Oil Peak? Consumer pique?

Published Oct 20, 2022, 3:02 PM

A bold call from David Fickling on oil this week... see if you agree. We also examine data showing the beginnings of a shift in US consumer behavior with Jonathan Levin. And John Authers discusses why we haven't yet seen capitulation in equity markets. 

Welcome to Bloomberg Opinion. I'm Vonnie Quinn this week. It's kind of the scariest call that you ever make as someone who writes about energy. That's David Fickling there, and we'll hear that prediction a little later. Also, people are just opting not to buy this thing. Still a lot of trading down as well, but some people are just turning around, doing one and walking out the door. Jonathan Levin and what might be the first signs the US consumer is starting to think before they shop first? Though to the markets and Bloomberg opinions, John Authors, John ys me have hundreds down more than on the year, the nazack down more, and yet we still don't feel like we've capitulated. Yes, and that's because I don't think we have capitulated, at least when it comes to equities. Bank of America's regular monthly survey of global fund managers, which has been going on over twenty years, finds that the number who are bearish on equities or who say they are getting more underweight is now the highest since they've been doing it, which is quite something because that includes two eight Now, how do we read that survey? Because the a AII survey, for example, is sort of counterintuitive exactly. That's what should be positive about the b of A survey, which accounts for people who are controlling very much more money than the AII. And generally speaking, what you want is capitulation. You want all the bad news to get into the price, or even more bad news than there actually is. You want all hope to be abandoned. And this report certainly does suggest that we're getting close. The problem is if you actually look at money flows into equities, they are still flows in much lower than they used to be. But you can't exactly say this is a capitulation when money is still flowing in. Where is it coming from? Is it just that there's so much cash out there and people are desperate to deploy, and we're coming into the fourth quarter and we're going to need to see returns at the end of the year somehow, and there's just denial going on. Well, that's a that's quite a good list of the things that might be moving. I think the other thing you have to bear in mind is that the Tina narrative is much weaker than it was. But it's not as though anybody wildly wants to own bonds at this point, and if you have rebalancing, you would be accustomed over the years for rebalancing every quarter to involve buying some bonds because stocks have gone up more, and you sell some stocks to rebalance into bonds. In the third quarter, stocks and bonds, by most measures fell almost exactly the same amount. That's part of the problems. Everything is correlated, yes, and at the margin that means that there isn't the money leaving the stock market that you would expect. I guess. The other point you can make is that volatility, or at least the vixed measure of volatility, how much people are used ing options to guard against falls in the market in the future. The VIX index has been very oddly calm, given it is around thirty these days, which is high. It got over a hundred on that Wednesday, and it got near to our hundred during two thousand and eight. Those are capitulations, right, All these measures seem to be teaching us. But right there, fix at its current level is elevated and shows concerned, which you know that we knew that anyway, it's certainly not giving the kind of signal that you would expect if we really reached a capitulative bottom. We had another small eas board of FED speakers this week. Timballeran, though, talked a little bit about equity markets and how he didn't see financial conditions as being particularly tight or tight at all. In fact, I guess would that commas news to some people. It's interesting if you look at our own Bloomberg's Financial Conditions Index, we still have it within one standard deviation of the north for the last five years. One standard deviation tighter than the norm is reasonable. It's not the kind of thing that is really going to reign in a major burst in inflation. There are lots of things that go into that. The dollar obviously is exceptionally strong, and that does have the effect of tightening conditions for Americans. The stock market, part of valuations and the ability to to raise I p os, the ability to to a secondary offerings are a big part of financial conditions, and the stock market is still anything remotely like cheap. So I think what Jimmy Bullard wants to see is enough negativity in financial conditions that it really does have an effect on people's behaviors. I don't want to read too much into what jim Buller had said, but it did sound like he was pressing the idea that they absolutely were not interested in equity markets and how much they dive. Was it almost expressing a wish that they would dive. I think it was. Uh. The other thing, obviously, is he's he's disavowing any interest in pivoting, or at least pivoting for the sake of equities. If you have something like what happens to Britain's guilts market a couple of weeks ago, they're probably not going to have any choice but to pivot or intervene. And