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 NYSE 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 NYSE and at ICE's Exchanges and clearing houses around the world. And now welcome inside the ICE House. Here's your host, Josh King, of Intercontinental Exchange.
Josh King:
Regular listeners of inside the ICE house will note the several times we've brought you inside special events happening in and around the Intercontinental Exchange in the New York Stock Exchange. Prior to the COVID-19 pandemic, the NYSE was the locust of headline and making events of all stripes with audiences arrayed in our boardroom and other spaces at 11 Wall Street that touched on different issues across the economic spectrum. One of those events was a discussion with ICE founder and CEO, Jeff Sprecher, who was live from Abu Dhabi on the past, present, and future of the oil markets that talk was hosted by Helima Croft, the managing director and global head of commodity strategy at RBC Capital Markets.
Josh King:
Well, times have changed somewhat and events have moved for the present online, but are no less timely and newsworthy. And today we turn the questioning on the questioner, before mentioned Ms. Croft.
Josh King:
What you're about to hear was recorded live in front of a virtual audience as part of our ongoing series of events hosted by Intercontinental Exchange, bringing our customers, partners, and others, the latest information and perspectives on what they should be looking at in the markets. The interviewer this time is our own Stacey Cunningham, President of the New York Stock Exchange, sitting down virtually with Helima to discuss this unprecedented time and energy. It was a fascinating and far ranging conversation covering the latest OPEC Plus headlines, supply and demand dynamics, and the economic impact, the upcoming US elections, and continuing COVID-19 pandemic, all that their effect on the marketplace itself. After the break, the next voice you hear will be Stacey Cunningham's introducing Helima Croft. Take it away Stacey.
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Stacey Cunningham:
This is Stacey Cunningham. I'm president of the New York Stock Exchange. And I just want to thank all of our customers across NYSE and Intercontinental Exchange for joining us in another session of our all access conversations. I'm pleased to welcome Helima Croft today, managing director and global head of strategy at RBC capital markets. Helima's going to help us unpack the current state of the energy markets. Helima has a deep background of commodities and geopolitical experience having previously worked for the CIA and Council on Foreign Relations, as well as leading North American Commodities Research at Barclay's. Along with her team at RBC, she's the voice on geopolitics and energy spending considerable time throughout the year in the Middle East and at OPEC. Helima, we're thrilled to have you join us.
Helima Croft:
Thank you so much for having me today.
Stacey Cunningham:
Great. So let's just to kick us off, let's go back to March of this year, which frankly sounds like more than a year ago. You were in Saudi after the March 6th meeting fall off that led to the start of the oil price crash in 2020. Tell us what that was like.
Helima Croft:
Actually, I'm going to back it up to the beginning of the year. I mean, it was so interesting-
Stacey Cunningham:
Which feels like two years ago.
Helima Croft:
Feels like two years ago. How we started this year. I remember in January we started getting the reports about this virus in Wuhan. Immediately people in the market were starting to think about what would the demand impact look like? Would it be something like SARS? Would it be more transitory? And it was interesting to watch how sort of OPEC Plus, this union that came together in November of 2016 with Russia and Saudi Arabia the helm, reacted to the reports of this potentially global health crisis. The Saudis very much saw it through the lens of the sort of '08,'09 financial crisis and they wanted to do a big cut immediately. They were looking to do a big cut in February to signal to the market that they were prepared to act and get ahead of the situation.
Helima Croft:
The Russians on the other hand, wanted to take a more wait and see approach. Wait for the real demand numbers to come in. And they were also growing increasingly tired of cutting production and essentially propping up US production. And you had a very, very powerful CEO in Russia, Igor Sechin. He comes out of the intelligence services. People say he's probably the most second most powerful man in Russia, very close to Vladimir Putin. And his position was, we cut the US growth and we get sanctioned. And in December of 2019, the US had imposed new sanctions to prevent the completion of the Nord Stream 2 Pipeline project. We had sanctioned in January Rosneft trading. And that really gave strength to Sechin's argument in Russia, in the power circles, that this OPEC Plus arrangement was not necessarily in Russia's best interest.
Helima Croft:
So we fast forward to the March 6th OPEC meeting decision day. And I was actually there in Vienna. And we had had reports all week that the Russians were not looking to do an additional cut. They were essentially saying, "Look, Saudi Arabia, the rest of OPEC, if you want to cut more, that's fine. But we're tired of doing this." And I think a lot of market participants like myself in Vienna, just didn't believe it could possibly fall apart. We thought it was in everyone's interest to basically do what the Saudis wanted and to do an additional big cut. And I think many of us were caught off guard by the fact that the Russians essentially just said, "No, we're not doing it."
Helima Croft:
And then the Saudi response was really, really dramatic. I remember being outside the OPEC secretary at that Friday night, and the Saudi oil minister, his Royal Highness Prince Abdulaziz, sort of leaves the building. And he's asked by reporters, "What's next?" And he essentially says, "Just wait and see."
