Speaker 1:
From the library of the New York stock exchange at the corner of Wall and Broad streets in New York city, you're inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership and vision and global business. The dream drivers that have made the NYSC an Indispensable Institution of Global Growth for over 225 years. Each week, we feature stories of those who hatch plans, create jobs and harness the engine of capitalism. Right here, right now at the NYSC and at ICE's Exchanges and Clearing Houses around the world. Now welcome inside the ICE House. Here's your host, Josh king of Intercontinental Exchange.
Josh King:
When I last filled up the Chevy Colorado down in a Hickory Hill market, the price of a gallon of gas was a $1.99 and I know that's well above the national average of a $1.77, according to AAA. Now, from that endpoint, the price sweep pay at the pump all the way upstream to where domestic crude oil is delivered in Cushing, Oklahoma. We have a little problem and it centers around that small town. A financial time story began last week, and I'm going to quote "Cushing, Oklahoma, population 7,800 has a steakhouse, a burrito restaurant, and a KFC. It also has America's most important complex of oil storage tanks." Those oil storage tanks, they're just about full to the brim. There's nowhere else to put the stuff. Why? Ask Adam Smith. Back in 1776, when he published the Wealth of Nations, the book so many of us read back in college and the smart kids who read it in high school. Smith wrote in book one chapter seven of the natural and market price for commodities.
Josh King:
He wrote "When the quantity brought to market exceeds the effectual demand, it cannot all be sold to those who willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither. Some part must be sold to those who are willing to pay less and the low price, which they give for it must reduce the price of the whole. The market price will sink more or less below the natural price. According to the greatness of the excess increases, more or less the competition of the sellers, or according as it happens to be more or less important to them to get immediately rid of the commodity." That's Adam Smith from the Wealth of Nations. In other words, when a coronavirus stops a country almost dead in its tracks, and there's no demand to fuel cars to drive, planes to fly or ships to navigate the oceans, demand dries up.
Josh King:
In the case of crude oil, it takes a lot more to stop supply from shuttering wells in the Permian Basin to agreement among nations like Saudi Arabia and Russia to cap production, no easy trick that. Intercontinental Exchanges, President Ben Jackson, put it another way in the company's first quarter earnings conference call, which took place last Thursday, when he told analysts distinguishing the differences between the landlocked WTI features contract and the Seaborn ICE Brent futures contract, and I'm quoting Ben here, "There's well publicized structural issues at Cushing. Infrastructure issues have happened in the past with pipeline and storage issues that create volatility and delivery. The major difference between that and Brent, is Brent is a waterborne contract, where it is much easier to load crude on the vessel and bring it anywhere in the world where there's demand and the economics make sense. You'll see the huge demand pool that you're servicing with the Brent contract and you don't have those fundamental land lock structural constraints on the contracts." That from ICE's President Ben Jackson, which brings us to this week's episode.
Josh King:
You know that over the last few weeks, we've occasionally been bringing you inside some of ICE's special series of webcasts, that it produces for its customers and partners on key issues facing those who trade in the markets during these unprecedented weeks, when so much of the world is sheltering in place. Issues having to do with containing, curing and vaccinating against the coronavirus to issues facing the broader economy. Last week, you heard Jim Greenwood, the President and CEO of the Biotechnology Innovation Organization or BIO, and this week it's Daniel Yergin, who the New York Times called the king of the oil pundits.
Josh King:
What you'll hear in this episode is a conversation between ICE's Head of Global Sales, Jeff Barbuto and Dan Yergin. Dan is Vice Chairman of IHS Markit and the Pulitzer prize winning author of The Prize, The Epic Quest For Oil, Money, And Power, and also The Quest, Energy, Security And The Remaking Of The Modern World. Coming out in September, Dan has a new book, The New Map, Energy, Climate And The Clash Of Nations. In his conversation Dan gave the audience an exclusive preview and his take on the volatility we're seeing every day. Later in the conversation, I come back and moderate a series of questions that came into us from live listeners of the webcast and Dan's thoughts on their comments were fascinating.
Josh King:
You should also know a little bit about our discussion leader, Jeff Barbuto, who manages ICE's global oil business, our oil market development and the oil sales team. Jeff started his career back in 1997 as the broker of fuel oil swaps, options and physical barges. Back when oil derivatives were traded solely over the phone, he joined ICE in 2001, working with Jeff Sprecher and ICE's founders to develop the oil derivatives business on the ICE platform, managing among other things, the transition of the Brent crude oil contract that Ben Jackson was talking about on our earnings call, way back when crude was bought and sold from the trading pits on the floor of the old international petroleum exchange to now, when it's a fully electronic market on ICE, a transition that has grown volumes more than tenfold since then. With that, after this, the next voice you'll hear will be Jeff Barbuto in conversation with Dan Yergin that's right after this.
