Transcription
Jeff, >> Mario, how's it going? >> Good, man. Um, yeah, so I will kick it off with oil. Um, as we as I just mentioned before we went live because it's been a discussion I've been having with a few guests. You should listen to my conversation I had today. It got a lot of attention the first time we had the conversation two days ago. Today we went deeper with Philip Pilington. Not sure if you know the guy. He's got a podcast. is a finance guy. And then I got Jeffrey uh not Jeffrey, sorry, Jeffrey Jeffrey Curry's thoughts on it yesterday and that's the price of oil. I'm just really trying to make sense of it. Um from a supply demand perspective, it just doesn't make sense. Um there is not enough oil coming out of the straight home was there's a report that came out today from uh kelp Kepler. Um there it is talking about how many ships are going through in the last 3 days. 34,48 and 38. Before the war, it was aboutund what 130 140 before the war. So, it's about a third of what it was before the war. Um, and then you've got the reserves. The American reserves are almost depleted. What the exact number is, I don't know, but it's, you know, it's couple of months away from being completely depleted if we keep uh if we keep it going at this pace. Um, you've got China, for some reason, the demand there hasn't picked up. And then you've got refineries. There was a calculation that my last guest was doing about the I forgot what he called it, but it was a calculation. He was explaining it in the in the interview and in in that um and what we was talking about is that the price of oil is so expensive, but their margins are so high. So either they're price gouging or the cost of paying per barrel is significantly higher than the spot spot price we're seeing. But it's impossible to get the exact numbers on how much a barrel costs coming out of the straight homes. So, you're the perfect guy to get your thoughts on what the hell is happening with the price of oil.
>> Yeah. What the hell is happening with the price of oil? Because you're right. You look at it from the supply perspective and it doesn't seem to make a whole lot of sense. Unless you're thinking oil traders are being wholly over optimistic about everything because you the data you cited is enough alone to say, okay, wait a minute, hold on here. The the issue on the supply side was always going to be the trajectory. How do we get back to at least something that that approaches normal? Now keep in mind some of the uh oil states like the UAE they've been able to reroute oil flow around the or straight of Hormuz. So there is some you know uh some ability to add back supply that has nothing to do with ships. So maybe the shipping through Hormuz will never go back to the way it was before. But you know 30 or 40 ships a day just ain't going to do it. So either the market is saying something's going to happen in the next little while that allows shipping and ship levels to get back up to where it was relatively quickly or something else is going on on the other side of the economic ledger, which is the demand side. That's where I've been focused more recently. I think you and I talked about this last time we visited. You know, that was always the bif, you know, always the the two sides of the coin. Uh when oil prices when when the conflict was over, oil prices were going to go down. Um supply normalization was going to be a big factor in it. But the other side of the hidden side of that we wouldn't know and wouldn't we wouldn't get any real sense of for at least some time was going to be what happened on the demand side and the demand side was not just um not just physical shortfalls in those countries who ended up ended up getting on the short end of the stick here but also you know the price destruction uh economies especially in Asia they couldn't that really couldn't handle the high price of oil for a three-month period you know almost four-month period um Europe Europe was in bad shape to begin with I forget what you forget what the central bankers over there said, you know, Christine Lagard all last year, oh, Europe's in a good place, Europe's in a good place, and then look at all the economic data, it actually fell off a cliff. So, there is a very big potential for demand destruction. And you look at the shape of the U, the WTI futures, bright futures curve, too, doesn't really matter. You look at how the futures market is positioned. It's positioned as if there's going to be an over supply in the near term, which is mind-boggling because we went from a historic supply deficit to now the futures curve is almost in contango. It's only pennies away as of Thursday's trading when before the market shut down for the from the for the uh Independence Day holiday. The futures curve was right there. In fact, it was in contango part of the day, which is the market saying we've got too much oil. And the only way you're going to end up with too much oil is if demand just kind of fell off completely, which is not a it's not an impossible possibility. It's it's one of those things you have to think. You have to think you have to start taking seriously. So it was always okay the price of oil supply normalization, but also what is the potential for demand destruction. I think that's where the oil market is starting to shift. Whatever happens on the supply side, the market may be looking at, you know, demand for the next couple months and thinking it's just not there. So wherever supply came down, demand might have come down with it. and therefore it's it's roughly bounced uh but with the market being more pessimistic on the demand side and therefore it's pricing for an over supply situation.
>> What about China? >> Yeah, China um the X factor on the demand side was going to be refilling inventories and that's more of a political than an economic choice. And you and I talked about this before too. Uh Trump and Shei met over in China. one was that back in May. Um, we have no idea what they discussed and it's very likely, I mean, just, you know, we have no inside information obviously, but it seems very likely that Trump and she kind of struck up some kind of short-term deal where they said, "Hey, don't don't kill us here or don't kill the oil market here. Don't refill all your inventories quickly or don't restore or, you know, normalize your import cadence uh, you know, very quickly. Let's let's allow let's allow the oil price to go back down to something that's more reasonable and so something more manageable." So, it seems like the Chinese whatever they got in return agreed to it because >> Oh, yeah. Exactly. What do you think they got in return? Sorry to interrupt. >> No idea. No idea. I mean, who knows what it could have been, but it had to have been something big. Or maybe she just kind of put put a favor in the bank and said, "I'm going to I'm going to come back to this later." But that's the only logical explanation other than the Chinese are acting out of self-interest and say, "You know what? We don't need to fill our refill our strategic reserves that quickly. So, there's no real reason to rush when the situation is fragile. Maybe we'll hold off on buying our our o oil imports and refilling the reserves for a while just because we don't want to upset the apple cart that's pretty is in a pretty fragile situation to begin with. So yeah, I mean it could be self-interest, but you got to think that maybe Trump and she came to some sort of agreement on on hormuz maybe the oil price because the Chinese have been relatively silent ever since then. It hasn't really come up all that much. And then there's the behavior in the marketplace which you know like I said the X factor on the demand side was going to be um countries refilling their strategic reserves which makes it a pol a policy choice but the fact that they haven't done it um and allow oil prices to continue to drop to the point that it's in contango I mean or almost in contango >> just for the audience because I mentioned it a few times I think contango means the spot price is lower than the futures price that's when people when the market is expecting a massive supply of oil to just flood the market. Yeah. So, you're you're an oil you're getting a delivery of oil some someplace. Doesn't really matter what it is. Um, you you've contracted for delivery to show up in your your your place, your business, and you have to sell the oil some sometime. You don't have it contracted yet. So, what do you what happens? Um, if if nobody's taking your oil, nobody wants to buy your oil. You have to drop your price of oil in the spot market lower and lower and lower to give somebody an incentive to take the oil off your hands that they can't use immediately and put it into storage. So the front the front price or you know the price of whatever point in time goes down below where the futures prices are to give some speculators or you know real economy participants the financial incentive to take that oil which isn't selling in the in the near-term marketplace and store it. So you've got to you've got to you got to buy price spot price plus storage price equals a futures price. So that's when there's so much oil that no one it's not even being used for it. So, so backwardation is where steep backwardation is where you have, you know, the oil futures curve is is steeply, you know, the the f the current price is way up here and futures prices are way down here. That's where we've been in the last couple months, which makes sense because when you have historic supply choked off, you know, there's a desperate scramble to get every barrel of oil you possibly can and pay any price to do so and have it delivered as soon as possible. So, steep backwardation made sense. And coming off of that, you know, this as things are starting to normalize, you would expect that backwardation to, you know, to normalize itself. And it did, but it has gone way past that. And even bigger, the bigger red flag here is it went way past that in a very short period of time. And looking around, like you started off the, you know, our conversation here with the supply side doesn't it doesn't make sense from a supplies perspective. It doesn't make sense that the curve would just completely flat. Now, if you look at the WTI futures curve on Thursday, it's a straight line across. you know, it's very very flat curve. So the I think the spread the prompt spread which is the first two contracts is four pennies. It's extremely flat and it's not like it's it's not like it's in contango next year. It's not like the market is saying we expect a whole bunch of oil to show up in March of 2027 which would make sense. You know it's a long way to normalization. We get back to where we were in December which was an over supply situation. The market's saying this is going to happen today. You know this might be happening now. And so the only thing that I can think of well not the only thing but one of the major factors that that uh that would explain that how quickly the market developed this way is looking at demand. Market saying look supply normalization's coming back but it's not coming back all that quickly. But we're expecting a shortfall in demand to continue to develop uh maybe even much more than people were thinking about just a couple of weeks ago. It's a again it's the speed of how quickly the oil curve has shifted that has to that has to change people's focus to shift toward the demand side.
>> What what is happening with demand? Why is it what changed between now and just a few months ago? >> Well, one thing if you're talking about just broad macroeconomic perspective, the manufacturing system throughout the entire world, it was true everywhere went went banana. It went went crazy. Um, everybody, you know, not everybody, but you know, producers on the production side of the economy started rushing to get material done, to build up inventories, to make stock, get things shipped, thinking that, okay, number one, prices of everything are going to go up because oil prices are skyrocketing. And number two, understanding what this historic closure of Hormuz meant that, you know, there was going to be material shortage. Plastic, plastic was always going to be a big one. Also, food and especially the inputs for agriculture. So there was a rush to get everything done as quickly as possible before prices really skyrocketed and material shortages really started to hit. But now once you once you frontload that much activity and it was substantial activity. Once you frontload that activity, what ends up happening? Well, I mean you've got all the stuff done and then you hit an air pocket. You get a payback period where activity comes down. And if um if the payback period occurs when you know macroeconomic conditions are themselves falling off and we've seen consumer spending soften, you've seen labor market data look increasingly weak, it can be you get payback on top of macroeconomic weakness, which is the base case whenever you have an energy shock to begin with. That's why energy shocks and recessions usually go together. you can understand why the oil market is starting to look and focus on the demand side because you've got the historic energy shock recession case alongside that payback from all the front-loaded activity and maybe there is an air pocket of demand here where the marketplace is saying look we don't we're not going to need that much oil in the near term at least for the summertime because we we did everything we needed to do a couple months ago
>> going back to China is there anything uh because everyone mentions China as the massive the biggest elephant in the room, but no one really does a deep dive into it. Everyone talks about the the American jobs report and American interest rates. What is happening in China? How's their economy looking? >> Terrible. It's not good. China has, you know, several crisis all at the same time. They got the banking crisis, a real estate crisis that just it's intractable. And the economic data looks worse than almost everywhere else on the around the world. The the recent numbers for the month of May were terrible. um retail spending, retail sales consumers, uh Chinese households, um what you would expect with a real estate bus where most Chinese household wealth is held up and tied up in real estate. So, you got an ongoing multi-year real estate bus where real estate prices continue to come down and deflate. Chinese households are not going to be in the mood to spend, and they haven't been. But some of the numbers more recently look like a Chinese recession associated with the energy shock, though it's not necessarily about energy prices in China, more so the fragile situation. Then like I said, you look at the banking statistics. Banks continue to pull back on lending. They only lend to the biggest Chinese stateowned firms or to the Chinese government itself. You look at the financial statistics and financial prices in China. China's government bond curve looks like a recession curve. It is massively still steepening from an ultra low level. You look front end uh frontend interest rates in China are almost to record lows back where they were in December of 2024 when everybody was running around panicking over tariffs. We're almost back to those same levels. the 10-year Chinese government bond almost at a record low. So, China is not actually doing well, which may may partly answer the question you asked earlier. What is China doing? Well, maybe they don't need to refill their oil stocks. Maybe it's a demand side coming from China. Maybe Chinese economy has fallen off sharply enough where the Chinese, you know, we don't need to buy any more oil because demand just isn't there for it. But would that would be consistent with the the entire global marketplace shifting toward contango. If China's demand has fallen off that sharply and looks like it's going to stay that way, then that's certainly going to impact the calculation of oil prices and in the uh physical flow of oil and demand for oil around the rest of the system, too.
>> But if what you're saying about China is true, what does that mean for the rest of the global economy that's become a lot more dependent on the Chinese economy? >> Well, it's everything upstream of the Chinese economy ends up taking it uh taking a big hit. One thing that we haven't seen that as much of is because of the uh AI bubble and AI especially in Asia. A lot of the Asian economies, Japan, South Korea, you know, South Korea, Taiwan, uh they have been supported tremendously by this AI buildout. And so demand for semiconductors and equipment that goes with it. So some of the underlying weakness that would normally be associated with China falling off hasn't really shown up in the economic numbers or even in reality in the real economy. But as the AI bubble might start to cool off a bit, then it's gonna then you're going to see these economies that are ultraexposed to what's happening in China. Then you look at the resource economies that are upstream from China, they're already struggling to begin with and it's only going to get worse from there. So if you're watching commodity markets, not just the energy sector, but commodity markets, you know, copper or some of the other metals like aluminum and steel, um they suggested exactly what I'm saying that China's gone through its early first year part of, you know, where they buy a lot of material and then they they back off and uh see where the actual economy is for the rest of the year. So you see commodity weakness alongside oil prices and the oil curve behaving the way it is that would tell you that China is probably one of the biggest factors with uh you know the setback on the demand side. you you talked about the AI bubble um and a lot of people are still using the stock market as a barome barome ter for the health of the economy or the average American but but there's a massive disconnect now between the average American and the and the stock market which is centralized across these various companies the handful of tech companies does that disconnect worry you it's being talked about here and there um Ray Dalio has been warning about it for years now if not decades um but it's the gap is getting wider and wider is that something that concerns you. >> Oh, absolutely. Because you, like you said, it's perception versus reality. Uh, it's one of the things that's driving the wave of socialism, not just in the US, but across the world.
>> Yeah. >> People are turning to socialism because they think, >> well, if the stock market is huge and everybody tells me the stock market is representing the economy. I look around, it's terrible for me. It's terrible for my friends. We all struggle. We can't make ends meet. Our incomes are nowhere near enough. You know, the the median age for a new home buyer in the US is 40. I got to wait till I'm 40 before I can afford a home. I can't buy a new car, but the stock market's booming. This economy is a booming economy and it sucks for me and sucks for everybody I know. I'm going to turn someplace else. I'm going to start, hey, Mandami, let's let's sign up for the Democratic Socialist of America. Right? That's where all this is coming from. It's the misperception that's driven largely by the stock market, but also politicians and central bankers in particular. Central bankers who have an interest in, you know, blowing smoke up your butt, telling you everything's great. Central bankers are the only one of the only one of the few places in the world where we we give them the authority or give them the mandate to try to make the economy and then also give them the ability to tell us how they're doing as if we're you know we we have no independent judgment and so central bankers keep telling everybody stock market's up the economy must be perfectly fine and it leads to this massive disconnect. So people have the perception of the stock market saying the stock market's up so economy must be booming when in reality those two things are completely different. Completely different.
>> So how does how does that end? How how do these two things get closer again? That gap stops to to widen and contracts to what it was a few a couple of decades ago. Is there two ways? Fundamental changes in the system itself which I'm not going to hold my breath or the other is something political that forces a change and that's not really the best path. historically hasn't been too good of a path. Not even a peaceful path. >> It's a dangerous path, that's for sure. So, yeah, it's either a political change or growth gets back on track and we we go back to where we were. And that's I mean, the more optimistic take that's where I think we'll be maybe in the 2030s. Um, because this look, this is not this is not anything new. We've been through this before. In fact, the world in the modern industrial sense has gone through these super cycles several times. It's no fun when you get into the downside of the cycle. it becomes messy and violent in many different ways. Um, violent in, you know, violent in the economy, violent in the marketplace, which by the way feeds into what Markx warned about capitalism, which is another reason why socialism has become so popular because it looks like Marx was correct.
>> But either either the political system breaks and we take our chances and roll the dice with what looks what it looks like on the other side, which I hope we don't get that far, but you can see how we're moving in that direction, or we fix what's actually wrong and get the economy back on track. And suddenly, you know, the old adage about rising tide lifts all boats, which is absolutely true. We get back to a growth path and we get back on track and all this stuff doesn't really matter anymore. It becomes a historical footnote. But the thing is these cycles, they're not a couple of years. They're multi-deade cycles. But the good news is we've been in the downside of the cycle since August of 2007. So we're 20 years closer to the end of it. If that's a >> When you say cycle, what cycle are you exactly referring to? >> You can break it down in numbers. But it's really globalization. So we had a wave of globalization that that tied in with monetary uh monetary evolution and monetary u really redrawing the global reserve currency system that took advantage of a whole everything that came out of World War II, technological advance, telecommunications. So you had monetary flow that became very elastic and very responsive to the system and it allowed basically money to flow around the world which led to this massive wave of globalization really from the 1950s until August of 2007. went through a period of you know what was that 60 some years 50 some years 55 years or so where we had waves of waves of prosperity all over the place yes there's always winners and losers in any economic development you know I grew up in the rust belt I saw the downside of it in the United States but overall we saw a period of unparalleled prosperity through more parts of the world than anybody we'd ever seen before anybody could have imagined so that that cycle of globalization was still a cycle we didn't repeal the laws of economics or certainly not the laws of finance When we got to August 2007, the monetary system broke down. It didn't recover. It triggered the next wave, which some people call delgobization. It's really just the downside of the cycle. So that's where you see all of this delobalization, lack of cooperation, people moving into their own se spheres of influence. Again, typical human cycle. We've gone through this a number of times before. Um, and so humanity being relatively uh ingenious innovation some eventually people start figuring out what's wrong and how to fix it and we go back into the upswing of the cycle again. So several decades into the downswing it brings us closer to the upswing. The qu the problem is the clock is ticking on the politics side while that's taking place. So, you have to you have to get back on the upswing of the cycle, the long-term cycle before you get to the uh the political break that might might happen in between.
>> Yeah. And that political that political break is moving or at least we're moving closer to that political break faster than expected. >> It always accelerates, right? Because um people become, you know, you think about you're 20 years into a downswing in a cycle. Things suck and they only seem to get worse. People's urgency goes up. uh their their their you know their their common sense uh their reluctance to take drastic action you know their their inhibitions that's the word I'm groping for here their inhibitions start to diminish the more urgent you become you know the older you get the more you say oh my god my kids are going to have to go through this the more likely you are to embrace some more radical and extreme political positions so there's there's always that race against time and it does quicken toward the end
>> there's there and and if you add to as well the widening gap in terms of inequality because of the centralization of wealth with tech and AI that makes it even more >> that's the primary it's not the stock market it's incomes that's the primary symptom if you're in the upper levels of the uh the economic uh system you've done perfectly well it's everybody else at the bottom so people at the top have continued to grow and expand at e even better rates than they did before 2008 whereas people at the bottom have been basically stuck so they're watching you know all these rich people get richer and richer and richer and yeah you can understand where this is coming from because they don't see any end to it. And most people are are incredibly patient. They will wait out, you know, periods of prolonged periods of stagnation, for lack of a better term. It's really a depression. They will wait out these periods for a long period of time, but you know, you get older, you start having kids, and you don't see anything changing. You hear the same crap over and over again from politicians and officials telling you not to whine about it because everything's great. Just look at Wall Street. Wall Street's booming, so stop your freaking complaining. you get tired of it after a while and you you say, you know what, enough is enough is enough. So that's the two the two parts of the equation, the the upswing in the cycle and the downswing in politics. And hopefully the one goes gets to where we need to go before the other one really breaks down.
>> Great analysis, great discussion as always, Jeff. Appreciate you jumping on. Thanks uh as always. >> All right, Mario. Thank you, man. All right, guys. I'll be live again in 3 hours and 20 minutes with Larry Johnson. Hope you enjoyed the conversation with Jeff. It's planned to be a longer conversation, but I was late and he had to go as well. Uh, but we'll continue this conversation later on. He's one of my favorite guests. I hope you enjoyed it. I'll see you guys in over three hours, three and a half hours. Bye.