because because central banks are also lenders of last resorts, that I think is where the chance of a pivot is greatest. You see lots of concerns about liquidity um and this has obviously gained a lot of steam since you know, the British implotion, and that's where you could probably see if we're going to have a change in direction from what it looks like we're having at the moment, which is a stock market enjoy enduring a bear market that grinds on for a while and rates that rise for a few more months yet and stay pretty high, you know, through to the end. Of next year. If we're going to get a change to that, I think it's because of some British style financial accident, rather than because inflation comes down a little bit faster than expected or because the FED is worried about the stock market. We're not going to talk about Britain because things will change inevitably in the next ten minutes on Britain, so we're going to leave that there. But I do feel like we needed a new era called the British implosion as opposed to the old British invasions. I have whatever. Yes, it's it's a it's hard to find the language to express quite what is going on. It's all basically an unforced error and yes words fail. John authors there. The US consumer has been pretty resilient for the most part post pandemic. As inflationary pressure is persist and persist, consumer facing companies are reporting pretty solid earnings, even if there's a little trepidation about how long this can last. Here's Bank of America's CEO Brian moynihan giving a broadly positive outlook. If you look at the consumers, there's there's not the signs that we see in our numbers or other people's numbers. Quite frankly, it says they're slowing down yet, or they're in stress yet, and that will have to be part of what happens in order for there to be a deep procession, because if the consumers have money in this big consumer driven economy, you know, that's that's what keeps America strong. So the consumer isn't in stress, but is the consumer beginning just beginning to alter spending patterns. Here's Moynahan again. What we told people is you're seeing it slow just a hair So it was very early in the year twelve and now ten, which is frankly, what people are trying to do is get the spending down a little bit, get the inflationary pressures down in the in the drag of the interest rates, but it's still strong. I spoke with Bloomer Opinions Jonathan Levin, who has been examining data that also suggests consumers are beginning to make some changes. So, Jonathan, what consumers say they'll do and what they actually do are often very different. That's an established behavior, but now it seems like we're seeing what they're doing shift. You've been examining the data. What is it telling you. I looked at a fascinating series that Morning Console does and every month they interview hundred US adults and one of the things that they've been asking them for the past six months is like, when you go to the store, do you experience sticker shock? And when people say you say, yes, I'm experiencing sticker shock, Morning Console then ask them, Okay, so how do you deal with sticker shock? Do you just walk out the door and go home empty handed? Or are you trading down or are you just sort of sucking it up and paying those higher prices? And what Morning Console is increasingly seeing, especially for their very latest round of this data, is that people are just opting not to buy the thing. Still a lot of trading down as well, but some people are just turning around, doing a one A D and walking out the door. And it had been kind of a mystery, right how the consumer was being so resilient in the face of so much inflation. I guess the mystery is now being solved. The consumer is starting to not be so resilient. Yeah, exactly. And to be clear, you know, I see these developments with the U S. Consumer is a very very slow burn, right, so what the morning consule data seems to be predicting. If you sort of run the time series against real personal consumption and real retail sales and things like that seems to be suggesting that we are going to see real declines in spending in the months ahead. Of course, in nominal terms, you might interpret that as continued resiliency. That does not mean like a crash in corporate earnings. That doesn't mean that retail sales automatically fall off the cliff, But it does put the U s consumer in sort of a precarious position, whereby if we are hit by another shock, and there's a lot of scary stuff out there that could deliver such a shock, the US consumer is in a very perilous position. Sticker shock, Jonathan, define it for us a little more. Is it about actual spending power or more like elevated inflation expectations or fear of recession? Yeah, I think it's mostly just the consumer's response to inflation. In other words, sticker shock is defined here is you know, you go to the store, You're expecting to pay one thing and the store is charging something else. Of course, you combine that with the fact that in real terms, people's purchasing power has been going down for the better part of two Wages have indeed been increasing at a meaningful clip, but they're losing their purchasing power after adjusting for inflation. So that's another thing I want to ask. When consumers retrench and it looks like they're beginning to just start retrenching, do they start