Doomberg: Is This the Start of a New Commodity Bull Market?

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1:24And now to the top analysis of today's markets.

1:40Are the stars aligning for a new commodity bull market? Welcome to this Real Vision Deep Dive series interview. My name is Andreas Steno. I'm the senior host here at Real Vision and founder of Steno Research. And given today's topic, I'm thrilled to announce that we have Mr. Doonberg as the guest of the hour. It's a great pleasure to host you on our platform. Again, welcome to the interview, Duenberg. And Andreas, great to be back with you. It's been too long, my friend. I'm very much looking forward to another fantastic discussion with you. As far as I remember, Duenberg, the last discussion we had was basically amidst the very peak of the European energy crisis during the autumn.

2:20And I'd like to start with a discussion on the backdrop in global commodity markets right now. We've seen a couple of quarters, if not three in a row, with slightly lower prices on a trend basis. So what do you make of the backdrop right now in global commodity markets after the storm that we saw during the autumn of 22? So I would petition the commodity markets into sort of different areas because they are behaving separately with their own supply, demand and potential future forecasting. I think the oil market is tightening correctly, and it does feel like we're at a critical moment. If you look at the chart for Brent, we're coming up to the sort of edge of resistance, multi-month resistance in that sort of$85 to$90 a barrel range.

3:09And we do see the bullish formation. Of course, if it doesn't burst through this resistance, then all bets are off. But I think the biggest change in the backdrop from when we last discussed the oil market it is the fact that there is really no more juice left in the US Strategic Petroleum Reserve. There had been some 147 million barrels of mandated future sales out of the SPR, but in January, I believe it was, Congress passed a reconciliation bill that retroactively applied the sales from last year to those mandates. And so we've just seen, I believe, the last of the sales out of the SPR for some time.

3:49and that was 1 million barrels a day of cushion for the market last year that, you know, unless China gets involved with its large SPR, something we could talk about, it seems as though that buffer capacity has been pulled from the market and the market no longer has that flexibility that the Biden administration provided it. And I think most would agree that the sort of collapse in prices from$125 to the$75 $5 range was due in large part to the aggressive introduction of excess supply for largely political reasons by the Biden administration. And to be fair, they worked. They had a better than expected midterm election.

4:30But taking away that excess, I think the market is beginning to digest that if we have any kind of an economic recovery in China and the U.S. economy is coming in a little stronger than many perhaps had feared, that we could be sitting up for a pretty decent run in oil. Natural gas, as you know, is a completely different story. And last time we talked, it was reaching truly historic prices. I think probably somewhere close to$100 per million BTU, which is just an insane number. And of course, the big story is the winter that wasn't in Europe, which thankfully the temperatures came in far warmer than many had feared.

5:06And the worldwide search for BTUs on the part of Western Europe, and in particular the Germans, paid off. and they made it through the winter, thankfully. And so prices, of course, because natural gas is amongst the most inelastic of the commodities because of the difficulty in storing it have collapsed. We would argue that we are probably at peak complacency in Europe with respect to energy. And we would note that March of 2023 ended a three-year La Nina cycle. And now, of course, everybody is talking about a new and strong El Nino. And we would point out that historically, La Niña's lead to warmer than average winters in Western Europe, and El Niño's tend to lead to significantly colder and drier than average winters in Western Europe.

5:54And, you know, the prices really had a mini peak in December during those 10 days where it was quite cold in Europe. One wonders what will happen if we end up having a colder than what the market perhaps is pricing in weather in Western Europe. And so from the energy side, those are the two broad strokes. Commodities, of course, everything depends on China. And the economic data coming out of there is always questionable, of course. And so that's sort of our broad overview, I would say. Bullish oil, being careful, of course, that others may interfere with the market. You're trading against the political intentions of the Biden administration, which is not to be taken lightly.

6:36Complacency in natural gas with very low prices might lead some to consider that to be a bullish setup with limited downside and potential significant upside. And then commodities is a bit of a black box depending on China. I'd like to allow you to elaborate a bit on the sort of talk of war between Saudi Arabia and the Biden administration in the oil space. As far as I'm concerned, as of the time we sent live here, we haven't received the confirmation from Saudi Arabia that they intend on limiting supply through the month of September yet this week. But we are awaiting the signals from the Saudi Arabian administration on that front.

7:15They limit supply by a million barrels a day, roughly south of a percent of the total consumption on a daily basis, if I'm not mistaken, Doonberg. So how important is this decision from Saudi Arabia and is the White House administration able to respond to it? I would guess that there is an ideal price for oil that OPEC would like to see. And it's probably not much higher than here. And so with no more SPR reserve, I think that probably gives the controlling factors back to OPEC plus. And of course, this is not a monolith. It's countries with their own self-interest. And, you know, I saw some higher than expected Russian drilling numbers over the past couple of days that might make it appear as though their commitments to cut might not come true.

8:04So I think at, you know, 85 to 90 rent, the Saudis are probably pretty happy. And at 70, they are probably not very happy. And so perhaps there has been a back channel deal that as long as the price remains range bound below, you know, measurably below 100, that this is something that all sides could potentially deal with. I think in many ways, you know, the history of people who have gone to war with the U.S. over oil is not a glorious one in the long term. Just strange coincidences that regimes get overthrown when they seem to run against the U.S. dollar and the policies around oil. And I think MBS has declared his independence from the U.S.

8:47in a unique way compared to, say, leaders of yesteryear. But I think that they would be happier at 87 than they were at 70. And I'm not sure they would be happy above 100. And so if prices do get away from the market, I think that the Saudis would be quick to put a ceiling on prices as well. That's just my view. I don't know if you have a different one, but that's sort of my feel for the situation. I don't think anybody wants outright war with oil going to$150 or$200 because everybody knows that's unsustainable for the economy and causes significant disruption. It causes people to overbuild and to spend unwieldy amounts of money, assuming they're drawing a tangent line to a sine wave, one might say, from the engineering side of the world.

9:32And people would like to have high and stable prices, not volatile prices with some upside. I tend to agree with that assessment. And based on anecdotal evidence from my client base in the northwestern parts of Europe, it also seemed like a lot of speculative investors were involved on the short side when we traded$10 lower than we do today on crude, basically in an attempt to force the OPEC plus group into noncompliance. compliance. And it seems like the speculators have lost that bet against Saudi Arabia in particular over the past couple of weeks, if not three here. So fully agree on that assessment.

10:17I'd like to pick your brain on the demand side of the oil equation as well, because we've talked a lot about the supply side so far with the SPR releases and the Saudi Arabian supply cuts. So what do you make of the demand side? Do you see early signs of an actual pickup in demand here from both China, but also the more cyclical components of the U.S. economy. Interesting question. The U.S. Energy Information Administration keeps revising up its prior reports on demand. And interestingly, all of their revisions make prior demand higher than they initially reported to the market, which begins to call into question the data itself over time.

10:58If all of the corrections are in one side and it just coincidentally, the politically expedient side, One wonders whether some of this isn't being managed. I did see a headline as we were getting ready to record that we set a new record, worldwide record for demand for oil. And I'm sort of the Luke Roman school of demand analysis, which is at reasonable prices, the demand for oil is effectively infinite. Energy is life. Everybody wants a higher standard of living. If oil were$30 a barrel, the demand for it would be much higher than it is today. That we are setting. record demand for oil at these prices is pretty indicative of that fundamental axiom.

11:41And so when we study the oil market, we tend to focus more on production and supply. They're two different things, of course. One is a precursor to the other. And so I think a carefully managed oil market where Brent is in the high 80s and demand to setting records is probably pretty ideal for OPEC plus. If you can't, especially given their cost curve, you know, their position on the cost curve, if you can't fund your domestic fiscal needs at$85 oil, then we all have bigger problems to worry about. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

12:27If we look at so-called crack spreads right now, both in Asia but also in the US, we've seen a trend upwards alongside higher prices in Brendan Crude. And my question relates to whether this crack spread, I guess the popular translation of a crack spread is the refiner's margin, whether that crack spread is an important gauge for someone like you following the commodity markets closely. Is it a gauge of the true demand from the refiners? How do you view that crack spread? And is it something that we need to watch here? Yeah, the fascinating thing about the oil markets is people conflate. the price of oil with the price of gasoline or the price of diesel or the price of jet fuel.

13:13But in reality, each of those downstream markets is a supply-demand market of its own. And this is the ultimate form of byproduct economics, right? And so the crack spread, it depends on the composition, which of the products is driving the crack spread. And so if you have a shortage of diesel worldwide, then you could give away gasoline and the refiners would make enough money. And this is actually one of the things that we point out when we argue that electric vehicles aren't going to dent the future demand for oil nearly to the extent that some in the environmental movement would like to project.

13:50Because we're still ultimately of the three major products, whatever the demand is, the highest demand for those three major products is what's going to drive the number of barrels of oil that are refined. And so diesel, you know, diesel is used in things like heavy trucking and heavy tractors and mining equipment to get the so-called green metals that we need for the very electric vehicle revolution that the environmentalists are proposing. In a world where, you know, diesel demand is growing and gasoline demand is shrinking, they'll give away gasoline and the emerging market will soak it up.

14:28And so, you know, whenever we look at a crack spread, the number itself is certainly an indication of refiner margins. But in reality, you need to do one level deeper to see which market is driving that spread. If it's jet fuel because, you know, people are traveling again and China's reopening. Is it diesel because the global economy is growing? You know, diesel also powers all of the cargo ships. It powers, you know, all of the supply chains. And these are what the environmentalists would call hard to abate sectors. It's very difficult to imagine replacing a diesel truck, for example, with anything viable today.

