Oil Risk Returns, but Do Markets Even Care?

0:00Andreas Steno Larsen:New week.

0:04Big moves. You ready?

0:09Andreas Steno Larsen:Andreas on the data, Mikkel on the flow. Turn the headline into trades you can know. From yields to inflation, every chart, every trend. Get the story, get the setup from the open to the end. They try to be as actionable and as honest as possible But keep in mind that their predictions might be Sometimes may be good Sometimes may be shit Sometimes may be shit

0:46Andreas Steno Larsen:It's Macro Mondays, big picture Clear plays, stocks, bonds FX, crypto on the way Get context strategy right now on your screen. Macro Mondays, level up your week. Oh, yeah.

1:06Mikkel Rosenvold:Oh, yeah, it's Monday again. Welcome to Real Vision. Welcome to Macro Mondays. My name is Mikl Rosenwald. I'm joined as usual by my co-host Andrea Steno. We have a great show for you today. Is the war back on? Do we have jet fuel shortages in Europe? And what is keeping markets afloat anyhow? Welcome to the show, Andreas. How are you this morning?

1:28Andreas Steno Larsen:I'm feeling a little bit better. You know, I've had a rough weekend, so I actually at some point couldn't care less about the Iran war during Saturday and Sunday because I was in bed. But, well, I think on Friday afternoon, I managed to tweet, the crisis is over, period. It looks a little bit wobbly, that message today, doesn't it?

1:54Mikkel Rosenvold:But let's see. Yeah, we'll get back to that, Andreas. I have to say I'm in a great mood today, mostly due to psychedelics. We had a great weekend as investors in Definium, Cybin, Compass, other companies as well, after Joe Rogan stepped into the White House and Donald Trump delivered an executive order. Obviously, we don't do legislation anymore in the U.S., so an executive order on psychedelics. So a great mood for me here anyway. It's going to look quite neat on our portfolio as well, but we will touch on that in our Macro Meets Micro Show. I can't remember if that's next week. I should have prepared that.

2:34Mikkel Rosenvold:But anyway, enough about psychedelics, Andreas. Perhaps, as you mentioned, things have been really, it's been quite the rollercoaster over the weekend in Iran. And, you know, I had some of the same feelings on Friday, and now we're here. So that's perhaps a good occasion to just mention our usual catchphrase here, Andreas, that our takes, even on crises, might be...

2:57Andreas Steno Larsen:Sometimes it may be good, sometimes it may be shit.

3:02Mikkel Rosenvold:Yeah, I think we got that. So, Andreas, before we get started, just a quick rundown of some of the great content we have for you this week on Real Vision. I released the drill article today and tomorrow I'm doing and asked me anything for alpha members at Real Vision. So not only the approach here, but also for Alpha members. It's mostly going to be geopolitics, but take your shot. Ask whatever you want. I'll see if I can answer. I'm happy to talk psychedelics as well, clearly. So get your questions in there and join us tomorrow at 11 Eastern for that. Thursday at 9 a.m. Eastern, we have the very first Chiding Macro Show with Joe Bland for free on YouTube.

3:42Mikkel Rosenvold:So if you're one of those guys just following Macro Mondays on free every week, you can go watch Joe Blanche's great shining macro show. He's been doing some banger trades lately, and you can track these episode by episode if you get into it. So do check that out Thursday at 9 a.m. Eastern. And finally, Friday at 10.30 a.m. Eastern, we have Jim Bianco joining Ash Bennington, and that's for the Alpha Group and above. So lots of great stuff. We have a couple of articles coming up, Andreas, including our Friday portfolio update, which is always one to look out for. So lots of great content, Andreas.

