking about the damage, the logistics and everything like that.

Amrita

Those are just the pace at which this. Yeah, like, reopens. No one knows. Yeah. And but why do you think. Because we have seen this coming into this year. The US banks were extremely bearish. They've not like they're a little bit bullish now like you shop but not like saying guys this is a crisis.

Jeff

They just mark to market right. And by the way it's almost like they're being censored. I don't want to go that far. But it doesn't make or they either they're being censored or they have no concept of the magnitude of this. Like I was reading one of them, we're drawing 14 million barrels per day, 14 million barrels per day draws.

Amrita

We don't have enough videos by there.

Jeff

Yeah, yeah. And then they go, okay, we're going to raise the forecast from 65 to 90, which is marking the mark. I was checking the market at the time when they raised to 90. It was trading at 90 spot five one at the time. That's a mark to market. And then but the front is trading at like 110 115.

Jeff

And you're saying we're here to go to 90 and we're drawing 90 million or 40 million barrels per day. I can't see where, you know, you know, where the, the where the disconnect. Maybe it's just the they I think part of it is most of them, you know, I mean, I date myself, you know, I've been through enough cycles in this.

Jeff

I think that their experience, they look back at cake, you know, nothing ever happens where. Okay. Yeah. This is going to be.

Amrita

You know, there's enough like everybody said, Saudi is going to raise production for 12 million barrels per day. It's going to be free for all the amount of people who have said this to me. And I think you're exactly right. I think Up Cake has reshaped how people think about, you know, geopolitical outages. But the difference is this is happening.

Amrita

It's happening as we speak. Right? It's it's not that. Okay. Let's let's pivot back to equities because you started with that. I have heard this theory of late. I want to get your opinion on this. The energy intensity and oil intensity of GDP is going down. So what happens in Hormuz doesn't matter. Firstly secondly hyperscalers their CapEx is going to go up to $1 trillion trillion.

Amrita

Yeah, we're $1 trillion next year. So that's like a huge percentage of GDP. Why should we care about hormones. So everything comes back to like it's it's immaterial. And that's why apparently the stock market can keep going up. But I guess okay, well I won't tell you what my viewers was just, just tell me on those two arguments like.

Jeff

For actually I mean, I get point something I learned this morning which was kind of shocking that 50 like almost 60% of the earnings have all the, you know, open the rest of them or this other category. The other category is their equity positions and the other companies that they own. So the market goes up on Gangbuster earnings, which is nothing other than equity realization.

Jeff

Yeah. So what happens when we go down anyway? I'm not going to get into that. But I think let's go to the point about, you know, the prices of the, you know, other commodities. The, when you think about, or oil versus GDP intensity, yes, they're 100%. Right. Does helium matter to GDP? Does any of these commodities matter to the GDP?

Jeff

Absolutely not. There's a big difference between price in quantity. Yeah, volume. And once you start taking this stuff out of the out of the market, I even, you know, I wrote a piece on this recently making this point I call it's the rare earth metals of of of energy. We start pulling this stuff out of the economy. God is going to hurt, you know, we don't know.

Jeff

You know that you're on the ground, plane shut down. You know, I think, by the way, everybody asked me, why did British Airways come out this morning and say that, you know, they they don't care about it, but we'll see. But, you know, the, but I think that the key point here is helium. Yeah. It doesn't matter that GDP.

Jeff

But once you're out where you're going to produce the chips and chips start mattering. Exactly. You know, for.

Amrita

It's the derived products.

Jeff

I products. And I think that that's why, again, they're just going to have to feel it. And the question is when do they feel it? And I and, you know, just go back to like distill it. You're going to feel it like any day. Yeah. You know, if you're at 102 or whatever it is.

Amrita

It is going to go down very quickly.

Jeff

I don't do balances. I haven't done them in years. But I remember 100 always being the magical number. And if we are at 102 and it's April when you we started out at 120, we're already at 102. And you should be going in before you get to the big, you know, the driving season for trucking and everything as we go into the summer months, you've got a real big problem on your hands.

Jeff

And whether if it's and it's the middle, it becomes out sulfuric acid, the list goes down. And so, you know, and by the way, it's all the commodities, copper. I like to point out almost all commodities are nothing other than dirt and diesel. So if you're out of diesel, you got a problem?

Amrita

Yeah. With mining, with everything.

Jeff

Everything. Everything. Everything.

Amrita

What's the view on the hyperscalers? $1 trillion, and that's why horribles doesn't matter.

Jeff

Oh, God. The, And I think, you know, the the point being there is they're spending. They're spending as if they're, there's an infinite amount of AI compute. Yeah. What is the biggest in what is the biggest input into AI compute? It's called oil energy. So you guys I don't care whatever you want. So if this is going up and it where are you going to get the infinite amount of demand.

