Crude Awakening: Oil Price Projections with Fernando Valle of Bloomberg Intelligence on "Buy Hold Sell"

[00:00:05] Oil prices are dropping. We're down almost 9% on West Texas Intermediate in just one week. But are the bulls, they're not crying, they actually think things might still be moving higher as we go into the fourth quarter.

[00:00:17] But we brought in our Buy Hold Sell expert. Well welcome everyone to the program. I am your trader Todd Schellenberger and I am joined by my friend and co-host Tobin Smith out in sunny and somewhat cooler,

[00:00:28] Scott Steller. Thank you Todd finally. And we are bringing back a very audience fan, our friend and we're a big fan of Fernando Valle.

[00:00:39] He is the senior oil and gas analyst at Bloomberg Intelligence. He's actually reporting today directly from the Bloomberg Mothership at 731 Lexington Avenue in Midtown Manhattan, which is always really cool as far as I'm concerned. But Fernando welcome back to the program. Good to be here Todd. Thank you.

[00:00:57] Well we have oil today. What a day to have you on because we are seeing oil prices just get bombarded. We are down 5%. We're down almost 9% in one week on West Texas Intermediate. Why the sell off?

[00:01:14] I think that's actually been my base case all along and if you remember the last time I was here it was fairly bearish for the long term

[00:01:21] and because we don't think OPEC can fight the Fed and ultimately that's what they're trying to do and everyone who has tried will be unsuccessful.

[00:01:31] So there were two aspects to it. First, the demand destruction was already happening, very evident on the gasoline side but then probably the bigger movement in oil prices has been China.

[00:01:43] China saying they won't issue new import produce for oil, trying to be the largest importer of oil in the world. That is probably going to lead to a higher competition in that market

[00:01:54] and you're seeing that because the differential between Brent and WTI has collapsed to under $2 a barrel. Yeah I was going to ask you that. I haven't seen that. I can't remember the last time I saw Brent and WTI go that south.

[00:02:07] Hey Fernando, so I was telling you beforehand that man I'm in California up in Malibu with a lot of rich people and they're bitching and moaning about the gasoline prices $6.78 when I was there.

[00:02:21] I of course rented an EV by the way it was awesome. The demand destruction do you have sort of a dollar point of where is there a correlation between is there more demand destruction at $6.50 a gallon or $6 or $5 a gallon?

[00:02:34] That's specific to California. Those prices tend to be significantly higher. You saw for example when we went above $3.30, $3.40 a gallon on a national average which happened just at the end of June and July as Brent and WTI rallied

[00:02:49] and also the crack spreads the margin of refiners make also widened that you already saw a leg down on gasoline demand. So July is supposed to be a very strong month for gasoline demand and it already took a significant leg down.

[00:03:03] I think the bigger problem is not just fuel itself but it's everything else that's happening in the background from the resumption of student loan repayments, higher mortgage, Medicare, the subsidies ending at the end of the healthcare emergency. All that is impacting disposable income and ultimately that's what governs gasoline demand.

[00:03:27] Wow you're a macro guy now Fernando. I always was if you cover oil, you're always a macro guy.

[00:03:34] You have to be right. Well, yeah, quick question for you that's on the domestic side the concerns you brought up so let's start talking about the oil cuts from Russia and Saudi Arabia. Do you I mean what kind of an impact because if that's the case and we're seeing a cut in supply, why are prices dropping?

[00:03:51] Well, two points there first is Russia didn't really cut that much. But more importantly, one of the big bull arguments early on was we didn't have spare capacity for oil. And when OPEC cuts what do they make spare capacity.

[00:04:06] So the big issue is not really the supply. It's really the demand side. That's what that's what the tapes telling you is that demand is weaker than expected.

[00:04:17] You can see it for example in the Japanese currency you can see it with China blocking the oil oil imports and their quotas. And then in Russia you mentioned their cuts they actually have an issue now because they forbidden exports of fuel.

