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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordert. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always on the Bloomberg
Terminal and the Bloomberg Business App. Stephen Shark of the Short grew of writing Homer's Remains at Risk and cease Fire Prospects a week pointing to a prolonged geopolitical disruption to global flows, Stephen joins us now for more. Stephen, welcome to the program. Let's just run with the base case as presented by the President. Things can change, I know that, but let's run with two to three weeks. Where would this energy market be? Where will it be in two to three weeks?
Absolutely so, with the rate we're going right now the way we've modeled it for the next actually three weeks, the current timeframe for the spot market right now is one hundred and three dollars at barrel. What was our top was our initial we'll call it our one stemit deviation envelope, and all of the simulations that we've run
potential price pats. Now that we are well beyond that, what do we do we begin to look for that next And because of the volatile that's been introduced, we have extremely fat tails on the distributions of potential outcomes. Three weeks sense we could be looking at one hundred and thirty three dollars in oil. So John, what we're essentially looking at or doing is the United States. It's oil and the contract that we're following in this case nomics to WTI.
That's been the cheapest barrel in the world.
And now what's happened is the arbitrage is well established. So now you're having a tremendous amount of buying interest coming in from Asia, coming in from Europe, and hence we've been the cheapest barrel. But because of that buying in, just because you just can't get oil from Asian refiner from U typical sources, you're going to start bidding that
oil higher. And that's what I think we're starting to see in the Gulf Coast is that US prices have been suppressed over the past four weeks, but that now it's starting to catch up to reality and therefore over the next three weeks, as this disruption continues, certainly the path is higher to our second tier envelope, which is, like I said, one hundred and thirty one hundred and thirty four dollars a hour.
Is that high enough to cause demand destruction for people to pull back on their use of oil or their ability to get oil enough to get oil prices back lower in the near.
Term based on recent observations and economic theory, noe, it's not there yet.
We have to keep in mind that.
Demand elasticities for guest line have changed tremendously. I'll give myself as an example. I drive plugging electric hydrid. I fill my car up about once every two to three months. Now, juxtapose this back to two thousand and eight when oil prices peaked that one hundred and forty nine dollars a barrow. I was filling my SUV up every single week. So that was an incredible pain point that has changed over the last fifteen years.
So that part was that is.
So what has happened is back then, if we adjust for inflation, three dollars and sixty cents at the pump, was that that that pressure point, that's that inflection point where demand started to fall off. We are higher because we've introduced more variables into the equation.
So based on what we've seen recently, I e. We're still a.
Dollar below a gallon where we were in twenty twenty two, and that did not destroy demand. So we'll look to see oil prices up of one hundred and fifty hundred and sixty dollars a level before I think we start to see the market correct and demand destruction kick in.
Steven, are we done? You think what verbal intervention has its run its course?
Well, are we doing verbal? So you're trying to draw on the market or try and do I don't think so. I mean, I think it's just something as an analyst, as a trade you just have to endure.
And so this is why we look at the spread markets.
So then the forward curve and any given market is your indication of where we're potentially going. And so when we see that, when we look at what is transpired now with the past.
The week in wt I with the curve.
That is an extreme bid or price increase on the front end of the curve for those prompt barrels, but that is now also starting to cascade down long from the curve. And then we look at a relationship between WTI, Dubai or you. For instance, we have oil production in West Texas delivered into Houston that is trading at a twelve dollars discount to the global price of oil, and that arbitr excuse me, and there's a backgradation along that, meaning that there's a strong bid for West Texas oil
and hence why we're still bullish on this market. And so regardless, you could verbally, you could address in the market and say anything you want. The market is reality, and what the reality is telling us, it's that prices are here higher and they're going to be higher for longer, certainly over the next three weeks.
Well, energy companies capitalized by actually reinvesting and expanding.
Production eventually, but what we'll see now, and if you're looking at quarterly earnings, quarterly earnings for if you are a refiner, looked the great I mean, you have diesel fuel that's trading out one hundred and seventy dollars a barrel against one hundred dollars crude oil, or guess Liane trading out one hundred and thirty dollars a barrel against one hundred dollars oil. So the refinery margins are going
to look extremely great coming through the first quarter. Now as we transition to this second quarter, as we've said that US prices are starting to catch up, so that is going to be a bigger hit now that that is what has been a boom from Golf Coast refineries, that wide margin between product.
Prices and crude oil prices. That's catching up, and oil prices.
Are catching up, and that's going to begin to squeeze margins, so we're going to see a lot of volatility. What was good for refiners last quarter is shaping up to be especially when demand is starting to pick up coming into the second quarter. So you've got the double wheremy of domestic oil prices catching up to the global price of oil at a time second quarter going into summer where demand for the output of the refinery is going to surge.
Stephen, I don't just want to talk about price. I want to talk about shortages and outright shortages. This from the Australian Prime Minister. We mentioned his comment earlier on today over the coming weeks, if you can switch the catch in the train or bus or tramp to work, do so. The EU Commission suggesting people travel less across Europe. You can track, You've got visibility on the tankers that
are arriving and won't be arriving. You can see the cushion that some of these countries have got the supply, they've got the inventories. How close are we to a shortage where these governments are actively tanning the people to stop doing things in the same way that they are in Asia at the moment.
Yeah, absolutely so.
Looking at the problem month, which has about three more weeks, that time frame that the President supposedly says we're going to be out of there or wrap this up. The market's highly skeptical, So I'll give it that three week time range where we'll start to see, certainly economies in the Far East, and now we're starting to see economies because that Atlantic basin spread is starting to tighten up, economies in Europe begin to seize. Up here in the United States, oil inventors are sitting.
Out of three.
We just got the weekly update yesterday sitting out of three year high. So there is oil here, but the problem is it's not where it.
Needs to be.
So even though we do have and the President might want to say buy American oil, that's great, but tanker logistics limitations, there's just a limit to how much stack.
Can sate that.
So while here in the US, as we said, oil prices or excuse me, oil supplies are fat three year highs, they're really being the seaze up and that's why we're starting to see the Brent mark it or WTI now outperforming Brent at this point because European buyers refineries are coming out of their once they come out of the refined maintenance season, they're going to be buying a lot more oil, a lot more US oil, but there is
a limit to how much. So we are two to three weeks away from a shortage that we're already seeing that that's going to grow.
Exponentially over the next couple of weeks. Stay with us.
More Bloomberg surveillance coming up after this. So here's the laces this morning. The President's stirring investor anxiety, pledging more aggressive action in a round without concrete steps to reopen the stradit for Merz at Mills of Raymond James, writing, the clear desire of the US and a round to wind down the wall will need to be reconciled within the very narrow diplomatic pathway it joins US. Now for
more ed, welcome to the program. Can you describe to us in a way you've described it to clients for the next two to three weeks might look.
Like, Yeah, John, I think that there's going to be an intensity of the operations. I think there is a higher probability of a ground operation.
I think that the market is prepared for.
At Raymond James, we've been highlighting to clients that it will take a while for things to return to normal once the straits of Hormoz has reopened. Our energy team has been doing a considerable amount of work on that. And I do think that there has been an expectation in this market that things were going to go faster,
quicker and cleaner. That expected, and we have been telling folks some cynicism here has been warranted, and the cynicism has actually been the thing that has played out consistently over this last month.
And when you say ground operation, do you mean to open up the straight of Hormoves for normal traffic or do you mean for military boots on the ground to go seize the uranium.
I think, Amory, that's to be determined. I do think that there is a history of President Trump. Once he has built up a military capability, he uses that military capability. So when we see how many troops have been positioned in the area, I do think that there is an obvious desire to reopen the straits of her moves. But President Trump last night did talk about that as something more natural than kinetic. There has been these conversations about
the potential operations to seize uranium. To me, that's probably the higher probability. I don't know exactly how robust that is going to be. I think some of that is to be determined, but very clearly Emory here, President Trump is building up pressure and was telling even the kind of Iranians last night they have a choice still here that the operations can get much more intense and less they negotiate.
And why give this speech last night? It felt like the tone of this speech was trying to get the American people on board that maybe it should have been given the first week or two of the operation.
Yeah, Emory, That's what we were discussing internally here at Raymond James, because I think there was a hope and an expectation that a speech a month into this was a speech to wrap it up. The tone of the speech was the first real rationalization directly from President Trump speaking to the American people of exactly why and almost preparing the American people for what comes next. When you have all of those comparisons to the lengths of other wars,
it is somewhat ominous. We are hopeful that this is two to three weeks from now, but there's no guarantees. I think that there was a hope that it was only going to be kind of less than a month when this started a month ago. Now we're already extending those timelines. So making that pitch to the American people because things are probably going to escalate before they de escalate is kind of my biggest takeaway from that speech.
Emmory, This to me is the key pointed that this was essentially preparing the American people for whatever is to come next. Do you have a sense of what that could look like and how much it will come in concert with United Arab Emirates, with Saudi Arabia, with other alliances.
Yeah, we're seeing kind of more of those alliances that take place. We're looking at the fact that AARAN in their initial response, probably kind of drew the region more together than split it. One of the key questions that we've been asking has been how long does the United
States and Israel stay together? Because there is a big concern, especially in the national security community that I talk to, about whether or not the endgame for the United States and the endgame for Israel are going to be aligned, especially if this goes much longer than mid April here and politically you do want to have those alliances, but usually those alliances happened before an attack. Build those cases,
get the American people on board. As we've seen gas prices, as we've seen inflation, as we've seen other impacts of this, As we see a market reaction to that, the American people are going to put more and more pressure on members of Congress in on this administration to wrap this up sooner rather than later.
And let's just stay on international relations. There's a very strange dynamic to the addressed by the President yesterday, and it's as follows. For a long long time this country, successive governments have wanted to keep the likes of China out of these regions, keep them well away, contain any international ambition they might have. And now we're almost in fighting the men to help solve a problem. Do we really want the Chinese military in the straight offormers No.
And when we've talked to some of the national security advisors and kind of China contacts that we have, there is almost zero expectation that a Chinese military will be involved. But you do have the fact that Trump and she will ultimately meet here over the next month and a half. And Trump always pulls things together, and to the extent that there are things that he is going to be asking China for, China is going to be asking us for, kind of adding in, hey, this is more of your
problem than my problem. Is really the subcontext of everything that he's saying with this tracer for moves, it's like, yeah, it's a big issue, but maybe Chinese is more, Maybe NATO members outside of the United States needs more, maybe France needs is more. In particular, come in protect that
it is not just our problem. I think this here is a reflection John over the fact that he does feel as if everyone has been willing to rally to his side on what he sees as an existential threat to the United States into the world.
Stay with us more Bloomberg Surveillance coming up after this. Equities lower following back to back gains with the presidents turning up the pressure on a run once again. Sarah Hunt of Valpied saxon Words, writing, higher energy prices post a real challenge to both earnings and the consumer. But given the multiple compression and equity markets, valuations aren't becoming attractive. Sarah joins us now for more, Sarah, good morning, Good morning.
Start with earnings. Is the outlook for earning solid or analysts just really really slow.
I think that there is a problem with earnings that is going to come through from energy, and it looked like if we were going to get some sort of a change over the last couple of days, maybe that would be okay. I'm starting to think as that weill back curve starts to move higher. I don't see how
earnings are going up for twenty twenty six. I think that there to be some sort of a balance, and I don't know where that balance is yet, but I think that we are getting a little over our skis on the arning.
Makes the question if I should begin excited about multiple compression with that in mind.
I think, you know, it's amazing you write something a day ago and the next day it's already different, which is why you know there's a lot of whiplash going on on the narratives. I think that there was. You could see how much the market was anticipating some sort of an off ramp. It looked like there might be
some sort of discussions that might get to something. The fact that we're back in this place a day later tells you that this is going to be at least for the next foreseeable whatever future that is twenty four to forty eight hours, you are going to have more issues. To your point about trying to get back to normal, I think that because there was normal illustraight of horror moves, it was okay that the Red Sea wasn't back to normal.
I think there's going to be a huge push to get anything back as soon as you get it open. But when that's going to be we don't know. The longer that takes the higher energy prices are that's going to feed through the earnings and people are not going to like that. So yes, I think that that definitely that tempers my usiasm for valuation compression because I don't think that you're going to get a solution as quickly as we thought just a day ago.
So when I hear you talking, I'm like, oh, yeah, this is the reason why I'm nervous. And then when I read your commentary, you see opportunities out there, I think, what am I thinking about? I just obviously need to go take a walk. So how do you get the conviction to decide to buy given the level of uncertainty?
Have there really been.
Enough selloffs in specific sectors or names to justify taking that risk.
I think that that's I think that's sort of the key. And I loved Jim zelter on earlier this morning because he was like, take a step back, look, zoom out, because it's also a timing question. Right over time, we know that market problems eventually get resolved. Am I looking at a five year window, at two year window a six month window? In a six month window, I can see a lot of volatility, and I would not be as sanguine on a six month basis as I would
be on a longer term basis. Is there going to be more volatility this year?
Yes?
Do people are still thinking that we end the year either higher than we are today or a flat to where we started. That's really going to depend on the next on the developments over the next couple of months. And I think that a month ago this was let's see how long it takes. Well, we're into a period of time now where that compression and just the traffic jam of getting through there is going to be a problem and is going to keep energy levels high, and
that's going to be hard for growth. I don't see how that doesn't impact earning.
So taking a.
Step back, I took a walk and I'm thinking, well, what has structurally changed if you take a look at a three to five year horizon, And what a lot of people keep saying is maybe not the equity story, not the AI story, but does the bond market story change given suddenly the renewed need for fiscal the renewed need to sort of support from a debt financing perspective, A lot of social initiatives that are only getting more current.
Well, that turns into a much longer, deeper discussion about what is the point at which the government cannot keep throwing money at things? And at some point you would think that there is a point at which bonds start to get higher priced because everyone's worried about the fiscal Every time I think that's to happen, it seems to back off. So I don't know what that point is, right,
but it's true there should be a point. Maybe that's why gold is sitting at forty five hundred dollars, because people are going at some point every currency has a problem because every government is too indebted. I don't know what that point is, though, and that point keeps moving.
So why do you think the market is so fixated on Trump's truths and just not looking at what he's doing. Just this week again, another US aircraft carrier and two destroyers were sent again to the region.
The troop build.
Up is consistent and it's getting higher.
You know.
I don't know if people think that that is a strategic move, if that is an actual move, if that is a syops move, I don't know. And I think that the problem with dealing with a situation like this, that's so fluid, and everybody has something to say, and everybody has an agenda. It makes it really difficult to parse out what's actually going to happen. You know, maybe we could just be looking threatening. Maybe we're actually going
to go and put boots on the ground. People said no, then they said yes, and they said no. I don't know what the answer is, but I think that trying to parse out what's happening from what people are saying is increasingly difficult. The market is obviously not necessarily buying that to the extent that it was in the beginning.
So where do you hide?
The term hide is such a tough one because when you're managing money, you have to be managing money, right. But I think this goes back to where we were sort of positioned into the beginning of the year, which is the balance sheets, cashle all those things really matter. All of the money that is being spent by the mag seven has made the mag seven less attractive than it was. I think that was a place where people spend.
A lot of time.
There was a lot of money in there. Some of that's come out because people are worried about that spend. There's still a lot of companies that have good cash flow, decent balance sheets, and are doing business that will continue to do it. I think growth is going to slow. It just makes it more tricky.
And Video has done nothing half a months. Microsoft was down pretty hard in the month of March. Alphabet down to you mess it down by double digits. What's going on with those names?
I think the big concern is they're all spending a lot of money. They're all spending a lot of money, and we're trying to figure out what the returns on that money are going to be right now, since they're all running into it. It was fine for Nvidia for a while, then people get worried about it. If you start to see anybody pull back on Capex, that's going to give that whole sector a scare because everybody who's spending a lot of money is now borrowing.
Do you think we're close to that moment learning that release.
I think we're closer than we were. I think we're much closer than we were because you start to see the electricity issues with data centers too. Right, Maine just said no data centers for two years. We want to see what happens.
There is a.
Conflict now between energy and data centers that there wasn't before that this is just exacerbating. I mean, it was there before, but it wasn't in the headlines in the same way before. And now you're starting to see that, and I think that that could kick something like that off, and I think that could be problematic.
Is that the reason why people don't see necessarily big tech being the obvious leader out of this potential rut that we see in the equity market?
I think so. But on the other hand, I will take the counter argument and also say they are in the best position to weather this in the end. So even if they do pull back CAPEX, even if they do, even if people start to get really worried about that, they're still generating a lot of cash. They're going to
generate a lot of cash. So to the extent that those multiples have compressed a little bit, that probably makes that part more attractive because you don't know enough about what's going to happen with some of the other sectors that are pulled back, like software, although I definitely think that's going to be an and and not an or for AI.
This is the Bloomberg Surveillance Podcast bringing you the best in markets, economics, angio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app