Bloomberg SurveillanceDaleep Singh, PGIM Fixed Income Chief Global Economist, says there's been a flight to quality as markets wade through the "fog of war." Julie Norman, UCL Centre On US Politics Co-director, says Israel faces a challenging path forward as they respond to the attacks by Hamas. Torsten Slok, Apollo Global Management Chief Economist, says the Fed is succeeding with their tightening and that the economy is moving towards a faster slowdown. Savita Subramanian, BofA Global Research Head of US Equity & Quantitative Strategy, says markets can rip from here and sees a 4,600 S&P by year-end. Alix Steel, Bloomberg News and Julian Lee, Bloomberg News, discuss Exxon to buy Pioneer for $60B.
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National security experts debating whether the US has sufficient throughput capacity to bank Ukraine, Israel, and possibly Taiwan in a simultaneous and extended conflict scenario. The unanimous and emphatic answer from experts is no, which underscores the likelihood of a period of fiscal dominance in which deficits are mostly disregarded and interest rates must adjust to a higher equilibrium.
The leaf Sinc.
The chief global economist and Peach and fixed Income joins us right now wander for to catch up with you, sir, What a difficult time. Going to lean a little bit on your experience in the administration along the way In this conversation as well, Paul Tudor Jones caught up with a regional business news network called CNBC in the last twenty four hours. You might have heard of Paul. I'm not sure about the network deal. This is what he had to say. He said, he's never seen this kind of geopolitical tension in the last something like fifty years, with the deficit position, the budget position of the United States this week, deleep, How important is that.
He's right? The backdrop is returned to the most intense period of great power competition in at least three decades. That's going to mean more demand on physcal spending to shore up our sources of competitive advantage. And you know, it's also it's also the reality that we're seeing a surge of yields driven by term premium because bond investors they don't know whether we're going to grow fast enough, whether tax revenues will be high enough to service a rise in cost of capital. They don't know whether other buyers are going to show up at auction, and they don't know whether Washington, DC can exert enough fiscal restraint if growth falters. And that's why you're seeing this repricing. It's a very challenging.
Time, Delli. If you wrote this column that we found fascinating and we've cited quite a bit about the lack of price in sensitive buyers really questioning the ability for the US to borrow at some of the rates that they were accustomed to in the past. Can you just bring that forward to today's moment, with increasing calls for military aid. How much does that actually make you double down on this idea of borrowing regardless of where we are, in order to finance national security and other concerns.
Well, Lisa, here's how I synthesize what's going on. There are three fundamental dynamics. What's the fed's near term reaction function, what's long run neutral, and what's the term premium? And then you have to overlay the impact of the attack on Israel on the Fed's reaction function. I think Lori Logan said it best, and we have a higher term premium. A higher term premium, all things equal, implies a softer economic outlook and greater likelihood that the policy rate has peaked. Okay, on long run neutral rates, I think what we're seeing with payrolls and lots of other evidence is it something really positive is happening on the supply side of the economy. That's how you can get above trend growth alongside disinflation. So long run neutral rates are going higher, then you have term premium. We just spoke about that. The balance of risks are still moving higher. If the house is in disarray, that means no durable physical consolidation is on the horizon, and therefore you have a durable risk of a supply demand in balance that is no longer showing up at every Treasury auction. Neither are large overseas buyers to the same degree, either because they're savings balances have fallen or because they want to diversify their holdings and now overlay the impulse of the attack on Israel. It's another injection of uncertainty. It's another potential supply side shock on energy prices. And the net of it for me is you do get a higher drift in long term yields with an anchored front end.
So, based on what you're saying, Tahalif, do you think that the move that we've seen, barring the past couple of days in longer term yields makes sense or that it's not high enough, or that it's gone a little bit over the board.
Well, I mean in the I mean Emory said it right right now. We're in the thickest fog of a hideous and tragic war, and so we're seeing a flight to quality on the back end of the curve. But I think over time, as market participants think through the second and third order effects, the forces that I mentioned going to cause a drift higher and the front end. I think think that's where I have the most conviction at this point. I think the FED has said now with a chorus of officials, we're going to let markets do the work for us, and if the data continue to moderate both on growth and inflation, we can watch and wait.
