A Deep Dive Into Oil Demand

I'm looking at Brent crude here, sixty seven dollars sixty four cents a barrel, up about one point eight four plus. You know I also mentioned earlier, Matt, that article I saw on Bloomberg terminal four dollars a gallon, UH to fill up your car if you live in the state of California. Energy pushing higher. Let's get behind the drivers of this crucial commodity. We do that the Virginia Regina mayor Global Energy head for KPMG Regina, thanks so much

for joining us here. We're seeing energy prices move up, oil move higher. Is this simply a demand play here? As more and more vaccines get into arms on a global basis, the expectation is that the demand for oil will be rising as well. Clearly it is a big A big part of the story is demand and how

quickly demand has recovered. You know, prices are incredible and very buoyant, but I like to take people back to where were we one year ago this month, when w t I settled in negative territory, and now look at where we are, and I think there's still upward momentum because we're seeing some potential supply disruptions and it's still a question of how quickly opec plus is going to

bring back those surplus barrels into the market. And in addition, the world seems to have worked through the billion plus supply overhang that we predicted a year ago, so I'm excited. It's very buoyant. I wouldn't have predicted these fundamentals even six months ago, but the industry is quite quite favorable. How much of cramp on demand is the tragedy that we're seeing play out in India truly a tragic event um, and and that will have an impact on global demand.

But I think the the overall global demand story from places like the US and China are overcoming the tragedy that we're seeing in India as well as you know, the challenges that we're seeing in other strong fuels markets like Brazil. The market seems to be very bullish that demand will continue to increase. We've got summer driving season coming up, We've got summer vacation season coming up. People are trying to countries are trying to look at ways

that they can open up their borders. So even my refining clients that were pretty pessimistic about gasoline demand return and jet fuel demand return are are actually quite optimistic as they look into and definitely into alright, Regina. So the demand side seems pretty solid improving. Let's talk about the supply side here. Talk to us about OPEC plus and the pressure on some of those key members of

OPEC plus start ramping up production. Yeah, so it's interesting that OPEC plus decided not to have the meeting that they were going to have today. I think that shows that they're very confident in their strategy and they're very confident in the commitment that they have and a part of the members to retain the cuts and slowly trickle

those barrels back into the market. Um, there is still even after the two million barrels per day come back into the market, that they've committed will come back by the end of July. There's still six million barrels per day that they're still sitting on, So that is the governor against a huge price spike, and how they trickle

that back will be will be interesting. The sixty range that we're in now is not enough to balance the budgets of all of those OPEC plus nations, but it is a nice buffer that's building on their financial reserves. But I could see them trying to push it to see can we get Brent over the seventy dollar mark before we start more actively putting those withheld barrels back into the market. What do OPEC nations need to balance the budget? The most estimates are that it's in the

eighties UM for most of the countries. So I but I don't think the world can survive that. I think there will be a lot of pressure on the OPEC plus countries. You already saw it a couple of months ago with calls from the Biden administration into Saudi Arabia as well as calls from the Indian government into Saudi Arabia that we can't have crude oil price be too hot. You mentioned that it's four dollars per gallon in California.

The average retail price for gasoline in the US right now is almost three dollars, and that's for all grades in all markets. So I think we're sort of at that tipping point. Seventy for Brent might be as high as people feel comfortable. Um, but I think they're really enjoying threading the needle by keeping things relatively stable in the high sixties, which makes them more comfortable with their board looking position. Three dollars a gallon would be a

dream come true for me here in Berlin. I would drive so much if I had three dollars per game. What is it's it's it's about seven and change, I think right, it's um, I mean I tank up with shell V power, of course, because I care about my engine. All right, all right, So let's talk about the shale patch. Are we gonna start to see some of these share patch producers ramping up production and maybe mucking up the

works a little bit? I don't think so. And you know, you never say never with the with US exuberants around oil production, right that's in our d n A and I sit in Texas and I definitely don't pay as much as you do for your kathleen, um, but they are making commitments to their shareholders that the the returns above some of you even said above forty dollars per barrel will be returned in terms of dividend growth to

their shareholders. That could be a very strong message if we take those profits and instead of funneling it all into captics, we pay down debt and we return that cash to the shareholders in the form of dividends. That's a story that all of the large ones have told to the marketplace, and I expect them to hold to that. And I think OPEC plus will be watching rig counts

and US activity. Rick counts have had held very stable, so most predictions are we might get to twelve million barrels per day by the end of but I don't think we'll see the thirteen million barrels per day or higher and the exuberance that we saw in the shale patch to quote mark up the works as you put it. By the way, I sit in Berlin, which is why my gas prices are so high. Um, Regina, let me just ask you quickly. We only got thirty seconds here.