4:20Mikkel Rosenvold:Wow, what a weekend, Andreas. I want to start maybe going back to Friday a little bit because we had had two and a half weeks of complete, almost building ecstasy, you know, a rally culminating in announcement that now the Iranians were going to open the Strait of Hormuz. And I had much of the same feeling as you, Andreas, that at least for markets, this was mostly over, We still had a peace deal to get signed, but that was mostly it. Then we don't know exactly what happened over the weekend. It's likely that we had some internal disagreements in Iran, or maybe the Iranians discover that when you're in a sort of, I think it's called a Mexican standoff, where you're like in a Western movie, when you have two guys holding a gun at each other, it's a really bad idea to put down your gun unilaterally.

5:11Mikkel Rosenvold:And that is essentially what the Iranians did by opening the strait without the US lifting their blockade. So the Iranians somehow realized this or made the decision to close the strait again. And we even had ship-on-ship or attacks-on-ship over the week in the U.S. Reportedly, we don't have all the details yet, boarding an Iranian tanker as well. So in my opinion, Andreas, we're actually at a worse point than we were before Friday because now we've actually seen action, kinetic action, as we like to use that phrase, against ships. That's not good. We're heading into the deadline on the ceasefire on Wednesday.

5:53Mikkel Rosenvold:We're not really hearing a lot about positive movements on talks, and it's getting late in the day in Pakistan as we speak here, Andreas. So did we jump the gun too early, or what's your take on the situation here?

6:06Andreas Steno Larsen:So I just saw a headline coming in three, four minutes ago. So Trump was asked whether Iran is doing the talks, and he says he don't know, but they're supposed to be there. Those are the headlines from PBS here. So let's see. It's comforting. Let's have a look at the actual flows through the strait first, Michael, because we did actually have a new peak post-war during this weekend. So there was a window of opportunity. It wasn't long, but it was there. and have a cruise ship going through apparently and i i take some comfort in the fact that they do not destroy these ships they they either bought them seized them or you know fires of guns at them to get them to turn around but uh in the early stages of the war they destroyed them so i still think there's sequential progress here um but as i said last week we obviously need the flow to improve, say, over this week or next week to continue this narrative.

7:14Andreas Steno Larsen:Having said that, I've spent countless hours trying to figure out how severe this scarcity is of various products of energy. I still think it's manageable, and we can get back to a few concrete examples in a second. But I'd like to start with a chart that I've taken tremendous amounts of insult from tweeting on page five. So what I wrote, and I stand by every single word of it, is that the US economy, the Western economy overall, is less dependent on oil than it once was. I'm not saying that it's not dependent on oil, just to underscore that, but it is less dependent on oil. Look at how much GDP we create per energy unit today compared to, say, two or three decades ago.

8:12Andreas Steno Larsen:Obviously, a part of this is that we've moved manufacturing out of the West and we've created service economies instead. And, I mean, you and I, we don't use a lot of oil doing our daily jobs, Michael, right? Of course, at some point, we'll feel the heat from various import scarcities and import price hikes. But the domestic economy is not particularly sensitive to energy anymore. And I stand by every word of that. And that is probably also the reason why$100 a barrel is not particularly harmful right now. So in that sense, to get the domestic consumption down, you probably need even higher prices.

8:57Mikkel Rosenvold:to the US economy at least. Yes. We are seeing damages across the globe, especially in developing countries. But I mean, talking about the US economy as the engineer, and there are sort of two layers to this, Andreas, as well. Just a quick side note here that the US economy is less dependent on energy and the US is less dependent on oil because the US has built up their own oil production and alternatives in the form of shale gas and what have you. So that's US. Fair enough, Andreas. But what about Europe? We keep hearing about jet fuel shortages. this and i'm uh i'm traveling to italy in a few weeks time here a month and a half but uh should

9:33Andreas Steno Larsen:i feel for my vacation or what's the situation you're safe um thankfully you ordered an early vacation um i did i actually i actually asked you to go on early vacation because we have a project coming up first of august enough about that for now but if we look at at the um jet fuel currently on water, you can basically see the trend over the past six weeks, right? So two things here. First of all, this is obviously a symptom of storages being drawn upon, right? When there's a scarcity of supply, you obviously use what's already being supplied, right? That's point number one. Point number two is that, look at last year, you typically see a tick up in the amount of jet fuel on water over the course of the travel season right because yeah essentially from six weeks from now and then the subsequent eight weeks there you basically have the peak jet fuel consumption season there right um how severe is the scarcity the european commission talks about an issue already in six weeks from now but they need to so let me highlight that when When you're an institution in charge of the supply or being held accountable for the supply of fuel, you obviously need to sound the alarm now because you want people to take action, right?

11:01Andreas Steno Larsen:So they make it worse than it is. If you look at the jet fuel consumption in Europe and the origin of the jet fuel, 70 %-ish is refined within Europe, often with imported crude, but refined in Europe. And I don't see any hiccups there. We do import some jet fuel from the US. The green bar here will likely grow in size over the course of the summer. But the issue is obviously the orange one here. So roughly 20-25 % of the consumption of jet fuel stems from Hormuz, or the Strait of Hormuz, right? And not much is leaving currently. We just have to accept that fact. So worst case, roughly one-fifth of the jet fuel used in Europe will not be available this summer.

11:55Andreas Steno Larsen:Is that manageable? It sounds like a lot. It is a lot. But I had a look at the airfare prices for a two-hour flight to France. I've booked the holiday home already in July, but I haven't booked the plane tickets, which was probably a big blunder. But having said that, four tickets, so two tickets for my wife and I, and then for two kids, above 6 ,000 euros now for a two-hour flight. And I'm used to traveling these two, three-hour flights during the peak season every summer. This is three to four X, the usual price. so the situation takes care of itself largely because if airfares are up three to four hundred percent you'll obviously see less traveling you'll see more people deciding on a staycation and so on and so forth so i think the most vanilla takeaway here for europe is that southern europe will have a bad summer northern europe will have a pretty decent summer because Northern Europeans travel south, and they'll stay home to a larger extent than usual and spend domestically.

13:16Andreas Steno Larsen:And hey, thereby, you use less jet fuel. So yes, there will be flight cancellations. We already see them incoming in Europe, and that's how you solve this. Is this a macro driver? Is it something that we should expect to see in GDP? Sure, to some extent. I mean, if you look at tourism, tourism is probably worth one-fifth of GDP or something like that in many of the southern European economies, say Portugal, Greece, those countries, while it is a nothing burger in the northern part of the Union, right? So some countries will face a few rough quarters as a consequence of this, but the region as a whole will likely get through this without any major issues.

14:05Andreas Steno Larsen:I did some calculations on the current state of the storages of jet fuel in Europe on page nine here. And assuming a 50 % blockade of the straight from now and until August to September, the dotted line here in red, we'll probably get to depleted storages by August. And remember, you cannot run storages fully empty, right? So we will run into trouble unless there is a demand side drawdown, and there will be a demand side drawdown. If we see a reopening this week, everyone will probably get on vacation, but still at higher prices. I think that's the fair takeaway here. One thing I'd like to remind people of when you look at it from a macro perspective, the broader context of this, on page 10, And remember, we have a very good empirical study of what happens when we see a sudden scarcity of energy in Europe or elsewhere from just a couple of years ago.

15:10Andreas Steno Larsen:In 2022, after the invasion of Ukraine, the imports of gas to Europe, so net gas, right, dropped more than 25%. So worse than what I'm depicting for jet fuel here. And remember, nat gas is substantially more important to the economy than jet fuel overall. Europe got through 2022, 2023 with admittedly some initiatives in place to limit the demand for nat gas, etc. But we didn't even have a recession. So that was clearly worse than what we're currently faced with. and that was not enough to prompt the recession or to trigger a recession and that's why you know pundits like luke groeman keep replying to all of my tweets saying the economy cannot stand energy prices at current levels and that is pardon my french empirically speaking auto nonsense auto nonsense we had a way worse situation in 22 and the recession didn't arrive Sure, it wasn't a good year, but it wasn't the landslide.

16:26Andreas Steno Larsen:So what I'm trying to say here again, and I want to reiterate that, this situation is manageable. So a quick break in your regular programming.

16:35Mikkel Rosenvold:If you're serious about your future, grab my free report called Prepare for 2030. I think you've got five years to make as much money as possible. And this guide will help you navigate what's coming. The link is in the description. Download it now. I agree with you, Andres. You know as well, you know me, I'm in the recessions have been outlawed camp, essentially. That is, to some extent, what we saw in 2022. We're already seeing European companies subsidizing to keep energy prices low. We will see more of that in the coming weeks. That's obviously going to work against the demand thesis, but let's see as we get close to the holiday season.

17:14Mikkel Rosenvold:But I agree with you completely. I mean, we probably should have had a recession for this, but we solved it. And then obviously there's a bill to pick up at some point. Then we'll pick it up as inflation or fewer vacations. But yeah, I agree with you. This is not the doom state scenario. It's laid out to be. So big disruption, big bill to pay, but probably not a catastrophe, especially also as the U.S. economy should be relatively okay out of this, Andreas. And so the big question right now, Andreas, we've had a rally for two and a half weeks here. We called the bottom quite well. I'm confident that we're going to see a lot of volatility over the next few days, a lot of fear mongering around these negotiations.

17:59Mikkel Rosenvold:If we look aside from that, what's your feeling? Can this rally go on? Yes. Okay.

18:09Andreas Steno Larsen:it's it's it's um it's one of those very used phrases right that this is a hated rally but i i actually think it is um it feels like it yeah a lot of people are not on board this train um first of all if you look at the most recent bank of america fund manager survey from mid-month we had the most bearish allocation since june 25 so basically right in the aftermath of of the um tariff debacles and all of that we see the cta so the trend following funds buying equities and basically all scenarios here so they've been wrong-footed and now their trend following strategy will have to buy into this uh whether they like it or not that's basically by design and um if you look at various long short books for example from ubs or goldman the prime books the net allocation to equities among long short hedge funds is incredibly low so um by all means this is not an over-owned market if you know what i mean it's it's rather under-owned still at least if if the crisis sort of fizzles or dissipates slowly but surely over the next two or three weeks and a lot of technical speak in favor of markets continuing higher here having said that short we're in slightly overbought territory right now we'll probably get a red day in nasdaq today but nothing to really alter the trajectory here so i remain bullish given this especially given the overall positioning out there.

20:00And maybe that's a good way to sort of enter the discussion

20:04Andreas Steno Larsen:on why is the market actually rallying? I mean, because it is slightly odd, I have to admit to that. But it goes very much hand in hand with what I've now casting has told us, basically in the run-up to the war, but also amidst the war. And I'd like to start with a few considerations on liquidity And I don't think we can understate how important this has been to the recent rally. For the first time in a long while, we've had the so-called narrow dollar liquidity back above pain levels. And what do I mean by pain levels? Well, you need a certain amount of dollars available for transactions between banks to ensure that money markets run smoothly.

20:56Andreas Steno Larsen:And we've basically been through, say, four or five months where we've had too few dollars. That was the exact reason why the Federal Reserve started this reserve management program back in December, basically a light QE program. So they're now buying. and at the same time, at least up until last week where we had some big tax payments coming into the TGA, the US Treasury also slowly but surely added liquidity to the market by hoarding less dollars. That is the red line on the chart here. We had a big tax payment last week, but on a trend basis, we will slowly but surely move lower from here. So all in all, that led to the sofa rates pricing below Fed funds rates last week and the week before that, again, for the first time since the debt crisis and the debt ceiling crisis back in October and the government shutdown and all that.

21:52Andreas Steno Larsen:And that is major news because essentially you can see the spread between SOFR and the effective Fed funds rate in yellow at the bottom of the panel here as some sort of gauge of the price of leverage. So is it cheap or expensive to get leverage? and it is now normal again i'd say maybe even slightly cheap so that is obviously big news once you get a direction in the market it's cheap to add leverage to that and we'll probably see that in coming weeks on top of that basically something that most pundits miss the train on uh except us we've been banging the drum on this and i'm actually very proud of that the eslr reform went live first of april and you can already start to see some of the impacts here right slowly but surely the supplementary leverage ratio is basically a piece of legislation designed to keep the leverage of banks at certain levels.

23:02Andreas Steno Larsen:And they've now eased this regulation a lot by 1st of April, meaning that it is a lot easier for banks to hold a lot of, for example, repos on their balance sheet because it is less punitive from a leverage perspective. A repo is not a particularly risky transaction. So when you allow more leverage, banks will take notice of that so on page 13 you see how important this repo market has been say since 2024 we've basically added more than a trillion in this repo market of treasury since 2024 this slr reform will likely add another trillion worth of capacity and what does it mean layman terms it basically means that banks can provide more leverage to those players actively taking positions in markets.

23:56Andreas Steno Larsen:And on top of that, it also means that the treasury market will run more smoothly since you have more players willing to take on more capacity since they can borrow with these treasuries as collateral. So overall, the ESLR reform is slightly improving liquidity dynamics in the transactions between banks, et cetera. I think this has been sort of the quiet hidden driver of what's been ongoing um say over the past two three weeks and it's looking good it's looking really good from from a risk taking perspective and then mickle growth um i mean someone forgot to tell the u.s economy that they're in a war and if you look at page 14 we've had two of the regional surveys out thus far um so from philadelphia and new york and if you take those two at face value and use them to predict the ism we'll get to plus 55 ish territory it's it's really it's really promising so so in that sense i mean inflation can go up as long as growth and liquidity goes up alongside it and markets can stomach that, right?

25:13Andreas Steno Larsen:But it does admittedly smell a little bit like a late cycle dynamic when you see all three going up at the same time, I have to admit to that.

25:23Mikkel Rosenvold:So, Andres, let's just round off and look at Central Bank's decision in the Fed here, because we've also obviously had a great fear that this wall would lead to inflation, would lead to hikes. Is that completely ruled out now that we have more or less got the crisis under control if we assume that.

25:43Andreas Steno Larsen:Yes, I can see that CNN now says that talks are planned for Wednesday in Pakistan. So that's basically right around the deadline. But if, say, a few weeks ago, most people expected the European Central Bank and the Bank of England to already move maybe this month or in May, right? um slowly but surely the officials from these central banks that i've basically held the view throughout that they would like to remain on in a wait and see mode some of the officials from these european central banks are now also you know they're trying to convey a message of of patience here because it's a very binary outcome for inflation in a sense when you have it's a deal or no deal scenario in a sense, right?

26:36Andreas Steno Larsen:So why take a decision as long as there's hope for a deal here short term? And, you know, at least my base case is still that we get some sort of light deal and then they'll probably spend months trying to iron out the details. But that's very awesome. Yeah, but as long as we get sequential progress from here, I mean, even dated Brent and such stuff is lower than it was a couple of weeks ago. So the prices most urgently on top of the agenda in the European Central Bank, in London as well, they're currently going down. And my best guess is that they'll continue going down. So the fear that central banks will swiftly end this business cycle, they're overstated by now, in my opinion.

27:40Mikkel Rosenvold:Great to hear, Andreas. That is pretty much all we had for you today. Still a positive outlook. It looks even better if we're actually getting talks on Wednesday, and then we'll see if a deal can be done. For even more geopolitics, we try to keep that relatively light in this show and keep the focus on macro. For even more geopolitics, tune in to my Ask Me Anything on Alpha and Protea tomorrow at Real Vision and follow all our content on an ongoing basis. We have a lot coming on the platform during the week. So thanks to you, Andreas, for joining. Thanks to everyone for pitching in. We'll be back next Monday.