Weak Oil Demand May Push Price Back Near $30: Schork

chart of w t I crude here looking back. Just since during the month of September, uh w t I has gone from about forty three dollars a barrel down to where we are today at thirty seven sixty five barrel, so quite a move down. When we talk oil, we talked supply models, we talked demand models, and when we do that, there's no one better to chat with than Stephen Short, President of the Short Group. Steven, thanks so

much for joining us here. Again, this is a commodity that had been trading in north of forty dollars a barrel pretty consistently. Now we pulled back to under thirty eight. What's going on in the global oil market? We have to keep in mind all commodity markets trade in seasonal blocks, so of course back in the spring we had that that debacle with oil prices going negative. Then we snapped back and we stayed in that forty low forty mid

forty dollar range for the entire summer. Now, the problem was the summer is your peak demand season for oil for gasoline, and on that snap back from the debacle, we only got as high as to where we were right before prices tanked, so we couldn't get much higher and we stayed in a very tight range. We demand historically is at its highest, but of course this is not a normal year. Demand for crude oil average two point five to two point seven million barrels a day

below normal. Now that we have the Labor Day holiday, it's September, we now go into that next seasonal block. We're going from the peak demand season to the negative of the demand season. So over the next two months, as refineries go into their maintenance season they buy fewer barrels, we'll see demand dropped by an additional nine hundred thousands to a million barrels a day. So it's clearly a

demand story right now. The US producer has done a great job taking two million barrels a day of production out of the market. But as I said before, it's not good enough because demand is still greater than two million barrels a day. So the producer has done a great job, but they're gonna have to continue. And it's all about the demand right now, and we're going into the weakest demand part of the year. How in the

longer run does China impact things? China we know it wants to increase it's reserves of crude beginning in one does that impact US producers at all? Absolutely? The US now is of course a virgin in UH exporter of crude oil, and in fact, since last October, five out of every nine weeks, the US has been a net exporter that is, petroleum products, which is not news. Now States has been a net export of petroleum products guestline diesel for a number of years. Now what has chain

change days over the year. We're now an exporter of crude oil. So five out of the nine weeks we have more oil going out of the Nited States than coming in. And of course with China, a lot of that oil is destined for those markets. Oil at these levels are is competitive for the Chinese consumer. So that's

certainly when we transition back into the demand season. We'll see a peak later in this year as we get into the holidays, then we'll go into another decline in demand through the first quarter, and then we look ahead to the winter and demand picks up again. So clearly, out in the long run, China certainly is a significant

force the supportive of US energy production. Steven, aside from the seasonal qualities or variabilities, is there a sense do you have a sense that demand for oil post pandemic will in fact be structurally lower. Yes, absolutely, I think this is the way we've been going in a number of years. The oil market is clearly a a twilight in history as we make greater uh stribes for technology,

electric hybrid so forth, battery storage. Uh. Clearly, this is the market was moving there naturally, especially when you look at like I'm a dinosaur. I'm in my fifties, but my children, all of our children, UH that they want they're they're making the push. That's where your next market segment is for the next generation. So clearly we were already moving in that direction, and I think what we've seen now in the pandemic, I think that will even

further it along at a quicker pace Stephen. How many more bankruptcies are we going to see or what kind of consolidation are we going to see before the pandemic is over. Absolutely so. When we had our original downturn in oil prices and then followed again earlier this year, all the concern was for the smaller shell producer. But now we're starting to see some of the big boys in the room. They're struggling. Uh you know the latest news being x on are they are they not going

to cut the dividend? How many employees are they going to lay off? Now? I'm not saying the big guys are going going down the tubes, but certainly the smaller producer. I think we've we've we've seen the bankruptcy is already, We're seeing consolidation, and as we take in I'm fearful we take another leg down during this the nature of demand.

Over the next two months, we see oil back into the mid to low thirties, potentially back into the twenties, and certainly that's going to hasten another I think round of consolidation in this industry. And of course we continue to get inventory reports, a couple of them per week, so we will keep a very very close eye on the oil prices right now still in New York below forty a barrel. Or thanks very much to Stephen Shork

coming to us all the way from Villanova, Pennsylvania. Or is thrilled to have the editor of the short report on. So it appears that some employees that JP Morgan Chase and may have had on some very naughty thing. It's really quite a disturbing story. And Michelle Davison's freetar and not a rag and investigated and found that JP Morgan found some of its employees and probably applied for and received COVID relief money that was intended for legitimate US businesses. So,