Jeff

Because they don't even ever ask what the price of AI compute is. They assume 00I compute is going to go to the moon. And and it also I had so many people I talked to make this point, they don't even know there's a commodity called I compute. Yeah. You can look on your screen. It's called H 100.

Amrita

But I think that that's the issue. Right. Even if you can say fine oil is not going to be needed, gas at gas prices, that's the same thing. What's demand destruction? I'm like, how are you going to have the hyperscalers delivering what they've promised without gas? Yes, it's the same, same issue. But it is fascinating how we are in the minority.

Amrita

And and you can see S&P is hitting an all time high every single day. So there is no problem clearly. Right. Like we we are talking about stuff because I've heard even people say, oh you commodity guys make a bigger deal than it is, right? But again, I keep going back to we we've lost like 9 million barrels of crude, slaughtered 12 million in production, another five in products.

Amrita

Then you've got chemicals and helium, like you said, gas. Why are we. Yeah, the the sense that everything is fine is probably the most worrying thing that I have in this market. Now, let's say this reopens at some point whenever it does, whatever that looks like. What's your take on the restocking like the infrastructure build out? Because that's got to be.

Jeff

It's this is it, this is it. That's what if you asked me what is mispriced in oil. It's long dated oil. The curve shape is fine. Everything like that. The back end is still at 70.

Amrita

The delta was 77 bucks. And I'm thinking, what am I missing?

Jeff

Yes. And that I think, is where, where we're going to see the repricing. But like Exxon's down the all the producers are down because they started that wrote you know that, you know, called the Revenge of the old economy asset heavy asset light halo rotation. It started but now everybody's given up on the halo rotation and gone back.

Jeff

I'll tell you my absolute confidence. I have so calls on the equity market but puts I'm so long Exxon shell BP oil all you know the miners the I have the old economy halo trade you know I out completely on and levered to the Hill my confidence I am I feel like almost 99.99%. They got it wrong.

Jeff

But in I go. What could I have wrong here. But then I just look at, I go back, I listen to the people. They can't even tell a articulate a story as to why this thing should go to a trillion. Why or yeah, why you should have, you know, by these different, you know, tech stocks. So, I, I'm really confident the question is, can I remain liquid at long enough before it begins?

Jeff

Yeah. To to deter. But I do know this. It's just it's struggle to go much anything on the equity market struggles to go much higher than these levels. So I think, you know, the point being is, even if I actually think it could be more bullish if it if it reopened, because then they're going to find out, oh, God.

Jeff

Producing oil is probably 100 plus. I don't know where it is. And the other thing too, you know, I've talked over and over about a macro repricing. And I do think it goes back to the simple observation every commodity is dirt. Plus diesel. And whether if it's grains, metals or whatever be. So if diesel explodes, then the the underlying cost structure of all the other commodities that go into producing diesel explode.

Jeff

And and also, the other thing I've learned in watching this is, is and I got this wrong, you know, it been doing this forever, but I mistake is I should have just owned oil in WTI. I try to put on the equities the you want to own the front end oil and everybody I know in front of oil you reached your all time high like a two days ago.

Jeff

Because you're rolling that front. But I know enough to know. By the way it's funny I told you did to all the clients way back in that previous supercycle by the front end of oil wrote up. By the way, I had to have a friend of mine call me Jeff. You're over complicating this by the front end rolling front month.

Jeff

And by the way, it's work like a charm, but the equities. And so you want to own the commodity right now. And then once we get that and you start repricing long term oils, then.

Amrita

That's when you go.

Jeff

To yesterdays. Yeah. And I did it the wrong order paid the price. And so even 30 years of experience I still made the mistake. But I do think that that's the big repricing. So with oil yeah the front end could absolutely explode off of this. But I think the backwardation it's not completely mispriced but it's at 70. What is it 77 or whatever on the back end.

Jeff

And I'd argue the Exxon Shell's BP's and the rest of them that they're going to reprice. And then you think, okay, how do you get the cost inflation. Then you start rotating money. And also the real explosion here is right now, they don't have to care about it. I mean, if you look at we when we were here, I think we almost had last time we had energy up close to 4% of the S&P.

Jeff

Yeah. It's back to like two and two. And so what happens if they ignore it. So let's say it goes up by you know I you know 30% to 3% or 30%. They don't care. Yeah. Now all of a sudden eventually it gets up to 5%. The index. Then they got a serious problem. And then they'll be having to sell their nvidias and the rest of them and reweight.

Jeff

And because of it, most of it's passive. They're going to be forced into these rotation. So it'll just start feeding. Not so. So everything is oh you're crazy thinking oil could go to I don't want to say because it's.

Amrita

Yeah.

Jeff

Whatever. It's not stopping at 5200 because then those companies will reraise everybody or reraise everybody's underweight it, then they're losing. And getting killed on their on their, on their equities or on the, on their television. And then they'll have to re wait on that. So the upside here when it starts to move the back end and I think is going to be the real the real shows.

Jeff

Yeah.

