Barnacles and Market Volatility

Bull or bear, trade or tariff, future or Fad, There's more than one side to every story With the flipide podcast from Barclay's Investment Bank, you'll hear two research analysts having a provocative debate on hot topics in business and markets. Listen to the flip side on your favorite platform You are not imagining it. The war in Iran is still going on. The Strait of Hormuz is still mostly blocked and oil is still trading above one hundred dollars a barrel. This has now been going on for nearly three months Nearly eighty countries have introduced some kind of emergency measures to protect their economies from higher energy prices But the world is mostly merrily getting through its oil reserves Hm Today on the show, arere we getting close to a tipping point? Do reserves hit a low point and send oil prices screaming higher Unhedged, the Markets and fininance podcast from the Financial Times and Pushkin I'm Katie Martin, a markets colonomist at FT Towers in London, where we have a long weekend ahead and yes, people. The forecast is suunnshine Sun's out, gun's out. Big man, Rob Armstrong is on his hole somewhere, but joining me in the studio in the depths of FT Towers we have another big man, Malcolm Moore, the FT's Energy editor. Regular listeners will recall that he knows which way is up on the energy beat Melcome, thank you for coming back on the show. We didn't put you off too much last time Have you had any days off since we last did this at the start of April Um What a question. This is not the time for days off Yeah, it's tough out there when the energy beat, right? So look, you've been writing about this recently, this concept of a tipping point because Oil and gas reserves exist for a reason, right? It's for this sort of eventuality, right where you can't get hold of the stuff and so you have some squirreled away, you know, down the back of the sofa kind of thing How far through these reserves are we getting and how dangerous is that? Well, I think I recall the last time I came on the show I said that the energy market was, I think, tearing its hair out or exploding in of drama confusion at the fact the rest of the world wasn't paying enough attention I mean Whver we were last time, whichever bit of hyperbole we were at We're further along that curve now So yes I mean, it's worth saying there are two types of reserves. So Companies have a lot of reserves They have three billion barrels more or less of oil in reserve. But it's not, I mean, we call them reserves They're not really reserves This is basically what the system a lot of it. I mean, obviously there's a margin, but a lot of it is what the system needs to operate, right? So pipelines in order to work, they have to have oil in them, right? And refineries in order to make gasoline, they need to have You know, crude oil waiting to be turned into gasoline So all of this stuff is just You know, it it's it's kind of slosing around the system. It's working capital. It's not's not a it's not a stockpile. It's just what you need to do your business. And then and their're companies, right? So they don't want to hold stuff that they don't need. There's no profit in that. So they're required by governments to hold a certain amount which is lucky because it's probably a little bit more than they would hold if it was up to them. but they don't have a huge Margin Now the other type of reserve are the government reserves, the most famous of which is the US Strategic Petroleum Reserve And there's one point two billion barrels of that, right Of which we have used four hundred million, or we will have used four hundred million do. at some point over the summer. So that's good, but just very clearly Companies have got a lot, but a lot of it's being used Governments have less But all of that is available, right Now, as the war continues, we're in the situation where we are using more than we have Demand has not really fallen. In fact, it's summer So demand is going to go up, right? because we have like driving season in the States and because Europeans go on holiday on aerplanes and you know and and and and there's aircon in Europe that suddenly needs to like really kick into gear. I mean, look this might be a stupid question, so tell me if it is, but the reserves that we have It's not like a car, right? You can drive your car until it literally runs out of petrol and then you can just point it down a hill and keep going ude How have you done that actuallyct. sound a strangely familiar look in your eye. recalling a happy time. It's a long story. But is the same true of these sorts of reserves? Can you run them down to zero or is there a level at which there's just not enough in the pipes Yeah, you cannot run them down to zero. So for safety reasons, I think that the line is about twenty five percent. needs to be twenty five percent full. The tanks need to be twenty five percent full. Otherwise they get clogged. You know, obviously, like any liquid, all the crud settles at the bottom of these tanks. know there are all sorts of operational problems So A, we need those reserves to make the system work and B The margin is even tighter because a lot of it is the buffer that needs to be there under all circumstances. Right. So Yes, we're getting to you know, squeaky bum time Yeah And and and the oil industry is jumping up and down and saying, hey, We have a real problem here, everybody, and P peopleople who trade in equities are just looking at the SpaceX IPO. Yeah, stock markets like Lol, whatever. I'm glad you called it squeaky Bumime because that's a phrase that I use quite a lot and Rob is pretty much convinced that I made it up. I did not anyyway So yes, these stressed out people in energy markets are saying the world needs to wake up to this possibility that unless we get a really dramatic turnaround of the situation in straight Hormz, then we're going to get towards the danger zone in these reserves I guess one of the one thing here is that differenterent ways of measuring the oil price as you know well, Malcolm. and One way that we do this is that there's what we call the spot price. So there's the price that it costs to buy a barrel of oil today. Pretty much that's what it means. But then you can also arrange effectively to buy barrels of oil in future And so there is a price of oil today, but there's a price for what that oil will cost in one month, two month two months, three months, six months in future So Malcolm, sometimes we like to call this Charts on the radio Tell me what a chart of oil futures looks like Okay So priceices now one hundred and ten dollars a barrel. That's for oil for delivery next month. right? You go one month along. so coming along, you're going to go down to, let's say one hundred and then down to ninety, then down to eighty. So what you're looking at is a very steep drop and then gently sloping into the distance because the further out you go There's less liquidity, peopleeople are not trading a lot of those contracts. And also because who knows what the future holds? So like there's just less price action over there. at the top, very steep. and what that steepness tells you is Give me oil now. I need oil right now. Please give me oil. I'm willing to pay anything for it And then and then it tails away and that's telling you I don't know whether I'm going to need oil in two months. Maybe I don't need so much. three months. Im I'm less willing to pay for oil in three months That's what the steepness tailing away tells you. So sort of today's oil price is a line that heads up and to the right and the futures curve is a line that heads down and to the right. Exactly right. Chance on the radio people. And that futures curve is saying What have worried about the price of this thing is coming down. We think that the oil price is going to come down So you've got the energy people tearing out their hair saying, hell world, hell world, be afraid. this thing could go to one hundred and eighty dollars in a straight line this futures curve saying This is going be fine Make that m sense. Yeah, it's a problem. And it's a big problem because politicians and all sorts of people are looking at the futures curve and saying we don't need to worry You know, the price in a few months time is eighty dollars a barrel, ninety dollars a barrel. We can live with ninety dollars a barrel. That was a normal price for oil not so long ago Okay their' misunderstanding of actually means. I just mean to tell me that politicians are failing to understand something in financial markets. It's not just politicians, Katie.'s you know because there is nothing else that tells you what the future is going to look like, everybody looks at that. compomanies build it into their forecasts, central banks use it as a sort of own neutral This is a neutral thing. We don't have to make our own forecast about the future of energy. We're just going to take this, what the market says Let me just explain what that curve does or what that market is. If you're an oil company, And you're going to be pumping oil out of the ground in six months time. You would like to know today before you make the decision on whether to invest in a new oil field how much you're going to get for your oil in six months time And if you're a buyer of oil, you're a refinery and you want You know, you're going to need crude in six months time to turn into fuel You also need to know what sort of price you're going to pay because hey You'd rather fix it today than just take a chance that in six months time it was something different. That allows everybody to do their financial planning. Right. So it's a hedging tool. It's basically you can take the risk out of the system, you can say, today, the most I'm willing to pay or the most I'm willing, you know, the least I'm willing to accept for my allil in the future is eighty dollars a barrel That doesn't mean that in six months time it's going to be eighty dollars a barrel because actually when we get there, we can see that the curve has a terrible track record of predicting prices. The curve always just gently slopes into the future, right? That's what people do when they're trying to hedge their risk. That's what risk hedging curves look like. But when we get to the future, it's usually totally different Is there an element here where oil producers and oil refiners and people who are actually involved in the oil business are one set of people who are active in the futures market? And then there's a whole other set of people who are active in the futures