sticking more closely to their jobs? Will we see it in the quits rate, for example, or the Jewels survey. Yeah, that's a very interesting point, you know, and when you think about how all these dynamics work together, is potentially going to be as weird as it sounds, maybe even a net positive in the short run as far as monetary policy goes. You know, there's some interesting tradeoffs there. The FED, of course, would love to see people quitting at lower rates and be able to get the trend rate of wage increases down from somewhere in the five percent range to something that they think is more sustainable, like a three point five Now. Bank of American CEO Bin moynahan told us that consumers are showing resilience. Are we talking about the same consumers or does it just take longer If we're to percolate through the banking system. I think what moynihan is saying is very much consistent with what we have seen in the data. Essentially, you know, three Q was a pretty decent quarter, and that's consistent with this sort of slow burn thesis. Right. We have to remember that the consumer went into two with an extraordinarily strong balance sheet, large cash balances, and a tremendous capacity to borrow more. They paid down a lot of their deaths during the pandemic, they re finance their mortgages at very attractive rate, and so they had a long, long runway. Then as much as the psychology, you know, starts to weigh on them, and I think that the psychology started to weigh on the months and months ago, you know, even when we first got hit with the gasoline shock. But they were able to take a step back and say, well, you know, this is tough, but I can deal with this for a few months, six months, and twelve months because my bank account is flushed. So I'm going to suck it up and I'm not going to change the way that I live. What the Morning Console data is flagging for us is that that runway is getting a little bit shorter, right, and people are finally starting to say, you know what, this is maybe not crisis mode for me yet, but I really need to start to make some lifestyle adjustments to make sure that I'm going to be okay if things get dicey going forward. So it's a little chilling when you see how Row saying that people are buying fewer toys, because the last people you want to punished in an environment where you're experiencing a little bit of tightening our children, right, the people you buy toys for. Yeah, and you know you bring up toys. I think the holiday season is another important part of this. If you want, you know, a little bit of a bull case to temper some of my my personal negativity on this. My my colleague Andrew Felsted wrote a great column recently where she really focuses on this is going to be the first holiday see is in without really any sort of restrictions on movement from COVID. So, you know, as much as some of these factors are starting to weigh, it could be that consumers, at least in many parts of the world reach for one last hurrah in this fourth quarter, and that you know, the slover and that I keep talking about gets pushed back yet another quarter here. But it is so fascinating just talking about inflation, isn't it, Because as you point out, at the beginning, it was gasoline used car price is then most of the inflation was being blamed on commodity cars after the invasion of Ukraine. But now it seems to be not just about things like shelter or used cars. It's broad and deep, as you point out. Yeah, absolutely, I think it's been pretty clear to anybody who has come to this debate with an open mind that inflation has been everywhere for at least the past six to nine months. It's a broad based adjustment in the price level. It's not about idiosyncratic factors. And you know, frankly, it began to six six to nine months ago. The team Transitory just kept on looking for new excuses for this thing. To the latest excuse seems to be, well, you know, let's focus on the lags in the housing data. And what I've been trying to say is just yes, of course, there are major lags in the housing data. Everybody is aware of that at this point. There have been many, many economist papers written about this. The Fed absolutely accounts for that when they conduct monetary policy. But you have, you know, plenty of market participants and commentators out there saying, well, look, inflation is actually not that bad. Look how much of an influence housing is having right now? And actually no, you know, every month, I do the exercise of let's strip housing out of this completely, because yeah, they're right, it could distort your ability to see an inflection point. But that inflection point is just not there period. You you do the exercise, you strip it out, uh, and core inflation is still very high. It's in many categories that have absolutely nothing to do with housing. Big gainers in the past month, including pet services. I'm not sure where they are impacted by mortgages, you know, automobile insurance. Right, it's just sort of pick your poison. And the problem here is broad based structural inflation and you just can't make excuses for it. And you point out that it could actually make a resurgence, that it doesn't mean that it's plateaued at this point. How long does it take for consumers slowdown? And I know you're calling it a slow burn, but how long does it take for it to eventually be reflected in prices, in other words, to