Amrita

And that's in a weird way like you said it almost needs to reopen because when it does that's when you realize how difficult it is. The storage with every country is going to want to buy and hold. I think the GCC will come out and say, we're going to build alternative routes and tanks. I mean, that's just going to be massive.

Amrita

Yeah. So okay, since you started talking about it, tell us what's your top three pick?

Jeff

I have absolutely still love Brant and WTI. I just, I you know, but back.

Amrita

End or front of you just think front.

Jeff

End I think just stick with the rolling front month and and it's like I look at people I yeah I don't know if you I'm talking technicals. They're candlesticks. You can see them in the market. Every time Trump comes out with his name it goes down, pops up. The people who were just doing rolling front month and just sticking to that strategy don't even have the candlesticks because you're picking up what's the dial.

Jeff

Yeah, the roll is so huge. So yeah, I still love that trade. And it's like and here we go. So you know, oh what happens. Like my wife goes because I am over my ski dips in this stuff. And she goes we know what happens when they do the truce. I don't care. I'll pick it up on the roll and you just keep picking it up.

Amrita

I think that's why we've seen that in our quant data. A lot of what we would call tourist. But I think people are literally just buying their in because of the backwardation and just rolling it. Yep. Yeah.

Jeff

And then I think the, then the other one is I just want to own, you know, broader commodity indices, just own the halo trade. And actually I'm now a senior advisor at, at Carlyle. And I'm going to be going back into and to the investment product business of commodities on the liquid side. And I'm still I'm still working with them, doing, doing private markets because I think that, you know, the opportunity in what I personally try to move in and do a halo trade.

Jeff

And I know a lot of the people listening here have all tried to do halo trade. It's close to impossible. So, you know, I want to go out and create the Halo products for people to invest in and you want to own the entire complex, agriculture, cotton, the rest of. And I don't want to sit there and have to choose, you know, so, you know, find something, you know, the ETFs out there that actually, you know, function, you know, that provide because the ones you and I were doing 20 years ago like B com GFCI, they're outdated is the problem is most of the products still are from that vintage.

Jeff

You know, I'd say two to, you know, I'd focus on or HAARP and hedge or HDR. Those are, you know, actually two of my very close friends from Goldman who actually have they knew all the pitfalls in, in, in, the,

Amrita

The traditional industries.

Jeff

Yeah. And by the way, their outperformance has been substantial. Okay. So, you know, that those would be ones that I would be focused on. And then I think the the other one is gold. I still want to be short gold here. And, and I think last time we talked about being short gold, it's work medium.

Jeff

Yeah. But ultimately when this thing gets really bad, you're going to people are going to be dumping gold to pay for it. Now, you want to be long gold. You want to be short gold until the central banks shift from being hawkish to dovish. Yeah. Of course. And then when they shift to being dovish I'm going to be all in on gold.

Jeff

We're going to go to 10,000 or something ridiculous like that. Because the other thing too is what is the world of dollarization. It's turbocharged now. I mean, what was orders 834 and 835? And China was basically saying, if you obey U.S. sanctions, you're in violation of Chinese law. It was an outright, you know, people go, oh, there's going to be a nice lovey fest with, with Trump in Beijing next week.

Jeff

No, there's not going to be a love fest there. You don't do that. We'll see what happens later on today. But but that tells you that the dollarization story is real. And, you know, the the whole architecture that was put in place after Bretton Woods is done, it's finished. I mean, the whole deal was America is supposed to protect global sea lanes.

Jeff

In exchange, you use the dollar. And oil was the most important commodity is supposed to protect. And the most important ship channel in the world was the Straits of Hormuz. And they closed it. They're closing it right now. So who's ever going to trust him again? Yeah. And so again, I want to own go long term here because, ultimately it's going to be a, you know, I'm not going to give their name, but I, I know somebody who's in the, in the military business know.

Jeff

So what's the world going to look like? China is China's not big enough to be the global segment. US doesn't have the money to be the global hedging. And so what is the world going to look like? Are we going to go back to the Dutch East India Company, you know, with, you know, mercenaries sitting on their ships protecting their own, with drones and the world's trading and, you know, tokenized gold and silver is out there.

Jeff

Is that where we're reversing to? I don't know, but I think, you know.

Amrita

Those risks are there.

Jeff

They're really are there. And I think, you know, the the right alliances are happening, you know, whether it's the Middle East, Asia all over the world. Yeah.

Amrita

So, so, long, brand long halo trade and short gold. Yeah. And equity markets not shorting it yet.

Jeff

I am I'm sell calls. But I put it that way actually the best trade I think out there I've been looking at is just by the vol the VIX. Yeah. That's probably the best way to trade it.

Amrita

Yeah that's true. Well thank you Jeff as always. Yeah it was great. And I think there's a lot of lot of really good trade ideas in there. Great. Thanks for Joining.

Jeff

Thanks for having me