Jeff Currie: Everything You Know About Oil Markets Is Wrong

[MUSIC] Welcome back to another episode of the Oil Ground Up podcast. I'm your host, Rory Johnston. A reminder, and subscribe, and leave us a review. Oil Ground Up is distributed in partnership with the Clear Commodity Network at clearcomodity.net, and also the Oil and Gas Global Network, the leading podcast network for Oil and Gas. Our guest today is Jeff Curry, former and long time head of Commodity Research at Goldman Sachs, and now the wearer of many hats, including non-executive director of ABX Markets, as well as chief strategy officer of energy pathways at Carlisle and a senior advisor to the firm's energy funds. Our conversation focused on the theory of and practice of oil price discovery, how commodities aren't typically anticipatory assets, and how that has shaken out amidst our glut fear through Hormuz Shocked Oil Market. Jeff Curry, welcome to the Oil Ground Up podcast. Thank you so much for joining us today. That's great to be here. It's a pleasure. I always wanted to take part with one of these discussions with you, Rory. It's a pleasure to be here. Pleasure is entirely all-mine, and for the vanishingly few listeners of Oil Ground Up this long who don't know who you are, or where you come from, could you just give us a brief description of your background and what you're doing these days? Okay. Well, I was head of commodities research at Goldman from essentially when the commodity business took off in the mid-90s all the way up until about three years ago. And for the last three years, I've been on board of ABX and I've been, I was at Carlisle where I'm currently a senior advisor right now to their energy funds. I'm also on the board of board drilling. I left commodities. I'm also on the academic boards of University of Chicago's Energy Policy Institute, Epic Energy Policy Institute of Chicago. And they're climate and growth initiatives. And I know I'm missing a few in there. Oh, I pulsed with Robert Friedland and Blue Spark. And I know there's another one I'm missing somewhere in there, but so I apologize to somebody I forgot. But the one thing though, I will say that I spent my first 30 years at Goldman all on the macro side. And in the last three years, being at Carlisle and on the boards of these companies, I've really learned a lot about the micro side. So if I can suggest to any of the listeners, make sure you get exposure to both sides because I think it just gives you a very good fundamental grounding and understanding. All of these different markets to see it from the micro as well as the macro side. So I really want to spend the bulk of this conversation on price discovery, price formation, something that I've heard you talk about for well over a decade now since I've been in the industry. And I think what, I think I have always understood the commodity market much as you have described it, not anticipatory, etc. And a lot of things over the past really two years have begun to shake my faith a little bit in these kind of core structural understandings of how these markets price themselves. They want to go through a bunch of the episodes we've seen obviously centered on the Hormuz crisis. But before we kind of get into any of the specifics, say this was back in January or heck, even back, you know, pre-COVID, how would you have described when you say commodities are not anticipatory assets? What does that mean in terms of flat price, in terms of term structure, or the shape of the futures curve? What do you mean when you say that? When I say that in the absolute sense, the term structure is the one that is entirely a spot asset. It cannot have any expectations put into it. And let me give you an example. Let's say I told you that Saudi Arabia was going to blow up in six months and we're going to lose all 10 million barrels per day. What would happen? It will go out six months on the curve, buy it up, and it would be the biggest contango we ever seen. We take all of today's oil, move it into six months out because the contango would be so big. What would that do? It creates shortages a day. The curve would flip back into backwardation and it wouldn't matter. It would wash out. The curve has to price today's fundamentals, not tomorrow's. Doesn't mean that the back end can't. The back end should be a very slow moving process driven by technology and underlying supply trends. But the front end of the curve, when it wiggles around, it's like we've seen with hormones in the rest of it. It should be entirely devoid of any expectations and it should be entirely reflective of today's fundamentals. And it really goes back to that simple point I've always said, time spreads don't lie. They cannot have any expectations embedded in them because otherwise it would be taken out immediately. And so when we think about it, if you anchor the back end, all that movement on that rest of that curve in any commodity really needs to be reflective of today's fundamentals. And for those of you who don't follow these markets, I like to give the example of you understand backwardation in the middle of the war, it was really backwardated. Spot was up here and the back end was, you know, spot was $100 a barrel and the back end was somewhere around 70. Now when we think about the shape of that curve, that backwardation is not that the price is going to go down, but rather it means you're willing to pay a premium to have that commodity today as opposed to tomorrow. And when we think about like oxygen, would anybody listening to this pay a premium to have oxygen tomorrow? No, because you're dead. You always have a pay the premium to have oxygen today because it'll keep you alive. And that's the way you can think about the back rotation. Now the back end of the curve, that's a whole different animal and that's more has to do with the companies. And the only time I've ever seen the back end move was the period between 2004 through let's say around 2007 or eight. When you have basically flat curve at $120, it was crazy. Yeah. And it stayed there until right around 2014 and then it reprised all within like seven or eight months, just went boom straight down all the way around the 40. Stayed there and then reprised again during COVID that era back up into the, I guess it was around that 50, 55 range and then it reprised again. Now the one thing this would tie into, you know, the glut story and everything like that is the back end and this is a, it cannot reprise unless the entire industry reprises. Meaning that you've got to have axon and the rest of them reprised because that's the cost of capital of the entire industry. And I remember one time I was sitting there, people were, this was a 0405, the back end move from 20 up to around 45. And everybody was, oh, it's you guys, you speculators with all of your, you know, Goldman Sachs commodity index making it go up and I go, no, that's impossible. You can't take a $450 billion market and move a $3 trillion industry. And then I started realizing I go, that's absolutely true because the returns of the company didn't change. You had to fill in all of that so that you had trillions of dollars move into the space so that the company's cost, the capital went up, the cost structures went up because he gave them money, they started spending. So the back end, again, is it, is it, you know, there's some expectations and fundamentals in there. But when I think about, you know, reprising everybody goes, oh, curry, you're insane. Why can't you go to 300 or 400 or 20 or whatever? It's just liquidity. I suck all the liquidity out. I can go to 20. And if I dump a lot of liquidity, it can go to 500. You can do whatever it wants to do because you'll just get a huge macro reprising across the entire globe. Actually, I may be rambling here, but