The Derivative - A Crude Oil Cornucopia: Covid, Crack, CSOs & Contango with Brent Belote of Cayler Capital

Episode Date: April 22, 2021

COVID affected a lot of ways that we interacted with the world – it changed how we worked, how we socialized, how we entertained ourselves….and if you’ve been tuned into the markets over the past year, it also changed our expectations on how in the world Oil prices could have ever gone NEGATIVE. Last year this time we put out our “Crude Oil Goes Negative…WTF ^%$#?! Pod” and were talking with veteran trader Brent Belote about the sticky situation. In today’s episode, we brought Brent back on to take a walk down memory lane about how last year really happened, what’s changed over the year since, how oil traders are taking different approaches since then, and how is the industry ensuring that we don’t head back into the treacherous red zone. In addition to all of that, we’re also digging in further with Brent about his shift from NY to WY, demand bounce back (or lack there of) for oil, flashback to negative prices 1 year ago, the physicality of oil commodities, background on the oil markets, fly fishing, starting out at the JP Morgan desk, effects of COVID on the oil industry, alternative energy and electric cars, oil storage & capacities, and Cayler Capital’s continuing success. Chapters:  00:00-01:52=Intro  01:53-08:38=No Space & Plenty of Space  08:39-25:55=The Physical Oil Trader  25:56-40:15=Oil Goes Negative: One Year Later  40:16-01:00:30=The Cayler Models  01:00:31-01:11:05=Oil Inflation, Alternative forms of Energy & Drill/Collect  01:11:06-01:16:27=Favorites Follow Brent Belote on LinkedIn and Twitter and check out Cayler Capital’s website. And last but not least, don't forget to subscribe to The Derivative, and follow us on Twitter, or LinkedIn, and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Oil production is very tricky, too. It's a lot stickier. You can throttle back some of it, but you can't just shut it down for the most part because it hurts the wells whether it's you have to build up pressure um you know it's just there's a whole thing there's two different ways of doing you can walk out there's send an engineer to the field they turn the screw turns it from 10 barrels a day to three but below three it's going to be a problem because you have to cap it there's a lot of you know a lot of issues with that so what happened was we started filling up production so again back to the beer analogy our beer just started to get close to the top of the

tap still running. And, you know, we had to figure out a way to jam that tap shut really quick. And it wasn't a sexy way of doing it. It was really just like that oil went negative. We filled up oil storage pretty much almost entirely here in the United States. All of these companies cut their capex for the future by 50 60 percent all right hello everyone uh one year ago we brought you one of our um og emergency pods crude oil going negative what the uh WTF. And that's right when May crude oil futures went down negative 40 something for the first time ever, essentially saying you get paid to take

that oil. So a year later, we wanted to catch back up with what's been going on in the oil patch, so to speak, with one of our favorite energy traders that we brought on a year ago to talk about what's gone on there and what he's doing with his program, Kaler Capital. So we've got Brent Belote with us from Wyoming. Welcome, Brent. Thanks, Jeff. So we're just talking online. I always find your travels, since I knew you right when you left New York, so I always find these travels. So you started in New York, ended up in California, and now live in Wyoming. What's that all been about? Yeah, we kind of fell in love with Wyoming. We did a cross-country road trip when we left New York, thinking my wife and I, both native Californians, we're going to live in

California for the rest of our lives. And we drove across country, stopped in Jackson, supposed to be three days, stayed eight, got to California, started looking at homes to rent and just turned around and came back and we haven't left. So it's been really good here. Kids love it. Winter's a little tough, but luckily we have family still in California that we can escape to if it gets too cold. So it's been a huge win.

Good community, great wildlife. And COVID has made this place go pretty bonkers. we can escape to if it gets gets too cold um so it's been been a huge win good community great wildlife and uh kovat has made this place go pretty bonkers and uh luckily we were here before then i imagine is the uh airport filled up with all the jets and people using their yeah it's pretty yeah yeah it's we've seen a huge influx uh not to make this a real estate podcast, but I think our real estate prices have doubled in the last year. And there's just no inventory. And people think of Wyoming and they think of a huge, vast expanse of open land. And that is the case.

But in Teton County, 97% of the county is either national forest refuge, like animal protection refuges or or a uh a national park so it's it's kind of an interesting dynamic we have all this space but there's there's nowhere to build yeah and there's some restrictions you can't throw up a 60-story condo building right no no restrictions in town i think are like 30 feet high so 30 feet high is the max so my brother's a realtor in uh boulder and it's the same thing he's like you think colorado but there's literally no more places to build in boulder because they've carved out green space and this park net park so he's like it doesn't matter if

the economy crashes people want a house in boulder they're going to wait for someone to die or divorce or something happen and jump yeah it's true it's a it's a weird it's a weird dynamic of no space and plenty of space but uh and then you guys got an airstream during the yeah we uh we decided to we decided to buy an rv um we initially bought it in april of last year and kind of the thoughts were we wanted to go see our family in california and um go stay with them for a while but we didn't. If we're going to quarantine, we'd rather quarantine with, you know, family members who haven't seen our kids in a while. And it was just a really good opportunity to try to hit the road,

