Odd Lots - Pierre Andurand Says the World Could Run Out of Cocoa Inventories

Episode Date: May 16, 2024

Pierre Andurand made his name trading oil and other energy-related assets, but wild swings in the price of cocoa have recently lured the founder of Andurand Capital Management into a new market. He bet on cocoa earlier this year and saw the trade pay off as the price of the beans surged to a record $12,000 a ton. Prices have since fallen back to around $7,800, but Andurand sees scope for further upside as extreme deficits in the building blocks of chocolate loom. In this episode, we talk about how he entered the cocoa market, how he formed his investment thesis, and potential interest in other soft commodities, like coffee and orange juice. We also talk about copper, where a similar story of structural shortages is now playing out in prices.See omnystudio.com/listener for privacy information.

Bloomberg Audio Studios. Podcasts, Radio News. Oh, and welcome to another episode of the Oddbots podcast. I'm Tracy Allaway. And I'm Joe Wisenthal. Joe, can I tell you something? It's slightly embarrassing. This could be able to many things, but yes, go on.

Okay, so I had a self-realization the other day. I think I might have prepper tendencies. I'm not, I didn't know that, but that doesn't totally surprise. Like, it sort of fits. I can. You're like, yes, you're paranoid. This makes total sense. I kind of get that.

So the reason I had this realization, we recorded an episode recently on the big surge in cocoa prices. Yes. And a few days after that episode came out, I was like, hmm, I should buy some chocolate just in case. So I went on Amazon and I bought like an industrial size package of milk a chocolate. And I was like, I'll just keep it in the pantry. It'll be really convenient. It'll be there for emergencies. I'm sure I won't eat it at like 10 p.m. when I'm craving something sweet. I'll just keep it there for a long time. And so I ordered it and then you know what happened? Tell me the rest. Okay. So the first thing that happened was I never got the chocolate, which is kind of weird for Amazon. Like they just never fulfilled the order and the supplier was like, oops, we don't have enough chocolate, I guess. But then secondly, as soon as I did it, prices of cocoa started falling.

This was the market saving you from a bad trade, basically. So you put in an order right at the top. You know, sometimes you need a little luck in life, and now you can buy the dip. That's right. I was fully refunded at the top of the market, and now I can buy it when it's slightly more reasonable. But I have to say, I'm looking at the chart of Coco futures right now. So they surged above 11,000. And then they came back down, let's see, we're about 8,000 right now.

So it's been something of a... roller coaster ride. And the thing that I don't really understand is when I look at coverage of the cocoa market at the moment, there seems to be consensus that supply is going to be an issue. So I know Bloomberg published a survey of traders where basically everyone was saying that they think prices are going to go higher. We could see over $15,000 later this year. But in the meantime, prices are sliding. So there seems to be a disconnect there. Totally. Well, look, I mean, even if the fundamentals are say, okay, this market is in deficit or, you know, all these growing conditions, like at some point, as they say, you know, trees don't grow to the moon or trees don't grow to the sky, to the sky, whatever it is. So at some point, like, you can have like solid, bullish fundamentals and the price. I mean, it really is crazy because last, you know, in December we were looking at $4,000. So we're still, you know, a double so far this year. Yeah. Well, I have to say we do, in fact, have the perfect guest. We're going to be speaking to someone. who timed the big cocoa trade a lot better than I did personally in my pantry.

But we're going to be speaking with Pierre Anderond. He is, of course, the founder of Onduron Capital Management. We're going to talk Coco and a bunch of other commodities. So, Pierre, thank you so much for coming back on all thoughts. Hi. Thank you very much. My pleasure. So maybe to begin with, talk to us about how you got interested in Coco,

because my understanding is you put a big trade on, a long position, earlier this year. It paid off massively. But this isn't a sort of normal type of trade for you. This is something that was a little bit different. Yes. Well, generally, my background is more in energy trading, but I've traded quite a bit of metals as well, a little bit of agricultural products. But I have one analyst who's very good and told me in January, Pierre, you should look at cocoa. So I'm like, okay, I don't know anything about it. Tell me, and it gave me a really good presentation that was really interesting. So then we really diged in really deep together to really understand the fundamentals of the market.