Jeff Barbuto:
And now a word from John Berger, President and CEO of Sunnova, NYSE Ticker, NOVA.
John Berger:
We're a solar company, and we're out there to bring solar to every home in the country. We have such a fast market that it remains untapped. I think it's less than 3% of the market of homes in the United States. And so there's just so much potential. New York Stock exchange is the home of capitalism. It's just for the action happens for no matter where you are in the world. All eyes are the New York Stock Exchange. Sunnova now listed on the New York Stock Exchange.
Jeff Barbuto:
Thanks Josh. Dan, thanks for being with us. There's been so much going on in the oil market these past couple weeks. It's just a great time to have you here and get some perspective from you. I wanted to start out with the oil price war between Russia and the Saudis. At the end of the last year, US shale oil counted to 15% of global oil production. Whereas Saudi and Russia remained at 12 and 13%. I wanted to get your thoughts on to what extent you think this was aimed at crushing US production specifically?
Dan Yergin:
Thank you, Jeff. I'm very glad to be on and hello to everybody to join this conversation. Josh, thank you for that nice introduction, and thank you for the pre-order of the new book.
Dan Yergin:
I think you put your finger on Jeff, what certainly was part of it. In Russia there was a real division between those who said we should cooperate with OPEC Plus and OPEC Agreement and those who said, "Why are we doing this? We're giving up market share to the United States." Some saw shale as really an adjunct to US foreign policy, enabling the US to use sanctions on Russian trading companies and most notably on the Nordstrom pipeline. That was part of it and it was divided there. I think the Saudis were in general saying, "Why should we make room for other people and make all the cuts?"
Dan Yergin:
So I think Shale was part of it. I think there was also that definite sense of competition with Russia, and you just have to keep in mind what a dynamic new force US Shale was when they put in that original OPEC Plus agreement in 2016. At that point, since the four years it was in place, US oil production went up 60% and in February of this year, ironically US oil production reached its high point of 13.1 million barrels a day. Way ahead of Russian, Saudi Arabia. I think for both those countries, Shale was a part of the picture and it was generally the sense what Ali Naim, the former Saudi Oil Ministers fed all the new players in the world oil market and shale was at the top of the list.
Jeff Barbuto:
Can you give us some historical perspective on what we're seeing now in terms of a massive supply shock and demand shock at the same time and how that compares with past challenges to the US oil industry?
Dan Yergin:
You know, Jeff, sometimes I think that the... One of the adjectives that has become part of our vocabulary is unprecedented and so this is unprecedented. There are analogies in 1986, 1998 during basically market share wars, ran out of space and out of storage and prices went down to $10 a barrel, but in some ways the only... An analogy you have to go back 90 years, really to the great flood of oil in West Texas in the early 1930s, when the price of oil went to 10 cents a barrel, which would be a little over a dollar today, if you correct for inflation, that's when the system of pro-rationing by the Texas Railroad Commission that is managing production by the state, aiming to deal with that flood of oil.
Dan Yergin:
There's never been a time even during the depression demand went down, but you've never had what we're seeing today. This month, we think demand could be down as much as 30 million barrels a day. That's almost a third of total world demand.
Jeff Barbuto:
Yeah, that's pretty incredible. One of the other things we've been watching is the storage capacity quickly filling up globally. Then on Monday we saw main WTI contract trade down minus $37, which is pretty incredible. What's the significance to you of the recent cooperation between Saudis, Russia and the US as part of that OPEC deal and do you think it did enough to at least get us on the road towards balancing?
Dan Yergin:
Jeff, there's two parts of the question. Let's do the deal first. I think when Saudi and Russia broke up at the beginning of March, it looked like we were going to have a Mar a war for market share. I think that was happening we were moving from the first phase of the Corona crises and people didn't really visualize, it was hard to visualize the second phase where everybody's at home and I think it was sort of backward looking to the decline in demand of 6 million barrels a day, which is what you had in the first quarter because of the shutdown of China.
Dan Yergin:
As the weeks went on it became clear that obviously we were in a second phase where a lot more demand was disappearing and I think that what brought them together was partly Donald Trump. He'd negotiated against OPEC with tweets, but I think, and as he said, he was always in favor of low gasoline prices, particularly in an election year. I think what turned him around was one US losing quote, what they call energy dominance in the administration. Secondly, it was the economic impact, not only in the oil states, but in the industrial states, it's Midwest, which are very connected.
