0:02

Bloomberg Audio Studios, Podcasts,

0:05

radio News.

0:17

Hello and welcome to another episode

0:20

of the Odd Lads podcast. I'm Joe

0:22

Wisenthal and I'm Tracy Alloway. Tracy

0:25

Copper has been on a tear again.

0:27

Yes, yes it has. It's kind of

0:29

weird because I remember recording

0:31

a number of commodities related podcasts

0:34

a couple of years ago where everyone

0:36

was super excited about

0:38

copper, and there was this long term,

0:41

you know, structural theme about

0:44

systemic undersupply. So

0:46

the idea that we hadn't invested in new

0:48

minds for ages, and it took so

0:51

long for new minds to come on stream

0:53

that there just wasn't going to be enough copper to

0:56

power all these new electric vehicles

0:59

or electrified the grid, all these

1:01

big things that the world wants to do. And

1:03

then for a couple of years,

1:06

copper just kind of went away. The price started

1:08

dropping, and now it's back.

1:11

Well, this is the problem, right, And I

1:13

think that that interim fall,

1:15

and it did for like twenty twenty two

1:17

and much of twenty twenty three is sort of back in the

1:19

basement a little bit. This does seem to

1:21

be the core problem that people have identified,

1:24

which is that we can be almost

1:26

certain that there is a long term huge

1:29

demand for copper from all

1:31

the capital spending that's going on for electrification

1:34

in particular evs, et cetera.

1:37

And we can also, i think, you know, as many

1:39

analysts have observed, forecast supply

1:42

fairly easily because we know what mines

1:44

are out there, We know that minds have a really

1:46

long lead time et cetera from decision

1:49

to break new ground to actually producing copper.

1:51

So like, there are these certainties, but then the

1:53

problem is, like in the meantime, when you

1:55

have these sort of periods of spot weakness where

1:57

there isn't a supply shortage

2:00

or there's plenty of copper, you know, those periods

2:02

don't exactly like encourage companies

2:04

to like get mining or get digging, and

2:06

in fact, they could slow down expansion

2:09

plans. Even if everyone sort of knows

2:11

the long term math checks out.

2:13

Absolutely, there's that mismatch between

2:16

the short term and the long term outlook.

2:18

There's also that tension on the ESG

2:21

side of things as well, this idea that you

2:23

want abundant copper in order

2:25

to decarbonize the energy system,

2:28

but at the same time, a lot of people

2:30

who are ESG minded are going to feel

2:32

very uncomfortable about encouraging new

2:35

minds in Chile or something like that.

2:37

Yeah, yeah, that's right.

2:38

And you know, obviously they have big environmental

2:41

impact, they have big water impact

2:43

and so forth. But you know, as we said

2:45

at the beginning, copper is once again

2:48

front and center. The price is back on

2:50

the rise, we're back talking about

2:53

this long term structural mismatch,

2:55

et cetera. And so I think it's time to sort

2:57

of delve deeper into this question

3:00

and like see where the math is today,

3:02

so to speak.

3:02

Yeah, I have the Ghostbusters theme in

3:04

my head, and it's like, whenever you want to talk

3:07

about Copper, who are you going to call this

3:09

guy?

3:09

We're going to talk to Jeff Curry. So

3:11

we've had him on the podcast at least

3:13

a couple of times before. Back

3:16

in twenty twenty one, we talked to him and he

3:18

talked about this idea of like a new commodity

3:20

super cycled. Of course, oil was surging and all these

3:23

commodities were surging as the global economy

3:25

was reopening. Then we talked to him again

3:27

in twenty twenty two and he said

3:29

that Hopper specifically may end up being

3:32

one of the the tightest commodity

3:34

markets he's ever seen, so real, real

3:36

issues with supply and again

3:39

looking pretty good these days. So we

3:41

are back with Jeff Curry, who is now

3:43

in a new role. So when we talked to him before,

3:46

he was the head of Commodities research at Goldman

3:48

Sachs, but today he is the chief Strategy

3:50

Officer of Energy Pathways at

3:52

the Carlisle Group. So, Jeff, thank

3:55

you so much for coming back on odd lots.

3:58

Great, it's a pleasure to be here. And hey, copper

4:00

ten thousand and odd lots here I come.

4:03

Let's go like a clock.

4:04

There's our headline right there. So Jeff,

4:07

what do you talk to us about the last few years.

4:09

It's been like over two years since we've talked

4:11

to you, So what's happening in copper world or

4:13

commodity world over that time.

4:15

Well, let's go back and lay

4:17

out the supercycles thesis that

4:19

we put forth back in it was October

4:22

twenty twenty. The bottom line

4:24

is the stories more compelling today

4:27

than it was then. So

4:29

you really have to ask what went

4:31

wrong? So let's start with the story, and then

4:33

let's go to what went wrong

4:36

over the last twelve to eighteen months.

4:38

So if we go back and review the story, there

4:40

was structural supply constraints, which

4:43

we called the revenge of the old economy.

4:45

Put bluntly poor returns in the old

4:47

economy, saw capital redirected

4:50

to the new economy, starving the old

4:52

economy of the investment it needed

4:54

to grow the supply base. Pretty straightforward

4:56

story. Still the story in markets

4:59

like upper or even oil

5:01

to a lesser extent, but it's pretty

5:03

much apparent across the

5:05

old economy. So structural supply

5:08

story very much intact.

