You're listening to Strictly Business Podcast with Lindsay Williams.
Oil has always been an enigma to me.
Oil traders, in my mind, exude this sort of air of glamorous mystery,
but that comes also with just a hint of potential skullduggery or sleight of hand
in the background.
Today, though, oil is a vital part of the world's power portfolio.
And despite tales of this black gold being a dead man walking, Here it is, still
influencing countries'
fortunes and that of the world's economy.
With me is Paul Gooden, Portfolio Manager, Global Natural Resources at 91 in
London. I sort of painted it as a sort of a James Bond type commodity pool.
Is that unfair or is there a hint of truth in that?
No, look, I think there is a hint of truth in that.
And, you know, when it comes to oil, I think it's worth remembering the adage
that there are sort of...
two types of experts on oil.
Those who don't know and those who don't know they don't know.
And, you know, sort of beneath that,
the reality is it's quite difficult to forecast oil in the near term.
And the reasons for that, there's kind of three reasons.
The first one is you've got supply and demand of oil are buffeted around
by exogenous factors which are difficult to predict.
So for example, supply might be impacted by OPEC action, by sanctions on oil
producing nations,
and demand can be impacted by the level of economic activity.
And then the second reason, and this is a bit more fundamental, is the cost
structure of oil projects.
So with an oil project, you've got a lot of startup capex,
but thereafter a relatively low ongoing operating cost.
And what that means is that In times of oversupply,
the oil price has got to fall a long way to shut in flowing oil barrels.
And meanwhile, in times of undersupply, it can take a long time to bring on new oil
projects.
And that means that you need the oil price to rise to sort of destroy demand.
So that creates this kind of volatility because of the cost base.
And I guess the third factor is really speculators.
There's a lot of speculative money, traders kind of moving in and moving out.
um the underlying commodity and that just means yeah it's a very volatile space it
is and the whole idea of bringing on a new project
brings me to trump and we will mention that fellow's name a couple of times i'm
sure and his policies but his famous
praise of drill baby drill it's not silly i mean it's great he wants to boost the
economy
of the united states for america and make american oil production great again and
all that sort of thing but you can't
want that and also want lower oil prices because at certain points drill baby drill
isn't economical in the united states yeah
it's uh you know if it's drill baby drill or pump for trump um you know he certainly
wants um you
know u.s energy dominance and and
that's broader energy it's not just oil it's it's natural gas as well um but but
you're absolutely right there is a
sort of contradiction at the centre of that because US shale needs...
kind of like
60, 65 dollars to be sort of profitable and to have kind of good
break evens on oil wells.
And, you know, I kind of think that early on in his presidency,
because of the inflation coming through in the US because of just general tariffs,
I think Trump wants lower oil prices as a way to kind of cushion that inflationary
impact.
and yes, I mean, I...
I am concerned that you're going to see a slowdown in activity in the U.S.
oil patch in the second half of the year because operators are going to respond to
the low oil price they see on the screens.
You talked about $65 a barrel.
Now, look at my screen at the moment as we pre-record this podcast.
It's just below $65 per barrel.
It was 82 in mid-January, just before Mr.
Trump started his latest tenure at the White House.
What has happened since then?
I'll give you my two reasons, and that's the Trump tariff story,
which promises or threatens global growth, so therefore threatens demand.
And the other thing is that during that time, with a feat of poor timing, I think
OPEC boosted production.
Is that correct?
Yeah, Lindsay, you kind of nailed it there.
On the demand side,
general macroeconomic weakness because of tariff concerns is beginning to weigh on
up.
expectations for oil demand.
So I'd say consensus at the start of the year was forecasting maybe a million
barrels a day of oil demand growth.
And to put that in perspective, the global oil market's about 100 million barrels a
day.
And sort of leading edge forecasts are falling to sort of maybe 700,000 barrels a
day or even lower.
So you're seeing demand forecasts come down.
And then on the supply side of things, OPEC's got about 4 million barrels a day
of excess capacity on the sidelines.
And they're bringing back about half of that, about 2 million barrels a day by the
end of 26.
And there had been a hope that they would kind of delay adding those barrels back.
But if anything, they seem to be accelerating it.
And one of the reasons they're doing that is because within OPEC, there's a little
bit of disarray.
So particularly Kazakhstan is overproducing relative to its OPEC quota.
So I think Saudi is getting a little bit frustrated with that.
and so they're kind of firing a warning shot across.
the OPEC members that are overproducing.
So yeah, those two things combined have kind of driven the oil price lower.
I don't want to speculate because it's not our job to do that.
But I'm going to sort of throw this in to the discussion that we're having, Paul.
And that is that if the OPEC members perceive that there is going to be a
global slowdown, I won't say recession,
because that's a little bit far fetched at the moment anyway.
But if there is a global slowdown, It's best to take advantage of $60,
$65 a barrel now and pump as much as you can and cheat a bit.
And they do have a reputation for cheating.
Is that what is happening at the moment behind the scenes, do you think?
Look, clearly, one way to think about the oil price is it's a tragedy of the
commons.
Everyone gets to sell at the global price.
But if everyone follows their own self-interest and maximizes production,
then the market gets oversupplied and the oil price crashes.
and so Clearly, what's happening at the moment is some countries within OPEC,
particularly
Kazakhstan and Iraq, are overproducing relative to croaters.
And I think Saudi is getting frustrated with that.
Saudi is having to carry water for the rest of OPEC.
