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Terminal and the Bloomberg Business app. The White House taking an oil and gas export band off the table as a way to bring down energy prices after the Vice President Jdvance met with oil executive Stephen Shork of the Short Group, writing, the Brent WTI spread will not narrow until one of two things happens. Homer's fully reopens or WTI stops pricing. In diplomatic optionality that never materializes. Neither is imminent. Stephen joins us now for more. Steven, welcome
to the program. I want to get to your line in your research. The Brent WTI spread says everything diplomacy won't. Stephen, just build on.
That yeah, absolutely, thank you.
So the bread market is now the benchmark for the seaborn trade in oil, and this is the market that is pricing the conflict is pricing the war is pricing the shortages that we are seeing. If WTI market prices optionality, prices optimism.
It's a landlocked contract.
It's a futures contract, and like every futures contract, it derives its value from a physical asset. The physical asset and WTI is landlocked in the Oklahoma.
It's a different type of crude oil.
Brent is a similar crude oil, a price in the land basin barrels, and it's the benchmark for the seaborne trade. So every time we see a dubbish headline the war might be ending or there's an off ramp, that optimism gets priced into the Brent, the WTI contract, and that is the hope contract. The bread market is the real market that is pricing the real event what's going on.
And that blowout in the spread that we've seen over the past week we can have tells you that this war is far from over because we are seeing a tremendous bid in Brent over that WTI contract.
Steved I want to pick up on your point about what the WTI is pricing in about policy, the US government could do. So yesterday Secretary Right tweeted that there is going to be no export pan, but then I had a bunch of calls from people saying no export.
Pan for now.
Do you think it's something the US will keep in their back pocket in case prices continue to rise?
Absolutely.
Now, let's be clear, an export pan would be catastrophic for US oil production because all it would do is pent up more supply here in the United States of oil we don't necessarily use, so we don't have a use for it, so we're not going to burn it, so inventories will just build, and as those inventories build, there's no place for new production to go. So ultimately it's a catastrophic move for production. And I think it appears that the White House got that message, but you
never know. It does make a nice headline, so we could potentially see it's a political tool, it's not an economic tool.
So certainly there is that potential.
And clearly with the way the Brent market has gone, we've gone from a five dollars premium Brent OVERWTI at the startup this week, so now it's upwards of thirteen to fourteen dollars, so we've tripled that premium.
So clearly the.
Market is skeptical that an export ban is not off of the table.
Steven, do you even think Brent right now is pricing in really what is going on in the region. When you look at Oman futures, I think yesterday they blew past one hundred and seventy dollars a barrel that's more tied to the physical barrels right now that are moving in the Gulf. So is Brent even accurate?
It's an excellent question, and you know I'm restent to say it's not, because then I've been saying, oh, the market is wrong. But to your point, we have a buibercated market, so the brand market is still an Atlantic basin market.
That's where it's derived from.
To your point that Oman and the Dubai future contracts which are linked more towards the Asian markets, that is really reflective of the shortage. So with the Bread Dubai or the Brent Oman, Brent steep discount to those markets is telling you is that we're looking at the Atlantic basin that is well supplied with oil.
The problem is in.
Asia where all that oil is still blockaded up in the Straight of Jomus. Those are so your refineries from India through Japan up through South Korea are bidding for that oil and hence why we're getting such a huge disconnect between the two markets. So the answer your question Brent Brent is certainly disconnected. It's more connected as we've said,
relative to WTI. But actually the way the shortage is with the physical shortages represented in the Oman and Dubai markets clearly again that is another telltale that this war is far from being resolved in any sort of positive manner.
And Stephen, that's the reality for Asian importers, buyers off that crude of that physical asset. Do you think this mark has taken too much comfort from the future's curve.
It's really interesting and where we're really seeing the blowout. And to answer your question, I think the market is rather relaxed. Is if we look at the Brent do my market for instance, if we believe in market theory or in that curve, then we're looking at Brent trading at a thirty forty dollars discount to Dubai a sixty seventy dollars discount to Oman. So the question is when does or does the market catch up so that we'll take to Dubai market. Right now, we're trading out about
a thirty five dollars discount Brent below Dubai. That's not supposed to happen. Dubai is an inferior quality oil. It trades at a discout to Brent. But that's not the case. But we know why. But we go two months out the Brent premium and we said Brent normally trades out of premium to Dubai is now trading out a life of contract high of nearly eight dollars of a barrel. So what the market, at least what the curve is telling us is that, yeah, there's.
A real problem.