5:10

What about demand? If anything,

5:13

the structural demand stories have been

5:15

turbocharged. Let's go and review the three

5:17

big policy initiatives

5:20

we saw driving demand. The

5:22

way we talked about them back then was

5:24

redlining commodity demand. Reed,

5:28

they are standard for redistribution

5:30

policies. Basically, as

5:33

lower income groups consumed with

5:35

higher wages, higher income, they

5:38

consume a greater share of commodities

5:40

than the higher income groups. That's

5:43

very much alive and kicking. You look at the low

5:45

unemployment rate, who's the biggest

5:47

benefactor of that? It is the lower

5:49

income groups. And you know, policies still

5:52

very much in play all over the world,

5:55

right now reinforcing these

5:57

lower income groups in the consumption

5:59

of commodit They so you are.

6:01

And then you had e the environmental policy

6:04

turbocharged from the last time we talked,

6:07

you have the IR the repower

6:09

EU China now

6:11

part of the reason why coppers rallied recently.

6:14

China's growth was over one hundred percent

6:16

in green capex last year, thirty

6:18

percent this year. So everywhere

6:20

you look in the world, we see environmental

6:23

policy through green capac

6:25

stimulating demand for commodities.

6:28

And then the third one, which was

6:30

the D the D globalization.

6:33

Again that's far greater than we ever thought.

6:35

Look at the potential military spin

6:37

in the US ninety five billion dollars

6:40

on munitions. We look at what's going

6:42

on in places like Germany one hundred billion

6:44

dollars of military spend. So

6:46

you've got all three going much

6:49

stronger than what we would have thought

6:52

two to three years ago. So what went

6:54

wrong? I want to first start with

6:57

the disinflation story, and then

6:59

I want to finish by talking about the dollar.

7:01

The dollar has been a big headwind to commodities.

7:04

When we think about the disinflation

7:06

that occurred late last year in the early part of

7:08

this year, One thing to keep in mind is

7:11

that it was globally correlated.

7:13

It occurred against the backdrop of record

7:16

commodity demand and incredibly

7:18

strong GDP growth in US and even

7:21

China was plus five percent. So

7:23

what does that tell you? Was it demand driven weakness

7:26

and prices or was it supply driven?

7:28

It tells you it had to be supply driven. It's

7:30

the only thing that could give you that pattern of

7:33

observations. So the supply

7:35

driven. Where did they get the supply?

7:38

I would argue is through regulatory easy

7:40

whether if it was you know, on sanctions

7:44

allowing sanctioned oil to flow more

7:46

freely, particularly in places

7:48

like US, Iran, Venezuelan.

7:51

Obviously that had a cost with Iranian hoodies

7:53

or even the Venezuelans attacking

7:55

Guyana, but that was a source

7:57

of supply. The other source of supply

8:00

apply was turning a blind eye

8:02

to environmental policy around the world. We

8:04

have record coal production out of China,

8:07

Indonesia, and India. Actually

8:09

that increase in coal production was bigger

8:12

than Saudi Arabia. Im backed up

8:14

gas prices and power prices around

8:16

the world. We saw you know, cutting

8:18

down mangroves in Malaysia

8:20

or deforestation for more

8:23

food in places like Latin

8:25

America. And then the third one, regulatory

8:28

easing was through immigration, so

8:30

you got more energy, more food,

8:33

and you had more labor, which

8:35

helped create the disinflationary pressures that

8:37

we saw the last sever years. I'm not going to say it's the only cause,

8:39

but it put you know, a big

8:41

headwind to the commodity story.

8:44

And by the way, that's going to run its course, particularly

8:46

after the election, because you look at you

8:48

know, the clamping down on Iranian sanctions

8:51

one hundred and eighty days from now. Surprise,

8:53

surprise, that's after the November election. Now

8:56

let's turn let's talk about the dollar. That's

8:58

the other big headwind here. Historically,

9:01

when commodity prices would rise, you

9:03

would have places like Saudi Arabia become

9:06

long US dollars. They would

9:08

recycle those dollars into US

9:11

treasuries. Interest rates would

9:13

go down as they bought treasuries. This

9:15

would create a weaker dollar that

9:17

would reinforce higher reflation.

9:20

If we called it the three rs. You'd start with

9:22

releveraging in China so

9:24

you get growth outside of outside

9:27

of the US, and then you would have

9:29

convergence in global growth, and then

9:31

you would have the purchases and the stronger

9:34

growth in the emerging markets buy US

9:36

treasuries and that would create the

9:38

weaker dollar in hence the reflation, and

9:40

you were in a virtuous loop. That's how we

9:42

went to one hundred and forty seven dollars oil

9:45

in the two thousands, and the same thing happened in the

9:47

seventies for the first time ever.

9:50

That dollar recycling is not

9:52

a curry and what is replacing

9:54

it? I like to call it gold recycling.

9:56

It explains a lot why goal prices are as

9:59

strong as they are, and what is the evidence

10:01

of that is that the emerging markets,

10:03

the brick countries all met with Saudi

10:05

Arabia and other key participants

10:07

November of last year and discuss

10:09

how they're going to trade with one another using

10:12

local currencies and then whatever

10:14

it nets out and settling, they would settle

10:16

in gold. So you've taken out

10:18

that dollar recycling. China's not doing it,

10:20

and think about why would they do it with everything

10:23

they've seen with Russia over the course of

10:25

the last several years. So that's an important

10:27

difference here. It doesn't mean it's a

10:29

very supercycle, but you're unlikely

10:32

to see that dollar recycling playing

10:34

out probably ever again, which means

10:36

that what do they do with this? If they're buying

10:38

physical goods like gold, they

10:40

could be buying things like oil, copper,

10:42

and other commodities as we look forward. So those

10:45

are the two big headwinds why I'd argue we're

10:47

wrong, But the fundamental story still

10:49

very much intact, particularly with copper.