Helima Croft:
And so when we landed in Riyadh, because they were having G20 Energy Security meeting over the weekend, when we landed in Saudi, when we had gotten off the plane, the Saudis had dramatically slashed our official selling prices. And that was the signal to the market that essentially it was game on. And it was really interesting to be in Riyadh that weekend with the discussions about why the Saudis were looking to do this. And it was different than 2014 November when they essentially said, "We're not going to put a floor in, and we're going to shift the burden of adjustment to the US producers." What the Saudis said they were looking to do, was essentially drive the Russians back to the negotiating table. The Saudi position has been, "We will cut, but everybody better cut with us. We're tired of free riding. And so we're going to drag the Russians back to the table."
Helima Croft:
And a lot of people, myself included, were looking at the Saudi fiscal break evens and saying, "Wow, you have really significant domestic spending commitments. Are you really prepared financially to deal with low oil prices?" And we were told that, "Look, the Saudis are prepared to borrow. They're willing to see this through." And then we had the Saudi production numbers go through the roof. You had everybody essentially saying within OPEC, "We're going to max out production." In the midst of the worst demand crash we'd ever seen. And the rest is history in terms of what happened with crisis. But it was just so interesting to see that up close, and just to see how a dispute over cutting 300,000 barrels a day would lead to this price war that had really serious implications.
Stacey Cunningham:
And then fast forward just one month. We have this huge OPEC Plus cut, and why is this one so important? There are some unique aspects of it. So talk to us a little bit about the cut.
Helima Croft:
Well, I think what was really interesting when we think about the cut that was done in April. The role that the US administration had played in the cut. So right when the price war began, President Trump, I think didn't know necessarily whether the crash and prices was a good thing or a bad thing. And so initially when asked about it, I think he saw it through the lens of the US consumer. And if you think about President Trump, President Trump spent the first three years in office being highly critical of OPEC, calling it a cartel, basically threatening to sign legislation that's been working its way through the Hill for years called NOPEC, which it declare OPEC a cartel and subject it to the Sherman Anti-Trust legislation. Basically said, "Break it out." And he had been tweeting a lot for the past three years in office saying, "Low prices are great for the consumer. Get prices lower."
Helima Croft:
He had called on Saudi Arabia directly in the summer of 2018 after the US had exited the nuclear deal, to essentially put a million extra barrels on the market. And so he was somebody who really talked about low prices being great for the US consumer. So initially I think he saw it through the lens that this is not necessarily a bad thing. But then when you had the scale of the collapse become apparent, when you had storage starring to fill up, and then when you had US oil and gas producers, stalwart supporters of this administration say, "This is a terrible outcome for us."
Helima Croft:
Then President Trump sort of shifted gears and became a sort of champion of collective action to stabilize the markets. And he became very involved and his team became very involved in brokering an agreement, getting the Russians back to the table, getting to Saudis back to the table. Getting the US to participate in negotiations. And obviously the US oil industry is very different than these sovereign producer countries, but getting the US is part of the conversation. And then at the 11th hour, when Mexico looked like they were not going to participate, because Lopez Obrador had basically run on a platform of making Pemex great again in Mexico. And he was like, "Look, I have a hedge in place." [crosstalk 00:11:25]. "I'm totally fine dealing with this low oil price environment. Not fun, but I'm better placed because of this hedging mechanism." He didn't want to take a 400,000 barrel a day cut.
Helima Croft:
And so Donald Trump had to make the call to do a workaround arrangement to get this deal across the finish line. And then you had participation with other countries, not formal cooperation, but obviously US production has come down significantly, Norway, other producers, Brazil. And that was done through the G20 framework, to have a sort of discussion about what the whole global production landscape was going to look like. But it did require significant US participation and a coordinating role. So I think when we talk about why this cut was historic, I think it was historic is the magnitude of it, but also because I think it was the first time the US president acted as a de facto president of OPEC.
Stacey Cunningham:
So you used the term first time, is it the first time or is this a one-off because of the unique nature of the situation? Do you think it's just because we were in the middle of a historic price collapse and dealing with the pandemic and demand was so low? Or do you think this is the beginning of a new norm in the start of a more permanent change? Is the US going to cooperate with OPEC Plus more regularly?
Helima Croft:
I think that is a great question because in the past, the US has made calls to Saudi Arabia. I mean, we have made calls on a number of occasions when prices are too high to ask the Saudis to help us. We've called them, for example, during the Gulf War to ask them to help us. We called them in 2011 when they had the Arab Spring and we lost significant quantities of production out of Libya. We called them to help with that situation. As I mentioned, President Trump called Mohammed bin Salman the summer of 2018 after the US had exited there on a nuclear deal and signaled real intent to take millions of Iranian exports off the market. We called the Saudis then and asked them to help us. So we've always done it on a bilateral basis.
Helima Croft:
It's essentially the first time, I think, that we decided to work with OPEC. So we just have to wait and see what the market brings in terms of either how a second Trump administration would look at working with OPEC or potentially incoming by the administration.
Stacey Cunningham:
Yeah. And I wonder how welcome that would be by OPEC Plus to have the US more involved in directly in those conversations. I mean, what are you hearing?