And so, look, I mean, you could argue, yes, on the one hand, it makes sense for
Saudi to continue to manage the market.
but on the other hand it's kind of like well look
occasionally the oil market needs a good sweating and what i mean by that is saudi
can basically say right
okay we're now going to significantly oversupply the market the oil price is
going to go down and that is going to sort of
remind everyone within opec that we need to basically hang together or we're going
to hang apart um
and it also kind of hurts u.s shale um and you know increases the cost of capital for
the US oil patch by, you know, The extra volatility makes it harder for
US oil producers to get access to capasol.
So several times in OPEC's history, 2014 and 2020,
they have made the decision to kind of launch a market share war,
irrespective of the fact it causes short term pain.
I mean, Saudis and the OPEC typically play a long game.
So, you know, part of me kind of thinks it might make sense for them to do that, to
kind of bring back that two million barrels.
quickly get it into the market and then we can kind of rebuild from there.
I saw a headline yesterday regarding China from a very reputable publication and it
said that they've been stockpiling
because they're frightened of the tariff situation, whether it be tariffs on oil,
if that is going to happen,
or whether it just means a slowdown.
They just want to have oil apparently.
I remember many years ago they were stockpiling oil for some reason in storage
facilities on the east coast of China.
Seems to me that they're doing it again if this article is to be believed.
How important is China in the whole equation here, Paul?
Yeah, look, I mean, China is very important across the whole commodity
space, not just oil,
but also on the metal side as well.
And, you know, historically, kind of over the last decade, China has been the
biggest growth market for oil.
And China itself doesn't produce a lot of oil.
Now, what has happened over the last couple of years is that China has
aggressively pushed a green energy agenda and it's aggressively pushed
a natural gas agenda as well.
And so one of the issues you've got in China, which is a problem for the oil
markets,
is that if you look at new sales of cars,
close to half of them are EVs.
And that has been sort of gradually weighing on the demand trajectory within.
within China for oil.
Now some people might say isn't that wonderful news, you know
China's turning green and actually it couldn't be farther from the truth because
those EVs are basically powered by
coal because you know around half of the Chinese grid is powered by coal so
actually it's a disaster for the
environment but that doesn't you know detract from the point that
China structurally is sort of slowing.
being less of a growth tailwind for the industry um but look you're seeing other
countries um
you know continue to grow so india in particular is probably going to be the the
fastest growing oil demand market this year yes certainly
china you know it's it's one to keep an eye on for sure okay i've got a few
questions now that constitute the last part of
this podcast and they're the most important ones i think firstly um we'll
leave this to last actually but you have it in the back of your mind
where do you think The oil price is going from here, as I said earlier, around $64,
$65.
Well, don't worry about that now.
I want to know where 91 is positioned at the moment, without giving away too many
secrets,
and also where you are seeing opportunities, because with the pullback
from the low 80s to the mid
60s, there must have been opportunities presenting themselves, Paul.
Yeah, look, I would say within the Global Natural Resources Fund, we're underweight
energy.
versus metals and mining and ag and precious metals.
And within energy, we are defensively positioned vis-a-vis oil.
And what that means is we've got quite a lot of natural gas volume exposure, which
we kind of get through the midstream names.
So defensively positioned, I'm happy with that defensive positioning.
And in terms of oil, look,
I think we need to kind of break it down sort of the short term versus the medium
term.
Now, on the medium term, I'm actually fairly optimistic on the oil price.
And the reason for that is that the energy transition is happening slower than people
thought.
So that means that oil demand is further out, probably 2035 and beyond.
Whereas on the supply side, U.S.
shale is plateauing.
It's maturing.
Peak shale oil supply is probably 2027.
And that's a dynamic that kind of sets up for a relatively tight market if you look
out three, four, five years and beyond.
So I'm kind of positive kind of medium term.
But on the short term, I am concerned about an oversupplied market.
And I do think there is a risk that the oil goes lower.
How low could we go?
Well, look, I think if you kind of get into the mid-50s, let's say, yeah,
the mid-50s, that is a level at which U.S.
shale producers significantly reduce activity.
So that would then...
balance the market.
The cure for low oil prices is low oil prices.
So my concern is that oil kind of heads lower through the second half of the year.
Now, we shouldn't get too bearish, right, because global inventory levels in oil are
relatively low,
and there are tail risks.
So for example, US sanctions on Iran and Russia could be stepped up, depending on
what happens geopolitically.
But my base case is for relatively kind of
um muted oil price in the second half of this year and in terms of where we are
seeing opportunities yeah it's largely around
natural gas and specifically in the u.s you're going to see a lot of growth in u.s
natural gas
volumes to put it in perspective the u.s is about 100 bcf a day market now in u.s
natural gas i
think it goes to probably 125 bcf a day by um 2030 and what's driving that is firstly
more domestic gas demand, and that's from AI and data sensors,
electrification of everything, and also coal-to-gas switching.
But also there's a lot of LNG projects starting up over the next two or three
years in the US,
which means that cheap US natural gas is going to be going to Asia and Europe.
So that is one of the key things we're playing at the moment within the Global
Natural Resources Fund.
So it's conceivable that in six months or a year's time we'll be chatting not about
oil, as our primary focus,
we'll be talking about gas and its various forms.
Look, I mean, both are important.
I guess what I'm sort of saying is now, at the moment, I feel the best structural
growth opportunities are on the natural gas side of things.
And on oil, look, I'm constructive on a five-year view, but I do think that we've
got a six to 12-month period where we have to absorb
extra OPEC supply and weak demand, and that can create a sort of a soggy oil
price environment.
Paul, fascinating chat.
Thank you very much for your time.
Paul Gooden is Portfolio Manager,
Global Natural Resources at
91 in London.
of the position of any other entity other than the speaker or the author.
And since we are critically thinking human beings, these views are always subject to
change,
revision and rethinking at any time.
Please do not hold us to them in perpetuity.