And basically, we have a massive supply shortage this year. I mean, we see production down 17% relative to last year. Most analysts out there have it down 11%. But that's because they tend to be very conservative. You know, they have a lot of clients and they don't want to worry the world. So they come with relatively conservative estimates. But really tracking the export from the main exporters, mainly Ivory Coast and Ghana, that we present together about 60% of world's production,

we see basically ivory coast exports down 30% year to date, I mean, season to date, and Ghana down 41%. So just those two countries together since the start of the season, which is the 1st of October, are down 800,000 tons. And now we have what we call the meat crop that is starting, but that represents only 20% of the balance. of the season for West Africa, and that's not going to be enough to really change the deficit that we have this year. So we have a deficit of 800,000 tons from those two countries,

and then looking at all the other countries, we have, I think, some are slightly positive, some are slightly negative, but basically we get to a deficit of 800,000 tons this year. And so that's the first time we have such a decline in supply, and that's very hard to make it fit. So at first, you eat into current inventories until you run out of inventories, and then the price can go anywhere. So when we look at, okay, what makes the price of cocoa, right, it's always about supply versus demand, but what has been capping the price between $2,500 dollars a tonne and $3,000 a ton? It was not demand, because demand is extremely inelastic. I mean, you can study that historically when you have a recession or not, when prices go up, a lot or not, I mean, demand

generally goes up. And that's because the amount of, in dollar terms that people consume in cocoa is very small. I mean, I did the back of the envelope calculation the other day. I mean, at basically $10,000 a ton, even though it's four times the more recent historical prices, out of a market of 5 million tons of demand per year, you know, you have like 8 billion people on the planet. So in average, it means that people consume 1.7. grams of cocoa per day, which at $10,000 a ton, we present 1.7 cents per day. Okay, that's the average person. Many people eat nothing and a few eat 10 times that amount. Like Tracy. I was going to say, I can personally attest that my chocolate demand is very inelastic. But yeah, but you know,

let's say if you eat even one full tablet, right, so 125 grams a day, every single day for the whole year, which is quite a lot, right, of a high, high, high, content of real cocoa because you know your milk and milk chocolate, you have like less than 10% cocoa in it. So the price can go up 10 times your tablet is only going to double in price. It's not going to react very much to the cocoa price. But if you take a high content, high chocolate content, like a tablet, 125 grams, that means that you probably have maximum of 50 grams of cocoa beans equivalent in it. I mean, it's probably a lot less. Then you get to an expense of $14 per month at current prices, which is an increase of $10 per month relative

to when we had a more normal price. So it means that demand for more reasonable chocolate lovers that increase in price in cocoa just corresponds to $2 to $5 per month. So people are not going to eat less chocolate because of that. So it means that prices really are capped by the amount of supply you get. So if you can't get enough supply, the price can go up a lot until we get more supply. And when do we get more supply? Well, that in part due to the weather.

If you have much better weather, then you might get more supply of cocoa beans the next year. But we have some issues that are also structural. So when we look at the reasons for this large decline in production this year, I mean, a lot of the reasons are actually structural. I mean, we can look at four reasons why. cocoa bit production has gone down a lot this year. I mean, first I should give like a little bit of background of why cocoa is so concentrated in West Africa. I mean, it's mainly because it requires very specific temperature, rainfall, and humidity conditions.

And that's why most of the production is concentrated around a certain latitude. So 70% in West Africa. And then you have a 21% in many Latin America and 5% in Asia and Oceania. So the main reasons why we lost a lot of productions this year is number one weather. So some of it due to El Nino, we had basically period of time when it was too hot and a period of time when we had way too much rain. Second is climate change. So climate change is every year shifting the weather patterns generally unfavorably for cocoa productions.

Then you have two diseases. You have one called the black pot disease that come from a fungus. and it occurs mainly during the rainy season. It's spread by rain splash. So basically, it can't grow when it's dry. And then you have a virus called the Threlonshoot disease. It's not a new disease. It was discovered in 1936.

It's transmitted by millibugs. But it decreases cocoa yields a lot. So basically, a tree that has that swollen shoot disease loses 25% yield within the first year and 50% within two years. And the tree dies with. within three to four years. And we've had, like, actually, a spread of that disease, like, over the last year. And then also, we had less usage of fertilizers, mainly in Ivory Coast, due to high fertilizer prices

and also shortages due to the Russian invasion of Ukraine. So, you know, everything is linked. So some of it might be solved if we get better weather. I mean, for next year, we should have Lannina and not El Nino, so that should help at the margin, but we still, you know, have issues with climate change. We still have issues with black pot disease and swollen fruit disease. And there's no indication that we get more usage of fertilizer in ivory coast because actually the farmers are still getting relatively low prices and they're still struggling to make ends meet.

So a lot of those supply issues are actually structural. This was already a really fascinating answer. And in particular, just all that point about how if a commodity just does not take up much wallet share, then, you know, yes, it can go up, but you don't get that same sort of demand destruction as if it were really creating a big financial burden on the end consumers. Something I'm curious about with Coco is, you know, when I think of like oil, we are just like, we're swimming in data about oil. There are multiple big, well-funded international statistical agencies that track out.

You can get inventory data easily. There's OPEC, there's, et cetera. With Coco, and I'm curious, you know, you said your analysts brought it to your attention in January. In my mind, I've imagined that there is less robust information and it's more scattered, et cetera. Maybe I'm wrong. But does that present more opportunities to identify moments where there's something going on in the market and traders and analysts aren't seeing it? You know, we managed to get enough relevant data, actually, to understand what's happening. You have some consultants that are specialized and every month they have a team doing surveys of

the main producing regions to understand, and then they work on their forecast on how much the same production will grow. So actually, you have some specialists. So actually, we get enough data to understand how. So what did your analyst, what did your analysts see, or how was your analyst able to see something in the supply and demand situation that he felt and you felt was not being identified by the analysts who cover this closely? I think it's mainly an understanding of how much prices have to move to balance the market. You know, people, sometimes people can trade that market for like 20 years. They've been used to a range of prices and they believe, okay, the top of the range is a high

price for example. But they don't really ask themselves what makes that price, right? And sometimes taking a step back can help. I mean, what makes the price is mainly the fact that in the past you would have a supply response if prices were going up. But if now you don't get the supply response or the supply response takes four or five years, then you need to have a demand response. And a lot of people look at prices in nominal terms.

So you hear people saying, oh, we're at all-time high prices in cocoa. But that's because they look at prices in nominal terms. previous high in 1977 was $5,500 something dollars a ton of $177, which is equivalent to $28,000 a ton of today's dollars. we are still very far from previous highs. And so you have to look at a bit more history and understand in the past how prices reacted to a shortage, how long it took to recover for that shortage to actually solve itself. And what's different today?

So there's a ratio that we look at that most people look at. It's actually the inventory to grinding the ratio. So it's a measure of inventory to demand. What we call grinding is basically. industrial companies that take the cocoa beans and they want to make chocolate with it. So it's a process and some of them make the end product chocolate directly. Some of them sell back the product to other chocolate makers. And so basically a typical grinder would take cocoa beans and make cocoa butter and powder with it.

And the prices of both those elements also went up even more than cocoa beans, which means that actually we probably had some distocking everywhere in the chain. So it looks like demand when we look at the chocolate makers. The end demand for chocolate didn't go down at all. It looks to be flat on the year. Grindings look to be down three and a half percent this year, despite the fact that the end demand is the same in volume, which means that they've been distocking cocoa beans, actually.

And so we had distocking everywhere at the chocolate level, at the cocoa beans, at the cocoa butter and cocoa powder level. So we had distocking everywhere on the chocolate. and now we have the largest deficit ever on top of two previous years of deficit, and it looks like next year we will have a deficit. So we're in a situation where we might actually run out of inventories completely. I mean, this year we think we will end up with an inventory to grinding ratio, so inventory at the end of the season, of 21%.

For the last 10 years, we've been between 35 and 40% roughly. At the previous peak in 1977, we were at 19%. And that's what drove us to $28,000 a ton of today's dollars. If we have another deficit next year, then we might go down to 13%. So I don't think it's actually possible. That's when you really have real shortage of cocoa beans. You can't get it. And that's when the price can really explode.

