Surveillance: $150 Oil With JPMorgan's Malek

This morning, this is not only the interview of the day, but I'm sorry, maybe it's the interview of two thousand twenty one long agoing far away. At Deutsche Bank, Adam Saminski had a team to dream of on hydro carbon's. They were red cover to cover worldwide. Christian Meylick part of that team and he is now at JP Morgan or He has a thirty two page power point migrating base case oil out to eighty with possibilities out to well over a hundred dollars of bear Girl and even

out to a hundred and fifty dollars a barrel. After JP Morgan London dusk. He joins us this morning. Christian. Within all the hyper detail of your wonderful report is the idea that United States shell production will not come on. Boy, do a lot of people disagree with you. Why are you skeptical Shell will produce it? A hundred dollars of barrel? Paul, thank you for your client comments. And I think that you know shale isn't a straight jacket. That's the best

way to explain it. The straight jacket is they've got to pay dividends, they've gotta paid their debt down, and they've got to decarbonize. When you layer all this on, we can talk economics four year dollars all day long, but the reality is the fiscal baggage on top of that, related in parts of transition, related in parts of what I call the black premium, which is, I'm a share little company. I've got to give Wayne more cash back now than I ever had to because my investments only

only for that reason. When you put that all together, you're clearing seventy five to eight dollars at least before you're all to qualify to invest and grow your capex once again, three years ago, that was down at forty. So things have fundamentally change, particularly in the context of this energy transition. It does applied to shale, not just the majors. Let's not bury the lead here, Christian. This is now earlier this week, one fifty one fifty on Brent.

Let's go there, Opec. You say, show me the barrels, walk us through. It reminds when I said thirty dollars back in and I think, ultimately what we have now here is this garage of spare capacity. I love today's headlines. Are they going to add four hundred, They're going to add two hundred and fifty, And we can debate this all day long. The question people are asking is what

do they actually have over the medium term. And you know, we've been running this supercycled thesis from the spring of last year and all went negative and it was almost right in front of us. We didn't see it, which was actually, we're obsessed with under investment with the majors. What about OPEC. You've got fiscal problems, you've got reservoir issues,

you've got supply chain issues. You throw that all together and our spect capacity nowalysis comes out as half what the market deems it to be around five million pounds And what does that actually mean? It means that we don't think they can actually clear two hundred up to that amount by the second half of next year. And so when you run that analysis, you get into around

a hundred and fifte hundred twenty dollars. But then if you fast forward in that scenario come eighteen months, there is this kind of like sort of like the penny dropping moment in the market, you know, which is, oh my god, these guys don't have the spare capacity. And when we've gone to look and looked at forty years of history around when a spare capacity being you know, single digits as a posential of total capacity, that's when the risk premium shoots up. And that's how you get

two hundred and fifty. You kind of your fundamentals are thing around a hundred and twenty, and then it's the market saying we've got no we've got no cushion here anymore. Christie and I just want to go through these numbers with you so our audience can really get their hands around them, because that's what separates you in the crowd. Right now, for OPEC spare capacity, you're at two million consensuses at four point eight that's a two point eight

million spread. Kristen, can you walk me through the numbers? How you got to two and what you think everyone else is all the way up there by five? It's it's it's basically, we've gone through the west upfroom countries. We want to juicy sea countries. And what we're looking at is not the oil in the ground. We're looking at two things, how they finance the oil production effectively as what we call the spare capacity, and to where the logistics supply chain are and whether it's conducive for

them to be able to do it. And when we look at this, we sort of break it into of high risk, medium risk and low risk countries. High risk countries you've got Iran, Libya and Nigeria and god, I mean, I love everyone sort of threatening around Iran. Sanctions again, remove the sanctions. Let's see what you've got in terms of actual barrels, and we think they don't actually have more than three and four and thou in addition to

where they're already are at the moment. And then we move to the medium risk and believe are not rushes in that camp because they've had reservoir problems, they've had to deliver storage into their own inventories, and equally they've underinvested, and then they can't add quickly enough because it will

hurt their reservoirs. And then you have a low risk countries like Saudi in the UAE, which have been investing in their specapacity over the past three years, and therefore as and when demand calls for it, they will be able to deliver. So we're actually two point eight million barrels of specapacity, the market somewhere around four and a half to five and a half, but it's a long way down and I think people ask me, when is that going to actually play out? How do we know?

