Transcripts
Erik: Joining me now is Goehring and Rozencwajg co-founder Leigh Goehring. Leigh, it's great to have you back on the show, we've got an exciting topic that's a little off the beaten path for today's show, which is the connection between commodity prices and changes in monetary policy regime. Now I'm sure a lot of listeners are going, what? Why don't you start by explaining what does commodity prices have to do with monetary policy?
Leigh: That's a really good question, Erik. And the answer is, I really don't know. However, as I'll explain, as I go through my talk today, is that we're now entered into a situation where commodity prices are radically depressed relative to financial assets. And, in fact, they've never been more depressed than where they are right now. And if you go back over the last 120 years, which really represents the modern financial world that we live in, there's only been three times previous to this instance, where commodity prices have been this depressed.
Erik: And what do you mean by this depressed, depressed relative to what?
Leigh: Relative to financial assets and primarily, say, just use a broad index like the Dow Jones Industrial Average. And what you do is you look at the returns of what commodities have produced relative to the level of the stock market. And going all the way back to 1900, that it turns out, like I said, there's only been three periods previous to this were commodities that have been as cheap relative to financial assets, in this case, represented by the Dow Jones Industrial Average. And what were those three periods, the three periods were the late 1920s, the second period was the late 1960s, and the third period was the late 1990s. And then you have today, which is basically represented starting in like 2019 to 2021.
Erik: Joining me now is Rory Johnston, founder and CEO of Commodity Context. Rory, it's great to have you back on the show. Our listeners frequently request your return on Twitter to discuss the Strategic Petroleum Reserve, which we'll delve into in today's interview. However, I'd like to begin by addressing the question of supply balance. Essentially, many industry experts, including Goldman Sachs and JP Morgan, anticipated a significant oil supply deficit in Q3 and Q4, possibly around 2 to 3 million barrels per day. This would have been a major development. Yet, it seems that this deficit did not materialize or started to do so in Q3 but has now faded. We're not observing substantial reductions in EIA inventory. What could explain this discrepancy, and why did experts expect a 3 million barrel per day imbalance? Is such an imbalance real? And if so, why isn't it reflected in the data?
Rory: Well, so this is the strange thing happening right now. So I run my own global oil demand and supply balances as well, just to kind of give myself a sanity check on these estimates put out by the big outlets, and my data is also showing very considerable deficits, at least since May and June and continuing right through to August and September, where the last data that I have is kind of tabulated for. So the balances, like the deficits, are there in the data. But I think it's pretty reasonable to say that no one looks at the market right now and says it's a market that looks like it's 3 million barrels a day in deficit. So I think there are probably a couple of places where you begin to see leakage away from that, call it paper deficit, to a real tangible deficit in the market. I'm sure we'll talk more about Iran later. But I think, you know, looking at a couple of easy examples, understated Iran production levels, I think are one area where you could probably get 200-300,000 barrels a day of extra balance on the supply side. I think China is a massive question right now, I think Chinese demand looks exceptionally strong, which definitely seems to be holding up the entire demand side of the world at the moment.
But on the other side, it does definitely seem to be running kind of orthogonal to the broader macroeconomic data and narrative we're seeing coming out of China, you know, vis-a-vis the economic slowdown, the issues in real estate, and kind of the traditional heavy industry sector. So I think all of that, all I'm trying to say here is that the supply-demand balances that we all love so much, as you're saying, are useful tools. But I think when you see realized outcomes in the market differ considerably from what you'd expect in the balances, you can get to look and say, okay, something's wrong. And you'll begin to start, you know, questioning and kind of troubleshooting essentially, like, what's wrong with the model? And I think, you have to kind of look through all those things.
And the questions around, you know, where are the biggest question marks? Well, you have things like that China demand and Iranian supply. You also have stuff around things like, for instance, that EIA data, which is a kind of a constant kind of talking point in the market, this is crude oil supply adjustment, which was very, very large, and particularly in the weekly data that one follows so closely. But what do I think the first thing that's important to note is that a positive, you know, crude oil supply adjustment in and of itself, people always talk about it as this bullish factor, but it is definitively a bearish factor. It means that the data you're seeing, the data we include in our models, is either understating supply or overstating demand. And I think most likely, and what the EIA is on investigation to found is a little bit of both. When they looked into this, the two major factors they identified as driving this crude oil supply adjustment higher were one, basically an understanding of blending demand or barrels of natural gas liquids, they were effectively being counted as crude, either in exports or in input into refineries. And the other thing is essentially an understatement.
So basically, you're overstating demand because this blending demand wasn't really demand, it was just kind of coming back into the supply side. So what they did was create these transfers to crude oil supply column in their balances. And this has reduced demand, in particular, by about six or 700,000 barrels a day, which I think is, again, these big chunks, notably go towards closing that balance and making this data make more sense, especially since these adjustments exploded more recently, so they're going to have a larger impact on more recent data. The other thing that we still know is that, that was only part of it and they've begun adjusting that in the monthly data, and they will begin trickling through to the weekly data in December. But then there's also this question of this understated production, they probably have kind of maybe 300,000 barrels a day more there, where that will begin to be upgraded and go forward as they're planning in March, I believe. So those are a couple of things that you start to whittle away at that balance, but I think the bizarre thing is that even all that together, it still looks like a reasonably tight market on paper. And it looks like a reasonably tight market, if you're looking at things like calendar spreads, not quite as tight as we were at the kind of peak of prices at the end of September, but still, you know, very backwardated. You know, Brent today is trading at like a buck and a quarter a barrel versus prompt versus the second month. WTI is a little bit weaker, but still in that kind of clearly backward area. And I think, inventories, like you were saying, total petroleum inventories aren't as hot as you would have expected. But crude inventories continue to decline or at least range trade sideways, when they should be building at this time of year in the US data. So it looks like the crude oil is tight, looks like the diesel market is reasonably tight, but you then have these like pockets of very weak conditions in natural gas liquids, in gasoline, etc. So it's a very, very messy market. But I think it's, you know, looking at everything, it still looks like crude is at least reasonably tight, even if it's not, 3 million barrels a day tight.
Erik: Joining me now is Saxo Bank's commodity chief, Ole Hansen. Ole prepared a slide deck to accompany this interview; you'll find the download link in your research roundup email. If you don't have a research roundup email, just go to our homepage macrovoices.com. Look for the red button that says "looking for the downloads" above Ole's picture. Ole, it's great to have you back. I'm really looking forward to diving into your slide deck. I love the 747 on the splash page there. But let's dive into slide number two.
Ole: Well, let's do that, Erik. Yeah, first of all, thank you very much for inviting me back. It's obviously continued to a very interesting time to be involved in the commodity sector, for good or bad. And movements are seen everywhere. But yeah, let's start with a conclusion first. Basically, our view is that the commodity supercycle is still alive. It's much driven by tight supply than it is by demand. And I think we're seeing that also unfolding across some of these key commodities. Right now, we've had a significant correction, as we can see on this slide. Bloomberg's spot indexes have corrected almost half the gains since the low in 2020. But have started to recover somewhat in during the past three months. And actually, so far this quarter is looking quite promising. But I've highlighted some of the reasons why we believe that the commodity sector will continue to be supported. Simply because in some cases, prices are not high enough in order to attract the production that is required for some of the targets and future goals to aspirations to be met. I mentioned some of them.
I think the first one we're seeing in full flow right now is the fragmentation game that has been ongoing now for a number of years. We're seeing production being reshored and friend-shored. It's having a quite significant positive impact on the US economy. But it's also helping to drive up prices, because it's no longer necessarily where the price of the cheapest that they are being produced. So that's having an impact. The green transformation we all know, and I think the structure of inflation is one that we cannot ignore. We are seeing the, and I got a slide later on just showing how the forward inflation expectations are already starting to pick up again. So we're not going to settle at the central, as the FOMC is, the Fed's long-term inflation time, we may dip, but it is not going to be where we were, we eventually settle. We think that will support commodities. And then we have tight supply. We have seen that in the crude oil market right now due to politically motivated decisions to keep production tight, but we also see it elsewhere across the food commodities and some of the mined metals as well.
Erik: Joining me now is HonTe Advisors founder, Alex Gurevich. Alex, I'm really looking forward to this one. Before we get started, I just want to salute you, sir, because it is so refreshing to me as seeing so many people in this industry, hiding from their mistakes and not admitting when they screw things up your most recent research note, which most people would only send to their research customers, you've actually shared with the whole world. And it starts in the very first paragraph by saying, hey we got some stuff wrong, and we got some stuff right almost. And then we need to talk about what we got wrong. It is just so refreshing to me to see someone with that much honesty and candor directly addressed their clients and everyone else and acknowledge when some of their calls didn't work out, which always happens in this business. That research note is linked in your research, Roundup email, if you don't have a research roundup email, just go to our homepage at macrovoices.com. Click the red button above Alex's picture that says, looking for the downloads. So what did you get right, what did you get wrong, and what happened with the stuff that went wrong?
Alex: Well first of all, thank you for having me. And thank you for your kind words, it's good to be back. The world is indeed somewhat different from how many of us have imagined it even a little while ago. And this note was written in a spirit of like me contemplating what it is that I have learned over the last couple of years. And in this note, specifically, I focused on understanding the persistent nature of inflation. That is, if I asked you Erik, one question, what would you like to know if I asked you? What do you think the inflation is next month? And I can give you only one piece of information about this of all the economic numbers. Do you know what that would be? I don't mind. I don't mean to put you on the spot. But do you have something coming to the top of your mind?
Erik: Joining me now is Forest for the Trees founder, Luke Gromen. Luke, it's great to get you back on the show. It feels like it's been too long, although it really hasn't been. I really want to talk to you about the US dollar. Our friend Brent Johnson says he thinks we could get a retest of that what was it, 115 that we saw on the dollar index. Looks to me like if it got that far, it could go all the way to about 122 or so, which would break a lot of things. Is that a possibility? Are we looking at the potential of the dollar moving even higher than it's been and if so, what would the consequences be?
Luke: Yeah, I think it could move that high. And in terms of what would the consequences be, that would break the US Treasury market, that would break Western sovereign debt markets, that would break US banks, Western banking systems, it would accelerate even further dedollarization of global commodity markets. You know, headline today that China and Brazil just did a deal end-to-end in Yuan, which would only send the dollar higher, force more deleveraging. So, it would break the US dollar system. It's a paradox that most people seem to think that the dollar rising is a sign of the US winning, it's not. It's a sign of the US dollar system unwinding itself.
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