And so understanding that, you have to slow down demand, and we know that demand can't really be slowed. So that's when you can have an explosion. And remember that these commodity futures, you need to have, they're actually physically settled, right? So if somebody wants to take delivery, they have to converge with the price of the physical. If you have no physical, somebody wants to take delivery,

the price can't go anywhere. So it's a dangerous commodity to short, right, if you have no physical against it. And actually, you know, sometimes we read news that the funds have been pushing cocoa prices. It's actually completely untrue because the funds have been selling since February. they actually went from a length of 175,000 lots, so that's 1.75 million tons of cocoa lands.

I think it was around like September last year in average or a bit earlier, to 28,000 loss, to 280,000 tons at the moment. So they sold more than 80% of their lengths, actually. and the people who've been buying a futures from the funds, it's producers because they're producing a lot less than they expected. So what has been happening in the cocoa market is that you had a reduction of what we call the open interest, where both the longs reduce their lands and the shorts reduce their shorts. And then we get into a market where you have less liquidity because you have less exposure, you have less longs and less shorts. And then the volatility increases. So in the past, when people were comfortable being, let's say, having a 100 lots position,

now because it moves more than 10 times more than in the past, we're going to have like a 10 lots position, right? So the market became more due to the fact that we had a massive move and we have a massive deficit. So everybody reducing their positions. And because of the increased volatility, we have less activity and that's what makes the price more volatile as well. This is something I find fascinating. So the way the financial markets sort of interact with the underlying real commodity and how that ends up influencing price, given the dynamics that you just laid out, where because of, you know, structural changes in the market, both in cocoa and then also in the way it's traded, this new volatility, making people maybe less inclined to short and leading to decrease. trading volumes. Are you still long cocoa in this environment or have you, like a lot of other people, backed off at this point? Well, you have to be careful about the sizing of your position because it's something that is clearly less liquid than the commodities I'm used to, which are,

you know, for example, oil or natural gas. So it's a lot less liquid. And in a market like that, it's a lot more volatile, right? It's not always volatile, but when you have a large deficit and low inventory is, it moves a lot. So you have to calibrate your position to be able to take a 50% move against you on the way, right? So that's what you have to do. It doesn't mean that you have to be out completely because I still think that there's more upside than downside. I think we still have the potential to go above $20,000 a tonne later this year or next year versus on the downside. Maybe we go from, if you look at a December contract, it's at roughly $7,000 a ton today. Maybe we go back down to $5,000, right?

So you have like $2,000 a tonne downside versus $13,000 or maybe more upside. So it's still worth having some lands, you know, in terms of probability. But now, I mean, it could go down. The probability that it goes back down is not zero. But for that, you need a lot of things need to go, right? You need like a bumper crop in West Africa next year. And it means you need to have the perfect weather in West Africa from now to the end of the year. in order to have a really good crop for next year.

And it might happen, but it might not happen, right? You need to get extremely lucky for that to happen. So I think the balance of probabilities are still that we will have a deficit next year on top of the very large deficit this year. We believe we have 800,000 tons deficit out of a 5 million ton market size, right? So it's a very large deficit.

If we have the production going back up roughly 10% from this year to next year, we still have a deficit of 300,000 tons or so next year. That brings us to 13% stock to grinding ratio, which would be much lower than what we had in 1977. So we still have, I think, a high probability of having much higher cocoa prices. Even if they go there, we might have big drops like we've seen the last months or so, the last two weeks, but we might make new high and then have big drops again, and then make new highs.

Or if over the next four months we realize that we're going to have, from all the surveys we get every month in Ivory Coast and Ghana, that the crop next year will be amazing, then the prices will probably come off from here towards, you know, I don't know, five or six thousand dollars a ton. But they're not going to go back down right away to $2,500 a tonne, because we have very low inventory, so we need to rebuild stocks everywhere in the supply chain.

These inventories, so you've been talking about the stock inventory to grindings ratio or the stocks to grindings ratio within the sort of cocoa or chocolate supply chain. Who are the holders of the stocks? And how do you get that? Like, how is that data collected? So basically you have the exchange. So first you have exchange stocks. So we have weekly data in European exchanges and the U.S. exchanges. So in the U.S., for example, everything's held on exchange pretty much.

so everything in exchange. In Europe, only 20% of the inventories on exchange. 20% of the European stocks are on exchange. The others are really with chocolate makers or that they need to hold stocks directly to make the chocolate. And then you have some also obviously at the producing region. And that's something that we can see the inventories at the port in Ivory Coast and Ghana. the main exporters, you can actually follow the amount in inventory there. And then the West,

what we don't know, is inferred statistically. So there's a bit of noise in what that total amount of inventory would be. But you have some firms that are specialized in it that will come up with an estimate of the number. So they'll do some surveys, and they'll do some cross-validation to make sure that the numbers are up at the end. Out of curiosity and just widening this out to a few other commodities, have you observed any similar dynamics in something like coffee, which has been getting a lot of attention recently? Or orange juice.

I ran into some guy called Mortimer who was telling me that Brazil is supposed to have a bad harvest this year. That's possible. I haven't followed orange juice. I mean, we looked at coffee quickly. It looked interesting as well, because you get big loss. in production from Vietnam. But we didn't see from far something

that was so exciting, so we didn't try it. Orange juice, we haven't, I don't know. But I would say that generally, the shift in weather patterns due to climate change are going to bring some structural stories into soft commodities. And so we'll have to look at more and more of the soft commodities,

because it's not only going to be from one year to another. You're going to have that everything could change, due to random change in weather. You have this underlying climate change that is also a trend that will impact production over time. And so we have to identify the communities that will be impacted by that. Talk to us a little bit more about, obviously, we've had you on in the past, primarily talk about oil.

And as you mentioned in the beginning, entering, and you don't trade ag as much. There's sort of a different space for you. Other than the size of the market, and I guess, you know, as you mentioned, it's all physical delivery futures. What are the other dynamics that are different when you go from trading a commodity like oil, which is gigantic and liquid to a commodity like cocoa? Well, you have to follow the, I mean, cocoa, I think is less complicated than the grains,

because in the grain, your weather can impact production so quickly. But as for cocoa, it does impact production, but it takes, maybe five years to, you know, when you plant a cocoa tree for, I mean, three to five years for that cocoa tree to give you cocoa beans. For grains, you get it right away. So you get like a slower production response. So it should be when you have a big supply issue and that you have issues due to climate change, you should have like a larger move than for grains. So it should make it easier in a way to have position that you can hold for longer

that are a bit more structural than for grains. would say. That's my understanding, at least for now. And there's enough data to, I mean, enough data, meaning like if we create a bit more, more data on how the new crops are doing, mainly in Iboricos and Ghana, to have a good understanding of what the crop will be, the production will be the following year. So I feel like we have enough data to understand in which direction we're going versus the grains. I feel like the grains can, they move up and down, a lot and you can't, it's more complicated. You have to look at a lot of tiny details versus cocoa where you have many one mega major producer and another very large one.

Speaking of climate change, can we talk a little bit about copper? Because this is also a commodity where I feel like there was a lot of discussion about it being in structural short supply as the world moves towards electrification. But then over the past couple of years, prices went down, I guess because of concerns over the outlook for economic growth. And just relatively recently, so starting sort of February of this year, prices are going up again. What's your thesis when it comes to copper? I think copper should go up a lot. Basically, we are going from, basically, over the last, let's say, 15, 20 years, we were in a market where demand was growing about half a million

tonne a year and supply was growing half a million tonne a year in average, right? If you look at long-term averages, it was over time a time of a balanced market. We had times where it was tight, times where it was in a bit of a surplus, many during the pandemic or during financial crisis, but overall it was a balanced market. Now, due to the energy transition, we're getting, obviously as we have to electrify the world, we have new demand from electrification of transport. So it means that not only to make the electric vehicles, but also to supply more electricity overall in the world for that energy transition. So you have to work on the grid, to have more renewables.

