Yasser Elguindi on hidden demand, oil's low point and OPEC reserves

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

So I am super excited to have Yasser Elguindi with me. He is, portfolio manager and partner at Westpac Capital, particularly their Energy Opportunities Fund. The reason I'm super excited is because Yasser and I worked together for, what, six years together at EY? I've known Yasir for a very long time, and I never thought he was going to say yes.

Amrita

But when I asked him, would you come and join us on air forum to talk about markets? Because, you know, I love talking to you about markets. You have just a very different way of looking at it. And when you said yes, I was like, you know, Christmas presents. So thank you. Yes. Thank you for joining us on air for.

Yasser

Thank you, Amrita, for the honor and a pleasure to be here.

Amrita

Welcome back. I would say, yeah. We've been talking obviously all throughout this year about this market. Now you're on the other side. You were on this and you were in this seat before, talking about, you know, fundamentals and how markets, you know, mispriced, etc. but now you're trading it. You can see and we've talked about it as well that, you know, yes, fundamentals are important.

Amrita

But so much of this is about risk management. So much of that is about flow. What's been I think I think we do want to talk about that kind of transition and experience. Like what is it, what is different, what is kind of relevant, but also what's kind of been the feeling from the other side this year in terms of everybody says it's been a challenging year.

Amrita

You guys have done actually very well, if I may say so. How have you managed to do well, but what have been those challenges this year?

Yasser

Yeah, I mean, that's I think you hit the nail on the head there. I mean, I think the, the word to describe our feeling is exhaustion. Yeah. You know, it's not so much the volatility, you know, that you can manage around, but it's the uncertainty. You know, every morning we wake up to see what the commander in chief has, has his truth to tweeted.

Yasser

Not quite sure what we're supposed to call those. And every day it's a different, thing, but somehow the same. So yeah, it's been a stressful year, especially when there seems to be such a clear dichotomy between people's expectations of what's going to happen in the balances versus the reality that we've experienced. So a lot of challenges for us, for sure.

Amrita

So, you know, you talked about this expectation versus realisation. And it's funny because just today we were talking about it saying on average Q1 was more or less in line. If anything, maybe the builds were a little bit more than we were thinking H2 on average, the bills were 1.1 million barrels per day, less so for the full year.

Amrita

You could argue the bills or not argue. You can see on average were about 7 to 900,000 barrels per day less than what the market was expecting. So if we were to fast forward to next year, our balances are showing 2 million barrels per day. I don't know what you guys are showing. We'll talk about that. But then if you on average say, oh, it's going to be 900,000 less, then it's about a million barrels.

Amrita

But then suddenly, is it that big a deal? Where is this glut?

Yasser

Well, if I can push back a little bit because the reality is, I think there has been this expectation for this glut for several years now, and it really hasn't materialised. And granted, there have been a lot of, you know, dislocations in the market. We're dealing with sanctions, we're dealing with shadow fleets. We're dealing with maybe some things that we haven't in the past.

Yasser

But this concept of, you know, balances that don't materialise is not, you know.

Amrita

It isn't.

Yasser

Here. We've had this before. A little bit older than you. So, you know, I remember in the late 90s, we had this whole missing barrels where the IEA was projecting one and a half, 2 million barrels a day of surplus builds that never materialised. And, somebody coined the phrase missing barrels, but, you know, my experience has been when the balances are that wrong, it tends to be demand, much more difficult to measure, much more difficult to identify when the changes are happening in real time.

Yasser

Yeah. In the 90s, it was China. Yeah. You know, back then, China was an afterthought. It didn't even have its own line item in the balances. It was just lumped into Asia writ large. Sort of like how Africa is just one line, you know, but you know, big, vibrant economies across Africa that maybe, are harder to account for.

Yasser

So, you know, the verdict is still out on this glut. And we're watching just like everyone else. But certainly all the traditional indicators that would normally imply a surplus. That's not what the story is telling us. So it could still happen, but we're waiting.

Amrita

Because if you look at the crude curves, they've been the most backward they did this year, even though we've fallen $25 in flat price, none of the differentials are saying that there's a glut coming. We have this problem at is while all our regional balances, we always have to do it basis the forward curve because it's the OGS.

Amrita

What flows are coming in all our regional balances. So maybe minor boost next year. And yet the global balance which we have to do on a macro basis is showing this big build. So then it's like it doesn't even add up. Yeah. So how do you treat this?