Helima Croft:
Well, I think that's really interesting because I think that in the past you've had OPEC officials. So for example, Secretary General Mohammad Sanusi Barkindo, a lot of these guys are educated in the United States. They have a very good view of the United States. And so I actually think that they thought it was very helpful to have US engagement in this crisis.
Helima Croft:
I mean, certainly I think the US played the marriage counselor role, and I think they think it was very helpful that the US could use the weight of its position, to again, get the Russians back to the table, get the Mexicans and the Saudis to resolve the dispute over 400,000 barrels. So I think that they were very appreciative of the US role. And I also think they're appreciative of what they believe is a growing view that sort of everybody's in it together.
Helima Croft:
When we think about the American energy revolution, I think all too often, we told it only through the lens of US ingenuity, the great story about the US frackers, our uniqueness of our legal structure, our land tenure structure, but also there was this sort of fundamental economic assist that was coming from OPEC since 2016.
Helima Croft:
There had been a financial lifeline provided by the sovereign producers to our US producers.
Stacey Cunningham:
I mean, what about the Saudis and the Russians? How do you see their relationship going forward in finding that balance and supporting their own prices and also trying to keep market share from a possibly resurgent US?
Helima Croft:
I mean, this is such a great story about the sort of... I think there's so many stories that can be written about how shale has fundamentally changed, not just energy markets, but global geopolitics. And if you think about the Cold War, I mean the US and the Saudis were such a strong Cold War partnership. I mean, many people think about the fall of the Soviet Union. We tie it to what happened in Afghanistan. Obviously the Saudis were a big backer of the US and the Afghan operation, but also oil prices collapsed.
Helima Croft:
And there is a view that the collapse of oil prices helped hasten the decline of the Soviet Union and Saudis have played a role in that oil price collapse that helped bring the Soviet Union to its knees. And so it's always been this sort of tough relationship that people thought couldn't sustain an OPEC marriage. They looked at 2016 and they said, "This is really a shotgun marriage driven by shale. Is it going to be very temporary?" And one thing that I think that the Russians have been very, very good at doing, is I think they've been very good at looking around the world and saying like, "Where are these political vacuums by maybe the US pulling back and where can we fill them?" And I think the Russians were very good in basically saying, "We're now in OPEC 2016 forward. Let's see what we can do in terms of expanding our global influence."
Helima Croft:
And I do think what we saw was, we saw a bunch of trade deals that were signed, for example, between Saudi Arabia, Russia, UAE, Russia, a whole host of countries. We saw sort of expanding Russian influence in places like Libya, in Venezuela. We talk about will Maduro stay or will Maduro go? I think it's largely question of like, "What is the Russian lifeline going to be?" I mean, in some respects, I would say that Russia has now displaced China as the most important bilateral partner of the Venezuelan regime. And so I actually think that the Russian gained a lot in terms of side trade deals and in terms of soft power by being part of this arrangement.
Helima Croft:
I mean, I go back to 2013, I was at the OPEC seminar and this is... I'm sorry, this was 2016. Sorry. It was actually right when we had this sort of price collapse. And I remember Alexander Novak, when prices had collapsed, he was asked, "Will you work with OPEC this 2015?" And he said, "No. We'll never work with OPEC. And I question its relevance in the face of US production." For the Russians have gone from saying, "We question the relevance of OPEC when the prices were... After the price collapse of 2014, 2015, to now essentially co-managing this organization. I mean, the fact that you have Alexander Novak, the Russian oil minister, sitting with the Saudi oil ministers co-chairs at this big, super sovereign producer group. I think again, I think the Russian in terms of soft power from this. But there are others within the Russian energy landscape, again, I mentioned Igor Sechin, who never wanted to be part of this agreement. I mean, Sechin has always been a critic of this. And his big energy behemoth, Rosneft, the most important Russian energy company.
Helima Croft:
I mean, they are the ones that have of the ties to companies in Venezuela. I mean, they are the ones who were really subject to US sanction. And again, from his standpoint, he looked at it and said, "We're part of this arrangement. We keep shutting down barrels and yet our companies are getting sanctioned. Why should we keep American energy dominant going?" And so I think that is a really important thing to think about sort of what was the US foreign policy gains that we made because of the US Resource Endowment.
Helima Croft:
And I remember being in Washington when the Trump administration came into office and they really talked about not just American energy independence, which is something that you would hear a bit under the Obama administration, this was really dominance. And I remember listening to Trump administration officials early on say, "The goal should be to get every US barrel we can out of the ground, get it on the water, upgrade our midstream infrastructure, because what that gives us is it gives us the ability to sanction our adversaries." And the fact that you could sanction a country without paying a price domestically, that oil prices wouldn't rise if you took millions of barrels of Iranian exports off the market. If you did an embargo on Venezuelan barrels coming to the United States, which we did, and US consumers would be shielded for them the effects of that because of sanctions. It gave us, they believed, a much freer hand to really challenge our adversaries in a way we never would've before, because we were too concerned about hurting the US consumer.
