Will Gas Become Unaffordable By Year-End? | Paul Sankey

Summary

In this insightful discussion, energy expert Paul Sanki delves into the complex relationship between AI's energy demands, the oil market, and geopolitical tensions. He explores how AI's reliance on stable, high-energy sources like natural gas impacts the oil and gas industry, amidst the challenges posed by renewable energy's variability. Sanki also forecasts oil prices, highlighting factors driving demand and supply, including the rapid adoption of electric vehicles and geopolitical influences. The conversation further navigates the nuances of global energy demands, the strategic maneuvers of oil giants like Exxon and Chevron, and the overarching implications of energy trends on the environment and global economy.

Takeaways

• 😀 The AI boom requires reliable, constant power, leading to an increased need for natural gas due to the variability of solar and wind energy.
• 🌍 Paul Sanki emphasizes the ongoing high demand for oil and coal, with global oil demand reaching over 102 million barrels per day.
• 🔋 Despite the growth in electric vehicle (EV) adoption, it's seen as slow, with significant reliance still on oil for transportation and petrochemicals.
• ⚡ US power demand, previously flat, is rising due to energy-intensive technologies like Nvidia chips, challenging the capacity of renewable energy sources.
• 🌞 The shift towards renewable energy is complicated by local opposition to new infrastructure, highlighting the tension between environmental goals and practical energy needs.
• 📈 Paul Sanki suggests that geopolitical tensions and economic forces are influential in driving oil prices, with predictions for fluctuations between $75 and $95 per barrel.
• 💡 The relationship between AI and energy needs highlights a shift towards more power-hungry technologies, underscoring the importance of reliable energy sources.
• 🌱 There's a broader energy market outlook that suggests continued reliance on fossil fuels, alongside the exploration of alternatives like nuclear power to supplement renewable sources.
• 🏭 The discussion covers the complexity of the energy market, including the balance of supply and demand, the impact of geopolitical events, and the role of innovation in shaping future energy consumption.
• 🚀 The narrative underscores the intricate interplay between technological advancement, energy demand, and environmental considerations, pointing towards a future where energy strategy is pivotal.

Q & A

Why does the AI boom necessitate reliable energy sources like natural gas according to Paul Sanki?

The AI boom requires reliable energy because data centers need constant power. Solar and wind energy's variability means they cannot solely meet this demand, leading to a reliance on more stable sources like natural gas.

What are the implications of the oil market dynamics discussed by Paul Sanki for the global economy?

The dynamics of high demand and controlled supply in the oil market, especially with Saudi Arabia's production management, suggest that oil prices could increase, influencing global economic conditions and possibly leading to inflation.

How has the shift to electric vehicles (EVs) impacted the demand for oil, according to the script?

Despite the rapid adoption of EVs in some regions, the global demand for oil remains high due to continued use in transportation and industry, indicating that EVs have not yet significantly displaced oil consumption.

What role does geopolitics play in the oil market as described in the conversation?

Geopolitical events can cause short-term fluctuations in oil prices due to market uncertainty, affecting supply routes and production, although long-term effects may be moderated by market adjustments and strategic reserves.

Why is nuclear power mentioned as a necessary energy source for offsetting solar and wind variability?

Nuclear power provides a stable and continuous energy output, making it a crucial source to balance the intermittency of solar and wind power, ensuring reliable energy supply for demanding applications like data centers.

What are the potential consequences of the energy transition on utility companies, according to the script?

Utility companies face challenges in adapting to increased power demand from technologies like AI and renewable energy sources, which may lead to 'traffic accidents' or difficulties in meeting this demand reliably.

How do oil prices and inflation relate to each other based on the discussion in the script?

Oil prices can contribute to inflation by increasing the cost of goods and services. Conversely, inflationary pressures can drive up oil prices, creating a cyclical relationship between the two.

What does Paul Sanki predict about the future of oil prices and their economic impact?

Sanki predicts that oil prices will likely range between $75 and $95 per barrel, influenced by supply management and geopolitical factors, which could have significant economic and investment implications.

Why does Sanki mention the rapid adoption of electric vehicles in China and Norway, and what does this imply about global oil demand?

Sanki points out the rapid EV adoption in these countries as an example of changing energy consumption patterns, but suggests that globally, oil demand remains robust due to slow EV adoption elsewhere.

How does the script describe the relationship between renewable energy and traditional power utilities?

The script highlights tensions between the growth of renewable energy and the capacity of traditional utilities to integrate these sources into the grid, indicating potential operational and supply challenges.

Outlines

00:00

💡 Energy Sources and AI Boom

The discussion begins with an exploration of the assumption that the AI boom requires petroleum, highlighting that it actually needs natural gas. The conversation emphasizes the importance of reliable, constant power for data centers, which is why nuclear power or natural gas is necessary to offset the variability of solar and wind energy. The oil and gas industry benefits from this demand, especially in regions like California and New York where nuclear power plants have been shut down.

05:00

📈 Oil Market Outlook and AI's Energy Demand

The oil market is analyzed, with oil prices averaging around $80 a barrel from 2020 to 2023. The outlook for 2024 and beyond is discussed, focusing on the demand side and the impact of AI on energy consumption. It's noted that AI and power demand have been flat, but the advent of powerful Nvidia chips, which consume significant power, could change this. The conversation also touches on the challenges faced by the utility industry in meeting the growing power demand, particularly from AI and cryptocurrency mining, and the potential for this to lead to significant issues in the future.

10:01

🌍 Geopolitical Tensions and Their Impact on Oil

Geopolitical tensions, particularly in the Middle East, are discussed in relation to their impact on oil prices. The costs and risks associated with transporting oil through volatile regions like the Red Sea are highlighted. The conversation also delves into the broader relationship between geopolitics and oil, noting that while there is no clear historical relationship, geopolitical events can lead to short-term price spikes. The discussion includes an analysis of past events, such as the 911 attacks and the invasion of Ukraine, and their effects on oil prices.

15:01

🛢️ Oil Price Forecasts and Market Volatility

The conversation continues with a focus on oil price forecasts, discussing the potential range of prices for the year due to various factors including Saudi spare capacity and seasonal demand. The potential for geopolitical events to push oil prices outside the predicted range is considered. The discussion also touches on the impact of inflation on oil prices and the role of the Federal Reserve in influencing the economic environment that affects oil demand and pricing.

20:03

🌐 Global Events and Oil Market Dynamics

Global events such as Russia's six-month export ban on gasoline and the ongoing feud between Exxon and Chevron over a project in Guyana are discussed. The potential impact of these events on oil prices and market dynamics is analyzed. The conversation also considers the broader implications of these events for the oil industry, including the potential for market consolidation and the strategic moves of major oil companies.

25:03

🏢 The Evolution of Oil Industry Research

Paul Sank, the president of Sank Research, shares his journey from working at the International Energy Agency to establishing his own independent research firm. He discusses the challenges and benefits of working within large banks and the reasons for his transition to an independent research model. The conversation highlights the importance of industry knowledge over specific buy or sell recommendations and the value of being able to provide a broader perspective on energy and related markets.

30:07

🤝 Building Relationships and Navigating the Oil Industry

The final part of the discussion focuses on the importance of building relationships within the oil industry and the challenges of maintaining integrity in research. Paul Sank shares his insights on the influence of the sales side on research departments and the potential conflicts of interest that can arise. He also talks about the limitations of Wall Street research and the benefits of his independent research approach, which allows for more freedom and a wider scope of analysis.

Keywords

💡AI boom

The AI boom refers to the rapid increase in the development and application of artificial intelligence technologies. In the context of the video, it's discussed in relation to energy demand, highlighting that AI data centers require highly reliable and constant power. The script points out that due to the energy-intensive nature of AI technologies, particularly those using advanced chips, there is a significant increase in power consumption, akin to adding a city the size of Phoenix to the power demand balance.

💡Natural gas

Natural gas is presented as a critical energy source for powering AI data centers, due to its reliability compared to intermittent sources like solar and wind. The video script elaborates on how natural gas serves as a primary energy source for ensuring constant power supply, reflecting its importance in the context of increasing energy demands from the tech sector and its bullish impact on the oil and gas industry.

💡Oil market dynamics

Oil market dynamics encompass the factors influencing the supply, demand, and pricing of oil globally. The script discusses several aspects, including demand reaching all-time highs, geopolitical tensions, and the role of OPEC+ in managing supply. These dynamics are crucial for understanding the fluctuating nature of oil prices and their impact on the broader energy market and global economy.

💡Electric vehicles (EVs)

Electric vehicles are discussed as a significant shift in the energy market, particularly in terms of reducing dependence on oil for transportation. The script notes the variable adoption rates of EVs across different markets and how this technological shift impacts oil demand. While EVs represent a move towards cleaner energy, their current market penetration and the challenges they face are important for analyzing future oil demand.

💡Geopolitical tensions

Geopolitical tensions, particularly in oil-rich regions, are highlighted as a key factor affecting oil prices and market stability. The script mentions specific incidents and conflicts, such as attacks in the Red Sea and tensions in the Middle East, illustrating how such events can lead to increased costs, disrupt supply chains, and introduce volatility into the oil markets.

💡Renewable energy

Renewable energy sources like solar and wind are mentioned in contrast to fossil fuels. The video discusses their intermittent nature and how it challenges the reliability of power supply for energy-intensive applications such as AI data centers. This highlights the ongoing debate about energy transition and the balance between renewable sources and traditional fossil fuels in meeting global energy demands.

💡Spare capacity

Spare capacity refers to the ability of oil-producing countries, notably Saudi Arabia, to increase oil production if needed. The script touches on how this spare capacity acts as a buffer for oil prices, preventing them from spiking too high. This concept is vital for understanding how oil supply and pricing strategies can stabilize or destabilize the global oil market.

💡Inflation

Inflation is discussed in the context of its relationship with oil prices. The video explores how oil price increases can lead to higher costs for a wide range of goods and services, contributing to overall inflation. This relationship underscores the broader economic implications of oil market trends and the challenges faced by policymakers in managing inflationary pressures.

💡Energy transition

Energy transition refers to the global shift from fossil-based systems of energy production and consumption to renewable energy sources. The script mentions challenges in this transition, such as the integration of renewable energy sources into the power grid and meeting the rising energy demands from technologies like AI. This concept is crucial for understanding the future of energy production and the environmental implications of current energy consumption patterns.

💡Oil and gas industry

The oil and gas industry is central to the video's discussion, focusing on its economic and strategic importance in the context of global energy markets. The script covers the industry's adaptation to changing energy demands, the impact of technological advances, and the geopolitical factors influencing oil and gas production and pricing. Understanding this industry is essential for analyzing global energy trends and their socio-economic implications.

Highlights

The AI boom does not necessarily require petroleum, but rather natural gas, which is a bullish factor for the oil and gas industry.

Data centers need highly reliable constant power due to the interruptibility of solar and wind energy sources, making nuclear power or natural gas essential for offsetting variability.

California and New York have been shutting down nuclear power plants, leading to a greater reliance on natural gas.

The oil market has reached all-time high demand, with over 102 million barrels a day of consumption.

Despite environmental challenges, coal demand is still hitting new highs, particularly in emerging markets.

Electric vehicles (EVs) are rapidly being adopted in China, but their growth in the US is faltering.

The oil market is influenced by geopolitical and economic forces, with the Saudis currently holding back production to maintain prices.

The oil price is expected to range between $75 to $95 per barrel in 2024 due to Saudi spare capacity and a strong economy.

The utility industry is facing challenges in meeting the power demand growth driven by AI and Bitcoin mining, leading to potential legal issues and market tightness.

The Red Sea tensions and geopolitical risks add to the cost and time of oil transit, contributing to inflation.

The market's reaction to geopolitical events, such as the 911 attacks and the Russia-Ukraine conflict, shows a significant impact on oil prices.

Inflation is seen as a positive factor for oil prices, as it increases demand and can lead to higher oil prices.

The rise in oil prices can have varying impacts on large-cap stocks, with some companies potentially seeing a decrease in margins due to increased energy costs.

Russia's announcement of a six-month ban on gasoline exports is expected to support US refiners and affect European reliance on Russian oil.

The dispute between Exxon and Chevron over the Hess deal in Guyana highlights the strategic moves and legal complexities in the oil industry's M&A space.

The consolidation of the oil industry into fewer hands is seen as a positive trend, with the best companies becoming stronger and more competitive.

Paul Sankey's transition from banking to independent research provides more freedom and flexibility in discussing a broader range of topics and industries.

The issue of compliance in banking research is highlighted, with excessive regulations often stifling creativity and leading to generic, less valuable research.

The influence of the sales side on the research department in banks is discussed, with the potential for corruption in the recommendations provided to clients.

Transcripts

but why is there an underlying

assumption that uh this AI boom will

need petroleum and not um other sources

of energy yeah there isn't I mean it

doesn't need any oil what it needs is uh

is natural gas so that's you know that's

the same business essentially because

because of the interruptibility of solar

and wind all these data centers need

highly reliable constant power and

therefore in order to offset the

variability of solar and wind you need

basically nuclear power which they've

been shutting down in California and New

York um and if you don't do that then

you simply you have to use either coal

which you can't basically use now so you

have to use natural gas so it's bullish

for the oil and gas industry through

natural gas Paul sanki joins the program

he is the president of sanki research

the number one ranked independent

research company in energy and we'll be

talking about his Outlook in the broad

energy markets and specifically his

outlook for oil what will the oil price

likely end up uh later on in the year uh

what is a floor and what will possibly

be the ceiling what are the geopolitical

and economic forces driving the oil

price today we'll be discussing all

these themes welcome to the show Paul hi

thanks uh the oil price is averaged

around um I would say $80 a barrel

between 2020 to 2023 I want to start

with your larger uh bigger themed

Outlook uh for the energy market and uh

basically your thesis for the price uh

going forward into 2024 and Beyond and

then we'll break down into the more

granular aspects of your thesis okay

sure I mean uh the oil Market has

reached Heights that we are alltime high

so basically demand for oil is is still

hitting new highs in fact demand for

coal is still hitting new highs believe

it or not um so you know that's a major

challenge obviously a major

environmental challenge but the reality

is that we're at over 102 million

barrels a day of

demand you know 1,200 barrels a second

and if you know how big a barrel is uh

which is as big as you imagine it it's a

lot of oil

and you know we have a tremendous weight

of global population so what we're you

know looking at here is 8 billion people

in the world of whom approximately a

third don't use a whole lot of oil so on

the one hand the demand side looks very

well underpinned by growing economy and

growing population there's obviously a

couple of major shifts that are

happening the obvious one I'll leave

till last but essentially we continue to

use oil for transport and trade uh All

Ships and trucks essentially use it

trains and petrochemicals remains huge

and growing and particularly in emerging

markets and oil is a big destination for

is a big use of petrochemical industry

and making based products so those two

elements are extremely powerful and then

you have the whole debate which could

take us three hours on electric vehicles

and their impact um which is happening

actually very rapidly in China uh very

successfully there's a couple of

countries such as Norway where you have

almost 100% sales now of EVS

and then you've got obviously the whole

theme in the US which is really

faltering sales and the lack of

popularity of EVS I've always say EVS

the the least the most slowly adopted

Mass product in the history of mass

products so that they are a mass product

it's just taking them a 100 years to get

anywhere and it's not going that well

right there's a few shifts at the margin

but the bottom line is essentially that

GDP and population will continue to

drive demand growth the stunning aspect

of record demand is that we have more

than Record Supply

so we actually have spare capacity which

tends to put a lid on prices Saudi is

holding back at least 2 million barrels

a day of production at the moment in

order to maintain prices they are the

lowest cost marginal producers so if

they were to produce that oil they would

create the oil Market but for now

they're holding that oil back from the

market and that's causing the market to

tighten and as we go into summer we

think we'll move from that price today

which you mentioned is also the average

price we've seen for a few years of

around

8285 Brent we just hit 80 on

WTI uh you know I think the potential is

there really depending on what the

Saudis do to push the price a bit higher

we think they want 95 they more or less

said they want $95 oil uh they need 80

to balance their budget and the other 15

is basically expenditure on growth which

they're doing in a very big way so they

want higher prices and we think with

seasonality favoring them going into

summerh we'll keep running with the oils

and just to to finish the mood has

turned bullish oil and so what you're

seeing with the NASDAQ at all-time highs

causing people to wonder if they can

really buy any more is a good lagger

trade in oils particularly if the price

is rising so we need to head to more

towards 90 to get really happy about

that trade but at the moment it's

working and and that's essentially where

we're at we're looking for the price to

be in a Range 95 is the is the highest

you'll see this year because of Saudi

spare capacity the econom is strong

enough that we don't need to go whole

load below 75 as we weaken post summer

and that's a good environment for the

oil so we think they'll make a lot of

money and they'll return a lot of cash

to shareholders which is essentially the

argument okay I want to come back to the

OPEC plus and the supply side of the

equation just a bit but let's talk about

the demand side you mentioned to me

offline there's a relationship between

Ai and the need for energy can you

comment on this

relationship yeah I mean for for years

us power demand has been flat actually

and that's been very positive it's

essentially pertaining to things like

more efficient refrigerators LED lights

Etc and this is what's interesting

because essentially the utility industry

is naturally sleepy it's a natural

monopoly you know regulated by states

that essentially allow the companies to

make a given profit and it's not the

most dynamic industry in the world by a

very long way you know you say utilities

and people's ice glaze over because it's

just very boring the provision of

electricity has been for the past 20

years but what we've got now these

Nvidia chips are remarkable and they're

big and each one is a is is essentially

at 700 Watts is about the size of power

demand of a house so if they're going to

sell 2 million of these things you're

adding a city the size of Phoenix to the

power demand balance that hasn't really

grown until now and additionally there's

a lot of state requirements right across

the US to reduce fossil fuel use so at

the same time as these uh certain States

particularly Virginia Texas with Bitcoin

mining um California is the natural home

of AI all of them have very strong

demand growth for power which is

somewhat un well it's not been seen for

for decades in the US meeting a sleepy

utility that's trying to add a whole

load of Renewables and we think that

you're going to have some significant

traffic accidents and not be able to

meet that power demand so you know what

do you do in that situation do you buy

utility or you sell one well right now

you sell them because they're not doing

a very good job of meeting demand and

what you'll see is that uh over time

that's probably going to get worse right

they're going to really struggle to to

just Balance power and power is is is

not like oil power is

instantaneous and you have to have

Reserve Supply at all times obviously if

you've got gas in your in your car

you're quite relaxed about it just

sitting there and you just turn it on

when you need it with power that that

electricity needs to be constantly

supplied to the household is hugely

important to everyone's lives and

ultimately leads to Major legal

arguments if it fails and that's what

you're seeing for example with the

current right as we speak wildfires in

Texas you can see that the utility XL is

trading off uh quite hard on the

assumption that they've got some sort of

liability for that fire so it's a risky

nasty looking business utilities and the

obvious conclusion to buy them is not uh

is not obvious to me now there are

certain ipps the clients really like

vistra and Texas where they essentially

have the power generation capacity and

Supply the market and therefore make a

ton of money from very high prices and

those companies we think are investable

but the standard utilities take a

Dominion in Virginia we don't think

they're going to we think it's going to

be a horrible job for them to try and

meet this demand one of the ironies is

that all this Renewable Fuel is comes

from environmental pressure local

environmental pressure is also very

strong so basically the same

environmentalists that say use more

solar and wind also say don't build any

transmission you know please don't build

a power data center a power hungry data

center in my backyard and so the whole

thing turns into a into a giant mess and

that's what we're anticipating next so

the markets buying the Nvidia picks and

shovels trade but the reality of being

able to actually generate the power for

the AI boom is Highly Questionable in my

view but why is there an underlying

assumption that uh this AI boom will

need petroleum and not um other sources

of energy yeah there isn't I mean it

doesn't need any oil what it needs is uh

is natural gas so that's you know that's

the same business essentially because

because the interruptibility of solar

and wind all these data centers need

highly reliable constant power and

therefore in order to offset the

variability of solar and wind you need

basically nuclear power which they've

been shutting down in California and New

York um and if you don't do that then

you simply you have to use either coal

which you can't basically use now so you

have to use natural gas so it's bullish

for the oil and gas industry through

natural gas New York power is actually

highly dual fired it's like 60% oil or

gas but they run almost zero oil because

oil is effectively six or seven times

the price of of gas right now gas is

trading at you know $150 per mmbtu oil's

trading at

$82 uh a barrel it's a 6:1 ratio

calorically so you just multiply that

$150 by six and that's what the

effective oil price is in calorific

terms so 6 * 1 and a half and I'm

getting to nine here so it's $9 a barrel

versus $80 a barrel for oil you're going

to use gas okay we're going to talk

about geopolitics and oil now but first

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there's been a lot of tension in the

Middle East as you know uh escalating

tensions in the Red Sea rocket fire

reported off uh Yemen in the Red Sea in

a new suspected attack by the hotti Reb

this just came in a few days ago

February 27th I'll just read you first a

paragraph from this article here rocket

exploded late Tuesday night off the side

of a ship traveling through the Red Sea

off the coast of Yemen authorities said

latest suspected attack by uh the

Yemen's hoti Rebels the attack comes as

the houti continuous series of assaults

at Sea over Israel's war on Hamas and

the Gaza Strip and the US and its allies

launch air strikes trying to stop them

how much of this has weighed down or

weighed or impacted oil at all yeah it

has I mean it adds to costs and it adds

to time to Transit so effectively it

increases the working capital of the

business because there's more oil on

tankers that to traveling further and so

that raises costs now the cost of

Transport is a small part of the the

gallon of gasoline ultimately but it

does add you know a buck two here

depending on on the specifics of the

route uh to Any Given uh you know the

cost of oil essentially goes up and uh

and and that is inflationary so we see

this as inflationary and ultimately the

oil gets there you know what I mean you

haven't lost any barrels the other thing

you'll you can read if you read that

story that you just read and think about

it uh with due respect is that the the

hoti Rockets are not very good I mean I

laugh about it but it's a serious matter

and you know you have one that explodes

next to a ship they're more like

fireworks the inflationary aspect is

also that the US takes a you know $150

hotti Firework and blows it out of the

air with a $1.2 million missile and so

that's inflationary as well and we

expect by the way the inflation trade is

is very bullish oil generally as a rule

so with Congress actually passing tax

cuts can you believe it and spending out

of their minds this year into an

election year the environment for us

remains very inflationary and and we

think that this fed is going to struggle

badly to be able to cut uh rates to the

extent the market expects it and so

that's another reason why be like oil

here your uh impact of the Red Sea is is

is very much part of that inflationary

call right you're adding you're adding

uh juice to the oil price which is

inflationary and you're adding cost to a

lot of other Goods globally that all

want to go through the sews canal and

you know that's that's also inflation

rate yeah let's talk about inflation

just a bit but going back to the hoties

and the in the Red Sea I think one of

the concerns from investors is whether

or not this is going to escalate Beyond

a point where we're not just concerned

about inflation here Paul we're

concerned about a war that would dram Al

Spike the oil price just simply out of

the need for more oil should there be an

actual kinetic war is that something

that you're looking at yeah the way the

market looks at it is the hooti become

Iranian backed and then it's a question

of what what are the Iranian what are

the Mad müller's doing you know and

um there again it's like the hoties are

kind of it's asymmetric opposition right

ships are very

vulnerable and any old person can be a

terrorist if they want to and it's one

of the great you know the better the

better angels of our nature is less not

many people actually want to be

terrorists but if you want to be one you

can cause a lot of havoc and that's

essentially what's happening so the real

kinetic threat is relatively very small

um but the fear threat the inconvenience

threat it's like taking your shoes off

at the airport you know what I mean it's

like come on man anyway so there's that

but what we watch carefully is the

potential always and we've been watching

this for 30 years by the way for for

Iran Israel uh us Iran you know these

things there's there's an overlayer here

which is diplomacy actually right

because what you see is the US will

loosen or tighten sanctions even on

Russia you would think that you know

would we put about as much sanctions on

Russia as we already could but actually

they suddenly announc you know even more

sanctions so uh you know there's still

can be more to be done and the Iranians

are very desperate to export oil

particularly to China and the Chinese

need the oil so reports of sort of the

breakdown of the world are probably

exaggerated we're also watching the

Biden uh Trump election closely because

you know that could have a significant

outcome for Ukraine war which would

obviously change the oil setup massively

if that war was to end yeah um so that's

the second thing that's out there the

the specifics of the Israel Palestine

conflict are not very oil related there

is some gas production there but

essentially unfortunately it's a very

localized threat and so for your

question and repeating the answer you

know what we're really looking is for

for the configuration to grow but my

tendency is to think that with the

importance of Iran to Russ to China with

the import of actually Russia to India

um you know that actually whil the

headlines look appalling we'll probably

stumble through and get away with this

one I think but you still have

completely intractable problems like

Israel Palestine that are going to

remain problems for you know I can see a

solution in Russia Ukraine

unfortunately I can't really see one in

Israel Palestine so you know the

situation could easily continue into

Israel going after Hezbollah while

they're on the job and Hezbollah is

closer to Iran than Hamas so you could

you know it's it's an ongoing real risk

which ultimately tends to be negative

for oil because it would be negative for

the global economy so while you might

Spike oil on fear you sell the

spike this is an interesting point uh

the relationship between geopolitics

overall uh generally speaking and oil i'

like get a comment on this please this

is a paper written by the ECB um

published in 2023 I'll just read you a

paragraph says here the relation between

geopolitical developments and oil prices

is not clearcut historically there is no

clear relationship between oil prices

and geopolitical events such as emerging

tensions between countries or terrorist

attacks for example immediately after

911 attacks Brent prices went up by 5%

about five times the average daily

change their brand price between 20 and

2023 however within 14 days the price

dropped by around 25% now when Russia

invaded Ukraine says his paper in

February 2022 brand prices increased by

almost 30% within the first two weeks

following the invasion however prices

then decreased again returning to their

pre-invasion levels after around 8 weeks

how would you evaluate uh just these two

examples and broadly speaking

geopolitics versus

oil I'm tempted to say it's completely

boneheaded of course I mean what what

this I mean I don't even know where to

start with that I mean basically they

saying there's no impact of geopolitics

because look the price spiked and then

fell you know it's like come on man how

dumb is that what it's telling you what

they're really writing is there is a

huge impact of geopolitics on oil where

you have 911 the price spikes because

suddenly everyone's saying it's an

attack from Saudi Arabia and then the

price collapses because suddenly

everyone says do you know how many

planes are flying in the US at any given

time how do you know how many planes are

in the air in the US the answer is about

25,000 planes in the air at any time and

it's about you know so when you ground

every plane at 911 you just cut us oil

demand in an hour sorry you've cut

Global oil demand in an hour by 2% if

you ground every plane in the US so

obviously at that point once you know

after the fear of the attack comes the

geopolitical impact of the impact of the

and that becomes very bearish for Royal

so yeah it's it's supporting my prior

statement but the idea that you know

geopolitics doesn't have anything to do

with it frankly completely boneheaded

right but do you but do but do you agree

a central banker man I mean what you

expect what kind of a job have these

guys done I mean you know look at the

FED I mean it's a joke you know I'm not

I'm not going to read you the entire

paper but they've they they've got some

they've made some regressions and

whatnot but what about the general

assessment that that um geopolitical

risk premiums don't usually stay hyped I

mean to their point the price fell

obviously not but I mean of course you

know that's a function of the efficiency

of the market you've got to remember I

mentioned that it's 102 million barrels

a day of oil traded a day at a price of

$80 a barrel this is a serious business

you know so what happens is obviously

the market the Market's highly efficient

that's one of the things that people

Miss it's absolutely incredible when you

think about it that you can take oil

from you know 30,000 uh feet under the

water in the GF Mexico and a be in your

tank in New York within a matter of

months basically so you know the the

inventry runs on very low in the in

Industry runs on very low inventory and

that makes it highly susceptible to

short-term geopolitical shocks and then

it becomes very volatile because

essentially you know one of the

interesting things about tankers which

is the way to play geopolitical Risk yes

is that actually if the market gets bad

enough the tankers turn into storage

units this is something I've been

working on recently so there's an

interesting option value implicit in

tankers that I've been thinking about

and and that's really if you if you

believe the world's going to hell in a

hand basket which a lot of people do um

unfortunately but you know I don't know

my father was evacuated from London

during the 19 late you know 30s early

40s because London was too dangerous for

kids you know what I mean the world's

not as bad as people think but um yeah

so the way to play it is it is a very

volatile and a very quick effect the the

there ISS of high prices that you see

very clearly for example in US gasoline

consumption so it's a fascinating Market

in so far as it um all right very

efficiently and you know you can

actually model it and guess what's going

to happen next and that's what we do

it's just extremely volatile and it can

make you look very stupid pretty

regularly because it's so difficult to

predict so just on that note um and then

we'll close off the political discussion

is there an event or maybe other events

U besides um the Middle East or perhaps

just the Middle East that you could see

escalating to a point where uh your

forecast for $75 to $95 a barrel uh

could be pushed in other words the price

could be pushed outside of that range

because of a geopolitical shock well I I

don't think China is going to invade

Taiwan that's my view you know it's the

kind of statement that that ultimately

you kind of end up regretting bitterly

the day after

when get invented by China but I just

think there's too much at stake for the

US and China to risk that um is is Iran

people have been telling me that

Israel's about to bomb Iran since the

2000s and it never happens you know I

think you people forget how much all of

these countries are talking to each

other in fact the latest confg of Hamas

arguably related to the Saudis

establishing diplomatic relations with

Iran you know it's probably not

unrelated so you know a positive theme

there is is you know un un Unwound by a

terrorist reaction to it but the overall

theme is positive in the Middle East in

terms of diplomatic relations and you

know particularly the Arabs versus the

Jews is actually a much calmer situation

in many ways than it was 20 years ago um

but there is still a major Palestine

problem which actually pertains to

population this is in many ways a

population dispute and population

fascinating and so far as the birth rate

in Gaza is one of the highest in the

world I think I read that there's 40,000

pregnant women in Gaza and um you know

you have very very the opposite effect

in Japan or in China where population's

declining so it's worth you know keeping

in mind that a lot of these

configurations pertain to population

pressure and you can predict where those

will be and they won't be in Japan the

Middle East is the fastest growing

population in the world essentially and

that's going to continue to be pretty

dramatic I would think okay um Africa

continues to struggle along Latin

America I think is better I'm going to

Mexico on Monday and I love going down

there I go down there all the time I

think the economy is doing fine um the

main one is is always going to be the

question of Russia Ukraine and Israel

Palestine and that's what you know

that's the main ones right now

sure migrant at a global Mega level as

well migrant all of that pertains to

migrancy

migrants and obviously that's a mega

theme which I tend to think is more

positive than the average Trump voter

you know so basic not to say I'm not a

trump voter but to say that uh my I tend

to see migrant migrant pressure is quite

positive although clearly it's a major

challenge in Europe because they have

too much Social entitlement that is to

say they you know the government too

generous essentially and there's too

many migrants so it's a problem there I

think it's less of a problem in the US

because the econom is so strong and the

social benefits are so low I shouldn't

laugh but you know right less them an

issue for the US I think it's a real

tension in Europe for sure I I I do want

to touch on inflation just uh very

quickly you mentioned that the inflation

trade is positive or beneficial for oil

which actually comes first inflation

overall the CPI going up uh or a riseing

the oil price causing the headline CPI

uh to go up is there is there a cause

relationship here why don't we write to

a university and say hey we're going to

do a PhD in the causation of oil and

inflation and you and I can spend the

next seven years do a whole load of work

and and come up with an answer of I'm

not really sure um no it's it's a total

circular reference obviously I mean it

depends the you know it's very specific

to the specific situation so at the

moment the FED has printed way too many

dollars and can't get the horse back in

the barn and that's positive for demand

and that's driving up oil prices um if

you have an external shock which you

arguably don't have at the moment and

you won't have because Saudi has spare

capacity so you're not going to see oil

at 120 in my view in the next two years

yeah for sure because of the Saudi spare

capacity then ultimately you know you

don't have the mega inflation which is

is is the spike shock of the kind that

you got in the 70s with the

invasions uh against Israel again back

in back in the you know the yam kapore

war and then uh and then ultimately the

Iran Iraq war were all very inflationary

to war because they destroyed Supply and

just made everything go up in price MH

um it's not quite the same as as the

overheated Market that the FED has

created causing demand to be very strong

and therefore for the oil price to go up

so I would argue the current environment

is the GDP is leading the FED is leading

inflation and you know we're still in a

very accommodative environment right

they haven't really tightened anything

that's why the na keeps making alltime

highs yeah absolutely and and just on

that note uh when oil does go up is that

is that typically um is that typically I

guess negative for the large cap stocks

presumably any company that utilizes

energy would see a shrinking of margins

and th thus lower EPS or is there no

clear Define relationship there yeah

know it's interesting again people tend

to be locked into their received wisdom

you know but the world has actually

changed absolutely dramatically in oil

over the last 10 to 15 years and and

that has changed the dynamic of the

negative impact of oil on the US in my

view and I've been arguing this strongly

for 10 years now um the reason for that

is that essentially back in 2008 when

oil hit its alltime high the US was

importing about 13 million barrels of

day of oil so oil prices were bad for

the us because they crushed our um

balance of trade you know current

account ense all that was all negative

when oil prices went up and additionally

we weren't producing a whole lot of oil

ourselves and so we didn't benefit from

the industrial activity of higher oil

prices yeah the US unconventional

revolution has changed us to be an

exporter of oil so we've gone from over

10 million barrels a day of imports to 2

million barrels they have exports and

people just are sort of not aware of the

scale of this shift and that of course

means that now and we went from zero

natural gas exports by LNG in 2016 you

know just whatever that is six seven

years ago to the biggest exporter of LG

globally within that period of

incredible effort by the US oil industry

and as a result you now have major gas

exports and Major Oil exports and as a

result the I think that the higher price

tends to be positive for the us because

economies such as Texas which

essentially lead the US economy which in

its own right is the 10th biggest

economy in the world um you know they

boom and and you know additionally a lot

of what goes on in the US such as in

California is not very oil intense right

so essentially Silicon Valley not

withstanding what I said about Nvidia

chips needing a ton of power in itself

is a hugely value add low energy

intensity effort you know something like

Facebook us a lot of energy but relative

to its profits it uses hardly any yes

and um so yeah the US I believe that the

high o prices are actually much but

actually good for the US and

additionally they have a beneficial

environmental impact to creating greater

efficiency which is not good in the US

let's be honest you know people use way

too much oil and you could use a way lot

less if the price was more sensible but

against people's understanding oil

prices here are actually very very cheap

gasoline prices particularly

structurally sure cly versus the rest of

the world uh all right well let's close

off on a few current events and how they

may impact the price going forward uh

first off Russia recently announced a

six-month export ban on oil uh starting

March 1st um you know the ongoing

petroleum ban uh gasoline ban has been

uh a subject of concern for a lot of

investors and well just everybody

especially Europe I just read you with

this article from here from reuter

Russia has announced a six-month ban on

gasoline exports from March 1st to

guarantee enough fuel to satisfy

domestic demand ahead of maintenance

work on refineries um this was dated

February 27th as you know uh Europe is

still purchasing Russian oil via India

at a loophole now should should

investors expect the price to be pushed

up as a result of this ban in the coming

weeks yes I mean the the specifics of it

at the margin are are less impactful

obviously than the big picture which is

Russia invading Ukraine and and European

gas being cut off those all have a big

impact on product markets because

essentially once you once you can't

Supply natural gas the replacement fuel

is distillate or diesel you would know

is diesel um but gasoline is Russia

essentially is a product exporter and so

if they if they believe they need to

sustain their own Supply and not export

it's positive for us refiners directly

and um it is a it is quite a big deal

gasoline's not their biggest export

product distill it is so we're much more

interested in that MH but at the margin

this is supportive for us refin is okay

uh and then finally let's talk about

this uh ongoing this feud between Exxon

and Chevron over um over a project uh in

Guana so Exxon throws a wrench in

chevron's 53 billion deal for hess uh

just just came in from the Wall Street

Journal uh Chevron warn investors Monday

that Exxon Mobile and China's uh CN are

asserting that they have a right to

preempt the company's bid for stake in a

pro a prolific oil project of Guana an

emerging dispute that could derail

chevron's Mega deal for hes what do you

make of this what's going on here and

how will it impact the

markets uh I mean it's fascinating it's

it's Game Theory it's prisoners dilemma

you know what happens is

that often when when these companies

have huge assets and Guyana is one of

the biggest in the world it's a

remarkable oil discovery of remarkable

size tens of billions of dollars of

value in that one field that one block

that they've got starbur because it's

known and Chevron as a result bought

Hess right which had the the the the the

second POS the third position alongside

Exxon and COK the Chinese that you

mentioned the China's national offshore

oil company and essentially chevron's

buying Hess to get Guyana which they

need to add to their asset base which is

somewhat overc concentrated in the peran

in Kazakhstan and in Australia so they

want that fourth area that Guyana gives

them Western Hemisphere low carbon

intensity high quality oil Supreme

performance of the reservoirs highly

profitable and so they're buying H if in

particular asset cases which would be

any given asset it's quite common in the

oil industry that if somebody comes in

to buy someone else's share because

typically all assets are shared by

companies to mitigate risk it's it's

quite it's quite standard that if

someone comes in to buy an asset the

original owners of the asset have the

right to preempt so they can essentially

match the bid uh to stop themselves

being diluted or to stop themselves

suffering from a you know bad you know

whatever there's numerous reasons why

you can imagine you would want the

partners to have the option to buy out

and they do the question is is that the

case in a corporate transaction and you

would immediately say I've never heard

of it

basically so it seems super cheeky that

Exxon and cenic are saying hey uh you

know we think we have preemption rights

here which presumably they would if hes

sold the asset they would right the

question is if hes sells itself doesn't

doesn't Chevron just become hes and the

assets not sold and that's the dispute

it's probably a clever Power Play Move

by Exxon to try and extract some value

right because they got nothing to lose

and they can say hey let's delay this

thing uh because we want to have a legal

judgment and we're going to take it to

arbitration if you end up in arbitration

you've like literally all got to fly to

the ha and stuff I mean it takes months

and that's not what Chevron and hes want

so the question is hes and Chevron

ically with their Bankers now have to

decide do we a you know firmly deny

exxon's legal rights and then just go

through a whole legal process and delay

the deal or do we look at the present

value of the deal and say look X One

what's it going to cost for you to go

away and you know is it 2% is it two

billion you know what's your number man

and I can see uh well lady and I can see

uh Mike worth and Darren Woods who are

not hostile towards each other at all

they're more often than not on the same

side of the table when they're getting

cred in Washington I can see them making

a deal you know but what it is and

whether or not it it's a fascinating

question for Chevron I would love to be

in the boardroom and decide what to do

next we had a very similar situation

with Chevron for

oxy it wasn't Chevron for oxy we had a

very similar situation with Chevron

fanad Darko where oxy came in as a

hostile bidder and bid out Chevron out

bid them and then Chevron had to decide

do we go higher do we walk away and then

the walkway side of equation was a

billion dollar payoff well certainly

this bidding war uh bidding war is kind

of a a signal for a strong appetite for

m&a overall in the space would you agree

unfortunately not because the prices

paid have not been at a premium you know

it's been more like pulation by

management so it's a more negative m&a

Trend it's not a frenzy of everyone

trying to buy everything it's actually a

frenzy of the biggest oils xon Chevron

uh essentially Kono essentially taking

out the weak hands

uh and those are typically unfortunately

managements that get rich by selling and

they have done a horrible job of getting

a big premium for their companies

essentially because the companies aren't

super attractive that's not the case for

Hess by the way hes is super attractive

some of the other stuff we've seen sell

has been you know essentially TI

succession issues um you know any one of

a number of problems with Standalone

operation and that's caused the CEO to

go hey you know what I'm going to make

30 million bucks if I sell this thing

and and that's what they do so it's

being kind of frustrating but the

general theme of the industry

consolidating into less hands is

something that we saw in refining and is

very powerful for for profitability so

the theme in general is super positive

because the best companies are getting

bigger and better and they're better

able to compete against the nvidias of

the world which frankly you know not

withstanding the importance of energy to

Nvidia as we' highlighted nobody's

particularly interested in oil compared

to Nvidia having said that you know

we're now running because I think people

can't buy any more inidia and they

they're thinking actually oils are doing

very well at 80 and if we go to 90

they're going to be doing super well uh

maybe I should own some of this

dividend let us know when it gets there

Paul uh we we'll follow your Le we're

saying we're saying run these things

since the middle of the year so um wish

me luck yeah for sure on that note let

tell us a bit more about your research

what we can learn from you where we can

learn about your work sure so I was you

know I was originally at the

International Energy agency then a

consultant at wood Kenzie quite well

known consultancy out of Edinburgh

Global now and then um I joined deuts

Bank in Europe in Edinburgh which was

great uh covering European oils and then

in 2004 I came to the US covering Exxon

for deutcher I was I always joke I'm an

extra in The Big Short I was at deutcher

when Litman was yelling about the the

property crash uh and then in 2013 I

quit D should to go to Wolf independent

so that's when I began to understand the

independent business model

instead of the Bulge bracket Bank model

which you know is is unwieldy and and

somewhat corrupted by conflicts of

interests and from Wolf I did a short

stint at moua then set up sanki research

on my own in

2020 it's a subscription service that's

really designed for institutional

investors but you can subscribe as a

retail

investor uh if you don't like the price

too bad um but you know we are really

more oriented towards institutions and

and that's where we get our ranking from

that you referenced at the beginning the

website is sanky research my email is

Paul sanky research.com

and you know for free we have a weekly

video that people like so you can sign

up to my YouTube video uh which costs

you a fat

zero fantastic it's not uh it's not

dependent on the oil price doesn't go up

with the price of oil my appetite for

recording the video does yeah man you'd

be surprised that's the problem that's

why I always stayed on the S side if

you're on the buy side you work at a

hedge fund you know what they say sleep

with your book and um yeah there's no

it's funny there's no people don't want

a bearish oil analyst right and they

they also you know have to understand

that when when things are bad we get

really miserable and when things are

booming we love it so yeah just out of

curiosity why did you leave banking to

start your own research

firm um because essentially the

compliance is excessive and it's

designed to protect the bank from the

dumbest analyst

right and so if you're writing stuff

that's a bit edgy and I mean I'm look

I'm not talking about you know we're

highly by the time you've been I

understand you're pretty good at at not

writing dumb emails you know you don't

send tweets you know about visiting

Africa then get on a plane you know what

I mean it's like it's second nature they

always say you know just don't do

anything that you don't want to see on

the front page of the Wall Street

Journal and and and so you know the Chan

of me sending a bad email are pretty low

um

so you know within with that in mind the

excess compliance and because uh you

know I'm quite a free I'm a writer

essentially that that was an issue and

then additionally because of the

dynamism of the space what happens is

that Wall Street research is very siloed

so the oil guy covers oil but God help

him if he starts talking about Tesla

because the Tesla analysts are going to

lose his mind right you can't you can't

talk about other people's stuff right

you can't wildly speculate about Nvidia

whereas being a standalone independent

research shop we a we can talk to

Bankers previously we couldn't because

you know obviously we don't have any

banking business so there's no conflict

B we can write about whatever we want so

if we suddenly get interested in

dominion and Virginia power we just go

off and write about it so that's super

cool um see we you know again and that

horizontal thing is powerful for clients

and and and see you know see within the

context that research we can say you

know stuff that you can't say at a bank

which um is really the bank protecting

itself it's not protecting clients and

so you know all of those things together

you also cut out a lot of commuting you

know other nonsense I mean the number of

times I took the money laundering course

at deuts bank and I was like I can't

launder money I don't have any account

you know it's impossible for me as a

research analyst to La a money I took

that that compliance course every

quarter for 10 years and then you know

five six seven years later I see that

Dutch bank's been fired whatever it was

half a billion dollars right for money

laundering Epstein's money whatever it

was you know it's just like you know hey

I think you had the wrong guy taking the

course Lads you know what I mean without

without giving too many details I'm

we'll leave it off here um uh did you

ever feel like the sales side had any

influence on the research Department the

what did you ever feel like the sell

side of the bank had any influence on

the research that uh the research

Department was putting out uh whether or

not the bankers did no that's illegal um

now of course it's an accident that 80%

of Wall Street research is either is

either buy or hold recommendations and

it's it's super stupid because the

clients don't really care about the

recommendations you know what I mean

that's their job what they want is

industry knowledge they do like if you

set out a thesis um and and risks so

they can judge you know the investment

case the problem is that you can't have

sell recommendations as you know because

the bankers are not going to be happy

they can't do anything about it it's too

bad for the bankers but also the company

gets super sulky and that's why you're

corrupted with Wall Street research and

it's just a an intractable corruption

that obviously you can't have a strong

friendly relationship with a company

that you're saying everyone should sell

and that's why the research the

recommendations become very corrupted

and meaningless and why all the

excitement that you have when you're

writing for a big bank about is there

10% upside to your price Target why

don't you have 20 cells and 20 Buy all

this stuff it's just like you know what

the clients don't care anyway and this

is all just basically nonsense and so

now we write research we actually don't

really have recommendations or Price

targets and we don't have to it's just a

self-imposed rule essentially by the big

Banks because they've screwed up so many

times and I haven't touch wood but I'm

keeping an eye on myself okay I'm

actually series 24 so I can compliance

myself

weirdly all right well we'll talk more

about some of the companies that yeah

we'll talk more about some of the

companies that you've done research on

next time uh pleasure to meet you Paul

thank you for joining the program and

I'll speak to you again soon yeah thanks

good stuff thank you and don't forget to

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