Dan Yergin:
I think there was a national security that like energy independence, and there was a political view as well, that Texas has almost twice as many electoral votes as Pennsylvania and Illinois combined, so very significant state. I think that got him mobilized and if he was a deal maker, this was his mega deal. I think the Saudis and the Russians were brought to the table by partly US arm twisting, the US senators from the oil states became part of the equation, and I think also they realized they were running to the problem of they couldn't sell their oil.
Dan Yergin:
You talked about storage. Russia doesn't have a lot of storage. I think all those things came together to come again to use that adjective, this unprecedented agreement to cut back, which was put in place just about two weeks ago.
Jeff Barbuto:
Starting here, do you think that was a one off cooperation between Trump and the Saudis and Russians, or you think we're going to continue to see that and especially as it looks like we may need deeper cuts, to catch up with reality?
Dan Yergin:
Well, I think President Trump is going to continue to be engaged in this, and there is talk of deeper cuts, but there'll be political decision which will affect production and then there'll just be the reality of lower investment, almost a freezing up in the United States, short cycle oil, shale oil requires constant drilling to replenish and grow and you can see activity going to a much lower level in some companies just not drilling at all. What's the point at this price level or they can't because they don't have the funds.
Dan Yergin:
Then the other part of it is going to be the shutdowns. We've seen shutdowns in the US, I think with the international companies, it's more complicated outside the United States to shut down because of agreements with governments and so forth and which fields do you shut down and what are the costs of... But so what we see when we talk to industry participants, they're going through a difficult internal process of assessing where to shut down and how much.
Dan Yergin:
I think that's going to be part of the adjustment too. We think in the US, we'll see between 1.75 and 2 million barrels a day of shutdowns in the next couple of months. That will be part of the balancing. Canada will be another place and it's going to happen elsewhere in the world. I think some of the big producers like Kuwait has announced that it's going to start... Not wait till May 1st, it's going to start pulling down its production now.
Jeff Barbuto:
It kind of leads nicely into the sort of new world order and the subject of your book, fresh in your mind, I guess new world oil order in terms of alliances between producing nations and consuming nations, I wondered if, how much do you think we've seen that that change happen for good?
Dan Yergin:
Well, I wouldn't say for good, because things change, politics will change. We have an election coming in November and the Democrats have different attitudes, some of the Democrats, the energy business and the Republicans, but I think it does reflect reality and the reality is that the kind of old world of OPEC, NON-OPEC has really become a world dominated by the big three. It's Saudi Arabia, Russia, and the United States and what each of those countries do and how they interact will do much to shape the oil market in the future when this crisis is over.
Jeff Barbuto:
One of the aspects of this it's been interesting to me is the market's been focused on all the turmoil we've been discussing for the last several months and we've sort of forgotten, now it's fallen out of the headlines is phase one of the trade deal between the US and China. One of the biggest headline commitment was that China was supposed to buy $18.5 billion worth of energy in 2020 alone.
Jeff Barbuto:
I'm curious what you think of how that all looks now and how do you think that plays out, especially going into election year?
Dan Yergin:
Well, of course for US producers and for US LNG, the China market is very important, but the China market shut down. I think that if we remember the kind of depressive impacts on the oil market late last year, or last year was trade war with the US and China and it kind of looked well that got resolved and the markets were looking better and so forth. We did think that numbers that were promised were very high in terms of actually how much that China could absorb from the United States.
Dan Yergin:
I think from the beginning of this administration, they'd looked to LNG for instance, as a very important way of helping to balance out the trading relationship. I think there's concern about where the US China relationship goes after this crisis, because there are issues that I talk about in my new book about the South China sea and so forth a lot of... But also I think there's going to be a question of where did this virus come from and that's going to be very controversial. You can feel that the divergence between China and the United States is kind of going to be a feature of the world after this crisis is over.
Jeff Barbuto:
I'm sure it's going to be a big part of the debate during the election period. Dan, at this point, I'm going to pass it over to Josh to see if we have some questions from the audience.
Josh King:
Yeah. Thanks, Jeff. We've got scores of questions coming in. I'm just going to throw some of them at Dan and Jeff, if there's anything you might want to add to these, please do. Will prices rebound fast enough to save many US fracking oil companies?
Dan Yergin:
I think that some of the companies are going to be under... Some of the companies will disappear. The oil won't disappear, but I think it's going to be very hard. The mainstream program will help. Secretary of Energy, Dan Brouillette is working on a program to create a lending facility for the, call it the major ENP companies, the independence so that they can have access to liquidity too. I think liquidity is going to be a big problem and I think the US will still be a big producer, but our production will go down. It's a really tough time, a really tough time for a lot of the companies and the people who work in the industry.
Josh King:
Will we see greater consolidation in the US oil industry as a result of the situation?
Dan Yergin:
I would think so that we will see in one form or another. There will be the question of people assuming other people's debt levels, but I think inevitably they'll be restructuring will come out of this. One of the features of the last couple years was a big commitment of the largest majors to participating in shale and I think that will continue, but I think consolidation's coming.
Josh King:
Does Daniel agree that the Saudi response to flood the market was immature and not properly considered MBS seems to have shown his inexperience as a leader here, and it's actually also hurt the Saudis?
Dan Yergin:
Well, I think I hear the answer in the question, I think it was... I know what the Saudi rationale was and the Russian rationale was, I think it was based upon looking backwards at the market, not looking forward, what was going to happen in the market and what did happen is that it did create a... Which I mentioned before, a real political reaction in the United States where some of the senators were from oil producing states who vote in favor of military relationship with Saudi Arabia were saying Saudi Arabia was waging an economic warfare on the United States and I think that was one of the things that led to the reversal of the opinion.
Josh King:
During a downturn, there are always opportunities. Where do you think the opportunities will be in the energy market during this pandemic?
Dan Yergin:
Well, I think those who have capital and access to capital will be able to... That there will be no opportunities there in the low prices and the low price of assets, because it's hard.. It may not seem that way right now, but this will end.
Dan Yergin:
It's probably not going to end with the V-shape recovery. Our economists think it's going to be very U-shaped, but values will be greater in the future. It's those who have capital who will be able to benefit from the opportunities. I think that we'll see more divestment by international companies, which will create opportunities for people. Then I think the domestic industry is really going to need capital.
Josh King:
Absent the pandemic, what did the aggregate production curve look like for us shale? When was peak US shale oil, likely to occur in your opinion? How has the combined effect of the pandemic and OPEX shift to a market share strategy, impacted the shape of that curve?
Dan Yergin:
Well, we were thinking at the beginning of the year, our team to focus is on shale that we were going to see... We were not going to see any more million and a half, 2 million barrels a day. We thought maybe in 2021 with the economic forecast at the beginning of the year, that it would be about a 400,000 barrel a day edition and we saw it flattening out in this sort of 13 to 14 million barrel a day range, partly because of the change in the relationship between companies and investors and the focus of return of capital to investors and that the companies were going to live within their cash flow and give money back.
Dan Yergin:
That was going to slow activity down anyway. That's 13, 14, we thought that was... The US could be on that kind of plateau for a few years. We think now at the end of this year, US production think 13.1 at the beginning of the year, will probably be around 10 million barrels a day. It could go another million barrels a day lower in the next year. So US is still going to be one of the big three, but not quite with all the muscles that it seemed to have in February.
Josh King:
If there is a bigger than anticipated shift back to business, as usual before the end of the year, and energy demand improves significantly, what remains as some of the longer term irreversible casualties of COVID 19 related crash in demand and prices?
Dan Yergin:
Well, I think one thing is distributed work. The rise of Zoom fact that what, and that will have an impact. I think on business travel, we saw our economists, went back and looked after 911, it took two and a half years for air travel in the US to return to the level it had been before 911 and I think there'll be... People will tend to want to drive, not fly. I think that will be a consequence, so we're not expecting... And it will be very tied to GDP as well. So we would expect that probably the world doesn't return to a hundred million barrels a day, anytime soon, there'll be a couple years certainly to do that, so the shape of... And companies, everybody's struggling with this question, how will the demand curve be shaped by what's happened?
Dan Yergin:
A lot will have to do with human behavior. It is interesting parts of the economy. We do a weekly series conversation, I did one with the CEO of Dow and he said it Dow's factories are operating at 80%. Parts of the economy definitely continue to work, but it's so much of the service part of our economy, is what's shut down.
Josh King:
Where did this leave other oil producing countries such as Canada?
Dan Yergin:
Well, Canada has already had... Canada went into this with a problem, which is access to United States pipelines, the ability to get its oil out. It was very noteworthy that the province of Alberta stepped in to be a partner in Keystone XL and to finance it and saying that is really economically essential. We think Canada will probably have cutbacks as much as a million barrels a day. Obviously for the Canadian industry and price is very low, not full access to markets, big problem. Just looking at a new report we've done on the OPEC countries, and it's quite dramatic to see what's going to happen to government revenues in countries like Nigeria, Libya, Angola, Iraq.
Dan Yergin:
I think one thing you should expect is there's going to be real turbulence in those countries. They're not going to be able to pay civil servants. They're only able to pay half their civil servants in Iraq now. I think there's going to be political turmoil and social turmoil in those countries that are so dependent on oil revenue and really have not been able to shift. I mean, oil is 75% of Nigeria's budget.
Josh King:
How much do you think the oil glut and low oil prices will play as an agent toward a faster recovery post coronavirus, be that through lower travel costs or increased profitability in oil, hungry manufacturing processes?
Dan Yergin:
Well, that's a very interesting question because coming out of this we're going to have high inventories. The inventory level will probably be three times what it was in 2014, 2015 and one of the noteworthy things in the agreement that was made among two weeks ago was that it provided that there'd be a descending series of cuts, but to maintain them for two years to work off the inventory glut and I thought that was kind of noteworthy to see the need to do that.
Dan Yergin:
That would get us back... That question gets us back to the more traditional way where low oil prices are a stimulus to the economic growth. I think that's a factor to think about. Let's take that under consideration. It'd be back more to a traditional model like 1998 or after 1986.
Josh King:
I got a question that just came in from a guy named Jeff Sprecher, we know him, he says, what does this...
Dan Yergin:
He knows all answers.
Jeff Barbuto:
Well, he wants to hear it from you, Dan. So I'm going to put Jeff's question to you. He says, what does this low oil price environment mean for Iranian revenues and the stability of its current regime?
Dan Yergin:
Well, the interesting thing about Iran is that, of course it's been sanctioned. Though it's only able to sell a few hundred thousand barrels a day anyway. In a sense, it's already made the adjustment and it's a more diversified economy, it ran as the sixth or seventh largest automobile manufacturer in the world. I think they're already living their kind of war time economy. I mean, it's an economy that's under a lot of pressure and they're holding it together.
Dan Yergin:
Obviously one has to be continued concerned about what kind of clashes or accidents could happen in the near term as we've seen in the last couple days with Iranian boats in the Persian Gulf. Although traditionally oil has been 50% roughly of the revenues of the government they've been sort of living without it. They've already been in on an enforced diet
Josh King:
Based on the pace of the inbound questions, we could certainly keep this going for another half hour, at least Dan, but I'm going to ask one more question. Will institutional capital come back to the Shale industry after poor returns that were there even before COVID?
Dan Yergin:
Well, that picks up on what the point I said before, which is that there'd been kind of a divorce between the capital markets and institutional markets and shale. I think that the shale companies were needing to build credibility, that they could return capital, stay within their cash flows and manage differently. I think that was in process, you saw a number of companies like Pioneer and many others, all basically moving in that direction even, dividends and so forth. It was like there needed to be a new social contract or compact between institutional investors and the shale companies. That would've taken four or five quarters, to demonstrate it, but I think the progress toward that has been disrupted by this... Really this calamity that has hit the oil industry, but it really has hit the entire economy.
Josh King:
Jeff Barbuto, let me pass it back to you for any final thought or question for Dan.
Jeff Barbuto:
Great. Thanks Josh. Dan, I just want to thank you so much for participating today and hopefully we can have you back as this unfolds further.
Dan Yergin:
I'd be happy to do it. Great questions. I know we only got through some of them, but a lot of questions to think upon. Thank you all for the questions and for the opportunity to be part of this dialogue.
Josh King:
So thanks to Dan Yergin and Jeff Barbuto for their time and insight and that's our conversation for this week. Our guests, were Dan Yergin, Vice Chairman of IHS Market and Jeff Barbuto Intercontinental Exchanges, head of oil sales.
Josh King:
If you like, what you heard, please rate us on iTunes, so other folks know where to find us and if you've got a question or a comment, you'd like one of our experts to tackle on a future show, email us at icehouseattheice.com or tweeted us @icehouse podcast. Our show is produced by Pete Asch with production assistance from Ken Abel and Ian Wolf. I'm Josh king, your host signing off from the remote library of the New York Stock Exchange here in the Catskills. Thanks for listening, stay safe and we'll talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE, nor it's affiliates, make any representations or warranties. Express or implied as to the accuracy or completeness of the information and do not sponsor, approve or endorse any of the content hearing. All of which is presented solely for information only and educational purposes. Nothing here constitutes an offer to sell. A solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purposes of length or clarity.
