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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. 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. Dan Pickering of Pickering Energy Partners writing, if the US just stops, then Iran holds the keys to chaos by threatening future straight shutdowns. This would create a perpetual risk premium on oil prices. Dan joins us now for more, Dan, welcome to the program. Let's build on that last line. It's important. Do you think this is regime change for the price accrude.
It's certainly putting a lower floor in on crude.
And it really does depend, as and Maria is.
Saying, it depends on things that are very difficult to understand and predict. And so if we end the war in Iran, without some sort of definitive action that controls the straits of horror moves, there's going to be a higher price to crew.
Is it going to be triple digits?
Not necessarily, but it will certainly not go as long as it's been recently.
And we've watched the domino's fall over the past two weeks as the energy couldn't move through the straighter for most production start at being come and now we're in a different phase. They're finding workarounds. First there was the pipeline, the East West pipeline in Saudi Arabia, and now there's other workarounds too. What face are we in at the moment?
Yeah, as the market titans, everyone looks for alternatives. Sooner or later, you can't tweak around the margin, and the problem remains. Fifteen percent of global supply is offline. You draw down inventories, you try to reroute pipelines, but that's just too much oil to work around. And so at some point point, and that point is is months, not quarters.
At some point price is going to have to solve the supply demand equation, and that price isn't isn't where we're at today with WTI near one hundred, it's going to be twenty or thirty percent higher.
So what is.
The oil market right now pricing in given the fact that there is a high likelihood that this conflict is going to go on for at least another couple of weeks.
Yeah, I think in a couple of weeks, I stop looking at the front month or the near term spot prices because those are wildly volatile and move with newsflow. I look out to the twenty twenty seven and twenty twenty eight crude futures, which have moved from call it sixty dollars a barrel WTI up into the sort of high sixties, low seventies. That tells me that the market's decided. There's five to ten dollars longer term premium that's coming in because of potentially how this situation winds up.
There are two.
Schools of thought dan On one hand, some people say there will be a longer, high, long term price simply because it'll be hoarding and a premium on some of these physical goods. Other people say that if the short term situation of the short term conflict does get worse, escalates and creates really high energy prices that actually on drive prices down incredibly low on the back end of this conflict. Where do you stand on that?
Yeah, the issue of the higher it goes, the more demand destruction you have, the longer it takes to recover from that. So the higher it goes potentially the lower it falls. Where I stand on this is that it is all about the duration.
If the straits are closed for six.
Months, we're going to have one hundred and twenty five dollars oil for quite a period of time. We're going to have economic issues, probably a recession. If we solve this in the next couple of weeks, we probably come back down to the seventies, Gasoline prices come back down to reasonable levels, and we're sort of back to a new normal where gasoline and oil are a little bit more expensive, but not dramatically more expensive.
Dan, what's the gap right now between the physical market and the futures market, Because I'm looking at Oman and Dubai crude and they're fifty five sixty dollars higher than we're brent Is trading.
Yeah, if you have to own the physical barrels, you are paying a significant premium over the financial markets to get them. I think the financial markets ten times bigger than the physical markets. So financial markets pricing where you can trade paper barrels, if you are trying to get a barrel in the Middle East, you're paying more. Same story with jet fuel and other products. So there are signs of physical supply tightness that is not being reflected
in the financial markets. That has happened historically as well, so it's not unusual, but it does say that the physical market quite tight.
If we have a prolonged shut or the Iranians continue to control and not allow most vessels to go through the Strait of Hormuz for a prolonged period of time, well the physical market or the future market rather catch up to the physical market.
It'll certainly, it'll certainly drag the financial markets higher. You're right now, you're pricing out demand in isolated instances with that one hundred and fifty dollars crew in the Middle East, for instance.
On the physical market.
The financial market's going to move up to the same spot and pull basically prices worldwide that direction. And if that happens, then we will start to see, you know, we will price out the five, ten, fifteen million barrels a day that we are not able to get through the straits.
Then what would happen if Iron turned around and said any vessel with a Chinese flag on top can come through, no problem with that changes things materially.
I think what we'd see is we'd see a lot of Chinese flag vessels moving through the Straits, and I mean the market suffision will move quickly to have China be the source of shipping through the Straits.
But I do think we'd see near term prices drop.
And I'm a believer that when this conflict in regardless of how it ends, near term prices come down.
Because more oil will flow.
So, whether it's Chinese tankers, a US flotilla, protection, regime change, etc. However it ends, prices come down, more oil through the straits, prices come down.
The question is come down to what.
Well, Dan, this is what I'm trying to work out though, where's the pressure point and who holds the case. And ultimately it feels like the pressure point is going to be in China. It's not going to be here in the United States. And they hold the case they can get the Iranians to come around. Now, am I reading it wrong or other people reading it wrong? Isra path there to reopen things.
Yeah, so China and India both approached to Iran and said, let us take tankers through the straits. That's another gambit in the strategy. The question is how long does that last or does the US allow that?
Ultimately?
Are you going to feel comfortable with Iran in charge of the straits and allowing some vessels to come.
Through but not all?
Do we wind up with this uncertainty premium that creeps into the market even if barrels do start to flow to Asia.
Stay with us. More Bloomberg Surveillance coming up after this.
It's the latest.
This morning, the Federal Reserve said to deliver a rate decision and new set of projections while facing triple digit crude prices. Neil Data of Rnmack writing, we're on track for three poor core inflation prints in a row ahead of a shock to oil markets. I think it's more likely that a cut is are raised altogether. Neil joins us Now for more, Neil welcome, was looking forward to this, So let's go from the top two pm Eastern time projections drop.
What changes?
Well, I mean, I don't think that the feder will be as dubbish as they have been if you judge it based on the summary of economic projections. I mean, if you just think about this in terms of mark to market and you're a forecaster, it's more obvious that they need to revise up their core forecast. I mean core PCE is basically tracking above three percent as of this meeting, and they expect it to go to two and a half percent by the end of the year.
In order to hit that bogie, you basically need core inflation prints I think around two tenths of a percent for the rest of the year. That's a pretty pretty tall order all things considered. I mean, we haven't even seen the flow through of energy into core inflation, and some of that will bleed it. Not a lot, but that's going to happen. And so you know, if you're looking at this objectively, I think you just have to say it's much more likely that they'll be revising up
core PC inflation. It could be as much as three tenths then revising up the unemployment rate estimate, which basically stays at four point four percent. So you put that into a simple tailor rule model, John, and you know, I think thirty basis points higher on CORNFLA. That's probably good for enough of them to take a rate cut off the table.
No, you've been pounding the table about the labor market and saying that it is much weaker than people are currently giving it credit for, or lacking the credit of. I'm just wondering, what do you think the consequence of a FED remaining on hold is for the economy.
Well, it's not good.
It's not good.
I mean, it reinforces the downside risk of the job market. You know, ultimately, if the unemployment rate is going up and the FED isn't easing and you know, providing some kind of shock absorber to that, it just reinforces the upside risk to the unemployment rate.
Do you think that it increases chance of recession this year, which ultimately no one is really pricing in.
Yeah, I mean I think that the risk of recession is higher than the markets believe. Of course, I've said that for some time now. But you know, look, at the end of the day, the economy is not in the same place it was in twenty twenty two, which is why drawing parallels to that period I think are misplaced. I mean, back then, the labor markets are wrong. Real incomes were rising today, that's not the case. Real incomes, not of transfers, are running basically half of a percent
over the last year. And that was true even before this latest inflation shot. Of course, back then, we had a massive pile of excess savings that consumers were able to draw down. Again, that's not the case today. The savings rate, if anything, has already been drawn down. I mean, that's one of the reasons why consumer spending has been as strong as it has been over the last twelve months or so. And even then, consumption has been slowing
despite that drawdown in savings. So I think that the consumer here is on, you know, not as strong footing as was the case a few years ago. And you know, it's encouraging to see oil prices moderate somewhat today, but ultimately we're on a glidepath nationally to four dollars a gallon gasoline. I mean, that's that's likely to happen at some point next week or two. So that provides some
sticker shock, I think to consumers. And you know, one thing we're not talking about, we're not talking about tax refunds anymore. So a lot of the enthusiasm that people had going into the year, I think has been effectively neutered as a result of this.
Well, Neil, in some states we're ready above four. In the president's own Florida, we're at three ninety three when it comes to a gallon of gasoline. You said going into the weekend, the two core pillars of trumpnomics are rising equity prices and low energy prices. Are we at risk of losing both of these at this moment?
Well, I mean I think we're losing the f I mean for households.
Of course.
The main issue is that, you know, even though America is a large energy producer, now the money doesn't recycle back into the economy quickly, so consumers will spend less than oil producers will spend more, at least in the short run. So I think that's something that people need to think about here, is that, you know, the sort of the els city of the spending. It's not like oil producers are going to take their new found income windfall and go out and spend it in a bunch of mining rigs.
I mean, in fact, to.
The extent that people are saying this is going to be transitory, they may be less inclined to do that. So I think the growth shock is actually that much more material, at least upfront. But with respect to equities, you know, look, equities are hanging in there. I mean, there's some there was probably some anxiety before all this. So even if you get a quick resolution to this, I mean, I don't think we're sort of like raging
back to new highs. But for now, I mean, the stock market is you know, for lack of a better phrase, trusting in Trump.
Stay with us. More Bloomberg surveillance coming up after this. Here's the latest this morning, Israel claiming the elimination of another top a round in a fish, the US ramping up efforts to reopen the strata for most, dropping five thousand pounds bunker busters on Iranian missile sites. Seth Jones csis with this to say, writing, the brutal truth is that while the US military may succeed in degrading Iranian capabilities, it has dug itself a large hull in responding to
other global conflicts. Seth joints are now for more.
Seth, good morning, good morning.
Where and how is this making the US more vulnerable?
Well?
I think the reality as the US's own national defense strategy and national security strategy. Note that the US priorities are elsewhere in the world, China in particular, but also the US notes Latin America is an ongoing war in Ukraine with the Russians right now, and the US is already running low. It was already low before this war started, on key stock piles of both offensive long range munitions like the JAZZM and the Tomahawk, and also on defensive
munitions for Patriot and THAD. So as those stockpiles run low, there's a big question. With the Chinese pretty active in the Taiwan Straits in the South China, see how much the US is going to have left in its bins for the future.
Lots of reporting too as well, that China is keenly focused on this to understand how the US military works. What are they learning from our offensive right now on the.
Gulf, Well, I think they are seeing, to be clear, they are seeing a US and an Israeli military that are superb but precisions strike.
They are also superb at air defense.
I mean we are shooting down a large number of Iranian drones.
Cruise missiles, ballistic missiles.
We're also striking with precision the leadership command of control bases. But you also see the limitations of the US military. It's stockpiles of munitions, and you also see that asymmetric challenges that the US faced in Iraq and Afghanistan.
We're seeing now in the Strait of Hormuz, which is the threat of minds.
It's not a big conventional force that the Iranians have, but it's those asymmetric challenges that do pose the throat.
You touched on it when you're talking about the Chinese vessels that are in the Taiwan Strait. Would this be an opportune time for Shijiping to do something when it comes to Taiwan.
It's possible. Anything is possible.
The big challenge for the Chinese at this very moment is they have obliterated their leadership within the last two to three years. They've gotten rid of over one hundred senior PLA People's Liberation Army officials, including of their top committee, the CMC. So the Chinese are not really in a position from all levels, the strategic down to the tactical level operators to make a move at this point.
But we do see them. I was up in an aircraft.
US Navy P eight in the South China Sea last year.
The Chinese are everywhere.
They're conducting exercises on a regular basis around the Taiwan Strait to simulate a blockade, so they're certainly thinking about it that I don't think now was the ideal time for them, just because of what they've done.
There's a question about just the munitions and what type of re sources the United States has. There's also a question of alliances and where they lie. How do you see them really shifting in the wake of, and perhaps accelerated by this war in Iran?
So I mean on the alliance structure.
I've talked to a couple of senior European defense officials, including Minister of Defense the other day of one of the US's NATO allies. I think the challenge they were never briefed on this war to begin with. They were asked once the US struggled along those lines to come in. The same was true with the US allies in Japan, South Korea, Australia, all of which have been hesitant to jump into the war that the US in Israel started.
So I think the US position.
With some of these allies has been very transactional recently, and I think at some point there has to be an effort to bring them, bring them more closely together. But they are very concerned, the ones in Asia about the growth of the Chinese, and the ones in Europe very concerned about the Russian military.
Just to finish on China, have we the US and I think about Chinese capabilities in places like around in places like Venezuela, and deficiency specifically, I.
Mean on the Chinese side.
The realities, the Chinese have not fought a war since the nineteen seventies, and they weren't particularly effective. But what they have done is they've provided components to the Russians in the war in Ukraine. They've also provided components in various types of assistance, including intelligence to the Iranians, not just now what over the last several years, including to some of Iran's partner forces, including the HOHO this in Yemen.
So they've also put contractors and intelligence officials on the ground to learn how to conduct these kinds of war.
So they are taking notes.
How flawed is that experience though given how clean the operation was in a place like Venezuela. We've had all things like they've got the defense systems that were sell to them by the Chinese, and ultimately none of it stood up against US capability.
I mean, it really shows in some ways actually, and I know there had been there have been some comments last year about the expense of say the F thirty five stealth aircraft, which is.
In the billions of dollars.
But the benefit of a fifth generation stealth aircraft that Lockeed Martin.
Makes is that it's hard for radar to see it.
So one of the things I think that even those Chinese and Russian air defense systems are finding out is that a fifth generation and the US is now working on a sixth generation aircraft, they are tough to see.
This is the Bloomberg Survandans podcast, bringing you the best in markets, economics, antient 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.