please stop me. Go ahead and stop me. Oh, okay. So, because I, okay, so I agree with everything you've said structurally. But I mentioned at the beginning, there were a couple of things that have started happening over the past year or two. Then I've had trouble explaining within this frame. And I would say that I still agree 100% that, let's say, prompt time spread. So first month or two, they absolutely don't lie. And I think, you know, and we can talk about how very surprisingly four months into hormones, they actually slipped into contango briefly over the past couple of weeks as many glutt. And I think the reason I don't doubt the many glutt is, because again, I don't think these terms spread, these times spreads lie. But I think one thing that we saw in the year or so prior to the crisis, we had, and I know, and we'll talk about the kind of, why not this club was going to happen or not. And I think there was overwhelmingly a consensus view that in 26, we were going to have a big oil glutt that the combination of OPEC coming back and, you know, slower growth and everything else. And we saw this weird curve structure emerge, so called the smiley shaped curve, where we basically say six, eight, 12 months at the front that were backwardated. And then you kind of had this broad contango, you know, whether it was a smiley face or a Nike swoosh or kind of, you know, that's the, that was the shape we generally saw. And when I look at that curve, the thing that kind of kept coming to me was the front's not lying, because in this period we are still tied. We were still drawing, even if we had a paper kind of glutt. or surplus, China was hoovering it up for the SPR, so it was getting absorbed by oil and water with sanctions. Like the actual realized supply demand balance was clearly still indefinitely still clearly had prompt, you know, backwardation. But then I had a hard time explaining the broad contango beyond saying the market thinks we're going to be drawing next year. Because again, it's to your point. It's not that the market was pricing where the price was going to be next year, but it was, to me, it seemed like it was pricing that we were going to enter into a surplus that would require some kind of builds regardless of the actual flat price level. Can you talk through how you saw? Because we've seen this curve shape appear a couple times in the historical record, typically around periods of transition, but it was very, very brief, kind of like vanishingly brief. This lasted months, almost a full year prior to Harvard. I was very prior to Harvard moves. You talked me through what you were thinking through that curve and why not like complicated your, your, come on, you're not in respiratory assets, these are. All I know is in 2020, 2019, you know, where there was a, there was 2017, we published these three investor rules on, on come on. One is times spreads don't lie. The other one is don't join the party till the parties already started. And people tried to join that party before the party ever started and they got destroyed. And I learned that lesson really hard and it was, and it was, there was an opact cut and it was, I think it was in November of 15 or 16. It was in November of 16, they cut. And I remember we all tried to price in the back rotation into February of 17. It was my worst year ever. Trying to do the exact opposite of what, all those people did before and it ended in tears. In other words, and by the way, we wrote the Mia Colpa in June of 2017. Yeah, it was 2017. And we wrote the Mia Colpa and made the point. Don't ever join the party before the party started. Because what happened is you had to still have a surplus out on the front of that curve. It was a contango and then it went into the back rotation and everybody were buying. We, we, everybody was buying calls on February of 17. All of this had the back rotation. I got caught up into it and what would happen, the problem is, is that as you tried to price that in, that thing would roll prompt and came down. The trade worked. It didn't work until the end of 17. And we went to 88 in 18. We went up, it worked. But we were just far too early and we tried to price it in. But what happened was also when you tried to price that in, you kept the situation prolonged it in terms of that front end kept it up, you kept the contango. And so when it rolled prompt, it was the most painful process. And, you know, anybody with, with my, you know, age handle probably remembers that incredibly well. It was by the way, it was the single worst year in the history of Goldman Sachs, commodity business. And I can't guarantee you nobody, nobody at Goldman and everybody else, we all learned that lesson so clearly. You do not join the party till the party started. And part of what was going on, people were trying to put on those contango trades and everything well before it ever started. And the, the decimation that occurred in, it was already occurring before the war ever started. And they kept getting blown out because the current, the front of the curve stayed back-wardated. So, you know, if you held it, you kept getting swamped up the side. Yeah. And so that goes back to that whole point about, you know, these are prompt markets. Don't try to fade them. Because by the way, you can make those curves do whatever you want after about six months. It's just a supply and demand of paper. Agreed. But it just goes back to the point, wait till the party started and then show up, don't go to the party early. I made that mistake once in my life and I'll never make it again. And so what was I thinking? And I go, yep, these people are going to learn that lesson. And don't go in the party till the party started. So, and I think even, because I agree. And even then, we hadn't seen this shape so pronounced in the past. Do you think there's a difference in the markets? Because again, like the market was wrong that we were going to get the contango in 26. For obvious reasons and hindsight, we didn't know it in the past. But now obviously that turned out to be incorrect. So you're pointed like don't show up to the party early. But they still put enough pressure, that we had enough, you know, selling pressure on the belly of the curve to really pronounce that shape for a guess we were saying months. Do you think that there's just a greater, I don't know, like pejoratively like a greater hubris in the market that we have so much more data now. We have such a better view on the market. I like that because there's just more conviction in these trades and there would have been historically. - 100% it's a data. And it's the satellite data, it's the Kepler, the board text, the world that have created this confidence. And I think probably what it's done is it's, people have lost the ability, they're so wedded to the data that they've lost their ability to assess what's going on in terms of a big picture because at that point in time, by the way, part of the reason refining margins are absolutely screaming, you knew you, there was no more refining capacity coming on. We're there, we're there. And if you looked into 27, there was no more upstream. There's nothing, there's nothing behind that. So they were unwilling to even look at the factual data around the board. Now here's the thing that bothers me about that data is the accuracy of it's terrible. You know, I was with a trader that had a terminal and asked I think it was board text, so I think it was Kepler. Tell us one terminal, tell us what the mount is in these terminals. They couldn't come after three chances, couldn't come within 20% in a terminal in a noECD contract. And so we've got people making these large scale bets on stuff that they don't look at the bottom line. It's the data for that whole time period is tell you that glut never really existed. And also if you go, okay, you had extra ships out there. You had to have extra ships, and it gives you have two types of crew, two types of payment systems, two worlds of buy for you. So we live in a bilateral world, the China world and the US world. You need longer supply change, you couldn't use the Red Sea. There was a host of real reasons why you had that floating storage out there, but nobody actually seemed to actually focus on any of that. They just focused on all the data came out and said this. And I think what's happened is people have lost the ability to assess anything other than look at it. Also, I'm a big fan of electronic trading in many of these different markets. 