Transcription
Good morning. For those who are not from Texas, this building where you are right now, you are on the edges of the Barnes Hill. Behind this hotel is Grapevine Lake. My house is on the other side of the lake. And a half mile away from my house, there is a gas well. And they drilled vertically, then horizontally under my property, and they got the gas under my property, and I got a check, royalty check every single month. That's the only country in the world where you do that.
So when we talk about a decline in oil prices or gas prices, the effect people think about ExxonMobil and Chevron; that's not the case when it comes to the United States. That's not the case when it comes to Texas. There are many families and others, tens of thousands of people, who are making royalties out of the ownership of the minerals under their uh properties.
I am going to answer two questions today. But before I do that, I do have a few charts that are intended to shock you. China knew about what's going to happen months in advance, either because they are spying on everyone or they have enough intelligence to know what's going to happen in the market and how President Trump is going to act, and they wanted to disarm Trump. They wanted to disarm the chips he has, make them useless. So what are the strongest things that President Trump has? Two things: oil exports and LNG exports to China. So what did the Chinese do? Some people think, well, they already imposed the tariffs. No, they did way more than that.
By the way, everything I'm going to talk about is written in our reports and um uh newsletters. So, literally everything I'm talking about is already published for those who are interested. And I post a lot of things on Twitter for those who are—I'm going to keep this for a second if you'd like to take a picture of that. So, what they did was literally surprising. Again, the two chips that Trump has against China, LNG exports and oil exports: zero. They stopped importing LNG before all of this happened. Trump cannot even influence this anymore. Look at oil. They literally disarmed those two chips.
Venezuela, as you know, President Trump reimposed the sanctions on Venezuela, and he did ask Chevron to leave. Look at Venezuela's oil exports. 30 to 40% of the oil exports of Venezuela go to the United States. We need that heavy sour oil. We need it because that chill that we have in the Permian or everyone else, it produces light sweet crude. But some refiners need that heavy sour. And we get it from Canada, we get it from Mexico, we get it from Venezuela. You can see in the chart that most of the Venezuelan crude goes to China and the United States.
Here's the problem. If we stop importing all of that oil from Venezuela, from where are we going to get the replacement? Canada is already maxed out, and they are under threat because of the sanctions, because of the tariffs, and they are threatening to cut their oil exports to the United States. So you cannot get it from Canada. You get it from Mexico. It's a good idea because the Maya crude, the Mexican crude, Maya is a perfect substitute for the Venezuelan oil in terms of quality. So if we shut down Venezuela, we can import it from Mexico.
Here is the shocking truth. Mexico's production of this type of crude is going down, and it's going down really fast, and their exports are going down too. There is no replacement. And you look—this is US imports from Venezuela and the Maya crude from Mexico. You can see the substitution there. So if we shut down Venezuela, we cannot get it from Mexico. We cannot get it from Colombia. We cannot get it from Canada. From where are we going to get that heavy crude? And if we don't get it, expect diesel prices to go up, and if diesel prices go up, then everything related to shipping in the United States, the cost is going to be transferred to you, and all of a sudden you have that excise or charge, whatever you want to call it, they will add it to to the shipments. So where that oil is going to come from?
Just a reminder, and this is one of the most ironic stories in the history of the oil shipping: in 2022, there was a coup in Venezuela where Chavez was ousted, and the industry was completely shut down, and their exports were shut down. US refiners were dependent on Venezuela, and they literally tried to find a replacement for that heavy sour, and they couldn't find—in a sense, just to think about it as um uh raindrop on a lake and how it works. You can see those circles. They literally move that way worldwide; you can follow the shipments. And they went all the way to Syria because Syria has the same quality crude. Despite sanctions, they got an exemption to import oil from Syria at that time. That's how bad it is. If we lose the Venezuelan oil, okay, this is just to show you that the exports of Maya crude is declining. That's from Mexico.
Let's go to the questions. I have two questions today, and I'm going to answer quickly because of the limited time. What is the impact of the tariff on steel and aluminum on the new builds of LNG? Why is this important? Because the Trump administration wants to encourage LNG. They wanted to—we have 11 projects, five uh under construction, six planned. They want them all to be built. And they want the United States, who is the largest producer and exporter of LNG, to be dominant for a long time. The problem is President Trump cannot have it both ways. He cannot have his cake and eat it. He cannot impose tariffs on steel and aluminum, which constitute about 50% of the cost of construction of those units, at least 50%. Because we are talking about only the units; we are not talking about all the pipelines that connect the gas to them and everything else. A lot of steel goes into those units. So we did a study, and we published the results for those who are interested. You can check them out.
And the second question is: can—what about this drill baby drill? It looks like, given what we've seen in the last two days, drill baby drill means to put drills on the on our bank accounts and drill them out. So what about this? Can President Trump or his administration increase US production significantly? Forget about what's been happening in the last two days. Even when we talk about two years, three years, four years, five years, even if he gets a third term, can he do that? So, I'm going to answer those two questions. Let's go through the first one quickly here. Okay. Why is this important? Because the largest exporter of steel is Canada. And these are not, by the way, these are not Chinese companies going through Canada. These are truly Canadian companies. So you impose a tariff on Canada, Canada steel 25%, you can see where the problems are. 25% of US imported steel comes from Canada. Look at aluminum. It's even worse. Almost two-thirds of the imports come from Canada. You impose a 25% tariff on that. You can see what's going to happen.
But let me go to the details because this is really the most important chart you will see today. This is the amount of steel or this is the amount of materials, mostly steel and aluminum, that goes to every 1 million ton of capacity in the new build of LNG terminals. A massive amount. And the average for the new build is 5 to 15 million tons. So you take those numbers and you multiply them by the size or the capacity uh of those uh new LNG plants, and you can see how much steel and how much aluminum we need. Of course, we need copper and other things too, but these are mostly aluminum uh and uh steel. So we look at the cost, and this is the second important chart on this—you look at the cost here, and really the most important things to watch is this—the materials that mostly here, right, the 20% that's steel and aluminum, and the equipment and facilities—these are mostly steel and aluminum, so you are talking about almost 50% of the new build are affected by the tariff. We did our calculations. Again, for the sake of time, I'm going to skip these things quickly. For the sake of time, I'm going to just give you the result. If these tariffs are imposed, the 25%, the cost of LNG plants in the United States will increase by 11 to 12%. Enough to delay them and enough to shut down some of them, which means that the Trump administration's vision cannot materialize. It will not happen. And I can tell you from experience, if you look at all the data historically, this is enough to delay those projects at least 18 months to 24 months.
We are very bullish on LNG, by the way. Whether you talk about it now or you talk about it two years from now, we are bullish on LNG. And this is only one of the reasons. There are more reasons to be bullish about it. I can tell you one fact. Just in the last month alone, we have three countries that started importing LNG. They were not counted in any outlook at all. You are not going to find a single outlook that predicted that those three countries or any of them will import LNG: Ukraine, Iraq, and Syria. So this is again—this is just added to the bullishness and the reasons that we think why we are bullish on LNG. These are the projects that are either under construction or planned, and all of them need that steel and aluminum, and their cost is going to go up by 11 to 12%. Of course, if you want to expand this to the oil industrial in general, for the oil industry, oil and gas, this tariff is going to increase costs by four to 5%. Which is enough when oil prices decline to 60 and 50. This is enough basically to make a big difference for the growth in the oil industry. I will talk about that in a minute.
All right. Here's the second one. Again, for the sake of time, I have only 20 minutes for the total talk. There are many problems that will not be possible for the Trump drill baby drill to happen. The industry is not there, and I'm going to go through those quickly. So if you look historically—so can he? No. There are several reasons. I'm going to show you the data for each: interest rates, decline rates, industry structure, and the tariff. So let's go through the data. This is the—you can see here—this is the US crude production versus prices. Prices played a role definitely, but there are cases where we've seen an increase in production where prices were not there, but there are—there is a long explanation for that. But the first issue we have to pay attention to is that this shale development that we've seen historically, this making the United States the largest oil producer in the world and among the top oil exporters in the world—all of this was built on cheap money when the interest rate was zero, near zero, even after the increase, the interest rate was very low. This is production versus interest rate. And you can see the correlation there. You know that this is not the case now because the interest rate is is way higher, and producers are not going to react because there is no—not enough money.
However, since 2016, first term of—since uh Trump came in in 2017, one in 2016, came in 2017, we have many changes in the industry that I'm going to outline. But one of them is we have many funds that decided, because of climate change, that they they are not going to invest in oil and gas, period. So interest rate, but this is another one that seems the Trump administration is not aware of. Yes, they have an energy secretary who was the head of a company that lost 40% in the last two days of its value. Why is he not bringing this up? This is the decline rate. This is the amount of oil I need to replace just to keep production flat. Based on the recent data, I need 660,000 barrels per month just to keep production flat. This adds to millions of barrels a year, which means that most of the investment will go just to keeping production flat. This idea of adding 3 million barrels of crude during the next term or the second term of Trump does not make any sense. Yes, we know one guy basically said, "Oh, that he means uh uh barrel of oil equivalent." Well, that's a joke. Anyway, I'm running out of time here. So, let's go.
Second one. The industry changed. The number of companies changed. The number of workers basically dropped substantially. Why is this important? I was in private equity. I can't tell you what was going on. You—you all those family companies, the small companies, the medium-sized companies, they went for drill baby drill because what you do is you drill, you prove your reserves, you increase your production regardless of cash flow, and you prepare your company either for an IPO or you sell it to the bigger fish. So the objective of drill baby drill basically was to sell it to the bigger company, and you make your money at the end. You don't make it through the life of the company. That's ended. Now Chevron and Exxon and others basically control the business. There is no bigger fish than that to sell it to. So the whole thing changed.
And the final point here is if we have any increase in shale, it's going to go to exports because we hit a refining wall in the United States. We cannot handle any more light sweet crude. Period. So those who are claiming, oh, we are going to be independent and we are—that it's nonsense because we still need to import six to seven million barrels of medium sour and heavy sour which we don't have, and any increase in shale is not going to help. So this—the whole idea of independence does not make any sense.
So these are the conclusions. I'll go through them quickly. Tariffs will slow the global economy and reduce oil demand. We did not talk about that. I just want to state this fact, and that's for when we had the panel later on. Probably I will discuss the OPEC+ decision three days ago because Bloomberg, Reuters, and others messed up the story. Whatever you heard in the media about it is completely off and wrong. Uh, oil supply won't increase as expected. So if you—if we pass this period, we are going to be very bullish later on. Uh, national security and economic concerns will force governments to retreat from climate goals. This is one of the reasons why we are b—we are bullish, especially on LNG. Without a recession or major political events, oil prices are expected to remain range-bound in 2025. We are talking about the 70s. We are in the low 70s right now. Yes, we went below 70 yesterday. Um, in case of a recession in 2025, the market will be oversupplied in 2026, and I'll be happy to explain that during the uh panel. Thank you very much.
U—this may be old news now, but u—I understand that the United States is the only place that's got sufficient oil processing u uh technique possibilities for crude. So they can give us all the crude they want until and if we're the only place that can turn it into something useful. Won't we be sending it back to them at a higher price? I mean, they send us Black Crib; we send them gasoline, diesel, naphtha, all that stuff. Um, won't we be shipping it back to them at a higher price and and be in good shape after all?
We have a serious problem because the US uh refining industry and the petrochemicals is shrinking, and in Europe, basically shrinking big time. We have a movement in refining and petrochemical capacities to the east and Middle East. So the control basically is shifting, and that's why these tariffs basically are more impactful than what people think because of this shift. Uh uh though we have the environmental regulations in the United States, uh some some of them basically are engraved in stone, and at the same time, we have to pay attention to this fact that most of the oil and petrochemical projects are designed for 25 and 30 years, while our political cycle is two years, four, and six and eight, and companies do not like flip-flop policies. So you are building something for 30 years. If a president comes for four years, even if those regulations benefit you, you don't want to change because it becomes really costly later on. So this is one of the reasons why some people in the oil industry are not happy with the changes that President Trump is making because they think it's temporary, and they would rather be on the safe side and and go for the longer term. Yes.
U—Thank you. Good morning. My question is uh twofold. One—PEMEX, Mexico, obviously state-run, government-controlled company, but it seems like they're inefficient. Is it possible that we can help them to reverse the trend and increase their production of the sour crude? And the other part is: of all the refineries in the US, and I think they haven't built one in 50 years, can some of those be converted over time uh to process the light sweet crude? If Mexicans know what we write about them in our newsletters—probably I will not go—I will not enter Mexico ever. Uh, the level of corruption at Pemex is unbelievable. The only match to it basically is in Nigeria. It just—it's—it's so—you want kind of like a Mexican Elon Musk to go in and clean up, and if you think that's going to happen, then we are optimistic, but we are not. This has been going on for over 40 years. So that's one. On the US and refiners basically—uh, shifting—first of all, uh refiners spent over $15 billion in the '90s to switch to the heavier crude. So they are not going to spend another $50 billion just to switch back. But this is not the problem. And uh uh we we have a couple of articles on this if if you are interested. The problem is demand. The problem is because of EVs and everything else, people expect the gasoline demand to taper off while demand for diesel and heavier products to increase, and therefore refining more gasoline is not a good idea. So switching back while the demand for gasoline is going down is not a good idea at all. You want to move to the heavier products because that's where most of the growth is because most of the growth in the future around the world is in the trucking industry, and they need diesel. They don't need gasoline.
Hi. Um, could you briefly talk about um the futures contract in the United States and whether crude sour or heavy is deliverable into it? Well, the uh—of course we have the marker crude. Okay, the marker crude basically they have certain characteristics like WTI. In Europe, we have Brent; in Asia, we have what we call Dubai Oman, and uh everything else basically is measured to them. So if you look at the Louisiana crude, etc., is measured to WTI. So if the if the quality is better, you get a higher price. If the quality is worse, you get uh you get a lower price. One of the problems we've been having with WTI since the shale revolution is that it—the—because shale brought in lighter crudes. So the definition of WTI became lighter and lighter uh over time and changed, and in—in—in Brent we have a serious problem because the field Brent, who—that's where the name came from—is running out. So they have to bring other other crudes basically to make—to make a brand, and one of the uh ways basically to support it is to include WTI in Brent, trying to support those prices. Something's got to give over time. We have a serious problem with uh Cushing, Oklahoma, is no longer relevant because we have all the pipelines directly to the Gulf. So something's got to give, and something has to change in terms of uh pricing, whether in the United States or Europe.
Sure. Thank you for the great presentation. On your last slide, you mentioned in 2026 you foresee an oversupply of the market. Are you referring specifically to the Federal Reserve stepping in with quantitative easing or the oil? And if it is the oil, given what you just presented—right, China no longer supplying, Venezuela not there, Mexico corrupted—if it's oil, how do you foresee that even oversupplied—
I mentioned that in the context of a recession in 2025, right? So if we end up with a recession in 2025, then we are going to have a build in inventories because things are going to be cheap, and people are going to build inventories, and those who are producing and they have no way to go anywhere, they just build inventories; those inventories will be carried to 2026. So when they—when the demand picks up in 2026, they are not going to buy from Saudi Arabia or Kuwait or Brazil. They are going to go to their inventories first. Okay. That means there is no global demand for oil, and therefore—
Prices will remain low, although we have a recovery in demand. Makes sense. So that's that's what it is. Thank you.
Yeah. Uh, I'd like your opinion on: do you think investing in oil at this time, like uh Exxon Mobile or Chevron or a uh a an oil ETF? Do you think any of those three are advisable at this time? Thank you. And you did a very good job by the way. Thank you. Thank you.
Uh, this morning when I woke up, I was looking at my uh Twitter account and I saw one of the traders, one of his trader investor, he said uh, by the way, I am all cash today, that's it. Uh, and given what we have right now—of course we have many investors here and we have many speakers who are way way better than me to advise you on this—but uh uh it is the situation is so fluid right now. In fact, we have a major presentation to invest; we decided to delay to delay it uh because the situation is so fluid; it just it's very hard to make some uh hard uh conclusions. But in general, when we talk about the medium-term and the long term, long term, we are bullish on oil; we are bullish on LNG; we are bullish on gas outside the United States, outside the United States. And I I mean we don't have enough time to go through this; I'll be happy to talk to you after we finish today. Uh, I have like a whole list of reasons why we are bullish on all of these things, but we are more bullish on LNG than anything.