Iran Tensions Firm Up Bullish Picture For Crude

They certainly rallied a little bit off of the geopolitical uncertainty over the last several days, but perhaps not as much as traders initially would have thought. We're gonna get the latest from Wells Fitzpatrick Wells as a managing director equity Research covering all things UH expiration and production for

sun Trust Robinson Humphreys based in Houston, Texas. Well, thanks so much for joining us, so give us a sense of how your stocks, the E n P stocks kind of have been reacting over the last several days to what appears to be a little bit more volatile energy space. Yeah, thanks thanks for having me on um. As you said, prices of jump, but only about two bucks um. You know, that's a that's a relatively modest move that tells you that the market isn't pricing in any sort of crisis

related outages. And you know, of course without those crisis related outages, we're going to be in this kind of fifty five to sixty five range. That being said, what the heightened tension does is it firms us up at the top end of that range, which is is massively

important for the group. I mean, the difference between fifty five dollars and sixty five dollars on w T I is a difference between two times that to EVA don one and a half, or the difference between being free cash flow neutral and having a seven percent free cash flow yield for the group. So, even though we haven't seen a big move UH from the recent escalation, it's good to have us firm up in in the upper end of that range, and that should be able to

carry on to a pretty positive the names. One interesting development over the past week or so has been the dramatic outperformance of shale companies versus the major oil producers, and I'm wondering whether they are taking advantage of this pop in oil prices to extend their credit lines with banks to borrow more money, basically to push out any kind of financing gaps in order to prevent or immunize

themselves against a drop in the value of oil. Yeah, no, that that that that's a great question, um, and and will certainly see it help them in revolver redeterminations in the first quarter here. Uh, for a lot of these guys. That's going to be very important. You bring up a good point because some of the uh, the higher debt load gods, I'd point to maybe an extraction, maybe a whiting that move from fifty five to or from sixty five to sixty five excuse me, takes them from three

times to two times debt. So it's really it's it's a heck of a lifeline, um for these guys. Uh. You know, as far as refinancing and the bond market still seems a little bit cold on the names. But um, you know, of course that can turn pretty quickly if if we stay up in this range and companies throw off the metrics that should allow them to well. If if oil does stay up in this higher range and

that that helps the balance sheets. Do you expect to see a pickup in consolidation activity in your space, or do you think a lot of the bigger players might sit on the sidelines. It really depends on how the stocks respond. Um. I think that given what we've seen of consolidation, it's more often I don't want to stay force, but you know the company is being consolidated. Don't always

have the strongest hand. And in so much as a higher oil price will strengthen these companies, I mean, just looking at the forty five companies that we follow, it adds over ten billion dollars in in Eva da UM so, so they'll have stronger hands and they'll be able to to maybe defend against that a little bit better to go and a loan strategy will look a little bit better. Uh So, I I wouldn't expect it to to accelerate,

uh that trend with the major's coming in. And the other thing worth pointing out is at this point, the majors have a heck a lot of shale, especially in the Permium basin, which, as y'all know, is is the favorite basin right now. So there's not necessarily a burning desire for them to get anything unless it is quasi distress and of course this this turns out around a

little bit. I'm wondering if you could zoom out and give us a sense of how long lasting you think this popping oil prices uh is and whether we has more legs in terms of upside. I mean, do you think that, barring some further escalation, oil prices can stay where they are? Do you think that the pressure is lower? Frankly, I think they could stay where they are, and I

think that they can go higher. I mean, you know, I understand that it's been three or four days since since the attack, and and so it seems as though there's a calm. But what's worth remembering is that the Supreme Leader declared three days of mourning and the likelihood of them attacking during that three days was pretty small. Now that three days is coming to an end, so the next hours are going to be very important for

the oil markets. Um And and you know, Lauran has made it very clear that the military option is still on the table. Really, the first time that that would have come to fruition is today, So it's worth keeping a close eye on if if you want to look at it from sort of short, medium and long term effects from a short term. We obviously we got the

popping crewed. Another thing that we got about that people don't talk quite as much about is we got a premium in the US contract, So the US gained about two bucks in the media and aftermath of the attack versus Arab light um. And then of course Iran abandoned the nuclear deal, so more international pressure could take another three hundred thousand barrels out of their exports, which would