Michelle Davis, welcome and thanks for a phenomenal story. Please give us some of the details. Yeah. So JP Morgan earlier this week surprised a lot of folks when they spent out a memo to all two d fifty six thousand of their workers saying that they had found instances in which customers had misused government relief programs. And they said that they were probing employees involvement in that. And this memo earlier in the week didn't satisfy exactly what

employees had done. But a store is confirmed to us wait yesterday that JP Morgan found that employees had some of the employees had improperly applied for and received funds as part of the Economic Injury Disafter Loan Program or the ideal for short. That program is different from the p p P program that has gotten a lot more

press coverage. UM you know the Small Business Administration's program that UH provided forgivable loans to businesses through the e I d L program, Businesses could basically get grants of one dollar to ten thousand dollars um as long as they applied directly through the s b A. And with this program, UH, companies didn't have to apply through banks. The money was just dis first directly to the applicants. The only requirement was that they had a bank account.

And so what we found was that JP Morgan discovered this fraud because it turns up that some of their employees had fraudulently received this money and it had been deposited into their checking accounts, into their personal JP Morgan checking accounts, and so JP Morgan's discovered it because they were on the alert to look out for fraud in

this program. These people have now been let go. But we understand that JP Morgan has found a ton of fraud among its customer base across UH all of the government relief programs that were ruled out because of COVID, not only to PPP but also the ideals as we were just talking about, and also through unemployment benefit some shows already. Are these just random employees within the sprawling JPMorgan complex or is there some kind of systematic issue here.

So what we understand is that the employees that participated in this, we're not acting as agents of the bank. It's it's not like they were, you know, people in charge of applying of approving p PP loans and you know they knowingly allowed fraud to happen. This seems like employees that we're just randomly scattered across the bank that saw an opportunity to get money basically free money out of the I d L program and you know, applied

for and received this money. Um, we also understand that of the fraud JP Morgan has found so far, and they're they're still working with authorities right now to monitor check the accounts, just you know, to see if there's any suspicious behavior, suspicious amounts of money hitting people's checking accounts or or you know, being used to purchase Lamborghinis or what have you. Um, it's our understanding that all of that that they're looking at right now, of that,

only a small percentage has been tied back to employees. Right. In the memo sent out to staff on Tuesday, Javie Morgan said it identified conduct by customers that didn't make different sils and may even believe illegal, and that some employees had fallen shorths on ethical standards to However, for this story, a spokeswoman declined to comment. Do we know roughly how many actual employees took the ideal funds? Michelle?

Do any idea whether this is just a small number that you know, may have taken a thousand dollars or two thousand dollars and will be taken care of immediately when they're identified, I'm sure by Japan Morgan, or if it's if it's actually a lot more widespread than that. At this point, we don't know. We know that it's several, um, but that's as much as we know. Uh. The one right spot is that the e I d L program, which seems to have been the most heavily abused um

in terms of fraud. Uh the money ran, It ran out of money in the middle of July. So it doesn't seem like, you know, there's a chance that more fraud is going to be committed. It's just there might be more fraud detected at this point. So Muchel, you mentioned that, are you reported that the bank had fired these employees. Is what's been the overall response from the

institution here. Uh So, my understanding is that JT. Morrigan, in disclosing to employees all two d fifty six global two hundred fifty six thousand global employees and disclosing this, they went against the grain. You know, you don't normally see a bank telling people, you know, are some of our employees may have done illegal things and a lot

of our customers have done illegal things. And what we understand is that the bank's leaders kind of made a calculation where they thought, Okay, this could hit our reputation by disclosing this. But the view was that it made more sense to tell employees to be alert for fraud so that they could help catch it, um than just staying silent. So that is that explains some of why they did this. Yeah, so so according to your source, the bank does you know, has already fired people that

it believes improperly tap the money, correct, Michelle, that's correct. Yeah, I understand that there's still they're they're still investigating, so there could be more people fired, but at this point, the people that have been confirmed to have committed fraud, they have been let go. Michelle, thank you so much for that. We really appreciate this excellent reporting. Michelle Davis, financial porter for Bloomberg News. Just a crazy story of Annie.

I guess there's so much money slashing around there that there's bound to be fraud throughout the system. But again, when you see it at the bank, lebots a little. Yeah. I mean, it's it's terribly sad. It's very very disturbing. It takes away grants and loans from people who really needed it as opposed to be get over employed therefore presumably didn't also have a small business on the side or need it, and it's just it's just terrifying. Well,

let's start with the US economic data. Plenty to talk about in Europe today as well, but this morning we got initial topless claims coming in a little more than expected eight hundred eighty four thousand, continuing claims much higher thirteen point three eight five million. And we also got p p I data a little higher than expected both for the final demand month over month headline figure and also you know ex food and energy year over year,

