Bloomberg TalksCarlyle Group Chief Strategy Officer for Energy Pathways Jeff Currie tells The Pulse's Francine Lacqua that commodities are a “win-win” for investors even if interest rates remain high, and that oil markets are "genuinely tight."
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Slationary pressures. But let's begin with a focus on the oil markets.
Now.
Prices have rallied since late last year and escalating tensions in the Middle East. Some analysts say that one hundred dollars a barrel is back on the cards. While joining us now I'm delighted is Jeff Curry, chief strategy officer of the Energy Pathways at Carlisle, a former head of Kamanti's research at Golden Sachs. I mean, you understand, welcome to the program. Great, Jeff, you understand these Kamanities really like no one else. I want to get your thoughts on oil off the highs. Does that reflect the fact that traders are less worried about the Middle East and has escalating conflict or is it supplying demand issues?
Well, obviously if you look at the pullback recently, we're back to the levels before the events of what happened between Iran and Israel a week and a half ago. But more importantly, everything's off. Commodities are going through a consolidation period. You know, we were beginning to price in equities every thing. This idea of rates being higher for longer. But let me remind everybody we're talking about rates being higher for longer because growth is so good. I mean, I just the things you just went over just now, private sector activity in Europe the highest level in the year. We're seeing a reacceleration of growth across the board. And so when I think about what's going on oil specifically in commodities and they I'll put bitcoin in there, and all the physical assets is they're going through a consolidation period. These assets, these physical assets are tied to underlying growth and inflationary pressures. In the bottom line, retail sales was smashing that we saw that. You know last week, you have unemployment still at very low levels, CPI surprise to the upside, Chinese manufacturing beginning to accelerate, Europe, Germany accelerate, and the list goes on.
This is classic late cycle expansion that you and I were talking about three months ago.
So what you're telling me is that there's a shift basically in the supply demand equation.
Is that right?
Well, I wouldn't say it's so much a shift today as it was when we were talking three months ago. What we went through in twenty twenty two and twenty twenty three is your classic mid cycle pause. The economy adjusts to the higher rates and the higher energy and commodity prices. It went through that adjustment, manufacturing slowed down.
Now we're coming out of it.
And is this thing any different than a previous cycles.
No?
But Jeff, if you look at so the rates expectations for the FED right higher for longer, and I know this is because growth is wrong, but does it have a harmful effect on commodities at all?
Look, well, this is why why I'm always why you want to own commodities in this environment, because if the rate, if you don't have a situation in which you're raising rates because of strong underlying growth, means commodities are going higher, and that's what's going to force their hand to raise rates. And if they do cut rates, you're adding more liquidity into the system, which means higher commodities. So commodities are a win win in this situation. That's why they nearly always outperform all other asset classes in this environment.
But I'm looking at the IA they're predicting for the slow down and oil demand growth next year, it's just one point one million barrels a day. Right, as we get closer to peak demand, do you agree with process.
By the way, when we look at late cycle commodities, there's a really important point. It's not the growth that matters, it's the level that matters.
And why do I say that.
Is because as the level of commodity demand goes up, it stresses the underlying supply level.
So yes, the growth rates are going to slow.
Yeah, and that's what will happen late, but the level could continue to grow. Stresses the system puts upward pressures on prices. So that and by the way, the equities, which are tied to growth rates, they begin to come down. So this is what I always argue over and over with commodities. They are tied to the level of activity, while financial markets are tied to the growth rates of activity, which is why you get the outperformance.
Opek plus has kept supply tights. Yes, is this about the backfire?
No, when we look at where you know that plus. First of all, everybody's talking about all the spare capacity in the system. It sits in Saudi Arabia, in UAE, that's it. And they have more market power today than they've ever had because of a lack of investment in many of the different non OPEC countries.
And yes, you're going to respond back that, you.
Know, rapid growth in the US, but that compared to what's going on more broadly, it's relatively small. And then I think the other issue that gives them market power is that you have in elastic demand because we've taken out all the low hanging fruit, so that so that group that sits on that spare capacity has more market power today than they have had since the existence of OPEC.
So does oil. You know, is it eighty dollars or one hundred? Next we were far.
Closer to one hundred. I'm not in the forecasting business anymore. Wow, we're going to hit one hundred. By the way, the one thing I learned in all my time, I'm looking at these commodities trade the wings. This thing's gonna when it goes, it goes, and when it drops, it drops. And you've been doing this as long as I have, you know, so the odds of this thing going over one hundred or extraordinarily high. The question is how high can you get before you start to see OPEK begin to adjust the system.
By the way, I want to say this and This is just history.
In the forty years of OPEK history and where we are in the cycle. Never has OPEK ever been able to bring on supply as we go into the final stretches of an economic expansion and tame the oil price.
What happens go back? Were they able to do it in twenty eighteen.
No, we got up to eighty eight dollars a barrow, and then we had the waivers on Iran. We could talk about that later. That's a very similar risk here. But I think it works to the upside this time around seven eight and then you can go back to one two thousand. I can keep going back all the way back to the distance they never because here's the point. If the rise in production misses by just.
Five days, what are you gonna do. You're gonna get backgradation.
You got to get that pinpoint, that accuracy, which is all by the way, If there was a group in OPEC that could actually get this right this time around, you know, I will say this, You know that this leadership can get it right. But again I'm gonna say you missed by five days, because think about what happens. We know that tankers out there in the Gulf wherever it is, it's coming into the refinery.
I don't have crew today.
I'm short by Let's say my inventories are five days, it's going to be six days late.
I got a problem.
I'm buying crued and the backwardation goes up. Also on the back gradation, another point, I want to emphasize. Everybody's talking about backgradation as an indication of a political risk. For geopolitical risk premium, it can't be. I always say time spreads don't lie. They tell you this market is tight. And another point, the market went off the board in backwardation. That means there's no investors in it. It's all physical. You really have a tight market here.
Jeff type market plus do you political risks? So let's talk about her on I mean, could this actually fly through the roof if something happens.
Oh? Absolutely, because I mean the market doesn't prepared.
Priced in the market is unprepared.
But we look at more broadly, I don't care if it's energy equities, Energy commodities are more like it. There's not a large investor participation. And also money today chases trends. They don't make bets, they don't trade, and.
So there's no real trend here.
By the way, when it started trading, a look at copper, copper overshot the fundamentals near term, they'll trade that trend. But when we look at more broadly, most of the discretionary money can't sit there and hold a position of geol political risk premium betting. For the thing that said, there is activity and out of the money options and you go up to that one fifty two dollars range. People are buying it because they're heading geopolitical risk, inflation risk, and you know equity risk type premiums. So there is activity, but it's relatively small and it's located in the options markets.
Jeff, I think Jpmorrian is saying that it's time for a reality check on the energy transition. It's slow, costly, and not rewarding for investors.
I mean, is that how we should see it?
Well, I think we're going through that reality check right now and people are making reassessing it. When we look at the returns in the green sector, there's two things that are driving it. One, there's a hangover from the big spike we had in twenty twenty two. Let's remember that when everything exploded in twenty twenty two, coal production went up the size of Saudi Arabia, by the way, that's how much coal we added in that environment. Gas prices went negative in Europe and you know US n imax natural gas and power prices reached an all time.
Low what's six weeks ago.
That's creating a headwind to the sector. And by the way, cause because we ramped up coal production. The second factor that's had a big impact on this is China.
What is China doing.
About their property market problem. They're rotating growth into manufacturing of green capex goods and they're pushing them onto the global market. And by the way, the returns aren't that great, which is the problem that the equity market has had in China. But I think the key key message here is there there's two drivers of that weakness.
One a hangover from that spike.
In twenty twenty two in what China is currently doing. Both of these are temporary, you know, longer term there is a story here.
And temporary a couple of years or temporary ten years.
By way, it's been temporary for two and a half years. If you look at the.
Peak, you know, you know, in fact, by the way that report Christian did I thought was phenomenal, but you know he has a chart in there.
Ye.
This has been going on for two and a half years. It's not something just cropped up in the last couple of days. So you know that we're going through that rough patch. But I think the longer term outlook is still very positive for the sector.
Okay, we'll talk about that longer term outlook, could Jeff? Thank you so mu Jeff Curry from Carlisle stays with us for a look at some of the broader Kamaniti themes and sectors, including also the rating.
Gold and medals. This is Bloomberg.
Welcome back to our deep dive from the energy and commanity sector.
We've looked at oil. Let's now talk about the routing golden medals.
Now, the index of all six base metals on the LME has gained more than thirteen percent this month on a better global manufacturing outlook, Investors will remain cautious on future moves by the Fed. Meanwhile, gold extending losses after its biggest daily decline in almost two years following a stunning rally in the haven asset. Now let's bring back Jeff Curry from Carl, Jeff, I want to talk to you about copper gold.
What is gold? Right now?
By the way, gold is a mystery.
I'm i going to say I got it, you know, and understand it because if you look at the drivers fundamentally, usually what drives higher gold are lower reel rates or a weaker dollar.
What are we actually seeing. We're seeing higher real rates.
And a stronger dollar, and typically gold goes down that when we look at it, clearly there's a mysterious buyer out there. You can see it in the physical premia. It's most likely coming through Dubai. You see it in the OTC market. Historically, when we see that and you get the data three or four months down the road, you find out it was an emerging market. You know, probably unlikely Russia is they just dig up their goal put it into the central bank because they got so much underneath the ground. But you know, you know, is it China, is it India or somebody like that?
Who knows what fly Is this a play against treasuries or trying not to buy treasury or could it be complexe.
I would argue it's probably an inflationary hedge.
I want to emphasize gold traded like this in the nineteen seventies, So what we're seeing here in this dynamic is not completely unfamiliar territory. You just got to go back four decades to see a period similar to this. So I would argue, you know, and you and you look at bitcoin too. Both of them are, you know, the strongest performers out there. I argue they're pricing in inflation risk. But the other thing both they're pricing in is liquidity problems. Liquidity risk, particularly in the financial markets, Yeah.
Which which have come to fruition, or it's something that they're just happy.
You know, one thing I can say, it's bitcoins a measure of liquidity out there. And you know, part of the reason the volatility you've seen across the space, not only in commodities, but in financial markets.
You know, liquidity still remains low.
Deeff talking to me about copper, so it's had quite a strong run. I think it's right on the cost of ten thousand dollars a ton. We talked about the energy transition. I mean, is this a signal that we could be there? I know you said, you know, we've been waiting for two years and a half.
Yeah, yeah, had time it.
You know.
By the way, I want to point out, we got bullish on corn in two thousand and six off of the biofuel story. Corn didn't perform till twenty twelve, but it went straight up, by the way. But copper typically trades like a stair step, and we just went through one of the stairsteps. So now the difference between copper and oil oil has bagradation.
That's telling you it's fundamentally tight on the front end.
And again I'm going to emphasize it off the board and back gradation. There's no investors going off the board and back gradation. In copper, we're a little bit of contango on the front end, which is telling you it's pricing medium to longer term stories.
So yes, you've.
Had the upward draft of everything under this higher for longer. You know, grows surprise that we're dealing with. I'm not going to call it a surprise. It's your typical lates.
You call it, not others.
But in terms of thinking about what copper and the metals are pricing, it's pricing a more medium, longer term story, which brings us back to the whole question around energy transition, because you know, we've all been making the argument, you know, going back, copper is the new oil, and stand by that that that view. Because we're going to electrify everything, you're gonna need need the copper to do it.
And so most likely it's pricing that in.
But even there, like oil, that's going through a consolidation period because the price got ahead of the fundamentals. But longer term, absolutely believer in that. And by the way, underlying demand for copper, despite the weakness in the property market in China, is still healthy because think about what we were just talking about, all of those green CAPEX goods in China that are being subsidized, and then you have all the investment that's occurring in the West and it really starts to accelerate in twenty six and twenty seven.
If you have the energy transition and you have AI.
So as we use AI, our mobile phones get more complicated, we're also going to be you know, using some of the rare earths or even some of the things that you follow very close, some of these metals, like how do you see that complex.
All AI is chips and copper, and what are the chips gallium and germanium so it is basically critical.
Metals and copper.
So you know, you know it's in the that is the bottleneck to really be able to make the investment in in AI. In fact, you know everybody goes well, AI and energy are the two most investible themes. Well, energy is more investible than AI because you need the energy to get to the AI.
Here's a stat for you.
One GPU, one of the Vidio GPUs, consumes as much electricity as the average American household. Now let's go start building enormous data centers. You could be up to one hundred megawatts of for you know the demand out there, So you know this is significant. And you know, I really believe when we think about the forward demand or the structural story, it's more bullish today post this AI boom that we've seen over the last twelve months than it was eighteen months ago.
But after decades of under investment, is there now danger that they're over investing and actually we'll have too much of it?
Absolutely not. And by the way, here's the point is.
You know people say to me, oh, look at all the investment in green energy, and I'm going to cite a number. I think it was two point three trillion in the numbers that Christian you know, in that report he did. You know, when you look at the need, you know, like I know, Goldman put out a number somewhere around between fifteen and twenty trillion dollars this decade alone, You're not even scratching the surface of how much investment we actually need to be able to achieve this. So I stand by the under investment thesis. And also remember greening represents somewhere around eighteen percent of the overall energy. Brown represents eighty two percent, and we have not been investing that we're under invested. And that's really the core of the supercycle story or the revenge of the old economy, is that lack of investment.
Finally, I mean I can speak to you for those three hours, but I know you do have business to do. Gasoline prices in the US are they critical in the US election year?
Absolutely? Yes.
And you know, when you look at what are the most important issues facing voters, particularly in the US, the dominant one is the economy and inflation.
And by the way, the.
One thing nobody's been talking about that is in that aid bill at ninety five billion dollars, Aid bill more sanctions on Iran around vessels, refining and how they handle the Iranian crewd I would say, the one way out waivers and remember.
We started this twenty eighteen. What a Trump.
So Waivers will be able to manage it as you go into that election.
So interesting, Jeff, thank you so much, as always for giving us a little bit of your time. Jeff Curry, there's chief strategy officer of Energy Pathways at Carlisle
