Understanding OPEC's Surprise Move

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1:47Hi, everyone. This week, OPEC Plus surprised the world by cutting production for a deep dive on what this means for the economy and geopolitics. I'm joined by Harris Kupperman, founder of Praetorian Capital Management. Hi, Koppi. How are you? I'm doing well. Thanks. How are you? I'm doing OK. So we know that you're paying attention to the oil patch. We wanted to catch up with you. And we had a quick email exchange because you're paying close attention to this. And it really did. OPEC Plus's decision to cut the supply really did seem to catch the market off guard. Clearly, everyone's been worried about banking and a banking crisis.

2:23But what's your take on this? What do you think was behind that? Well, I think OPEC Plus looked at the SPR draining and they kind of realized that this was their moment to exert pressure. I mean, without an SPR to play defense, you know, they can move the price however they want. And they're in the business of maximizing price. So they're going to move the price higher. And we're at a moment in time with not a lot of incremental supply that can come online. And, yeah, they're going to move the price higher, especially because demand is hitting really strong. I think also OPEC is really looking at what the Federal Reserve is doing with raising interest rates.

3:01And, you know, when the Federal Reserve raised interest rates, one of the key components of inflation is energy. And the Federal Reserve is basically saying we want the energy price to go down because we want to destroy demand. and OPEC is saying, hey, wait a second, like we need demand. And so if the Federal Reserve is going around the world destroying demand, and when I say destroying demand, it's not really in America because American oil consumption doesn't really change that much with the economic cycle. It's really emerging markets where they don't have the same amount of purchasing power and often their currencies depreciate, which makes it harder to buy oil.

3:35But if the Federal Reserve is going around the world and basically trying to create economic crises in all these emerging markets, well, then that's going to destroy energy demand. And OPEC's just saying, hey, if you try to play this game, destroy energy demand, we're just going to destroy supply. We're going to end up in the same spot. It's a race to the bottom. And no one wants a race to the bottom. In the end, and I don't think J-PAL has realized this yet, OPEC's the one driving the bus here. And J-PAL is kind of in the back seat. He thinks he's driving it, but he's just kind of a passenger.

4:03In the end, the price of oil drives inflation and OPEC drives oil. Yeah, and we saw that was such a problem before. So a couple of things here. OPEC traditionally likes to keep it somewhere in the middle, though, because if there is too much upward pressure on oil prices, as you just mentioned, that will kill demand. So are they just trying to keep it in a range here? Because we have people talking about$100 barrel of oil again. I mean, right now, we saw that pop after the news, and it's kind of sitting right around$79,$80 for light sweet crude. Do you think that they just want to stabilize it, or are they trying to put upward pressure on prices here?

4:46Well, I mean, I think they want it in a range. Obviously, a too high price destroys demand, and no one wants that. But I think, you know, the world can deal with a price that's triple digits. I mean, if you go back to, like, you know, 2012 to 2014, oil was pretty consistently around$100. Adjust that for inflation, you'd be around 150 today. And, you know, the world functioned just fine. I just don't see why we can't have a price in the 100 to 150 range as opposed to, you know, this range we've kind of grown used to, which is kind of this 50 to 75 range over the last six years. I think OPEC plans to guide it there.

5:22You know, I don't think OPEC wants it to be spiky, but OPEC wants it to, you know, over time go back into that other range. And, you know, I think they're going to get it there. So, you know, there's been a lot made of the fact that this is uncomfortable for U.S., for Europe, who are trying to fight inflation. They're trying to do that. They're trying to manage the economy through. Is this a sign of a larger political rift? Well, I think so. I mean, I think the Middle East, which has always been a place where we just arbitrarily bombed countries, you know, it's kind of unfortunate, actually. I think a lot of the Middle East countries have kind of gotten together.

6:03I mean, you see Iran and Saudi, I don't want to say friends, but they're talking again. I think they've realized that, you know, they don't sell much oil to the U.S. anymore. They're selling their oil to India and Africa and China. And I think they're going to, you know, move out of our orbit into their orbit. It's kind of unfortunate for America. But I think that's the direction things are going. And that rift means that they're not as focused on what happens here and in Europe. They're more focused on their new customers. And yeah, I think that they're just going to do what's best for the Middle East.

6:39Yeah. Those new customers. So what are the implications of that, do you think? I don't know. It's probably not good for the U.S. Yeah. What do you think it means for oil prices, though? Because the new customers don't want high oil prices either, right? Anybody who's importing oil wants to keep oil low, as low as they can. Well, I think what's going to happen is these new customers are going to pay in their traditional currencies, their national currencies. They're not going to pay in dollars anymore. And so the net result is you're going to see some of these currencies appreciate because they can purchase oil in their own currency.

7:12They don't need dollars. And that's always been what made the U.S. strong, is that the world needed our dollars to buy energy and all this other stuff. But if they're willing to take rupees, and they're willing to take rupees at a discounted price, Russia is right now, well, then the rupee is probably going to appreciate against the dollar, and India is going to have more purchasing power. And then it's not going to feel so expensive to pay$100 or$125 oil, because you can do it in rupees, you can print. It's going to disintermediate the dollar, and like I said, it's probably not good for America, but it's probably very good for oil prices priced in dollars.

7:46So do you think that the market is, you know, we saw that big decline in oil. Everyone's anticipating that we're going into a recession. That's going to hurt demand. Do you think that the market is mispricing the oil narrative here? Yeah, I mean, there is no recession coming. I just don't see it. We talk to companies all day long. Things kind of got slow in Q4. I'd say the worst of it was November or December. And every month incrementally, it's accelerating. You have to understand there's two economies in America. You have the economy that's driven by interest rates. That's commercial real estate, private equity, hedge funds, VC.

8:24That economy is suffering. It's slowing down. Then you have the whole rest of the economy, which is capital goods. It's services. It's everything else that we consume. A lot of it happens in flyover country as opposed to coastal cities, and that's booming out of control. And I think people focus on the overall GDP numbers, and they're missing the fact that large parts of the country are really doing well. And those are the parts of the country that drive a lot. And I think the demand for oil is going to stay very high. The number just came out today. There's huge draws. I think we're going to see huge draws of oil in the U.S.

9:01every week going forward now until, you know, it hits zero or they start drilling for more oil. And, you know, the only time that they start drilling for more oil is at a much higher price. And then, you know, there's a lag. No, I think the demand is very strong. And I think the world's gotten way too focused on what the U.S. is doing because we used to be such a big piece of the oil puzzle. And then, you know, Europe was the second biggest piece. But the incremental demand, it's not here. I mean, Europe and the U.S. have almost flatlined for a decade now. It's really India where, you know, look, they sold 50 % more motorbikes this year than last year.

9:35I mean, those motorbikes are future demand for oil. Look at what's happening in China. Look at Africa. Look at Southeast Asia. It's all growing very, very rapidly in terms of oil demand. And people forget that there's 6 billion people on this earth that want the same standard of living that I have. And I'm sitting here with air conditioning. I got all my lights on. You know, I got a microwave and I just drove to work. Like most of these people don't have any of these things yet. But I believe in human progress. And I think in 20 years, they're going to have most of the same toys that I have. And as a result, they need a lot more energy.

10:08And obviously, you know, petroleum products are, you know, a dramatic, a substantial piece of that future energy consumption. Can Middle East producers meet that kind of demand? No, they can't. If you look at what's happening in the Middle East, a couple of the countries have some spare capacity. Obviously, these recent cuts add that spare capacity. We're talking about one year worth of global growth. I mean, then, you know, they're full. Look at Saudi, which has always been, you know, the big player in OPEC. I mean, the fact that they're aggressively going offshore right now, the fact that offshore is far more technologically complex, it's far more expensive.

10:47it's a longer cycle the fact that they're aggressively uh bringing rigs on uh into the into the arabian gulf i think it just shows that their onshore production is in decline now and it's you know rapidly in decline and they have better data than i have obviously but they wouldn't be going after this much more expensive oil if they had onshore stuff that they could ramp up and i i mean i think the middle east you know all of opec probably has two million barrels of spare capacity, maybe three at most, but global demand is probably going to grow three a year. So, you know, maybe you can postpone the problem a year, but you can't postpone it indefinitely.

11:25And, you know, oil has to come from somewhere. And there's been a seven-year period with really minimal exploration expenditure. And unlike U.S. shale, where you kind of flip a switch and six months later you have oil, the vast majority of the world's oil comes from a long cycle that takes five or 10 years of planning and spending, and they cannot be able to turn it on fast enough. I think you could have an energy crisis. Just a reminder, the Real Vision Daily Briefing is in partnership with the Gold Investment Letter, helping sophisticated investors successfully navigate capital markets and maximize profits in gold, silver, and mining stocks.

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13:29So, wow. So, do you, first of all, let's dig into that energy crisis a little bit. But do you – what happens to the price – sort of give me your price target. If you think there's an energy crisis and there's not enough capacity to meet the demand for an economy that's presumably, in your view, stronger than people expect it is outside of the interest rate sensitive area, what are we talking about for a barrel of oil then? I mean, does$100 seem conservative against that? Or do we have a sort of – is this a longer-term thesis? So in the next year or so, we'll stay range bound. I mean, it's really hard to predict these things.

14:10I do believe that, you know, the price of oil has to go to a level that incentivizes new production. Because, you know, the demand doesn't ever get destroyed by the price of oil. Oil has to go much higher. It's not 100. It's, you know, 200, 300. And so, no, I think you're going to see a new range for oil in the 100 to 200 range. And I think there's going to be some spikes because, as we've learned, oil is very geopolitical. and there's moments in time where oil comes offline and people get scared and the price goes out of control and oil has massive amounts of derivatives tied to it. And a lot of those derivatives are counterparty with banks that are in trouble.

14:47I think you're going to see at least one or two super spikes along the way. And super spike can take you to a crazy number over a short period of time just because you have some sort of derivative blow up or squeeze, whatever you want to call it. But no, I think you're going to see a much higher level to the price of oil. Just going back a second, the price of oil declined from last summer really until a few weeks ago. And I think people looked at it and said, this looks like recession. I think people missed the fact that, you know, you had China offline, let's call it, I don't know, 200 days at 3 million barrels a day.

15:24That's, you know, 600 million barrels. You had Russia dump all of their refined and unrefined product, called another 150 million barrels. You had a rather warm winter in the U.S. and Europe. It's another 100 million barrels. So we're already posting 850 million barrels. And then you had the U.S. SPR dump another 250, let's call it. You're at a billion one. You start going around the world and you say, wow, that's a lot of oil that just got dumped on the market in a six to nine month period of time. And, you know, global inventory is barely even in rows. I mean, that oil got consumed and it impacted the price, obviously.

16:06And, you know, at the very end, a couple of hedge funds had margin calls because they did crazy things with interest rates. But, no, you had a lot of oil get dumped on the market and mostly got consumed. And that oil, you know, the weather you can't predict, but a lot of that oil isn't coming back. I mean, the SPR, they have a bit more to sell, but they don't have much more. So I don't think it was that the economy was weak. I mean, the oil got consumed. It was just that you had these random things that happened simultaneously that pressured the price. And I think it gave people a very false sense of confidence.

16:38Meanwhile, on the production side, I think a lot of oil companies looked at what was happening with the price of oil. And when they were setting their 2023 budgets, they said, hey, let's pull back a bit. And so you just end up with another year with less spending. Meanwhile, you have massive inflation in oilfield services. I mean, my mom, she complains about the price of broccoli and cucumbers and stuff. But if you're doing oilfield services, you're getting 20%, 30 % annual inflation. I mean, that's way worse than broccoli. And so your cost to get this oil out of the ground is accelerating, and it's accelerating rapidly.

17:12And these guys used to say they were breaking even at 50, but they couldn't have been because they all went bankrupt when oil was 70. But if they were kind of breaking even at 70, they're probably not breaking even at 100 now. I mean, that's the thing about commodities. And it's just supply and demand, and you look at what the cost curves look like. And sure, there's some great places in the Permian that might still be at 50, but the vast majority of the world's oil needs a higher price. So you just brought up a great point on that shale, that break-even. That's what a lot of people talk about, right?

17:44They look at, at what point can you bring U.S. production back online? So for you, you think it's much higher than we are now? Yeah, it's absolutely much higher. I mean, one, you're running out of Tier 1 locations, so your EOR is going to be lower in the future. And then two, you have massive inflation of oil and food services. No, I think the price is going to be much higher. And, you know, the world's not running out of oil. Don't get the wrong idea. The world's going to have a period of time, two, three-year period, where, you know, there's a gap where you're not going to have the 3 million barrels a day of incremental supply that meets the 3 million barrels of incremental demand.

18:25And, you know, I think the second half of this year is going to be the first time where we really get to see what happens. You know, we're getting pretty large draws. Look at today's draw. I mean, before OPEC did something, the global inventory was drawing two to three million barrels a day. Now we're drawing three to five million a day. And you can't draw at a couple percent of global production daily without there being a crisis. The crisis gets solved with much higher prices that destroy demand and incentivize people to do stuff. But you can incentivize people all day. It still takes them a couple of years to do stuff.

18:59Yeah. So when we were facing the higher oil prices, there was a feeling that there was no way the U.S. could afford, especially when we're going to be facing an election year, to let oil run up that much. So they tapped the SPR. That's what they did. Now that the SPR is drained, do you see a situation where in order to cap oil prices, they put an export ban on? I mean, they'll try all sorts of stupid things. I mean, governments historically do really dumb things that make problems worse. That's the history of governments. I assume they'll try all sorts of things that'll fail. And all that it will do will be to destroy the supply response because the government's interfering in your ability to do your business.

19:50You're going to sit on the beach and enjoy your profits. So you won't see the sort of production necessary in order to meet demand if there's some sort of export ban or some sort of price control? Yeah, they're probably going to try excess profits taxes. They're probably going to try export bans and price caps and all sorts of other things. And the net result is that guys will take their dividends and go to the beach. They're not going to drill for oil. No, I think it's almost inevitable that the government will take a problem and turn it into a crisis. And when we're looking at China, Africa, do you anticipate that demand remaining strong?

20:32A lot of people are concerned, look at China and say, okay, they reopened, but their economy is a mess behind the scenes. We don't really know what's going on. They have a huge property bubble problem. The level of growth they're going for anymore is more moderate than they would have in the past. does that change the demand equation for you at all? Or do you think that you're just going to see enormous demand coming from that country? I think you're going to see enormous demand that's going to stay or keep growing. I mean, look at per capita energy consumption in China. I mean, compare it to the U.S.

21:07And no, they're going to keep needing more oil. And yes, you know, there's probably going to be a bunch of bankruptcies in the property sector. They already have been. And you'll see a bunch of regional Chinese banks that disappear. And, you know, that's just the nature. I mean, we've gone through that in the U.S. I mean, look at energy consumption per capita over 100 years in the U.S. We've gone through, you know, world wars and Great Depression and economic crises. Energy demand just keeps growing. It's unstoppable. So if we're at a higher range for oil, do you think that encourages other forms of energy, nuclear, all the things we heard about being talked about, especially right when Europe was facing the crisis with the cutoff of Russia?

21:52Or is that not just long term and not quick enough and not with enough political momentum behind it to make a difference? Well, I think nuclear is the obvious solution. If, you know, you came to me and said, we have this new technology that, you know, produces clean energy at super low cost, that's amazingly reliable and stable, I'd say let's go do it and do it at massive scale. Unfortunately, nuclear has, you know, 70 years of baggage. And, you know, there's been a couple of accidents along the way. And I think, you know, humans get smarter and better. You know, they learn from accidents, I hope.

22:26But no, I think nuclear is a large part of the solution. We own a lot of uranium through an entity called Sprott Physical Uranium Trust, because I think the demand for nuclear power is going to grow. And this is a deficit on the production side. But the problem is a nuclear power plant takes five or 10 years to build. And that's not a short enough solution. I mean, step one is to stop retiring a bunch of these power plants that Europe, for whatever reason, still wants to retire. But I think on the margin, that's very bullish for uranium demand if you can save some of these power plants and maybe even turn some of the ones on that are mothballed.

23:04But that's really around the margins in terms of total global energy production. But sure, it would help. Absolutely. So how are you trading this energy crisis or what are the trading implications of the energy crisis that you see? Is it the straight commodities? How are you looking at this? Well, the way I'm looking at this is that to solve the energy crisis, you're going to need incrementally a couple hundred billion dollars a year of incremental demand above the current baseline of energy exploration, spending, drilling. And so we own a couple companies in that supply chain of companies that are helping to explore for oil.

23:44My particular focus right now is offshore. I own two companies. One's Valeris, the largest owner of offshore drilling rigs. Tidewater, which is one of the largest owners of offshore supply vehicle vessels. I mean, I think a lot of the incremental supply of oil is going to come from offshore just because, like I said, onshore U.S. can't really grow much more. And a lot of the big discoveries are in countries where they're very open to oil exploration. and you're going to go where the discoveries are. So Guyana, Suriname, maybe all of West Africa. I mean, I think that's, you know, Brazil. I think that's where a lot of the growth is going to come from.