take it to zero. And most importantly, most importantly, and I think some people miss this, is that the other thing that this does is that if a democrat wins, this makes it so much harder to uh to find it to taunt with with Iran. And that was the nightmare scenario, was that in one you have at the tont and one to two million barrels of Iranian crewed come back into the market. This makes that vanishing lee small chance of happening, and of course underpins a more

bullish longer term viewing group. Hey, wells, what are the companies that you cover doing in terms of production as you look forward to they taking advantage of some some higher prices here? Well, actually, it's it's it's it's been a little bit of a shift um. As you know, the sectors touch out of favor to say it, to say it nicely, UM, And and the company's have been moving towards free cash flow buy backs, etcetera. Which is why

you know that range of fifty to sixty five. It's so important to be in the top end of that range when you're throwing off high single digit free cash flow yields and you can actually deliver. Uh, you can actually deliver on that. But in general, the growth rate in the US has really really slowed. UM. I mean oil or gas for example. Uh, the e I A predicts that gas production will be flat December to December, which is is really remarkable coming off the growth that

we've seen. Oil will be up, but it'll be up a lot more modestly. I mean, you're talking December to December of something like four dred thousand verses. You know, prior years you're north of a million, So you have a pretty dramatic pullback. And I think that the incremental cash that will come in the door from this higher price will likely be used to fuel those those buybacks as debt repurchases, um, etcetera. To to really fix the

financial situation versus putting more holes in the ground. Well, Wells Fitzpatrick, thank you so much for being with us. Well As Fitzpatrick Managing director focused on energy and research and e m P sector generally at sun Trust Robinson Humphrey. Joining us now is David Wayner of Bloomberg News. David, what was the biggest takeaway that you got from this press conference? Yeah? I think I think exactly that he's responding to this sort of wingering question that many people have.

What is the U S strategy in the Middle East? What is the U S strategy and Iran specifically? And I think what he's trying to say is this, you know, this is tethered to a strategy. This is part of business as usual for US. You know, we have a strategy in Iran which is a maximum pressure campaign, UH to put you know, maximum pressure economically on Iran with sanctions to respond to any threats that they have against US troops or US assets. UM. And that's what we

did when we took out Solemney. So I think he's sort of trying to um to really show that the that there is this sort of holistic approach. Interesting, David is there any sense within Washington d C the extent to which this administration will go uh, if there is in fact the next step a retterritory step for the U S. If in fact Iran UH does retaliate. Yeah, I think we're we're being a lot of different uh, you know, a lot of different signals here. And that's

definitely sort of a billion dollar question here. You know, what what would the US do if Iran took action? Around is carefully signaling and uh and making it very clear that they plan to to retaliate, but within some sort of um, you know, within some sort of confines of what they call international rules. Right, Um, So we'll have to see. But I don't think we have a clear signal of what the U S would do. David Winner stick with us. We want to bring into the

conversation Ariel Cohen. He's senior fellow at the Atlantic Council and founding principle of International market analysis. Ariel, can you give us a sense of whether we are getting a clear picture of what the US has planned and how far it is willing to go in response to any

retaliatory measures taken by the Iranian government. Well, I think uh, Mr Trump is articulating a very strong stance, probably went too far referring to cultural sites, as we witnessed at this press conference and from the statement of many American politicians, experts, et cetera. People are very uncomfortable with US um committing any kind of war crimes, and justifiably so we shouldn't.

But in terms of Mr. Crump being Mr Trump and missing with Iran's Iranians heads UM, I think he probably did it, not fully, not being fully cognizant what he's getting into. In terms of the actual fight, UH, Iran is no match to the United States extentionally and of course not unconventional. They don't have nuclear weapons as far

as we know. But in terms of this indirect warfare, the they excel in UM terrorist attacks, UH, subversion, weaponizing Shia minorities throughout the Middle East, UH, the creation of the so called Iranian Crescent from the Mediterranean to the Holy City of Comb in Iran. They're doing all that. They are now less one um quarterback, and that was

Mr Sulimani. General Sulimani UH. He was not a regular military He was a paramilitary leader who was engaged deeply for decades in terrorist activity and in that respect his elimination was justified. So Ariel wanted to get your thoughts on a Secretary Pompeio said that Iran's nuclear program is more diminished than it was under the j c p o A deal that President Trump pulled out of. Is that in fact the case from your understanding, I'm not sure, and these things are very nicole and you need a

lot of classified information to really analyze it. If Mr Pompere, who has better access to a classified information than I do, says so, uh, it would be m a challenge to all of us to prove him wrong. Uh. The question is how many centri futures they have running now, and the fact that they're already the Iranians already made a

classic Iranian move, we killed soley money. They're moving on a different chessboard, and on the nuclear chess board, they're saying there are no limitations anymore, uh, in terms of enrichment. So that means they can go to enriching all the way up to nine that they need of uranium enriched

in order to produce nuclear weapons. The other question I'm asking myself to what extent countries with nuclear expertise who are engaged in a strategic competition with US, Russia and China are going to help Iran now to develop their nuclear the potential nuclear um web and especially the means of delivering the rockets in the warheads. I think the

war warnts are absolutely key. Yes, well, and actually David that that brings me to a question that I have, which is what is the international response, both from allies as well as UH non allies of the United States to its actions with respect to Iran. I think you know what you're hearing from, you know everyone, both allies and U S ravals. There's you know, calls to the escalate There's some lot of sort of behind the scenes

UH discussion going on. A Reef has already said, UH confirmed that he's going to be at Davos, although he didn't get his visa so far to come to New York. He was supposed to be at the United Nations on Thursday for a Security Council meeting. So there's a lot of back channeling going on, a lot of calls for the escalation UM even the sort of you know, the regional U S allies such as Israel, Saudi Arabia and the U A E. Uh, they're not interested in an

escalation here. Israel has been relatively quiet. Um. I mean they praised the US action, but they're distancing themselves from specific strike on Sulamani. So UM, you know, I think there's gonna be a lot of uh you know, quite a quite a significant attempt to reduce tensions here. And I would also note that you know, Iran has generally responded this way when something like this happened, rhetorically speaking, but in terms of action, Uh, they're going to be

very careful and calibrated. And I you know, if you if you look back to the last time someone really senior uh in this apparatus was thinking was was killed Imad Mougnia Hasbalah, but he was very close. Uh. It actually took maybe you know, a decade. Uh, it took years until you saw a reaction. Um. And so it's gonna take some time for us to see the repercussions of this Aria. What do you think Iran will do

in terms of retaliation? What are their capabilities? Well, Iran demonstrated a totally chilling capability when it knocked out half of Saudi oil producing UM infrastructure, including the Abu Kaiks facility, which is absolutely crucial. I war gamed a strike on Abu Kaik and the Saudi facilities about ten years ago. The results were much worse, much more catastrophic that than

what we found today. Why because of the massive US oil producing capacity UH from shale so uh, the Iranians are capable of doing a lot of damage to the Saudi oil capacity and that may tip the global oil market,

throwing the prices into a much higher rage. On the other hand, people ask me if I think they would block uh blockade the strait of hormones, the bottleneck through which global oil is moving out of the Persian Gulf to the global markets, and I said no, because this will be Iran shooting itself, not in the food, but

in the head, because that would stop Iranian exports. And also on the table as the US warning, not the fifty two cultural site, but very uh important, very vital to Iran um Hard Island Oil terminal that is responsible for the majority of Iranian oil exports. If they make a big move uh, they're Hard Island Oil Terminal will be UH in play and potentially devastated by the US Airport. Harry'll Cohen, thank you so much for being with us Aero Cone, Senior Fellow at the Atlantic Council and founding

principle of international market Analysis. Also our thanks to David Wayner and Bloomberg International Government Reporter, both commenting on that press conference and the US strategy with Iran. Time to check in with Bloomberg Opinion, we welcome Jim Bianco, President, founder Bianco Research. Uh. He is based in Chicago. Interesting, Uh, Jim just wanted to get your thoughts just kind of on the last few days the the re emergence, if you will, of geopolitical risk coming out of the Mid East.

How does that kind of fit into kind of how you're thinking about the markets for you know, the thing about it is everybody's wondering when is the next recession going to occur? Because it's been eleven years since we've had one, and it's the longest period that we've ever had. And I've been arguing that the natural state of an economy is to expand it will expand forever and ever, but it never does because something comes along and breaks it.

In the leading cause over the last many decades of breaking an economy in the recession has been a spike in energy prices. So when you get these events that you've had in the Middle East over the last week or so, you start to wonder if history is going to repeat itself again. Are we going to have a spike in energy prices and will that bring down the

economy like it has so many times before. And I'll remind you that in two thousand eight, we did get to a hundred and forty seven dollars on West Texas Intermediate by June of two thou eight, so there was spike of energy prices then as well too. A lot of people are expecting that the next move for the Federal Reserve will be lower than the Federal cut once more this year. That's what's being priced into the rates market.

I'm wondering, do you think that that is required in order to keep the economy going or do you think that the FED should cut more or not cut at all? I do. I do lean towards the FED cutting um. I think that they will cut one more time. And if I had to uh put a bias on that, I think that the bias would be that they would more than once uh. And I think they would probably

do it in the first half of the year. They will definitely once we get into the second half of the year, try and sit on their hands because of the election. But history shows sometimes they're forced to move on election right before elections. Remember two thousand and eight when they did some of the most extraordinary things they've

done in their history literally days before the election. I do think though, that if you look at the shape of the yield curve, it is back positive, but at only twenty six basis points, it is well below its long term average, which should be about a hundred and twenty basis points, and it is telling us I've always looked at the yield curve is being something very simple, is that when the yolk curve is inverted, are very flat, it's a market signal that maybe the funds rate or

the policy rate is too high, especially when it's inverted, and even when it's very flat. And I would call twenty basis points where we are now flat. So I think that there's gonna be downward pressure on interest rates and the lack of inflation. The thing that the FETE has been scratching their head about should be embraced by them and say, look, there isn't any there's room for us to lower interest rates, and I think they'll eventually

come to their view. Jim, do we still need to worry about that short end of the curve the repo market that was obviously much in the news several months ago, a little bit less so today. Yeah, No, I definitely think we should worry about it. Um it is. It has been drugged into submission by the FETE. They've just buried it with with supply. They've supplied m repubs to the tunes of hundreds of billions of dollars and brought another hundreds of billions of dollars of bills to keep

the market quiet. All Right, it's quiet. It's not a problem. It's not an immediate worry today, tomorrow, next week. But what is most concerning is I don't hear a plan from them on how to fix this. I don't hear a plan for them on how to get out of this. Other than that they just keep throwing the junkie a dime bag every week and saying here, we'll get you the next week. We'll get you the next week. That being just more repose supply every week. That's not a

long term fix. It's been four months. It's time for them to kind of step up to the plate and say, Okay, here's how we're going to fix this problem. I might add I think I know why. I think they know that. The reason is that they've overregulated the short end of the yield curve. It has not been able to come to come to grips with that regulation. They need to

back off that regulation. But they've been getting pressure from no less than Liz warrened Sheila Bear former FDI c had Alan Bleer, former Flights chairman the FED saying don't back off on the regulations. Okay. If you don't do that, there's no way to fix this problem. And that's why I think they're kind of stuck right now. You've got away with words. Jim Bianco throwing the Junkia dime bag.

I love speaking with you, and Jim Bianco always a pleasure, President and founder of Bianco Research and a Bloomberg Opinion contributor. Joining us from Chicago and actually interesting, uh to see that today the REPO operation operated by the New York Federal Reserve was oversubscribed for the first time, and a couple of the operations, So showing ongoing demand for this liquidity at a time when there are a lot of

questions about the REPO operations. Well, the fourth most read story on the Bloomberg terminal uh this today is about the credit card business and gas stations. Apparently the gas stations are not prepared to accept the chip reader credit cards and apparently that's going to be a big problem. Really interesting story here. Jenny Seraine, the reporter on that story, finance reporter for Bloomberg News, joins us here on o Bloomberg Interactive Broker Studio. Jenny, I didn't even know this

was a thing. Scope it out force. What's going on? Um? Yeah, I think a lot of people maybe haven't been um, you know, it's like it's not some thing a lot of people pay attention to. But basically five years ago here in the US, we started making this transition to chip cards, um, and so people should be seeing that, you know, at your regular Bodego, your regular grocery store instead of swiping we now dip UM and gas stations

have been a little bit behind. They were given a little bit longer of a deadline to make that upgrade because um, you actually have to rip out the pump from the concrete and you know, replace it there. And it's a very big expense. Um. And so the industry kind of recognized that, um. And so that deadline is actually replaced the whole pump as opposed to just some little thing that accepts the corder card. Yes, so the hardware for this is just a very unusual beast um.

And so yeah, these gas station operators actually have to rip out from the concrete. Yeah. Well that's actually interestingly this story. I gotta say, I noticed that the people who were quoted where people who are involved in the installation of some of these events saying they're woefully behind. They gotta get on this. I mean, how big of a push is uh their ports on their part. I

think everyone realizes that the deadline is coming. Um. And so what that deadline basically means is that after October, if a gas station hasn't upgraded its systems, it will suddenly face all liability for any card fraud that happens at the station. And so it's a big expense that's coming for these station operators. UM. But yeah, the industry just says it's going to be really tough to make

it on the credit card side. How much more secure is the chip versus the swipe And by the way, I really I want to incorporate that into my lexicon instead of swiping we now did okay? Carry on? Um? Yeah, well it's uh. So the chip was basically designed to

head off counterfeit card fraud. So that's uh. You know, I think a few years ago the real risk was hackers would attach skimming devices onto the point of sale um, and so when you swiped your card, they were able to get all of the card data and then basically go and make a counterfeit card and use that wherever

they wanted to. So the chip basically heads that off by each time you dip your card, it creates a unique number, and so even if the hacker has infiltrated that point of sale device, they can't go and make copies of that card and use it wherever they want. So that kind of fraud is what this is really addressing, and it is a lot safer. You know, we've seen uh counterfeit fraud dollars fall by you know, more than fifty since the deadline, and so it has addressed that.

Now hackers don't just go away because you've taken away one form. So we've seen a subsequent increase in other types of card fraud that the industry is now trying to address. But UM, at least for counterfeit card fraud,

the chip did do what it was supposed to. Different When I'm over in London for business, I noticed people just kind of tapping their card and so when I walk up to get us pay for a sandwich, the person going to counter just like size because now they have to dip it and do it exactly signed something. What's that technology? Why don't you have that? It's it's coming. So the US is woefully behind the rest of the world in terms of adoption of tap to pay UM

and but it's coming. So you've seen it so far. The m t A has started to install these readers on the subway, so you should start to see that more and more. And I think retailers kind of UM and a lot of ways follow transit. So when you see these big transit operators adopting that technology, you should start to see other retailers. But yeah, it's this one area of finance where you know, the US has long been a leader, and so many things within the credit

card industry. But this is where we really fall behind. Well, going back to gas stations. If they're spending all this money to implement entirely new pumps to dip rather than swipe, are they gonna have to do it again so that we can tap? So it should be one upgrade. Um, that's what you've seen with a lot of the other retailers who had the deadline. Um, so it should be one upgrade. Now, just because a retailer adopts the dipping does not mean they have to adopt tapping. So some

retailers have said they don't want to. Um. There's a lot of different reasons for that. Um. You know, a lot of retailers are starting to come up with their own forms of mobile payments, so they maybe don't want you know, someone walking in and using Apple Bay. So you've seen a little bit of kind of differentiation. It's another area for retailers to kind of catch up. You know,

they've got a lot of catching up. I have to say, I can just imagine someone coming up to one of those things and just like taking their card, just like snacking it and then dipping it and sliding it. I mean, honestly, at a little confused after a while. Jenny, do carry cash? I am a weird millennial that does carry cash. Yes, you are a weird okay, because this kind of goes

to the issue of kind of the cashless society. And you actually see some stores as a restaurant, I guess they're right here on election to navtu you know, sign out front and we do not accept cash. Yeah, but it's kind of a gimmick, isn't it. I don't know, it's you know, it's actually a big debate. Um. Folks actually are now saying that going cashless might improper, you know, take advantage of poor people who only carry cash and don't have access to financial services. I carry cash. I

always carry cash, carry cash. No it asks, but I do. But not that anyone should really back. How much does it cost? It sounds like a lot um, so it can vary. The averages are right now about thirty dollars per store um to upgrade all of your pumps. And you know, that's really hard for an industry where profit margins are less than two percent, So it's a really big outlay at any point in time that these gas station operators are gonna have to make swipe, dip, tap, swipe, dip,

tap and swing. Thank you so much for being with us. Jenny Serena, I'm gonna get I'm gonna get absolutely pummeled for saying that Jenny Serena is a Bloomberg Finance reporter training us here in our eleven three oh studies or Interactive Proker Studios. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa Abram woids

I'm on Twitter at Lisa Abram Woyds one. Before the podcast, you can always catch us worldwide on Bloomberg Radio