Yasser

Yeah I mean so the way we structure our portfolio is, you know, we have you know, we're making bets. In the short, in the medium term on the price of oil. It's pretty vanilla. We're not doing anything complicated. We're simply making directional bets on the price of oil. And, you know, we have sort of these themes that play out over longer periods of time.

Yasser

And so those positions tend to be a little stickier, a little bit structural. But there are so many impacts on the front part of the curve that, you know, quite frankly, 25 years ago didn't exist 20 years ago, didn't exist. So you have to account for that. So we also have a tactical trading book. But this year it's been the tactical positioning that's really, driven our performance.

Yasser

And, you know, I think you have to be, in a position where you've had this vol compression over the last 2 to 3 years. And you have to be nimble and you have to be not married to your positions, and be able to react very quickly. But it's been a challenging year for sure.

Amrita

But I was talking to your colleagues not that long ago, actually, and he kind of mentioned this, that people have tried to trade this from the short side this year.

Yasser

Yeah.

Amrita

And actually haven't made money. Yeah. But those who've traded it more from the long side, not that they've been long haul. Yeah. But kind of tactically traded in from the long side are actually probably the few that are up on the you know even if it's small. Would you kind of agree with them. Because the short guys have been talked about a good few times.

Yasser

Absolutely. And I think that's part of the reason why, you know, prices has not done anything. I think most of the traders out there would prefer if the oil price would just collapse. Yes, it would just rally, but it's done. Nothing because I think the consensus has been bearish in part driven by these expectations for the large builds, which just haven't materialized.

Yasser

But think about what we've experienced this year between Liberation Day in April. And then you had the US bombing of Iran in June, and then you had the government shutdown in the US, and you just, you know, Europe is going through a number of challenges. So it's a lot and it's hard to that does have conviction in, in a position I think that's why you're seeing a lot of short-termism.

Yasser

Plus, as you get into the end of the year, risk managers are tapping people on the shoulder and saying, you know, maybe, maybe we shouldn't have such a big position on going into year. And so I think that's part of it as well.

Amrita

Do you feel that everyone like you exactly said now everyone's expecting or hoping prices just collapse? It'll go down to $50 or $40 and then everyone's going to buy it back. I think, like you said, you've done this for longer than I have. It's never that simple.

Yasser

No, nothing moves in a straight line. And, you know, the oil market definitely is the one that just tries to extract maximum pain from whoever's involved. So, no, it's never that straightforward. And because, you know, I mentioned that there's so many different factors driving and, you know, these are participants that quite frankly, just don't care about the price of oil in a sort of tangible way, not the way that, say, a refinery producer does.

Yasser

And so these are people who don't care. They're just they're in it for different reasons. And so that makes it hard. So you have to understand those dynamics. So we spend as much time trying to figure out those things like positioning and CTAs and you know, producer hedging. And those things tend to have as much impact as, you know, supply and demand.

Amrita

So then how do you because like I said, you guys have actually done well this year. How do you keep kind of getting that alpha out? Like because it's it's not that simple, especially when prices are so stock. You are looking at something where positioning or sentiment is saying something balances might be saying something else. So what are those things that you're looking for in a market like what are the things you're saying okay, I'm not going to look at maybe x, y, z, which everybody's looking at.

Amrita

I'm actually going to focus on these couple of indicators like what are those kind of I mean.

Yasser

It's going to be a lot more boring maybe, than what you, might think. But, you know, we need the conscious decision going into Labor Day, Liberation Day that we were going to be smaller than we normally would be. Too much risk, too much uncertainty. And, you know, if you don't have a view and you're in the market, then what?

Yasser

What are you doing? Yeah. So, we decided to be very tactical in our positioning. Like, normally, you know, we might have two thirds into a structural position, and one third accounts for our for tactical positioning. I think tactical accounted for far more, you know, and those are like day trades. Well, right. Hours as opposed to, you know, being being in something a little bit longer term, which.

Amrita

Also is why it's exhausting.

Yasser

Which is also it's exhausting. But it was the right decision. Right? You know, we had so many times when we felt like oil was on the cusp of breaking out one way or the other, and then something happens. And so confidence is a big part of you know, what what we do and why we, you know, subscribe to.

Yasser

Yeah. And we subscribe to a whole bunch of different places because you want to have a little bit of edge. And, and having confidence in your views. And, it's hard to do that this year and 26.

Amrita

What is your view then, like what happens to oil prices, structure everything.

Yasser

Yeah. So we we we might be a little bit more, constructive than the consensus in terms of, you know, we do have a build in, you know, implied for Q1, but not as much as what the market believes. We're probably a little bit more bullish on the demand dynamics. We think that oil is going to bottom at some point over the course of Q1, Q2 but we're not sure what that certain level of.

Yasser

Yeah, which is really what we're, we're, we're trying to understand, but, you know, so what gives us confidence. You know, we've been in this three year cycle now in the oil market, really. And for us, demand is the most important factor. And, you know, demand has been good. I think it's been better than what many people expected, for sure.

Yasser

But we've also been in three years of sub, global economic trend growth. Right. So China is not grown. It's struggling. It's only just starting to emerge from it's post-Covid. Shell the US went through a mini manufacturing recycle post Covid hangover if you want, from all of the, spending that took place, then.

Yasser

And Europe, like we mentioned before, has its own challenges. So those things we feel are beginning to turn around. There's a lot of fiscal in the pipeline. The US, you've got the big beautiful bill. There's a fair bit of fiscal implied there. I think Europe is going down a path we've not seen in my generation, let alone, you know, the current generation.

Yasser

So, defense spending that's going to happen in spades. As the, you know, political dynamics between the US and Europe change and Europe is going to have to effectively fend for itself against Russia. Yeah. So we're going to see a ton of fiscal spending, in Europe in ways that we haven't seen before. And then, you know, China is sort of strategically targeting certain sectors.

Yasser

So we do expect to get a little bit of a fiscal impulse, in the economy, which should get us back to trend. So we're not raging bulls on the economy, but relative to where we've been, we think it will matter on the margin. And also over these last 2 or 3 years, you've had a scenario where supply has been growing, right?

Yasser

A lot of those projects that were greenlighted, you know, five, ten years ago when oil prices were much higher, you know, those of all come to market and we've seen spectacular growth in a number of different places, which, you know, you write about regularly. But we're starting to see that Peter out. And by the fourth quarter of 2026, we expect that growth is going to stall out.

Yasser

We're not massive bears on the US. In shale, we think, you know, spending is going to continue to come, you know, compress. But you know, there's a big base of production out of shale that will continue to produce, maybe a little gas here than it was. But the point is, the US is not going to grow a million barrels a day anymore.

Yasser

And, and that matters, you know, since, since, 2011, the US has accounted for 75% of non-OPEC growth. And if that's beginning to stall out, we think that makes a difference. So it is at the end of the day, supply and demand for us. We we're probably a little more constructive on the demand side. And we think the supply side should begin to, should, should begin to even out.

Yasser

And then as OPEC continues to add its barrels, we'll see spare capacity begin to erode again. And, and then, you know, there are a lot of different ways that can play out.

Amrita

Yeah. I mean, but then and even look at raw numbers right. Sequentially, this is the really the big quarter for supply growth after this is flat. Yeah. Day to.

Yasser

Day. Well I think the equity markets are starting to sniff that out. Right. You know ironically as oil has really struggled this year, you have a lot of the oil indices. Actually up on the air. XLP is up. Oil is, is up, I think 7 or 8% this year. You know, and I think people are starting to look around, the equities and in anticipation of what they think is the next cycle and oil we've had three years now sub trend growth big supply growth.

Yasser

And that's beginning to reverse.

Amrita

I was going to ask you about this because I think one of the things I used to enjoy thoroughly when you were here at EIA was because you've got this ability to look at other sectors and say, okay, this is what it's telling you about oil, that it's coming. Right? Sometimes when you are in the commodities markets, you're just so myopically talking about just the physical, you know, supply-demand balances.

Amrita

And, some of the energy equity guys we speak with or the macro guys we're speaking to, they're starting to ask us about a 20, 27, 28 balance. They didn't care about 26 anymore. Yeah. So I mean, is that too soon though?

Yasser

I don't think so. I mean, look, I mean timing is the hardest thing. Yeah. And you know, you're either in it or you're not. Yeah. And I think the way I like to think about it is what's the downside versus the upside. And right now, like the oil market is, implying something far more sinister than what exists today.

Yasser

Yeah. And maybe more sinister than what ends up happening. We'll see. I'm, I'm open to the fact that we still get these builds. I'm not going to say it's impossible or it can't happen. It's just for three years we've been waiting and it hasn't. So, but the point being, you know, you're discounting the future. And, if you wait until the move happens many times in our market, it's too late.

Yasser

So you have to have some participation. And look, the reality is, you know, I think macro has had a big inflation. The, dollar theme play. Yeah. I mean, every single risk asset, whether it's gold or silver or copper, or the energy equities I would argue are sort of, you know, implying some form of dollar debasement.

Yasser

We can argue about the degrees, but it's very clear that that's what these markets are pricing and trading, except the oil.

Amrita

Have you seen I'm sure last few days lots of macro banks and strategists are coming out and saying next year is going to be the commodity year. Oh, and guess what? Energy is underpriced. And I was like, yeah, but I, I'm like, it's so fascinating because when you talk to the physical S&P guys in oil, they are genuinely they're like oh this is going to be the biggest contango since Covid.

Amrita

And then you've got these kind of completely opposite views. And that's why, you know, one of the things we've talked about as one has been maybe the back end of the curve just gets anchored. And then the front can do so we can go into a bit of contango and whatever else. But it's really about that back which was, which has been decimated by shale over the last ten, 12 years.

Amrita

But maybe it's now, especially if we think OPEC will kind of release the barrels and there is no spare capacity. Is that the trade then?

Yasser

I think so, I mean, especially with the equities. Right. Because they're less focused on the prompt. Yeah. And they're a little bit more focused on what returns are going to be 2 to 3 years out. So you know I would argue that there is not a ton of downside when you're looking at, you know, the 27 part of the curve.

Yasser

Because of these dynamics that I mentioned in the course of 26. And, you know, whereas shale five, 6 or 7 years ago, used to, you know, break evens for shale represented a ceiling for prices. Because the market understood. Once you got to a, you know, price above that, you released all this production. I think now shale break evens become the fuel.

Yasser

Yeah. Because now if you fall below that price level, you actually will get a reaction, from shale that maybe we didn't understand. And for me, the surprise is going to be if we get to a point where we need shale to deliver a million barrels a day of growth again, and it won't be able to, I think that's going to be the catalyst that, you know, galvanizes and makes people understand there's there's too much, armchair quarterbacking in our in our space.

Yasser

It's really fascinating to watch. But, you know, there are a lot of people who are commenting on the oil market that I feel like maybe don't understand some of these dynamics very well.

Amrita

OPEC, I know you obviously do a lot of work on it. That's how the first time we met was back in Vienna in an OPEC meeting. You followed OPEC and, you know, particularly Saudi Arabia for a long time. Where do you think that goes? Because I think, again, to your point earlier, a lot of people also misunderstand.

Yasser

Yeah. So, you know, OPEC is an important organisation. I mean, for the Saudis and for other countries that are a part of it. So, you know, my expectation is that OPEC is probably around for a while. And they do serve an important role and function. Right. But what I think people are missing about what's happening within OPEC today, and especially with the recent announcement that was made regarding, the,

Amrita

The baseline changes.

Yasser

Not just the baseline changes, but the accounting and auditing reserves. Yeah. And, you know, the Saudi oil minister, energy minister, you know, he's a wordsmith. He doesn't say anything unless he has a point to make. Yeah. And, you know, there was this phrase and I'm going to paraphrase and, you know, we can do the auditing of that later.

Yasser

But he said something to the effect of, you know, this is a very important decision, a monumental decision. It's important for the world to know how much is left. And that really caught my attention. I think most in the mainstream media especially didn't pick up on that right. And the calculation for spare capacity is very important. And that's something I've been arguing and writing about, because we have this concept of spare capacity that's driven by supply outages, short-term outages.

Amrita

Yeah.

Yasser

But if the US system is maturing and we're starting to see, projects not being replaced, then, you know, the further out the curve you go, you have to really start wondering what's going to support the baseline of growth. And our concept of capacity has to change. It's not just about short-term outages. Those will still be important.

Yasser

But that's why we have espers and things like that. But for Saudi it's not the what you can bring on in 30 days and sustained for 90 the way the IEA and others look, the fact that they're saying our capacity is for one year's worth of production, I don't know how many other countries within OPEC are going to be.

Amrita

Able to sustain. And that's exactly the test.

Yasser

And that's the test. Yeah. And so, that could also be why we have these inflated balances. Because capacity might be a little bit less than what we think it is. So you know look this is an opaque mark opaque opaque. Yeah. But it is opaque in the sense that the data is incomplete and it's not sometimes provable.

Yasser

And so being able to have a have a look under the hood, I think is going to be monumental, especially for the analysts who really do a deep dive on this, for us to have accurate forward balances, it's very important.

Amrita

And I think this year more than ever, I've noticed so many people even saying like, supply demand balances have just been useless, right, for trading purposes. I mean, some of the stuff that our, data science team, I mean, they've they've really embedded, they're now embedded within the research team and some of the stuff they've revealed through just in, I would argue, alternative methods of calculating.

Amrita

Right. Because otherwise you're just taking supply-demand numbers at face value. We can see Russian production is inflated by 400,000 to 600,000 barrels per day. If you just use flaring because you can see all the flaring data by field and then you're like, okay, that's let's call it half a million barrels per day right there. Or suddenly Middle Eastern as a whole, you can't find the barrels quite like what they are saying versus what you can track, demand.

Amrita

We are doing something similar, but you can easily come up with a million barrels per day, which is just not there. Yeah. And we're coming up with this concept of what we would call comfortable capacity rather than the point being is that if you use a definition of 12 months, not a lot of people have it. Yeah. And I think that's something I think the combination of that and or the US is not going to be able to grow at a million barrels per day, because you'd be surprised how many people will say to me, oh, if the prices go to $70, the US is going to grow.

Amrita

And I'm like, no.

Yasser

Narratives in our market are really hard to just.

Amrita

Like.

Yasser

Yeah, you know, that was true during the period 98 to 2008 when oil prices were.

Amrita

Going off. But yeah.

Yasser

Yeah. And the forecasts just, you know, so narratives are really difficult to dislodge. And, you know, we're still stuck in this paradigm of, you know the shale miracle and lower for longer. And Elon Musk is going to make oil obsolete in five years time. And you know, so and while those things are true to some extent, I think, you know, people have to take a holistic look at the energy, at the energy complex.

Yasser

I don't mean just oil and fossil fuels. Right. So Westpac is an energy fund. Yeah, right. We have three strategies that play. Ours focuses on the oil market, but we have the volt, the fund which also looks at what I think people would characterise as an energy transition fund. Right. Yeah. But you know, these are the things that we think have longevity, for decades, because power and, electricity and fuel are going to be super important, right?

Yasser

We all know that economic growth is energy transformed. And when you look at the demographics of the world, demographics favour energy consumption 100%.

Amrita

And I think that's my point, is that that penny hasn't dropped yet. No. So when that does, I think that's when to your point, then you can then say, oh, I will position for this because then it's too late, right?

Yasser

Yeah, exactly.

Amrita

So final question is what do you think could surprise the market next year? I think we've been surprised enough this year.

Yasser

Yeah.

Amrita

I don't know if it's surprises just like, oh yet again I think everybody's become a bit like immune to surprises to some extent. But what do you think we're all thinking.

Yasser

Yeah, I'm honest, I mean I've already talked about it, but for me it's demand. And like when, when a paradigm shift happens in demand, you only find out about it six months afterwards or more. And again, for me, like, because I sort of lived and experienced that shift in China, the revelation, it really was a revelation of what was happening in China at the time.

Yasser

There are some similarities right now, I think. And, you know, I don't know where. Right. But we're looking very closely. And for me, I think ultimately what we're going to find is that there is a source of demand that is unexpected and new. And that's why we haven't seen this glut for three years, which, you know, the bears have been trying to.

Amrita

I mean, even just the US ended up revising their August numbers up by 300. I mean, this is the thing, right? It's just I think it's going to be lots of these smaller ones, but I agree. I mean, we are now at 1.1 million barrels per day of demand growth for this year alone.

Yasser

So America's great you know, even when people lose their jobs, they go shopping to make themselves feel better. So, the consummate optimists, but consumer societies are emerging everywhere. Yeah, right. India is a huge consumer society and very quietly has been growing at 10% a year. I don't know how many years. And nobody I mean, you know, we talk about it, but I don't know that people understand, like how important, you know, when I say we, when policymakers say to emerging markets, we need you to reduce your emissions by 2050, what they're really saying to them is you cannot improve your system.

Amrita

Absolutely.

Yasser

It is not.

Amrita

You consume.

Yasser

No, no, no leader is going to willingly do that. So we need to take a step back. Right. Because energy is the fuel that makes the economy work. And we have to really get this right. And, too much talking at each other.

Amrita

Well, thank you so much, Yasser. Thank you for doing this. And I know, you know, everyone's had a difficult year, but that's why I think you've been so eloquent and kind of putting through what those difficulties have been, but also what we can look forward to. So thank you so much. I hope to have you back again.

Amrita

And happy holidays.

Yasser

Thank you. Amrita, I'm happy to join you any time.

Amrita

Thank you.