Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
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All right, we need to get.
The latest reporting from Israel and obviously a fluid situation. Ethan Browner joins us. He is the bureau chief in Israel for Bloomberg News. He's in Tel Aviv. Even thanks so much for joining us here. Can you give us the latest reporting from the ground in Israel?
What's developing right now?
Sure, we're still in basically a large waiting mode for Israel to begin the next part of its massive operation. Still his three hundred thousand guys in uniform. They've kind of they've built a contemporary base with infrastructure near Gaza from which they're going to launch operation. It's almost certain it's a ground operation, but they haven't officially announced it.
At the same time, the Americans have sent a bunch of help because the Israelis say that their material is fairly stretched, both in terms of their ability to monitor from the air what they're hitting and even basic things like helmets for their soldiers. They say, everyone has a helmet, but some of them are old and lousy, and there's
some protective gear some. By the way, some of the protest movement that was working very hard against the government has now turned itself into a fundraising operation to help troops and families in the south, and they've raised tens of millions of dollars in order to excuse me, I'm sorry, in order to help those in the south and soldiers get protective gear. So there is a lot going on at the same time as southern Lebanon. People are afraid
that something's going to happen there. They are driving away that could because his ballood does decide to come in. I live in Tel Aviv and we have had missiles from Gaza hit Tel Aviv three times today. Hasbella is also known to have long range missiles that can reach here, so it's pretty intense.
So Ethan, what does it look like to a mass three hundred thousand soldiers.
Outside of Gaza.
I mean, that's a large number of people for an area of land that I'm going to say is roughly the size of you know, New York plus Westchester.
No, look, it's a good question. I mean they're not all in one spot, but I mean there are because there are people have gone north there, people have gone to the West Bank.
There are people.
But three hundred thousand men are in uniform as reservists, So.
It's a lot of people.
I agree with you. Now, they're obviously going to try to take them into Gaza soon because they feel that they need to strike while the ironness out, while the world still has in its mind the images of the slaughter on Saturday, of kids at a rave concert and families that are key boots and so on. So they clearly want to move quickly. One of the things that they've had more trouble with than they expected is was the sort of securing of the south and the border fence.
They have largely done that now, but that was so incredibly breached by Hamas fighters on Saturday, and they now it looks like there were probably close to two thousand Hamas guys.
Who came in on Saturday.
They'd been saying one thousand, but today they said that they found fifteen hundred bodies of Hamas guys, and they've taken a bunch of people prisoners, so it's closer to two than one.
So ethan, what is the expectation for the next step for Isra? Are they going to send in tens of thousands or more troops into Gaza? And if so, what would be the objective?
So they're not, of course telling us, and we can only speculate, but the objective seems to be to put in a large way, the way they're saying it is, it's to send a message and make clear to Ramas that it never again will carry out an attack like it did on Saturday. It will not have the capacity because we're going to take down every ability of their to do so. Now, is this really possible? And if you go door to door in this way, aren't you going to lose a lot of guys? It does seem
like they're going to lose a lot of guys. It feels like they have decided that they're going in that there is an almost existential cause that they think that they have here to send this message not just to Ramas, but to the greater greater region, to Isbela and to Iran that Israel is willing to lose people and to fight in an ugly way to It's a very interesting shift that has occurred here because just a week ago, if you like, it was all about making you know,
the new Middle East with Saudi Arabia and railroads and optic fibers. And now it's we are we have to send a military message of muscle, and that's what we're focused on.
Now.
It'll I think it's a hell of a gambole. We shall see where it goes.
Do you think we're gonna have to see this fight broadened out? I mean you mentioned hes belaw is lobbing down missiles from Lebanon, and of course all of this hamas Hesbelah is funded. I think, to the tune of I heard this morning, ninety three percent by Iran.
I'm an.
So you know, I suppose you can have an academic debate about whether or not Iran new every single detail of this plan and green stamped it at every step of the way.
But it doesn't really matter.
If they're the ones who are funding everything, you need to take the fight to them.
Well, I mean, I don't think that they want to take the fight to them, right, I mean in that would be a really a kind of regional conflagration that is almost unimaginable, both in terms of supplies of oil and everything to the world and the number of people involved. So in fact, the US has sent this big fleet right to the eastern med it's on its way to send a message to his Ballah to say don't send any missiles down, and to send a message to a Ran to say we're going to limit it to this.