Dealey, But I just want to finish on the potential policy response, and this I think involves your experience in the administration. What kind of sanctions response should we be looking out for as a team. For the investors listening to this program right now, what would you expect to see from the administration the White House in a coming weeks and months.
Well, I mean, the leading edge of any response from the administration, if it proves necessary, will be in the military route. That's why you see two aircraft carriers moving to the Eastern med That's why you see all of these efforts to shore up Israel's Iron Dome. There will be a sanctions component because money is fungible to the extent that Iran is seen as directly directly involved in the planning and execution of the attack. I think you'd see the screws of screws of sanctions Titan. There'll be a global effort, but that's that's second order to the military response.
Delim's just been said about the sanctions response and the fact that perhaps this administration turned a blind eye to Iranian crude production and perhaps Chinese's buying off that crude. What's your view on that.
I disagree with the prebis. I mean, I know there's a lot of a lot of hype about the six billion dollars. The administration spoken pretty clearly not a dollar has been has been sent to Tehran. I would be shocked if a dollar ever moves to Tehran in the aftermath of this attack. And so you know that there is going to be I think less and less Iranian crudeill on the market. The question for the administration is can they get an offset from Saudi from other sources, from domestic producers. That's going to be the challenge.
So dully, you just said that you think that refreezing that six billion dollars is pretty much a certainty at this point. Is there a potential ramification? Does this have any kind of play in to some of the accusations of using a dollar as a weapon or any of these talks that have really flared up a couple of years ago.
I don't. I don't think so, Lisa. I mean, if we're talking about the barbaric invasion of Ukraine or this hideous attack on Israel, Uh, there have to be there have to be consequences. And when you stop short of deploying your military, economic tools are the are the second best resort. So that's that's what we're seeing I don't think it's a threat to dollarization. We're going to move with our allies, and we're doing so to uphold the principles that underpin peace and security across the world. That's that's good for the world, that's good for for financial markets, that's good for the economy. That's what these sanctions do.
Deleeve, don't be a stranger. It's trite to catch up with you, SA. Hopefully we can do that again soon, Deleep. Think of page and fixed income. If you want to guess now, is Judy Norman the Center on US Politics Code Director Judy wonderful to hear from you, and let me do you offer you the challenge to answer that question? Is that a distinction without a difference?
You know, I do think it's important to differentiate on this, and it's interesting to me that Israel in particular is being very cautious to pin blame directly on Iran. Again, Israel and the US have long known that Iran has funded Hamas, has provided much of their weaponry, et cetera.
But this operation does look to be different.
And again importantly, I think a direct pin on Iran would escalate the region very quickly. This wouldn't just be Israel and Iran as to states, it would also include all of Iran's proxy groups has Blah proxy groups in Iraq and elsewhere, and.
So it could just blow up very quickly.
And I think both the US and Israel are aware of that, and one of their goals in these coming days is going to be containment along with you know, retribution and deterrent. So that's on everyone's mind right now. It doesn't mean that Iran is not going to play into this, but I think for the short immediate future, coour heads are trying to figure out where exactly a place to blame and act accordingly.
Did Judy walk us through the tension in that statement? The words that you just used almost a contradiction between retribution and containment. Are those two things compatible?
Well, I think this is going to be a real challenge over the next few days, the next few weeks. On the one hand, of course, Israel wants retribution for these attacks. They want to deter a broader conflict, as does the US. But at the same time you're trying to contain again the conflict as we just spoke about, from spelling out whether it's in the West Bank and has Bolah or throughout the.
Region or just over the long term.
And you know, John, Israel is going to be if they do launch a ground offensive, it's going to be very difficult. Gaza is a very highly populated urban area. You would face mass casualties for Israeli military personnel, for Palestinian civilians, which we're already seeing, and of course that does of hostages that are being held in Gaza, So this would be very tricky. It's also very tricky to just OUs to mass as a group, and it's very tricky to know what would be.
Next for Gaza.
So I think the road ahead is going to be challenging for Israel. We've seen these, you know, I would say Israel Palestein has become almost emblematic of the term cycles of violence, with different kinds of acts of retribution that then lead to more acts and unfortunatably and casualties on both sides. So that's the reality of the situation, and it's a very tough needle to thread.