15:04And that's why they haven't. And so crack spreads are interesting. And of course, there's a meta-analysis of the fact that we don't have enough refining, especially in the U.S. And so ultimately, byproduct economics is driven by the constraint. and it's actually a fascinating, one of the more fascinating economic situations to model is when the same factory produces four things and you can't toggle the supply-demand balance of those four things to any degree. How the prices interplay with each other is really something that is well worth studying. And with our background in the commodity sector, this is something that you run into very often.

15:49Speaking of China, you mentioned China, and I'd like to get your take on the Chinese strategic petroleum reserves as well. It's been a topic brought up by quite a few pundits in the commodity space as well. And I find it interesting since it is typically very difficult to fully confirm numbers out of China. So do we actually know the true size of the Chinese SPR? And how big of a thing is this Chinese SPR if it is actually taken into use in force by the Chinese authorities? Two questions there. The size of it and whether they're likely to use it for the purpose of capping the price of oil, which as some pundits and several that we respect seem to be implying here recently.

16:47I've seen estimates that it is 460 million barrels. That could be wrong. All data from China could be wrong, but that would be sort of 60 % of the size of the U.S., but far more if it's full than what the U.S. currently has. I think the U.S. has like 360 million barrels left in the holster. We recently gave a presentation to our pro tier called Doomscrolling, searching the globe for things to worry about. And we had a section there on whether or not China's preparing for war. And then, you know, I don't know if you noticed, but a week and a half or so ago, Kyle Bass gave this really interesting presentation at the Hudson Institute.

17:24It was one of those Ben Hunt quote, why am I seeing this now moments for us? You know, why is Kyle Bass a hedge fund manager talking about a geopolitical military situation in China at the Hudson Institute of all places. And I watched the video. You can find it on YouTube. You can just Google Kyle Bass, China war, it will come up. And he made a pretty compelling case that President Xi is preparing his domestic audience for war. And his main thesis is that if you read what Xi is actually saying versus how the West is portraying it, there's a vast chasm. And so if in fact, And, you know, there's a question that we would have as to whether this is defensive posturing or preparing for a true offensive move.

18:05And, you know, an invasion of Taiwan need not be what we all think it is, you know, the wars of yesteryears. But if he is, in fact, either defensively or offensively preparing for kinetic conflict with the U.S., one would imagine that he would be far more concerned about supply of oil than price of it. and that if he has a relatively full strategic petroleum reserve, the last thing he would be doing is worrying about the price and he would be more interested in stockpiling in case of a blockade. And so if you pushed us, we would probably fall into the camp that President Xi has sort of developed this Stalin-like surroundings where people are afraid to tell him the truth and show trials and disappearing foreign ministers and so on.

18:51I don't imagine that if you have something controversial to say, it must take some courage to tell the truth. And so who knows what he believes and what he is preparing for. But if you pushed us, we would say that they would not try to use their SPR to manipulate the price of oil. And that if they are, in fact, at least preparing for provocations with the U.S., that they would be more concerned about keeping several months of supply within their domestic borders. Makes a lot of sense. And I think this is the perfect bridge to a discussion on the underlying policies in the commodity space, in particular in the energy space, both in Europe, in the US and in Asia.

19:33And I'd like to start with a discussion on the European policy setup heading into the winter season in, yeah, say three, four, five months from now, depending on whether we actually get cold weather already from October. And I noticed that the German secretary in charge of the energy policies, Robert Harbeck, said, was it two days ago, that Germany should expect five tough years ahead due to the decisions taken over the past couple of years. I think that's, I mean, finally, he admits to it at least. But in any case, you wonder why he closed down well-functioning nuclear capacity amidst all that.

20:16But in any case, how do you view the European policy setup ahead of this winter? And do you see any clear risk scenarios for both the natural gas situation, but also, of course, the spillover to the electricity markets in Europe, given this? It's really fascinating to watch. And of course, you're much closer to it and much better connected than we are from over here. But if you ask me to pick one metric to watch for an indication as to the political dynamics in Germany, it would be the polling numbers around the AFD party, which have been exploding higher. And then we are noticing how the incumbent sort of elite political establishment within Germany is trying to make even the mere mention of perhaps collaborating with the AFD in a coalition government as taboo.

21:10they shall be the party that nobody even names. And we do wonder whether this might create a bit of a Streisand effect where the efforts to suppress only cause the popularity of the AFD to grow even larger. And I saw a German party member today was out saying we should be prepared to sacrifice more of our standard of living. We have in the name of climate policies and the so-called green energy transition. I suspect this won't be a popular platform from which to run. and I do see that the German politics is complex for outsiders like us to analyze and so you should take everything I'm saying with a grain of salt but pattern recognition of an unpopular party digging in and because they truly do believe what they're doing is right it is important to sacrifice the standard of living in Germany for the good of the planet it's all fine but in the last poll that I saw the Greens were barely above 10 % and they seem to be the swing deciding party And I do think that the critical blunder in Germany, and you can correct me if you have a different view, has been this forced transition of furnaces to heat pumps and so on, causing people to wake up and realize that, hey, wait a minute, this is actually affecting me in a real intangible way.

22:22And then, of course, obviously the deindustrialization that is ongoing as companies view those policies and see that there are other places in the world where they can set up shop. I mean, five years, what party has ever run on stick with me for five more years and it'll be worth it? You know, it's really amazing that this would even come out of his mouth. You tell me what you think. I mean, you're much closer to it. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

22:54Well, it's pretty clear if you watch the industrial trends out of Germany that at least the most energy sensitive parts of the manufacturing industry has basically left the country already or scaled down materially. And I tend to agree with you that it's hard to envisage a scenario where it returns. So I guess to a certain extent, the energy situation could solve itself, given that very heavy industry leaves the country. And I think it's also one of the reasons why we've seen sort of a stronger balance in energy markets in Germany after this, because, well, the industrial production is still very low compared to a couple of years ago as a consequence of the energy policy.

23:41And, of course, then you need less energy, ultimately, which may help him out. But, of course, at the consequence of lower standard of living for many Germans. So I probably share your sentiment. And, well, you mentioned Voldemort, as we would say, the AfD party, and obviously it is still very much an unthinkable scenario that they will have anything to do with relation to governing the country. But who knows? At least you're absolutely right that they're trending upwards in the polls currently. If we look at the current natural gas situation in Europe, we've seen victory laps by many European politicians over the past couple of quarters.

24:25and we've also seen how the numbers on the natural gas storage situation have been shared by many politicians from the European Parliament, etc. Europe is on course to have full storages by 1st of November. The issue here is that the storage is not particularly large relative to demand in case of an adverse scenario. So how much does the situation need to sort of change to bring back the trend of higher natural gas prices and electricity in Europe, Doonberg? Is it a feasible scenario that, for example, a cold winter could wreak havoc with already full storages, more or less? Well, absolutely. And I would say, again, we certainly hope that this has not come to pass.

25:20You know, Twitter trolls notwithstanding. We are not sitting around the table hoping for crisis. We are trying to warn against such scenarios in the hopes that policymakers eat those warnings. And we have written several times that it is our sincere hope that the European political establishment does not confuse good luck with sound strategy. But the irresistible temptation to do so, to score political points, gives us some concern. The storage, again, depends on the country. Certain countries have an enormous amount of storage. The UK has practically none. And so storage levels don't really matter in Germany, whereas they might matter in the Czech Republic.

26:02I'm sorry, in the UK, but they might matter in the Czech Republic or Austria or pick your favorite country. And then there's also, of course, the daily maximum drawdown rates from the storage as well. And so you may end up in a situation with rolling blackouts at the worst time. The problem with Germany in particular is the doldrums, combined with the shutting down of the nuclear power, combined with elevated prices of natural gas now that most of their natural gas is no longer coming from Russia via land pipeline or under the sea, but instead is coming in via LNG. And even though LNG prices are down significantly, at$10 per million BTU, this is still significantly more expensive historically than natural gas was delivered via the pipelines.

26:45And of course, at$100 per million BTU like it was last year. This is just insane numbers and it is unsustainable. We do worry about that combination of cold, dark, no wind. Because of El Nino, there's no amount of wind capacity or solar capacity that will help you when it's not blowing or the sun isn't shining. And so again, we do believe that Germany will be relying substantially on coal, even more so now that they've shut down the nuclear power plants. You know, my friend Mark Nelson at EnergyPants on Twitter has been pointing out and released a report that eight of the German nuclear power plants that have been closed are in a position where they could be reopened in relatively short order.

27:33And if there were to be a crisis this winter, say a four or five week cold snap of historic proportions that causes a bit of mayhem, One would hope, first of all, that nobody truly suffers from such an event. And then secondly, that maybe a newfound appreciation for steady baseload power, carbon-free power like nuclear, might be the political consequence that follows from it. The fear, of course, is that you end up getting a populist government, that the people revolt, and the leaders who put the population in this circumstance are swept out of power, and we all might not like the people that replace them.

28:12And so this is why we've tried to warn our friends on the progressive environmental left that the path function matters, and the people will riot. But thankfully, last winter was relatively easy. We have a slide in the presentation that we gave to our protier that shows the historical deviation from mean. Most of the back half of December, January, and February were routinely touching the 90th percentile from a relative warm temperature scale. And very, very rarely did it reach the cold side of that standard deviation. If we have a repeat of that this year, I think if they get through this winter, then the coast is much clearer.