So I don't Ran meanwhile sending messages saying, if you guys go and start killing people in Gaza, you should know that you're.
Going to pay a price.
We don't know what that means, but it may mean something. So I don't think the goal here is to bring it to a broader front, but it may happen anyway. I'm not sure how well thought out this all is. I do know there is an incredible sense of fury and humiliation in Israel, and I'm not sure that makes for the best laid plans.
It's definitely scary.
Yeah, I wonder what the mood is like on the ground, Ethan.
I mean, you're you know, covering this.
I imagine in a professional sense every waking moment of your life right now. But when you stop and reflect personally, or when you look around at the you know, human costs. I mean, how terrifying is it.
It's terrifying.
It's utterly terrifying. And and I'm you know, I'm not in Israeli and so I don't have that same sense that they have. But I have been amazed since Saturday morning at the complete shift turning on a dime of people I know here who all they cared about before was stopping the judicial overhaul and trying to drive Benjamin Sanyahu from office, And now all they want to do is go in and be hard asses in Gaza.
They it's just.
They want to go in and they want to fight back. They've there's almost like a genetic impact here on Jewish DNA and Israel that what they saw happen on Saturday reminded them of the Holocaust, reminded them of pilgrums, reminded them of things that they decided to build this state to stop from happening. And that sense deep fury and cause and purpose is everywhere right now. I know it won't last, but it is everywhere right now. And when you see also videos of the soldiers gathered near Gaza.
They are pumped up and they are ready to go in.
So, Ethan, how are the folks. So you're in Tel Aviv? Now, do you have family there as well?
I have cousins, I do have a wife. I don't have children here kids in New York.
Yah.
Yah.
I'll be interesting to see because it's just it's such a difficult situation there on the.
Ground, very difficult.
And everybody's got kids, cousins, brothers, husbands and who are now in uniforms. So a lot of people know people who died on Saturdays as well.
All right, Ethan, thank you so much. We really appreciate getting some time with you. Ethan Bronner. He is the bureau chief Bloomberg News in Tel Aviv, Israeli bureau chief. Appreciate getting a few minutes of his time. We understand.
I'll tell you what we don't is you know, we haven't and we don't I guess on radio or television go into the horrendous crimes that were committed over the weekend.
I mean Ethan mentioned the.
Mass murders at the music festival, and when you read some of the reporting about that.
It's just so bad that it's hard even to talk about publicly. No, and that's why.
And I can't imagine how human beings would do that. You know, maybe someone a sick individual, but how would a group of humans do that to another group?
And that's why getting Ethan's on the ground reporting was fantastic to get a sense of kind of what he's seeing with the people on the street and how committed they are to you know, going in and kind of re and re retaliating. So again, probably some more difficult news before it gets better over there, but we will obviously have full reporting going forward.
You're listening to the team Ken's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business app, or listen on demand wherever you get your podcasts.
All right, let's bring in Ira Jersey here. He's a chief US interest rate strategist for Bloomberg Intelligence. We're going to get some inflation data over the next couple of days, and I think most people feel like it's going to show continued moderation in inflation, both at the producier level and at the consumer level. If I'm the Fed, is that enough to kind of say, all right, I can just sit on my hands for a while and see how things play out. Is that kind of how it should be?
Well, assuming we do continue to get moderation, I think that there's a risk that some of the moves that we saw last month in oil prices are going to maybe lift the headline numbers a little bit, particularly in the consumer price data. But it's really the key, I think will be the core inflation data. So what is core core CPI? Does that continue to moderate and assuming it does that, then it probably gives some cover for the Federal Reserve to to not hike again in November.
I still think that that, you know, there's less than fifty to fifty chance that they actually do at this point, and I think things like, you know, global geopolitical tensions increasing certainly is something else that will weigh on whether or not they're going to hike interest rates again. So so yeah, you know, I would argue that that, yes, this data that we're getting this week is critical, but it's there's a lot of other moving pieces obviously.
To the to the mathematics of another hike or not.
One of those moving pieces, I guess is real rates, And in intense it reminds me of Mike mclonoy says higher prices are.
The best cure for high prices exactly.
I guess it's the opposite in the bond world, right. If these prices fall to a loone enough, everyone's going to come in and start buying them.
Yeah.
So I think for rates, you know, there is a level where where bond yields are attractive. And certainly when you look at things like tips yields two and a half percent, you know, a little bit lessan two and a half percent for ten year tips yields, You know that I think is pretty attractive to some people.
But then when you go back and you look at the historical.
Context, where were those types of yields in the late nineteen nineties when tips started to trade, and then before the global financial crisis, you still had tips yields that were.
Were three percent or above.
So I think from when people look at these charts, it's only relative to the last ten or fifteen years that real yields are particularly high. So I do think that though that you know, they're not they're not unattractive at these levels would be would be what I would say. And now there are much more interesting inflation hedge than
they were when tips yields were negative. Right when tip yields were negative one hundred basis points, that meant in order to you know, just to break even, you'd have to have inflation of at least one hundred basis points. But you know, for a bond investor, you want to have a return above inflation.
And you know, we're finally at a.
Level where I think people could be comfortable that we're reasonably enough above inflation in terms of the yield that you get that that you can continue to see some some nipping at the at the edges there, especially if the Federal Reserve is going to be done hiking rates.
Well as you well know, I it's world known here that I have taken recession off the table, and I think the yield curve is kind of supporting me here. I'm going at the inversion inversion of the yield curve. It's only negative thirty basis points today, and back in July was you know, north of one hundred.
So what's that tell you?
Yeah, So, so it's not a surprise to me that we've we've become less inverted. It's the way that we become less inverted that was a little bit surprising to me. So, you know, our our view had been that as the Federal Reserve winds down its hiking cycle, that we'd see two year yields start to come down versus ten year yields basically staying the same, and we've gotten.
Just the opposite of that.
And I think that that's a reflection and a major reflection. Not so much of that the Fed is going to be done, because the Fed, even if it hikes again, is probably done after one more hike. It's more how long do they keep rates at this level and if you're right, Paul, and we don't get a recession, which is more or less the view that we take here at Bloomberg Intelligence rates strategy is the yields can wind up,
you know, basically pancaking. So we're calling it a pancake of a yield curve where you can have two year yields, five year yields, ten year yelds basically at the same ish level and wind up maintaining that for the next six to nine months, and then you probably start to see, you know, calls for a cut, people worry about growth in twenty twenty five and the like. Because the longer the Fed holds rates high, the deeper a recession that
the market's going to price. So I do think that eventually it's going to be time to get into what we call both steepening, which is buy two year notes, keep ten year notes kind of market weight or underweight, and then you wind up seeing a pretty significant steepening of the YILD curve.
What would do you think cause the Fed to cut rates? Are we talking about unemployment breaching a certain level for and a half percent for example? Is it about the speed rather than the level, you know, if it jumps up all of a sudden to over four or.
Is it about you know, GDP slowdown? What do you think?
Yeah, so, if there's some kind of exogynous shock that causes mass layoffs, then certainly the Federal Reserve would take notice. But remember I do think that in this environment, and given how difficult it has been for the Federal Reserve to kind of get inflation expectations and maintain inflation expectations to be relatively low, I think that you have to have not only an increase in the unemployment rate, but you also have to have a continued decline of inflation.
So in a situation where you have the PC deflator running at three percent or three point two percent and the unemployment rate rises a little bit over a few months, I think the Fed still on hold. Right, They're still going to be worried about that inflation component of a lot of the data, right, and their mandate. They do have this dual mandate, which sometimes makes a little tricky
for them. Right, If you're the European Central Bank and you only care about inflation, then you know, it's a little bit easier to kind of manage your rate and rate expectations. So I do think it has to be the unemployment rate rising very quickly, but only in an environment where inflation is moderate continuing to moderate.
HIRA.
When you talk to your institutional investor clients, the folks you've been talking to for years, what's the trade they're talking about most these days.
Yeah, So it was a couple of weeks ago. The idea of being long duration because typically typically the longer end of the yield curve does pretty.
Well when the Fed.