10:51

Jeff, that was an amazing overview. I'm

10:53

just going to say for our listeners that we are talking

10:56

to Jeff from his office in

10:58

London. There's a little bit of sound

11:00

quality issue. Obviously, we need

11:02

more transatlantic copper cables

11:05

running under the ocean thanking tracing.

11:07

Thank you.

11:08

That's a good sig. Right, all right. I have a very

11:10

important question for Jeff, which

11:12

is are you wearing a copper bracelet right now?

11:15

Absolutely? It

11:17

is the most compelling a trade

11:20

I have ever seen in my thirty

11:22

plus years of doing this. You look

11:25

at the demand story, it's got

11:27

green cap backs, it's got AI. Remember

11:29

AI can't happen without the energy

11:32

demand, and the constraint on the electricity

11:34

grid is going to be copper. And then you have the

11:37

military demand, so unprecedented

11:39

demand growth against unprecedented

11:42

weakness in supply growth. Because we have not

11:44

been investing. It's ted you up

11:46

for what I would argue is the most bullish

11:48

commodity that actually I just quote

11:50

many of our clients and other market participants

11:52

say, you know, it's the highest conviction

11:55

trade they've ever seen.

12:11

Earlier, you were talking about the sort of general

12:13

commodities supercycle and why that didn't

12:16

necessarily play out in the timeframe

12:18

that we initially thought it would. But can

12:20

you dig a little bit more into copper

12:22

because this is something that I see over and over

12:25

again. We talked to a lot of commodities

12:27

experts on the show. Everyone

12:29

seems to have a high conviction

12:31

on the copper trade, or at a minimum

12:34

see lots of upside potential.

12:37

Why didn't that play out in

12:40

the sort of immediate post pandemic

12:42

years.

12:43

Because investors were unwilling

12:46

to take on blind faith that China

12:49

property market could sink and you could

12:51

still be long copper in other

12:53

base metals because as for as long

12:55

as many of these people had been trading commodities

12:58

without China, you could not be bullish.

13:01

And what happened in twenty two and twenty three

13:03

was the Chinese property market started

13:05

to sink and sink very quickly, and

13:08

that discouraged investors to get

13:10

long and I think they have now seen enough evidence

13:13

last year and this year. For example, you

13:15

know, copper demand so far this year is

13:17

up six percent year over year

13:19

despite an incredibly weak

13:21

property market in China. So I think what

13:24

has shifted here is confidence

13:27

from investors in metals

13:29

that you can buy these markets

13:32

based upon the green cap back story

13:34

despite a weak China property

13:36

story. And I think that's what has really changed

13:38

in the last let's say six

13:41

to eighteen months.

13:42

Let's talk more about the long

13:45

term supply outlooks. So the basics,

13:47

Yes, it takes a really long time to get

13:49

a new copper mind online. Maybe it takes

13:51

even longer than in the past due to local

13:54

opposition and concerns about the environmental

13:56

impact. What's happened in terms

13:58

of planned new minds over

14:01

the last three years. Are there new

14:03

projects that are breaking ground or at least

14:05

pencils down yet that we hadn't seen in twenty

14:08

twenty one. What's happening in the planning cycle.

14:10

You don't have to look any further than the

14:12

Anglo American bids BHP

14:15

finds it cheaper to buy Anglo American

14:18

then putting a drill into the

14:20

ground, And that's pretty much been the case

14:22

across the board, is that they're finding ways

14:25

to increase supply, particularly through

14:27

MNA activity as opposed to

14:29

having to do it through organic

14:32

let's call it green field investment. When

14:34

we look at, you know, the commodity supercycle

14:37

in the two thousands, how did it start

14:39

off? Started off with the creation of

14:41

BHP REO. You know, then you

14:43

had exceon Mobile, VP Shell,

14:46

all the super majors were all

14:48

created, both in metals

14:50

and energy at the beginning of that supercycle

14:53

because it was easier to consolidate to

14:55

grow your supply than it was to

14:57

do it through green field investment. And

14:59

so well, because we observe that going

15:01

on, it tells you we're not at the point right

15:04

now where people are willing to make greenfield

15:06

investments because they can buy other companies

15:08

more cheaply, which means prices

15:10

got to go higher and the conviction has got to be greater

15:13

before you start to see that substantial

15:15

rise in greenfield investment.

15:17

So one thing I wanted to ask is what is

15:19

the impact of price on investment

15:22

here. This is a kind of a weird question,

15:24

but like, does it actually make much

15:26

of a difference if copper prices start rallying?

15:29

If we do see another record in

15:31

the price per ton, would you expect

15:34

to see an investment response of some

15:36

sort eventually, Yeah, even

15:38

if it's on a longer term timescale.

15:41

Yeah, eventually you should. We saw it in

15:43

the two thousands. Let's review what happened

15:45

in the two thousands, because it think is pretty instructive

15:48

to right now, that supercycle lasted

15:50

twelve years from basically two

15:53

to around thirteen or fourteen, and

15:55

the supercycle in the seventies basically

15:58

lasted sixty eight to eighty, again

16:00

twelve years. Why the twelve years years

16:03

one through three are usually

16:05

higher prices creates a confidence

16:08

that hey, this is real. We're

16:11

three years into this and the confidence

16:13

is so so, you know, the diehards

16:15

that I talk to have a lot of confidence, which

16:18

means you probably need more higher prices

16:20

for people become convicted that

16:22

it's actually for real. What

16:24

creates the second big uptick

16:26

in prices because once these companies

16:29

start to spend, then you get

16:31

cost inflation and that drives you

16:33

up to the next level. And if you look at what happened

16:35

with copper in the two thousands,

16:38

we went from let's say two thousand a ton to

16:40

four thousand a ton over that first three years,

16:43

and then around six throughh

16:45

eight it exploded to eight thousand

16:47

dollars a ton because that's when they started to spend.

16:49

But they had to achieve that confidence

16:53

that still is not apparent in this

16:55

market. And then let's say, you

16:57

know, the final five to six years

16:59

is when you begin to deep bottle

17:01

neck the system and then the investment

17:04

plays out and you know, it takes another let's

17:06

say seven years and you get actual supply.

17:09

So where are we in that process? We're

17:11

still in that first three years creating conviction

17:14

around Is this for real, our estmates?

17:16

You need to be above nine ten thousand

17:18

dollars a done before people really

17:20

start to be confident that they

17:22

can make this type of investment. And I

17:25

think the other thing too is not only does their prices

17:27

have to reach those levels where

17:29

the breake events begin to happen, but they got to

17:31

go above to create some type

17:34

of confidence that they have some type of cushion, which

17:36

means we like to see much higher prices

17:39

before you start to see that supply response.

17:42

I have a very odd ball question,

17:45

but I've been wanting to ask this

17:47

question to someone who knows for a long time. So very brief

17:49

story. Sometimes they take ubers

17:51

to work. I haven't in a while, but I used

17:53

to sometimes take ubers to work, and when the driver's

17:56

seas I'm working for Bloomberg, they want to bring up something

17:58

finance, and usually it's like, what do you think

18:00

about like dogecoin or bitcoin or something like

18:02

that. But one time I had an

18:04

Uber driver and he's like, I'm really you know, you're

18:06

talking about gold, he said, I'm really bullish silver

18:10

because I believe there's not enough copper

18:12

mining going on in the world, and

18:14

silver is often a byproduct of copper

18:17

mining, and there's a lot of silver content

18:19

and some of this evy stuff, particularly solar

18:21

panels, he said, and therefore there's

18:24

going to be a shortage of silver. And I know this is

18:26

like a little diversion, but I just had to

18:28

get this off my head because we're here talking to Jeff

18:30

Curry. What do you think about my uber drivers

18:32

thesis?

18:33

I like that you're asking questions on behalf

18:35

of your.

18:35

Uber I'm yeah, and I still have his

18:37

context. I still have his context. So two

18:39

years later, I'm finally gotta get a chance to get back

18:42

to him on this. What do you think about

18:44

my uber driver's silver thesis.

18:46

I definitely think there's legitimate

18:49

arguments behind his solar thesis, and

18:51

you know, it's one of the arguments we put forth

18:54

for prices moving higher. But the one thing that we

18:56

watched, you know, particularly back

18:58

in you know, it was in March April of

19:00

twenty twenty one when everybody it

19:03

was actually during that GameStop era when

19:05

people were they were going to move and they were going to try

19:07

to short squeeze silver. The

19:09

problem with silver is there's just too much

19:11

of the stuff around. There's you

19:13

know, millennia of production is sitting

19:16

above ground, like gold, but

19:18

unlike gold, it is not as rare, so

19:21

it's more plentiful. So I think, yeah, it

19:23

will behave similar to what he said,

19:25

But I'm never going to be jumping on the super

19:27

bowlish bandwagon on silver just

19:30

because of the fact that there's just so much

19:32

of it around the world and it's not nearly

19:35

as rare as something like gold.

19:36

Yeah, even I have a bunch of silver I think

19:38

we've talked about this first. For my dad keeps

19:41

giving me silver coins from his

19:43

collection for my birthday and

19:45

for Christmas, and so I'm expanding

19:47

this collection of silver coins to the point

19:49

where I think I could successfully have

19:51

one of those silver stacking channels

19:54

on YouTube at this point. That would be fun.

19:56

Jeff, There's one other thing I want to ask you, So you

19:59

know we're talking about the price of

20:01

copper, the future's price, I

20:04

want to ask you about the copper

20:06

concentrates market and get

20:08

into like a little bit of the discrepancy between

20:11

like maybe the financialized price

20:14

versus the physical price.

20:16

Can you walk us through what's been happening

20:18

there, because in some respects like this

20:20

is where the immediate shortage is

20:23

playing out, even if it hasn't been

20:25

reflected up until recently in the

20:27

overall futures price.

20:29

Very good question, Tracy. You know, when

20:31

we think about metals, the or

20:34

that comes out of the mind that typically

20:37

gets turned into concentrate and ship

20:39

you know somewhere around the world where it

20:41

basically has to be smelted into

20:44

you know, a refined type of hopper

20:46

that it can be used and sent

20:48

on into you know, markets like wiring

20:51

and so forth. But it's there where

20:53

you saw the very first signs of a shortage.