[00:04:34] Russia because it's primarily an export nation doesn't have a lot of storage. So they won't be able to continue storing products for a much longer time which means either they're going to have to export crude or they're going to have to lift those sanctions.

[00:04:49] You know, Russia obviously has been selling their crappy oil at the $60 rate to China and to India. And in my math that's been saying well okay then that's cutting demand for US exports particularly to India and China. Is that correlated?

[00:05:12] It definitely is but I think it also opened the market for Europe to US exports. And I think that's partially why we've seen that compression in Brent WTI because as opposed to having to discount it to compete in the Asian market we're now only having to go to Europe where we have a lot less competition and the freight significantly cheaper.

[00:05:31] Then on top of that OPEC cutting their supply showing that there is weak demand. That's essentially the suppliers competing more and more for the consumer of oil, the ultimate consumer of oil.

[00:05:42] Yeah and how did the comments, I'm just going to say that, comments that I hear a lot is about you know okay the strategic petroleum reserve now is down to like a 40 year low and if it goes any lower that all of a sudden the caverns are going to collapse yada yada yada.

[00:05:58] Now that we're not pulling out oil and by the way you know there's better than anybody. Guess who bought all of our strategic petroleum reserve time? China.

[00:06:08] If you look at the actual sales I mean it was just crazy but does that factor in that it's too expensive now for us to essentially refill the SPR at current prices?

[00:06:19] No I think that's not the big driver. It was an anticipation of planned sales from the SPR so we don't really need, we're not required by law to refill it and I think we'll have the opportunity to refill it at much cheaper prices down the road.

[00:06:35] That's my view on oil prices but what's important also is that when George Bush raised the SPR after the September 11 attacks we produced 5 million, 5.5 million barrels a day.

[00:06:49] We produce 13 million barrels a day now so we have a lot more flexibility of having a lower SPR. The security risk is not as much because between the US production of 13 million barrels a day a little over that and then over 4.3 million barrels a day from Canada we have a lot of supply in North America locked up that we need in case of emergency.

[00:07:11] The other narrative has been the conversion of the drill baby companies, the frackers to cash flow baby frackers. That was one of the arguments of why oil was going to remain higher for longer is that the depletion rate on these fracking wells or fracked wells I should say, particularly in the Permian is pretty rapid and they're not replacing that.

[00:07:39] Doesn't that put someone on the floor or tell us how well oil goes? I just made that up right there.

[00:07:44] Well so I think again the short term is really demand driven and our view is that it's already being affected and because of the consumer can't withstand more of this. At the margin. At the margin.

[00:07:58] At the margin and again that's punctuated by today's EIA numbers on the demand side the lowest in 10 years on gasoline. Wow.

[00:08:09] As you go it for seasonally adjusted but then as you go in the longer term beyond 2024 or maybe even the second half of 2024 what you're bringing up to have been is totally true.

[00:08:22] Shellwell will decline 90% within its first year. We haven't really invested in exploration outside of US shale over the past decade almost so we don't have the supply to make that up and everyone expecting that OPEC can just bring on more and more capacity.

[00:08:36] That's to me very wide of the mark they have exhausted their ability to grow not to produce but to grow.

[00:08:44] They'll have some because they've created the spare capacity now but beyond that they don't really have the ability to grow so we'll have to rely on my native Brazil, Guiana and exploration to bring that back.

[00:08:57] The issue is at 8% interest rates globally you know it's not just the cost to drill it's also the cost because it takes you three months from spud to production at least if not longer.

[00:09:08] So a private operator is no longer making the returns that they wore at $60 oil even a few years ago because rates are so much higher. So here's a silly question. Is the SPR empty? No, still fairly significant it's just that it's lowest levels in about 10 years.

[00:09:27] Well okay lowest level in 10 years and from a national security standpoint that seems quite frightening to me because it's always nice to know that we have this because Americans need oil. But with that you said that we are pumping, you said what was it 10 million barrels? 13. 13. 13.