'Cause I, in fact, I spent a lot of my time with quants right now. And I like in it too, like when Luke Skywalker and R2D2 would fly the X-Wing, R2D2 flew it all the time. You know, you know, you just Luke Skywalker to only take it when, you know, when Darth Vader entered the picture. But the point in you-- - The point in you-- - The trench in that, and you have to go down into there. But the point being is R2D2 could fly that thing a lot better than Luke Skywalker could. And I think that, you know, that I'm a believer in quant trading, and it's important here. The problem though is the quants key off of all of the information flow, the sentiment. In fact, if I were building a model to trade today, I would be trading off sentiment more than I would off facts. And you're looking at oil today, which means, you know, right now, and the government does, as everybody knows, it just keeps a sentiment and the headlines go in a certain direction, the machines will do what they do. Also, you get the trend going where they're going. So was I surprised the way the market was trading during that time period? No, you know, in terms of-- But the question that I asked myself today is what will cause it to go to another pricing regime? And by the way, the pricing regime, the revenge of the old economy or whatever you want to call it, was playing out from November of last year all the way up till April 8th. Yeah. Yeah, whether it was in metals, oil, whatever, the revenge of the old economy was working great. And then on April 8th, it was a risk of reversal of the magnitude of it was unlike anything I've ever seen before. And a lot of that-- Let's just stop there for a second. Because I want to split these two kind of Hormuz pricing regimes in half for a second. So let's talk first about the kind of-- It happens. We have March and April. We have our upward spiral with these pronounced jagged, kind of jawbone drops of $10, $15 a barrel in today on Monday morning. It was always a fun way to start the week. But we did actually-- we did spiral up to-- we didn't get up to $200. But we did get up to-- I think it was $144-- an all-time high nominal on data rent. And then a $20 to $25 physical deliverable premium on top of that. So we had $170 crude in the North Sea. If people were willing to pay it, late March, early April. Let's start there. Is that the way that you expected a Hormuz crisis? Good again. We've all considered it a bajillion times prior to this. Is that how you make sure it going? Let's say we don't think-- know anything happens after April 8th, yeah. Is that first trunk how you expected it to roll out? Absolutely. I mean, it was-- just right over home plate. There was nothing about it. The back radiation was an all time high. - Yeah. - By the way, $16 a barrel and WTA prompt. - Yeah, by the way, people are going, oh, Curry, when are you going to liquidate your position? By the way, I owned USO and B&O all the way through that. And by the way, I'm still up 40% why? Because the role, you rolled into that back radiation. You're always liquidating every single month. And I want everybody here. When you own a commodity, you can't hold it like an equity. You're forced to roll. And when you're rolling, you're selling at the peak and you're buying. So you're liquidating at the peak every single month, every single month, every single month. And it's commodities are unlike any other asset class on the planet earth, your long volatility. You're not short. Every other asset class is short ball. And it goes back to this whole point. You can't print molecules. You can't borrow from the future blah, blah, blah, so that you're end up with that back radiation and the spiking is on the front. So to your point, absolutely. Everything was working as planned. The equities were playing out. You're getting the rotation. Tech was getting smashed. It was textbook example. We'll be right back after this short break. [MUSIC PLAYING] In mining, the difference between a good project and a great investment often comes down to one thing-- visibility. Terra Hutton is a Sweden-based mining investor platform built to make the invisible investible. Even the strongest project can be overlooked. Geology is inherently complex and data-heavy. And when it's reduced to raw numbers, like drill results and technical reports, investors can miss the story. And companies can miss out on investments. 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We're offering oil ground-up listeners an exclusive 20% discount off their first full-year subscription by going to CamaradyContext.com/groundup. That's CamaradyContext.com/groundup for 20% off your first full-year. And now back to my conversation with Jeff Curry. Okay, so then we get the ceasefire. It's April 8th. We see this massive collapse, particularly in term structure. And I think one thing I was wondering in hindsight was does this, and again, as we've seen, we've collapsed on a flat price with a collecting term structure. We went deep into Prompt Contango briefly there. Is this, how much of this was a pure sentiment drive? And how much of this was a differentiated risk pricing from markets between the kind of, and we're gonna get this later in terms of inventory in the future, but how much of this was the market tolerating a couple more months of deep deficits versus the upward spiral risk of upstream facility damage, durable supply loss in the Middle East. Was there a difference in your mind in the way the market was pricing physical deficit versus still the ever-mountain tail risk of the true apocalypse scenario, which is, you know, advocate gets wiped out. They wipe out Rastonura, you know, all of the facilities in the region kind of get devastated. Like how much, what is that balance in your mind? - I don't think commodities are pimple on the butt. Nobody ever cares about them. What they care about is on tech. Tech. And tech was pricing in higher, you know, so the feed back into the broader market was higher oil leads to higher breakeven, higher breakeven, higher nominals in your pounding tech. That is the revenge of the old economy. You're getting a shift in the cost of capital. You're moving from long duration to short duration. Everything looked fine. And really what occurred after that was that's when the government and the rest of the thing that the message was, this is over with, don't worry about it. Interst rates are going down. We're going to see, you know, environment. The focus was so much on these summer capital raises that are behind us now. And at that point, that you just saw, again, the macro flows here dominate everything else. And so when we look at the macro, it goes back to my point. Liquidities, what's going to determine the price of oil? And by the way, it's not just the price of oil. I own a lot of that kind of stuff, all of that old economy stuff. There's no one, there's none of it. There's none of it that's gone well. My wife goes, why do you own this stuff? But the reality is that it was a liquidity suction, like unlike anything I've ever seen before in my life. How brutal that rotation was back. And by the way, that, that, I scroll with the SpaceX IPO. It's a single most, it was almost looking like that. Now you look back at, I wonder if like the US gave the Iranians like some of the SpaceX IPO because it was, you know that all I had to do was stay above that, the IPO price for five of the first 10 consecutive days that it traded, which is that MOU was assigned almost the exact same day as the, the SpaceX IPO. And they're just like, hold it up, keep it up, keep it. They keep the oil down. And so when I, you know, look at this, it was more, if there was one point that was being, it was calming the markets on the equity side. And by the way, the amount of leverage in that, that tech equity and everything. But the minute you've cleared, you've finished into June, you got the July 4th, the funeral, all of it, all the way boom, we're right back to the same place we've done before. You ask me where I'm surprised is why today, it won't respond. Because if you were scared back in April, by the way, the peak on oil actually is also when, when Trump went to Beijing, actually, if you really put it down, it just, it spiked around there and that 115, 120 between April 8th and then it just went straight down after that. And, but that's when it became clear that, you know, you had the massive equity capital raises, the US 4th of July, Uranian, funeral, blah, blah, blah, nobody wants any of that stuff interrupted. But now it's behind us and right now I'm confused. I don't understand why the market long. You're in good company. I am also very confused because I think, you know, and over the weekend we saw, you know, this last week has been, you know, definitively the most violent, most kind of, you know, porpoid for the MOU, since the MOU was signed announced a month ago. I just wanted to read you because I just, always good to timestamp. So we are 10 30 AM Eastern on July 13th, 2026. And, you know, 15 minutes ago, Donald Trump tweeted, "Draight of Hormuz is open, we'll remain open, "with or without Iran, we are reinstating "the Iranian blockade. "So named because it is only stopping Iran's "ships or customers for entering or leaving." It goes on to say that they will, they will be the guardian of the straight of Hormuz. And as a matter of fairness, of course, we'll be reimbursed at a rate of 20% on all cargo ship, which is steeply higher, I should note, than the $2 million for a VLCC that Tehran was using (laughing) a couple of weeks ago. Okay, talk about, and I'm gonna have a lot more of the price discovery questions, but obviously with everything that's happening, and when we had set this call up, it actually seemed like things were coming down a little bit still deeply unstable, but we weren't back in this kind of flare-up. Talk to me right now, 'cause again, I agree. If we're not worth the worst period right now, in many ways, since early April, so why are we not seeing prices respond? I was in New York a couple of weeks ago chatting with a bunch of traders, and the one thing that they all told me, it was a unanimous comment, which was all of our models have never been more bullish, but all of our risk tolerance, all of our risk limits have basically been 90, 95% down, 'cause they'll get beaten up extensively through that earlier period. How much of this is like, are commodities, so this is entire market just being driven by macro. Now, are commodities folks kind of in the corner, kind of licking wounds being like, "I hope this is over soon, because I want to go back to my models working." Like how much does this explain? By the way, the last thing any government ever wants is, investors in commodities. And I learned my lesson that no way. It was Christine Lagarde, she was finance minister of France. Her whole goal was get us all out of there. US Congress wanted us out of there. And you know, in fact, it was Christine Lagarde. You guys were starving people to death. I think was her comment back in '08 by driving up the price of commodities. In my way, she's succeeded. They don't people don't own any agriculture commodities, particularly in Europe anymore. And Trump wants them out. There are affordability questions. By the way, I don't to die with the arguments I made back in the 2000s. I still stand by. Yeah. You can get a spike by the investors coming in. But ultimately, the sellers come in and re-equivable rates. And then your back end to something that's fundamental fair value. And if anything, what happens is the investors buy it and give you a slower trajectory up to some repricing of a fundamental picture, bring in the supply. And that's why future markets exist. But the problem is policy makers don't like it. Now, I will argue that Scott Besson, he understands these markets incredibly well. And if you create volatility, they will leave the investors. And by the way, you look at the longs and the shorts in those markets. It's pretty consistent with the type of volatility that you've seen. People are gone. If you, you know, this is one of the arguments I made about. We also, why I'm so bullish longer term on commodities. The higher the ball, the lower the investment, the lower the investment, the higher the ball. It's a vicious cycle. It just gets worse and worse and worse. So it's no surprise to me that these investors have backed off. And by the way, if I'm looking at this, back off just on a call with a, with Boyhoo, I think is one of the best oil traders out there. He said, I've never been this bullish. Because this time, there's no taco for Trump. He can talk like this. There is no taco. And by the way, the Iranians, they're, they're, they're, there, there's nothing going to stop them. I mean, the bottom line, whether if it's Trump or Putin, they're both in a escalation trap on a read Robert Paye from a huge fan of Robert Paye's work. And the the escalation trap, you can't go back to your, your constituency and tell him you cut such a bad deal. So you're forced to escalate. You escalate until you can't escalate anymore and you go back. That's the trap. You just keep going back and forth, back and forth. And ultimately, by way, with LBJ in Vietnam, it was finally the, the, the, the, the, the, the Democrats who took him out in the end. And so, you know, whether, you know, Russia's in one of the US is in one now. So, you know, is, is going to be, you know, his ability, the inventories are lower, the situation is tighter, correct, you know, refining margins. The other point to him and talk about is, if I were an alien and came down on this planet Earth that didn't know anything about it, I would say, hey, we're out of refining capacity. We're going to do, we're going to do, we're going to get refining sites. We're going to get to the refining premise. But the bottom line is that, I think, you know, going back to your broader question, the volatility is what's going to. So I thought there's no way these, these current politicians are going to repeat what we saw in no way and just force you out of these markets. But they are, they are by creating the volatility is scaring people from making the investments and then the investors leave and that creates lower prices until, by the way, in this picture, I used to always have it was Gerald Ford with onion futures. He, he banned it and you look at onion futures when he got the investors out, they would do this and then straight up. Yeah. Also, coal, coal in 2008, Newcastle, coal, no investors, it went like this straight up. Well, WTI had investors, it just went, did it, did it, did it, it went all the way out there. You got the investment and it came off and it had no volatility because that's why you want the investors in there. But the problem is all these policy makers think the investors are creating the problem. No, the problem is there, which by the way, it goes back. What's the in game for this? It's just like coal in 2000, Newcastle, coal in 2008. Go back and look at it, did it, straight up. Onion futures when Gerald Ford first, you know, they did it straight up because it has no capability to anticipate the pothole. You're driving down. Yo, I see the pothole over here. Let's drive around the pothole. No, you're just going to go straight into the pothole. And so, you know, I think that it's unfortunate that the policy makers are like this. But I guess it's not a surprise and I was probably a little naive to think that they would, it's a different reaction function. By the way, the Chinese do this too. They don't like investors in these markets, which actually begs the question, why did I choose this as a career to go into affordability markets because affordability markets make it really difficult to be a fundamental analyst. But they're just so darn interesting. And they most of the time make a lot of sense. So like when you talk about, and you've talked about these like the jaw boning, the injection of these kind of varshocks, could you explain for our listeners what that means? Like the actual the actual technical side of why an explosion in volatility, why when you were saying best in those of these markets works. You explain it for the audience like why that works. You want to hear the lecture I get from my wife when she looks at the statement? Volatile nobody likes volatility. They want predictability. Actually, a really good way to understanding it was the IMF put out this report talking about how the US is equally as corrupt as Nigeria. Now the difference was that the US had predictability and corruption. Let's say if you're like in New York and you can build in an apartment, you got to pay the S best dose guy to go take the S best dose out. You know, it's 25k or whatever it is. But it's predictable. You know where it's going to be. In Nigeria, you don't know who's going to hit you up or how much it's going to be. So why does the Nigerian economy suffers because the uncertainty and the volatility, nobody likes that. They like the predictability of knowing what is going to be the cost of X, Y, and Z. So your point about talking to a bunch of oil traders in New York was, hey, you know, they the risk managers are going, I don't care how bullish the fundamental risk. Yeah, I agree. It's a 95%. I mean, everybody has been gotten their wings clipped. And ultimately, you know, that uncertainty. I guess the best way to say it, volatility discourages investment because you cannot predict the future is too uncertain. Yeah, Roy, you and I have been around these markets longer. I'm really comfortable in being logged. I can withstand this because I've been around it long enough and seen it. And by the way, the anybody who's going to trade commodities, you need to have 30, 40% drawdowns. It's just the fact of life. But you try to tell our risk manager, you're going to have a 30 or 40% drawdown. They're going to know no way. And also a lot of the strategies like multi-strats, you know, they just truncate the ball. They just take off the sides of the distribution. That's how they maintain those relatively high returns is by truncating the outcomes. You'll never get a blowout year out of a multi-strat. Now, are you going to get a bad year out of them? Now, the problem with commodities is once you start going from 75 to 125 and boom, boom, boom, boom, boom. People don't have the stomach for it. And by the way, we always said why that goldman business in the 2000s did so incredibly well is that the positions were so ill-liquid, you could never get out. So, when everybody got really fearful about, oh my god, what's going on? You're down 30, 40%, you couldn't pull the plug. You bought the view because you based upon fundamentals and the volatility was irrelevant. And I think that, so I think the summarizes the predictability is lost when you have a high ball and investors don't like the inability to predict. Yeah, so when we were talking about kind of everyone's models are bullish, and I think there's this question of, you know, this might be a forward, as, you know, a forward supply demand balance, which lots of debate about. But I think there's also this question of, you know, what's what's fair value for commodity prices for oil prices based typically on regressions against inventories. Inventories are low, prices are high, and backwardation is strong, particularly if you're drawing quickly, that, you know, the pace of that delta typically drives the kind of, you know, shape or kind of intensity of the backwardation or contango, and the level of those inventories kind of determines the overall level of the curve give or take, at least at the front. One thing we've seen through this crisis, and I think again, we've now drawn down, you know, a billion barrels of kind of crude from the system, whether or not that's pure commercial inventories or whatever's going on in China or oil and water, we're down a lot of oil and commercial inventories invisible OECD tanks are very, very low. A level so low that you would expect prices to be a decent chunk higher. One of the things that I've been wondering, and this goes back to this, our commodity markets anticipatory. My core kind of question I ask myself in the morning at, right, you know, every morning right now, is, has there been a short circuiting of the normal kind of relation? Because like, I think I always think about this asymmetry between backwardation that can tango to a degree, you know, when you have Some contango, you have to pay for some storage, deeper contango, more expensive storage. You know, you're super contango, 2016, 2020. You get like the super tanker trades and floating storage plays. There's a cost curve there that makes sense. There isn't the same explicit cost curve on backwardation. It's more on draw down incentive, kind of opportunity cost of holding. But it feels like at least in my mind that there's more play in what's fair value backwardation than what's fair play in contango. Is there this weird scenario right now where again, everyone generally expects that there's gonna be some kind of glut next year, assuming hormones goes back to normal, gigantic assumption, but assuming everything goes back to normal, UAE, Maxes, et cetera, et cetera, et cetera. We get the glut that we were supposed to have this year next year, but maybe even bigger. Or when we have really low inventories, historically, typically when we get into a low inventory position, the forward view on fundamentals is usually pretty bad too. That we don't have this, it's very rare to have a scenario where we get really, really low, but we know next year is gonna be a big surplus and we're gonna operationalize and fill those tanks. How much of that is playing into it right now that low inventories are not seen as much of a problem? Because well, we're actually gonna need that tank space next year, otherwise we'd be in a much bigger problem. How much is this play into it again, going back to that cube risks or kind of overconfidence in markets now, versus say even five years ago? - Well, I think part of it, normally you would argue is you take positioning over fundamentals. Just take OTC positioning, put them on top of fundamentals they're highly correlated. And that the speculator is the one who transmits price discovery. It takes that information, turns it into a price. That is the relationship between price and fundamentals broken down, other relationship between investor and fundamentals are broke. Well, you and I think one way they think another. Actually, I think part of it is that the analysts today and given their client base in the short term nature, they don't care about the longer term story. And so they're focused more on explaining where prices are today. You got the mini-glot. Bottom line, you have a mini-glot. Hit the front end, explain it that way. And I don't think there's any, there's no assessment of what the longer term fundamental picture really is. I mean, let's take all those equity out. It's what do they do in 27? By the way, you can sort of dart at a dart board at this point and probably be just as right. So why is the confidence coming from that, you're gonna have this mega-glot. And I am a little bit baffled by that. By taking, they're taking China at these lower levels, extrapolating forward, you know, the burst in production out of Brazil and can't, by the way, that Canadian Brazilian production was just the same story I had for decades and decades. It backs it backs up and finally it comes on, but there's really not gonna be anything behind it. But I think it comes from that. But the failure is not in the markets. The failure is in the investors and their positioning. So again, it goes back to liquidity. And there's the, you ask me if anything, I learned in all my decades of doing this, liquidity drives everything. And the liquidity is very bearish right now and it's not that much. They also remember is the amount in US equities. If you ask me if there's something mispriced here, it's US equities are just in La La Land. And so that the, in the amount of debt that sits behind it is even more worse. And by the way, the last thing they want is oil prices going out because interest rates go up and it kills it. But you know, looking at the question is why, so what little capital that is in this space is very bearish? And the, in the level of confidence is the part I don't understand. And I think it just goes back to their unwilling to look forward. And also the other thing that Dodd Frank did is it killed off all the liquidity out of the forward contract. So these markets are just sitting here focused on the very, very near term without taking any assessment of what the forward looks. So if you go, okay, another way, I'm round battling here. So I think the best way to summarize what I'm trying to say, is that the forward looking nature of the market was telegraphed through the investor. The investor today has no appetite to think past three to four weeks. Therefore these markets are just pricing today. Yeah. So now we're going to get to the, now we're going to get to the refining side because I think that while crude has become, you know, as it's come to pressure, you know, you got that, you were processing a bit of this mini glut, you know, it's some terms, you know, it's some kind of terms, structural weakness and prices, I think Brent fell, you know, very close or briefly into the high 60s, even which again, four months after hormones, you know, you had told me this a year ago, I'd have told you you were a crazy person. But let alone, this is where we are. But meanwhile, you know, product prices continue to march higher. And one of the things that when people talked about back in even March and April, when I very publicly was wrong about crude oil kind of creating towards 200, I still think we got pretty close with the 1, 70 and the RC. But clearly we didn't get as high as I expected. Things settled down earlier. But one question I always had at the time, and one thing I was never that confident in was demand destruction. The reason we were talking about such high prices was that we were going to need to fundamentally price demand destruction. But that crude doesn't actually, typically price demand destruction. It's the products that actually, you know, each product, each industry has its own kind of pressure points. And I was never that confident on what the split between say, you know, if you had $400 diesel, how much of that was $200 crude and $200 crack spread or $300 crack spread and $100 crude? Like that I was never that confident on 'cause I was never quite sure how that balance would work at Toyota with that. That would exactly. Now we find ourselves where I'm starting with screwing now. We have $79 brand, which is actually up about a 10 bucks a barrel on the week. But we also have $78 New York Harbor diesel cracks. You know, these are staggering. These are roughly as high as we saw at the peak of the crisis, just below the peak of the crisis in 22, kind of the peak of that summer. And we're kind of, and on a seasonal, and on a seasonal basis, we're at all time highs on cracks spreads for both our bob gasoline and kind of New York Harbor diesel. So the way I've been talking with this is like we have this situation where like, let's say you had 100 barrels of supply on upstream and 100 barrels of kind of consumer demand, but we only have 90 or 80 units of refining capacity in the middle. So now we have this situation where we have a weak crude market because we don't have enough crude consumers because the refineries the bottleneck and we have ultra kind of mega tight refined products. Talking about how, 'cause this is some of its hormones, we're still feeling the ripple effects both refinery loss in the golf. You know, we didn't have any offsets for refined products. China's still out of the market generally might be coming back in now, but obviously the massive kind of Russian bear in this is the massive wave of hugely successful attacks of Ukrainians drone attacks against Russian refineries. So like, talk to me about how you're seeing this play out on the refined product side. And whether or not, even if we did get a spiral back into broader war in the Middle East, do you think this would mainly manifest in crude? Or do you think it would just expire a leak stress itself in products if that bottleneck is still in the kind of refining space? - If this doesn't manifest itself in crude, oh my God, do we have a problem? And hopefully it does. In my car, you know, I sit there and I go, what if it doesn't? And you really, I mean, we know that refining capacity was severely constrained going into this. And you know that you've taken out what three million barrels per day out of Russia, we don't know, it was extended to damage. By the way, looking at those pictures, the amount of damages. And also what I found shocking here was normally Trump has a cow, you know, when Zelensky goes in and blows one of those refineries up, the Americans didn't say anything this time. And by the way, they couldn't have been hitting them without American assistance. So has the administration just gone? Yeah, I don't know. - They think they can just talk down the pump price. Is there maybe this freedom fuel? - Yeah, whatever. I own a lot of those companies in that talk of, by the way, if I've been doing this so long, I've never seen European oil companies outperform US oil companies. But with this talk of DOJ price fixing, the Europeans are the, thank God I got them in my portfolio right now. It's usually the Europeans doing, you know, windfall profit tax or something like that. But the reality of this is you lost two to three, I wait with China, everybody goes to mystery. No, China just cut the runs. That's all they did. They cut runs and then they cut the exports at the products. So I don't think there's any mystery there, but there's no way they can maintain it. So they got to come back. My understanding is they're coming back now. And also people go, why don't they come back? back with the margins. They're on a, they're in a committee driven energy security, national alert right now. They're not like, hey, margins are great. Let's crank it back up. Can we get the crew to turn them back online again? And so, and by the way, the people never experienced that they drew down the product prices. They have price controls internally. The rest of the world had a feeling because China was a big export or of transportation fuels. Yep. And so that that could go. So you lost the three million barrels per day out of, out of three out of China, three out of the Middle East and three out of Russia to the point that Russia is importing product from India right now. And she has filled some Japan. I was like, these are like crazy things. It is insane actually. But ultimately China will bring that refining capacity back online. The profits are too big. They'll chase it. So do you think this is something where like, because again, I think that like maybe, hormones could heal itself eventually, maybe, and we get some product back there. Eventually China, I agree, will come back. And we saw that even in the winter of 2223 where they, you know, you saw the rise, next pork photos that allowed the kind of teapots to swing in particularly in the distalettes and kind of help address some of that bubble that had built up or that frothingness that built a Middle-List-Lit Brax then. And I think that would be something now that would kind of help address that balance between crude and products again. The other thing that, and you mentioned earlier this idea that like the market is very, very bad thinking through the forward implications. And I think in fairness, like I can't think of a time where like the fog of war even six, 12 months out has ever been thicker. Like I have no idea what next year is going to look like. I can tell you a couple of scenarios, but I don't know. The other thing I think about with this example that we've seen in Ukraine, Russia is the, I would have, like this is something that's just so new. The vulnerability of these fixed assets. And you've talked about the revenge of the old economy. Imagine the old economy where it's like, oh yeah, all of a sudden, belligerent 2700 kilometers away can bomb your facility with drones. And you can't really do anything about it. Like the best you can do is like hang some nets above your oil refinery. The whole system just feels so much more precarious now that. I was shocked that the economists went out and did the Miyakopa on this. By the way, I think they pick out the dead pan bottle on it. But I think they double-ticked the bottom. Yeah. But the reality is how can you be saying this is over with when you have a mega energy crisis and something that's more serious than crude. And we don't know even what the, and whether, and here's the other point that I think gets lost is if, which is why Trump is going to have to be aggressive about taking back the straight is because ultimately, who's China's number or who's India's number one supporter or Iran's number one supporter? It's China. So China controls the straight. China controls the straight. China controls. He has 20 million barrels, but a very refining capacity against the US is 17. It controls processing of every single commodity out there. Now you're going to let them control the straight. So they control all the world's critical minerals, the atoms. They control all the world's molecules. They control the chips if they take Taiwan. And so then with the India, they control the world's calories. So they control everything that's important physically on the planet earth. How can you let that happen? And so I, yeah, I'm a little shocked at your point here is we're just getting going. I mean, this is just the same. This is, you know, I go back. We made the super cycle call back in, you know, October of 2020. I'm core, but it was decal, decal, globalization. The story just gets stronger and stronger after every iteration and people, by the way, do you know the best performing asset class this decade is Commaughts? Because people forget every one of those spikes, you're banking it in silver and gold and oil and refined products diesel all of it. You're banking it. And so that, you know, do it. Is this thing just the, you know, it's just part of the bigger process here or bigger scenario. And the more, the longer it goes, the more exposed you are. And then once they crank it up on oil, how much refined product do they have? And, you know, is this thing even close to being over with? And also the other thing too, it's pretty clear too that, you know, you had military of the ships that went into the Gulf. They weren't VLCCs going in there to get oil. They were container ships, banking military hardware in there. And it's like, guys, this is, the, you see the pictures this morning of, you know, missiles with game over USA on it, you know, it's just like, yeah, this is just getting going. And so when you think about your point about the risk, whether it fits in oil and copper and chips and food, whatever it might be, I think it's just getting higher and higher. But I think the key point here is your under invested begin with really low inventory across the board. It just leaves you more exposed. The ball, and you're at your point about going all the way up to 140 and coming down to 69. This is, this always happens in these, these types of events. And it's going to turn around spike again. Boom, boom, that's what there's nothing about this. This is a nice steady upward trend. And, you know, you go back and look at European natural gas in 21 and 22. How many times did you see it come back and you're like, oh, this is over with. And then people ignored it. Oh, Russia just cut all. Oh, wait. George Street 2 just blew up. Oh, don't worry about it. And then boom, it absolutely exploded into 22. So, yeah, I just calling this thing over and done and not being worried about, you know, the future, but I think it is missing the broader picture here. Even and I think also like this idea that if you had asked me prior to this year, what's the probability that the straight of hormones is closed for any durable period of time? I would have said like sub 1%, like vanishingly small. Always something we talk about is like the, you know, the thought experiment risks to kind of stress tests the first year, you know, analyst or whatever, really just stress them out. But it was never something that we talked about as like a real thing. Now it feels like going forward, sure, even if we get it open now, going forward, it feels like there's a 10, 20% risk on any given year going forward that we're going to see disruptions to the straight. And even if, feel like, well, the straights is decaying strategic asset that, you know, Saudi and the Emirates and all the rest of the golf are going to work really hard to build pipeline capacity to reroute all probably true. But it also doesn't one, not going to happen overnight, particularly for a rock and quay. And two, even on top of that, we know that while Iran is the easiest kind of like spigot to kind of twist and turn in hormones, it can still obviously threaten all the upstream facilities that feed these pipelines. You know, Fuzhera was hit multiple times through this war and is the outlet of all the Imradi pipes. So like, how do you even think about like going forward the forward risk to supply? Because this is the the other thing that I have been someone. I actually had a bit of like a bearish bias prior to this generally that I, I was an analyst that was born in the kind of 20, 2014 collapse in the shale revolution and everything else. I'm someone who has my entire career shorted the idea of political risk premiums that when we mean political risk premium, it's like it's a probabilistic assumption, a probability waiting to get some kind of supply. But we've actually already had the supply loss. We still are having the supply. It's no longer political risk. And I think forward political risk is just abs, you know, abnormally, astronomically high relative to what we've ever seen before. And it's something that like I can no longer in good faith, just like short political risk anymore because it just does different things now between, or moves between Ukraine and Russia's refineries between whatever's happening in China. Like this is just massive tectonic stuff that we've never seen these markets before. Not really. At least not that not since the kind of big upsets in the kind of 70s, 80s, etc. Like how do you think about the ability to like even even parameterize? Like how do you even perform some kind of like scaffolding around this risk out because going forward because the markets are going to need to price it to some degree eventually, begrudgingly or not. I just stick by my, by my saying, get long buckle your seatbelt, hang on for the ride. And by the way, that strategy's worked great. In fact, so far, again, if you just owned oil by rolling front month, you're up just to begin. I think you're up like 44% year to date. It's not a bad trade. Fine saying, actually, I think SpaceX done better, but I get, I will take all the bets, which one's done the best at the end of this year? I'm pretty sure I know which one's going to do best at the end of this year because it's just the reality is, come on, China's back in Iran, Russia's back in Iran, and Russia want this to end, China want this to end. Absolutely not. They want the US beaten, down-traded. And by the way, they're just going in there and doing it again. And this time around, you can be rest assured that the Iranians are locked and loaded and ready to do this again, all with Russian military hardware as well as with Chinese, whatever it might be. The last time was all surveillance. Who knows what it is this time around? Right Chinese drones. And it's like when Trump went out to Beijing, Putin went the week after and came back with a 17,000-page document. What a Trump come back with. So you got a you the wonder what the motives are here. And it's just like, you know, there's a reason why Iran's called the grave-wrought yard of empires. Don't go in there. And it's just, you know, to do the Russians, the Chinese, you know, you put the bricks. I the way I like in this and the other here in Europe and the Europeans don't seem to get this. This is bricks versus the G7. They're tired. They're tired. The West has been pushing these people around for 400 years. They're done with it. And they're not going to roll over easily. And they're now in a position where they really got them. And by the way, you, you know, all of you live in North America, complain about your governments over there. You live over here. It's like the day Ross Lephan was taken down. It was pure, starmer and, you know, Mark Carney taking a jog in the park and hide park. And there was not one emergency ministerial meeting. They just completely unaware of what's the severity. And, you know, we, it's think about with what Ukraine is doing with Russia. And now Russia's responding with much more heavier artillery on, on Ukraine. And the thing that these things, what's going on in Ukraine is not tied to what's going on in Iran. The other important point here is military military, you know, call it war kit 1.0, which was artificial muscle oil, which was war planes and ships and everything, those refuelers. Well, that stuff's not doing too well against, you know, war kit 2.0, which is drones and AI. And whether if it's Ukrainians with the Russians or the Iranians with the Americans, it's to think that this thing just doesn't get mudier and mudier as we go forward. And then we haven't even brought in, you know, what were our three criteria for being bullish commodities? One was declobalization, the war on free trade. And by the way, it started with Iraq 1 in 1991 was you had the fall of the Soviet Union and you had George Bush senior who went into Iraq, came with 10,000 body bags, used 147 of them. The thing was over there, but wow, the Americans are super powerful, Russia had fallen. That's when the globalization started. Me, that's created all the income and equality. It ends with Iran was the exact opposite. China exerted its dominance and the US is not doing too well. It's not that it's just the two, those are the two book ends. That globalization is over. So declobalization. And I think it's just going to, it's going to be building out new supply chains, you know, new military. You're going to have to have energy security. The list goes on and on. The second one was electrification. We called it decarbonization back in 2020, but we're going to electrify the world. And if anything was straight to harm lose, it's going to turbocharge it. Think about all the commodities you need to electrify the world. And then the third one was income inequality. I don't even want to. In fact, I'm just going to quote Paul Tudor Jones who just basically said that, you know, what's going on, you know, he called Elon Musk, the French Revolution moment. Whatever you want to call it, these people are going to get more angry and more angry. You know, I thought UK was, was my home. You can see it there too. It's all over the place. The income inequality. And by the way, the only way you deal with that is through debasement. You just keep pump of money into the system to keep everybody happy and to you run out of money. At the same time, you're building out your even your military to fight declobalization. So do I stand by those three things? Absolutely 100% and I think it's going to get worse. By the way, one last point about batteries. That's the way if you're asking for an investment. What did we learn from this war? Well, it's those big refuelers, those planes and those ships. They were, they were sitting duck for these AI drones. And so now everybody's realizing you got to get rid of the oil. You got to have batteries, battery batteries. And so, you know, I like to point out to all the greenies out there who created all the green tech. It was the military. Whether it's the nuclear power, man, solar, wind, all of it was created by military. Military's got its focus on batteries. And batteries are the only missing link to have a fully renewable slash nuclear power grid. And so right now, they're all guns are focused on. Let's get that battery. Small and compact where no drone can get it, get you. So, you know, we're moving really quickly in very, very different directions than we were three, four years ago. Certainly. I think that's probably a good place to end it for today. And again, I'm hopefully going to have you back on the future because we could do a whole episode on China, which we didn't talk about extensively in this conversation. But I really want to thank you so much for coming on. That's wonderful. Before I let you go, are there any things that you want our audience to look out for from you or look out for in the market? Give some, give some, give some folks some things to look at. I just want to make sure everybody understands that when you own commodities, you are long the ball. You're not long enough for training. Everybody goes, "Kurri, you got to your positions." I was out every single month on the roll. And that you, it's not like an equity, you're short ball or a bond market, you're short ball. Everything you know in commodities is upside down. And so that when you think about, looking at the environment right now, own something like the rolling front month. In fact, if I were you own like the like the Bloomberg petroleum index that has gasoline, diesel, oil, all in that thing. And that thing just is going to reset every single month. It just rolls and rolls and rolls. And that ultimately all I can tell you is the volatility is going to be absolutely explosive. So own an investment vehicle that pays you when the volatility explodes. Awesome, and we'll leave it there. Jeff, thank you so much for joining us today. So I wish you a lot of good luck. Thanks, Rory. It was a pleasure. The information presented should not be considered investment advice. 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