but we weren't sure how to get the 15 hours from here to California or 15 hours here to Southern Oregon where my mom is. And so we bought a, we bought a, an RV and kind of caravaned out there and have really fallen in love with it and being able to to do it and you know it's nice because the kids you know you don't have to go inside of the bathroom you don't have to we don't have to get hotel rooms we can just pull over it's it's very self-sufficient self-sustained safe place to be so it was uh you're this is a driving one or you're towing it uh it's a travel trailer so it's a it's a tow so we towed in the car yeah got it so they can't like i'm almost thinking of the one i'm driving and the kids

would be like no no i'm making a sandwich or microwave popcorn or something like no no it's not as easy as that but luckily you know in this day and age with all the entertainment nowadays kids are happy to get in the car because we use that as their only means of watching watching shows and things so and then you just came back from california from one of those trips seeing the family and you drove through the southern route you were telling me yeah exactly so we did a week long trip through the southern route did um you know took a couple days and did uh santa fe taos up through colorado a town called leadville and and then Steamboat Springs, and then a kind of a shotgun drive after that. It's about eight hours, but it took us 12 because we had a freak snow

storm, which if you're pulling something in a car and you get a kind of a blizzard where there's 30 feet and it's two degrees feels like temperature, it's time to pull over. So yeah, my buddy actually had a has an Airstream and he had a like the Infiniti SUV, Tony, and he was coming down in Colorado and rolled the entire thing. Oh, Jesus. And like it went sideways. It terrifies me. Yeah, flipped the whole thing. He has three kids.

They're like upside down when they stopped, and he's like, everyone's – two were crying, he said, and one was laughing. Wow, that's lucky. Is everyone okay? They're like, yeah. It's scary. Those things are scary. Wow, that's lucky. Is everyone okay? They're like, yeah. It's scary. Those things are scary. Yeah, so be safe out there. And then I just, when we, I mentioned Taos and another pod,

and some guy on Twitter told me Louis Bacon, the famous trader, bought that a few years ago, which I never knew. The mountain? The ski resort? Yeah. That's cool. I didn't know that. I've never skied there.

It's a skier's mountain. Like, my wife wasn't too happy about it like where's all the fun stuff and the so yeah yeah yeah and that's all you get i get spoiled though because i asked the local i said oh nurse heater do i need to scare you like where you're from jackson's like just stay there yeah he's like no i get it yeah all right let's not get into uh let's do jackson this winter and we'll do a pod a live pod out there perfect love it that'll be fun um so sorry we could talk about skiing all day yeah yeah this is a great real estate real estate and ski podcast

so let's back up of what you were doing in new york how you got started um sure stuff the background yeah so in new york i worked for jp morgan i was trading uh gasoline heating oil jet fuel wti and brent uh started on the oil book and after eight years switched over to products working on refinery models uh in the oil book i was trading a lot of basis markets working on the physical space um so really kind of got a good understanding of how oil moves out of the ground through a refinery and into you know at the end of consumer um started uh quantitatively started programming and kind of trying to track as much info as i could algorithmically and pulling it into different

models and build Kaler Capital pretty much, you know, right when I left JP Morgan, sat out for a year at a year, sit out, you know, non-compete clause and launched Kaler Capital. And we are a algorithmic systematic trading firm. And our program is Kaler Capital Systematic Energy Diversified. We only focus on the oil space, so no natural gas. And we trade six models that look at different aspects of the energy space. I'm going to pause you there because we'll come back to Kaler. I want to dig into what was going on at J.P. Morgan on that desk. Because huge, huge numbers, right?

In terms of dollars and barrels and everything you're doing. So, right, this wasn't a prop desk. You're not trading the bank's money per se. We had access to the balance. It was kind of a trick question because, you know, the Volcker Rule, you had to be careful with outright prop trading, but we also had risk parameters that we could stay within.

So I would say about 70% of the trading was client related. So clients, you know, on the oil book, clients from producers to consumers. So we would deal with airlines, we would deal with, you know, standard EOGs, conchos, kind of the guys who were doing shale drilling at the time. And they would come to us and we would hedge out future production for them, come up with different strategies. We would help them with, you know, kind of structuring revolving lines of credit. So really anything. And then also we had the hedge fund clients who were more flow based, would be more opportunistic, would come in and do huge option structures or just want to buy spreads or do something like that. And so the shale guys, that's tied in with

the whole bank. So they're saying like, Hey, this is a super risky loan because you might not find any oil. So I want you to hedge. And like, how did that all work? Yeah, exactly. So, you know, a lot of the banks kind of have a monopoly on some of the trading flows that go on, especially JP Morgan and Mark Zalian and Goldman Sachs, because they, you know, they issue the revolvers and the revolvers will be that you have to hold the credit. You have to hedge a certain percentage,

or you have to hold it with us. So we'll give them lines of credit, and they'll have to either trade with us or come to us for certain hedging parameters, because otherwise they're going to get capital calls against us, against our credit, right? Because Goldman Sachs doesn't care what revolver we have. They want the money in their house if it

needs to be marked market so it's an interesting dynamic to be there and learn about it and um especially when i started i started uh jp morgan oil book in 2008 and when i hired i was the 11th hire on the oil team and we grew to 140 within i think five years um they purchased uh mercuria we purchased ubs canada and it was actually you know people say i'm like oh that stinks but it was really a great learning opportunity for me because we kept purchasing these physical groups because there was a big push to expand into physical oil um which in hindsight wasn't a great choice, but it was great for me because I got to learn about the physical oil, gasoline blending, how everything moves. We worked on how to work on a project where they were doing rail from Canada down to the Gulf Coast, and then they'd throw it