20:55

It actually was in sk in

20:58

Korea, where there was

21:00

not enough concentrate to go around

21:03

to be able to smell into something that

21:05

was more useful. And so it's

21:07

called the you know, the TC charges, the

21:10

concentrate charges, And right now

21:12

everybody's oh, they're negative, which is telling you

21:14

the shortage is at the

21:17

mine and that concentrate

21:19

not at the inn used consumer. Yet it's

21:22

gonna work its way down there. By the way, it's

21:24

the same thing happens in refining margins.

21:26

When you have a real big shortage in oil, it crushes

21:28

the refining margins. And so the fact that

21:30

you have zero or negative TC charges

21:33

right now is an indication

21:35

that you have shortages at the mine,

21:38

which says eventually this is going to work further

21:40

downstream, which as we look out further,

21:42

particularly towards the end of the year, we'd expect

21:45

those shortages to work further downstream,

21:47

more towards this consumer in a

21:49

way from the mind, but absolutely, I think

21:52

that's a critical And it was about two or three

21:54

weeks ago. One morning I was looking at the Koreans

21:56

and go, wow, here we are finally

21:58

physical shortages happening at

22:00

the concentrate level, which is telling you

22:03

just a matter of time before we see it at the inn

22:05

us consumer level.

22:06

So, Jeff, I just want to nail you down

22:08

on the price target for copper and the

22:11

timeframe just so that you know when we have you

22:13

back on in Yeah,

22:15

in a year or two. We know exactly

22:17

what our priors were and what our expectations

22:20

were for the move. But where do you see copper

22:22

going from here? Where's

22:24

the sort of upside risk? And what timeframe

22:26

are we talking about?

22:28

Yeah, our view over you know, call

22:30

it a two to three year horizon is it's

22:33

got to reach somewhere around fifteen

22:35

thousand dollars a ton. Where do we get the fifteen

22:37

thousand dollars a ton is you go

22:39

back to nineteen sixty eight, the beginning

22:42

of that super cycle, and it was a big housing

22:44

boom driven by the War on Poverty

22:46

through the Great Society. We

22:48

saw copper prices reached the equivalent

22:50

of fifteen thousand dollars a ton. We

22:53

know that demand destruction occurred. Now,

22:55

we'd never had another opportunity other

22:58

than that time period to observe demand

23:00

destruction, because that's basically, you

23:02

know, at the inn us consumer level, you're out

23:04

of supply, like that Korean concentrate

23:07

situation, you ran out of supply,

23:10

you're short, and now you have to get

23:12

the in US consumer to ration their demand

23:14

out. That's to find out how high these

23:16

commodity prices can go. And at fifteen

23:19

thousand dollars, a Ton was saying,

23:21

Okay, the only time in history we've observed

23:24

actual physical demand

23:26

destruction or rationing of physical

23:28

supplies was that time period. Whether or

23:30

not that holds in the current environment, we'll find

23:32

out. But that's our best guess of

23:34

where prices could go because we've seen it

23:36

before. How long does it take to get

23:38

to that dynamic? You know, I thought we would

23:40

have been to that dynamic by now. I would

23:42

tend to think of, you know, if we meet back up

23:45

in the next twelve to eighteen months, there's

23:47

a probability that where we're looking at prices

23:49

in that twelve, five hundred and

23:51

fifteen thousand dollars range, because if

23:53

we know what's happening at the concentrate level,

23:55

it's just a matter of time before it starts to

23:57

physically happen at the inn us level and

24:00

that's where places, you know, the markets like the

24:02

LM and the comacs are pricing

24:04

it and that's where you would see that price bike.

24:22

Last time we talked to you, you were at Goldman.

24:24

Now you're at Carlow. What is the Energy Pathways

24:26

group in Carlo? What are you up to these days?

24:28

Well, the whole idea is to

24:31

focus on the pathways between

24:34

the brown in the green. You

24:36

know, so far this transition has

24:39

been you know, to use it lack of a better

24:41

word, chaotic, and it's primarily

24:43

been focused on the green. But

24:46

you need to be able to think about

24:48

this transition and manage

24:50

it. You need to think about moving

24:52

from the brown to the green. And we

24:55

talk about pathways. It's those pathways

24:57

between the brown and the green. And I have a

24:59

saying I like to say it's critical here is

25:03

if you don't own the emissions, you

25:05

cannot control the emissions. So

25:07

you have investors out there, you

25:09

know that they don't have emissions in their portfolio,

25:12

but it doesn't mean emissions are going down. In fact,

25:14

what do they do with the last Every year since

25:16

started this process, they've gone up. They haven't gone

25:19

down, and the only way you're going to make them go

25:21

down is start concentrating. Instead of thinking

25:23

about net zero, think about what happens

25:25

this year versus next year, and are we going to get

25:27

them down, particularly inside of the

25:29

portfolio, because by taking them

25:31

completely out of the portfolio, there's

25:34

no way you can control or say anything that

25:36

they actually went down. And so when we think

25:38

about the dynamic here is we don't

25:40

know the pathway. I like to point out

25:43

in the War on Acid reign during

25:45

the nineteen seventies and eighties,

25:48

when we took the sulfur and the aerosols

25:50

out of the atmosphere, it was a

25:52

smashing success. They remain

25:54

technologically agnostic, and I like to point

25:56

out, who would have ever think that

25:58

if you put platinum platium in your tail

26:01

pipe you're going to get rid of these

26:03

aerosols. But it took trial

26:05

and error trying those different

26:07

pathways until you found the one that actually

26:10

worked. And so we're using the

26:12

term pathways here is to really denote

26:15

this whole idea that we don't

26:17

know what the answer is. We're going to be trying

26:19

these different ones. We may have the one we need right

26:21

now, we may own it, But finding that

26:23

exact pathways is really the goal here, and

26:25

looking at that connection between

26:28

the brown and grain is going to be central

26:30

to creating a managed transition

26:33

that is less chaotic than what we've already seen.