Julie, Given all of that, what do you make of the discussion of John Kirby of the US talking yesterday about Cutter actively trying to negotiate some sort of hostage release, something that could maybe de escalate the way that you're talking about.
Yeah, it'll be really interesting to see Cutter's role in this. We have heard these reports of some kind of negotiations around hostages, at least around women and children and elderly, some kind of a negotiation that might happen there. You know, Cutter has has been an important intermediary, I would say, between the US and Israel and groups that they can't or won't negotiate directly with. And I think we're going to see that playing an important role here. Again, this question of the hostages is very much in the forefront for Israel and how they coordinate any kind of operation. It's also very much, obviously in the minds of the US and other countries that have their citizens being held there.
Right now, What are the red lines, Julie, do we have a sense of as Israel plans the incursion, the potential ground operation in Gaza, is there a sense of pressure being placed on Israel to show restraint in certain areas from the US, from other allies as well as from Middle Eastern partners like Saudi Arabia that had previously been discussing with Israel.
Sure, absolutely.
You know, I think we heard from Biden yesterday a very committed US response to Israel. You know, we're with Israel and really not setting any red lines at this point.
We're hearing different messaging.
From the EU, from European partners in AWA, and of course from within the region, you know, calling on Israel to stay within the bounds of international law, within the bounds of kind of rules of war and these kinds of things in terms of proportionality and targeting of civilians. So I think this will be an ongoing conversation. I think it's it's a very difficult one. I think many feel a lot of aversion to talking about both sides, whereas others feel it very necessary degree for the civilian loss of life on both sides of this border.
Judy, when you hear numbers like more than one thousand civilians, and then we have conversations where we talk about a proportional response. What on earth is a proportional response to what took place over the weekend.
Yeah, I think many in Israel be asking that.
And again I think this has been again a situation that, unfortunately, time and time again has played out in the Middle East, and is this in this Israel Palestine conflict. You know, over the decades we have seen different kinds of atrocities that again are then met with a response that you also read aults and civilian casualties that then just escalate for many this kind of long term security challenge of then getting more people involved in resistance and whatnot. So it's a very challenging path, I would say morally as well strategically for Israel as they try and balance what might be short term necessities and responses with what might be real long term strategic thinking of what does this mean for the long run and what kind of future are we setting up if we respond in a way that just fuels this conflict even further.
Judy, thank you, Thank you for your insight. Jully Norman. Then, if you see our center on US politics.
Someone who's been tracking the sort of push pull between inflation and potential weakness around the edges is Torston Slock, chief economist Apollo Global Management, who puts out charts that we cite pretty much every single day. And Torston, I just want to thank you and your team because we always use them as talking points and hot topics.
So we appreciate that, but I.
Want to start with your impression of a reacceleration that we're starting to see on the margins in goods prices.
I think what's most important reader here is it shows how difficult it is to get the horse back in the bond when it comes to inflation. You think about first, goods inflation went up when we were sitting at home ordering stuff online during the pandemic. Then goods inflation came down when the supply Chaine came back on steam. And now, as Mike was just pointing out, it looks like goods inflation is beginning to re accelerate because manufacturing is beginning to show more signs of life. And you have, broadly speaking, therefore, as separate cycle in goods inflation relative to the cycle in services inflation, where initially when we were sitting at home, there was no service inflation. Now we're all going to restaurants, hotels, basically flying consumer services, and that's why service inflation has been very high. What we that cycle difference has been a very important feature, and it shows in the data also today.
What we did see though, during the immediate aftermath of the pandemic was that people weren't as sensitive to price increases because they accepted that inflation was happening and they had huge bundles of savings that were left over from the pandemic. Is now different? Are you seeing consumers push back, spend less.
Not actually spent when they see prices going.
Up that much?
Well, if you look at what was the distribution of consumption on goods and services before the pandemic, we have not normalized back, so that level in terms of the shares spent on services reads as to the shares spends on goods. We still spend quote unquote too much on goods, So that means that services still has some more upside. So you're right, people have been willing to spend more money to go to Taylor, Swift, tickets, US Open and Queen's all these things that have been so expensive because there has still been savings around. But as we all know and as we talk about all the time, we of course have this issue that savings are running out, combined with student loan payments coming back, all that does point to still more weakness on the consumer in the coming quarters.