in tanks, blend it, and then resell it. And it was this whole project where we did a lot of hedging, and I really got to understand kind of how oil has moved around the world. And I say it wasn't a good move because when I left in 2016, we were in the process of divesting all of those physical assets. Yeah, Mercurial is back a private company now, right? Yeah. The primary reason is it's just, it's really capital intensive to do it. And, and if you look at a cash on cash return, it's not a very good one. Whereas like, I think our, our derivative group was making somewhere in the 20 to 25% range, you know, cash on cash of how much we were tying up the bank. And the physical business is usually single digits. And it makes sense. If you think about

it, if you charter a, you charter a million, you know, a million barrel, uh, you million barrel vessel, that could be $50 million of cash that you have to tie up on day one if oil price is 50, not including the charter costs, not including the insurance, not including the other people. So it's just kind of a murky thing. Physical oil outside of, I'd call it, first world countries, gets a little gray area with some things on how deals are made and ships get released and customs. So not the risk you want to have at a bank, per se. Yeah. That could be a whole podcast explaining that one sentence. And talk to me for a second about just

the size of these flows either from those physical groups or from the hedge funds and it was it all going to exchange or there was a lot of over-the-counter stuff as well you know we did a lot of otc um until amaranth and that whole kind of blow up happened um and once that happened pretty much there was a huge push where I think almost all of the flows had to be clear port, or ice, ice clear for the rice block, something had to be they had to be exchanged just because we had too much risk. And so like, I mean, the amount of the amount of flows that we would see from hedge funds could be anywhere from 10,000 options to 20,000 options. And, and on the, you know, the flow of the producers,

some of the producers do 300 barrels a day, which, you know, if you think about it over the course of the year is 300,000 barrels a day, excuse me, you know, which you think about over the course of years, just a massive, massive amount. And they would try to do, you know, I'd say 20 to 30% of their hedging in a two to three week window usually. And so, you know, there's times where they did that. And we also handled one of the largest hedging programs in the world, which

was Mexico. So Mexico, you know, if you Google, Google Maya, you know, Pemex hedge, it's the largest one that comes out in every year. It's, it's, it's, you know, they come in and they're doing 5 million barrels of oil every single time they come in, which at the time was about 400 million, $400 million worth of oil every time it comes. So it's, uh, it was a very interesting, you know, interesting time and really a great learning experience. So, yeah. And do you, it's just, it's crazy world to me that most people don't know about, right? Like the physical side. Yeah, absolutely. And I didn't, I mean, I was kind of naive too. Like I knew when I came out of NYU,

I knew I wanted to stay in commodities and I was kind of focused on oil, but I was open to natural gas, but I knew I wanted to stay in commodities because I love the physical aspect of it, of how it's, you know, it's not like valuing a company where it can be different. It's, you know, there's arbitrages that open

and then they get shut and that's how you price it. And there's different, you know, there's arbitrages that open and then they get shut and that's how you price it. And there's different, you know, different, different mechanisms and levers and movements and, uh, kind of forecasting. It was really fun. So it was something that I, that seems like there's a lot of optionality too, right. Of like, Hey, I'm wrong on the direction, but let's throw it in this storage tank. Let's keep it on this ship. Uh, yeah, yeah. I mean, yeah, yeah. People always joke. It's like, it's, and it's true. it's a lot easier to trade around physical assets. Again, part of the murky waters is some of the best physical oil product traders in the world are based out of you in Chicago at BP. They seem to have quite a lot of oil refining capacity and get a lot of insight into how things

are pricing and blending and what's the cash market doing. So, you know, I will say that they're, you know, if you look at it, they have, they have the info and having the physical information is kind of what led me to Taylor Capital. Cause I found that that was the real driver of price. It wasn't. And I saw a lot of traders that came in and would just, you know, they were looking at physical oil and I met some that were technical and there's no wrong way to do it. You know, there's a million ways to skin a cat, but the ones that I found that were really, really successful had a deep, deep understanding of the physical oil market.

You know, and I'm talking, you know, the Andy Halls of it. You know, the guys who have come in, Pierre Andron is another good example of guys who have a deep physical understanding. And so just on that J.P. Morgan desk and around New York at the time, like guys coming off these energy desks, are there guys getting like million dollar bonuses, 10 million dollar bonuses? What are those for youngsters out there listening who want to get? Yeah, I mean, it's they're big they're big yeah they're very large so it was uh it was it's a good place i mean i think uh i think if you were

there between 2005 and 2015 it was much better um you know and i think that was kind of the impetus i've seen a lot of exits from banks and trade houses from guys that I knew at the time. And the primary impetus is the banks just, they want you to more less risk taking and more just capturing the client business that has pushed your way. And they know that they can pay people less because you don't need as talented as traders if you're just trying to have the back-to-back. So yeah, I mean, they used to pay very well and it was a great time to be there. But it's also just one of those things where kind of the nature of the world, margins