And renewables take a lot more copper than like nuclear plants or like fossil fuel generated electricity. So like solar panels and windmills take a lot more copper. and also all the data centers take a lot of copper. So we have that surge in power demand that we need a lot of copper. And now we're getting into a market where despite the fact that the Chinese property market will be much weaker than the last 15 years

in terms of growth, and we're seeing decline in the property, in the copper demand in China for the foreseeable future, despite that we see a market in which we are going to have overall 1 million tons of demand per year, roughly of demand increase per year. And the supply grows, basically by the end of next year, will be zero to negative. So we think that in terms of mining supply, we're picking in about a year, like 12 to 18 months,

and then we flatten and then we go down. So best case scenario, you get like a million tons increase in demand against no increase in supply. So you get a larger and larger deficit every year. And the price hasn't reacted. yet. And that's mainly because I think there's not enough funds out there or companies that actually trade the futures market and hold positions for very long. I mean, if you look at most of the hedge funds out there, it's a bunch of like pods that have very many, many teams in those big multi-strategic funds that have a very tight drawdowns. So they tend to try to trade for the

next few days or next week or so they can't really hold positions for very long. And there's not a lot of companies that can hold a position. So the market is not really doing its job to actually give a price signal to solve that deficit, that upcoming deficit, that's a multi-year deficit. Basically, it takes, you know, to grow supply in copper. I mean, if you bring a new mine, it's like more than 10 years to bring, it's like 10 to 15 years to bring a new mine. And everything has been relatively well explored. So now the supply growth from copper is coming from more and more dangerous countries as well, like less and less stable countries. So you don't get that quick supply response in copper.

But the demand is now, and the demand is growing. I mean, we're going to build that electric grid, and we're going to build all these EVs, and also that data center, they're going to be built at whatever the cost of copper. And remember that the price of copper is a very small percentage of the price of the end product, right? So if copper goes up 10 times, I mean, your end product will go up a little bit. It's not going to double in price. So if you need to have a demand response, mainly when the world is kind of obligated to go through that energy transition,

then we should get a really, really large price move. So I think there's a long way to go for copper. I'm interested in this because, you know, we have seen this bit of a copper rally, though we're not even, I don't even think we're quite at the 2021 highs. But it's interesting. I'd love to hear you explain further about the connection between, okay, any fool can look at supply and demand and say there's this much demand for copper out there. There's this much supply coming online. There's going to be a deficit that seems bullish. How do you take that analysis or take

that starting premise and then think about what does a fair price look like? And so as opposed to just saying, yeah, there's more demand than supply. How do you get to like a number that in your view or in your analyst view looks like a number that might bring supply and demand into balance. I mean, it's going to be, you know, I don't think it's just a price. It's like the whole path is important, I think. Okay. So we look at it year by year. So we think, okay, at current prices, what would be the supply and demand balance? Do current prices have an impact on demand growth or not? Or what is the state of the global economy? What kind of, you know, demand growth do we expect for copper? and what is the supply growth.

I mean, supply growth is not going to be too dependent on copper prices for the first few years. I mean, a little bit to scrap. You get a bit more scrap metal when prices go up. So you can model for that. When prices go up, you get more scrap supply. That comes as a source of supply for copper. And then the demand, we look at, okay, what can be price sensitive, what can be pushed to later or not? It's not that much, to be honest.

and then we get to a path for the demand. And then we look at, okay, what do we think the supply and demand balance looks like every year? So for Apple this year, at current price, we think we're going to get about like 400 to 500,000 tons deficit, and we had less than that in terms of visible stocks at the being of the year. So it means that we could actually run out of visible inventories

by the end of the year. Now, there is some extra inventories, mainly the strategic results, what we call the SRB in China, but if they know that we're going to, we are at the beginning of a multi-year deficit, they're not going to sell their strategic reserves in the first year. So then we look at the following here. We think for next year, we also have a half a million ton deficit. And actually, we can't cover that with a level of inventory.