But having noted that, does the electric vehicle push do anything to hurt demand in the near term. Not in the near term. It only degrades about two um uh gallons of total fuel, and so we only see maybe a million two a couple million barrels per day coming off in the next five years from v penetration, and so it's just a drop in the proverbial bucket. I see, all right, Well that's what I thought, but I just

wanted to get it confirmed by the experts. There are a bunch of electric vehicles whizzing around here, but obviously it's not even close to um the majority, not not even close to half. When I'm in California, I see a lot more than really much more prevalent. Well, maybe California is the future. Man, Regina, thanks very much for joining us. Regina Mayor, their global energy head at KPMG talking to us about UM, this commodity price, the games,

maybe transitory. We're waiting for FED chair J. Powell. This is Bloomberg. Let's bring in now Stephen Kine. He is the group managing director and a portfolio manager at tc W. They have about two hundred fifty three billion dollars in assets under management. I know Paul when he was working in the finance sector. You must a musty when you go to stop out there every time he was on

the on the best coast. Stephen, UM, big day today, right because we had kicked off the day with news about the Biden tax plan, which is very big, and we're gonna finish the session with the Fed. Um. These two pillars to me seem key for your business. What do you make of the current environment? Uh? Well, what I would say, I think you're you're dead on. As a matter of fact, I think the bigger point as we think about the markets in general is the markets

are always affected by fiscal and monetary policy. But I think given the degree of involvement of the government currently not only in the uh COVID era, but as we move forward and the degree of involvement by the FED, I don't think the capital markets have ever been as as driven and influenced um by my policy right now. So UM, in terms of today and what's going on. Um, you know, I don't think there's much to talk about in terms of the FED. I think it's it's going

to be a bit of a snoozer. I wouldn't hold your breath for anything significant out of the Fed. The Fed is extremely duvish. They've changed their framework, as they've articulated uh numerous times to be outcome driven and not

outlook out uh look driven. And therefore, given that inflation is running far below the two plus percent that they're looking to see for a stain period and unemployment it's six, um, it would be shocking to see the Fed do anything but maybe tweak the language on on the current you know, statements around the current economic environment. UM. On the fiscal side, um, yeah, this is developing. It seems to be one big package after another. What's changing now is those packages are now

being balanced to some degree with potential tax increases. And we'll just have to see how things go. But if it goes in this direction, uh, not to get to uh uh you know uh loud about this, but you know, we could be entering an era bigger government um, and you know that could have bigger implications for for the economy long term. Alright, So, given where we are in the cycle here, Stephen, we have this reopening trade, if you will, We have in a comminent date of federal reserve.

We have fiscal stimulus, perhaps partially offset by taxes. What are some of the sectors that TCW is looking at, know and your unconstrained fund do you do top down but also a lot of bottoms up work as well? Yeah? Yeah, So kind of the good news bad news for UM for the credit sectors is that the good news is we do have significant fundamental tail winds in terms of

strong economic growth and good operating leverage for businesses. There's gonna be a lot of good earnings and cash flow and all those good things that tend to support risk taking. The bad news is that's already in the markets. Spreads are extremely tight. The the overall yield and the high yield market is just under four percent, So you're really not getting paid, uh for for taking a ton of risks. So as we look at sectors UM, we are up

in quality just due to the value and UM. One of the sectors that we think offers probably the best risk return is the highest quality sector outside of treasuries, which is agency mortgage backed securities. And the reason for that is that it's a FED controlled asset. UM they're buying forty billion a month and therefore really controlling the

price and the spread. And then the second reason, and what makes them really attractive to us is to buy them in the forward or tb a market where, due to the fact that the Fed's buying up all the net supply of production of agency mortgages, the financing rate to to not own the mortgages but roll them forward

in the forward market is extremely attractive. It's it's minus seventy basis points, so you're picking up one and a half to two percent spread to treasuries for a risk free credit, risk free asset that is controlled by the FED. That's you know, double the spread that you get from

investment great corporate bond. So we'd start there and then from there we would, uh, you know, go to other areas of the securitized market where you can stay relatively high in quality, double A, triple A in the non agency mortgage market, in the CLO market collateralized loan obligation UM, and you can get spreads in the mid one, you know, far better than you can do in the corporate bond

market with uh, you know, with reasonable volatility. When is the FED I'm going to be interesting, you know, we we had UM some people start to talk about talking about tapering and expecting that to happen towards the end of this year. Does that time frame make sense to you? You know, I think it's I think it depends on what happens in the economy and with inflation. UM. People tend to be focusing on the the Jackson Hole meeting or time period is when they might start to introduce it,

and certainly that's it's good. At time frame is any, but it really sort of depends on how things go. I think the FED is if the mark financial conditions stay loose, UM, I think the Fed will probably sit on its hands as long as it wants. If things start to get volatile at the market starts to um worry about inflation more than today, you could you could see the Fed move that time frame up a little bit. Hey, Steven, thanks so much for joining us. We really appreciate getting

your insights and thoughts there. Stephen Kane, Group Managing Director, Portfolio manager at t c W. As more and more people in this country get vaccinated, we're starting to see economic activity pick up the reopening trade, if you will. We're starting to see that in the economic data. Are we seeing it on Main Street America? Let's check in

with Don McCree. He is vice chairman and the head of Commercial Banking for Citizens Financial Group that's the New York Stock Exchange listed financial services company onto the CIBIL cf G. Don thanks so much for joining us here. I'd love to get a feeling from you as you talk to your clients, the businesses, the small emit sized businesses that you guys deal with. Are they investing in their businesses? Are they seeing a pickup in business activity?

You know, it couldn't be here fall it's a tuck you again. UM. We we're definitely seeing indications across the board of of companies coming out of their dormancy stage, at the stage as I would call it UM, not not huge amounts of investment going on, but beginning to see it in the form of a little bit more loan growth than we had seen before UM and certainly

seeing it in terms of the results of companies. Results are generally coming in broadly much stronger than we expected as as revenue lines recover UM and companies begin to get back to business. And of course it's it's at different speeds in different parts of the country UM, with with some of the southern states opening more quickly through the outdoor activity UM in the Northern States, but we're seeing it up north. Also, what kind of loan demand are you seeing and what kind of loan demand do

you forecast throughout the year. Loan loan demand on the commercial side, that's been relatively muted, and I think part of that is due to the significant securities issue instead of taken place over the last year or so. Companies are pretty flushed with liquidity, particularly the midsized companies UM, and there's lots of deposits sitting in the banking system. So what I would expect is to see some of that excess liquidity burned down before we begin to see

loan demand. What our what our base cases is really the second half of the year, we expect to see UH loan growth on the On the commercial side, we are seeing quite significant transactional activity, both in support of of M and A and then other corporate events that are beginning to materialize. So really record activity in the syndicated loan markets and continued record activity in the in the bond markets. Don I'd love to get a sense of kind of maybe the credit quality out there. It's

been obviously a very difficult period for corporate America. What's the credit quality of your portfolio right here? Are you seeing any cracks in there? Uh? It feels good. It feels a lot better than it felt a year ago. And you saw most banks including US released reserves in the first quarter, and that's an indication that the credit

is improving across the board. We still have a ways to go and things like you know, service businesses like hotels and restaurants who were only beginning to recover as the vaccines, uh take take hold across the country. But we're seeing every indicator of credit is improving. And you know, we had you know, billions and billions on watch a year ago and that's down by about seventy in terms of a total amount of credit that we're we're still

working through the back ends of the pandemic risks. What are your net interest margins look like? And what can you do in a in an environment like this? You know, we we were very deliberate around how we price credit.

Our Our net interest margin actually held up well in the first quarter um as we as we achieved slightly better spreads on our lending than we expected to by being disciplined, really because we were able to lower our deposit costs aggressively UM and with the with the amount of liquidity that's in the system, both on the consumer side and on the commercial side. UM, there's just a very attractive deposit UH costs to financial institutions right now.

You know that could compress a little bit as we go forward, but we're very focused on maintaining that interest margin. And of course, if you see a little bit of uptick in the tenure like we're seeing over the last couple of weeks, that helps a little bit in terms of doing interest margining DON in your business in the commercial banking business, are you guys looking for M and A opportunities to grow? Is that something that's in UH in the space that you compete in. Is that something

you're looking to do with the strategic vision going forward. Yes, so so a couple of different things. We we actually have acquired three merger and acquisition firms over the last three years. UM. Our M and A activity for our clients is at record levels right now. UM. It's it's really concentrated in changes ownership, where private companies are selling themselves to take advantage of what has relatively attracted multiples

and very very attractive financing markets. So the macros on the on the client side are quite good and on the M and A side are quite good. Right now for us, we're really focused on, you know, small add ons to the portfolio like we've been doing. We're constantly looking and what we really try to do is is build industry expertise by bringing on corporate finance and M and A expertise that we can differentiate with our clients versus competition. Don, what about clients who want to avoid

the step up basis changes? I mean, Um, these tax plan changes are significant. Must be significant to your wealthy clients and institutions. Yeah, they you know, the their their their proposals at this point, so there will see where they land. But I would expect some some form of increases of taxes. It's definitely accelerating things on the M and A side. So if we were, if we were in a robust market before the proposals that came out of the administration, I think people are looking to UM too.

If if they're sellers, they're looking to sell their companies probably within the calendar year of two thousand one. Don, thanks so much, great to get your insight you have a really unique point of view that I think is helpful for everybody looking at this market. Don McCree is the vice chair and the head of commercial banking at

Citizens Financial Group. Really a policy day today in addition to earnings, Matt, you know, we've got the Federal Reserve it too was John was just mentioning, which Bloomberg will bring you as well as President Biden's speech at nine pm Wall Street time again Walls, Bloomberg will be bringing that to you. So a lot of policy initiatives here that are likely to have a, you know, pretty significant impact on this economic recovery as this reopening begins to

really accelerate here in the US. Yeah. Absolutely. Let's check in right now with someone who knows a little bit more about, um, the policy and effects. Casey Matthews joins US Chief Investment Officer at U m B on what

we could get from these tax changes. In Casey, I want to start first with the with the arguments, Um, if this had happened ten years ago, you would have heard freshwater economists go absolutely nuts with the jump in a capital gains tax, even if it is for people who are in more than a million dollars a year. But as it is, it doesn't seem like there are any more freshwater economists with any cloud. At least all of the economists who have influenced these days are um

of the salt water variety or more um Kynesian. So where is the pushback on this? Well, good morning, you know, I don't think there's much pushback because our takeaway is taxes don't drive economic activity. There's all kinds of data out there. Even though every cycle, you know, you talk about your years ago, every economic cycle, every potential tax policy change has its own set of nuances. But yeah,

we know and economists know that. One the academic research says tax policy doesn't drive economic activity, and we can use the fiscal multiplier to prove that. And that is the bang for the buck that each government, that the government spends for stimulus, what happens if they spend a dollar, do we get more than a dollar of economic activity? And the data shows us that low and behold direct purchases of goods and services has the highest potential the

biggest bang for its buck to stimulate the economy. The lowest initiative would be corporate tax cuts and tax cuts for um, high way earners. So this stuff doesn't impact economic activity at all. It's not a catalyst, it's not a driver. All right, Casey, how much do you think, uh, these tax increases, the post tax increases are economically based i e. To pay in part for President Biden's fiscal

stimulus plans. And how much is maybe social i e. Trying to deal with the income inequality, wealth inequality, the redistribution type of issue. How do you think about that? Well, I would go back and look at the empirical evidence that we've seen tax policy changes before, and some of these things just um. I think it was Mark Twain who said maybe history doesn't repeat itself. Maybe at rhymes, but we hear a lot of rhyming right now. Right.

So back in UH was President Clinton who changed the highest marginal tax bracket for individuals from to thirty nine point six. He bumped up corporate taxes a little bit, right, So, I don't know. I think it was for economic reasons were trying to do. That was the Deficit Reduction Act in Lowell Behold that had little impact on the economy and no impact on markets. And we saw it again

in two thousand and thirteen. Of course, President Obama changed the top marginal tax bracket on those making over four and thousand dollars a year, So you can see this rhyming. And even in nineteen Apartment two thousand thirteen, I mentioned that these cycles have their own nuances. The tenure Treasury rate went from one point seven to three percent that year. But she would think would be negative for markets, negative for economic growth, so I would probably be in the

economic camp. I think what they're trying to do is just pay for the stimulus to make sure we um get out of the COVID recession, stay out of it, and get back to a sense of normalcy. One of the things, one of the changes were likely to see. We just spoke with Don McCree over a Citizens Financial and he told us private companies now are looking to to sell in this calendar year, a lot of them

to avoid things like step up basis changes. You know, if you're gonna get danged, or your kids are gonna get danged when you when you pass it onto them, you may as well sell and deal with it in a different way. Do you see that kind of behavior changing some of it? Yes. Of course, with these smaller family owned business. I don't think it's driven again by uh, capital gain taxes or the elimination of the stept up cost spaces. The family wants to run the business and

they feel good about it. They're just going to row harder, if you will, case some more tax in row harder. But I would tell you the the empirical evidence suggests you see some behavior changes. So back in when capital gain tax rates were increased, you saw realized capital gains surged by And this isn't the public markets the same thing in two thousand and twelve, but there was a change in the capital gain tax rate, realized gains increased by. So yes, you do see a slight change of behavior

when you have some of these tax policies. But you don't see a drop an investment because that's the concern, the sort of awesome concern, not at all. Because here's the thing. I mean, of course, when we talk to our clients, a lot of small business owners if the tax policy change changes to some degree, are they going to sell risk based assets? What you think about it? Just using the SMP as a proxy. Last year we made this year, we're up eleven. You're gonna sell those assets?

To avoid some type of tax to what go by a tenure treasury at one point six ten year yield? Right, I don't think so? All right. Veriously, we will pay attention certainly to the Feds for noon, and obviously President Biden tonight to get a handle on his tax plans. Casey Matthews, economist and chief investment officer for U m B Bank giving us his thoughts, and certainly we will cover both of those later on today and this evening. This is bloom Work. Thanks for listening to the Bloomberg

Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Miller. I'm on Twitter at Matt Miller three, and I fall Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.