[00:09:47] Okay so how much oil because what was it like 10-15 years ago I think worldwide we were consuming what 85-86 million barrels a day. What are those numbers right now as far as what's being pulled out of the ground and what humans are using worldwide?

[00:10:03] So the total demand is around 102 million barrels of oil and condensate in the US per day. We produce just north of 13 million barrels a day. Canada produces around 4.3. The US refines just shy of 18 million barrels a day. Canada is just about one and a half.

[00:10:24] So and we consume in the US about 20 million barrels a day in Canada about one. So 102 million worldwide how many barrels of oil are coming out of the earth each day? Just about the same. We're close in balance.

[00:10:42] There is obviously periods of inventory build. They tend to be seasonal but you typically try to match the balance. So there's not a lot of margin there. I mean one thing if you have something that happens could be detrimental and obviously push prices a lot higher.

[00:10:59] He's not a line breeder Todd. He's an analyst okay? He doesn't know if Putin's going to go crazy. My question for that is... He's a brilliant analyst and he's been spot on every time we have him on the show.

[00:11:12] Very true. So Fernando do you do any work on product tankers or on just oil tanking etc? I tend gentrally so it's not my area of expertise but I obviously know the cost of the ship product and crew to key destinations.

[00:11:32] Yeah we've been very long LPG. It's not quite your bailiwick. It's simple because the demand has been so strong from India, China and so on and so forth. But in the part of the world where we're shipping oil and then it's getting refined.

[00:11:49] Is Europe having this thing sort of slow down on demand as we've seen here recently? Certainly on the gasoline side but there is a huge concern on our end for diesel and middle distillates because what Russian crude does is that it produces a fair amount of that.

[00:12:07] And our crude produces a lot more gasoline. So with both Europe and the US running what we call lighter crude more light oil like shale, we tend to produce less diesel.

[00:12:20] What is diesel good for? If not some of those tankers you talked about transportation but also heating and as a backup for power generation.

[00:12:28] So when you look in the East Coast for example we're at the lowest levels and 10-15 years on diesel Europe is also very low levels.

[00:12:36] So it creates a big concern that's the real security risk from my standpoint that if we have a cold winter prices can spike significantly and to become unaffordable for consumers that will need it for power generation and heating.

[00:12:52] Yeah particularly in the Northeast. So do you do natural gas my friend? Not directly but again I look at all the major oil companies and they're big natural gas producers.

[00:13:04] Yeah well I'm interested in this weather pattern you know the El Nino winter from all the data that I get says that we're going to have a cold winter and that typically means higher natural gas prices. Am I smoking the wrong pot or am I close?

[00:13:22] Well if you think about last year we had the warmest winter in 50-60 years in the northern hemisphere and they're usually followed closely by the coldest. So we don't go from progressively goes from warmest to cold.

[00:13:36] So I'm with you it's hard to predict but I agree with you and you know I was speaking to a colleague and saying everyone's very complacent because the European natural gas inventories are near the brim but they aren't season long inventories.

[00:13:53] They're going to be drained very quickly if there is implement weather and we have to remember this is going to be the first real winter where Belgium has shut all their nuclear reactors, Germany has shut all their nuclear reactors,

[00:14:06] Holland has shut the Groningen field and even here in New York we shut all our three nuclear plants in 2021. And those are for repairs right they're not doing it. No no they've closed them. Really?

[00:14:20] Yeah and in Boston relied on natural gas that was imported or re-imported from Russia so it becomes very tenuous especially in New England because as you said New England still uses a lot of diesel for heating.

[00:14:35] Wow I must have been gone one day I did not realize that they actually and they're not doing anything to reopen them. No Indian Point closes by my house and totally closed last bolt. Wow.

[00:14:48] Hey so the next question is in Brazil and Ecuador the most screwed up country I've seen recently these new salt dome you know offshore wells are just starting really to crank it up how much more can they produce? It sounds like they're the marginal player here.

[00:15:06] Brazil still has a significant potential. Guiana is more than doubling in the next five to seven years.

[00:15:14] X1 is the largest developer out in Guiana but it's we're speaking Brazil produces just shy of three and a half million barrels of crude oil so it's a fraction of the US. It can maybe get to four million over the next five to ten years.

[00:15:28] There's a host of other challenges in Brazil from political to even just the exploration market and then the development market. Then Guiana it's going from about just under one million barrels a day to probably around two and a half to three million barrels by 2027.

[00:15:49] That's all really driven by X on and HES total is also there but most of it is going to be driven by by X on and HES.

[00:15:58] And so I think it's significant but it's not the solution to you know we thought the US was going to get to 18, 19 million barrels a day.

[00:16:08] That's a six million barrels a day delta that we need to make up and Brazil and Guiana are maybe going to be one to one and a half of that. So 18 million a day from the US would then balance the market or just what the demand is?

[00:16:22] Well remember the rest of the world is on permanent decline right? Everything in oil declines that anywhere between three to seven percent depending on the oil price. So you have to make up for that decline and then meet the growth in demand.

[00:16:38] That's three to seven million barrels a day of decline that you have to make up every single year. So if we went from 13 to 18 million barrels by 2027 in the US, that's two years that you've made up. Yeah that's a good point. It's not enough.

[00:16:54] Wow I think I should then start going along airlines here because their prices if you're right are going to be coming down and they just got crushed over the summer with the high prices.

[00:17:05] Well but remember in this case it's a demand driven issue so I started my career working for airlines. So this is not the ideal scenario and especially if what happens to oil in my head works out after we have this initial crash.

[00:17:25] Well then you're saying that the macro, if the price of oil is coming down because demand's coming down because macro environment is getting the marginal buyers out of the marketplace then that's not good for jet travel. It would just be your friends traveling from Malibu.

[00:17:43] They're all private jets there Fernando. Yeah, XO baby. I love it. XO I want to do an after them. Final question before we close this out. So any predictions for the fourth quarter as far as oil prices with West Texas Intermediate? Maybe even gas prices?

[00:18:01] I mean obviously they go hand in hand but what are you forecasting Fernando? So we're expecting the average US retail price to go from around 380 now to anywhere between 3 to 330 per gallon so good news for consumers on that end. Wow.

[00:18:20] Just because of the latest shift. Again the gasoline crack spread went from $38 about a month and a half ago to 10 so that's a huge drop. That's not good for refiners margin. Although diesel continues to be very strong so some refiners benefit still very much from this. Which ones?

[00:18:41] Valero does pretty well, Marathon does pretty well with their diesel component and then I think the East Coast refiners they have a locational advantage right now because of how the demand is skewed like PBF and Phillip 66's Bayway finery. So we still have the refinery in Delaware?

[00:19:01] Yep, Delaware City. Delaware City that's right. And then as far as crude I think ultimately it's a macro game. I'm watching Japan very closely and obviously watching the Fed meetings. My views that we end lower below 80 on WTI.

[00:19:19] My colleagues that cover Brent think we're going north of 90 again because of the supply side of the equation. My feeling is still that demand outweighs supply especially in this near term. Okay, I like that. 180 is that what you're saying Fernando? Yeah. Okay. Hey that's a great number.

[00:19:42] There's some great numbers. I know the audience is going to love that. Well Fernando we thank you so much for joining us. We know that you're on high demand there at Bloomberg everybody probably wants to talk to you. Bloomberg intelligence Todd, Bloomberg intelligence. Bloomberg intelligence.

[00:19:55] Well I'm thinking of the news side, the television and radio side of Bloomberg LP but that's a topic for another time. So listen Fernando thanks again for joining us. On behalf of Fernando Valley who is the senior oil and gas analyst at Bloomberg intelligence. There you go.

[00:20:12] And Tobin Smith, I am Todd Schoenberger. Thank you so much for joining us today on Buy Hold Sell. Take care. Thanks guys. Buy Hold Sell brought to you by Cross Check Management. We're partners on this exhilarating journey through the financial markets.

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