How can we believe this? It will simply be through month and month production ads where they just can't keep up with whatever they're targeting, be it four hundred or potentially to fifty Christian The idea of a hundred and fifty dollars a barrel oil comes from the idea that demand is going to pick up back to pre pandemic levels by March of next year. How does the armicron variant really play into this at a time when we see people canceling their travel plans and we see a

lot more uncertainty in the global vacationing space. If nothing else, Yeah, you're absolutely right. I was hoping you wouldn't ask the question. But the whole thing relies. The whole thing is anchored on demand. It's almost like the you know, it's nine and nine of our thesis that demand actually continues to recover and grow. We've already adjusted in the context of a weak aviation outlook in Key One clearly that was

omicron is going to be um somewhat uncertain. But we do think as a house to add on risk because we do see demand recovery. Mark Colin the also talked about that in his recent piece to Buy the Dips, and the raality is that, you know, we're sort of coining this very especially the the omega, in the sense that this is potentially what qualifies for a risk contrade, because immunity will continue to be strong, and we don't think that hospilitations will actually keep sort of end up

of catching up with the cases. In other words, even if I have high cases, it won't actually fundamentally impact demand. Outlook. Now, if we do see demand potentially damaged where we're around we're around a hundred million pounds from next year, I do expect then to take take action Christian the perception in America as a Democrats, President Biden's secretary grand Home

are against American oil. In our conversation with Secretary grand Home, what she emphasized is oil is one global price, is it. It is one global price um and it's set ultimately by the marginal producer. And if the marginal producer can't deliver owing to productivity or federal land restrictions or Wall Street, that marginal role moves to whoever does have the spare capacity. And at that point the question is model price do

they want? And I think ultimately, when we think about e M countries, I understand the point around wanting to keep press the prices low, but that global price rob ultimately drives significant revenue for a lot of the poorer e M countries, and so there's a sort of interesting

tension between the consumers um and the producers. And I think that then segues into opexibility to actually manage this balance between having to keep the west and sort of restrict inflation visit versus the i M countries that relyableheartedly on this as a revenue source. But the bottom line is the marginal cost of the marginal price setter is shifting to OPEC. Then it all comes down to how

much additional barrels they have. And this is the point where it's almost like you can ask them to do whatever you want, but it really the question is can they actually do it well? Christian, just real quick here, does this give them incredible cover the omicron variant to basically not boost production for January at their meeting that

ends today? It does. It gives them cover it and and it actually gives them a breather, which is that you can actually get back to your reservoirs, focused on the technicals, build your inventories and delay um and at that point when demand recovers and we don't see it being damaged, but ultimately as it continues to grow, you then have these barrels for a higher or price and

a sunnier day. Christian, before you run, because we've got sixty seconds left and to make sure we use all its and we've got with you just briefly, do you think this esset class has taken a bit of a hit the credibility of it, it's taken a bit of a hit recently. It's a great question, and I do I think that's rather that we've seen we're in a bear market for oil ultimately creates this volatility kind of paralysis, which is, you know what, I don't want to go

on holiday and come back and all down. This is just too high octane for me. And so with that in mind, I think that being able to put a floor on price is important. Ultimately that's open role in some ways, but equally the geopolitics of oil can often sort of get in the way. And this is where I think if you just take a step back and just cut through it all, we've got to come back

to what's the marginal cost to produce this stuff? And that's what we're trying to say here, mean a hundred and fifty dollar oil called this, colleague, quite bold, but people are missing the detail, which is actually what we're saying is the aged dollar, long term wal prices, what you're gonna need to produced the additional bowl and that's bullish reguties. Christian, just absolutely fantastic to hear the work that goes behind a call like that. It's just brilliant.

Christ a mantic there of JP Morgan, Tom out of London, brilliant Tom. When did we start to describe the holiday period as a period of getting together and breathing on each other and making each other sick. I'm enough to actually remember when there was a wonderful majesty of this towards Christmas. Sea. Yes, John, there were some excesses along the way. It's not about COVID, it's it's it's slipped

away over the last ten years. Yeah, well we got to the point where we had saying at the Christmas party that worked out, Well, let's get it back to let's get it back with dust coast Rick now, but a Christmas spirit with our global allocation. From portfolio manager of black Rock Russ, let's start right here your line. We expect interest rates to rise from these low levels. We think any backup in long term rates will be

contained given a still insatiable appetite for yield. How much of what we're seeing, Russ, is that How much of it is actually worries about the future, the future of this economy? Good more and Jonathan, still, look, I do think that what you're seeing now is the unexpected uncertainty over the virus. You know, we we thought we hope this was behind us. Clearly that's not the case, and this is why you've seen this modest pullback and yields.