When the FED stops its hiking cycles, and I think
a lot of people were the wrong way. So people are a little bit nervous and and you know, don't want to take big positions right now because there's a lot of uncertainty and the direction not so much of monetary policy, but more in terms of positioning in the market, what the supply story is going to be, because deficits continue to be run pretty high, so people are worried that there's there's been a supply shock a little bit, although that's our data and our work suggests that that's
not as much the case. But nonetheless, I think there's a lot of people out there who got burned and would just rather you know, stay market wade or just sit on their hands and not do a lot. Yet, until there's you know, a more significant it becomes much clearer what the direction of the economy and monetary policy is going to be.
Hey, Ira, how's liquidity in the marketplace? If I if I call up my you know, the Govey desk at you know, JP Morgan and Goldman Sachs, can they make me a nice deep market.
They haven't been able to recently, so the liquidity has been pretty poor.
Are really in the last eighteen months.
And I think a big part of that is just because the market's gotten so big, and the pipes that all of this money and all these bonds have to flow through is it has basically remained the same size. So you have a lot more flow and a lot more supply out there that needs to find a home.
And on the other side, you know, you don't have dealers that are willing to take on the size and warehouse risk the way that they were you know, prior to the global financial crisis, prior to the Basle new Basle regulations that that kind.
Of constrain the way that dealers can operate. So part of the.
Reason why we've seen a lot of the volatility in the market has been a little bit of liquidity, you know. That being said, like top line, like, if you want to do you know, social what I call social size, you can probably.
Get it done.
But if you want to do a bigger trade, it's going to be more difficult to get off. So people are going to add leg into these trades, which just means that you might have, you know, longer.
Periods of time that you have to shift your risk around.
So another reason why you might just want to sit on your hands for a little while.
What about the auctions and especially any longer dated treasury auctions. How much do dealers, primary dealers take down now?
And you know who's the rest?
So dealers actually have been taking down historically tiny amounts.
So in a lot of in a lot of.
Treasury auctions, dealers used to used to take a bulk of auctions, you know, forty forty percent, thirty percent. Now in many many auctions they take less than ten And it's really the demand from domestic asset managers and foreigners that wind up being the mix of buyers of these of these auctions.
There is higher.
Savings now than there was, say fifteen years ago in the United States, when we had a significant amount of dissavings. So some of the money ends up going back into into into various you know, we call it savings vehicles, whether those are insurance funds or or even baby boomers, you know, shifting money out of equities and into fixing come mutual funds or ETFs.
All of those flows to.
Combined and meant that asset managers have been you know, by far the largest buyer at auction.
All right, are thanks so much for joining us as always. Ira Jersey, chief US interest rate Strategists for Bloomberg Intelligence, joining us from Princeton.
You're listening to the tape. Ken's our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Matt Miller, Paul Sweeney live here in our Bloomberg Interactive Brokers studio looking at pepsi. They reported some results a little bit better than expected. Let's break it down. We can do that with Ken Shay. He's the senior analyst covers beverages, tobaccos, and cannabis with Bloomberg Intelligence. So we're going to break that down. Ken, Thanks so much for joining us here talk to us about pepsi headed our friends there in Purchase, New York.
Do Yeah, hi, Paul. They did really, really well, you know, as is PepsiCo style. It was a report that exceeded expectations as they normally do. But you know, sales were up a nice strong high single digit rate EPs came in about fourteen percent. Both again beat expectations, and importantly, the underlying trends were good. The games were broad based, international was really strong, which off set a lot of currency had winds still, and the company's outlook was also favorable.
They lifted their outlook for core EPs justice for currency up a little bit, and they even went out unusual for them and looked out to twenty four and I think of a lot of detail, but they said that, you know, their long term algorithm, which is mid single digit revenue and high single digit EPs growth, looked like it was going to hit the high end of those ranges. So overall you had to have a hard time finding a lot of fault with these numbers today.
What is the what is the the currency headwind? Is it the fact that the dollar is so strong that the revenues they're bringing in from elsewhere are lower.
Yeah, that's right. The recent strength of the dollar, uh, you know versus the pound in particular has been weighing a little bit on their on their reported numbers. You know, that's been going on for quite some time now. It made extend a little bit further. But again, I think the underlying fundamentals of the business are are are very favorable. I think that's what investors are looking at. You know, they're also looking at this whole notion of the obesity drugs.
You know what I mean to jump to probably a question that was coming up, but a lot a lot of investors were nervous about the talk about obesity drugs. How's it going to weigh on the snack and confection of food companies. They seem to allay those fears and said, look, there's no real evidence of that happening now. And you know, I'm looking at you know, the past per capita consumption of salty snacks and it's been rising at a you know, low single digit steady rate over the last few years,
higher than sweet snacks. So I don't see really being an issue in the near term. I think that's helping the share of sentiment today.
Well they have I mean, they expect core earnings per share growth of thirteen percent.
At costan currencies.
That's strong.
Organic revenue growth forecasts at ten percent, so that's big and I wonder if the you know, we talk obviously a lot on the show about the GLP one drugs, the obesity drugs and their effect on consumer discretionary stocks. And you know, after news like what we saw at Walmart last week where they said people who get these drugs have a smaller calorie basket, that makes sense. On the other hand, we also talk about weed a lot, Ken, and I'm here to tell you that.
The wait is the crazy bunches.
The craving for salty snacks and sugary drinks. Probably I'm guessing rises.
If you're using marijuana products.
So I guess these things are kind of running across currents, aren't they.
You know, that's I agree, Matt. And that's a potential a trend line that they don't point out, but it's probably there. You know, other long term secular gains to their favor, you know, or when you think about a company as global as they are, you know, it's the urbanization of you know, consumers. You know, they have access to more access to convenience stores or a lot of these things are sold rising middle class and wealth they
can buy these evaluated products. And then consumers today, at least that I do anyway, you know, I graze throughout the day every time I go, you know, buy the kitchen I'll grab something, you know, a snack or something, and that's how people eat today. The traditional three meals are kind of going out with the dinosaur. And so this play all those play really well at a Petsico's business model.
All Right, So Pepsi COO the dividend.
They've got a little more than a three percent dividend. They've got a lot of cash on the balance sheet. They throw off a lot of free cash flow. What's the dividend story, what's the cash return story for Pepsi.
Yeah, so PepsiCo is very balanced when it comes to the capital allocation through long term capital allocation and prioritizes dividends, you know, select on a selective basis. They'll buy some shares back. And you know, their algorithm is, you know, with sales growing a mid single digit and EPs growing high single digit, low double digit, they believe that even you know, at a current pe they can kind of churn out kind of a low double digit total return
for investors. And that's kind of what they've been doing. And you know, if the if the algorithm's working, why why break it? Right, So this is what they've been saying for a long time, you know, and the company pointed out today their stability. You know, you've looked back five to ten year there's a lot of been a lot of macro shok events, pandemics, earning economic expansions, slowdowns,
you know, disruptions and Europe whatever. And they keep saying the same long term algorithm, and they've beaten revenue expectations of the last five years one of the time, earnings expectations ninety five percent of the time. So the company pointed that I was saying, you know, there's a lot of questions about these these obese drugs and so on. You know, we're just going to keep doing what we're doing, and we have a pretty good track record in meeting and beating our guidance.
By the way, I must drink five to ten cans of flavored selter water every day every day. I mean, it's it's huge. I think in this country, maybe it's just this area because the Polar selter water, you know, they're based in Worcester, mass These the Polar beverages. But I've noticed other countries don't have this yet. The no calorie, no sh ugur basically just stelter water with a hint of flavor.
Is that a growing trend?
Oh, sure it is, Matt, PepsiCo a wish PepsiCo would spend a little more time on its on its international markets. Uh, you know, performing really well, and you know it's a smaller portfolio of their food, snack and beverage portfolios outside the US, but that certainly is you know. I wrote a recent report on Bloomberg Intelligence about the enhanced water market and how it's really stepping forward to be a really strong growth area for these companies. Has it got unnoticed?
It's just that don't talk about it a lot. I mean to come out with a Gatorade of water right now, which is basically, you know, a product that fits into lifestyles with alkaline water and low calories.
The functional functional water.
It's a functional waters. That's that's right, thank you. And it's a really great market. I mean, it hits on so many who were attributes and where they're going right now gives them a great runway for growth.
All right, Ken, thanks so much for joining us. Ken Shay, Senior equity analysts. Bloomberg Intelligence follows all the beverage companies at tobacco companies, the cannabis companies as well, so look.