When you put charts out, especially on that savings rate. How much pushback do you get from people because everyone is so discerning of the type of data and the way that it's being framed. That a story with data can be dissected in five different ways by five different people.
That's right, and I think that's also why it's not only about savings running out. It's also about the very big picture that the FED is trying still to cool the economy down. We hear that also from Merry Daily here in the segment you just played, where we are seeing already in the data, consumers are seeing higher telanguage rates on credit cards and order loans. Corporates are seeing default rates go up on high yield and on loans. We're also seeing interest covers ratios starting to dip, both by investment grade and high yield, and also on the banking side, we're also seeing a slowing in loan growth in the weekly data from the FED, both for large banks and for small banks. So taking consumers, corporates, and banks combined, the FED is succeeding. This is exactly what the textbook would have predicted, that we are seeing a slow down on consumption on corporates and on banks, and that's why this also will result in more slowing over the coming quarters.
More slowing and recession. More slowing is not the same, right, And there's a question of how much slowing is necessary to truly put the horse back in the bar. And as you say, to use your analogy, and this has been one of the conundrums that's been into the market.
Do you have a sense of whether.
It requires a greater slowing to get that horseback in the barn? Then people are currently using as a base case. And when I say people, I mean FED officials.
I do think that we need more slowing because coll PC today is three point nine and the target for the FIT is that it should be two. So we are still running around after the horse out there and trying to get it back into the two percent range, and we're just not there yet. That's what literally every from C member is telling us. So with that backdrop, given what's happening to the delinquagy rates for consumers, given what's I mean, the fault rates for Hiyil are going up at the fastest rate in the last six months in years. So the result of that is that we are seeing the effects of the FED tightening. Every single day. There are companies that cannot get financing. There are consumers who cannot buy a new car, and at the moment who have a hard time buying a new home. So in that sense, tight up policy with the Fed funds rate at five and a half is way way above the two and a half percent where they're fed and the dot plot things we should be in the long run. So policy is working exactly as the textbook have predicted. Is just the savings making it take a little bit longer time. But we are moving towards, in my view, a faster slow down what the market is considered to six expecting we're going to.
Put the horse back in the pasture and leave that alone for the remainder of our time. But I do want to know why we are seeing upside surprises to the economic data in such a significant way if there is this material slowing, I mean, this has been one of the conundrums for so many people who are expecting and seeing anecdotally all of the slowing and yet each economic print coming in stronger, stronger, stronger.
There are some exceptions to that. I know, the label market obviously surprise to the upside on the headline, but if you look under the hood. You see that in particular in terms of job openings peaked literally in March of twenty twenty two when the Fed started raising rates. That's been coming down. You're also seeing the work week coming down. You're also seeing wages for jobs switches coming down. You've also seen an increase in percentage of permanent job losses. So a number of the label market indicators under the hood are showing more signs of weakness, and we are definitely moving towards that. We will also maybe get that increase in the unemployment rate that Jay Powell has talked about.
Given the unrust in the Middle East, there's a lot of focus on oil prices and what would happen if oil prices do have a sustained rise. How do you factor that in to your concept of harder landing than people are certainly except.
I know that is certainly a very important point. I mean, oil prices now they first went up and now they've gone down a bit. But it's certainly the case that the moving oil prices is very critical also in particular of course for headline inflation. So from that perspective, the second round effects are likely going to be more limited, at least historically, they have become more and more limited over time because the economy is less sensitive to oil prices, is less energy intensive. But the short answer to your question is for headline inflation and therefore also for the fit, it does become important what oil prices are.
Doing when we shake out. Where are you?
Where is your thinking in terms of the long term neutral rate and how much shifted upward given some of the paradigm shifts.