But again it's worth highlighting even a few weeks back, when inflation was pushing up against thirty year highs, nominal GDP was pushing up against multi decade highs, the tenure was at one. That's not something that would have made

sense to us two or three years ago. I think a lot of it does come back to this longer term secular trend that has nothing to do with the near term inflation outlook, nothing to do with the virus over the next few months, and really is about the fact that we've been in a low yield world for decades. You've got an Asian population, people need income, and when you see these backup in yields, it's incredible how quickly people jump on that and enter the fray. And that's

likely to continue even in this current environment. Rossimnor to ask you this because not only is a global l ocation, but it's you really thinking across assets as well. How important is the sector call into the new year versus the individuals security call. I think the sector call is

going to be very important. You know, where you are in the sector always matters, But you think about the last year, you've seen days where the market is flat, and whether you're in the right sectors or the right style, he's made a huge difference in your performance. So you've got to get the stock pick right. But you've also got to think about what is the regime we're in, Or we're going to see inflation continue to climb, or

we're going to see growth decelerate. Those are going to influence whether we continue to see technology dominate, whether we go back to that value cyclical trade. Uh So, I do think it's gonna matter a great deal, particularly in an environment in which the economy, while still very strong and growing above trend, is almost certain to decelerate in two thousand twenty two. Rus we're giving narrative to all sorts of macro themes, and it's unclear whether this narrative

is actually playing out in markets. Instead, people are saying it's positioning. It's people hunkering down, cashing out of their positions after a tremendous year. If they were long equity, if they were long risk, What are you doing over the next couple of weeks as we head into two given the uncertainty and given the lack of conviction right now of what next year we'll bring. I think the

short answers were we're sticking to our positions. Uh, you know, we've had a portfolio for most of the year, really all of the year that has been overweight equities. We're going to continue with that because we still think an environment of well above trend growth and very low rates is still positive for equities. Were underweight duration. Again, we don't think right smelt up, but we're not changing that. And you know, we're also sticking to what I would

call a Barbell approach on the equity side. I don't think this is the time to chase steep value. I don't think this is a time to go all in on early growth. It's really a matter of having high quality cyclicals that are going to benefit for this recovery and sticking with some of the longer term themes and technology, communications, healthcare that we think are still going to work until

next year. Why do you think the dollar is going to continue to strengthen if a lot of the rate hikes have already been priced in, you know, the dollar, I'm going to frame it slightly differently if I can. I think the dollar has become one of the last hedges that are really working in this environment. We all know that, you know, the correlation between stocks and bonds have shifted up. Has been a problem this year, given

that as traded with risk, not against risk. What's happened with the dollar is that it's actually become fairly negatively correlated with stocks. And it sounds like, well, you know, fairly geeky observation, but it's important because when you get these days when the market is getting hit on rate volatility, which has happened a lot more in the last six to eight months, the dollar has generally worked as a hedge. So we've been maintaining and overweight to the dollar. We're

going to keep that into two thousand twenty two. Sintensity, catch up and good to see you as always, Rust Coast of black Rock, Thank you, sir. It is a hundred eighty nine miles from Munich to Davos, and this is a real important idea. Yesterday DLD Munich was canceled for January of two thousand twenty two, no doubt, getting out front of shoals and Chancellor miracle as well and Lisa, to me, that's the first real symbol of the log vector.