Helima Croft:
And so if you're sitting in Moscow and you're hearing this rhetoric and then you're seeing what was unfolding, again I mentioned Nord Stream 2 as an incredibly important gas pipeline project for the Russians, and for us to basically try to block it once again, when it was 94% completed, and then again sanction Rosneft for doing business with Venezuela. From the standpoint of someone like Sechin, that was like "This just isn't working for us."
Helima Croft:
So I think about the marriage between Russia and OPEC. I think that in a rising price environment, it becomes potentially strained. And I think again, if you have more US sanctions put on these companies, someone like a Sechin might become more emboldened again. His arguments may become more powerful. I think it was a twin thing that happened that made Sechin powerful, was rising US production and it was further sanctions efforts against Russian corporates.
Stacey Cunningham:
It's hard to look at 2020 and not think that we are going to have a total sea change, right? That there's going to be a real shift in the landscape. And when you look at prior events, 9/11 being one of them, what do you see going forward?
Helima Croft:
Well, I think what is so interesting is you bring up 9/11, and I began my career working in the US intelligence community as a CIA analyst. I joined out of doing PhD at Princeton right after 911. Vice President Cheney came with an energy industry background for being at Halliburton. And the moment we were in was the idea of energy dependence, and the idea that us national security came through having multiple supplies of energy, not having concentration risk in one region because we didn't have the US Resource Endowment. Us production was declining at the time. And so we were very focused on, "Can we secure additional supply out of West Africa?" We were very focused on getting additional barrels in from a place like Nigeria. Can we get barrels from the stands? Can we make sure we're not so on the Middle East?
Helima Croft:
And I think it did impact our foreign policy. We're very focused on not doing anything that could disrupt global energy flows. And if we were going to take action that would do so, they've been on the Iraq War, we were very focused on if we're going to lose Iraqis barrels, can we make sure that we can have barrels coming in from other places? So I remember as a CIA officer, we were very focused on Nigerian supply disruptions in 2003, because we were going into this conflict with Iraq and we were expecting to lose those Iraqis barrels. We were very concerned about the Venezuelan oil strike in 2003, because again, we thought we needed those barrels. It was a position of dependency. And I think about 2019 in particular, that was such a seismic year for me because I kept being in the Middle East when things that were happening, which I thought would've exploded oil markets before.
Helima Croft:
I was landing in Abu Dhabi in May, and as we were touching down, we got reports across the screen that four tankers, they've been hit off the coast of UAE. And the Iranians had just made comments days before that there could be planned accidents around strategic waterways, because we were trying to take off so many of their exports off the market. And I thought, "Wow, if you had told me that we were going to have tanker attacks in the straits of Hormuz linked to Iran, you'd be talking about potentially US military action." I mean, we have had a doctrine in place called the Carter Doctrine since 1980 that says that, "Gulf energy assets, protecting them, is a strategic priority of the United States."
Helima Croft:
And so for the fact that we had those tanker attacks followed by a tax on Saudi's East-West pipeline, further drone attacks, and then on September 14th to have cruise missiles and drones take more than half of Saudi Arabia energy production offline... I mean, they hit the nerve center of the global energy system, or what we thought was the nerve center, the Abqaiq facility, the world's largest oil processing facility. To have had that hit in an attack linked to a sovereign state and A, not have any formal US military response, but also to have very limited price response. To me, that was really sort of a really interesting seismic shift in terms of the geopolitics.
Helima Croft:
And so I think if we think into 2020, and now we've had sort of a depressed oil price environment, I think there are interesting questions about, do we see more instability in key producer states, in countries that just don't have the ability to balance their budgets and pay their security services and this price environment? So we are looking at potential more instability across the sort of sovereign oil producer landscape, and what is the sort of US response going to be?
Helima Croft:
So I think it'll be very interesting to see if we're in this sort of $40 to $45 range, what's a political landscape going to be around the world? And what is the US sort of desire to become involved in sort of stabilizing crises?
Stacey Cunningham:
Since you mentioned this I just want to reference. You were quoted this morning in the Wall Street Journal suggesting that Russia's claim of $42 a barrel to meet their budget requirements is more like $65. As the price of oil increases, it will be harder for Russia and the Saudis to agree or comply to cuts?
Helima Croft:
Well, I think that's really interesting because the Russians they very much say publicly, we have a much lower break even than the rest of the OPEC producers. And certainly they do. And they certainly have things like exchange rate flexibility. I mean, ruble depreciation was one of the key ways that they were able to weather the price collapse that we saw for 2014.
Helima Croft:
And we can talk about the fact that the Saudis and the GCC have this currency pact so they don't have exchange rate flexibility. But, the Russians do have... And they're certainly more diversified as well. I should also point that out. They're not as dependent on oil for government revenue. It's certainly a big part of their government revenue, but it's not primary dependent. They have a much bigger manufacturing sector. They have other industries. That said, they also have, we would say, significant security and foreign policy expenditures that don't necessarily make it into official budget numbers. And you can look for example at the expansion of their bases in a place like Syria over the past couple years. That's not in official budgeting numbers, but that would be something that would contribute to a higher fiscal break-even.