get squeezed, people get paid less and they want you to do different jobs and different things. Right. And the grain side on the physical side, it would be- Yeah. When I say back-to-back, I more mean that a producer comes to you know they want to hedge their production so i give them a price they come to me i have you know kind of two different tranches built in i have a i have a tranche a bid ask of what jp morgan the bank is going to charge me to hold that which is usually 10 to 15 cents a barrel. And that's just based off of what they charge our desk. The treasury department at JP Morgan charges our desk for using credit. And so that would be that charge. And then also the bid ask of what I think the

current liquidity as the trader is to get in and out of that. So that's how the margin on my end would work. And then once I execute the trade with the client, I'd go to either the screens and I can either do it in one tranche or I can piece mail it, or I can look at my overall portfolio, which would house, I think each portfolio have something around the realms of four or five million trades in it. And you could look at the overall portfolio and say, okay, well this kind of fits here, so I'll put that there and it offsets this one. And oh, I came into the day short and it's oiled down, so I'll take some profit.

So there's a lot of nuances and ways to go about it that made it easy. What I'm thinking of is on some of these grain desks, right? And they have a farmer. Some will just buy his whatever, 5,000 bushels of corn and book it internally, warehouse that position and that risk and then start to hedge it and trade around it. And other groups will only buy it from them if they have the seller already lined up. Yeah. Now we're the first. We would buy it. We'd buy it. We'd figure out, okay, anyone want this? Who's going to do this you know especially when you're talking about large derivative portfolios where there's you know thousands and thousands of option trades and offsets and you know okay well i'm getting long 50 000 vega but i already have the offset because i came in short or i'm long and oh i like it at this price so i'm just going to hold it you know oh historically

here's where here's where we start seasonally turning and seeing demand pick up so we're just going to hold it and ride it out so there's different ways that work when you had 150 traders like then that book is so complex like how do you know that what you're doing is well our book the books are always split up so we ran a uh we kind of took we took the goal we took a golden model they used to have they had a book called ldny it was london new york and it was the london new york crude book and so when It was London, New York. And it was the London, New York crude book. And so when I was on the crude book, we combined with the US and London, and it would essentially just be a handoff one-to-one. And then eventually we added Singapore. So it would basically be a 24-hour book that was just kind of trading. But New York was the main. I think New York trading hours had about 80%, 90% of the trade flow. And it would just be a massive book.

But then everyone else, then you have your oil basis traders, and that's their wheelhouse. So they have theirs. So if someone came and wanted an oil basis trade, it goes to them. If they came and wanted a derivative trade, they'd come to us. So there's all these different silos of traders and who gets what and how it's kind of chopped up. But having a global book like that.

Yeah. So like 150 traders. Yes. I dealt with, you know, on the LDNY book six and then on the product book three. So it was, you know,

it was a very, very much more nuanced, you know, aspect of that. Yeah. And I just, to your point of like the world progresses, technology progresses.

I feel like just the banks have better risk controls and are better able. Like 20 years ago, there might have been someone could exist in one of those silos and start to add risk that they don't know about until it's too late. And these days, it's like, no, you have risk limits at the end of every day, and we're monitoring it, and we have technology that's monitoring it. I'll say yes and no to that because, you know, it's a perfect example. Great intro, oil going negative, right? Like everyone's Black-Scholes models are not set up to price options at a negative price. And, you know, when I was leaving, it was a big change that they were trying to get into to trade CSOs, which are commodity spread options, so spread between a month and those are

tricky because those spreads like an oil can be minus 50 cents they can be plus 50 cents they can be my they give you plus $10 you know so trying to price those and create an option model you really need a two-factor model to have it and you almost need a separate vol model just for those. It's tricky when you have that go negative, which is again, why a lot of people when I forget who it was, but you saw that a lot of their option books just didn't price at negative oil. Talking to Ian Primozola in the banks, it's like when oil got to $20 and they started

trading $5 puts, people were scrambling to try to do it. And it was actually a great lesson because all the option models that they had were zero bound, right? So you have your zero bound. So if I told you, okay, Jeff, price me a $5 put, you go, okay, that's worth 25 cents because the most I can lose is $5. It's going to go zero and stops right and so people were pricing those up if you look at if you go look at the price that option as soon as we went negative the price that option went about 10 or 20 x because now all of a sudden people's models were like oh crap like i it's not it's not zero pound it's negative and then that

makes sense you know it's it's and we should have all known that from interest rates right like hey exactly right people pay and oil is an interesting commodity because you can't you know you can't just turn it off you can but you're going to cause problems either in your your well or your pipelines or you know it's not like you can just go negative and keep flowing keep pumping because that eventually you're going to have space if you're pouring you're pouring pouring a beer into a glass, when you hit the top, it's over. You got to stop pouring the beer. Otherwise, you're going to have big problems. That's where chugging comes in. Yeah, exactly. That was interesting to see how the dynamic played out and who the mechanisms were that had to shut off when we went there which is why you know if you look at the podcast a year ago we would go negative and i go wow this is

this is one of the most bullish events that i think i've seen in oil and you know where was i right in that you know i was i was like this is a great buying opportunity this is the most bullish because supply just got shocked lower massively because we had to meet demand, which was down. You know, and where I was wrong, I'd say is I thought demand would be coming back stronger. And I think I underestimated the variance and the lockdowns and also the how slow the rollout of the vaccine was. And also, even now, now that the vaccine's been rolled out so far, I thought we would be almost zero restrictions right now. And I'm still shocked at how many cities were globally or even