I think that there are some very important arguments for why the long run rate is going to be higher. We first of all have more deglobalization, more segmentation globally. That's putting more upward pressure because of unsharing or reshowing and friends showing increasing cost of production. We also generally speaking have that energy transition is going to be costly. That also is going to put upward pressure on the production of energy, and therefore if people pay more for energy, including the adjustment costs, then that will also be putting upward pressure on inflation. And finally, we likely also have globally less immigration, and if that's the case, that also means that we'd like you to going to see higher cost of production, not only in the US, but also in Europe and a broad So the conclusion is both the globalization and also energy transition and also what might be happening with immigration, all argues for that the long run rate neutral rate is likely going to be high. The FED says that in the long run will be two and a half, but we could be up closer to three, maybe even three and a half. And that's very important for anyone planning with a long horizon, because that's telling you that on page one in the finance textbook, if the risk free rate is going up, we all in financial markets need to pay attention.
Tourist and slack of Apollo. Always wonderful to get your thoughts. Thank you so much for being here with us.
It's a bit a supermanent.
Second quotative strategy has a job at BANKCAW.
Good to see it.
Nice to see to see a constructive and I read your note from the other week that this can work. We can see equity returns in a higher rate environment. So the lower rates her to sort help us us out which one is it.
So I think that lower rates are I mean, I think there's too much focus on the short end of the curve. I think the long end of the curve probably matters more for stocks. And then when I think about, you know, why the long end is moving higher, one of the reasons is supplied demand. You know, there's less demand from the FED and China, boja, et cetera. But there's also this growth story that you could argue for, which is the idea that companies are now focused on, you know, what they should be focused on. So so we're in an environment where I think a lot of the levers for margin improvement from kind of lower quality sources like globalization or cheap finance and saying are behind us. But ahead of us is this very exciting new theme which we haven't you know, talked about for a long time, which is efficiency, productivity, replacing labor with you know, more efficient procedures, be it AI or automation, et cetera. So I think that those are the drivers that could move the market higher from here. Now what's interesting is that so far this whole AI theme has only been rewarding tech, and I think that the story is so much broader than that. So, you know, based on our quant work, we've found that if the S and P five hundred has the opportunity to become even labor lighter than it is today. That translates into stable margins and a bump up in the multiple because investors are willing to pay more for efficiency gains than just low quality you know, fed money plus.
A little bit of globalization.
Are you saying that the AI boom has maybe been priced in accurately for tech companies but inaccurately priced for the rest of the comple that will benefit in just a significant a way.
That is a much more eloquent way of saying what I just said with many less words. But I do think that that's the idea is you know, we're so far we're in this environment where it's like old economy is terrible, don't buy anything that's not tech. We're going to get money from this AI theme. I think the idea here is that old economy companies that are labor intensive have more tools to get labor light. And what we found, you know, in our quantitative work, is that companies that become labor light always outperform companies that don't. And it's kind of an obvious point, but it plays out in the data.
Part of being able to get there and to survive long enough to get there to be able to make investments, which requires money that potentially you have to borrow. So it raises a fundamental question about at what point the rate structure makes this prohibitive for some of these old economy companies to come up to the new world. What's the tipping point for yields where it starts matter really significantly to you?
For Yeah, for the S and P five hundred, I think we can see higher yields, and I guess the good news is a lot of these problematic companies with floating rate risk and that are unable to handle current rates or higher rates have dropped out of the S and P five hundred. So there's been this sort of natural attrition out of the SMP into the Russell two thousand. What I think is really interesting is that twice as many companies have fallen from the SMP to the Russell than have risen from the Russell to the SMP compared to an average year. So that is telling us that it's basically a story of the losers dropping out of the index into other indices. I don't love the Russell two thousand right now. I think it's riddled with small cap zombie companies like healthcare tech companies that can't handle this rates environment. But I think the S and P five hundred has seen a lot of those problem stories drop out, and it looks pretty healthy, right right. I love the equal weighted S and P five hundred.
That's my well.
I just think that the you know, as you pointed out, probably a lot of this good news has been priced into the mega cap tech cohort, maybe even overpriced into the megacap tech cohort. Everybody owns these companies, so there's not a lot of buying pressure if you think about who's next to load up on the Magnificent seven. But there is a broader array of companies that actually look pretty healthy. And if we don't go into this you know hotly forecast recession that we're all preparing for, embracing ourselves for. I think that the market could rip from here. The equal weighted SMP could.
