Trading disruption

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0:21Pushkin. Lausanne, Switzerland. It looks like a pretty place. A hilly city, Wikipedia informs me, on the shores of Lake Geneva. Why am I banging on about it? Well, aside from its beautiful views and classical architecture, it's also home or near home for a lot of the top executives and traders in the commodities industry. If it's oil or gas or really anything that comes out of the ground and then gets bought or sold for billions of dollars at a stroke, then it matters in this part of the world. which is why the FT holds an annual commodities conference there, and that's underway as we speak, with perfect timing, as we all try and figure out exactly how much to freak out about everyone's favourite stretch of water, the Strait of Hormuz, a.k.a., if you listened last time, the Strait of Vermouth.

1:13Now, listeners, let's find out how badly hardcore commodities traders are losing their cool about the slowly unfolding endless nightmare in the Middle East. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London, which has a tube strike on, which is very boring. And I'm joined by phone by Robert Armstrong, our man in Lausanne. It's a tough assignment, ladies and gents, but he is up for the task. Now, Rob, what I want to know is, what is the gilet game like out there? You know, like the little slim puffer jacket with no sleeves that you wear under a suit and it's like Euro finance bro uniform.

2:01First of all, it is not gilet weather here. It is like 69 or 71 degrees and sunny and lovely. And people are wearing those things anyway. The weather doesn't even matter. You'll still see gilets. Right. have you have you succumbed i know that you have like a good kind of homing signal thing for like high-end i will never wear the puffer gilet it would it would burn my skin if one of those were to touch me but let me say on the upside this is a beautiful place you look across lake geneva at the mountains to the south and the air is fresh and you sort of mentally feel the the clanging of cowbells and people singing songs.

2:47And it's wonderful here. So there is like several hundred people, big crowd. And it's about half, I would say, people from the trading houses, but it's also miners. It's also representatives of big banks who lend to these guys. It's also the people who sell them the technology. It's the whole complex. And so there's people here who are involved in the industry that gives us copper, aluminum, the whole spectrum of stuff made about oil, food. You know, basically, if it's something people use every day and it has to go into a ship, there's somebody at the FT's Commodities Global Summit who trades it, produces it, procures it, ships it, packages it, et cetera, et cetera.

3:32I had one guy on one of the panels I led yesterday who operates a rare earth's mine in Nebraska. And so it's like, who knew? And like, I don't, I can't even pronounce the thing. This guy digs out of the ground in Nebraska, but you can't make an industrial magnet without it. And there's some of it in Nebraska and he's digging it out of the ground. That's why commodities people are like interesting and fun, right? They do real things with real stuff. They're not just looking at numbers for a living. So how much is the commodities community, let's say, how much are they freaking out about what's going on in the Middle East?

4:11Well, it's a little bit complicated in the following sense. One, the people at this conference, probably half of the people at this conference are commodities traders. So there are people, you know, as distinct from, you know, commodities, desks and banks. These are big houses that use capital to buy and sell commodities and to make money on price differentials and so forth. Now, A, these guys really know where the barrels go, how they get there, who needs the oil, all of that stuff, chapter and verse right down the way. They know this is a very difficult situation for the world. That is point number one.

4:50Point number two is they are making money hand over fist in this situation because literally this is their job, right? The job of a commodities trading house is when prices of a commodity are really different in point A and point B. They make sure that the commodity can get from point A to point B, which is a job the world really needs done right now, obviously, because one of the main places it used to come from, aka the Gulf, it's not coming from anymore. So there has to be a massive reshuffling of getting this stuff where it needs to be. And we're not just talking about oil, industrial chemicals, refined products, diesel, gasoline, everything's in the wrong place.

5:34These guys get it to the right place and take their scrape along the way. So they're going to have a good time. Are they like wearing shades indoors, back slapping each other, high fiving and, you know, drinking champagne for breakfast? Russell Hardy, who runs VTOL, was talking today, you know, he's been trading this stuff for 40 years or more. And he said this is the biggest energy crisis he's ever seen in his career. So yes, they're making a lot of money, but these are dangerous times for them. Like, they're in the turbulence business, but even for them, this is a lot of turbulence. You know what I mean?

6:13So it's not high fives and sunglasses inside just because you've got to get it right if you're going to do well. Right. And they must also be conscious on some level that, you know, their gain is everyone else's pain. Yeah. It's a bad look for them to be like, hooray, hooray, there's an energy crisis. You know, that would be ugly. And even people in the commodities market know that that is not to be done. Yeah. Yes. That's not cool. So this period of turbulence is great for them, as they say. How long are they expecting this or something like this to last? Is this, you know, it's all going to blow over in a few days, right?

6:48This was the kind of drop your notepad moment for me at the conference, is you ask people, if the war ends like this week, how long does it take for the commodities markets to look like, the energy commodities markets, to look like they did before the war started? And the answer is probably something like 2030. Not to say we're going to be in a... 2030 the time or 2030 the year? That's 24 o 'clock. Not 2030 this evening. We're talking about four years from now. That doesn't mean we're going to be in a huge shortage for years from now. But there will be scars from this event for years to come. You know, and again, it's important to size this.

7:31So the world uses, we're going to call it 100 million barrels of oil a day. 12 of that, we're going to call it are not coming out of the Gulf and usually do. So as somebody else put it, you know, we're losing. probably by the end of this crisis, you know, even if it ends reasonably soon, it's a billion barrels of oil that were supposed to be shipped somewhere that weren't. Right? And that has implications for diesel, gasoline, jet fuel, industrial chemicals, et cetera, et cetera. And ironing those kinks out is going to take a long time. Long, long. Again, that doesn't mean$200 gasoline three years from now, but it means things are different now because of this.

8:12So that's sort of headline number one. The headline number two is it's very different regionally. So as we've all we've all become straight of Hormuz experts in the last couple of months. And one thing that we've learned is that the oil that comes out of that straight mostly goes east to Asia. In Asia right now, as a result of that, there is a full blown energy crisis happening right now. Right. And people are really worried about that. So countries like Malaysia, the Philippines, Indonesia, that whole region, like proper shortages, rationing, governance getting involved, wildly high prices for the most important product for those regions is diesel.

9:00And there are just wildly high prices for diesel in that region and wildly volatile prices for diesel. And then now you're talking about agriculture is the energy crisis. They're going to turn into a food crisis. so like a asia big problem already there's demand destruction there they're using way less fuel than they used to use really big things are happening well that's the thing isn't it like so first of all i'm pretty sure in fact i'm certain it's pronounced rationing this is another word that randomly you can't pronounce yes anyway rationing aluminium boot but one time when you were away recently, I was chatting to Malcolm Moore about this.

9:42I'm sure you're hanging out with him over there. He's one of our kind of people who know about energy at the FT. But yeah, there are different prices for pretty much the same thing in different parts of the world. And so the benchmark oil price tells you a lot, but it doesn't tell you the full picture, right? Like in certain parts of the world, this whole situation is much worse than you think. It's worse than that, Katie, because even the regional benchmarks in the physical market, so there's a million different futures prices, you can do these derivatives and so forth, but even the so-called spot prices, the regional benchmark prices for the physical stuff, diesel, oil, whatever, those always have a premium attached to them depending on where you have to deliver them to, right?

10:33So it's always 10 bucks over there to get it to, I don't know, Malaysia and maybe 20 bucks more. But those premia have gotten way wider. So if you're just looking at your Bloomberg screen and saying, you know, what is diesel cost in Asia? That number doesn't tell you the premium for actual physical delivery. And at this conference, there is like horror story swapping. Oh, I host I heard so and so filled a tanker, you know, at four hundred dollars a barrel for diesel. Well, I heard. And so, you know, So it's like, you know, what is, you know, the price at the pump, as it were, is really different and really volatile over there.

11:13And this kind of leads us to the next important point that was new to me. You know, some of this is going to be old news to people who are real commodity specialists. But for dumb old Rob Armstrong, this is incredibly interesting. The crisis is going to move west as the year goes on for two reasons. Yeah. Right. Right. Reason number one is we were talking about how the commodities traders, their job is to get the stuff from where the prices are low to where the prices are high. So, you know, the price is a signal for where the stuff needs to go. Right. So what's happening now is all this oil is flowing out of inventories in the West and going to the East.

11:49So you're like filling up a boat in Houston to take it to Australia. Right. And that's a profitable trip to take. And Australia needs to fuel. Great. Well, when summer driving season comes and then... In the States, you mean? Yes, in the States. And then winter refueling season, filling up all the tanks to get us through the winter, that happens. There is a natural increase in seasonal demand. And guess what? A lot of that stuff is in Malaysia someplace or Australia or Philippines or whatever, right? And even if the stuff isn't in Indonesian waters or whatever, you're going to end up with a situation where the ships are in the wrong places.

12:27at the wrong times. You've got empty ships where you need full ships. You've got full ships where you need empty ships and everything is just bad. Yes. I mean, it's like one of those riddles on a graduate school application test. Like you have three people and two goats and two canoes and you can only cross twice. Can you get everybody to the other side and the goats can't swim kind of thing? So it's a huge logistical nightmare. And it is going to become more vivid to the rich West as the months pass, even if the war ends soon. Okay. You have been warned. But one interesting kind of wrinkle around all this is for all of the kind of volatility in prices, and heaven knows there's been enough of that in energy markets over the past couple of months or so, the markets themselves have functioned extremely well.

13:22Like, I'm not talking about stocks and bonds and stuff here. Like, you know, oil might be a lot more expensive than it previously was. It's like 50 % more expensive than it was at the start of the year. But you can buy and sell the stuff. It's not sending out sparks and smoke. This thing is working. Yeah. And what people here have told me is that it is really important. Two things are really important to the smooth functioning of the market during this crisis, despite the volatility in prices. One, and we've talked about this before, the world was in surplus for most of these products when the war started.

13:59People were worried that oil prices were going to crash until the missiles started to fly. The second thing, and this was new to me and very interesting, the Russian invasion of Ukraine was a kind of financial dress rehearsal for this conflict. So in that conflict, it was like volatility went crazy. Traders hit their trading limits. Trading houses couldn't get enough credit to buy the stuff that was now more expensive that they had to ship wherever. And that all worked itself out in the end, but it took time because people didn't know how to do it. Can we change our value at risk limit? Can we expand our credit?

14:38This time, everybody's on stage at this conference saying, our bankers have been amazing. we called up we told really we need you know we we called them we told them they needed more money and the bank said we know you're going to make money in the end how much do you need and the trading houses and the trading houses all new for their traders we're going to have to expand these guys risk limits for a little bit and it's not going to last forever but we gotta let them put more money out there or this whole system is not going to work yeah like crises are like no fun but you do learn useful things from them don't you but you know i mean there is it is all kind of exciting but you know just to kind of ground us in the reality here energy crises do turn into food crises eventually well i was about to ask you know someone at the conference was talking about this saying again somebody from vitol saying we're on borrowed time and this is going to turn into a food crisis unless the flow of gas through the strait of hormuz like gets back to the more reasonably quickly.

15:39I don't like the sound of that very much. No. So two things to know. One is that fertilizer is made out of natural gas. I mean, that's a bit of an exaggeration, but you start to run out of fertilizer, that means there's less food production. That is very bad. Point number two, as anybody like yourself and myself happen to have done, who has worked on a farm, will tell you, you just drink a huge amount of gas running a farm, running that tractor, running all that machinery. That is an energy intensive business. So both of those things are true. So if there are proper shortages, the places where they grow rice in Asia, that's an issue.

16:13Right. So this is and this this becomes a very serious problem, which kind of brings us to the to the broader question is, you know, when is this war going to end? And how can markets price anything, given the uncertainty about when the war is going to end? Yeah. So are all the commodities pointy heads in Lausanne, are they like looking over at the equities market, like at stocks and saying, I don't get it. Right. So as we keep saying, like stocks are doing great. US stock markets are all time highs. Everything's recovered. Everything is awesome. There's a little asterisk there, but whatever. Everything is reasonably awesome.

16:53Are they like, I don't know what these guys are smoking. Like what's going on here? This will amuse you, Katie, because you like being mean to me at the like dinner for all the speakers. I did the before dinner speech last night and I basically gave the speech on the topic that you just described, which is we're having an energy crisis and financial markets do not care. That is the message. I was like, here's here's my message from the financial markets to the energy markets. We don't care. Right. And I talked about how all these different markets. But I know you think the bond market is freaking out.

17:27I don't. The stock market is not freaking out. It doesn't matter which stock market you're looking at. And like going through possible explanations of why the broader cash-based financial markets don't care about the energy market. And I like told some jokes and Katie, I bombed. It was like the people in the audience. It's like they were, it's like they were dead. Blank stares. And you know, it was the classic thing like, is this thing on? Hello? Oh, now I'm even more sorry that I'm not in Lausanne with the commodities guys. That sounds hilarious. And a lot of people came up to me later and were nice about it.

18:04And I don't know how you explain that. Maybe I'm just not a very, you know, there's reason to think I'm not a very funny person, as it turns out. At least on the topic of the energy market. But, you know, more seriously, I think, you know, several people at this conference has told me, frankly, the reason for the disconnect is very simple. The broader financial markets are just pricing in the straight opening soon. Period. End of story. And they are kind of not as a rule. I mean, they're not open right now. Right. Right. But like, how do you trade that? There's been a lot of interesting discussions at this conference.

18:46A lot of people talking about the difference between the volatility they like, which is driven by like supply and demand and the volatility they don't like, which is driven by true social accounts. One in particular. Right. And that volatility turns out to be hard to trade. But in general, I sympathize with the market right there. It's not being naive. It's like you don't know anything about when this thing is going to happen. you know what I mean? You just sort of turn your eyes away. It's very human for the market to say, you know, there's so many factors, there's so much complexity, the parties involved are talking past each other.

19:24I think it's very human to say, I'm just going to put that risk, the risk that the straight stays closed for months and months to one side, because it's just too hard to think about, right? Yes. Too complicated, too hairy, too hard to predict, repercussions too complicated. You have to start thinking about politics. Everybody agrees here that the president of the United States negotiating with these Iranians is like, you know, a giraffe negotiating with a refrigerator. Like these are like totally different categories of beings trying to talk to each other and resolve a very serious dispute. And, you know, nobody's smart about this.

20:01Nobody is here like, oh, I know what's going to happen in the strait. Not a soul. No one's making that claim. Right. Radical uncertainty, baby. You better get used to it. With an overlay, radical uncertainty, with an overlay of these tweets. You know, I was talking to a hedge fund manager today. And, you know, like we don't get$20 movements in the price of oil usually. And we get them in like half an hour now. Right? Or it's not$20, but it's$10. You know, a truth social post can move the price of oil by$10 or 10 % or whatever. Instantly. You can't trade that. Nobody can trade that. You know? No.

20:39No, but it sounds like they're making friends and having fun along the way. Yeah, no, that is happening. That is happening. Everybody has a lot of war stories to tell, that is for sure. You are finding out lots of fun things over there on your little jolly in Lausanne. We can catch up more about it when you are probably back, but we're going to have to come back in just one sec with Longshore.

21:09There's more than one side to every story. With the Flipside podcast from Barclays Investment Bank, you'll hear two research analysts having a provocative debate on hot topics in business and markets. Listen to the Flipside on your favorite platform. Okie doke, it is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Rob, out there in the mountains, what are you saying? Katie, I'm long the volatility of everything. being at this commodity summit, you hear reason after reason to expect not only that the volatility is going to continue until this war is over, but the kind of placid days of the 90s, say, or the teen years in this millennium, they're just over.

21:58We're going to be living the rest of our careers and a lot of our kids' careers are going to be in more volatile times. So I'm going to go long. You want to buy volatility. you know because there's going to be a lot of it. I am long the latest manifesto from Palantir the slightly sinister tech company so this is basically a pricey of a book that the chief exec Alex Karp wrote I think last year but for some reason he was like spouting out on X over the weekend talking about how and I quote some cultures have produced vital advances others remain dysfunctional and regressive. And he's called for an end to the post-war neutering of Germany and Japan and predicted a future dominated by autonomous weapons.

22:47I kind of like it when people are like, hello, I'm a baddie and a massive weirdo. Like, I'm literally... Exactly. I'm literally a billionaire supervillain. Here ends my audition for James Bond villain. I'm a billionaire super villain please give me all your government contracts and then governments go okay then here's all the NHS data and do it like just send the data over to my underwater fortress like I don't know where these tech guys get off but I love when they think that they're like masters of the universe and tell everyone how strange they are so Rob presumably you're heading back to New York fairly soon so we will chat again Then, listeners, we will be back on Thursday.

23:34Listen up and tell your friends.

24:01just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.