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Low's is also what we're seeing within the commodity market as well, oil getting slammed. That is similar to what we saw back on August fifth. Joining us now for more as Jeff Curry, chief Strategy Officer of Energy Pathways over at Carlisle. Jeff, it's such a pleasure. Thank you so much for staying up late for us. What is seventy dollars WTI say to you about global growth?
It will definitely stimulate it relative to eighty five ninety, But I think, yes, you're right, it's still sell off based.
Upon concerns around China.
But the data disappointment was at PMI that was expected to be forty nine point five and came out at forty.
Nine point one.
Does that justify the oil market being at a record short Absolutely not. No, I'm not going to argue Chinese demand is robust in any shape or form, and yes they have structural problems on the longer term outlook, but by all means it's not a collapse that would justify the market being as short today as it was in the global financial crisis of eight. So you've got to ask what's going on here. It's something far deeper than a slow down in China, because when you look at
this market, fundamentally, inventories are low. The forward curve today, even after the selloff, is backwardated in a very high level of bagradation, which is consistent with a you know, a very tight, fundamentally strong market. And then the third
issue is concerns around OPEK bringing on supply. They're bringing on a small amount that is being completely compensated for by decreases out of Cosic stand as well as IRAQ, and given the credibility of OPAC recently, it's going to be important that that credibilities maintained.
So I think these fears.
Need to be put in the context of what the physical market looks like, which is relatively robust.
I'm curious, Jeff. I mean, as everyone tries to read these economic tea leaves, obviously oil sends a signal, or at least they think it sends a signal. Also, people are trying to look for those signals coming out of copper, and we're seeing a lot of weakness there for a fifth straight session here. We're a far cry from those days when people were calling for ten thousand or even
fifteen thousand, as one person called it. Maybe we get there long term, but I wanted you to talk more about the near term as exactly what's ailing that copper trade.
Well, I think you had two dynamics in China.
One, you had a very weak property market, and when everybody was bullish on copper going back in May, the offsetting force was that strong green cap back. So China was subsidizing and beefing up the green capex investment evs, solar panels, lithium batteries, and that strength with keeping strength in copper demand, offsetting the weakness in the property demand.
What has happened since then, The US as well as Europe have responded with tariffs on some of these EV goods, slowing down that engine of growth for China.
And at the same time, the policy.
Focused at propping up the property market has not come through as strongly as many people have thought, and so that weakness in the property market is currently dominating.
So what does that mean to copper prices.
It still has a floor based upon that strong structural supply story, but it has a cap on the upside based upon that weakness and demand. I would say, you know, eighty five hundred type on the bottom, ninety five hundred on the top until we start to see the policy begin to create some strength in China. But I want to emphasize China is not unraveling like a global financial
crisis situation in any shape or form. You know, you look at you know, we Chat pay numbers, it shows consumption up about one percent.
And yes, oil demand was a.
Little bit weaker than what would the economics would suggest because you have trucks switching to LNG from diesel.
When that's structural, that's priced in the market.
So I want to emphasize, yes, it's weak, but it's nothing like the positioning.
So let's get to the positioning part. You had a really interesting note out last week, Jeff, that talked about how oil being used in essence as a carry trade. I'm gonna pull a little quote from your piece. You say, with the rate cycle likely peaking, given recent data, we will see that the borrowing costs for oil will be relatively more expensive. And then you go on to say, hold only pull it up here forcing an unwind like it did with the end, which is likely cause fear
short covering from both the financial and physical markets. Basically, you're saying, look, what you're we're seeing in the market is that oil has been used to buy other stuff, and when that on wines, that's going to be a sharp spike up. What do you see that everyone else is missing?
You see this not only in oil but some of the other more capital intensive industries. What oil is more volatile than most of the other sectors, so it has an extra cost of holding it. We estimate that to hold oil with a risk free return of five point twenty five percent, which is where the money markets are paying you right now, you need a return in excess
of fourteen point twenty five percent called fifteen percent. A fifteen percent price move at a seventy five dollars price level means somewhere around you know, ten or eleven dollars a barrel, and then so your expectations have to be for a big upward move before you're going to own it. Now, with the sell off down to seventy three on a brint basis, the probability of seeing that upside is now much more likely. You're probably going to see investors pull money out of the money markets and put.
It back into oil.
But when I talk about the borrowing costs and being short oil, essentially by drawing down your inventories to very low levels, leaving yourself very exposed to being short. If something were to happen, like a demand surprise to the upside or some type of supply shock, then the physical guys that have to come in cover that short, which
means increase the demand for the physical barrels. And then you look at the paper inventories you know, call it working capital of physical oil, working capital of financial oil.
They're also short the financial oil.
And so when we look at the market today, you have you know, record shorts against really low inventories that historically doesn't happen. The only explanation for that is people are taking money out of this market, taking working capital out of this market, and putting it into higher returning endeavors. Now with the pullback, you're likely to see some of that money come back in.
You'll race back.
Part of the reason why we've seen the market go from you know, seventy three up to like ninety two, back to seventy three up to ninety two is the investor's got to be pretty comfortable they see a return in the oil market that's greater than what they can see elsewhere.
So what.
So what happens Jeff in a couple of weeks time when the FED, as most people presume, begins to cut rates, Does that change that trade?
Well, I think you can. There's an orderly unwine.
In a disorderly unwine, the FED cut is expected. You know, if they were to be much greater or something like, it's probably going to be a very orderly process. As we move back to lower risk free rates of return or think.
About the cost of capital holding oil.
In the financial as well as the physical, where that's going to begin and begin to unwind.
Here's another point too, is to take is that the.
FED is a global central bank with a low mandate, meaning it's policy effects the world. In many of those places like China, Europe of Japan, they're very capital intensive, and as the US lowers the rates and lowers that cost to capital for a lot of those capital intensive sectors around the world, there's going to be a lot more leverage in those parts of the world where you're going to see the uptake in oil is in particular,
one of those industries. It's very capital intensive and very global in nature, so you should start to see a bigger, more stronger improvement in the oil market than you would see in other sectors.
You also write your note, Jeff, how this circles back to the US fiscal deficit.
How does it do that?
Because when we think about the fiscal deficit at seven percent, it's near it's a record peacetime non receptionary fiscal deficit. That means when the Fed had to raise rates to slow down growth, they had to raise it a lot higher because it was going against that seven percent fiscal deficits.
So the interest rates.
Got too high for the rest of the world, particularly the oil industry, is slowing it down. And you think about OPAK. It was responding to that weakness.
It was seen globally because of those pressures.
And again when we think about as they lower rates, that leverage to the other part of the world will begin to increase and allow OPAK to be able to put those barrels on the market.
Interesting, all right, all right, Jeff, got to leave it there. Great to talk to you. Great to catch up Jeff Curry. He's now the chief strategy officer over at Energy Pathways at Carlisle