which rules quite substantially. Let's bring in someone who can make sensible all this for a Steve Blitz is chief US economist for T. S. Lombard. Steve, can we begin with the p p I data, because we all know that the labor market is in a terrible way. What does the PPI data say about inflation? Nothing? It says a lot of It says a lot about prices. UM,

and there's a difference between prices and inflation. And what the p p I is reflecting is shortages and supply chain issues that are still um kind of getting back online in some case, in some cases still disrupted. Uh. And you've got a big rush to get back to produce things because he was shut down for a while. So UM. I think of these price changes really as healthy in the sense that this is doing what the FED prevents the capital markets from doing, which is price

changes to direct effort and money and all that. Uh. In different directions, and that's where the well functioning market economy does so. So Steve, when you say nothing in terms of inflation, explained to us the p p i X food and energy, so all other goods. Doucers are paying point six more in August than they were last year, and economist are looking for them to paying point more.

How is that not more difficult for producers to pay and therefore inflationary well, because over time the prices that they are paying for these inputs will go down as supply chains come back on. In addition, you talk about moving those prices forward with high levels of unemployment, where you're continuing to add people to the unemployment roles in terms of initial well above the prior recession. UH, then the demand side, broadly speaking, it's going to be weak.

And so that is not a combination that is going to allow firms to pass through these prices and sustain margins. So their input costs will go down over time as these UH supply issues change and the demand's not going to be there. And that's why I say it's not inflation. Inflation in this country. You get inflation when you've got a lot of leverage buying going on, uh to buy real goods and UH, that kind of leverage is what this is what Defense been trying to create for the

last and odd years. Uh. That's when you start to get a real inflation. Uh, this is just price changes. Prices are up, now, prices can go down. All right, Steve, let's switch. Here is a little bit and more data this morning out the jobless claims UH came in at eight thousand. The expectation consensus was eight. Give us your sense of kind of where we are in the jobs market, seems like or at the stubbornly high level of jobless claims. Yeah.

And as I mentioned just before, I think sick hundred and eighty thousand or something was the peak month of January of two thousand nine in the last procession. So that just tells you how high this initial claims number really is. UH. And that was ten unemployment. Now you've got two job markets, and that's what makes these gross backgrod numbers so difficult to discern. You've got the people who are temporarily laid off back in the spring, and

about half of them are back on the job. As the reopenings continue, I would expect more people to get back on the job. And that's all a very very positive event. By the same token, there is an emerging recession as firms recalibrate their expectations for growth going forward, but to build back cash loss in Q two all sorts of things, and the number of people who are unemployed and say their jobs have been permanently lost is

up over four million. It jump in August. Uh, if you go back to April, that huge number of people got unemployed. A of that was people said that job

loss was temporary. What I have been saying since April and still saying and watching, it's the permanent job loss because that's the number that reflects an underlying recessionary environment that as the reopening start to fade simply because you know, everything's reopened there has reopened as much as people feel safe to reopen everything, um, that number and the impact that that number has on spending, etcetera will begin to dominate the data. So, Steve, what should we be looking

for incoming weeks? I mean, obviously we got the news that indoor dining will start out a quarter capacity in New York City, which hopefully might bring back a few more jobs here and there. But what will the data that you be most concentrated on the well, right now, the word unfortunately it comes every month, right, I think there's all that high frequency data that tells you that

reopenings are continuing. And I think that's that's great and very happy is in New York City resident, Very happy to see, he said, at least indoor dining because the winning where all these restaurants are gonna do when it gets to be too cold to sit outside to eat.

But um, the number to watch every single month is this job losses, permanent job losses, and that's really the number and that will and then the second part of that is that as that continues to go, watch these forward expectations numbers because the forward expect because those phone expectation numbers never really dipped as one would have expected in their normal recession. All right, Steve, thank you so

much for Joiner's got leave it there. Steve Blitz, chief US economist for T. S. Lombard, giving us his thoughts on current economic conditions. We're just looking at the SP five here. We're off about seven or eight percent off of that recent high of just several days ago. But let's be clear here, we're over off of that March low, so a tremendous move up in the market despite some

recent pullbacks here. To get a sense of where we go from here and what the drivers are that we should be focusing on, let's welcome Michael Scaling, portfolio manager of Manu Menu Life Asset Management based in Boston. Michael, thanks so much for joining us here. So we've had a little bit of a pullback here. Uh, the question is you know what's driving it and how do we What we really think about is over the next couple of quarters, heeries as it relates to the equity markets. Sure, well,

good morning and thanks for having me. Um. I think that after we've seen as you just reference, that huge move off of the bottom of fifty plus percent, not surprising at all to see us give a little bit of that back and consolidate some gains, especially when you driver consider that the majority of this big move that we've seen has been multiple expansion on the SM five.

So UM, I think that while it's been a big move in in a short amount of time, I wouldn't read too much into the more recent results on the market. Is it you know, the market just doesn't climb to the sky forever. What are you anticipating will be the catalyst for the next move for this market, whether at the upboard down. Well, I think it's going to be more driven. I'm really less focused on the the actual move in the market and just more focused on the

individual stocks. I mean, it certainly feels like this has been the best pure stock picking market that's seen since prior to the financial crisis. Uh. And you've certainly seem differentiation in individual stocks. I mean a lot of people like to talk about the move and the fangs, but what what's that really reflective of is a great stock pickers environment. Um. One thing I would keep in mind on the market as you look at it is I

talked about before about the multiple expanding. I mean, it's not surprising that the market is trading at very elevated valuation today, and frankly, I would expect that that's going to continue for a very long time, meaning years as you can no longer fund any liabilities from the fixed income markets after the collapse in US interest rates. All Right, so where do we go from here? What are some of the sectors that we should be looking at here?

Because it appears that the economy, while it's coming back, is coming back very very slowly, despite the incredible accommodation provided by the foot of Reserve. Yeah, it's been interesting. So this week there's actually been a few industry conferences which have been attending, and was on one just right before we came on live here. UM. I think what's interesting is that, you know, heading into this week with a lot of the retailers and consumer stables companies presenting

at various conferences. UM. Frankly, I was expecting to hear more about kind of a late August slowdown and stimulus UM and the enhanced unemployment benefits were unwound UM and just the slowing and foot traffic its stores and those kind of things. But frankly, you haven't heard that from anybody at any of these conferences. Uh. They continue to talk about a solid demand environment, a little bit of

the unknown if there isn't another stimulus package passed. UH. And the other thing they continue to talk a lot about is just UM it concerns around securing enough inventory as some of the supply chains have been disrupted as we saw the depth of COVID earlier this year. I would love your thoughts on the succession plan at City that came out today. Yeah, so, uh, in the John Hancock Violence Fund that I run, we don't own shares of City Group. Um. It's uh, the woman that was

announced to the CEO, I'm not familiar with her. Um. Frankly, a little bit surprised that Michael Corbett is retiring so quickly. I mean, I don't know that that was on the immediate radar of any shareholder. Um. But obviously you know, in terms of humanity, a great day that she's gonna be the first woman wondering running one of these large

global banks. How about on the technology front, give us you later thoughts on Apple that's been such a leader in the market place, and I guess some concerns that you know, is there a bear case out there for Apple? Yeah?

So it's funny I think as we've gone through these iPhone cycles the last ten years, the price action and Apple stock has become more and more pronounced in terms of the playbook that everybody follows, and that is that you ride up Apple into the announcement of the iPhone update coming, and then after the initially announcement, the stock pens underperform I think some of this big run up that we saw throughout the course of the spring and into the summer was largely attributable to that, as this

is expected to be kind of a benchmark type cycle with the rollout of the five G I phone. UM but the stock is cooled off obviously in the last week or two here. You know, if you wanted to make the bearcase argument on Apple, it would be largely around valuation, right. I mean, the stock has had such a high, big run that it's now trading in a twenties multiple UM and uh, you know when you think about the fact that this is still a company that

sells an iPhone every couple of years. You know, if you wanted to be maybe put a bear scare in the stock, that that would be it. Right, is that it's still cycle dependent um and and and consumer electronics company. Now that's not to say that I believe it, but that's what a bear would tell you. Okay, well, we're going to get that event on the fifteenth, so just early next week, to reveal the new watch and also you know, a new iPhone cycle. Will it be successful?

What are you anticipating? Yeah, I do expect that there's a fair amount of pent up demand. Uh. You know, the last handful of years, you're certainly seen in elongation in terms of the cycle that people actually hold onto their iPhones. So I do think there's a there there's quite a bit of pent up demand. Um. I would hedge that a little bit in when you look at where we are from unemployment levels both domestically and just

economic stresses that you're seeing globally. Um, you know, it's a bit more of a stretch for people to run out and spend a thousand dollars on a new phone, So I think you do have to kind of hedge on it from that front. And I think the other thing is there's still an education process that needs to go on, right. I mean, you've had some of these wireless service providers that have talked up that they're on five G e uh and people might think they have

a five G I phone. They don't have a five G I phone until they have an iPhone with a five G chip in it. So there is a bit of an education headwin there as well for some less informed consumers. Michael, thank you, always a pleasure of speaking with you. Michael Scalan Portfolio manager from Manu Life Asset Management. Thanks for listening to Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever a

podcast platform you prefer. I'm Bonnie Quinn, I'm on Twitter at Bonnie Quinn, and I'm Paul Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio