#1031 - Will Inflation Send Commodities Higher? with Doomberg | Energy, Semiconductors & China

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0:37Will inflation send commodities higher? Welcome to Real Vision Daily Briefing. It's Tuesday, May 7, 2024. I'm Ash Bennington, joined today by Doonberg, head writer of the Doonberg Substack. Welcome. Hey, Ash, great to be here. I got to say, crosses off a key item on my bucket list to be interviewed by Ash Bennington on Real Vision. I mean, who could ask for more? Doonberg, I feel exactly the same way. It's like, You know, longtime listener, first time caller. I've been watching on Real Vision. And it's just a pleasure to have you here and to have this conversation with you today. Before we get into the weeds, I want to, since this is your first time having a conversation with me, let's start at the 50 ,000 foot level and talk a little bit about the way you currently see energy markets, big picture.

1:23You bet. So we like to say the single most important thing a macro analyst should answer to themselves is, is the global market for primary energy well supplied or in short? And if it's long, that informs a certain set of views. And if the energy markets are short, supplies are tight, commodity prices are high, that informs a different set of views. And if we look across the primary energy spectrum today, we see coal trading between$125 and$150 a ton, which is relatively affordable, let's say, compared to historical averages. Natural gas in the U.S. is in the middle of a glut. You can't give it away in some parts of the U.S., which we'll probably talk about.

2:11And the one primary energy input that stands out when you correct for energy content, when you sort of normalize dollars per million BTU, is oil. And oil is trading at a relatively substantial premium to the other primary energy commodities. and one, two things you should sort of ask yourself about that is how can you estimate that premium and what is the genesis of it? What is the source of it? So our preferred view to try to get a thumb in the air estimate of the geopolitical risk premium in oil is to multiply landed natural gas prices as quoted in dollars per million BTU by six and compare that to WTI and Brent.

2:58And if we look today, natural gas landed in Europe or in Asia is about$10 a million BTU, which makes it roughly the equivalent of$60 a barrel oil. And we see WTI trading around 80 and Brent a little higher, which means some portion of that$20 to$25 difference is as a result of the, we think, the ongoing kinetic conflicts, both in Ukraine and in the Palestinian, Gaza, Israel, Iran nexus. And in our view, if peace were to miraculously and spontaneously appear, we think oil could easily head south of 60 and below. Because we do believe at the highest level, commodities are pretty well supplied. You have OPEC holding back a couple million barrels a day of production.

3:49Interesting to see how that discipline maintains itself as things progress. But by and large, there's plenty of natural gas in the world. There's plenty of coal in the world. In the physical markets, there seems to be more than enough oil to be had. And the only real standout metric that we see on the board today is this geopolitical risk premium in oil. And so we view the price of oil as a proxy for the market's assessment of risk of the war expanding. And that's our view today. So let's take that view and talk a little bit about how you express it in terms of positioning. WTI, I know, is something that folks here at Real Vision watch quite closely.

4:29I think most people have a rough idea of what that chart looks like. You know, heading down to essentially zero, I don't know, below zero during the depths of the pandemic in the spring of 2020. shooting up during the reopening in, I guess, May, June, July of 2022 to just shy, I believe, of$120 a barrel, now trading on my screen,$78.45. Talk a little bit about how the thesis intersects with price and how you think about expressing. Yeah. So the sweet spot for oil, look, oil is not a freely traded commodity, right? I mean, we have like an overt cartel that has an express desire to help manage the price.

5:09It is highly inelastic. So a million barrels a day or two million barrels a day of supply swing can radically change the price, as we saw when it traded for minus thirty seven dollars a barrel at the height of the covid crisis because we're basically running out of places to put the stuff and traded up to one hundred and thirty dollars a barrel. I think Brent touched at the apex of the initial outbreak of war in Ukraine as a result of Putin's invasion of that country. And so another example is President Biden released a million barrels a day, 1 % of global daily demand for a period of six months.

5:45And he cut the price of oil in half. That gives you some indication of the sensitivity of the price of the commodity with respect to supply deficits for supply excesses. And so the sweet spot for OPEC is between$70 and$90 a barrel today, which on an inflation-adjusted basis back to like$1980 is$25 a barrel. I mean, oil is still incredibly cheap today for all the talk of cheap oil and all that nonsense. There's plenty of it, and it's dirt cheap considering its utility for humanity. So$70 to$90 a barrel is where OPEC would like to manage the price. anything below that, and they begin to see budgetary stresses and anything above that, and they begin to concern themselves with economic contraction and inflation causing pullbacks and things like that.

6:31And so we're kind of in the middle of that sweet spot right now. I think when we saw the initial reports that Iran was lobbing a couple of hundred missiles and drones into Israel, you saw oil spike. And then when Iran preemptively said, even before the missiles had landed, that this was the end of their conflict in their view, oil prices collapsed and gold prices collapsed and so on. And so the one thing that we need to keep an eye on as investors, whatever your views on positioning, is Biden's extreme attention to the price of gasoline in the US. He's an old school politician. We personally interacted with his staff when he was the senator from Delaware, which we used to jokingly say, you know, Joe Biden, D, DuPont.

7:13He knows the commodity industry quite well. He's acutely aware of the price of gasoline at the pump and how that affects the future runway for politicians. There's talk just today that they might tap the SPR again, the Strategic Petrolling Reserves, to try to manage oil prices down ahead of the election. And so when you look at the fact that oil is trading at a substantial premium to the other primary inputs, and the president would like oil prices to go down, it sets up sort of a short-term scenario where we view the risk to be on the downside. I will close by mentioning a new Substack author, Jack Johnson, who's a really great commodities trader.

7:54And I think he's retiring and now starting to write more broadly on Substack. Had a really great note this morning. JJ745, I believe, is the Substack handle, talking about how the risk of 60 seems more likely to him than the risk of 90 or 100. We're going to take a quick break and be right back with more of the Today's top analysis on the Real Vision daily briefing.

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9:18Do you share that view? I do. Yeah. Yeah. I think, look, if we could broker a ceasefire in Israel and, you know, the Russians reach the Nipah River and hostilities come to a close there. and we have some form of a North Korea, South Korea situation where the West claims that these borders haven't moved and Russia is just going to occupy the place and dare somebody to do something about it. I think we could see downside risk to the price of oil. And on top of that, look, when you have natural gas trading for as cheap as it is, and we should say, Henry Hub has since recovered off the lows, which we had thought might have been in at$1.50 per million BTU, Henry Hub.

10:00But just last week, it was a pipeline, Kinder Morgan pipeline declared force majeure. And the price of natural gas at the Waha Hub in the Permian Basin is minus$4 million BTU today on the screen as we're talking. That's a spot price, of course. But they're giving away natural gas in the beating heart of the U.S. oil and gas and commodity infrastructure in Texas. And that is eventually people will just switch the engines. They're not going to burn diesel with WTI at$80 or$78 as it is today when they can burn natural gas and do the same work at a fraction of the price. And so the markets will close that arbitrage over time.

10:42In a glut, arbitrages tend to close down. In a supply crisis, arbitrages tend to close up. And we have so much natural gas, especially in the U.S. and the thing that people perhaps don't understand is that the production of oil and the production of natural gas are linked in the US. And so this geopolitical risk premium in oil is driving the glut in natural gas because it is co-produced, especially in the Permian, as an unwanted by-product. And you can't give it away. The reason why they're paying people to take natural gas in the Permian is because they want to sell that oil for$80 a barrel because that's above their break-even price or their profit zone.

11:22And so, perversely, war will eventually be the undoing of that energy arbitrage when you correct for content. This is so fascinating for me, Doonberg, because I'm barely a tourist in the space where you are a permanent resident, but it's fascinating to me and it's really interesting. I want to talk about natural gas in just a minute, but I also want to ask you something about something because it's generally in the news for political reasons. You mentioned the SPR, the Strategic Petroleum Reserve. I am, again, just a visitor in this space, but I'm looking right now on the EIA website. This is the U.S.

11:59Energy Information Administration at the SPR Reserve stocks. And what I see here is a peak, it looks like, around 2010 at just shy of three quarters of a million barrels, staying relatively constant, rolling down in 2020 to maybe 630 ,000 barrels. And now we've cut that in half since President Biden has tapped that. What are the risks in doing so if we get below, say, a quarter of a million barrels? So need to correct you by six orders of magnitude, sorry, three orders of magnitude. It was three quarters of a billion barrels of oil. And now there's some 300 and change million barrels of oil. All right.

12:39It's expressed in thousands. This is how you know I'm a tourist. Well, actually, Bloomberg has this crazy, they express it in 1 ,000 barrels, but then the chart is in millions. So it's 0.365 million thousands. And I don't know why they just don't say 365 million. Toonberg, I can't imagine why I would be confused. Exactly. But nonetheless, one of the things that people need to realize about the Strategic Petrolling Reserve is it was constructed as a consequence of the supply crisis as a result of the oil embargo of the 1970s, the Yom Kippur War. And back then, the main U.S. political establishment thinking was that Herbert's peak was right and the U.S.

13:25had reached peak oil production. it was already a major importer of crude and would forever be. And what has changed in the intervening period is the shale revolution. So we built and filled it when we needed it because we were net energy importers and by a wide margin. But the shale revolution has made the U.S. a gigapower in energy. We produced 20 % of the world's oil and petroleum products. We produced 30 % plus of the world's natural gas. We're still a net exporter of coal. We have some 95 nuclear reactors operating with really great capacity factors. We have an abundance of food and fertilizer and the ports to export them.

14:07We are a superpower in energy today, unlike the world has ever seen. I believe, and I quote Luke Roman in this regard, that we've added two and a half Saudi Arabia's worth of BTUs since the advent of the shale revolution. And so the... Is that total energy production capacity, including natural gas? Yeah, gas and oil, two and a half. That's like a BTU normalized. Yeah, exactly. And then, by the way, we have, unlike most petro states, we have a relative still, despite China's best efforts to hollow it out, we have a relatively robust manufacturing sector that can feed off of that natural gas and do quite well for themselves.

14:42If you're a fertilizer maker in the U.S. who gets the price of your product in the global markets, you're pretty happy to have somebody pay you to take natural gas so that you can make your fertilizer. Whereas if your competitors are paying$10 a million BTU for landed LNG, then you're going to win in that market. You're going to climb the cost curve quite well. So when the SPR was built, we needed it. And we were short. And now we're long. We're net exporters. We have more refining capacity than we need. We're net exporters of refined goods like gasoline and diesel. In parts of the country, we still have to import because of various insanities like the Jones Act, which doesn't allow us to ship diesel from the Gulf Coast of Texas to New York, because unless it's a U.S.

15:27flagship and we don't have any such ships because we're not in the marine business anymore. But nonetheless, we have this abundance of energy in the U.S. And so it seems reckless. It is certainly political. It's overtly political. So I can understand why people who might be Trump supporters think it's a dirty deal for Biden to empty the SPR ahead of the midterms to save a few House seats and now ahead of the presidential election. But he's going to do it. And on the pantheon of risks that the U.S. is taking, that's relatively small compared to the fact that we've allowed, for example, China to hollow out our manufacturing sector, especially in the military supply chains.

16:09In fact, in our Doom Zoom presentation for our pro tier this month, we half jokingly called China the new arsenal of democracy because all democracies have outsourced their military supply chains to China. And we just assume they'll keep giving us these critical goods when we go to war with them. It's insane. But I digress. The SBR will be emptied ahead of the election if Biden needs it. It will be overtly political and it'll work. It will swing a few percent of voters because people care about the price of gas. But interestingly, what I hear you saying is, compared to the other risks that you see in the economy around energy, around supply chains and elsewhere, you believe that the new supply dynamics in the United States makes emptying the Strategic Petroleum Reserve, though it is, in your view, an overtly political act, far less dangerous than it might seem on the surface because of the productive capacity of the energy sector in the United States.

16:57Correct. I mean, again, if we were net oil importers and we were at the behest of the Saudis, it would be a different story. Now, look, if you're Europe, you're still in that situation. But Europe has got its own insane energy policies to deal with. The U.S. is an energy gig of power today. There has never been a country more powerful, more prolific from an energy perspective than the United States of America in 2024, period. And that has to be the first input into geopolitics, into economics. Well, I think it puzzles us. We wrote a piece early this year called Slick Landing, where we predicted that it would be highly unlikely that the US would slip into a recession.

17:38And we tried to explain why we thought that was. We all know that if oil goes to$150 a barrel, we're probably going to see recession. In fact, last time it peaked out in that range, we saw the great financial crisis of the 809. We also know that if oil spikes to$150 or$200 or$300, we're going to see inflation. And we also know that Germany screwed up its energy policy, and it is undergoing massive deindustrialization and struggling with a recession. Why would it not be then that the exact opposite of those things, We're swimming in cheap hydrocarbons. We can't give away natural gas. We produce more than enough of the oil that we need.

18:15We're net exporters of coal. We have the world's best nuclear and largest and best nuclear power fleet still until China laps us. Why wouldn't it be that that concoction would be something that might insulate us against a recessionary impulse, especially when you have Congress wastefully spending so much money and running these large deficits, and you have an overtly political Fed that has an eye on the election and everybody in Washington, D.C. wants to keep the orange man out of the White House. Like, how is this a recipe that's going to bake a recession cake? I don't see it. We don't see it.

18:48We made the call. We'll see if we're wrong. We'll try to figure out why and we'll admit it. But, you know, I think lots of people have a political lens when they try to view sort of macroeconomic numbers. They want Biden to fail. They want oil prices to go up. They want gasoline prices to go up. that's just not in the cards. Like, I just don't see it. You have to be, the difference between an analyst and an advocate is you try to read the numbers on the screen and do your best to interpret them. And that's our view. Look, we came to some prominence during an energy crisis, but that doesn't mean we're permanent energy bulls.

19:19Like the very most important question you have to ask is, are we short or long energy? And the very nature of that question is there are two possibilities. And once you convince yourself of one or the other, you have to go with it. And we think the world is long commodities today. Gosh, that's so well said. Advocacy just seems like it's bleeding into everything in 2024 on both sides of the aisle. And it's a real challenge. And it's one of the reasons why we're so happy to have you here on Real Vision to cut through a lot of that noise. By the way, Doonberg, before we move on to the next segment, I wanted to give you the opportunity.

19:50You mentioned the pro tier. Tell folks if they're interested in hearing more about what we're talking about right now, where they can find you, where they can find your content. Sure. All our work is at Doonberg.com. We recently ejected a squatter from that domain name at no small cost. I suppose that's a compliment that we had to pay up to get rid of said squatter, and they made a good investment. But we're now Doomburg.com. We're still a Substack site, and we are partners with Substack. We have two tiers. We have an annual subscription tier where you get all of our articles, and you get to comment on all the pieces and interact with us.

20:24and then also we have this pro tier for perhaps wealthier or even some people who work on Wall Street to get additional access to DoomBergen. That tier also gets a monthly webinar from us, either a presentation we put together or a high-profile guest. And so those are the two tiers we have. But basically, this is the work of our lives. We publish seven or eight pieces a month and one DoomZoom a month, as we call it for our pro tier. And this is all we do and it's really a blast. I can't even imagine publishing seven or eight pieces a month. You know, we were joking before we went on the air. We're a very small team, but when you find what you were meant to be doing in life, you just keep doing it.

21:04And these pieces just sort of come to me and then we research, write, edit, publish, promote, defend all of them. And sometimes we're wrong and we admit it and we learn and we have this amazing network. We're approaching 230 ,000 subscribers on the Doomburg platform, which means we have this vast network of experts to tap into for ideas and for, and consulting on pieces as we're working them. And, oh, this person that I know works in the utility industry and they're very senior position at such and such a company. Let's reach out to them off the record and find out whether we're characterizing this right.

21:39And so on and so, and then we have a cascade of, of really interesting story ideas coming to us every day via email. And we try to respond to every subscriber. And so it's just really fun. You know, again, like when you find what you're meant to be doing, you know, good Lord, just keep doing it. And that's our plan. And so back to the whole advocacy versus analysts thing. Look, an energy crisis would be great for Toonberg as measured by our subscription business, for example. We're not cheering for an energy crisis. We are trying to analyze the markets and call the balls and strikes as we see them because our goal is just to be doing this in 10 years, right?

22:13And the more credibility you build with your audience by calling it as you see it, then look, we get things wrong. We were early to the European energy crisis and we hung on to that thesis too long. But then we were pretty quick to call the coming glut in natural gas, which I think we got right. And we were certainly dead to nuts right on the sanctions policy and that it would backfire. And so we've gotten some big calls right. We've gotten some big calls wrong. Nobody bats 1 ,000 in this business. And as one of our subscribers who appreciates our authenticity in our analysis said to us, the only thing worse than being wrong is having no opinion.

22:47Give me your opinion, show me your homework, and I'll do the rest. And so that's our view. We're going to take another quick break and be right back with more of the day's top analysis on the Real Vision daily briefing.

23:01Very well said. Talking of which, I want to take a look at another view. This is Andreas Steno-Larsen, and we'll talk about his view when you get back. A piece called, What if the Fed Holds Rates Steady? This is from today, 5-7-2024. Let's take a look at that clip. when you see such a decline in the input price of everything from energy to chemicals to food, you typically see a tendency towards increasing order books because of falling prices. So basically the opposite of what an economic textbook will tell you. But what happens when prices decline is that a lot of people assess that this is a good time to buy and load up on inventories.

23:41And that's essentially what we're seeing the first signs of now. And if I'm right, that's a very positive sign for the overall commodity cycle during the rest of the year. And when we pair that real world reflation or inflation with easy financial conditions, I still think financial conditions are pretty easy, especially in the US, we probably still have an inflation problem down the road. Jimberg, I think you may have a slightly different from Andreas Daniel Larsen. Let's give you a chance to respond. Sure, first of all, a big fan of Andreas. Love his work. Always try to catch him when he's out there.

24:19And I watched that clip with interest. I think one thing that's really important for people to differentiate is you might be in the commodity sector, but you are either a producer of commodities or a user of commodities. And where are you drawing that commodities line? So if I look at that chart that Andreas showed, the chemical industry, for example, which is one we know quite well, they are in the U.S. benefiting greatly from cheap natural gas. And so, of course, global investment is going to come to the U.S. and perhaps stay away from Europe or Asia because we have this natural gas advantage, and that is a key input into the chemical sector.

24:54The chemical industry is dotted with cogeneration facilities. The two things you need to run an integrated chemical plant like BSF, or pick your favorite, is you need electricity and you need steam. You need industrial grade heat. And you get both of those from a natural gas-fired power plant. And so if you're a producer of natural gas, you're in the commodity sector. And if you're in the chemical industry, Wall Street investors think they're in the commodity sector. But in reality, they are benefiting from this natural gas gulot. And so you always have to ask yourself when you're analyzing an industry or a stock or a company, what are their inputs and what are their outputs?

25:36What are they paying for their inputs? What do they get to charge for their outputs? And so if you look at the fertilizer companies, like we mentioned earlier, like you want to be in the US today if you're making fertilizer because fertilizer is a globally traded commodity. Fertilizers are globally traded commodities and your inputs basically are natural gas. And so if you're$2 a million BTU Henry Hub, but you get to charge ammonia global prices out of Tampa for export, you're going to be printing cash, like literally a license to print cash. And if you're an ammonia producer in Germany, right, you're in the hurt locker.