Helima Croft:
So we actually think if you take the full spectrum, Russian military, security, arms activities, again, put in things that we're doing in Crimea, Ukraine, Syria, they're global footprint in turn of security, military expenditure. We think it pushes their break-even into the 50s or low 60s. Again, it's a gray area number because a lot of this expenditure is off-book. But again, we think that's why it's not a $42 number. And you also have a situation because of the Russian tax structure, windfall gains of higher oil prices, somebody does benefit from them. I'm always amazed when somebody says, "Well, they don't want higher oil prices because issues about the currency." I'm like, "No, in a higher oil price environment, the windfall gain go to the state treasury, but they don't go necessarily to the companies because the tax structure." So they have an incentive to increase volume.
Helima Croft:
And so I think there's always been this sort of tension within the Russian energy sector between those who are looking at, "Well, what does the government coffer look like in a rising oil price environment?" From someone like the head of the Russian direct investment fund saying, "Well, what kind of deals can I do with cooperation with OPEC?"
Helima Croft:
And then the individual companies who say, "Well, look at our tax structure. Why don't you give us tax relief if we're going to be forced to sit down production?" And so I think that's the internal tension within the Russian energy sector that people don't always appreciate.
Helima Croft:
In the case of Saudi Arabia, or another golf producer, it's a national company that dominates the sector. I think in Russia, because you have these companies, it's a different structure and their tensions within the system. And the Russian oil minister... Putin's the final arbiter on everything in Russia, but there's always this process of negotiation internally.
Stacey Cunningham:
What about other countries in the region? And we talk a lot about Russia and Saudi, and obviously there's a terrible explosion in Lebanon earlier this week that killed so many people and wounded thousands more. But how do the tensions in that region end up overflowing into sort of the US global oil markets and how's that going to be impacted?
Helima Croft:
Well, I think, again, what's so interesting is if I think back to 2019, and we did this year, it's the timeline of 2019 looking at starting when the US decided to end exemptions from ports of Iranian oil in April. And you had Iranian officials out there basically saying, "Look, if we can't sell our oil, you know what, nobody can." And I remember listening to Iranian officials saying like, "They're going to be planned accidents around like strategic waterways and the Gulf." Basically giving us the roadmap for what we saw from May onwards when they started with those tanker attacks, attacks on the East-West pipeline, because the Iranians have really been squeezed.
Helima Croft:
I mean, if you think about OPEC in general, I mean, there are numbers that talk about, if you look at like 2012, the total oil revenue for OPEC was like 1.3 trillion dollars.If you look at 2019, that's around like 580 billion. And now you look at 2020, it's going to be potentially less than 350 billion dollars. So again, like 1.3 trillion collectively to potentially less than 350 billion is a huge revenue hit. And countries like Iran have been hit, not just because of falling prices, but also because they've been subject to such serious sanctions. I mean, Iran has lost probably over a million and a half of exports they can put on the market. So they're facing such a serious financial crisis because of lower oil prices and sanctions.
Helima Croft:
And what we saw in 2019 was an effort to try to change facts on the ground through using their proxy groups, and frankly their own asymmetric capabilities, to try to hit out at the Gulf states that were backing this policy. And what was so interesting was it just didn't necessarily move the needle in terms of price.
Helima Croft:
And so I think the question is, "Are we going to see more type of attacks from the Iranians?" And they've been fairly quiet since the killing of Qasem Soleimani, the head of the IRGC Revolutionary Guard Corps force in January, which again, people thought could be kicking off a third Gulf War. They've been relatively quiet since then, but it'll be interesting to see. We've had this summer a number of mysterious explosion in Iran. We've had the Natanz enrichment facility where they have their centrifuge program for their nuclear devices. There's a mysterious explosion at that facility in July. There was a mysterious explosion at the facility that they used to produce ballistic missiles. Some have said that the Israelis are behind these attacks trying to degrade the Iranian capabilities before US election. And so there are all these things that are sort of going on under the radar that aren't moving the needle in terms of price, again, because I think we have so much spare capacity out there.
Helima Croft:
Demand is weak. And five years ago, if you had said, the Natans facility in Iran, where they have their centrifuges for the nuclear program, it's going to be a mysterious explosion that people think may have been a bomb and the Israelis or an Israeli sponsored group in Iran may have done this. Prices would've been through the roof. But again, now we don't really see a price response. And frankly, it's not really covered that aggressively in the media.
Helima Croft:
And I saying now what oil has become... Oil used to be a leading indicator of instability in the Middle East. I remember 10 years ago, when you would just have like the whisper that you might have an Israeli attack on Iran , then prices moving like... $5 could move on that. And now you literally have a potential bomb attack on the main enrichment site, and no one bats an eye.
Helima Croft:
It's like to me, I think, it's become a broken barometer, not a leading indicator. But that does not mean that there's not a lot of potential tension. That there could be a trip wire across. If you asked me like what I'm telling people to be most focused on, is really be focused on what we're seeing in terms of these mysterious incidents.
Helima Croft:
Now, Lebanon, it does look like that was just a horrific accident. And it's interesting because on Monday you had had Israeli military strikes on militant targets from Syria, after the Israelis had said that these groups were trying to sneak across and plant explosives in the Golan Heights. Again, something that we would've really been focused on years ago, and now we're sort of like, "Oh, it's just... It's more noise." And so that's why I think there was this initial concern about Lebanon, but that looks like it was a terrible accident. But again, it came only days after these Syrian airstrikes.
Helima Croft:
And on that Tuesday, you still had Netanyahu give this speech where he essentially said like, "We will vigorously defend ourself. Nobody should basically doubt our resolve." And so I do think we want to be watching what's happening, this kind of shadow war, it seems like it's been happening between Israel, Iran, Hezbollah in the region. And again, the market is not a leading indicator of the tension. It's a lagging in indicator. And so I think that that's just something we need to really be very cognizant of, that it's not in any way stable in that region right now.
Stacey Cunningham:
Yeah. I think that's true for a lot of indicators around the market where we're seeing events that would've triggered a major market response, even just in major indexes and we're not seeing that same connectivity around volatility and market moves broadly. It's interesting.
Stacey Cunningham:
I'm getting a few questions around the US specifically and what to expect with the election. What happens to US domestic production if Biden wins the election? Or can you just talk a little bit about US politics?
Helima Croft:
I think this is a great question. I think this is going to become the really increasingly question. Because when you think about the Biden Climate Taskforce, it's headed by John Kerry, and then Congresswoman Alexandria Ocasio-Cortez, and then you have Congressman Conor Lamb from Pennsylvania, a big supporter of the industry, on that taskforce. And you say, "Well, what does the Biden plan really mean?" And you see the $2 trillion for clean energy, the climate plan, they're going to go back into Paris Climate Accord on day one. They're talking about really strict limits on methane. You're trying to get to net zero. It's a very sort of renewables, clean energy focused plan.
Helima Croft:
But then when you look at the traditional oil and gas sector, what it doesn't have in it I think is really important. It does not contain a ban on fracking. It does not contain a ban on US exports. They're talking about sort of no new leases on federal property. Keeping the Arctic and wildlife, sort of zoning that off. But it's not a whole scale assault on oil and gas. That said, when you talk to people around the campaign they will say that you have to now separate oil and gas. That it will be a more gas friendly policy likely, because gas is viewed as the really important bridge feel in a clean energy transition.
Helima Croft:
If you're going to displace coal, you need natural gas. And if you're very focused on coal displacement in India, in China, you need natural gas. And so when we're all to think about sort of pipeline permitting, it's going to be potentially more favorable for gas. So of the oil and gas sectors, you, we potentially see it more heavily focused and supportive of gas because gas is seen, is so important to achieve in global climate goals.
Helima Croft:
But where I think is really interesting in terms of physical markets, and I always say to investors like, "To me, if you're looking at the physical market, supply and demand, probably the most consequential near term decision that could differentiate President Trump and a potential President Biden would be on Iran." Right now, the Trump administration is sticking with the maximum pressure policy on Iran and continuing with efforts to really try to squeeze the regime financially, and doing things like trying to get the UN to extend the embargo on arms purchases for Iran. So again, everything remains quite punitive on Iran.
Helima Croft:
The real contrast I think with an administration, is they're talking about not just going back into the climate agreement, the Paris Climate Agreement, they're also talking about reentering the Joint Comprehensive Plan of Action nuclear deal from 2015. That was seen as one of the principal foreign policy achievements of the Obama Biden administration. And so I think that they are very serious about trying to resurrect that agreement.
Helima Croft:
And when you have potentially between 1.5 and 2 million barrels of Iranian oil export that are off the market because of sanctions and we have a weak demand outlook, certainly better than the catastrophe that was April, but still a fragile demand picture and a market that's really being propped up by, frankly Chinese buying at this moment, if we were to get an additional million, million and a half barrels of Iranian oil exports on the market, that is a, I would say for oil prices, that's a potentially very bearish outcome.
Helima Croft:
And then potentially we think about any relaxation on sanctions on Venezuela. It could get more Venezuelan barrels back on the market. Again, the market does not need those additional barrels right now on the water. And I think that is probably, just in terms of balances, the most consequential difference would be near term would be JCPOA. And I think there's certainly things that the Iranians would have to do. They've made breaches of the agreement since the US withdrew. So they are enriching uranium at higher levels. They are spinning some of the centrifuge devices that they were not supposed to be spinning, the high speed centrifuges. They are sort of restarting work in facility that were supposed to be sort of mothballed under the 2015 agreement. But none of those breaches are seen as irreversible, and so it's seen that Iran could relatively quickly become compliant with the agreement again if the US reentered. And the mechanism for providing sanctioned relief on energy, looks fairly straightforward in terms of the United States simply issuing exemptions for importers to import Iranian barrels.
Helima Croft:
So again, I think there is a real chance under a Biden administration that you could be talking about by end of 2021 significant return of Iranian barrels. Again, in a still fragile demand picture for oil.
Stacey Cunningham:
So you talked about Venezuela. What's the capacity for barrels coming back online in the future? And so it does sound as if that is tied to our election to some extent based on how you just described it.
Helima Croft:
Yeah. And I certainly think what's so interesting is in the case of Iran, we say, "It's not a regime change policy. We simply want them to moderate their behavior in the region. We want to end their nuclear ambition." But like publicly we say, "It's not a regime change policy." I think the audience looking at it saying, "No, it's a regime change policy." But what's so interesting is if you look at the contrast with Venezuela, we explicitly do have a regime change policy. The United States government really recognizes Juan Guaidó as the official head of Venezuela. There is a Juan Guaidó appointee as the ambassador in Washington that is not the Maduro ambassador that we have as our key into [foreign language 00:41:17] that we have recognized.
Helima Croft:
We have really stepped up our efforts to squeeze that regime, starting with our embargo on Venezuelan barrels coming into the United States. I mean, we had been taking about 500,000 Venezuelan barrels into our Gulf Coast refineries. We put a blanket embargo on those barrels coming into the United States ,and we've made it more challenging for for Venezuela to be able to service its debt, for foreign companies to do business with Venezuela. Leaving them very dependent on the Russian lifeline, and to a certain extent, the Chinese life line.
Helima Croft:
It'll be interesting to see if you have a Biden administration, would we start relaxing some of those restrictions? But I think the difference with Venezuela and with Iran, is that Venezuela is a crisis that is multi-decade in the making. I talked about being at the CIA, going into the Iraq War, we had all these problems in Nigeria that we were about, and as I said, we were very concerned about the Venezuelan oil strike, where we had lost like a million barrels plus the Venezuelan production because of this strike by employees of the National Oil Company, PDVSA, which at the time was one of the best around national oil companies in the world. And what Hugo Chavez did after that strike, I think, would fundamentally change the a trajectory of Venezuelan production. They fired thousands of PDVSA employees who had taken part in that strike.
Helima Croft:
They'd taken a jewel of an organization and turned it into a vehicle for the State. It became a piggy bank for the State. And so I think it's been a collapsing industry since 2003. And it has certainly gotten much worse. The speed of the collapse is accelerated. But I mean, Venezuela, you almost want to think about it as a post-conflict situation if we get a new regime. Millions of people have left Venezuela. It is one of the world's largest mass migrations in human history. You look at all the economic indicators in terms of poverty race, in terms of extraordinary inflation, shortages of food. I mean, diseases that have been eradicated are now virulent in Venezuela. And so the type of reconstruction assistance that's going to need to be provided and need just to get the country back up on its feet.
Helima Croft:
And then when you want to think about oil production, I mean, they basically get the companies to feel comfortable operating there. I've been in these meetings where you literally have oil company officials say, "Do you know how many arms are in circulation in Venezuela? How many sort of these paramilitary groups are making the environment just so unsafe? We almost need a DDR program." And so companies are going to need to pour billions of dollars in investment back into that energy sector there. So I think that Venezuela, removing some of the sanctions, can help with getting some of the low hanging fruit in terms of production and exports back online. But a recovery of this sector on any meaningful scale is going to require a coordinated action of the international community. Will be likely led by the IMF and World Bank, but it's going to need significant participation from Western powers to rebuild this country.
Stacey Cunningham:
So I'm going to turn to another question that I received here. So with the growing globalization of the natural gas market, which you've touched on a little bit, do you think the formation of an OPEC type organization for new natural gas is a realistic possibility?
Helima Croft:
Well, I think that's an interesting question. I mean, they have this big gas producers association led by the former head of Gazprom. I don't think yet we are going to get a sort of a OPEC arrangement for gas do to some obstacles to getting that done. But I think what's really interesting is I think that geopolitics... They talked about if we had an incoming Biden administration, I think the emphasis would be more on gas. I do think the geopolitics of gas are becoming increasingly interesting. And again, I think when we think about like the efforts that the US is now redeploying to try blocking Nord Stream 2, which is putting us at odds with some of our key European allies, like the Germans who are essentially saying like, "Wait a second, what are you doing trying to block our ability to purchase Russian gas? This is the most economic gas for us. Why are you trying to get involved in the middle of a contractual between Russia and Germany and Russia and key European importing nations?"
Helima Croft:
And so what I think is going to be interesting to think about is, if you get a Biden administration or second term Trump administration, are we going to continue these efforts to really try to force Europe to find non-Russian sources of gas? And that leads to the sort of discussion amongst consuming countries, and frankly other gas producers who are not happy with the US policy, saying, "We see sanctions as simply a way to allow US companies to gain market share." And this is like... I've literally have been in these conversations where you've had sort of Indian officials, and the the Modi government. Modi's very close to the United States, still talking about sanctions as a way for US... They believe it's a way that the US is trying to get market share for their companies.
Helima Croft:
And so I think that in the sort of energy transition where gas is an important role, I think these whole discussions about energy access, about sanctions, the whole geopolitics of gas are going to become increasingly important.