shift to the supply side of the economy. And how does that even happen our companies forced in our their margins eventually, or how does it work? That's what you would expect, right, you know, it depends on what industry you're talking about. Right, So, if you're talking about a services industry where they're facing very sticky wage pressure, for instance, from that tight labor market, but all of a sudden they're waking up to the fact that they can no longer pass on their higher input costs to the folks that are dining at their establishments, you might start to see if those margin pressures come up as soon as now. Um, you know, I think the consumer sector is an important place to remember the famous long and variable lags, and they are variously estimated to be in the twelve to eighteen months range. But basically, like I say, it's going to take some time for this to show up in the corporate numbers. You know, it seems reasonable to say, you know, maybe Q four is is the inflection point. But if things keep going the way they have been going, which is to say, little by little the consumer adjust their behavior each month, you're still not going to see any shocking shifts in the nominal numbers, maybe for many quarters to come well, which means it's on for the FED. Right another seven five basis point hike in November most likely does that punish the consumer instantaneously or even quicker than six to eighteen months. You know, it really doesn't seem like it. Until now, the consumer sector has really been able to take these hikes. I think everybody is concerned that, you know, one day we're going to wake up to the true impact of these long and very of ole legs. And I think the Deves would say that the FED maybe has no idea what it's getting into, that it could be ugly when we finally get there. But you know, the real question just comes down to are you going to see an outside shock? You know, are we going to wake up one day and see that the housing market is crashing and suddenly people are looking at their home equity and they're saying, oh my goodness, I need to dramatically change my consumer behaviors. That would certainly be a breaking point. Any number of things that could happen with the war and the energy market could be a breaking point. Any number of things that could happen with European and Asian economies could do the trick. So it's impossible and probably imprudent to guess what such a shock could actually be. But there are so many things out there, Jonathan. How much is the bond market reflecting this as opposed to say, you know, a whole bunch of things, including expectations for Fed policy. Yeah, I think the bond market seems to be in a fairly rational place, right. You've got the two year treading essentially call it thirty five forty basis points below where the FED funds futures would imply. You know, we think the terminal rate is headache. That makes a degree of sense, right, because the bontom market is pricing in this possibility that they may well not get there, that they may have to stop short because one of this series of unfortunate events could play out and they'll have to stop sooner. Jonathan, live in there. You're listening to Bloomberg Opinion. I'm Valley Quinn. Well, it's a call that's been made before once or twice over the past one years Bloomberg Opinions. David Fickling, though, is making it now. For the first time I had a conversation with him where all was revealed. David, you made a bold call in a recent column, and you say it's mostly your own power's fault. I guess what isn't these days. But we'll get to his fault in a moment. Talk to us about this bold call. It's kind of the scariest call that you ever make as someone who writes about energy, because it's a call about peak oil, and it's a phrase that you hear from time to time, and almost always when you have suggested it's wrong. In fact, I was tracing back one historical call of a peaking in oil production made in nineteen nineteen by the chief geology of the U S Geological Survey. He said, peaking our production in the US was going to be in nineteen twenty one UM. And so here we are a century or later, and we are very, very very far above that peak. And of course, about fifteen years ago there was a lot of talk about a sort of peaking conventional oil production. And then of course we had the shale oil boom and that was the end of that. But back then a lot of people thought that essentially the world was running out of oil and that prices were going to go ridiculously high. We did in two thousand and eight see oil at nearly hundred and fifty dollars a barrel. Because so obviously I've got a little bit of trepidation about making this claim, but I think there is reason to think that things are actually changing quite substantially, because I think the key is not a peak in oil production and geological shortage of it. I don't think we'll ever see that, but rather is a peak in demand, which is a thing we do see in commodity market where essentially people starts obstituting other products and the products are no longer as much in demand as they were. And I think we are close to or I think we've probably passed that point. And I think we're already fairly close to that point. But the crucial factories, as you said, what's happening with the Federal Reserve, what makes you say that we're past peake demand even though I know all