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You're listening to Strictly Business Podcast with Lindsay Williams.

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Oil has always been an enigma to me.

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Oil traders, in my mind, exude this sort of air of glamorous mystery,

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but that comes also with just a hint of potential skullduggery or sleight of hand

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in the background.

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Today, though, oil is a vital part of the world's power portfolio.

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And despite tales of this black gold being a dead man walking, Here it is, still

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influencing countries'

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fortunes and that of the world's economy.

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With me is Paul Gooden, Portfolio Manager, Global Natural Resources at 91 in

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London. I sort of painted it as a sort of a James Bond type commodity pool.

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Is that unfair or is there a hint of truth in that?

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No, look, I think there is a hint of truth in that. And, you know, when it comes to oil, I think it's worth remembering the adage

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that there are sort of...

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two types of experts on oil. Those who don't know and those who don't know they don't know.

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And, you know, sort of beneath that,

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the reality is it's quite difficult to forecast oil in the near term.

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And the reasons for that, there's kind of three reasons.

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The first one is you've got supply and demand of oil are buffeted around

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by exogenous factors which are difficult to predict.

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So for example, supply might be impacted by OPEC action, by sanctions on oil

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producing nations,

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and demand can be impacted by the level of economic activity.

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And then the second reason, and this is a bit more fundamental, is the cost

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structure of oil projects.

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So with an oil project, you've got a lot of startup capex, but thereafter a relatively low ongoing operating cost.

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And what that means is that In times of oversupply,

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the oil price has got to fall a long way to shut in flowing oil barrels.

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And meanwhile, in times of undersupply, it can take a long time to bring on new oil

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projects.

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And that means that you need the oil price to rise to sort of destroy demand.

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So that creates this kind of volatility because of the cost base.

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And I guess the third factor is really speculators.

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There's a lot of speculative money, traders kind of moving in and moving out.

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um the underlying commodity and that just means yeah it's a very volatile space it

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is and the whole idea of bringing on a new project

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brings me to trump and we will mention that fellow's name a couple of times i'm

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sure and his policies but his famous

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praise of drill baby drill it's not silly i mean it's great he wants to boost the

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economy of the united states for america and make american oil production great again and

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all that sort of thing but you can't

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want that and also want lower oil prices because at certain points drill baby drill

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isn't economical in the united states yeah

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it's uh you know if it's drill baby drill or pump for trump um you know he certainly

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wants um you

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know u.s energy dominance and and that's broader energy it's not just oil it's it's natural gas as well um but but

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you're absolutely right there is a

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sort of contradiction at the centre of that because US shale needs...

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kind of like 60, 65 dollars to be sort of profitable and to have kind of good

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break evens on oil wells.

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And, you know, I kind of think that early on in his presidency,

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because of the inflation coming through in the US because of just general tariffs,

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I think Trump wants lower oil prices as a way to kind of cushion that inflationary

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impact.

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and yes, I mean, I... I am concerned that you're going to see a slowdown in activity in the U.S.

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oil patch in the second half of the year because operators are going to respond to

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the low oil price they see on the screens.

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You talked about $65 a barrel. Now, look at my screen at the moment as we pre-record this podcast.

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It's just below $65 per barrel.

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It was 82 in mid-January, just before Mr.

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Trump started his latest tenure at the White House.

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What has happened since then? I'll give you my two reasons, and that's the Trump tariff story,

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which promises or threatens global growth, so therefore threatens demand.

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And the other thing is that during that time, with a feat of poor timing, I think

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OPEC boosted production.

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Is that correct?

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Yeah, Lindsay, you kind of nailed it there.

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On the demand side,

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general macroeconomic weakness because of tariff concerns is beginning to weigh on

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up. expectations for oil demand. So I'd say consensus at the start of the year was forecasting maybe a million

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barrels a day of oil demand growth.

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And to put that in perspective, the global oil market's about 100 million barrels a

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day. And sort of leading edge forecasts are falling to sort of maybe 700,000 barrels a

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day or even lower.

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So you're seeing demand forecasts come down. And then on the supply side of things, OPEC's got about 4 million barrels a day

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of excess capacity on the sidelines.

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And they're bringing back about half of that, about 2 million barrels a day by the

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end of 26.

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And there had been a hope that they would kind of delay adding those barrels back.

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But if anything, they seem to be accelerating it.

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And one of the reasons they're doing that is because within OPEC, there's a little

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bit of disarray.

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So particularly Kazakhstan is overproducing relative to its OPEC quota.

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So I think Saudi is getting a little bit frustrated with that.

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and so they're kind of firing a warning shot across.

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the OPEC members that are overproducing. So yeah, those two things combined have kind of driven the oil price lower.

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I don't want to speculate because it's not our job to do that.

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But I'm going to sort of throw this in to the discussion that we're having, Paul.

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And that is that if the OPEC members perceive that there is going to be a

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global slowdown, I won't say recession,

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because that's a little bit far fetched at the moment anyway. But if there is a global slowdown, It's best to take advantage of $60,

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$65 a barrel now and pump as much as you can and cheat a bit.

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And they do have a reputation for cheating.

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Is that what is happening at the moment behind the scenes, do you think?

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Look, clearly, one way to think about the oil price is it's a tragedy of the

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commons. Everyone gets to sell at the global price.

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But if everyone follows their own self-interest and maximizes production,

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then the market gets oversupplied and the oil price crashes.

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and so Clearly, what's happening at the moment is some countries within OPEC,

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particularly

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Kazakhstan and Iraq, are overproducing relative to croaters.

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And I think Saudi is getting frustrated with that.

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Saudi is having to carry water for the rest of OPEC.

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And so, look, I mean, you could argue, yes, on the one hand, it makes sense for

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Saudi to continue to manage the market.

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but on the other hand it's kind of like well look occasionally the oil market needs a good sweating and what i mean by that is saudi

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can basically say right

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okay we're now going to significantly oversupply the market the oil price is

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going to go down and that is going to sort of

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remind everyone within opec that we need to basically hang together or we're going

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to hang apart um

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and it also kind of hurts u.s shale um and you know increases the cost of capital for

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the US oil patch by, you know, The extra volatility makes it harder for

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US oil producers to get access to capasol. So several times in OPEC's history, 2014 and 2020,

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they have made the decision to kind of launch a market share war,

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irrespective of the fact it causes short term pain.

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I mean, Saudis and the OPEC typically play a long game.

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So, you know, part of me kind of thinks it might make sense for them to do that, to

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kind of bring back that two million barrels.

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quickly get it into the market and then we can kind of rebuild from there.

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I saw a headline yesterday regarding China from a very reputable publication and it

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said that they've been stockpiling

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because they're frightened of the tariff situation, whether it be tariffs on oil,

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if that is going to happen,

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or whether it just means a slowdown. They just want to have oil apparently.

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I remember many years ago they were stockpiling oil for some reason in storage

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facilities on the east coast of China.

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Seems to me that they're doing it again if this article is to be believed.

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How important is China in the whole equation here, Paul?

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Yeah, look, I mean, China is very important across the whole commodity

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space, not just oil,

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but also on the metal side as well. And, you know, historically, kind of over the last decade, China has been the

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biggest growth market for oil.

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And China itself doesn't produce a lot of oil. Now, what has happened over the last couple of years is that China has

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aggressively pushed a green energy agenda and it's aggressively pushed

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a natural gas agenda as well.

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And so one of the issues you've got in China, which is a problem for the oil

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markets, is that if you look at new sales of cars,

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close to half of them are EVs. And that has been sort of gradually weighing on the demand trajectory within.

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within China for oil. Now some people might say isn't that wonderful news, you know

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China's turning green and actually it couldn't be farther from the truth because

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those EVs are basically powered by

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coal because you know around half of the Chinese grid is powered by coal so

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actually it's a disaster for the

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environment but that doesn't you know detract from the point that

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China structurally is sort of slowing.

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being less of a growth tailwind for the industry um but look you're seeing other

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countries um

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you know continue to grow so india in particular is probably going to be the the

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fastest growing oil demand market this year yes certainly

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china you know it's it's one to keep an eye on for sure okay i've got a few

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questions now that constitute the last part of

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this podcast and they're the most important ones i think firstly um we'll

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leave this to last actually but you have it in the back of your mind

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where do you think The oil price is going from here, as I said earlier, around $64,

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$65.

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Well, don't worry about that now.

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I want to know where 91 is positioned at the moment, without giving away too many

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secrets,

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and also where you are seeing opportunities, because with the pullback

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from the low 80s to the mid

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60s, there must have been opportunities presenting themselves, Paul. Yeah, look, I would say within the Global Natural Resources Fund, we're underweight

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energy.

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versus metals and mining and ag and precious metals.

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And within energy, we are defensively positioned vis-a-vis oil.

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And what that means is we've got quite a lot of natural gas volume exposure, which

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we kind of get through the midstream names.

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So defensively positioned, I'm happy with that defensive positioning.

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And in terms of oil, look,

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I think we need to kind of break it down sort of the short term versus the medium

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term.

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Now, on the medium term, I'm actually fairly optimistic on the oil price. And the reason for that is that the energy transition is happening slower than people

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thought. So that means that oil demand is further out, probably 2035 and beyond.

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Whereas on the supply side, U.S. shale is plateauing.

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It's maturing. Peak shale oil supply is probably 2027.

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And that's a dynamic that kind of sets up for a relatively tight market if you look

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out three, four, five years and beyond.

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So I'm kind of positive kind of medium term. But on the short term, I am concerned about an oversupplied market.

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And I do think there is a risk that the oil goes lower.

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How low could we go? Well, look, I think if you kind of get into the mid-50s, let's say, yeah,

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the mid-50s, that is a level at which U.S.

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shale producers significantly reduce activity.

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So that would then... balance the market.

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The cure for low oil prices is low oil prices.

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So my concern is that oil kind of heads lower through the second half of the year.

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Now, we shouldn't get too bearish, right, because global inventory levels in oil are

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relatively low,

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and there are tail risks. So for example, US sanctions on Iran and Russia could be stepped up, depending on

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what happens geopolitically.

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But my base case is for relatively kind of

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um muted oil price in the second half of this year and in terms of where we are

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seeing opportunities yeah it's largely around

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natural gas and specifically in the u.s you're going to see a lot of growth in u.s

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natural gas

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volumes to put it in perspective the u.s is about 100 bcf a day market now in u.s

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natural gas i

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think it goes to probably 125 bcf a day by um 2030 and what's driving that is firstly

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more domestic gas demand, and that's from AI and data sensors,

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electrification of everything, and also coal-to-gas switching.

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But also there's a lot of LNG projects starting up over the next two or three

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years in the US,

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which means that cheap US natural gas is going to be going to Asia and Europe.

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So that is one of the key things we're playing at the moment within the Global

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Natural Resources Fund.

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So it's conceivable that in six months or a year's time we'll be chatting not about

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oil, as our primary focus,

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we'll be talking about gas and its various forms. Look, I mean, both are important.

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I guess what I'm sort of saying is now, at the moment, I feel the best structural

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growth opportunities are on the natural gas side of things.

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And on oil, look, I'm constructive on a five-year view, but I do think that we've

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got a six to 12-month period where we have to absorb

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extra OPEC supply and weak demand, and that can create a sort of a soggy oil

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price environment.

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Paul, fascinating chat.

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Thank you very much for your time.

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Paul Gooden is Portfolio Manager,

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Global Natural Resources at

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91 in London.

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of the position of any other entity other than the speaker or the author.

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And since we are critically thinking human beings, these views are always subject to

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change, revision and rethinking at any time.