Rip, could rip. What kind of upside is rip?
So yeah, it's all relative, right, So you know, I think that what we're forecasting through your end is forty six hundred for the SMP. I think the equal weighted SMP could do double those gains. So from here it's not that demonstrable. But I think over the next ten years, buying the equal weighted S and P five hundred today on a valuation basis suggests that you could get more than ten percent price returns per year from the equal weighted S and P. This is not an environment where a lot of other asset classes promised ten percent returns plus additional dividend yields.
What I'm doing technically, though, I was stripping out the muscle of big tech. Yeah, and relatively speaking, giving say financial is a bigger presence.
Do I want to do that right now?
So financials is a tricky one. I like financials. I like large cap financials because A the banks have already been regulated. B A lot of the bad news is behind us.
See, there's got.
To be a shape of the yield curve that helps the banks. And what's interesting is that every phase of the yield curve has been cast as bad four banks. I think we're actually moving into an environment where, you know, if the FED is closer to being done on the short end and the long end is potentially higher for longer, that's historically been a good environment for lending. I think the banks also have the opportunity and old financial companies have the opportunity to get less labor intensive, which is bad for me, but it's good for margins of financial companies. So lots of levers that I think are underappreciated, as well as the fact that if financials, if regulated banks are regulated utilities, now, why don't they have the multiple of a regulated utilities company.
Is your view.
Predicated on the idea that we're really not going to get much.
Of a recession.
Is this basically predicated on the Fed's view of the world.
It's well, this is predicated on the idea that the reason it's taking longer for the FED to control this economy is that a lot of that leverage risk has been taken out of consumers and corporates and moved to public the public sector, the government balance sheet, and the fed's own asset base. And while that all sounds in nerm racking and terrifying that we're sitting on, you know, levels of debt to GDP that are similar to emerging economies, what we found is that high levels of government leverage are not anathema for stocks. So this is interesting because I've always been like kind of worried, like in the back about this looming debt to GDP for the US and what's it going to.
Do to us?
It seems really awful, leverages evil. The truth is the market actually outperforms or does better during periods of a higher leverage ratio in the public sector than lower. So leverage in the public sector isn't necessarily what we need to worry about. Maybe it makes our bonds that much more less attractive, which you know, I think US treasuries might be the riskiest assecline.
We can have this conversation for a long time.
I wonder if yes, that's associated with coming down of bottoms in the economy, and that's.
When the exactly and we grow our way out exactly.
You see as always so bit of superminding. The of Bank of.
America joining US now, I'm so pleased to say, to give us a lot more light than I certainly can Shatt Bloomberg's Alex Steel and Julian Lee joining us. Alex, I want to start with you, why is this deal so important?
So?
First of all, fifty nine point five billion dollars is nothing to sneeze. Ad in eighteen percent premium for a Pioneer. This is an enormous deal, and the broader context is that this could potentially unlock shale what people are calling shale three point zero, which would be a huge wave of m and a big deals, big spending in the permium and really long laterals, which is the basically the technique that you use to get a lot of oil out of shale, and that would be a very different place than we were in just a few years ago, where it was very much reducing capital spend. Interestingly enough, many analysts say that buying Pioneer is being capex sensitive because it actually longer term will cost less than having to increase capex to keep production.
Even level, much less growing.
Funnily enough, there's a question about whether part of the reason why now this deal is happening is because regulators will be more okay with it, that actually this is going to be more amenable to both investors and to regulators because of this emphasis on energy and appending this idea of just generally focusing a bit more on the need for fossil fuels rather than the move away.
Yeah, you know, I see it twofold. I think one it is going to have some many trust issues. I think this gives a lot of fodder to the Greens in DC to say you're spending sixty billion dollars on fossil fuels, you're spending seventeen billion dollars in the next few years on carbon solutions and low carbon solutions. So there's that part. But in terms of kind of why now, I wonder, and I'll ask the CEOs this in the next hour, is this actually a Scott Sheffield thing? So pinor Natural Resources is like the holy grail of the permium. Scott retired once, then he came back because they didn't like the CEO at the time.