the workouts out there are that demand is going to be less next year. I think the crucial factor is half of all of demand goes into road transport fuel essentially, and that is plastics, and everything else. But it's crucial to think about what has been happening with road transport fuel efficiency over the last fifteen years. After that last hundred and fifty dollar barrel oil period in two thousand and eight, and obviously with people more focused on the issues of climate change, there was some pretty dramatic improvements in energy efficiency that were passed file fuel economy in the US Europe. We see the same also in China and India. Every major car market. The cars are required now to be much much more efficient than they were fifteen years ago. How the life of a car is about twelve years, so we're sort of twelve years on from these regulations passing, and so what you're seeing is quite rapid improvement in the average fuel efficiency of the fleet, which is only going to increase with each passing year. Add to that, of course, the growth of electric vehicles. A third of the cars sold in China last month were electric vehicles, twenty percent of both sold in the European Union or electric vehicles, So that is a really dramatic shift in the sort of roughly five percent of the global car fleet new cars each year. The turnover of new cars adds about five percent and five percent straps on the fleet, so that's very significant, but of course, actually more significant at the moment than that is the sort of the other ninety five percent of the fleet, which is not new cars, but they are being affected by these fuel efficiency regulations that have been in place for twelve fifteen years but are only really starting to buy. So most mainstream forecasts look at a peak in oil demand around them, the sort of hundred and three million barrels a day mark VP that have the same numbers total energies. We're not very far below that market at this stage. And so if you then add in the effect of a major recession, which always causes the slumping old the month, then really that peak we sort of never get there, essentially because the sort of long term secular decline and transport fuel intervenes with the sort of economic crash of a recession and means we sort of really never get above the point we're at now. And this is where your own power comes in a way. It's his hold, absolutely, and I think that's worth bearing in mind as well, is that a large slight of inflation is being caused by energy prices, and if you think about what happens when a central bank raises interest rate to reigin in inflation. It's essentially saying that the demand in the economy is too great for the supply that we have, so we must slow the economy, we must cut it back until it is weak enough to cope with the weaken supply side that we have. And though in that sense we see this from the Federal reservant, we see it in a way or so from OPEC. The Federal Reserve is weakening the economy to the point where the st weakened theup fly of oil and energy generally that we have is sufficient to meet demand in the economy. Likewise, obviously we've seen opeque cut of production. We are not seeing significant boosts of productions from anywhere. So there is no constituency, either monetary or on the oil production side, that is actually trying to meet levels of demands above what those fairly arish forecasts of sort of a hundred and three million dos a day arraiming at. You know, if you if you go to OPEC or exomobile, they have some more bullish projections to the demand, but no one is actually investing in the production to meet that demand and if you don't invest in the production, but it doesn't happen, right, And I guess the whole point is that it won't be economically viable at some point to invest in the production. That's why they're not doing it. But so what happened? Does oil stay in the ground, then eventually it's not that we'll run out of oil? And what do countries like Saudi Arabia think about that? And the interesting thing is that a lot of the large producers, they have done very well from the current circumstance. At a time when oil prices are high and you're producing pectime, you know, producings for us we tend to twelve millim barrels a day. If you cut your production by one million brels a day and it increases prices by you are making a lot more money than you would have been if prices were thirty percent lower. In production was one win in barrels higher. And Saudi Arabia doesn't actually care about the volume of bolts produced. It cares about the amount of revenue that goes into its treasury. And that is the case that every one of the OPEC countries. So from their perspective, a tighter supply side that results in higher prices is a good thing for them. Now. Of course, the danger of that is always that enough tightness is going to induce more production from non opex sources, and then they will lose market share. But as we've seen that non ope production has really not gone up very much, and particularly with rusher in the solders, OPEC plus the only real source of incremental production in the last twenty years in the world economy. You've had a little bit from Brazil and other parts of South America, but really the only player in town is the US shale sector, and that has picked up, but not sufficiently to offset what's going on with an OPEC. But David