You're listening to Strictly Business Podcast with Lindsay Williams.
The oil price consistently enthralls, not least because of its strategic importance
and sensitivity to geopolitics
and global hostilities.
Recently, the latter have caused unprecedented oil price volatility.
We've had these wild swings characterising recent trading sessions.
With me to try to make sense of it all is Paul Gooden, Portfolio Manager at 91 in
London.
It's been...
astonishing in the last couple of months i'll just go back to may when it was about
60 a barrel brent crude that is
paul uh got up to nearly 80 this week and now down to uh just below 70 all
over the place why yes
so look i mean lots of volatility and really what has happened is a geopolitical
premium was put
into the oil price and now that's kind of unwinding and really it all really started
on Friday,
the 13th of June, when Israel bombed Iran.
And it kind of culminated over the weekend when the U.S.
launched its own attack on the Iranian nuclear facilities.
So a lot of uncertainty and essentially, you know,
about 20 million barrels a day of crude and product moves through the Straits of
Hormuz, which is right next to Iran.
So the concern was that this could...
spill over into a regional war that could then curtail some of the exports through
the streets of Hormuz and that would then tighten
up the market.
So yeah, that's really what's driven the last couple of weeks.
So a regional war, but also the possibility that Iran would actually block
the Straits of Hormuz, that's been mooted.
But then somebody else said, well, they can't do that because then their tankers
couldn't get out to go to China, for example.
Yeah, that's entirely true.
So it would be an act of self-harm.
But if you're backed into a corner and you feel like you have no other option to put
pressure on
other folks in the global economy, then it was an option for Iran to do that.
But it kind of seems that, you know, there's sort of de-escalation in the air.
And I think certainly both China and the U.S.
have an incentive to kind of pressure Iran not to curtail barrels and not to
block the Strait of Hormuz.
Not least because, as you allude to, China gets most of its oil from
Iran and most of it comes through the Straits of Hormuz.
So China, which is seemingly providing support to Iran, don't want those barrels
curtailed.
So I think there's a sense in just the last day or two that we could be through
the worst in terms of this
geopolitical premium.
And now the market's attention is beginning to turn to the supply over.
And the oversupply that we seemingly have post the summer peak demand season and
oversupply that we have
next year because OPEC plus is adding back barrels.
Yeah.
Just going back to geopolitics before we talk about supply and demand in the
future.
It seems that things have calmed down and certainly you and market participants are
predicting that if I look at my screen.
But on the other hand, the ceasefire that was trumpeted by Trump.
overnight, even before it had been ratified, has already been broken by both
Iran and Israel.
And a furious Trump said a rude word about the two of them this morning,
the two countries.
So even a ceasefire, which seemed cast in stone for a while, can be broken very
quickly.
So it's a fragile truce to me.
Look, I think that's exactly right.
And we can't be complacent.
and if the events of the last few weeks have taught us anything, it's to...
expect the unexpected.
But I would have thought the oil price was kind of like $65 at the start of June.
We've gone up to close to $80.
We're now back at kind of $68.
I would kind of expect over the next period, you kind of get back to that $65
level.
I don't know if that's days or weeks or months.
And once that geopolitical premium has come out of the oil price,
then the market's attention will turn to the sort of more fundamental supply-demand
imbalance.
Terribly difficult for producers, consumers, hedgers, traders, investors,
isn't it, with all this volatility?
And off-air, you said to me, yes, making my life a little bit difficult.
Difficult but interesting.
You think it's going to come down, but it can't come down that far,
given the background that we've been talking of.
Look, the distinction I would make is between the paper markets and the physical
markets.
So the paper market, it's the price that you see on the screen, and that is driven
by...
in part by speculators.
betting on these types of geopolitical things.
You've then got the physical market, which is like, you know, how many molecules,
how many barrels of supply are available versus how much is demanded.
So, you know, we need to make that distinction.
And look, what my view is, is that unless there is sort of physical disruption to
exports from the Middle
East, then ultimately the paper markets will be driven by the physical markets.
You know, what that kind of means is the geopolitical agreement kind of comes out
of Europe.
I don't know if it's days or weeks or months.
We need to remain vigilant.
But the fundamental story, I think,
for the next six to nine months is we're looking at an oversupplied oil market,
which the market has to physically balance.
So the cure for oversupply is to have a lower oil price that then incents
producers to produce less oil.
But what I will say is the outlook is not entirely gloomy because one of the reasons
that the market is
oversupplied in the second half of this year is because OPEC Plus is bringing back
barrels to the market.
And I think by the end of this year, we could be in a position whereby the excess
OPEC spare capacity is back on the market.
And at the same time, Shell, U.S.
Shell, is plattering because the key...
Shell drillers are kind of running into harder geology, i.e.
they're running out of tier one infantry.
And so US Shell has been a deflationary force in all markets for the last decade.
And looking into next year, it looks like Shell's plateaued.
So it's not going to be that deflationary force anymore.
So these two factors combined, the OPEC barrels back on the market, Shell not
growing anymore,
those potentially set up a more optimistic scenario for the second half of next year.
Are you saying that shale producers are now having to go deeper in enduring or
rather
encountering more difficult conditions and therefore it's more expensive for them to
get the oil out of the ground and therefore
they need higher prices and therefore they curtail production?
Yeah, that's basically right.
I mean, but the reality is, it's not that you have to drill deeper.
It's just that certain formations have got better oil characteristics and other ones
have slightly
less.
less good characteristics and it just means you're kind of moving from that tier
one type well to that tier two type
well where you know you need a higher oil price to justify the drilling of doing
that and look the reality is it's a range it's not as simple
as you know moving from one type of well to another type of well different
emps have different inventory situations but as a general trend across u.s shale it
kind of seems that
um you know they're beginning to run into some headwinds and
I'm not saying that US shale is fundamentally going to go down over the
next two or three years.
I just don't think it's going to grow much.
What about OPEC?
What about Saudi Arabia?
What noises are they making given what's happened in the last few days?
Well, actually, remarkably little from Saudi in the last week or so.
But in the months sort of ahead of this geopolitical issue,
Saudi and OPEC have been adding back barrels faster than they initially
indicated.
And some people speculate that maybe that means that Trump gave them the heads up.
I we're going to get involved in Iran to get some barrels back on the market ahead
of schedule.
Now, I don't know if that's true or not, but I think that, you know,
something to really keep an eye on is in the next few weeks.
I could be meeting again and deciding what they do for the next production increase.
And so, you know, I'll be looking very closely.
Do they go for kind of like a standard production increase or do they go for.
you know a triple production increase which is what they've done in the last the
last couple of months i suspect they'll go for the triple production increase
and i think that puts them on course to kind of add back all the excess barrels
they talked about by the end of the year as a portfolio manager how are you
positioning yourself uh nimbly is the answer i mean we we are quite a
significant underweight in energy
in the global natural resources portfolio um as
about three weeks ago um i would now describe it as a kind of like a a
medium-sized underweight and so
you have to de-risk into these events a little bit.
But we've still got a meaningful underweight.
And I shared my views on the oil price between now and the end of the year.
And as a team, we basically see better risk-reward in other types of commodities
and equities at the moment.
Very good.
Paul, thank you so much for your time.
Paul Gooden is a portfolio manager at 91 in London.
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