still knocked down or have failed to roll out faster. So, you know, I thought, and I still think that the U.S., you know, when I look around, I still think that it's the roaring 20s. You've heard this analogy that this summer is going to be a boom that we haven't seen in a long time. And I'm already seeing it in Jackson and travel. If you look anywhere around, it's really ripping. Now, a year later, give us, was there anything that you didn't know at the time that's come out sense of like the dynamics of going on there or just give us if i'm gonna try to i'm gonna try to toe the line on that without dipping too far into politics yeah or just give us the what uh like technically in the oil markets happen now that we know all the facts so to speak

yeah yeah i mean this is a good question so so i think where i've been right is supply supply has not come back as strong as i would as i thought back then um u.s shale is still growing rather slow we haven't come back um and also the willingness of OPEC to keep barrels off the market was something I, I, you know, I expected, but I didn't think they would have this much discipline and they've done a great job. So I'm very, very impressed with how they've kind of held that together. And even the Saudis doing the emergency 1 million barrel cut, they've never been that giving to the other players in OPEC specifically. So that, I thought that was kind of fascinating to see their dynamic of like,

Hey, we're going to do this. We're going to, we're going to commit, you know, where I've been wrong, you know, and being,

we always, you know, the worst thing you can have as a manager who back trades you, who, you know, a week later he goes, well, why did you do that?

You know, you should have saw this because you make the decision that you have, you know, at 0. zero for that trade. Now at T plus 30, that trade might be totally different and you might hate it. But you have to make the decision at the time with the information you have. And so where I've been frustrated with COVID is March 1st, 2020, people are still going out. Everything's doing. We shut down through March, April. What do we look like? We're still on lockdown. May. Okay. Now that we know this, what did we do? June, July, et cetera. Every like month should have been like a new evaluation of like, okay, if we got all this data on date right now, what do we do? But what happened was

all the politicians, Republicans, everyone, they had already been so pot committed to their line of thinking from day one, whether it was a no mask, whether it was a mask, whether it was full lockdown, no lockdown, 50% capacity, no indoor dining, you know, that they were too stubborn to change and pivot and look at the data and think about how they could go forward. So, you know, where I've been frustrated is I feel like the world, I feel like right now, given what we know, given the vaccine rollout, given everything, I feel like the world, at least the US, you know, with how much we've vaccinated and how things are, should be close to 70, 80% back to normal. And instead, it's like, I think, what, California just got indoor dining back, I think, what a week or two ago, I don't even know. And kids back just got back to school. Yeah, right. Kids just got

back. So yeah, and we knew in I think, in August, they came out and they said, you know, kids are not carriers, kids are not this kids are not that. But now it's still a function where the kids are not being punished, but they're not being allowed to live their life. And that's where I, you know, I get frustrated because that all drives the man. Now it's, you're getting the message that kids need to be fully masked and they're not safe in school. So now people aren't traveling. They're not, you know, the people, you know, obviously, you know, this is going to sound kind of bad, but you know, if COVID affected only people under five, this would be a lot different scenario for the entire United States. The world would have been shut down for years because no one's willing to risk their kids.

And that's just the way of the world. And with three kids under five, you want to see me go into bunker mode in Wyoming with guns and with you know guns and guns and canned goods and bottled water like that's how that's how that happens um you know that's been out there a lot of people have been saying like yeah if it had been if the demographics had been switched it would have been way people would take it but i also think that you shouldn't like at a certain point the kids just need to get back you know we've already proven that we can't it's like that like we've they've they've come out they said okay kids under five are not affected they're not carriers they're not transmitters okay great well then why aren't they back in

school you know and then i think that comes back to both politicians and and people making decisions that they have to stick with and and the the message of of it um so anyway so you know back to oil i thought that i thought that we would be able to pivot every month they look at the data okay okay cases are dropping vaccines are rolling out okay we're fully back travel's good go and the world would be you know much back you know back to normal so i expected but you're also probably. If I'm like Southwest Airlines, I'd like, don't flip flop month to month. I need like a, it's almost better if you're overcautious and then flip it totally back on instead of month to month.

I mean, my wife and I joke about this. It was like, you know, I, I have, I have friends, I have texts, I have everything. I think February 1st or 2nd, I'm telling my dad in San Francisco, I'm telling my mom, I'm telling everyone to like batten the hatches, stop going to school or stop going to class, you know, to work, stop commuting. I'm like, stay at home, work at home. Just tell them you're not safe. Tell them you're sick.

I don't care. Take a sabbatical. And, you know, we were very, very diehard masked, gloves. And, you know, I was the guy walking around in mid-February in gloves and a mask. And Jackson, people are looking at me like I'm insane, right? We drove down to Kentucky last Easter and camped. We're like, this is safe. We're just going to be in a tent on some land.

But stopping for gas in Kentucky, I've got the goggles, gloves, mask. And these people are looking at me like I've gotten off a spaceship. They're like. Yeah, yeah, right. But I was also the first person who went, June, July, when the data started turning and you're looking at what's actually transmitted, how it gets from A to B, where it goes. When I'm reading these research reports, I'm going, okay, now I'm less concerned about my kids. I'm less concerned about me. I'm less concerned about, you know, I'm not scrubbing every item I bought at Whole Foods down and setting it in the garage for two days. You know, like it's not, we're not

there anymore. And, you know, so I feel like, and that's where I feel like everyone, I got frustrated because I went from a 10 out of 10 to back to like a six, you know, okay, let's pull this in the middle. I'm still cautious. I'm still of it. That's where I think demand should have been way higher for the last six months in oil. When I looked at it in 2020, when we first got to that, I'm looking at the balances, I'm looking at forward demand, I'm looking at what I expect us to rebound to. I thought we could be closer to $80 or $90 this summer. I still think it could happen. But that was kind of my initial target that I put out was,

I think this can be a problem. Like we could be in a world of hurt in terms of oil production. And I still might be right. Let me back that up for a second. So I'm on a spaceship last year. I didn't know what happened in terms of oil going negative. Like what was that landscape in a quick paragraph just what happened exactly that caused it to go negative yeah so in march when we went into full lockdown uh demand global oil demand went down by i believe 24 now so it went from about 92 million

barrels to down to 70 or 73 i think at the low um And oil production is very tricky too. It's a lot, it's a lot stickier and you can't, you can throttle back some of it, but you can't, you can't just shut it down for the most part because it hurts the wells, whether it's, you have to build up pressure. You know, it's just, there's a whole thing. There's two different ways of doing it. You can walk out, there's, you can send an engineer to the field. They turn a screw, turns it from 10 barrels a day to three. But below three, it's going to be a problem because you have to cap it. There's a lot of you know, a lot of issues with that. So what happened was, we started filling up production. So again, back to the beer

analogy, our beer just started to get close to the top of the tap still running. And, you know, we had to figure out a way to jam that tap shut really quick. And it wasn't a sexy way of doing it. It was really just, like I said, oil went negative. We filled up oil storage pretty much almost entirely here in the United States. All of these companies cut their capex for the future by 50%, 60%. What's our total storage in the U.S.? Do you know that? Oh, man, I'm not sure.

But it's got to be like hundreds of millions. Oh, yeah, yeah. I mean, Cushing itself has, I think. I think they just built more, I think, throughout 75, 80 million just in Cushing, Oklahoma. And there's tank farms on the Gulf Coast. I think it's a couple hundred million. I'm not sure I've done it. But is it the case, like, is this a 40-year problem in the making, right?

Because the rest of the time in our history it was just get it out of the ground as fast as possible and deliver it right so there's no like no because there's on farm storage as we'd call it in corn or soybeans right yes yeah there's a certain amount of stores that meet as like working like 10 to 15 percent is working capacity storage which is either again like tanks that are used for blending um or ones that are used by like valero or bp which are tanks that are always in production right they're filling it they're pulling it they're filling it they're pulling it so you know there's certain amount that are that are always being used um yeah so it's it but it has been yes you're right like for the most part

we have but we also changed i think two or three years ago where we started exporting oils, that changed kind of the dynamic of Cushing and really moved the hub of oil. And a lot of us in the oil industry think of like Cushing, Oklahoma, WTI, it's the hub. It's really Gulf coast now. Cause the Gulf coast is kind of the pricing mechanism because it's how we export. It's where most of our oil refining is. So, you know, it's kind of ironic that Cushing, Oklahoma is still a has a has a say in it. So it goes down 20 million barrels demand. Yeah, yeah. And so where were we six months later? Now? Where are we 12 months later? Yeah, so so so oil demand goes down 620,

you know, 20 million barrels. And what happens is, is the response from the oil producers are to cup capex, which lowers the future oil production and how much we're going to be able to grow. And what's interesting about the U S production is shale wells produce about, I think it's 75 or 80% of the total oil in that well within the first 18 months. So, you know, the decline rates are very steep. After 18 months, you drill one well, you get 100 barrels a day. 18 months from now, you could be down to 10, 5. It's an interesting thing where you have to keep drilling to grow. A lot of the shale producers say that you know if you look at their you know if you look at their earnings reports they say that we need to keep you know hey we

improved production by 15 and we're going to be year on year flat oil oil oil production this year and you're like how you produce 200 you know you produce 200 000 barrels a day and you got better by 10 to 15 in your flat and it's like okay that's their decline rate so they're losing that amount of oil so you have to keep drilling to do it and luckily like i said like you know multi pads and the pad drilling has changed and made it really more economical and efficient but it's still something where they're losing oil every single year just by attrition tell us what multipad is or pad drilling. You're able to just kind of have, you have like a number of different wells in one basically structure and it can just move to each one and kind of go around. So it's, it's less rather than you're not just drilling one, drilling

all the way down and stopping. You can, you can kind of do and connect them all together. So it's just a way of having it, it less equipment more people and uh and doing it that way so and then what and so where we've lost the uh so now a year later we where we based off yeah so that again that was kind of my big bull thesis was we were gonna we you know went too hard to the other side we filled up oil storage storage, we cut supply. And then again, like back to kind of what I was talking about demand and the politician stuff, I thought demand would flip back and we would come out of COVID. There'd be a travel boom. There would be driving insanity. You know, people would be traveling all over and the supply side has a lag time to do it. So that's

where I thought the demand would outpace it. So again, like where have I been wrong? I'd say like, you know, India going back into lockdown now, you know, Brazil cases are still bad. London is still kind of in a middle muddling around lockdown, you know, and so a lot of these are attributing to it where we haven't come all the way back. And if we had come all the way back and we were, if global oil production was up five percent overall for the last six months we'd be at a hundred dollar oil because you know i have no doubt in mind like i this would this would have been a really big and there's i still think there's a chance with you know everything kind of going on the middle east and the timing of it all that you know it still could happen and i'm still i'm still bullish in the the longer term

so give me the numbers though so from a year ago where demand is where is it up and down from last year we're still down small i think we're high 80s right now i think is the number um so we you know we were at 92 93 dropped down to 70 and i think we're back about like 89 so it's close and gasoline demand is coming back jet fuel has been obviously the one that's lagged the most um got it that's what i was gonna ask so if we've removed jet fuel like what's down and what's up so jet fuel's down that feels down gas i think heating oil which is diesel fuel is relatively flat just because obviously people are buying more stuff on Amazon. Trucking's up. So the trucking industry has obviously had a boom, and the shipping container industry has done really well.

Gasoline is – I think I saw a stat where it is all the way back. So we're still pretty close here in the United States. Like I said, the U.S. is doing its part, and I think you've seen that in stocks like in oil and even and and even in um you know the rest even in the s p and whatever all of our stock market you know things are booming the us is going and they're pretty committed to opening a lot of this stuff um so it's just curious so storage basically yeah it was pretty close i think we're down about 50 now so yeah and what's kind of the long-term average? I'd have to check.

I think it's in the 35 to 40 range. Yeah, there's usually a lot of extra. I guess I should update my numbers. Yeah, sorry. I'm hammering you. Yeah, thanks for that. I just want to say, I'll throw the disclaimer out there. We're just looking for rough estimates.

Yeah, yeah, yeah. I'm going to get some tweets at you from oil. He's like, yeah, you're off. You're off pretty big in these. So let's switch gears and come back to everything you're doing at Kahler, how those models work. Give us the quick elevator pitch. Yeah, exactly.

So we try to aggregate about 2000 data points daily, looking at the energy market, refinery runs, oil production, demand forecasts, really anything that touches or move pipeline flows, anything that touches or moves oil or stuff we track and input into the models. And again, it spits out by cells on six different oil-related products. About 70% of the bar is related to relative value, and the other 30% is directional oil plays. And give us an example of some of the relative value trends. Sure. So a great example on gasoline is we use gasoline cracks, which is essentially the profit that you would get if you took one barrel of oil, put it through an oil

refinery, and then sold the gasoline that came out of that. And that would be your profit margin on that. So it's a really good barometer for the strength of gasoline, how much refiners are making or how little they're making. And subsequently, those prices will affect, you know, you can change your oil, your refinery slate to either make a little bit more gasoline, a little more jet fuel, a little bit more, you know, heating oil, and that'll affect it. So if you're making a ton of money on gasoline, but no money on jet fuel, which is kind of in the case for a year, or no money on diesel, you'll make more. And so if you make more, then obviously supply is going to go up. It'll bring the price down a little bit.

So there's kind of a, you know, like I said, it's a wave where you ride a whack one side and try to ride the other side. And you can, is there actual, you can trade the crack spread itself or you have to buy crude and sell gas or vice versa? No, there's a single entity trades on all the platforms. And then crack comes from, that's like the chemical process at the refinery, right? That they're eating it. Yeah, exactly. Hydrocracker, cracking of carbons, essentially.

Yeah. And so how, I don't know, you're not a chemist, right? So, but it's like, tell me how it works. So the highest octane is like the top of the heat chain or how does that work? So octane is a tricky one because that's more gas focused, just not gas. Sorry. Just so if you take a barrel of oil, you put it into a refinery, it goes into the hydro cracker, right? That's usually the big still that you see. It's a huge, like if you drive past a refinery, you'll see one giant tall one and what that is

that's different levels of it in it and you put the barrel of oil in and as it heats up the lighter ones go to the top and then it kind of filters down so you'll have you know like jet fuel at the top or you know some of the really really light ends like napa um and then at the bottom will be the sludge so they think of that as like, you know fuel oil or Heavy heavy resit I think is what it's trades us And then out of those those get filtered out and go to each different different There's a lot of different processes so that are you know, there's an F But then you'll blend it with ethanol and get something or you'll blend it I mean, it's kind of interesting because gasoline is one of the only products that's not one product you know like you'll get gasoline out of that one but then you

blend it up with you know whether it's ethanol or you blend it up with uh diluent there's all these different ways to create different types of gasoline and and the united states is kind of a weird scenario because california has their own one called Carbob whereas everyone else trades Arbob. I've never even heard of Carbob. I like it. Yeah. Also, it has to do with the weather. You guys, I think up in the Northeast, when it's cold weather, you have winter grade and

summer grade gasoline. You probably don't even notice it but there's different prices associated with it. You probably feel a little bit. It's a very seasonal product in that regard too and then talk to me a little bit about the refinery right if they're buying i think saudi oil right and even normal texas oil used to be like the cleanest and purest and then some of the shale stuff or canadian sludge yeah? Yeah, so they have different API contents. The Saudis have, whether it's sour or they do have regular light sweet crude. So WTI is obviously a light sweet crude.