explained to us that demand is peaking and we could see big oil demand in the next few years according to your diseases, and it seems very very plausible. Why doesn't that mean oil prices are also peaking? Well, I think we have a tendency to sort of think about commodity prices the way we think about equity prices in a way, and so if demand is going up, then prices should be high, and if demand is going down, then prices should be low. But if you go back to your sort of economics one or one classes, this is not necessarily the case that the price is a result of the intersection between supply and demand. We see these cycles in commodity markets and have done since since tording time. Pretty much. If supply is falling and demand is falling, but supplies falling fast and demand, then you will have high prices. And if supplies rising and demand is rising, that supplies rising fast and demand, you will have low prices. The prices that the prices are to do with the extent that supplying demand are out of whack, they're not really to do with this direction of overall output essentially. So so I think that's what we will see, and I think we'll see that for a decade in the twenty forties and twenty fifties, we will see periods of high oil prices because the supplied demands will still often go out of wax. But it may not matter as much as the world economy. David, what about countries like China and India? Countries are a billion plus people still developing. Will there be major differences in demand and refining needs across regions? I think you almost need to put them in two separate categories because of course India is one of the biggest incremental holding on from here, but it's quite a small consumer of ole now, sort of four or five million barrels a day compared to China, I think off top of my head on about twelve million and the US on about eighteen million. So these are you know, injuries in somewhat of a separate category there. India also has almost no domestic production so is much more dependent on imports, whereas China is one of the world's biggest stile producers. China produces about five or six million barrels a day of oil itself. Comparing all of those countries, I think with China, China has as I said earlier, you know, a third of the vehicles sold that last month in China or electric vehicles. China is strategically, very heavily pivoting away from import demand. It's going to have import demand for oil in a foreseeable future, but it is very concerned about that as a strategic weakness. The supply lines from China to its mayor supplies of oil tends to be very long, so China, I think the speed of electric vehicle uptake is going to mean that certainly, transport fuel we see that sort of moved out of the economy fairly rapidly, possibly more rapidly than cold consumption over India, I think is a bit of a different story. But of course India's at a much lower level of dual element. When you talk about the road transport fuel, you're mainly not talking about cards. You're talking about two wheelers and three wheelers, which are also actually very quickly being substituted by electric vehicles because the sort of value proposition for electrification is a lot stronger for two and three four wheelers. Yeah, and I mean, you know, I think in a way, because there's not the sort of strict Egypt value that China places on it, I think probably the demand from India, you know, will be more incrementally substantial than from China over the course of becoming decades. But the thing to bear in mind is, of course the O E c D still consumes half the worlds oil, and so fifty million barrels a day is going into the O E c D. So if the Indian old demand doubled, you only need a temper center client from the O E c D to eat up all of that, David, with the Russia War ongoing, do supply chains in terms of oils stay changed forever or at least for a very very long time. I mean, I think that is clearly another factor here. And you know, when I talk about demand, you demand and supplier obviously intertwined. A lot of supply has been held back from the market or is struggling to get to the market. You know, even though obviously there's been a lot of exemptions around energy in terms of Russian sanctions, in practice, we've seeing what's happened to the North Stream pipeline. We've seen some of the sort of chaos around like you know, shipping arrangements and things like that, the rerouting of all that supply, it will lead to sort of ongoing shortfalls. And of course the other factor is that the sanctions that really that are actually have sanctions that affect oil services and upstream services from the most pieces of European and American companies that provide those oil field services. Russia will much like Iran, you know, I mean, the worst case snary obviously it's something like Venezuela. It will struggle to produce oil in the volumes, but it's been still producing is in the past because the Russian oil industry is highly technologically advanced, and the technology is just not going to be there in future, so that is an issue on the supply side as well. Bloomberg Opinions David Fickling. Do get in touch with your comments and questions at Monty Quinn on Twitter or email Vequen at Bloomberg dot net. We're produced by Eric Mullow. That does it for this week's Bloomberg Opinion

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