Saudis Go In For The Kill As They Target U.S. Oil Producers

first time ever. We're a little bit positive today on that May contract. That's the last day for the trading of the May contract. To give us a sense of what is going on in the global oil markets. Who welcome John Kilduff, founding partner of Again Capital, based in New York City, New York City, John, thanks so much for joining us. What does negative oil negative? W t A.

What did that mean yesterday? Well, it meant that there's just an abject gluts of oil uh in the US, particularly you're in the Gulf Coast in the Pushing Oklahoma region, that any more additional barrels are having a problem finding a home. Basically, the folks who have storage all of a sudden found themselves not sitting on a oil tank, but sits sitting in the penthouse. And uh, we're able to charge accordingly. Other words, not only am I going to get free oil, you're gonna pay me to take

your oil. And again, it's because of what's happened here over the past number of weeks now, and it's just crash in demand both globally and hearing United States, where, for example, gasoline demand has so John, I'm looking right now at the June contract w T I, which has plummeted to about fourteen dollars of barrel, just to give you a sense. Back in March, when things we're not looking too pretty, Uh, they were twenty almost twenty four

dollars a barrel, comparatively high. Um where we headed here. Are we going to see the same kind of trading activity in the June contract as we did in the May one? Yeah, it's very much my sense that we we will. I mean that this is going to be a steady march lower. The physical market conditions are only going to worsen over the next several weeks for a

couple of reasons. Um, even though we have the US recount plunging and we are starting to finally see some US oil production get get reined in and decline by about seven thousand barrels from the recent peak by the way, but this market is going to have to stare down a massive amount of Saddi Arabian crude. Oh, the Sadie's

are going in for the kill here. It looks like, and um really just you know, put a knockout blow onto our domestic producers, particularly the shale players, because they have barrel schedule to be heading our way over the course of the next couple of months here that are going to compete for what little available storage space remains, uh and use that crew to run it through their refinery in Texas. That will preclude them from you know what they usually do, which is by at least some

US Gulf of Mexico produced crude oil. So, Um, this is gonna get a lot worse still before it gets better, all right, So give us a sense of what that's going to mean for the US oil producers, the shale patch uh companies. Um, you expect a wave of bankruptcies consolidation if in fact this does come to pass unless the administration comes through with some kind of aid package.

There's been some hint of that. Yes, there's there's no one there's no way around it that these and these negative prices are are just uh, they're problematic for even companies as large as Conuco and Exxon Mobile, although they will withstand it, uh, and they will you know, be on the other side of this thing and probably be

the ones picking up the pieces. Here. You're going to see a consolidation and concentration u emerge in the industry where there's probably only be a handful of really significant the large players because they're the ones with the deep pockets that can afford to a whether this arm and then you know, buy out or or buy these assets out from the auctions and bankruptcies that ensue. So, John, you did mention President Trump's uh pledged support of the

energy industry. So let's go there, President Trump tweeting earlier this morning, we will never let the great US oil and gas industry down. I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future.

How much do you sort of uh foresee that helping things given the fact that, yes, federal law does authorize the Energy Department to set aside emergency supplies, but the agency has only ever used about two thirds of that capacity. So how much are we can actually end up seeing here? Well, I mean, for starters, you know, you know that the Saudi Arabia has never been a friend of ours. Whenever there's oil market turmoil, when the prices are sky high, they're very slow to put moral on the market to

help us out. And then and and right now, Um, I don't you know, I don't want to be over the top about what they're doing, but I mean they are really coming at us hard here. Uh. This is not something an ally or a friend were certainly a country that benefits from our protection should be doing. If I was the president, I had urged the president to embargo there oil and keep these forty tankers off and

away from this market. But um, what we don't want to have happened here, um, is for the oil industry to get wrecked and then we find ourselves once again vulnerable to the policies of OPEC. Plus and Russia and UM, and we get a tight market where consumers, the US consumers get squeezed again, we go through the whole cycle one more time. UM. That's what I'm concerned about. And I think to the extent that the administration can lend some kind of aid and prop up at least a

portion of the industry, they should. They should definitely do it. They should get oil into the Strategic Patrolling Reserve. I have always been an advocate of using that aggressively because we're up against the cartel. Um. You know, we least the oil when when when OPEC is tightening the spigot, and build it up now when prices are super low, and we'll have an insurance policy in the future, so you know, hopefully they'll get aggressive on an administration we

can do something about this. This is not an entirely free market. That's the problem. John Kildeff, thank you so much for being with us. John kilda founder of Again Capital on the oil markets not entirely a free market. Although you can get oil for free if you can store it somewhere, in fact, someone will pay you to take it off their hands. At least when it came to the main contract. Interesting to see whether we'll see the same dynamic again play out with the June contract.

