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Chapter 1: What is the main topic discussed in this episode?
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Subject to credit approval, Apple Card issued by Goldman Sachs Bank USA, Salt Lake City branch. Terms and more at applecard.com. Bloomberg Audio Studios. Podcasts, radio, news. Glad to welcome Ed Morris of Hartree Partners now on set here at 731 Lex. Ed, great to have you in the building today. How do you see this war in Iran?
When you look at past incidents of, you know, war in the Gulf or the Arab oil embargo, I mean, we've had a number of hot points in the Middle East. Where does this rank? So it ranks somewhere in between. Certainly this is the third Gulf War we've seen since 1990, 91. The Strait of Hormuz wasn't closed in the first one or the second one.
And it wasn't even closed in the events of the early period of time in the 70s or even the Iranian Revolution. So this is pretty unique. So I'd put it more serious than anything we've seen since the early 1970s.
Does that mean that even, let's say this somehow resolves in a week time, Trump or someone backs off, is it serious enough that we're going to have a fundamental rethink of the way energy flows and energy markets after this, much like after the Arab oil embargo, when the SBR came, like after COVID, after Ukraine, when we rethought just exactly how energy markets are structured?
So I think we should look and see what some major countries are doing, and were doing even beforehand. China is energy dominant when you think of clean energy. And they have certainly decided, as being very dependent on flows, particularly from the Middle East, that they're going to double down on the clean energy scenario. Europe is already talking about going back to green energy targets.
We'll see what happens in the U.S., but certainly there's been a kind of worldwide rethink about what to do in terms of dependence, and that includes emerging markets as well. It includes India, certainly, as well as China, and much of the Far East. We were playing some sound from the U.S.
Energy Secretary, Chris Wright, on yesterday's Sunday shows, and he was saying, look, this is a fear premium that's going to last a couple of weeks, but we're going to start getting ships through the Straits of Hormuz soon. He seemed pretty sanguine. Do you share his view that this could be relatively short-lived?
Well, I share his views that it could be relatively short-lived, but I'd say I would turn his remarks of a few weeks to a few months. And that's certainly the case if we look at the nitty-gritty of the oil market and the gas market in particular.
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Chapter 2: What is the impact of the Iran war on global energy markets?
And they are a proxy still of Iran, and we haven't seen a complete shutoff. You know, we've seen a shutoff that people are arguing is it 10 million barrels a day or 16? In either case, it's pretty large. But it can go to the full 20 coming out of the Middle East if we have a closure on the other side of the Arabian Peninsula. There just feels to be a disconnect.
I'm listening to you and other experts in this that are talking about the potential for this to stretch on and have very big implications. Then I look at what markets are doing. I mean, the backwardation suggests that oil prices resume something close to normal pretty relatively soon. Are we being sanguine about the risk that this could stretch on and have much higher oil prices to come?
I think we're being a little bit too sanguine. The futures curve doesn't tell you very much. It tells you that we've had a spike in the interim. It tells you that backwardation has increased. So there's just not a lot of liquidity in the market.
Chapter 3: How does the Strait of Hormuz disruption compare to past crises?
And the fact that 10-year prices have not changed very much doesn't tell you what's really gonna happen in the next few years. So I wouldn't use that as a predictor. I'd say that's a reflection of where macro funds are placing their short-term cash. We have seen a big spike in prices at the pump.
And I thought it was interesting in reading your research that the product prices rise faster than the underlying crude, for example. Why is that? And how do you expect to see gas prices go? Because, I mean, this chart doesn't do justice to what we've seen on the price at the pump. It's the highest in either Trump term.
Yeah, so we've seen prices coming from the lower $3 range to the mid $3 range. There's been a, what, 15%, 16% increase in the price of gasoline. If you look at crude oil, where was crude oil trading two weeks ago? Brent was trading at around 70. It even fell below to 68, 69. And it's now at 103. WTI was trading at 65, 64, 63. And it's now at 102, 103.
That's a double increase from what we've seen in gasoline. So we've seen a very slow reaction, so to speak, on the gasoline side. That's due to a whole bunch of factors, including you deliver out of what you have from storage and the like. But we're seeing a curtailment on the product side. We've seen the big curtailment. out of the Middle East.
The Middle East, while they're exporting 16 million barrels a day or so through the Strait of Hormuz, two million of that is product. And we've seen that product, which largely goes into Asia, having a dramatic impact on jet fuel prices in Asia,
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Chapter 4: What fundamental changes might occur in energy markets post-crisis?