26:36

So we've obviously been talking a lot about

26:38

that energy transition and the impact

26:41

of price on investment and

26:43

maybe the transition itself. We

26:45

would be very remiss if we didn't

26:48

ask you about what's going on with oil prices

26:50

at the moment, and I think the big story

26:52

for everyone in the market is probably

26:55

that non OPEC supply that has

26:57

really ramped up a lot quicker

26:59

than a lot of people expected.

27:02

How much has that changed the way

27:04

you view and analyze the

27:06

oil market. How big of a difference has that

27:08

made.

27:09

Let's start with the big one that everybody's focusing

27:12

on US. US increased above

27:14

expectations four hundred thousand barrels

27:16

per day last year. It was a lot more. Basically,

27:19

expectations at the end of last year were for five

27:21

hundred thousand barrel per day growth and you got something

27:23

close to nine hundred. By the way of that,

27:25

two hundred was in Golf of Mexico, one

27:28

hundred in Permian, one hundred

27:30

in Bachan. You're not repeating the Bacan and

27:32

the Golf of Mexico, which means the only

27:34

ones that you can repeat are really the permium.

27:37

Now, let's take that aside, and then let's put

27:39

this in the context of the supply increases

27:41

that you saw out of i Rant. You know, it was

27:43

eight hundred and fifty thousand barrels per

27:45

day. Out of Venezuela. It was one hundred

27:48

and fifty thousand barrels per day, so

27:50

you're well over. You're talking about a surprise.

27:52

Last year, the surprise out of that

27:54

sanctioned oil was well in

27:56

excess of a million barrels per day, more than two

27:59

x what you got out of the US. Also,

28:01

remember natural gas prices were extraordinarily

28:04

high last year. That reinforced

28:06

even more US production. So

28:08

you know, I mean, we'll see what's happening this year.

28:10

So far, you know, the surprise is

28:12

coming out of the US or nothing like what they

28:14

were last year. And then when you look at

28:16

places like Mexico, if

28:19

anything, many of those places are struggling

28:21

to bring on their production. So yes, it was a

28:23

factor of the last year. Is it something that

28:25

we need to be conscious of? Yes,

28:27

is it something I'm focused on, Yes, But

28:30

is it derailed the story? I would

28:32

argue that the increases in the

28:34

sanctioned oil derailed the story far

28:36

larger than what those other surprises

28:38

that you're referred to did. And let's think about

28:41

the cost of allowing that sanctioned oil

28:43

to come online. You know, it had an

28:45

impact on the Iranian hoodies, you

28:47

know. In fact, I thought the one that actually surprised

28:50

me throughout this whole process was a British

28:52

flagship carrying Russian material

28:54

owned by Swiss trapp Era shot

28:57

by an Iranian backed hoodie. If

28:59

that's not, you know, emblematic of

29:01

the problem, I don't know what it is. And then Venezuela

29:04

similarly, you know, invading. They

29:07

clearly focused on this because

29:09

they've made the efforts to cut back on

29:11

those you know, saying sinned oil. But it's

29:13

not unlikely to take effect until you go after

29:15

the elections. But the bottom line, that was a

29:17

lot of supply hitting the market

29:20

at a time when demand was relatively

29:22

weak as we're going through what we like to

29:24

call is a mid cycle pause in the economy,

29:27

meaning that if you look at that period

29:29

in twenty twenty two and twenty twenty three. It

29:31

was your classic mid cycle pause, huge run

29:33

up in rates, energy prices. The

29:35

system had to adjust to the higher rates,

29:38

higher energy prices. It slows

29:40

down, and then it begins the second leg of the business

29:42

cycle, which is where we are right now. By

29:44

the way, never in the history of the

29:46

post war era, as you go into that

29:48

second half of the business cycle do commodities

29:50

not act as the best performing asset class.

29:53

And there is very little history that

29:55

OPEC ever tames that price bike as

29:58

you go in. They can't bring it on fast enough. So

30:00

that's why it's not as bullish as copper. And I'm

30:02

not going to try to say it's as bullish as copper,

30:05

but it is part of the overall story

30:07

here, and you know, we never thought it was going to

30:09

be as bullish as the base complex.

30:11

But also when you look at these commodities supercycle,

30:14

it's rare, whether if it's grain, softs,

30:17

oil, base, precious, that

30:19

these markets can get that far away from one

30:21

another, because there's ultimately arbitrages across

30:23

them.

30:24

What about on the demand side. You

30:26

know, obviously evs in theory

30:29

over time should cut into

30:31

oil demand, but in practice

30:34

and you know it's hard to see it showing up

30:36

just yet. And you know there's still tons and tons

30:38

of ice cars on the road. What is this

30:41

sort of I don't know, medium term prospect

30:43

for actually reaching peak oil

30:45

demand or bending that demand curved down?

30:48

Right now? We have used a lot of carrots

30:50

to try to solve this problem, you know,

30:52

if it's the IRA repower EU

30:55

subsidies. When I say carrots, there's no

30:57

sticks in this. Yeah, you

30:59

really want to get oil demand down? And how

31:01

did we always do these other transitions or

31:03

when we had to, you know, environmental issues,

31:05

we use sticks, but a tax on sulfur

31:08

as we have in the past, and it's not

31:10

a closed loop. And if we're really

31:12

serious about getting the demand down, we

31:14

would create impediments to the demand growing.

31:17

I don't want to get into the politics of that because

31:19

they become relatively sticky.

31:22

But I think the key point here is we

31:25

have the tools at our

31:27

disposal to get that demand

31:29

down, but nowhere in the world

31:32

is there the political will. And I think where

31:34

I was really wrong on all of this

31:36

is if we go back, let's say,

31:38

twelve eighteen months ago, I

31:40

fully overestimated

31:43

the willingness of Western governments

31:45

to pay for their politics, whether if

31:47

it was through sanctions, environmental

31:49

policy. And I don't care which country wantn't

31:51

you use? You can all come up where they loosened

31:54

it. Yeah, I live here in the UK, and

31:56

you know there's good examples there where they loosened

31:58

it. But I think the key point point here is

32:01

that when the going got tough and

32:03

the cost of decarbonization

32:06

became very apparent and very high,

32:08

that political will didn't carry through.

32:10

And if we're serious about getting

32:13

that demand down, which I firmly believe we should

32:15

be. And by the way, I'm not going to demean

32:17

the politics at all whatsoever here

32:19

because I know they're really difficult, but that

32:22

needs to be front and center before we're going to

32:24

start to see a significant decrease

32:26

in overall demand. And part of the you know, the

32:28

reasons is people I know somebody

32:30

who I'm not going to make it the name. They have one of

32:32

the plug in hybrids. They don't ever

32:34

plug them in, and that's god has a

32:37

very common problem. But if you want people to plug them

32:39

in, make it expensive for them not

32:41

to plug it in, then they'll plug it in. So

32:43

I think we got a ways to go. But I

32:45

think the key here is, you know,

32:48

I actually point this out historically. I think

32:50

I made this point when we were on last

32:52

time. Is that historically

32:54

when you got to get a tipping

32:56

point where you actually see policy

32:59

really get serious about the problem. And

33:01

when we think about the War on Acid Rain, it

33:03

was the lake Erie effect nineteen

33:06

sixty eight, lake Erie caught on fire. Richard

33:08

Nixon had to respond. He created the

33:10

Clean Air Act Amendment, the EPA. We

33:13

went to town and we solved the problem.

33:15

We used tools at our disposal which

33:17

we've all learned in econ one on one, What do you

33:19

do with the negative externality? You tax it,

33:22

so we know what to do. We just got

33:24

to get to the point where the political will is there

33:26

to do what we know how to do.

33:28

Jeff, I want to go back to what you were

33:30

talking about with petro dollars and the

33:32

idea of this being a sort of key difference

33:35

in the current commodities rally versus

33:37

commodities rallies in history,

33:39

where you know the price of oil would go up and

33:41

then that additional cost

33:44

would get recycled into US assets

33:46

like treasuries, and that would end up having an impact

33:48

on the dollar, and you would get that sort of self

33:50

reinforcing cycle. But you

33:52

know, a lot of commentators tend to be kind

33:54

of cynical on the idea of dollar

33:57

diversification. But it sounds like you

33:59

think that the that's one of the

34:01

things that's happening here, this idea that

34:03

there are countries out there who are getting together

34:05

and saying that we want to trade in our own

34:08

currencies and diversify away

34:10

from the dollar. How do you see that playing

34:12

out?

34:12

I think it's going to become more and more apparent

34:15

because owning those dollars. So let's

34:17

take we know Russia and India do this with they

34:19

trade oil in I and R and

34:22

so anything that's left over, they're

34:24

the ones who can settle this up in gold.

34:26

And by the way, Western governments are very careful

34:29

in maintaining the integrity

34:31

of the Russian frozen assets,

34:33

the four hundred billion, because they don't want

34:36

to create that concern. But I think the damage

34:38

has been done because you don't see,

34:40

you know, these countries are not trading in

34:43

dollars anymore because of fear of

34:45

what are they going to do with these dollars? And you

34:47

don't see the Chinese, who actually still get substantial

34:49

dollars lining up to buy US

34:52

treasuries anymore. So again I

34:54

don't want to get in the politics of this, but

34:56

the question is, have we passed

34:58

that point of no retur are we going to see

35:01

that recycling play out

35:03

again? By the way, I don't think you need

35:05

it to be bullish commodities, because what if they start taking

35:07

those dollars in those rupees and everything

35:09

else and just buying raw commodities with them,

35:11

which is what they're doing with gold. We know they're doing

35:14

it with gold. You know what if they start doing

35:16

it with copper oil and other

35:18

commodities and building strategic

35:20

dog piles or something like that, it starts to get pretty

35:22

bullish again. But it's a very different dynamic

35:25

than what we've seen in the past. And

35:27

I would say, if you asked me really, what I got

35:29

wrong was I don't know why I thought we

35:32

would keep doing that dollar recycling

35:34

dynamic be given everything that's happened.

35:36

But that's one point where I would

35:38

say that caught me really by surprise.

35:41

Jeff Curry of the Carlisle Group, so

35:44

great to have you back on. I always feel

35:46

like it's such a masterclass and how these commodity

35:48

markets really work. Great chatting

35:50

with you, and we'll chat with you again in eighteen

35:52

months or two years, and we'll see how this is all

35:55

playing out perfect, Racy.

36:08

I love talking to Jeff so much.

36:10

I know.

36:11

I remember when he left Goldman

36:13

he published that like ten Things

36:16

I Learned in Commodities Markets,

36:18

and I encourage everyone to go, like seek

36:20

it out and read it because even

36:22

though he was very forthcoming in

36:24

that conversation just now about what he got

36:26

wrong. But of course, like anyone

36:29

who is in this investment world analyzing

36:31

things, if you do it for long enough, you're going to get some

36:33

things wrong. And so it's really useful to

36:35

go back and look at his lessons and kind

36:37

of understand the framework for the

36:39

way he thinks about things.

36:42

No, totally, he's just so clear, right, And

36:44

you know what I think is interesting because

36:46

some of the stuff, you know, is like rebuilding

36:49

on themes we had talked about. But one thing I

36:51

thought was really interesting is some of the easing

36:53

that he described that took place over

36:55

the last couple of years, which is

36:57

not like the sort of conventional easing

36:59

as we think about it, but a little bit more stealth

37:01

and so less sanctions enforcement,

37:04

a little bit environmental regulation, yeah,

37:06

a little bit more tolerance on environmental

37:09

restrictions to minings and things like that,

37:11

things that don't show up. You know, no one

37:13

comes out and really makes an announcement, Oh

37:15

we're going to be lax on sanctioning.

37:17

You just hear it.

37:18

People like sort of deduce it from the data. Oh there

37:20

must be this Ornian oil getting out or

37:22

whatever it is. Or no one really comes out and says,

37:24

oh, we don't really care about the

37:26

environment anymore, and we're going to drop

37:29

all our rules. You know, again, you sort of deduce

37:31

it from like what activity is going on. I

37:33

thought that was a really interesting point.

37:35

You know, I was thinking the exact same thing. So

37:37

I asked him about what's sort of different in

37:39

the oil market right now and US

37:42

oil production and non OPEC production,

37:45

because that tends to get a lot of attention, It gets

37:47

a lot of headlines. So the spr release

37:49

and the Biden administration maybe has

37:51

a little bit of an unusual

37:53

relationship with oil drilling at

37:55

the moment. But like we do see those headlines

37:58

that the US is making a difference in

38:00

world oil markets. But then to

38:02

Jeff's point, he was saying that he

38:04

thinks actually the lack's enforcement of the sanctions

38:07

was a bigger factor in all

38:09

of this. But it's exactly right

38:11

that, like we don't talk about it as much

38:14

because it's not out in the open.

38:16

You can't see those official statistics

38:19

about how much oil supply is getting

38:21

out of Russia. And same thing with environmental

38:23

regulation as well. So I thought that

38:26

was a really good point.

38:27

His last point about the lack of sticks

38:29

I thought was particularly interesting too,

38:32

And this idea of like, yeah, carrots

38:34

are easy, but if you actually like there is not

38:36

a lot of appetite to say, just like, you

38:39

know, raise the gasoline tax in the US,

38:41

or is he put raised the sulfur tax, Like these

38:43

are things you could do, people wouldn't

38:45

like them, but you know, in a world

38:47

in which practically trade offs exist, it's

38:49

like how much political will is there to

38:52

your point just now, obviously we've talked

38:54

about this a little bit before, but even with

38:56

Russia's war in Ukraine, the sort of obviously

38:59

arming Ukraine back in Ukraine, but you know,

39:01

not being particularly excited about Ukraine's

39:04

attacks on Russian oil facilities

39:06

and the costs that that would add to the

39:08

sort of overall global war effort.

39:11

Like, it's sort of interesting to think about him

39:13

saying he's been a little bit surprised

39:15

by I guess the lack of will to take the

39:18

painful part of the transition.

39:20

Yeah.

39:20

The other thing I was thinking about was

39:22

the evolution of environmental problems.

39:25

Ye, let's say, and he mentioned acid rain

39:27

there and the sort of Lake Eerie moment

39:29

that led to a lot of additional

39:31

regulation that made it sort of salient

39:34

and politically palatable.

39:36

I guess, so that you could do that, and

39:39

now there's a tendency to think about

39:41

like all the things going wrong in the environment

39:43

and focus on everything else that we need

39:45

to do. But if you think about acid rain, this

39:48

was such a big talking point in like

39:50

especially the like seventies, eighties,

39:52

maybe even into the nineties. But nowadays,

39:55

because of those regulations, acid

39:57

rain has a lot less impact, at least

40:00

places like Europe in North America.

40:01

So now when we when we are kids, or least

40:04

when I was a kid, who is acid rain in the ozone last?

40:06

That's right? And to save the whales, it

40:08

was like, yeah, that was the trifecta

40:10

of environmental concerns.

40:12

It's certainly in my memory.

40:14

Yeah, all right, well shall we leave it there.

40:16

Let's leave it there.

40:17

This has been another episode of the Odd Thoughts

40:19

podcast. I'm Tracy Alloway. You can follow

40:21

me at Tracy Alloway.

40:23

And I'm Jill Wisenthal. You can follow me at the

40:25

Stalwart. Follow our producers Carmen

40:27

Rodriguez at Carmen Arman, Dashel Bennett

40:29

at Dashbot and kel Brooks at Kelbrooks.

40:32

Thank you to our producer Moses Onam. For

40:34

more odd Lots content, go to Bloomberg dot com

40:36

slash odd Lots, where we have transcripts, a blog

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