I'm gonna write them. I'm gonna write them a message right now. I need I need Ken to help me out with questions.
Okay for the Pepsi CFO.
I don't know if I mentioned I don't know if I mentioned that I'm interviewing the CFO Pepsi at one today on Bloomberg Television.
Okay, so you need some good questions to ask to sound smart Ye to talk to me, I said, I answer, you do it. Okay, PEPSI good numbers today have the pricing power, that's for sure.
You're listening to the team. Ken's our live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app and the Bloomberg Business App, or listen on demand wherever you get your podcasts.
Let's get back to the geopolitics Israel and what it means for the region, the greater Middle East region. We want to go to Sam Dagger. He's a reporter covering Saudi Arabia form Bloomberg News. He is located in Dubai. Right now, Sam, can you talk to us about kind of We're just a few days into what's been developing in Israel.
Give us your sense of what you're hearing, what your sources.
Are telling you about some of the ramifications for the greater Middle East region.
Absolutely great to be with you. I mean, obviously, the one thing in terms of ramifications that everybody's talking about is what does this do to efforts US led efforts to get Saudi Arabia and Israel to normalize their relations. I mean, obviously the US has put a lot of
effort into this. The Biden administration had come out openly and said it was optimistic and there were certain things that they needed to work out with the Saudis and with these Raelis as well, and things were progressing, and we had the crown princes from Howning been Sla just three weeks ago saying that progress was being made every day and that we were getting closer to a deal, and then this that kind of puts the freeze on on on everything at a time.
Being Sam, we you know, especially being in New York, I think here for the most part one side of this story. So many people here obviously have very close connections to Israel, have family members that live in Israel, and of course the you know, atrocities committed by the terrorists over the weekend aren't a great way for them to for you know, for them.
To tell their story.
But there are two sides to this thing, right, So being there, do you hear a lot from the Palestinian side.
Well, I mean, I'm in Dubai. I'm mainly hearing from people in the region. I mean Saudi's and Marati's, people in the Gulf who are coming out. I mean, I'm not saying all of them, but there are people in this region, including many Saudis, who are coming out in support of Hamas and saying, you know, this is long overdue. I mean, I'm just quoting them now saying this is
in response to all of the atrocities. And again this is them speaking that Israel has been committing against them and that this is in response to all of that, all the injustices. Again I'm just quoting them that the Palestinians have been subjected to. And so you have people in this part of the world who are looking at it differently.
Sam, what role do you think Saudi Arabia would like to play in this or if any, or do they do you think they prefer to just kind of stay on the sidelines here.
No, I mean definitely, I think they want to play a role in terms of just ending this. And they came out today said this, and they said, I mean, the Crown Prince spoke, Mohammed Ben Solomon spoke today with the president of Pastini Authority, Mahmudabasi, spoke to the Jordanian king and the Egyptian president, and then his foreign minister spoke to his counterparty in the US, Anthony Lincoln. So they're quite active, and they're saying this must must not spread beyond beyond Gaza.
And the problem is we're hearing reports that missiles are being lobbed out of Lebanon. Obviously, the West Bank could be a real problem area, although for now it seems, at least from the reports I've read, that most of the threats are coming out of Gaza. How do you think things may change once Israel sends its troops into the Gaza strip.
They will change a great deal. I mean, obviously depends on the scale of the Israeli operation and once we unfortunately start start to see the carnage that may be associated with this type of operation. I mean, the again, depending on on on on the scale of the operation, then obviously things are are going to change. Uh, there are concerns also, I mean you named Lebanon, West Bank, other places, Uh, Syria. I mean we' we haven't reported this ourselves, but we've seen reports of of of of
Iranian proxies moving from certain parts of this Ayria. Of Syria closer to the border.
With Israel are Jordan and Egyptian? Are there no threats from those two neighbors.
In terms of direct threats to Israel, yes, I mean not that we know of, but in terms of the sentiment on the street, obviously most people in those countries are with the Palestinians.
Yeah, I'm just trying to round up the region. You look at the mat the vast majority.
It's such a tightly new area. And you know, I wonder if all the work that's been done to get the Saudis on, you know, on the same page as the Israelis, it will be undone if there's a massive attack, I mean, if there's a massive response here, Sam, does it look like any kind of reconciliation with Saudi Arabia is off the table?