So we need, and then assuming we had enough inventories, we go to in 2026 to invent, like, deficit that are more than a million tons and eventually more than three million tons in 2030. and that obviously those deficits accumulate, and we don't have enough inventories to actually go through the first year. So it means that we are going to have a really large price increase sooner than later to slow demand. And I don't know how much it would have to go by. So basically, on copper, what I mean that we are going to have to have a nonlinear move sooner than later because of the large deficit we think we're going to have this year, and if not this year next year.

and we don't have enough inventories to meet that deficit. So we need to slow down demand relatively fast. And we think that demand is also very inelastic due to the fact that the price of copper as a percentage of the end product is very low. And we need to go through the energy transition regardless of the price almost. So I think that's why prices can move a lot for copper. So at the end, like we don't know exactly how high they can go. Do we go to, I think they could go up four times.

over a five-year horizon. But does it mean that we go up from 10,000 to 15,000 this year, and then 22,000 next year? I don't know. But I think that the kind of price moves that I'm expecting, you know, like this is multiple in price, not a 20% increase. The 20% increase doesn't change anything

to your supply and demand balance on a two to three horizon. So Joe asked you how you come up with the price thesis for something like copper and how you, see it play out. And, you know, we're mostly focusing on time scales there, but there was one commodity that I wanted to ask you a similar question on, which is oil. And oil, it feels to me, is facing a very uncertain year in many respects. We have the upcoming U.S. presidential election, and it feels like things could go in very different paths, depending on whether Trump or Biden get the presidency, not necessarily in terms of U.S. oil production, which is already quite high and I think

has surprised a number of people, including possibly yourself, but maybe in terms of things like the response from OPEC or what happens with Russia, Ukraine. Can you walk us through how you, in such an uncertain moment, how you even begin to come up with a short-term thesis for the price of oil over the next year or so? Yeah. So when you look at all the potential supply disruption that we could have had. At the end, we didn't get any supply disruption. So if you look at in 2022, 2023, we're all expecting to see at least some decline in Russian production due to sanctions or due to issues in Russia.

And at the end, there was no supply response at all. I mean, there was no supply disruption. Last year in 2023, we got a surge in Iranian exports due to the fact that the sanctions on Iran were not really. enforced, I would say. So we had, relative to expectations, we ended up having a lot more Russian production and Iranian

production. And also last year, US supply group grew up more than expected. In the beginning of the year, so for the last four months, four months, four months, I would say, US production has been disappointing, so has been a bit lower than people expected.

And at the first time in a long time, obviously four months is not enough to grow a trend, but it's something to watch out for. I mean, is U.S. shell production about to peak or not? We don't know. We'll only know it after the fact. But so far, it looks like U.S. production is actually not going too much, I mean, at least over the last four months. With the tensions in the Middle East, in terms of what scenario we could have to really lose supply, I would say it's only if we get an attack on Iranian oil facilities. but I don't think the US would want that, so I don't think Israel would do it, because if they were to do it, then the Iranians would probably try to blow up the Saudi facilities

or close the Strait of Amos, and then we get into really huge supply disruption. But it's a low probability event, right? It's very unlikely, but it's not impossible. But if the conflict stays between Israel and Gaza, I mean, there's no oil there. It has no impact at all in oil supply. So where we could have supply disruptions is coming from the U.S. Ukrainian attacks on Russian oil infrastructure. And when you look at what they've been doing for the last six months,

they have many attacked Russian we find with. And that's really to try to hurt the war effort in Russia, in the sense, not actually really so much financially. It's more for them to not have the white amount of fuel to make enough rockets and all that. And for the Russian people to feel like there's something going on, and it's not just in a far away land. But the Ukrainians have not attacked pipelines and ports yet. I think if they really wanted to impact the revenues of Russia,

they should attack the ports and the pipelines bringing crude oil to the port and keep on blowing a pipelines. And then that would really have a big impact in the revenues that Russia would get, but that would also have an impact on oil prices. And the US don't want to have million in an election years. They don't want to have the Biden administration. is very, very paranoid about having high gasoline prices before the election. So they're putting pressure on the Ukrainians to not attack ports,

but if we get into a situation where the Ukrainians become, you know, more desperate and need more help, then they might attack ports. So that's where we could potentially have supply disruptions. In terms of, yeah, sorry. I just real quickly, how much do you think that pressure from the admin not to attack oil infrastructure is hampering the war effort for Ukraine? Well, at the end of the day, if they had no help from the U.S.,

they would attack the old facilities in Russia. But the fact that they're dependent on U.S. weapons, obviously they have to listen to what the U.S. say. I mean, as far as they're helping, if the U.S. stopped helping, then, of course, they will go for the old facilities, I think. And in terms of the elections, you were asking, like Trump versus Biden, does it change anything for oil?

I mean, I think it's quite marginal or nothing, I will say, for US supply, because despite all the talks, US production surged under Biden. So I don't think that Trump would make it surge more. I mean, it's just a question of geology and money, actually, more than anything. I think we can't be too far from peak in US production. So, you know, I don't think the US supply grows has a potential of many millions of parallel set extra. So I think it's quite marginal for U.S. production. But where there could be a bit of an impact for oil would be, I would expect Trump to enforce the sanctions on Iran more tightly. So we might lose some oil from Iran and the Trump.

But against that, we probably get a bit more oil from the Saudi. So I'm not sure. I don't think Trump versus Biden have a big impact on oil prices. All right. Well, Pierre, we're going to leave it there. Thank you so much for coming back on all thoughts and walking us through all these various soft commodities and oil as well. Really appreciate you coming back on. Pleasure.

Thanks very much. Thanks for all your opportunity. Thank you. Thank you. Joe, that was super interesting. I really liked hearing someone's conception of the cocoa market when they haven't necessarily been in it that much and like how they formed that thesis and decided to actually put on the trade. Totally. I thought that was fascinating. I mean, just hearing him, like, walk through all of the different factors, whether it's climate change, whether the two diseases. Fertilizer was one that I hadn't heard that much about before.

Totally, but makes total sense. Like when you think about it and when he brings it up, some of the metrics he looks at. I'm also interested in just this point, which is obvious, but I hadn't really thought about it that you could have a quadrupling in the price of cocoa. and even if that translates into a quadrupling of the price of a cocoa bar or a chocolate bar that you buy, that in a commodity that ultimately is just not that big of a monthly expense or weekly expense for people, you might not get much of a demand response. If you had a quadrupling of the gasoline prices, you might expect carpooling or people that take less trips or, you know, whatever. More subway rides. You're just not going to get that same effect, the market that's small.

Yeah, and it was kind of interesting to hear a similar dynamic. in copper as well. The one other thing I was thinking about just to push the inelasticity point a little bit more. I wonder sometimes if all the headlines about cocoa prices going up, if everyone rushes out to buy chocolate in the same way I do, maybe you get like even a bit of a demand boost in those scenarios. Or a bullwhip, right? Because then everyone buys it and then they're pulling demand from the future and also

whatever you have in your pantry, Tracy, is probably, you know, it's hidden inventory. Right? Like the statistical agencies can't see into that. So then there's more, who knows, whether that's an, but it is, it is an interesting question. Yeah, no one knows about my strategic chocolate reserve. Tracy, I'd never tell you about the time that I was at the top of the Petronus towers in a nightclub and I talked to a palm oil magnate? Yes. Yes, you have in Malaysia, right? Yeah, in Malaysia, yeah. But it was, it's interesting, too, because he was talking about the fact that, like, palm oil is a tree-based commodity, obviously. And he was describing very, very different market dynamics versus a field-based crop in which a field-based crop, you just have

one person on a tractor or a combine to the whole field. The labor intensivity, the difficulty of automation when it comes to a tree-based commodity versus a field-based commodity. There aren't many robots that can climb trees yet, as far as I know. So it's interesting thinking about the market structure of some of these different commodities and how different they are just depending on the growing conditions, how labor intensive, how prone they are to automation, scale, etc., things like that. We should have asked Pierre about palm oil. We'll have to have them back for that.

Yeah. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Allowway. You can follow me at Tracy Alloway. And I'm Jill Wisenthal.

You can follow me at the stalwart. Follow our guest, Pierre, on Durand. He's at On Durand, Pierre. Follow our producers. Carmen Rodriguez at Kermin. Dashel Bennett at Dashbot and Kail Brooks. Thank you to our producer, Moses Andam. For more Oddlots content, go to Bloomberg.com slash Oddlots, where we have transcripts, a blog, and a newsletter.

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