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You're listening to Strictly Business
Podcast with Lindsay Williams.

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The oil price consistently enthralls, not
least because of its strategic importance

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and sensitivity to geopolitics

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and global hostilities.

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Recently, the latter have caused
unprecedented oil price volatility.

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We've had these wild swings characterising
recent trading sessions.

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With me to try to make sense of it all is
Paul Gooden, Portfolio Manager at 91 in

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London.

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It's been...

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astonishing in the last couple of months
i'll just go back to may when it was about

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60 a barrel brent crude that is

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paul uh got up to nearly 80 this week and
now down to uh just below 70 all

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over the place why yes

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so look i mean lots of volatility and
really what has happened is a geopolitical

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premium was put

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into the oil price and now that's kind of
unwinding and really it all really started

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on Friday,

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the 13th of June, when Israel bombed Iran.

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And it kind of culminated over the weekend
when the U.S.

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launched its own attack on the Iranian
nuclear facilities.

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So a lot of uncertainty and essentially,
you know,

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about 20 million barrels a day of crude
and product moves through the Straits of

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Hormuz, which is right next to Iran.

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So the concern was that this could...

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spill over into a regional war that could
then curtail some of the exports through

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the streets of Hormuz and that would then
tighten

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up the market.

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So yeah, that's really what's driven the
last couple of weeks.

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So a regional war, but also the
possibility that Iran would actually block

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the Straits of Hormuz, that's been mooted.

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But then somebody else said, well, they
can't do that because then their tankers

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couldn't get out to go to China, for
example.

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Yeah, that's entirely true.

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So it would be an act of self-harm.

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But if you're backed into a corner and you
feel like you have no other option to put

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pressure on

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other folks in the global economy, then it
was an option for Iran to do that.

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But it kind of seems that, you know,
there's sort of de-escalation in the air.

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And I think certainly both China and the
U.S.

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have an incentive to kind of pressure Iran
not to curtail barrels and not to

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block the Strait of Hormuz.

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Not least because, as you allude to, China
gets most of its oil from

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Iran and most of it comes through the
Straits of Hormuz.

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So China, which is seemingly providing
support to Iran, don't want those barrels

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curtailed.

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So I think there's a sense in just the
last day or two that we could be through

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the worst in terms of this

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geopolitical premium.

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And now the market's attention is
beginning to turn to the supply over.

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And the oversupply that we seemingly have
post the summer peak demand season and

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oversupply that we have

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next year because OPEC plus is adding back
barrels.

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Yeah.

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Just going back to geopolitics before we
talk about supply and demand in the

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future.

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It seems that things have calmed down and
certainly you and market participants are

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predicting that if I look at my screen.

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But on the other hand, the ceasefire that
was trumpeted by Trump.

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overnight, even before it had been
ratified, has already been broken by both

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Iran and Israel.

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And a furious Trump said a rude word about
the two of them this morning,

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the two countries.

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So even a ceasefire, which seemed cast in
stone for a while, can be broken very

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quickly.

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So it's a fragile truce to me.

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Look, I think that's exactly right.

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And we can't be complacent.

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and if the events of the last few weeks
have taught us anything, it's to...

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expect the unexpected.

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But I would have thought the oil price was
kind of like $65 at the start of June.

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We've gone up to close to $80.

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We're now back at kind of $68.

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I would kind of expect over the next
period, you kind of get back to that $65

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level.

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I don't know if that's days or weeks or
months.

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And once that geopolitical premium has
come out of the oil price,

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then the market's attention will turn to
the sort of more fundamental supply-demand

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imbalance.

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Terribly difficult for producers,
consumers, hedgers, traders, investors,

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isn't it, with all this volatility?

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And off-air, you said to me, yes, making
my life a little bit difficult.

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Difficult but interesting.

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You think it's going to come down, but it
can't come down that far,

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given the background that we've been
talking of.

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Look, the distinction I would make is
between the paper markets and the physical

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markets.

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So the paper market, it's the price that
you see on the screen, and that is driven

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by...

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in part by speculators.

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betting on these types of geopolitical
things.

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You've then got the physical market, which
is like, you know, how many molecules,

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how many barrels of supply are available
versus how much is demanded.

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So, you know, we need to make that
distinction.

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And look, what my view is, is that unless
there is sort of physical disruption to

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exports from the Middle

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East, then ultimately the paper markets
will be driven by the physical markets.

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You know, what that kind of means is the
geopolitical agreement kind of comes out

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of Europe.

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I don't know if it's days or weeks or
months.

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We need to remain vigilant.

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But the fundamental story, I think,

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for the next six to nine months is we're
looking at an oversupplied oil market,

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which the market has to physically
balance.

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So the cure for oversupply is to have a
lower oil price that then incents

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producers to produce less oil.

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But what I will say is the outlook is not
entirely gloomy because one of the reasons

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that the market is

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oversupplied in the second half of this
year is because OPEC Plus is bringing back

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barrels to the market.

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And I think by the end of this year, we
could be in a position whereby the excess

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OPEC spare capacity is back on the market.

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And at the same time, Shell, U.S.

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Shell, is plattering because the key...

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Shell drillers are kind of running into
harder geology, i.e.

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they're running out of tier one infantry.

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And so US Shell has been a deflationary
force in all markets for the last decade.

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And looking into next year, it looks like
Shell's plateaued.

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So it's not going to be that deflationary
force anymore.

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So these two factors combined, the OPEC
barrels back on the market, Shell not

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growing anymore,

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those potentially set up a more optimistic
scenario for the second half of next year.

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Are you saying that shale producers are
now having to go deeper in enduring or

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rather

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encountering more difficult conditions and
therefore it's more expensive for them to

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get the oil out of the ground and
therefore

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they need higher prices and therefore they
curtail production?

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Yeah, that's basically right.

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I mean, but the reality is, it's not that
you have to drill deeper.

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It's just that certain formations have got
better oil characteristics and other ones

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have slightly

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less.

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less good characteristics and it just
means you're kind of moving from that tier

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one type well to that tier two type

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well where you know you need a higher oil
price to justify the drilling of doing

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that and look the reality is it's a range
it's not as simple

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as you know moving from one type of well
to another type of well different

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emps have different inventory situations
but as a general trend across u.s shale it

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kind of seems that

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um you know they're beginning to run into
some headwinds and

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I'm not saying that US shale is
fundamentally going to go down over the

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next two or three years.

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I just don't think it's going to grow
much.

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What about OPEC?

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What about Saudi Arabia?

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What noises are they making given what's
happened in the last few days?

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Well, actually, remarkably little from
Saudi in the last week or so.

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But in the months sort of ahead of this
geopolitical issue,

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Saudi and OPEC have been adding back
barrels faster than they initially

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indicated.

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And some people speculate that maybe that
means that Trump gave them the heads up.

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I we're going to get involved in Iran to
get some barrels back on the market ahead

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of schedule.

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Now, I don't know if that's true or not,
but I think that, you know,

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something to really keep an eye on is in
the next few weeks.

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I could be meeting again and deciding what
they do for the next production increase.

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And so, you know, I'll be looking very
closely.

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Do they go for kind of like a standard
production increase or do they go for.

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you know a triple production increase
which is what they've done in the last the

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last couple of months i suspect they'll go
for the triple production increase

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and i think that puts them on course to
kind of add back all the excess barrels

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they talked about by the end of the year
as a portfolio manager how are you

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positioning yourself uh nimbly is the
answer i mean we we are quite a

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significant underweight in energy

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in the global natural resources portfolio
um as

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about three weeks ago um i would now
describe it as a kind of like a a

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medium-sized underweight and so

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you have to de-risk into these events a
little bit.

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But we've still got a meaningful
underweight.

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And I shared my views on the oil price
between now and the end of the year.

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And as a team, we basically see better
risk-reward in other types of commodities

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and equities at the moment.

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Very good.

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Paul, thank you so much for your time.

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Paul Gooden is a portfolio manager at 91
in London.

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The views and opinions expressed in these
podcasts are those of Lindsay Williams and

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various contributors and do not reflect
the policy,

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position or opinion of any other agency,
organisation,

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employer or company associated with
StrictlyBusinessPodcast.com.

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Assumptions made on the analyses are not
reflective of the position of any other

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entity other than the speaker or the
author.

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And since we are critically thinking human
beings, these views are always subject to

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change, revision, and revision.

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