market who are speculators hedge funds and Are they the people that are helping at least to pull this futures price? down lower than you can argue it should be No, I don't think so I mean, again, I don't think anybody in the market is trying to actually predict what the price is. They're simply trying to settle at a level where both sides are happy and can make money. And the financial players are there to absorb the risk from you know, the physical players, the refineries and the oil producers. So essentially the oil companies and the refineries are transferring their risk to people who know how to manage risk, right? Fancial players And financial players are taking a cut and saying we're willing to, you know, we're willing to This is probably going to be around here. I mean, it helps make the market run efficiently. So I don't think they're distorting where the price is. I just think that people think it's a crystal ball That's not its purpose. Its purpose is to deliver certainty today people who are trying to make their plans, so they don't have to worry about what the future price is. So the frazzled energy pointy heads who you speak to, That's very mean. I say I don't have pointy heads. I'd say this with love So they're looking at the futures curve, which says six months from now, the oil price is going to be about eighty dollars a barrel. Today, it's about one is six hundred and six dollars a barrel. by when I last looked at a screen If we do hit this kind of sudden stop, if you like, where where we really do like hit the buffers on what's left in the reserves Worst case scenario, What's the most plausible, worst case scenario you've heard for where the benchmark price goes Um I mean, I've heard all sorts of prices, right? But most of them congregate around the two hundred dollarars a barrel mark And the reason for that is You know, if we remember, the all time record for a barrel of oil was just over one hundred and forty dollars And that was about fourteen years ago So actually in today's terms, in real terms, the spot price is still H notot too bad. but on the other side of the ledger Um Nobody really knows what happens when oil goes above a certain level in terms of demand Right Nobody knows whether people really just say, actually I'm going to stop driving there. or I'm going to stop flying or like. noobody knows how quickly demand collapses. Lots of people have tried to model it. It's very difficult to model. It's very, very tricky And so People are unwilling to say mad things like, oh, four hundred dollars oil partly because people have said mad things like that before and then had egg on their face, right?. But also because above two hundred Who knows how quickly demand disappears? Let me ask you about something very important, which is summer holidays. yes. First of all, will I be able to go on an airplane to my summer holidays in July So I've heard different things to reassure you All of the airlines say yes. would would wouldn't they that Well they have forward bought their oil So or their jet fuel, rather. They've bought it, they've paid a price for it. Now obviously, there's an interesting question of whether actually it shows up or not and is delivered But Let's assume that people delivering Commodities are going to deliver to rich places first. Sure You should be okay. U There were lots of warnings, particularly around the European airline industry early on in this crisis that This is bad. We're going to run out of the stuff. There's going to be people's holidays cancelled. The heat has really come off that and certainly the message from the UK goovernment is, don't worry it's all going to be okay Malcolm is it all going to be okay? Well, I think if you want to give credit to anyone, then you're going to have to say, God bless America Because America is shipping so much jet fuel to Europe at the moment. I think it's shipping half of all the jet fuel that's coming to Europe it's coming from the US right now. I've always liked America So you have to say, if you can go on your summer holidays You know who to thank As long as Rob doesn't take any credit for this No one knows what's going on with Iran. Obviously no one knows what's going on with the Strait of Hor moz, but we did have a fairly reasonable drop in the oil price. I think it was yesterday, which is Wednesday because of this news that there were two super tankers full of Iraqi oil on its way to China that managed to pass through the strait and didn't get blown up.. So feeling a tiny bit more confident that maybe the ships can start heading through. There was definitely a sense yesterday that something had changed. Obviously we're going to need to see more evidence of this. Yeah. Two ships isn't going to cut it. But essentially what is looking like is happening is, I mean It's three ships, is the good news.. There's a Korean one as well. but Um you know, and that's a lot. That's six million barls of oil That's the largest volume of oil that's passed through the strait since the war began. So that is good, and that's what got everybody excited Also, because after the Xi Trump summit, they thought, oh, maybe there's a deal that's been worked out. Maybe it'sinuff go through. But also Iran has now set up what it calls the Persian Gulf Strait authority. which is their new and potentially highly lucrative body to manage traffic through the Strait of Hormz Now we don't know, again how that is working. We don't really know ship operators are paying or not paying It is illegal because that's sanctioned. So most people say they're not paying We don't know whether countries are doing deals. So you know Pakistan does a deal directly with Iran and everybody, you know we don't know all of that. But what we can see is that people seem to be edging towards a new sort of status quo where maybe some ships can come out.? And so maybe that door is opening, and there are a lot of mayies here. But if that door is opening, how many ships can get out and what does that mean for flows? And can we detach the whole strait of Hormz business from the hole. Are we at war with Ir own business? Okay. Speaking of things being detached and attached, she says, shuffling her paper We have a story today saying that ships trapped in the Gulf are accumulating barnacles, algae and jellyfish because they're just trapped in this warm water going nowhere. and that's the sort of thing that barnacles and jellyfish like. anyway There are mechanical problems that can come as a result of this Barnacles the next big like macroeconomic risk that we need to worry about. How worried are you about barnacles? I'm going to preface my answer by saying I know absolutely nothing. about the effect of barnacles on the drag of giant oil tankers. This is not a subject that I have researched even with a casual Google search. Rice. With no disrespect to this story, I am short barnacles be long or short yet, that has to wait. Sorry. I'm short, Barnacles. I've seen a super tanker These are not small things. I've seen barnacles These are very small things But you get a lot of barnacles. A lot of barnacles gonna eat a supertanker? I don't think so. Cil tankers are very big, but if you get enough barnacles, surely there could be a problem I am willing to say Yes, I expect that the more barnacles you have, the slower you would move through the water. And indeed that that could be a problem if you're trying to outrun the IRGC through the Strait of Hormuz. So yes, I'm not going to minimize that these small sea creatures present a threat to global oil markets. But are you simultaneously saying this isn't necessarily the biggest issue in the straight Form moves at the moment? I'm still going to go with the missiles and the speedboats and the mines being a more important issue than the barnacles. We will check back on this prediction at a low date Maybe we could send the barnacles to attach themselves to the mines and this whole problem will go away. mean You're going to leave mines in those waters. They're going to be jellyfish, they're going to be barnacles. Yeah. I mean, Iran's got to think about that Jellyfish experts, please get in touched unhedged atft. com but Malcolm we're going to come back in justust for sec with Lhort and you're not allowed to stay barnables globilization to innovation, sustainability to market volatility There's always more than one side to a story Explore different perspectives on today's most important business and economic issues, with the fllipide podcast from Barclay's Investment Bank Hear two research analysts in a lively debate and get insights from every angle to further inform your view. Listen to the flip side on your favorite platform Alrighty, now it is time for long, short where we go long, a thing we love or short, a thing we hate. Malcolm Moore, what are you saying I am going long black and white crisp packets I don't know whether you've seen this, but in Japan where they love crisp packets and they love plastic packaging of all kinds Some companies, and I don't know whether this is a marketing stunt or not, but they've said that because of the energy crisis, They don't have the colored inks to be able to paint their gaudy plastic packets in the way they wish. And so they've turned them grayscale And as a result, I am envisioning Japanese shoppers lost in the aisles, unable to tell the difference between flavours, probably buying all sorts of terrible flavour combinations for their kids which would be immediately rejected and lead to tantrums. And I am one hundred percent there to watch that spectacum. Yeah. I think this sounds good I am long lower value human capital You were almost certainly aware of the story this week where it's the standard Chartered Chief executive, Bill Winters He said to journalists that they're looking at sweeping layoffs. thousandousands of people place quotes, in some cases, lower value human capital This went down like a cup of cold sick and he's had to follow. How to make your staff happy. Hello. I'm paid thirteen million pounds a year and I'm going to fire eight thousand people, but some of them are lower value human capital. Anyway, he's trying to make nicey nice afterwards, but this just feels like one of those comments that doesn't It doesn't sound good, does it? Feels like it could go viral. Could go viral Malcolm Moore, you are higher value human capapital. Thank you so much for coming on the show. Listeners, we will be back in your ears on Tuesday. I Hope you have a lovely long weekend if you get one between now and then. So listen up then