We see in Austria terrible, Switzerland somewhat like the UK, Frankly and Germany in between, and they're migrating in the wrong direction. It's so frustrating, especially because of vaccination rate and a lot of these nations in Europe is actually better than the United States. You wonder what we have to come as we head into the winter months and when we can just leave the pandemic era and enter

something more endemic that people just deal with. The latest headline of Bundestag to have quote open vote on mandatory vaccination. We have a mandatory conversation with Halline Becker, senior research Analystic Cow and barely describes as she has seen it all. What does it symbolize, Hallane, excuse me from Europe and do we see those tensions of Europe come over to America economy and America aviation? Yeah, morning, Tom, thanks for

having me. Um. Yeah, we're really concerned about dusk because typically what happens in Europe gets exported to the United States with some type of lag. Um. And I think you're right, we are going in the wrong direction. We need to move forward. Um. Lisa made the comment that this is endemic. We all get flu shots every year, so why wouldn't we get booster shots for the coronavirus every year? And it's a flu, it's a type of flu, a bad one, admittedly, But in order to have vibrant economies,

you need vibrant airline industries. And the only reason the world has been able to get as vaccinated as it has in the past one year has been because the airline industry, fed x UPS, DHL and others have got really distributed all this vaccine um that's enabled us to get to where we are. So why wouldn't we just keep moving forward and instead of moving back? Elena, what we would and what we could and what we should do is not necessarily what is happening, and we are

seeing these restrictions put back into place. We are seeing global conferences canceled, like the d LD in munich As how much just mentioning what is the potential ramification for an airline industry heavily indebted still from the pandemic, dealing with reduced capacity, reduced numbers of travelers, reduced business travel. How much of a hit are they going to take? Yeah,

I don't know the specific answer to that. Question, because to your point about liquidity, all the airlines grabbed as much cash as they could last year, and the government was governments, not just the United States, but worldwide government supported the airline industry to the tune of two billion

dollars and that money is still on balance sheet. If you look at all the US airlines specifically, which is obviously my purview, UM, you'll see that they have huge liquidity position, six billion dollars of liquidity, and and they

weren't going to repay debt um that quickly. Their their goal is to keep that liquidity in case of scenarios like this where you see continued UM restrictions in place, or where we make it difficult to travel for business because you require testing and so on, and so it makes it and practical to do a one day trip to Europe or something like two day trip to Europe whatever. So so I think that, um, the liquidity side of

the equation is fine. I think to your point about demand, we think we're seeing demand x business traffic and international that exceeds two thousand nineteen levels UM. Two point four million people were screened on Sunday, which is a near which is a pandemic record where clearly within ten percent of where we were in two thousand nine. So I think that's a good sign. Um. I was at an industry event last night. A lot of the airlines were there.

Not well, few airlines were there, and um, they said they haven't really seen an impact, but are expecting in an impact, but they haven't seen cancelations for December yet. They're still seeing December bookings Alane, And just to sort of put this into cold relief, if there is another downturn and travel, if the US implements some curves similar to what we're seeing in Europe, are there airlines that will not be able to survive it? Probably yes, Um,

I mean it will be tough. Uh. We don't have any cell recommendations, but we actually do have bone cell as I think about it. Um, But yeah, if we go into a downturn again, even with their massive liquidity, some some one or two airlines, well, this is the gloomy at least, this is the gloomyous Helene Becker I've ever seen. Helene. Let me cut to the chase. I own United Airlines at ninety You told me to get out. I didn't. I got crushed you loaded the boat in

March of two thousand twenty. Is this an opportunity to reduct March of two thousand twenty again? Yeah, I think so. I mean to your point of being bullish, be bearish. Um, we're we have I think seven or eight buys actually, and I was looking. I went out to Lynch yesterday and the stocks were up, and I came back and they were down six. I do think it's a it's a significant overreaction and I need their opportunities. So yes, thank you, Helene Becker. Thank you so much. On something

we all care about, which is aviation. We do this of stunning headlines out of Germany. A theme this week has been uncertainty. It's out there and one of the best people we know to measure uncertainty is a gentleman out of the Wisconsin Complex of economics. Birthday boy Michael Darta joins us this morning. Michael Darta, Happy thirty nine, thrilled to see your cotton chiseled at thirty nine. Michael, you mix in the stock market synthesis with some wonderful economics.

I want to start with the animal spirit that links the markets to our economy. What does our nominal GDP look like forward? Well, it looks pretty incredible going into the fourth quarter. Tom we have tracking estimates pushing ten percent for real GP quarterly annualized in Q four. The p m I data yesterday would have been consistent with at least a five real GDP handle for Q four, but I think it will be stronger than that. And with high inflation, we've got nominal GDP running well into

the double digeons. So this is a very hot economy. But risk markets are jittery because of concern about this new variant. And then obviously Ben Chairman Powell has pivoted this week I think completely appropriately, so so we've got a bit of a dust up in volatility. But you know, these things happen, and this is an economy with tremendous

forward momentum, and that is a good thing. Not that What is the choice set that the Fed will have not at the December fifteenth meeting, But if I wander on, folks, a great terminal function on this is f O m C. If I staggered a January or the March seventeenth meeting of next year at St. Patrick's State meeting, what will

be the choices the Fed has at that time. Well, I think the Fed really does want to wind the taper up for midyear next year, so they have the flexibility to start raising short term interest rates if the economy continues to perform as it has been. Let's take a step back for a moment and recognize that the Fed is still doing quantitative easing, albeit at a slower pace each month, with an unemployment rate in the mid fours and plunging. Okay, during the last cycle, the unemployment

rate fell only very slowly. This is a much more rapid recovery, and we're very far along towards full employment with the Fed still doing HWEI in paining short term interest rates at zero. That is a policy that will cement a more permanent inflationary backdrop in place if policy doesn't adjust. And so if we're talking about you know, retiring temporary and transitory, a big part of that is

adjusting the policy stands to a more neutral level. And that's going to require the Fed to wrap up quantitative east sooner, and that's the right thing to do in my opinion. So taking a step further, Mike, in order to fight what you see as what otherwise will become a very persistent high inflation rate. What does the FED have to do? How much do they have to act

next year? Well, I think if they get going sooner with an economy that has a lot of momentum, that should actually increase the probability that we don't have a hard landing later on. What you don't want is a situation where the FED falls so far behind the curve inflation and inflation expectations become embedded, and then there's a panicky catch up to adjust policy later on. And you know, that's the that's the go stop cycle, and the stop

part usually needs a severe recession. So better to start doing adjustments that don't have to be panicky and radical earlier when the economy is strong and hopefully we'll be able to preserve the business cycle, um, you know, going forward. And so that's that's really the key here. But I just think it's important for people to understand this is not the last business cycle. We've got double digit at average annualized nominal cheating he growth since the economy bottomed

last year. In the last cycle, nominal growth was running four per anum on average, with sub two percent inflation those variables look nothing like that this time, much much much stronger. And so if we go back to the old Milton Friedman concept, which is that money times velocity equals prices times output times out nominal GDP, so by definition that that has a much more accommodative monetary stance this time. Uh, and they're they're going to need to

to adjust that light. I'm gonna channel Danny Blanche Flower of Dartmouth, who would come out and say people are ignoring some of the warning signs on the peripheries. The idea here that you have consumer confidence that fell dramatically in the face of some of the inflation reads that we've been seeing and what they see in the grocery stores, and that the participation rate really has not gotten back up. In fact, it's still far below where we were pre pandemic.

How do you spawn to these issues? Is this the new normal that we're facing? And if the FED has to sort of reckon with or if we keep policy easy, do we start to see more people come back into the labor market well on participation? You know, I don't

think anybody really knows exactly what's going on there. The hope was with schools reopening in the pandemic proceeding until this recent news that we start to see a pick up in labor supply, and that may still be in the offering, but so far the numbers have been disappointing. In the meantime, the labor market is tightening drastically. I mean, we've gone from you know, almost fIF unemployment in the eye of the storm last April to the mid fours uh and the Fed is still doing QI and holding

short term interest rates to zero. So you know, I think the question is how far along do you want to cook this thing? And yes, inflation is already high, the temporary transitory folks, and let's just face it, they've been completely wrong even even inflation headline inflation falls next year. You know, the that crew was just simply incorrect in terms of matut timing. So you have a lot of

forward momentum in this in this economy. Yet confidence is definitely, you know, looking a bit stopped, but you have a strong labor market with jobless claims. We just got the two figure. That's an extremely good figure. So this is not new in terms of this debate. You know, we've had previous waves of the virus even before the vaccines didn't stop, the recovery, didn't stop, growth didn't stop unexpectedly

high inflation. So you know, at some point, those making those arguments over and over again incorrectly, I think, are going to have to, you know, think about adjusting their view. Mike. We've sent a lot of adjustments in the last week. It's gonna catch up, Mike down to that of m Campotus on this economy. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live week days from seven

to ten am. He's Stern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg