Jeff Currie — Situation in Energy Is 'Dire'

0:00 Diesel cracks highest since the mid-80s while crude fades

• The read on one of the highest diesel crack spreads since the mid-1980s against fading crude futures: "when that MOU came out, it was like popping a pimple." Trapped Gulf oil flooded out and hit crude — "but obviously you can't refine it immediately and put it into products," so the product side stays tight.

0:25 Two simultaneous shocks — released crude and destroyed Russian refining

• The MOU released "over 120 million barrels… some estimates as high as 150 million" trapped behind the strait, hammering crude as it came down.
• At the same time Ukraine struck "1,300 kilometers inside Russia with precision drone strikes… taking out what we call the CDU crude oil distillation unit — the primary tower." Damage is so extensive it's "taken out more than 50% of the refining capacity out of Russia," some units "going to take years to rebuild," and it has led to crude oil shut-ins. "Not only have we now lost all of the Straits of Hormuz again, but we have also lost the crude oil and the refineries in Russia."

1:20 "The situation in energy is pretty dire" — the insurance policies are exhausted

• "We have exhausted all the insurance policies in round one of the Straits of Hormuz" — the inventory buffers, and China flexing its economy to survive the downturn. "It's a very different situation in this round two than when we saw in round one."

1:41 The "abundance illusion" — why the optimism is misplaced

• The administration and some CEOs point to an "oil glut" and idle tankers ready to pick up the slack — but "there's no buffer, no cushion." Their confidence comes from "the fact that nothing happened in round one."
• 2:22 "Commodities are a spot asset. They price today's fundamentals." Round one was a deficit (demand above supply, drawing inventories), "we didn't run out of oil." Products now trade at all-time highs — diesel in New York Harbor "like 130 or $140 a barrel" — "because we are now witnessing the probability of running into real shortages of products."
• 3:19 "It's what I call the abundance illusion": inventory draws + China flexing meant no visible shortage in round one, "so everybody's convinced round two, you won't see the shortages."

3:43 Why round two is "far more dangerous"

• "Both sides have entrenched themselves." The Houthis control the Red Sea and "can take out Yanbu, which was the diversion export for Saudi Arabia." So the situation "is just far different and far more dangerous."

4:01 A structurally higher commodity era — "revenge of the old economy" and the HALO trade

• "All commodity prices — oil, metals, agriculture and the rest — are going to be structurally higher… everything was going that direction until the ceasefire in April."
• 4:22 The revenge of the old economy: asset-heavy industries "starved of capital in favor of asset-light technology" now need investment.
• 4:42 The HALO trade — "Hard Assets, Local Operations" — rebuilding supply chains, energy security and defense, "which are going to lead to higher prices."
• 5:06 Part of a sequence — Ukraine 2022, the Strait of Hormuz, the next Iran/Russia round — "all of this is the deglobalization theme in process, which just leads to higher commodity prices."

5:29 Not cost-push inflation — the real risk is growth

• On what price slows growth / changes central banks: "it's not so much the price of the commodities — that's a relative pricing." Oil is a relative price move; the inflation question is whether you get a higher overall price level. "I'm not a big believer in the cost-push relationship."
• 6:12 "The question around growth is very interesting and important, because if we end up with shortages, that's how you end up with impact on growth." Europe "survived 2022, but it lost 25% of its energy-intensive industrial output — that's the growth problem." Without the products or the oil, "it will hit growth."
• 6:34 "The insurance policies are gone… there is no strategic petroleum reserve for products," so escaping this "starts to become extraordinarily difficult."

6:54 Underinvestment everywhere — and hyperscalers are cyclical commodity businesses

• On the AI build-out (the PJM disclosure) finding equilibrium: "No. We need to start spending money." 7:15 Need FID upstream in oil & gas, downstream in refining, and in metals/mining — all "severely underinvested." Mining CapEx is down 35% from its peak, yet "you need a lot of metal in those data centers… for the grid, for transformers, for turbines," and "oil and gas to burn in them."
• 7:38 Commodity prices must get "high enough to attract capital back" and earn a higher return than the asset-light group, whose returns "are coming down." "You look at the hyperscalers — these guys are commodity guys… in a cyclical business. It is cyclical. They need to be re-rated, and we need to see commodity markets re-rated."
• 7:56 Investors don't touch commodities because they're "such a small part of the overall indices" — energy was "roughly 18% of the S&P" at the 2014 peak and "runs around 3% now." 8:14 "Even if it doubled," a broad-portfolio PM feels he "can miss out" — so commodity prices "needed to move higher" to pull capital back and fund the production build-out for "the AI, the electrification, the data center boom." "We still have a long ways to go here."