What's Driving Down Oil Prices?

0:00People are going to lose their minds. This is a moment in history unlike anything humanity has gone through. It's a very different world for humans to come. Take a step back and see the broad picture, which is the way all these technologies are interlinked. Because this is all about exponentiality, and humans can't think in exponential terms. How consequential do you want to say machine intelligence is? It's almost certainly as consequential as writing. How long did writing take to disseminate through the human population? You know, hundreds, thousands of years. And we're dealing with it now on a scale of months.

0:33But in this kind of world, you're compounding 100 % growth every year, and the numbers become astronomical. AI is going to spot patterns in the world that were just completely invisible to us. Even if you think that the AI and the robots are your demise, you might as well bloody invest in them and make some money out of it. If not, you're just going to be angry man shaking your fists at the clouds.

1:09What's pushing oil prices lower? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Doonberg, author of the Doonberg Substack. Hi, Doonberg. Welcome back. Maggie, great to be here. I see that you dressed appropriately for the occasion. I must say, I'm very, very humble, but you would think of me. It was subconscious. It was subconscious, but I must have had the green chicken in my mind for sure. Either that or it's your Halloween costume. Yes, exactly. It is great to see you. So we're kicking off the I mean, maybe we were both we're both subconscious because we're reflecting the markets, right?

1:42We're kicking off the week with a big rally in US stocks, steady Treasury yields and oil down about 3%, sitting right around$82 a barrel for WTI. As you look across the dynamics of the market, and they've been pretty volatile so far this this autumn, there's been an awful lot going on just broadly. you know, what's top of mind for you when you look at the dynamics? So specifically when it comes to the price of oil, we think that for the moment, at least, during periods of heightened geopolitical tension, like we're experiencing in the Middle East, the price of oil is really the market's proxy for its bet on whether things are getting better or worse as it pertains to tail risks.

2:22And obviously, with the terrible events that transpired in Israel, And then I would say the rather limited response by Israel thus far compared to initial market fears that drove oil higher. The lack of spreading of conflict to Iran in particular, although we saw some headlines today that did give us a little bit of pause. But during such times, the market tends to be voting on whether or not things are getting better or worse. Senate, it would seem that the market at least believes that the situation is not going to spiral, at least not to the worst case scenarios that were initially feared in the aftermath of the horrible attacks by Hamas on Israel.

3:06Having said that, I would counter that heading into the Russia-Ukraine conflict, the market was sending very similar signals where it had probably underestimated the seriousness of Putin's intention. And so we shall see. During times like this, I think fundamentals are always important, but take a second row seat to geopolitical events on the ground. And for Western analysts looking from the outside, this is really kind of incredibly difficult to model. And so I certainly have no particular geopolitical expertise as it pertains to the decades-long Israeli-Palestinian question. And so we just have to watch and react like everybody else.

3:47Yeah, that's a great point. And also an excellent point that it is very hard to model this. And the market tends to run from one extreme to the other, you know, so it can change quickly. What is happening on the supply front with fundamentals? Because I think, OK, even if you're able to sort of say, you know, not the worst case scenario, at least for now, some of the worst fears sort of at least on hold. so you can take that out of the equation for the moment. But from a fundamental point of view, we're still getting pretty strong numbers coming out of the US. What's the supply side of the equation look like?

4:25Are people looking at that and concerned about that or are they anticipating the fact that maybe that's going to slow down and that we will see demand start to move lower? I would say sitting in the mid 80s for Brent in particular is kind of the sweet spot for both sides. And I think absent any geopolitical risk, I think both the Saudis and OPEC plus in general, along with the major oil consuming countries, would be happy with a low volatile oil price range bound between 70 and 90. In those price regimes, producers can make good money. Governments can fund their fiscal obligations. and the economy is not really thrown into much strain vis-a-vis recession risk that typically comes when we see super spikes in the price of oil.

5:17So I think mid-80s is high historically. It's probably roughly three times the sort of multi-decade average price of oil back when such things were being actively managed versus the US dollar. And so it is important to remember that at$80 oil, there's a lot of people making a lot of money in the energy sector. Of course, the day-to-day movements of equities are always measured against forward expectations and not necessarily absolute values. And the changing market expectations relative to what they had previously thought are usually responsible for the ticks up and ticks down. I would say supply in the U.S.

5:54has remained more robust than some people had feared. And demand in China has remained more robust than some people had feared. And the market is kind of roughly balanced. Again, whenever I see the oil range bound between 70 and 90 like this, it tells you that supply and demand are roughly well matched. And I do think the swings we're seeing, you know, up$3, down$4, up$5. This is just headline risk manifested in the daily action. Yeah. And you are right that it's that sweet spot because, you know, certainly, especially when it comes to OPEC, we know all of the producers like to see it there. What is the – on the supply side for the U.S., there were a lot of fears, a lot of headlines about the depleted SPR.

6:43Where's the supply coming from, and is it sustainable, or is the U.S. sort of vulnerable as we're entering this stage of the cycle to sort of be able to manage any geopolitical spike, or spike that would come on the back of geopolitical events? The SPR has been drained to the point where it's unlikely to be a cap on oil prices going forward. But you have to remember that in its place, OPEC plus, and most specifically Russia and Saudi Arabia, have artificially taken offline substantial production volume that could be brought back into the market on a moment's notice. And I think this is the next sort of cap of capping pressure on the price of oil.

7:28and might explain why we're range bound here. In fact, if the Saudis and the Russians hadn't decreased their supply, we'd probably be in the 50s or 60s. And so that's where we were certainly headed in the aftermath of Biden's political emptying of the SPR. And that's not a partisan statement. I think that's a perfectly objective analysis of what he did. There seems to be a few headlines around the desire to eventually maybe potentially refill some small portion of the SPR, but our view has always been that the SPR won't ever be refilled. And it's no longer really an issue that market participants need to ponder as they wonder which direction the price is going to go.

8:10And in fact, China has a very large and quite full strategic petroleum reserve of its own. And it has its own interests in maintaining a cap on oil prices. And we suspect that they would behave in ways that are far less transparent to market participants. And so there are two sort of caps to the price of oil, which is when it spiked up here recently to the mid-90s, you see it now again back down into the mid-80s, which is sort of that comfortable equilibrium price, if I may borrow a phrase from physics, where both sides seem to be relatively happy. But the SPR was drained by roughly 50%. I think it was at 690 million barrels total, and it's now in the 350s range.

8:54but it's no longer thought, at least, that the U.S. can actively deploy a million barrels a day of incremental supply to bring the price of oil under control, which it did quite successfully. That is actually a pretty fascinating data point, by the way. 1 % of global supply is enough to knock 30 % of the price of oil. That tells you just how inelastic the price is and how sensitive it is to such disruptions, which is why, again, back to the original question, we think that the price of oil today and the price of oil tomorrow and the price of oil on Wednesday and Thursday is really just a reflection of the market's belief about whether the situation in the Middle East is heating or cooling.

9:32That's so interesting. So you don't think that they'll refill it and you think sort of China will play that role now? Well, the US is a net energy exporter. So you have to remember that the SPR was constructed and filled at a time when the belief amongst the US political elite was that we had reached and long ago surpassed peak oil production in the U.S. And there's a piece that we've been contemplating for a while that would explain some of the fallacies of U.S. foreign policy through that lens, where they underestimated the technological capabilities of the domestic energy producers and went about on various foreign adventures and in search of a reliable supply of oil.

10:16And of course, the revolution in the shale patch changed all of that. And so the U.S. now, unlike when the SPR was conceived, constructed, and filled, is a net energy exporter. Now, look, we have some flows that don't make sense because of some nuances in our refining capacity, especially when compared to the types of oil that are coming out of the shale patch versus the types of oil that were being refined when those refineries were originally constructed. But on balance, the U.S. produces an enormous amount of energy. It is a net exporter of refined products. It still imports oil, but it also exports oil, again, to match refining nuances.

10:59But it's very difficult for me to imagine a scenario where the Democrats who control the Senate and the White House are ever going to be in a position to what they would call subsidize the oil and gas industry by putting a put under the price of oil. And in fact, you only have to look when oil went negative. And the days after oil went negative and was trading in the low teens, President Trump tried to actually buy the lows. And he was gleefully overruled in the Senate by Chuck Schumer. And if we can't refill the SBR or top off the SBR, when oil is at$10 a barrel or$20 a barrel, there's no way we're going to do it at$75 or$80 or$90.

11:41And so I just don't see a world in which the Democrats have less than 40 votes in the Senate and that this is going to be politically palatable. 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.

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13:02so what is this uh what what is your feeling about how uh the energy component is going to factor into the fed because they're looking for inflation to come down from what you described we might not see spiraling oil or a much higher oil price but are we going to see a low enough oil price to take some of the you know the pressure off of of the inflation scenario how are you thinking about inflation here? I think on balance, oil is an inflation headwind for the Fed. I think the cost of incremental production is probably, Luke Groman would peg it at between 7 % and 9 % a year, which would explain some of the sustained inflationary pressures that the Fed is confronting.

13:50And in fact, there's an argument to We made that elevated interest rates only feed back into the energy sector because financing becomes more difficult to come by and more expensive, which then requires a higher price of oil for the incremental producer to make a reasonable return on capital. Now, there was a time when the stock market was rewarding growth above profits and people were willing to lever long and destroy value by producing excess oil in the name of growth, hoping to make it up on the sale of their equities. That time has long since passed. And so we shall see. But our view is that there's a sort of an interesting contrarian view that elevated interest rates are, in fact, pro-inflationary because it acts as a form of fiscal stimulus.

14:36Obviously, the interest payments on new debt goes to people who are investors, of course. And maybe the velocity of that money is not quite as high as direct handouts that we saw in the aftermath of the COVID lockdowns. But nonetheless, we are running huge fiscal deficits in large part because interest payments are approaching a trillion dollars. Well, that money ends up in the economy. It floats around. It ends up in your brokerage account if you hold key bills and treasury bonds and so on. And it gets spent. And so we've never really raised interest rates at this rate with this much debt before.

15:11And so we are really running an uncontrolled experiment. But to your specific question, I think on balance, the technology developments in the oil sector are deflationary.

15:24But at reasonable prices, there's an infinite demand for oil. And so this is the constant tug of war that we see. By the way, on the point of debt, I see one of these headlines. It's always so shocking. There was one today, Treasury announced it's going to borrow$776 billion in the last three months of the year. That's lower than some of the forecasts. So there's actually some relief on that. But it just gives you an indication. They thought it was going to be north of a trillion, I think, or in the 800s. But in total, the high end of that just gives you a sense of where we are at this level of debt.

16:02Do the math. We have, what,$7 to$10 trillion coming due in the next year or two? 5 % interest rates. I mean, if you just do 5 % times 33 trillion, you could see what the run rate, if we had to refinance all of it would be. Then you look at the term structure of US debt and you see that we have this wall of refinancing. It's very similar to commercial real estate. Everybody knows that this is coming. This wall of refinancing and a famous Kyle Bass line, I think, well, at least I heard it from him, which is a rolling loan collects no loss, which is such a great way to say it. Everyone's going to extend and pretend, I suppose.

16:39But I don't know how you fund the U.S. government with$33 trillion in debt and counting at 5 % interest rates when interest rates are a greater expense than military expenditures. And Lord knows that we're going to be amping those up here as we enter various wars. And so it's truly a historic time. Yeah, it certainly is. We've got some good questions coming in. I just want to touch on a couple more things before we get to them. So don't do not fret. By the way, David, David Stiles says, hello, back from the Austin F1 race. Texans are burning a lot of oil. I'm sure that was awesome. I hope you enjoyed that, David.

17:20F1 certainly getting around to all these American cities, really trying to grow that brand here. So, Doonberg, when I know you've been looking, you mentioned China and the SPR. I know you've been looking at what they're doing, the role they're playing in natural resources and how they're building it up and some of the advantages that they have. How do we need to be thinking about China in this space, especially when it comes to some of those critical minerals? We need to be thinking about China as an adversary. And we need to admit that we're in an economic war with China. And we just put out a piece which raised a few eyebrows called geopolitical warfare, where we talk about our commodity producers.

17:59forget about innovation and so on the number one driver of cost is the answer to one simple question how much are you allowed to pollute and in the western world we have correctly implemented expensive pollution controls because we'd like to live in a society where the water is clean and you could breathe the air and you don't have to wipe dark stuff off your face when you walk outside because there's, you know, the PM 2.5 number is 250 that day. Having been to China several times in my career and having competed against Chinese state-owned enterprises, we have said on several podcast appearances that when your competitor's idea of a water treatment plant is a pipeline to the river, no American company can compete on cost.

18:43And commodities are price takers. You know, commodity producers are price takers. And so if there is a series of industries that we feel we need to have domestically, then we need to recognize that the Chinese are competing unfairly and we need to subsidize those industries, pay them to implement the pollution controls that we find acceptable and offset the competitive disadvantage that they find themselves in. Because otherwise, what happens is what we see happening. The Chinese effectively illegally subsidize their domestic producers by allowing them to pollute. They degrade their local environment in exchange for geopolitical power, And then they spend that geopolitical power aggressively.

19:21The latest example is their moves against graphite exports, which is going to cripple much of the electric vehicle space. I don't believe the market has fully digested the seriousness of this move. Perhaps they're underestimating whether or not China will follow through on it. We would argue, having seen this rodeo many times, that this bull is trying to buck us off. And they will probably follow through on it. But it's the same if you look at gallium, if you look at germanium, if you look at the whole solar industry, if you look at battery materials, whatever China decides is strategic and happens to be environmentally taxing to produce.

19:57They put us out of business. I've been put out of business by China in my career. I've seen how Western procurement teams will ignore what China is doing. They'll steal intellectual property. They'll pollute anything to put Western companies out of business and get a chokehold. 100 % of the rare earths produced in the world are processed by China. Why? Processing rare earths is incredibly environmentally damaging, if done poorly. It's expensive to do it in an environmentally friendly way. We should measure the difference between how we would do it here and how China's doing it and pay those companies to implement those pollution controls because we view the domestic manufacturing sector to be a national security issue.

20:42Look, there's three things that the market fails to properly address when it comes to energy. Energy is different than downstream high-value manufacturing. There, once you have abundant energy, the free market is, in fact, the most powerful force. But when it comes to energy and closely related industries, there are three market failures. One, environmental degradation is underpriced. It just is. Left to their own devices, companies will pollute for short-term profit, and they will leave the problems they create for future generations to handle. That's just simply undeniable. And anybody who thinks otherwise is either naive or never worked in industry.

21:16And we should just know that and we should accept that as an axiom. The second is energy is different than the other sectors. The GDP measurement of energy is a particularly terrible measure of its geopolitical importance. And we saw this when Russia invaded Ukraine and various Western analysts were saying, oh, you know, Russia's economy is tiny on a GDP basis and they had no power. That is a terrible measure of their geopolitical power. It just is. Energy is life. And if you control energy, then you control everything. And then the third thing that is not property price is the national security implications of allowing a geopolitical enemy to monopolize certain choke points.

21:57And we've done that. The military is caught off guard because of decades of Wall Street-driven financialization and driving these industries offshore. And we all know it's a problem. So we put out a piece trying at least to propose a set of solutions, which is, one, decide which industries we need to have domestically or in the hands of trusted allies. Two, identify most effective technology for the production of those materials. And then three, support those companies that are willing to do it. It's a lot cheaper than what we're doing with the Inflation Reduction Act. I mean, it is very straightforward.

22:34We'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.

22:45So we have this fight for critical minerals on the one hand. And then, you know, you just brought up this issue of technology. And I don't know that they're always contrary, but in some instances, there's this, you know, arms race for minerals. And then you have the tech revolution, which some say is going to change all of the rules. I want to play a clip from a conversation that Raoul had with Jordi Visser, who had some thoughts on this, and then we'll talk on the other side. So we were worried about not having enough food. We have too much food based on obesity. We may not have enough food for the rest of the globe, but we've wasted so much food that I believe, aside from the solutions through nano and through getting to having resistant crops and all the things you said, which are innovation, which are happening, We're going to get through the efficiency side and the productivity side.

23:36We're going to eliminate waste. And if you think about what happened with fracking, you can divine it as many ways as you want. But we went from inefficient searching for oil in the ocean. And I can just remember when Petrobras was in the middle and it was like to find it. And we were planting flags at the bottom of the Arctic Ocean to try and find oil because we were running out. And then we have fracking, which is really about efficiency and the ability of getting this on. So I just think people underestimate when it comes to commodities that when you argue that we're going to have more people and we're going to run out of them, I think we've wasted an enormous amount.

24:14And AI is going to help us be more efficient, but it's also going to come up with other solutions. And that entire conversation is available on our website. If you are joining us on YouTube and you are not a full Real Vision member, hit the link, jump on a trial, and come find out what you're missing. So, Dumerga, it's so interesting to think about this. So do we have to sort of think about technology and maybe not against this argument of scarcity? Because that is what drives commodities or certainly a lot of energy is that supply versus demand. Is this going to be a game changer or how are you thinking about that?

24:50So we would broadly be in the camp of techno optimists. We think the market has difficulty modeling exponential growth. And in that way, we would agree that the latest developments, for example, in artificial intelligence, but broadly in supercomputer power and modeling, have indeed fed an exponential growth explosion in our capacity to more efficiently procure such materials at reasonable prices. And we're researching a piece on the singularities near. This book is published almost 20 years ago now. It's incredible. But Ray Kurzweil's book, which is everybody who sort of ended up in science, reads at some point in their careers, made some pretty amazing predictions.