There's a stranded barrels in the straight or hooves.
They're not going out.
Therefore, Dubai trades at a massive premium to Brent. We're going out two months that premium reverses now to a significant discount. So the market, if you believe in term structure or in the forward curve of pricing theory, is telling us, yeah, we've got a real problem in the spot market. By the time we roll into summer, there's going to be some sort of exit in this war remains to be seen. We're not seeing it in the product markets, for instance. So another question now is the
diesel market. The crack spread of the margin between diesel prices and oil prices in the Golf Coast is almost seventy dollars a barrel.
That so one of two things are going to happen.
Oil WTS is going to have to catch up to where product prices are. A product price is going to crash because of demand destruction. And now we're talking about significant economic contraction. But the here and the now is that the spread is telling us significant shortage in the spot market prompt month, but going for two months out we should start.
To see some sort of resolution. At least that's how the market.
That's what the foward curve is suggesting to the globe.
Stay with us. More Bloomberg surveillance coming up after this. The US and Israel working to calm crude markets, both countries vowing to avoid targeting Iran's energy infrastructure. Following retaliatory attacks across the Middle East. The fuel and oil spies spike general Robert Welsh of Academy Securities, writing, the conflict is transitioning to a war of attrition. There is no
clear checkmate scenario. General Welsh joins us now for more General, welcome to the program sir, Are you suggesting this war has entered a new, more enduring phase.
Good morning, John Jonathan, Thanks for having me today. You know, the war changes as time goes on, and what we're seeing now is from a perspective, it is going into a little bit more of a war of attrition. There's military sets that we've talked about in the past and what the US military in the Israelis is trying to take out. They're systematically doing that. They're very successful from
a military standpoint. But as we see that the nature of conflict is really a clash of wills, and that clash of wills is going on now between both the US, Israelis and Iran. And Iran has to say so in this and what we're seeing from Iran is they're taking a very asymmetric approach to this, and their asymmetric approach is number one. Their objective is the regime to remain.
But we're now seeing what's changing a little bit in that is they're also looking at cost imposition on the US and Israelis and also the golf partners in the rest of the world. So that cost imposition now is changing, and we see those attacks now becoming more prevalent on infrastructure in the Persian Gulf, and we're seeing it more
and more taking place. And that's that costant position that they're now parting to put to make it so painful that the US, the Israelis, and the world community want to get out of this situation.
General, we do have the United States sending a second amphibious assault ship to the Middle East. Can you walk us through what these highly trained marines could potentially be used for in the region.
Sure.
I think as you look at the combatant Commander Admiral Cooper in the Central Command, he wants to have as many capabilities.
In his hands as he can use as possible.
Is the planning takes place, we see what we call branches and sequels. As things start to change on the battlefield, then different branches and plans come into play. Having a marine amphibious group with a Navy amphibious ready group with it marine amphibious unit, that capability brings it's a toolbox in its own which adds to the toolbox that he has, and it brings many capabilities that comes to bear. It's got a reinforced infantry battalion with plenty of fire's capability
or attack capabilities. It has a full range of aviation assets from attack helos, heavy transport helos with the H fifty three's, it's got the MV twenty two's with our rotor assaults support aircraft that can go out long ranges and do raid type missions or insert missions. And then it's got F thirty five's on board two that can provide the close air support that.
The team would need.
But in this case, they'd be inserting themselves into a very large joint operation where there's many capabilities that the Centcom commander has to be able to fit this tool into his toolbox and be able to use it as he sees fit. So some of the missions you could see you talked about carg Island, there could be raids there going into the if there were any indications that we'd go into than nuclear sites to try to hold those. We've got very highly trained special operations forces that can
do those missions. But you'd probably need a conventional force to go in that the Marine Expigracery Unit can provide to go in and provide some of that security along with many of the joint assets that would be on top of that providing air superiority.
How vulnerable will they be though in a narrow corridor.
I think what you're seeing right now is why the US Navy is not operating inside the Straits because those conditions have not been set by the Joint Force to be able to bring Navy ships in there. Yet the Navy would rather stand off than stand inside there where there are much more risks. So the threats to the Navy, both from drones, missiles, and fast attack craft has to be taken down more before you start to see them entering.
So this is a phase campaign based on conditions, and what we've seen recently start to really play out is as the air superority has been gained, the US has now brought in capabilities like the A ten aircraft, which you start and operated at a very low altitude, can see targets and take out small targets like the fast attack boats or where they've got missile sites hidden along with these attack aircraft they're in so they're bringing much
more capabilities in there than are for that type of mission. The septic conditions for navy aircraft could come.
In stay with us. More Bloomberg surveillance coming up after this. The conflict in the Middle East pushing global bond the attire as central bank's way, increasing inflationary risk. Terry Weiseman of Macquarie Rights and the ottomate cost of the war is unknown, but bond traders aren't taking any chances. Terry Johns is now for more its Terry Carnic twkerd boarding Terry Watson I said, what's going on? What kind of a question is that in daylight today? See whatd ride
it's been in the old bond market. What's your reaction to the most same, particularly at the front end of the cave.
Well, the front end of the curve is responding to policy, of course, John, it's you know what we wrote on March fourth, actually just a few days after the war began, was that central banks were going to respond to this war and to the implications having for oil prices in a hawkish fashion. Now that might not have been obvious on March fourth, right, you know, in terms of crisis and certainly in terms of high oil prices, we've also
seen historically higher unemployment. We've seen recessions in some cases. But I felt that these central banks would have been felt burned by what had happened in twenty twenty two and twenty twenty three, and that they weren't going to take any chances. So it's not just the bond traders are not taking any chances here. The central banks aren't taking any chances as well, certainly not through their rhetoric.
And that's why the front end of the curves moved up, and that's why you've seen these very wide swings in the last few days in the money markets. Projection of where central bank policy rates are going to be at the end of this day.
I can tell you as well, because the consensus view coming into these central bank meetings is they would look through this shock chair and power effectively said it's not that simple. And the takeaway from the ECP and the bays they might actually hike in the next several months.
Sure, and keep in mind there's something going on here besides just the increase in oil prices and its transmission to CPI, for example, Because if it was just that it might not be that big a deal because in many of these industrialized countries, you know, the energy products are not that large a component of the CPI basket.
I think what central banks are worried about are the so called second order effects, whereby if you do get an increase in inflation, let's say by half a percent or three quarters of a percent, it becomes sticky because it becomes embedded inflation expectations. It then becomes embedded in wage demands, and you don't have just the impulse from the original increase in oil prices, but you have a
propagation of inflation expectations that causes more inflation. That's why they're trying to nip this in the bud right now, admitedly through their rhetoric at first. But if they have to raise rates, they.
Will raise rates.
Can we talk about the cost of this war?
Sure?
To day, I believe you said it's one to two billion dollars. Now you have the Pentagon asking Congress for two hundred billion. Are we going to see movement on the long end of the year old curve because of this?
I think the long end of the curves have moved up for three reasons, and one of them is clearly the fiscal implications. But let's talk about the first two reasons. The first reason, the most important reason, I think, is just higher inflation. When you have higher inflation, nominal assets, nominal paying coupon assets like long term bonds just seem
all of a sudden less attractive. And we know that's the case because break evens these in these markets have gone up inflation break evens that is telling you that the market itself is expecting more long term inflation. People have been fleeing into the inflation protected products. They've been fleeing out, relatively speaking of the nominal products. So yields are going up on the long end of the US Treasury curve and in the long end of the curves
in Europe. The other issue here, of course, is that central banks are tightening, and that makes it more expensive to carry a position in long bond you're financing at a higher rate. It becomes less attractive to do that you sell off the long bond. And the third reason is the one you've just highlighted, which is that there might be more issuance. Why, because there's a cost to managing and running a war and I've seen reports suggesting it's one to two billion dollars per day is the
cost of the US right now. So obviously, if this becomes a long war, it could start to impinge on the outlook for death.
So we've got about forty five seconds left. Where a guests earlier on the programmer said some value would opened up at the front end of the curve, the barter hike is simply too high yields of three where fat funds are right now, can't push it much further, and if they do hike over the next two years, they may well cut in response to those hikes further down the road. Where do you think value has opened up across the curve?
Look, I think it's not just a question of where on the curve, but maybe where. Internationally we have seen major, very aggressive swings. Let's say in where the market expects the ECB to be at the end of the year, three hikes, for example, is priced, and currently two or three from the BOE. I think there the market may have overreacted. In the market may be anticipating that this war will take will last longer than it might actually do.
So, and of course if.
It doesn't and if it ends somewhat sooner, you're going to see those violent reactions in the front end come back down. So if I were looking for value in the short in the short end of the curve, it's not so much we're on the curve six months, twelve months, eighteen months. It's internationally. I think some markets have simply reacted more than others, and now might be where the value is.
This is the Bloomberg Sevents podcast, bringing you the best in markets, economics, and giet 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.