Then I don't think we should jump to that conclusion right away. I mean as are my story today points out. I mean, obviously this is a blow to the Saudi vision for the region. I mean the Saudi vision. I mean it's not only they have they don't. They don't just have a vision for Saudi Arabia, the Vision twenty thirty. They have a vision for the entire region, which says, you know, shared economic benefits and prosperity. It should take
precedence over wars and ideological differences. I mean things at this part of the world has been mired in for decades. That's their vision, and they're saying, you want to work with every and you saw the concrete steps that they've taken since the beginning of the year. They've they've reached a tent where they'ran that was broken by the Chinese. They are negotiating directly with the Iranian backed with the rebels in Yemen. This is a country where they've been
involved in war for eight years. They've they've made overtures to char Lassad who was backed by the Iranians. So they're doing everything to time down tensions. That's their vision. Their vision is development, prosperity, juxtaposed the Iranian vision, which is aren't resistance, you know, quote unquote the annihilation of Israel, which is what the Supreme Leader said. I mean that's the vision of Iran. So you've got two competing visions.
Obviously the Saudi vision has been delta blow. But I wouldn't be jumping to conclusions, you know, right away and say it's completely off the table.
Yes, Tim, you raised the issue of Iran, and that's clearly for a lot of observers one of the big big wild cards here. What role do you think Saudi Arabia and maybe some of the golf neighbors there can have as it relates to I guess just mediating with Iran or just dealing with Iran or communicating with Iran. How do you see that playing out?
I mean potentially, But I mean the one country that has the most contact with the Iranians at the moment is Katar. I mean, it mediated the US hostage release, if you remember, so they're the countries in the best position to be involved anyway. And obviously, I mean the Martis and the Saudis of late have you know, contacts now with the Iranians. Maybe they'll play a role too, but it's too early to see if that's going to happen.
All right, Thanks very much, Really appreciate getting your thoughts there. Sam Dag at Dagger, he's a reporter in Dubai talking with us about the greater i think Middle Eastern golf issue.
As this unfolds into you're.
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At Miller Pulse when you live here in our Bloomberger Interactive Brokers studio. One of the big moves yesterday in response to the news coming out of Israel over the weekend is crude oil. We had WTI crude oil, Brent crude oil up about four to five percent yesterday. Both of those are pulling back about one percent today, so a little bit of a more stability coming into that market. But we want to get a sense of kind of what the war in Israel means for the global energy space,
and for that we turn a Fernando Ali. He is the senior analyst for Bloomberg Intelligence covering global energy. So Fernanda, let's start with Chevron. Talk to us about what's happening in there, because I know they have a field in Israel that I believe the Israeli government has asked them or ordered them to shut down. So let's talk first about Chevron.
Yeah, absolutely, they have tomorrow into Leviathan Fields, their natural gas fields offshore in Israel that produce around fifty five to sixty thousand barrels of oil equivalent a day of natural gas that tend shipped to Israel and sometimes regasif gas liquefied and shipped out elsewhere. So it's a small
percentage of their current production. They intend to grow in the region, but obviously this disruption may cause some slows down and some second thoughts around there, but it's not a significant short term impact for the company itself.
But I know, I guess I'm sorry just for Europeans they were getting some of you they were obviously lost the supply from Russia last winter, they're getting some of it was coming out of Israel.
So is that a concern for European buyers?
Well, not just Israel, but then the broader scope of it, because they get a lot from Qatar, and Qatar shares its gas field, the Northfield, the largest in the world with Iran, So that is a significant concern if there is an escalation and if Iran is involved in how we get liquified natural gas from Quitar over to western Europe.
What's up with that giant natural gas field in Holland that they've decided not to use?
Are they still using that?
Groningen is going to be shuttered this year. So no, because of the earthquakes and other and global warming concerns in Holland, they are decommissioning that field. It has been underproducing. They had extended the life for a little bit, but they will decommission Groninggen, all.
Right, So, Fernando, I think the expectation is that this conflict the Indusraal is going to intensify, maybe expand and scope a little bit. Give us a sense of kind of what the global oil markets are telling you over the last couple of days.
Well, the pass back yesterday is really around reinforcing the Iran sanctions and the likelihood of a deal with the US being off the table. After the attacks, I'll caveat that Iran has been able to export a lot of it's screwed through the shadow tanker market. The official numbers show a huge decrease, but we know that some of those volumes had made its way to countries that don't
observe the sanctions as tightly. This obviously lowers their overall revenues for the country, because as you limit the amount of buyers, it becomes more difficult for them to get a full price for their barrels, especially because China, the largest oil importer in the world, has said they're done issuing import quotas in twenty twenty three, So that creates a significant log gym in those countries, especially after Saudi Arabia had just raised prices in to Asia.
All Right, So.
When we see oil coming back up to eighty five dollars a barrel from you know, it had dropped to eighty two, but not nearly reaching the ninety five dollars of barrow last week, doesn't that signify that people just aren't very worried right now.
Well, I think it signifies that people are very worried about demand and not so much about supply. It got it, and that is really has been what Mike mcglohan and I have arped on for the remainder of the year and early twenty twenty fours that demand is really going to be in the driver's seat, and all the OPEC plus cuts they just create spare capacity that could come
in to satisfy supply in relatively short order. What this does is that it does create a benefit for US suppliers because there are fewer barrels that are allowed in Western Europe and countries that are by by sanctions. So the Brent WTI spread expect will continue to be very tight, but the overall price of oil, we think will be governed by demand.
What is the expectations this winter for Europe? Will they have enough gas? Will they have enough fuel? Last winter came in much better than expected from that From that issue.
Yeah, I mean, that's that's the million dollar question, probably even more millions than that. They are at their highest natural gas inventories for seasonally adjusted they're nearly full. And where there's an issue is is Matt pointed growing against offline Belgium and Germany they coommissioned their nuclear plants, so their overall use of natural gas is likely to increase. The question is last year we had the warmest winter in fifty years on the northern hemisphere. If that's the case,
then they're probably fine. If they're not, then that inventory will fall very quickly. It's not a whole season inventory, it's a buffer. And the other issues that the diesel side of the equation, we're considerably short, both in western Europe and in eastern in the eastern United States and North America, So if we haven't implement winter, even a normal winter, it would really put pressure on those inventories.
And then you add the wrinkle of the straight or horn moose, the one shipping lane for Qatari natural gas. If that's shuttered, then it's a really big wrinkle.
How far out do people in your industry try and forecast the weather. I'm just interested because you mentioned last winter was unseasonally warm, and that's true. Can you look at this winter already and tell what it's going to be like with any kind of certainty?
Well, we try to forecast five years out, and we are successful about two weeks out, maybe sometimes left in that. It's very hard to forecast weather. I mean, I'm not a meteorologist. But it's clearly very hard, as you can tell from your weather app on your phone.
Fernando, what's the call in the energy space these days about China both as a source of supply and more importantly demand.
Well.
As a source of supply, they've been on the decline since twenty fifteen twenty sixteen because their fields are relatively high cost to continue production, so they haven't really invested in growing the supply to the level required to recover the post twenty fifteen levels. On the demand side, again, our fear has been around the real estate environment, and even with stimuli that's been promised by Beijing, the Chinese
consumer is in a fairly dire spot. You know, if we look at how the average ways necessary to buy an apartment in Beijing or Shanghai, it dwarfs New York and London, which are, as we know, unaffordable, and so much of the provincial government, obviously the real estate market, and then the provincial banks relied on land sales and development for their revenues, and with that drying up, it creates a huge headwind for the country as a whole. Everyone looks at China as having a fairly low debt
to GDP ratio. But that's without accounting for all the provincial governments, all the provincial banks that ultimately rely on those governments. So once you can consolidate that their level of debt is fairly elevated and they'll need to rectify rectify that in order to return to the growth. And I'll mention that Exxon gave their guidance for the third quarter and petrochemicals very linked to construction were down massively. I mean they were less than half of the second quarter results.
All right, Fernanda, thanks so much for joining us as always, appreciate getting your global view on the energy space. Fernando Valley, senior analysts Bloomberg Intelligence and Matt just staying on the global energy plate.
Thanks for listening to the Blue Burg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm Faull Sweeney.
I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio