Name: Get Ready for $30 Oil
Uploaded: 2015-12-09
Duration: 7 min 47 s
Description: The future of raw materials looks grim.

So Sean, what happens if energy prices do not stop their descent next year? You're in the renewables. Excuse me, the resource fund space. But since at least early 2014 you've been [ UNKNOWN ] on energy and on other commodities. Do you see more of the same? Yeah, I would say there's more pain to go in oil and that's why probably I'd have a different view than some of the people here about how 2016 is going to shake up for, shake out for the market and the economy. So share with us, please. Yeah, so I see oil going down to operating cash costs which we think are $ 25 to $ 30 a barrel. We think the oversupply will persist. For 2015 it was roughly two million barrels a day. We think it's gonna be roughly one million barrels a day. When oil prices hit that ten dollar low in 86 OECD days of inventory were at about 70 days and our models would suggest we're gonna hit that in June or July. And so frankly, if we see that, theres enough, worrying signs in the high yield market that suggest to me, I mean energy and metals in mining represent over 20 % of the high yield index. It was higher before these credits started taking a bath, that's not done This set up, frankly, you know I'm not the house economist, that's Hero Price, but this is just my view. This reminds me a little bit of 2001 and 2003, I mean there was a three year credit downturn, it was around IPPs, tech and Telecom. Telecom was 17 % of the high yield index at the peak. Energy was 17 % of the high yield index at the peak. I can see tightening credit conditions as a result of a credit event around commodities and my guess is 2016's gonna be pretty disappointing as a result. So Sveta, if Sean's view plays out and crude oil sees 30 or dare we say a two handle, what does that do for not only earning estimates in the S & P 500 but what does that do for the multiple That investors are willing to pay because conceivably the headlines would be filled with carnage of North American focused producers, and certainly there might be some geo- political Sure. ramifications as well. Yeah, its not a great scenario. I think we would see a little bit more of the same of what we've seen over the last six years. Which is that the micro is basically a signed premium to two areas. One is a specific faith dividend yield or defensive bound like stocks, and the other area are idiosyncratic companies like tech or like biotech, which have no secretality but just have really strong growth way out in the future. And I think we would see more of the same. So we would pay up even further to companies that are Divorced from the economic cycle. From the cycle, exactly. We could see multiples go through the roof for those two areas of the market. And I think that, you know, comparing multiples today to historical multiples, I don't know if it really makes sense because we are literally Completely off the grid in terms of kind of being at zero interest rates and you know the massive amounts of liquidity that have been pumped in to the capital markets from central bankers across the globe. Multiples could surprise everyone in a variety of distortions given how different this cycle has been. Can I jump in please? Yea please. I think that the other thing to ask is how long will prices stay? With the two handle or in the 30's. That quickly is recovered. You do get a lot of production capacity shutting down because at that point you have many producers who arent' covering their cost. So if it's a very short time, which is what we've seen historically that oil spikes up then spikes down. Then what you've got is a situation where you finally get the capacity reduction that everybody's been waiting for. Involuntary capacity reduction. Involuntary, but it's because companies that have been stretching and stretching to try to make it until oil rebounds can't make it any longer, and then you might actually see oil bounce back to where it is today, and then so [ INAUDIBLE ] So a definitive bottom could even be cathartic. And maybe be the flush that's necessary. Shawn, do you share that view, or do you think it's a more prolonged downturn? Yeah, so, I think it's an interesting point. We can take analogues from the past, 86, we hit $ 10, and within 12 months, we were back to $ 20, but it was a long bear. And I think if we're right and there's an event in the credit cycle, that's going to take a little while to wash out. I do think there would be a bounce off 25. I think the new normal for oil is about where we are, 40 bucks. I think the real oil process over 150 years are in the 30s. I think we're coming off a super- cycle high, this is no different than the 1970s. Productivity and new technologies have changed the cost curve and collapsed it. So I think what will surprise people is hey look if we're wrong about a credit event people are going to be surprised by the fact that U. S. oil production is going to start growing again in the first half of the year anyway and you know so I guess I'd wrap this up and say and sure we can get a balance off that twenty five or thirty dollar low but it will be pretty short lived because [ CROSSTALK ] oil will come back in. So crude oil so Jim I want to go to you on commodities. Just generally. So crude oil is down 63 % from it's peak. Since 2011 silver's down 70 %, gold is cut in half just about. Copper's down 55 %. Can you actually have global economic growth with Raw materials having literally no floor. Are the two permanently at odds with each other? Or is this something people are going to say, this time it's different, we're much less reliant on that stuff and the reason is blank? Well it depends on who and where. So we've done a lot of work on the commodities cycle and Just some interesting numbers to frame what happened in the 90s and into the millennium. So global capital spending for the big publicly traded minors went in 1991 from four billion a year to 2001 14 billion a year. And that was really good growth in the 90's. China entered the WTO in 01 and the game went on steroids. Global mining cutbacks went from 14 billion a year to 125 billion a year in 2012. So you went from a aromatic growth function to a geometric growth function over a 20 year period. That is basically the story of EM in China over the past 15 years. And it's not just China. We just did some work. 30 % of GDP is either China or the people that sell to China, i. e. the Australia, South America, Africa. So a third of the globe is now Basically downshifting depending on your view of China's accounting, either dramatically or at least at a reasonable glide path. That's going to be a drag just on general global growth because China's one point of global growth, and then the rest of EM selling to China is about one point of global growth. There's two point right there. That's a pretty strong headwind. Two points of a four point pie. Or three. Or three. Yeah. And so, I think we underestimate just the knock on effects that China's 15 year once in a lifetime urbanization really meant for the rest of the world. It was an immense stimulus program and it's now winding down. That's really really important and so I think it's gonna, it fits with your views. I think the views I'm hearing that, that we're gonna get bifurcated, we're gonna get bifurcated stories, we're gonna get bifurcated evaluations There's going to be an awful lot of companies still facing real problems. And a lot of companies that have secular growth. [ MUSIC ]