John Kilduff saying it looks like it's the very likely possibility given the supplied to Man dynamic and the glut out there of crude. Well, one thing I think investors are beginning to become accustomed to in this coronavirus era in terms of the markets is volatility. I'm looking at the VIX right now up a little more than three

full points here to forty seven. That's a long way, certainly from the peak several weeks ago about eighty, but it's also a long way from where we've historically been trading in the thirteen fifteen kind of level, So a higher risk environment for short. Someone to give us some perspective, there's nobody better than David Kotok. He's a chairman and chief investment officer of Kumblan Advisors, about three billion dollars under management. So David, thanks so much for joining us.

I don't think we've really chatted much at all since this coronavirus has really become the narrative of not only our lives but also financial markets as well. I would love to get your long term perspective on kind of how you're thinking about this new world that that we're in and how to allocate capital. Well, thank you, Paul. We are hunker down as everyone else in the world who can hunker down just doing our view is a cash reserve in equity portfolios is necessary in bond portfolios

highest grade credits. We are about to watch the dismemberment of the credits related to lower grade energy sector, and we expect that to be a worldwide phenomenon. And we have to wait for the elements that we know we must obtain, and they are testing, testing, testing, immune system enhancement antibodies, vaccines, and robust, credible treatments. And as soon as we have those, we can open up and we can get back to work and we can eventually fully recover.

We cannot recover before we have these things, and any attempts to recover before you have them is a high risk gamut. We're about to tell that in the United States, where we see people in bowling alleys in Georgia and on the beaches in Jacksonville and assembled at state capitals protesting, and we're gonna find out in two or three or four weeks. If there are infectious surges in those locations or tied to people who participated in those activities, we're

going to have that evidence very soon. And a lot of people are worried about what the economic damage would be from a resurgence of cases. You're saying that it's important to hide out in the safest of investments through this all as there is a washout effect of the shutdowns, and we're seeing that certainly in the bond market today. Tenure treasure yelled back at near all time lows zero point five FO. You've been covering treasuries, you could cover.

You understood the FED inside now for decades. Where do you think the tenure yield is going basis points here, Oh, I don't know, because the FED is trying to follow a world war to model. Lisa and the World Work to model essentially took the FED and said, we're going to help the Treasury finance all it has to finance, and we're going to become partners with Treasury, and we're gonna set aside moral hazard discussions for later. We're gonna set aside FED independence for later, and we'll deal with

that after the crisis and that's what's it worked. So in World War Two, the FED stabilize the entire treasury curve within a few basis points and it became predictable and a reference point. My expectation is the FED will get to that here as well, and we'll have a positive of lee sloped full yield curve of treasuries managed and stabilized by the FED. I sure hope so, because that will then become a platform reference for high grade credit for the entire world, and it is much needed

right now. David Kotalk, this is fantastic and really interesting. In other words, yield curve control will be the policy from the Federal Reserve, as it essentially monetizes the debts of the United States by buying up the excess treasuries that the US government sells cells to plug its deficit. Given that model, how big can the Federal Reserve balance

sheet get? My estimate is the Federal Reserve balance sheet could grow to between eight and eleven or twelve trillion, and it would be able to be financed and managed and maybe larger. In World War two, when once Pearl Harbor occurred and the FED policy changed in it went on for four years. The Federal Reserve assisted the United States of America in financing the war, and the debt to GDP exceeded a hundred percent, and it had to do it, and we were able at the end to

be victorious in a war. This is a different kind of war, but the models of the same and federal finances needed. It's needed in the states and hospitals, in the cities, in agencies and nonprofits for assistance to business or else. We will have a mass of financial failures and bankruptcies and there's no reason to have them. If the policy is to gap across the valley to the other side of the crisis in science and medicine will

fit this. So, David, about thirty seconds, just give us your sense of what the government's fiscal stimulus to date and what else you think needs happen. Well, we have two trillion direct, we have an argument of three or four trillion which would be indirect, and we have a current debate for another half a trillion. My view is will need a number of more chanchas of that, and sooner is better than later. So I hope politicians realize it and deliver it. David Kotalk, thank you so much

for taking the time. All my best to your family and to yourself as you manage through this. David Kotalk, chairman and chief investment officer at Cumberland Advisers talking yield control, your guild, curve control, and that's actually something that a number of strategists are saying. We seem to be headed

towards with the federal reserve buying. The bulk of the treasury issue is that the federal that the U. S. Treasury is selling to plug the skill deficit that we are developing to pay for some of these necessary bridges to get together side. Paul, Yeah, and David suggested it from a fiscal stimulus perspective, there's very likely going to need to be more just given our sense of timing of how this may play out here. So you know, it looks like the government is going to have to

remain pretty active here. The Fed has certainly done its job as the dollar continues to strengthen. In light of this flight to haven, flight to quality is the fate of emerging markets, and especially given the fact that the developed nations really have been strapped on their own and dealing with the coronavirus We're so lucky Eric Fine joining US portfolio manager of focusing on Emerging markets fixed income

strategy at van Eck Global. We have touched with it, based with him yesterday after the I M F meetings and some of the focuses that everyone is looking at. I just want to start with the flight of cash from developing markets. How much appetite are you hearing from your colleagues and from frankly uh staff within your own company about putting money to work within the developing world given the pain that we're seeing in in places like the United States and Europe and the lack of wellness

to take risk. Thanks for the question, and uh So, first of all, last week saw the first influence e M bond funds UM. So that's a narrow answer to your question. Second, I'd say more broadly, e M is different from the pre global financial crisis e M. Before the before the Global financial crisis, when I spent about half of my career UM when something went wrong in the world, all the money flowed out and that was

the end of the story. UM. After the Global financial crisis, markets learned that having high real interest rates, independent central banks, good fiscal policy. UM actually generated good returns. And so the big change from this I m US meeting compared to UH past crisis meetings was the discussion was very much who are the winners? Who are the losers? Obviously everything is kind of a loser, right, so it's going to be a big relative question to a big extent. Um.

But uh, last week we saw the first inflows in general. Right. I can't talk specifically about my company, of course, um. Um yet um, because that's a matter of official timing issues. Um. But uh, but it hasn't been as bad as it's as it's been in the past. And the other thing, I'd say official support. A lot of this official support is not just to their own economies, it's to the e m s and that's also a big change. So, Eric, we've seen just unprecedented volatility and energy markets over the

last couple of days. How does that kind of impact emerging markets broadly defined? Great question? Um. The problem with oil is it tends to correlate with everything, and when the markets seat oiled down, they think it's risk down because they think it's demand down. Um. I think that's generally right, but I don't think that's the right characterization of why oil is down right now. Um, it is about a storage capacity, and it is about a supply shock,

not necessarily a demand shock. So that's the broadest point I'd made. The second point I'd make is there are winners and losers. UM. Consumer the consumption basket. The typical consumption basket in an emerging economy is food and energy. So a lot of these countries are seeing their inflation going down. UM. They are not just a bunch of oil exporters. UM. There are even some explicit winners, like

South Africa. Strikes me, so I thought that it's complicated and all these countries, but they export gold and their import of oil. UM. So the oil story generally correlates badly and for legitimate reasons. But for me, it's all about the details. UM. And there are winners and losers. And I was glad to see and I m meetings that the focus was not oh, just exit and sell everything. UM, it was very much careful analysis of country by country

and what it means. One of the biggest countries in this complex is China, and I've heard a real bullcase made that China will recover first, given the fact that they were first to experience the coronavirus, and we did see signs of that in the economic data. However, they are now facing the decline into band for the supply chain items that they have previously supplied. Given the fact that the rest of the world is shut down, what's

the prospect there? Yeah, China is UM. China is one of the most important countries, not just because it's the largest economy and PPP terms from you know, second biggest UM, but UH, if you're going to see a V recovery anyway, it seems to me it's most likely a V shaped recovery. Letters are probably not the best way to answer economic questions this time around, but the most likely to see V.

This is the biggest fiscal sting know US they've had ever. Basically, UMU the lockdown team to have been working and they're unwinding and the early data, as you refer to is has been positive. Another key feature of China is it's acting as a global stabilizer. UM. They are keeping their effects stable. That is a very unusual role and it's an important anchor for UH for the e m UM.

You will also, I think a big signal will be on whether the Policy Committee coming up gets delayed or not on the last one I see on China is look for lower rates in our framework. Real interest rates are too low there, but you know what frameworks. There's a time for frameworks, and then there's a time for sort of more narrative common sense thinking. UM. I would I I don't think looking at zero percent or a

zero is an extreme sort of UH grabbing statement. But I think much much lower interest rates in China as it stimulates fiscally is a very very reasonable um uestion to be asking, and that would boost it. But I would say it's the likeliest to be UM. There are some early signs UM and UH, and so this some of this optimism UM is not unfounded. Hey, Eric, thanks so much for joining us. Really appreciate your thoughts. Eric Fine, portfolio manager for Emerging Markets fixed Income Strategy at van

Eck Global, based in UH New York City. So it's interestingly so you think about the risk UH that emerging market investors typically take on for that presumably better return. One could argue there's quite amount of risk of potential return in more developed markets. Now, given some of the pullbacks we've seen in the volatility, we've seen. Yeah. I think what Eric was saying though about the details is important.

The idea that lower oil prices will be beneficial for countries that import, even though they could decimate, say the budgets of the likes of Nigeria. Yeah exactly, yeah, exactly. So one one one hand, it's good in terms of inflation. On the other hand, if you're producing that commodity like a lot of the emerging markets do clearly a big issue. Market selling off today SMP off two point nine. We'll

have more. This is Bloomberg. As we watch oil prices plunge, the question is what does this mean for inflation when you see that the FED is trying to fight it with everything that they have. The idea of this disinflationary trend, the FED would like to see more inflation. We are yet seeing inflation expectations fall once again. Ira Jersey joining us. He's been talking about the disinflationary pressures. He's chief US interest rate strategist for Bloomberg Intelligence. I want to start there.

Given the price of oil, what we're seeing, how correlated has that been to inflation expectations in the near and long term and the fedsibility to change that yeah, so, so traditionally it's been very high. So the correlation between short term inflation expectations, like you know one year and

two year is at times over well over correlated. Now, I think the issue with the current move is that even though UH front end contracts of oil so you know, May, June, July, those are all coming down, but when you look at what the markets still expecting for oil in say UH January,

it's still over thirty dollars. So the so the thing is, even though we might have a short term dip in headline inflation because of what's going on with the spot oil price, and then your trim oil prices, if they do go back up to those kind of thirty ish levels, then you wind up seeing um basically an unchanged energy component of cp I. So so actually today, ironically and even yesterday, you didn't get significant moves in the market's

expectations of inflation. So I were thinking about, you know, all the money that the government is spending here in fiscal stimulus, how concerned is the treasury market for you know, the US budget deficit made quadruple this year to almost four trillion dollars. How's that being reflected in the market place. At some point, we gotta start paying this stuff back. It's not being reflected at all, UM And in fact, it's just the other way. So that you know what

what tends to happen with treasuries. So unless you think that the federal government actually will be UM in default at some point in the future, what what tends to happen is treasure yields tend to go down as the Treasury is issuing more and more debt. And the reason for that is because they're issuing that debt into economic weakness.

So two things occurred during during those periods. One is there's a lack of appetite for other fixed income assets, and people want to be in the safest assets, so they jumping in by treasuries. And that's exactly what you've seen. That's the flight the quality bid that UM that's been in a lot of the government bond markets over the past couple of weeks. UM. The other the other thing is is that when the I think the expectation by the market is that the Federal Reserve will continue to

be very large buyers of the treasury market. And because of that UM there's not a lot of impetus, and and it's very hard to get short the market because you're worried that the that the Federal Reserve is just going to keep on buying and buying and buying, so you won't be able to um to profit from being short the market, except maybe in very short term trade.

This is sort of a strange concept. The FED has thrown everything it can think of and may try to throw more at the markets, with its balance sheet expanding by two trillion dollars in a month. You've got Congress expanding its deficit, and yet you have city analysts rate strategists saying that they don't think the Fed's views are expansionary enough that they aren't necessarily easy and accommodative to the degree that would be required given the shock that

we're seeing to the economy. Do you agree? So? I disagree with them because I think that there's nothing zero that central banks can do that will stimulate the economy without getting people back to work and having physical distancing rules change at the end of the day, and economy is made up of transactions, and when you have a significant reduction in those transactions that are occurring, and I mean real money transactions, I mean me, you know, I

just take me as an anecdote, I've gotten I used to get gas once a week in my car. I have not gotten gas in a month. Right, So you know you wonder why oil prices are low, Well, right, there is the reason and that and you do that over mill Yeah exactly, well, in in part, in part it is and that's because you know of this physical

distancing that we're all doing. So because you know our economic activity is lower by ten twenty percent, you know, anything that the Fed does is not going to stimulate demand for credit growth, and that's what you need in order to UM And that's how monetary policy helps, is that it helps people who want loans to be able

to get them at much cheaper levels. And they just you know who who's getting out alone at this point to start a business or to buy a car that you can't go to a car show room, so how are you going to buy a car? So alright, just quickly we had we saw negative oil prices yesterday, or

we can see negative interest rates. Um well you have in a lot of places, and in fact in the treasury bills traded negative earlier today, so you have, um, I don't think that the Federal Reserve will cut interest rates to negative But you know, is it possible for T bills to trade their on occasion? I think there is, just because of that flight the quality bid that the markets continuing to absorb. Thank you so much, Yeah, thanks so much for joining us. We appreciate that. Ira Jersey,

Chief Interest rate Strategists for Bloomberg Intelligence. 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 bram Woyd's I'm on Twitter at Lisa A. Bram Woit's one before the podcast. You can always catch us worldwide. I'm Bloomberg Radio