Stacey Cunningham:
It's almost like a movie when you think about all the different players coming in and so much is happening all in such a short period of time over the past several months, and it's hard to predict the future. I certainly don't think that anyone would've started this year... Going back to the beginning of our conversation when you talked about in January what we were seeing just over the next few months, it was really fascinating.
Helima Croft:
Right. I mean, I think what's so interesting is I started the year... I'm at my house in Rhode Island now because we've been outside the city since the pandemic really sort of having shut-ins in March. But I started the year here getting woken up because we had basically killed Qasem Soleimani, again, the head of the Iranian Revolutionary Guards Corps force, in this incredible strike, and people thought, "Oh my gosh. He was so important." It's almost impossible to overstate how important he was to the Iranian security services. Almost every spectacular Iranian oversees action, he played a role in. He's like the [Kaiser Soze 00:48:00] of Iran. And to have him kill by US action...
Helima Croft:
We really thought we were potentially going into third Gulf War. And the fact that now no one really cares about what we're seeing in the Middle East. I mean, I think that just shows how the pandemic has totally altered our market expectations, that this is something where we don't know what's going to happen in the Middle East and the other parts of this sort of fragile producer universe, but right now it's not capturing our attention.
Stacey Cunningham:
Well, sticking with the Middle East, I'm going to go to another question that we got here. Libya's oil facilities have been at the heart of its conflict with different groups repeatedly closing them. What do you see for its future and will they continue to leverage their oil production in this civil unrest?
Helima Croft:
Well, this is such a great question as well, because I think about the Arab Spring in 2011 and Libya was one of the primary casualties of the Arab Spring. And I remember initially... Remember when we talked about people in the streets of Tahrir square and the Arab Spring initially looked like a colored revolution. It looked like... People were comparing it to the fall of the Berlin Wall in '89. And they were saying, "Here are these young people in the streets demanding better government's, democracy."
Helima Croft:
And we saw these autocratic regimes fall in Tunisia and Egypt, and people saw it through the lens of something very optimistic initially. And then it came into civil unrest and it became protracted conflict. And again, we talked about Syria now, but really Libya, I think, is where it turned into the Arab Winter. And Libya has seen nothing but sort of unrest and misery since the fall of Qaddafi. And oil production has really been a casualty of this conflict. I mean, pre Arab Spring, they were producing around 1.7 million barrels a day. Now they're down to a couple hundred thousand, and production has varied wildly. But what has become really worrying about the Libyan conflict, and my primary takeaway for your audience would be, it's become so internationalized. That this is no longer a situation where the outcome of Libya depends on what the internal actors do.
Helima Croft:
It is now about what the foreign sponsors basically decide on. And you have this situation now where you have one group of actors being supported by a coalition that includes the Russians, the Gulf states like Saudi Arabia, UAE, and then you have... And the Egyptians, a really big sponsor of General Haftar. And then on the other side, you have the sort of UN backed government that is also being strongly supported by Turkey, by countries like Qatar. And so it's becoming very much a sort of theater where these external actors are settling scores and trying to secure resources. We talk about Russia, there's a significant Russian mercenary presence in there by a group called the Wagner Group. And people have said the Wagner Group, it's not formal Russian security services, but they're more tied to oligarchs. And they're very focused on securing natural resources.
Helima Croft:
And so you have all these foreign actors piling in, and that just makes a settlement of Libya ever more challenging. And it's just become such a horrific tragedy in terms of the sort of... There was this moment when people were talking about Libia for the Arab Spring about sort of basically US sanctions have been removed, they were becoming a more normal part of the kind of international order. And Libya now is just a... It's a failed state.
Stacey Cunningham:
So we're running out of time. And just to recap a bit and focus on, what's the one thing you think people should be focused on? What should they be looking at for... Where should they be keeping their eye out?
Helima Croft:
I mean, again, in terms of oil markets, in terms of the geopolitics oil markets, I think elections matter.
Helima Croft:
And I think, again, as we talked about, I think in a weak demand picture with a fragile recovery, we don't need additional barrels on the market if you want a better oil price. And so I do think that the pace at which Iranian barrels might return could be very impactful for the oil market.
Helima Croft:
And then as I said, the other sort of election story to watch is, if it is a Biden administration, could it be much more focused on gas as opposed to oil? And then again, the Middle East as well, things that go bump in the night. Pay attention to [crosstalk 00:52:31] mysterious explosions that we've seen in places like Iran.
Stacey Cunningham:
Well, Helima, thank you so much for unpacking all this information and helping to make sense of it. There are a lot of moving parts and a lot of players in the oil markets and gas markets. And it's really helpful to have you out there putting it all together and making sense of it for us so that we can be better informed and manage our risk.
Helima Croft:
Thank you so much for having me on. It was such a huge honor. Thank you.
Stacey Cunningham:
All right. Thanks Helima. Have a great weekend.
Josh King:
Thanks again yo Helima Croft, managing director and global head of commodity strategy at RBC Capital Markets, and our own NYSE president Stacey Cunningham doing the work of asking the questions. 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 comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected]. Or tweet at us at ICE House 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 Library of the New York Stock Exchange. Thanks for listening. Talk to you next week.
Speaker 1:
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