Oil Expert: We Can’t Predict Iran Anymore

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1:48in 10 minutes or less. The Markets Podcast from Goldman Sachs. Listen now.

2:06Jonathan Cohen:Money markets matter. If money is evil, then that building is hell. The show goes on!

2:17Jonathan Cohen:Welcome to Prof G Markets. I'm Ed Elson. It is September 23rd. Let's check in on yesterday's market vitals. The Nasdaq climbed to another record high, boosted by a rally in chip stocks. Meanwhile, the S &P was flat, while the Dow declined. Brent crude was volatile. More on that in a second. And finally, the yield on 10-year treasuries was flat for the day. Okay, what's happening? Oil tumbled to its lowest point in two weeks yesterday morning, but by midday, those gains were mostly erased. Early on Tuesday, Brent crude had fallen 3 % to around$97. That was on hopes that Saudi Arabia's crucial east-west pipeline would restart this week, and that there might be diplomatic progress at the United Nations General Assembly.

3:08Jonathan Cohen:But just a few hours later, hopes sank, and oil prices climbed back above$100 following President Trump's speech at the UN. He said that he had a big decision to make about whether to strike a deal with Iran or to, quote, annihilate it. He also said that a deal might be made after the midterms. Then during a meeting in the afternoon, Trump claimed that his team just concluded a, quote, very good meeting with Iran's representatives. Brent crude settled the day at$98 a barrel. So lots to unpack in the world of oil Today, we're speaking with Matt Smith, Director of Commodity Research at Kipler. Matt, great to see you again.

3:47Jonathan Cohen:I was going to begin with a question about what is going on in Saudi Arabia, but then Trump goes to the UN and he suggests annihilating Iran. And I think that matters, but I'm not sure. What do you think? Oh, gosh. Well, that's the thing. we came into Tuesday and there was the bearish influence of both Trump talking about sort of tentative diplomacy. And you had the same signaling from Iran as well. And so you don't know if they're both playing games or what, right? Yeah, I think Trump has come to terms with the fact that we're probably in a holding pattern and nothing's going to happen until after the midterm elections here.

4:29Iran, on the other hand, is perhaps chancing its luck and saying, yeah, sure, like we could open the strait in seven days. All you have to do is remove your blockade and unfreeze all our assets. And so that's the path that we're faced with here. And so after, you know, initial positivity and the move lower on that news, really, we're just back in a holding pattern here, Ed. And so perhaps the Saudi staff has more relevance in this case.

4:58Jonathan Cohen:Is there any evidence that the relationship with Iran or the progress towards some form of a deal or some sort of peace talks, that it's moved in any substantive direction? Like, I mean, he says that he's open to meeting with the president, but then he also suggests annihilating the nation. I mean, is it better or worse, or is it just we have no idea? I think we have no idea, particularly when President Trump talks for so long every single day. He throws out so many things, right? Some of them are helpful and some of them are not. And so I think really we have to look beyond these headlines and just assume that we're in a holding pattern here until after the midterms.

5:46Jonathan Cohen:JP Morgan, their commodities team, they put out some research. They officially abandoned their baseline forecast for oil markets. They said, quote, we simply don't know how to model the end game, which to me is quite striking. I also kind of respect it. They're basically just saying we don't even know. What does that say about the situation we're in? And what was your reaction to them sort of coming clean in that way? I think a lot of us could relate to that. We've all been feeling it at certain points over the last six and a half months here during the conflict. And so, you know, to have a base case is very difficult at this point.

6:26Even with ourselves, we revised our balances pretty strongly at the beginning of September here, because even if we do get some kind of progress with the Strait of Hormuz, it's not going to be a straight path to normalcy. It's a very difficult thing to model here. You know, the concern really is that we do get escalation once the midterm elections are out of the way. And that escalation being, you know, whether it is Trump trying to define his legacy in terms of boots on the ground or whatever that may be. It's just very difficult to see how we see an end to this conflict here. The kicker to all of this really is that, as you mentioned, they're all prices around sort of$98 here.

7:10On the product side of things, we're seeing them absolutely ripping, you know, on a retail basis in the U.S. diesel is at six dollars fifty a gallon you know that's up sort of 75 percent year on year uh we're really starting to see that biting in not in in terms of inflation but in terms of everything right that it that those higher costs work their way into um but the but just in terms of the strait of hormuz the ironic thing is that we've been seeing oil prices rising over the last month well we've actually been seeing improving volumes coming out of the strait as well and so there's more barrels getting out but i think it's the risk premium involved that is the that's what the issue is is that while there's increasing flows there is an increasing chance that you're going to get hit by uh by iran there and i think the main option that iran has right to deter these flows or keep leverage over the strait and so i think on a certain level we should expect them

8:05Jonathan Cohen:to be doing more of that going forward here to me if the if the price is reflecting a risk premium about just reflecting an anxiety that this war could flare up or could be sustained in some way, that sounds like a structural problem. That sounds like something that isn't going to change, as you say, even if oil flows increase through the Strait of Hormuz, which then makes me think this is not going away anytime soon. This is something that will sustain itself for a long time. And perhaps we will continue to see diesel prices at record highs, gas prices at close to record highs in America for quite a long time.

8:47Jonathan Cohen:Is that your assumption at this point? Just going back to what JP Morgan said, right, when they said they just don't know how to model or plan for this endgame, whatever that may be. And that's the biggest challenge here, because there's either the potential that Trump just, you know, walks all of this back or walks away. the other is is on the escalation side of things and that that could really turn out to a full blown boots on the ground war and so both of those options don't seem attractive whatsoever right at this point and so because even if trump does walk away that doesn't that's not the end game you've still got the the strain of hormuz uh partially blocked or under control there it It doesn't resolve the situation.

9:32And so even if we get all of the situation resolved with Australia for moves over the next three months, it's going to take six months, nine months to resolve all the problems that we're seeing in the products markets. And then you have the U.S. talking about doing a diesel export ban, which would just like just send things absolutely crazy. Right. Because when you think about global waterborne diesel exports, the U.S. accounts for about 20 percent of those. and you've got russia that has already banned its exports because ukraine has just been relentlessly striking its refineries with drones there russia's about 10 of global exports so they're already off the market middle east is about 10 of global exports as well for diesel they're pretty much out of the market too because they're straightened so you combine those three and say u.s does an export ban that's 40 of global diesel exports not actually coming to the market what would be the

10:29Jonathan Cohen:downstream effects of that, I assume just inflation globally because of the amount of products that diesel is an input into. Is that the end game here? Exactly. You take diesel to the price where you cause massive demand destruction because there simply isn't enough barrels out there to meet the needs. And so you just drive those prices higher globally. Even from the US perspective, if you're going to put the diesel ban export in place, all that's going to do is cause refiners to dial back, take maintenance, and that. It may have an influence, particularly in the US Gulf Coast, to reduce diesel prices, where there's those, you know, 50 % of US refining capacity is.

11:12But ultimately, it's just going to have all manner of different, you know, unintended consequences here. And yeah, at the same time, it feels like it's being seriously considered.

11:23Jonathan Cohen:You speak with oil traders and commodity traders, you are in the commodities world. And so you have access to the conversation that is closest to this conflict in a lot of ways. Just on sort of a social or maybe even a political level, how have feelings about this war changed among traders and among the commodities community? Like, it seemed as though there was a time where a lot of traders weren't too worried about this, or they thought that this was something that they were kind of used to, or that, you know, it shouldn't necessarily be priced in, in a, in a, in a permanent way. Seems like maybe that's changing, but how have, how have reactions in that community changed over the past several months?

12:19So, so the market keeps us humble, right? And so we have seen certain markets being able to adapt to get the supplies that they need. And on the flip side, other things haven't happened that perhaps we expected. Like I've been on your show before, you know, March, April time, we're expecting prices on oil to be much, much higher than where they actually went. And so there's that piece of it. But then the second piece of it is that markets fix themselves, right? Economics drives everything. And you ultimately see, like we're talking about with diesel, prices rise to the point where you kill demand.

12:53I think that the challenge right now is that it's very difficult to, A, fathom what is going to happen next, and B, see how it is fixed over the short to medium term. And so there remains a lot of unknowns in this market here. And I think everybody is continuing to scratch their heads here. So while a lot of our clients are still very much focused on what is happening in the Strait of Hormuz, we have all manner of other situations that we're trying to figure out from Chinese demand to Chinese rebound to Russian diesel export bans, all of this stuff. And the complexity of it is only increasing and that's not going to go away anytime soon.

13:34Jonathan Cohen:Matt Smith is Director of Commodity Research at Kepler. Matt, appreciate your time. Thank you. Thanks, Ed. After the break, sports betting. And for even more markets insights, you can subscribe to my weekly newsletter, simply put, at edwardelson.substack.com.

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17:14Jonathan Cohen:We're back with Prof G Markets. Football season is underway, which means it's a lucrative time for the gambling industry. But one of America's largest sportsbooks just hit a speed bump. The New York Times reported on Saturday that DraftKings has built a machine learning model that scores customers on what it calls elasticity. The score predicts how much a customer will lose after getting a free bet or bonus. Customers who are expected to lose more will then get more offers. Reportedly, the company has also built a model to flag customers heading towards a gambling crisis, but it actually shelved that safeguard.

17:56Jonathan Cohen:The news lands in a bad year for the stock, which is trading near a 52-week low, down more than 50 % from its peak in 2025, now facing increased competition from prediction markets, which captured roughly a quarter of US sports betting volume during the World Cup. Investors are left wondering, where is the sports betting industry headed? Here to break this down, we are speaking with Jonathan Cohen, policy lead at the Institute for Boys and Men, and author of Losing Big, America's Reckless Bet on Sports Gambling. Jonathan, thanks for joining us. Good to see you. First, tell us a little bit about this New York Times report on DraftKings.

18:36Jonathan Cohen:It sounds like they are using AI to figure out who loses the most money and then get them to lose even more money. Is that what's going on? Yeah. And on the one hand, this is a crazy new story. And on the other hand, this is sort of business as usual for the sports gambling companies. You know, I don't think it will be a surprise to any industry observer that a gambling company knows who loses the most money and targets them with promotions and tries to entice them to gamble more money. What sort of new and special about this, and as you know, I listen to your podcast and you have to talk about AI these days and you put AI in the title of something and then the number goes up and the New York Times sort of did a good job of sort of framing this, not just about the company targeting people, but using machine learning, using AI specifically to target people to do a better job than Vinny at the sports book, knowing which guy who walking into the casino deserves a promotion.

19:27And that I think scares people because of how micro targeted, just how precise these algorithms can be relative to a human sort of making that same decision.

19:35Jonathan Cohen:I think the part that is maybe surprising or maybe not surprising, depending on your view of these companies, is this idea that they are actually targeting the people who are most vulnerable to gambling addictions. And a lot of the policy communication from these companies has been, no, we protect those people. We're just a platform. And if you have a gambling problem, if it's clear to us that you are in danger, we will put some sort of safeguards in place to protect you. But they're not doing that. Is that commonplace in the industry? I would say this is something we've known actually for a long time, that modern online sports betting would afford us an amazing opportunity.

20:15Better data on gamblers than we ever would have been provided when people sort of walk into Vegas and cash tips or whatever. And then the question has sort of always been, okay, who gets that data, right? Does the VIP team, the people whose job it is to like ply big gamblers with free iPhones to keep them betting? Or does what's called the responsible gambling team, the team whose job it is to monitor for problem gambling and to slow players down? And as the reporting makes clear, and this has sort of been consistent in the industry over the last eight years or so, that is in many companies, I think particularly at DraftKings, that is a very much a sidelined section of the company.

20:54Their job is basically contrary to the rest, the other 90 % of the company. And at DraftKings in particular, that has been a disempowered and almost disemboweled department.

21:04Jonathan Cohen:Just looking at the data, revenues on traditional online sportsbooks, 11x'd from 2020 to 2025. It's gone from a$1.5 billion industry to a$17 billion industry that is just online sports betting. What is causing this rapid increase? And to what extent is it dependent as an industry on a handful of the most vulnerable gamblers? The number one driver is availability, right? Since the 2018 Supreme Court decision, 39 states and Washington, D.C. have legalized sports betting in some form, 32 of them providing it online. So whereas previously you had to like get on a plane and get your butt to Nevada, now you can bet on Malaysian women's doubles admin from the comfort of your home.

21:52Great. To your last point, it's a very keen observation, right? Lots of industries rely on a small subset of customers and gambling is no different. During the 2023-2024 NFL season, 82 % of revenue for sports betting companies came from just 3 % of customers. And those are the kinds of folks who we assume are going to be targeted through the program that the Times uncovered from DraftKings.

22:14Jonathan Cohen:Having said that, the stock has gotten hammered recently. It's down around 57%. FanDuel is also down 70 % from last year. I assume this is a result of the fact that they are now competing with these other players in prediction markets, which are, of course, getting into online sports betting as well. What do you make of the fact that investors are starting to stay away from these companies? Yeah, I mean, I would say a lot of it is prediction markets. A lot of it is also just sort of natural maturation, right? These companies shot up to, I think, 80, 70, 80 percent of the market share immediately after legalization.

22:52And it was sort of inevitable that over time, specifically a company like Fanatics would begin to chip away at the pole position that DraftKings and FanDuel had asserted for themselves. And then the prediction markets is really weird. You know, 69 % of prediction market trading volume on sports is coming from folks in states without legalized sports gambling, 43 % alone from Texas and California. But DraftKings is leaning really hard into prediction markets. FanDuel and Fanatics are launching prediction markets as well, but they clearly are not investing as much energy and as much advertising behind it as DraftKings is.

23:25So you would think that the rise of Calci and Poly market wouldn't do as much damage as it is doing to a stock like DraftKings. But clearly, the market knows a lot better than me because, of course, it does.