On gasoline prices in Asia. Diesel. Diesel prices in Asia. And that's much more than the 15% increase we've seen in the U.S. So the U.S. is a laggard. And if we see what's happening in the rest of the world, it tells you that we're going to see $4 at the pump sooner than we otherwise would. By the way, Ed, what does it mean that NYMEX catches up to Brent? I thought it was interesting.
The other day I looked at a WTI quote, and I thought it was a mistake in the graphics that it was actually Brent. Because usually there's a $5 gap between the two. I'm, you know, rounding. But now we're at the same level. Well, don't forget that there's more crude coming out of the United States than there is out of Northwest Europe. And the US has available incremental crude. It can be bid up.
We don't have restrictions on exports. So we're seeing the demand for WTI-related crude skyrocketing in a way that makes it get closer to where Brent has been trading. We're seeing Murban in Dubai. at a $10 increment, even above where Brent is trading. So that tells you that the world pricing is sorting itself out.
So if we're at 102 on Brent right now, Ed, Matt started this out saying that your call's about a 50% chance likelihood that we see a rise of 50% in prices. What does that scenario look like? How do we get there, and how long does that price, elevated price last? Well, one scenario, one I just mentioned, the Houthis get to work and we see the western part of the Arabian Peninsula also shut off.
Chapter 5: How are major countries adjusting their energy strategies in response?
That's 20 million a day. We're not going to see the battlefield ending pretty soon. We're going to see at least two good weeks, I suspect, of continued bombing of energy infrastructure in Iran and in the western part of the Gulf. The Iranians are not slowing down, as far as I can tell.
We're going to see, inevitably, if there are some ships trying to get through the Strait of Hormuz, we'll see those being attacked, and we'll see tankers being attacked. We have to remember that Iran has just reaffirmed the hardline approach by putting in place the son of the former supreme leader, And they had a big debate about that.
It was a week-long debate, which way are they going to go, and they chose the hard-line way. So they're there for an existential threat, and they're going to fight for the existential survival of the regime. I want to actually zero in on that, because you talked about that in your notes. We could have seen Iran after the Ayatollah, if he had been led to die, of natural causes, right?
Go with a more, I guess, reformist... supreme leader. But it seems as if this attack by Israel and the U.S. has at least helped to push them towards a more hardline leader. So I wonder, what do you think were the justifications for this war? We haven't heard much from the administration in the way of an official line of why we did this.
Well, that's the interesting question of why did we do this, and we did it for all of the reasons I suspect that we've heard from the White House. We've done it because that regime has been a threat, and it's been a threat to the economies of the part of the world for a while. It's been a threat to Saudi Arabia. It's been a threat to the UAE.
The bombings that came when Abqaiq was hit in 2019 was not an accident. It came from Iran. The proxy attacks come from Iran. So there's been that threat for a long time. Yes, there was regime change in the minds of some people, including the president. He said it too often for you to not believe that regime change was certainly there.
In this case, it's pretty much worse than what we had, considering the regime. Well, certainly not what we expected. We expected, I suspect, they expected, I didn't expect it. They expected this to be over in a couple of days, and that certainly didn't happen. Well, so it's a president at the same time who's been making this push for affordability. And you've advised presidents before.
You've advised governments. We have finance leader ministers at the G7 meeting right now discussing possible release reserves of oil. The U.S. is surely trying to figure out how to stem some of the issues, too. What would you be advising governments at the moment to try to mitigate some of the price rises? I think they're doing what they have to do.
The governments that have better control than the U.S. government does on local electricity prices is keeping the weight of the increase in the hands of utilities, many of which are public sector anyway. The U.S. doesn't have that privilege exactly. We have very independent regulatory agencies for power generation, and power prices are certainly going to go up.
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Chapter 6: What is the current outlook on oil prices amidst geopolitical tensions?
And we're seeing what's going to happen in the next hour, I suspect, on what the G7 are going to decide. They're talking about big numbers. They're talking about 300 to 400 million barrels of a release. which is bigger than the release after the Russian invasion of Ukraine, which was a very large release to say the least.
And that didn't stop prices from going up because it takes a while to redeploy oil when you have some of the major oil paths sanctioned immediately after that Russian attack. So it's going to be a while. I think it will be a good month or two before we see... the weight of strategic stocks coming in the market, the release will obviously cause the market to fall.
But how long that'll last is another matter. And we should hear from them in about 15 minutes time after that readout. Ed, it's such an honor and a joy to have you on. Ed Morris of Hardtree Partners. This message is brought to you by Apple Card. Apple Card members can earn unlimited daily cash back on everyday purchases wherever they shop.
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Chapter 7: How do gas prices differ globally due to the current situation?
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