And he's retiring at the end of the year.
There's also been some productivity questions for Pioneer over the last two quarters. It just basically means you've gotten all the good stuff.
Out of the rock.
There's more there, but the really juicy stuff has been drilled and can you really get more out? Many say that that problem has been solved, but still a productivity question. There was underperformance over the last few months a Pioneer versus its peers, and I wonder if I wonder, and I'll ask it if that played more of a role.
I'm wondering, Julian, from your standpoint, where the US plays in the global oil sphere and how much deals like this and just generally looking for more efficiency and frankly record production this year plays on the global stage at a time or Saudi Arabia is trying to control supply that much more.
Yeah, I mean, you know, the US is certainly playing an important role, and growth in output in the Permian and other shale basins is going to be important. I don't think this deal sort of changes the outlook for oil prices in the short term, but potentially over the longer term it may do it. Certainly. I think brings together contiguous acreage, you know, acreage next to each other under a single owner that allows for longer horizontal wells to be drilled, greater economies of scale in terms of that investment in you drilling. That could boost the prospects for Permian production and US production in total, but that's probably two or three years away at least in the short term. I think it doesn't change anything. But what it does do is mean that the shale basins of the US are going to be important contributors not just to production but to potential production growth in the four to five years ahead.
Julian, from your vantage point, how much are deals like this made possible based on oil prices being higher and if you have the feeling that they are going to remain so in the longer term.
Well, I think, you know, there are many things I think that have factored into this deal and why now, And I think, as Alex said that, you know, the Scott Sheffield question is certainly potentially one of those. As to oil prices, I mean, at the moment, they are very much being dictated I think by Saudi Arabia's oil policy. They want oil prices somewhere closer to one hundred dollars a barrel than seventy, for example, and they are prepared to make the production sacrifices at the moment to ensure that happens. The big question is going to be over the longer term whether they can continue to do that if demand growth starts to ease off as people are expecting next year, and we get additional supplies coming on from places like the US, Guyana, Brazil, and so that's going to be a challenge for Saudi Arabia, perhaps over the next twelve to twenty four months. The immediate question is how this terrible attack by Hamas on Israel is going to play out. We saw a jump in prices, followed over the last couple of days by something of a retreat. Very much is going to depend on whether this conflict spreads and starts to suck in oil producers in the Middle East, Iran being the big question.
Mark Alex, your idea just in terms of the pricing and how that factors in.
Yeah, so one analysts said that Pioneer has sixty three hundred net locations of high quality inventory. That's like top tier acreage where you get a ten percent return at WTI price is fifty or lower. So like the last barrel produce may increase, like you might need eighty dollars a barrel for that kind of floor, but you're buying stuff that you can make money and have a nice return sub fifty.
Which is the reason why I thank people are doing this, Alex. What are you hearing in terms of other deals coming down the pike to either compete with this or just that have been in the work since suddenly people are finding the reason to get it done.
So it's going to have to happen because if you're a mid tier player, you will not be able to compete with this. So the Oxes of the world, you have Chevron like, they're going to be just fine even though they're dwarfed a bit by this deal. But the smaller guy, I don't know how you're going to do it. And there's a lot of small, mom and pop private companies as well that have are been kind of pulling back on some of their drilling, and the theory is they're doing that so then they can clean themselves up a little bit to them be bought. So we'll see how quickly it takes for that to happen.
And just real quick here, Julian, and not to pivot too much, but I would like to get a final word from you on what you're hearing out of Iran and how much further crackdown of sanctions would really influence the price.
Well, I mean we're hearing relatively little out of Iran. I mean there's been you know, political support voice for Hamas as they're very often generally is from Tehran. We're not hearing anything yet about action against Iran or any action to try to restrict their own oil exports. We've seen a fairly substantial increase in estimates of production and exports over recent months. That's been an important factor in holding oil prices lower than they would otherwise have been. And there is a challenge here that if you start going after Iran's oil exports, that is going to have an impact on the oil price, and nobody wants higher oil prices in the consuming countries.
Julian Lee, Bloomberg's Alex Steel, Thank you so much for being with us. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot Com, the iHeartRadio app tune In, and.
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