So low sulfur. That's the easiest to refine? Not necessarily. So each refiner, so what was is we had kind of a resurgence of heavy and medium sour crude in the Gulf Coast all these refiners in the Gulf Coast that came around in the 90s They built them to accept that medium sour crude And you know what's interesting about shale is it's super super light So it's almost causing problems in those because it's so light But what's interesting is you can take a lot of that shale one that's really light.

You can put it through an FCC and you end up with almost just gasoline without doing the whole refinery process. So what you saw is a lot of these FCCs just kind of pop up in hydrocrackers and all these kind of teapot refineries around the U.S. to accept that because they can put condensate into that and have it split out and it's good quality already. What's an SCC? Dr. A fluid catalytic converter. Got it. Sorry, I got us off topic there. So back to-

Dr. No, no. No, it's a good question. The short version is every barrel that you put into an oil refinery have a specific slate that it creates and each refiner knows that so they okay if i buy one oil one barrel of bakken oil it's going to produce me you know one third gasoline two thirds this one through this one tenth here we go okay go from there and then the other one will be okay if i take that and i blend it with mars which is you know more medium sour okay that's what i get out and so each one it's always like that's all the refinery engineers do is they sit there and they tinker with it and they look at it and they try

to optimize it on what they need to produce and and how to go through it and so each of those inputs are part of your model of like hey i need to know what each of these inputs are to know what the proper profitability of a yes and no that's not that's not that's i don't get into refining engineering and the slate of it i just try to forecast more what's one barrel going into it versus one coming out got it and in theory that's a little that's a little too granular to be honest that's something that i don't even if i gave me all the research of jp morgan it'd be very very hard to track even just from that standpoint that's a very uh close to the vest kind of refining refining issues because that's

kind of their profit model yeah that's true yeah they like they don't want to know that they make more money doing eagle for i mean you can guess somewhat the slates are pretty well known it's just chemistry right but um when you look at it you't want to, they try to hide some of that. Yes. And so all the inputs come out, then it gives you a buy or sell, either on the relative value and on the directional stuff? Yeah, exactly. And then is there discretion there?

Like, okay, I'm taking it. I'm not taking it. No, there is no discretion um on it so the only human input that i have is um sometimes i will manually input refinery turnarounds or um you know whether they're going down or how it's going and a lot of times that's just because uh it's in the industry but it's not published yet so we might hear you might hear that hey shell is going to move forward their their uh turnarounds and it'll change it you know change forecasts for how much oil you expect to be used how much product's coming out of it um so you think of like a turnaround just for

maintenance it's another word for maintenance they call it turnaround they shut it down they got to clean out the pipe so to speak and then turn it back on yeah exactly and it's it's always a process and you have to plan because you have to buy parts you have to shut down you have to you know you think about it you're selling the refiners have to do two things they're buying the oil and they're selling the product so you have to stop doing both at the same time otherwise you'll just end up holding the bag on one of the others yeah um okay so all this comes into the model it shoots out these buys and sells. So you said 30% is directional. Yeah. And that's kind of long-term or short-term?

What does that look like in terms of your forecast? Yeah, the average holding period is about seven days. It's kind of what I said earlier, how you have the decision you make at that time, and sometimes it changes, and sometimes it doesn't. So I'd say they're longer term models but i will say that they change quite frequently and you know seven to ten holding period and then like so i remember last year you were saying everything was so volatile you're going out into these 20 futures yeah um so even though you're trading the d20 you're still only looking seven to thirty days

or something yeah yeah exactly there's enough liquidity out that far that it's not a big deal, especially in the oil market. So, you know, we target an annualized volatility between 15 and 20%. And when I think March happened in April, even though we were positive volatility, it was still we're still running at about 36% annualized fall, which was just too high and too much. So we rolled out from April at the time to December and it brought it back down, you know, kind of to the low 20s. What else on the model you want to tell us? And you changed, I can't remember when that was right around march of last year right like you made it more systematic or was that back in 19 yeah that

was in 19 i started um i initially was going to launch and trade an option portfolio as well um obviously doing sma with uh doing managed accounts with option portfolio is very tricky. And, um, and, and I ran into capacity constraints and size constraints with that. So that kind of caused me to reevaluate how I should be approaching this and just launching a pure systematic strategy was the right call. Yeah. I was going to say, how has you've been happy with that switch i think absolutely i mean yeah i mean i think uh yeah 2019 you're up seven percent you know i think last year we can't talk performance but um yeah i'm happy with it uh and then how do you always write no doubt no

down years yet i will jake i go um how do you think about it? Like you're a small one man shop. You have some outside vendors and help and whatnot, but like, how do you, how do you compete with like Mercurio who we mentioned and VTOL and all these big boys who are essentially also looking to make money there? Is there enough room for both of you or how do you view that? Yeah. Yeah. It's a good question. I mean, I think there's room for everyone. It's kind of one of those things where there's enough, there's a million ways to skin a cat. And you talk about the VTOLs and the Mercurias. And everyone who's trading that, I mean, they have guys whose only

job is to do gasoline blending, you know, and that's their that's all they're trading. So I think I'm a little bit different in that I look at the whole picture, you know, I'm trading gasoline cracks and trading heating oil cracks, we have WTI Brent differential. There's an option component overlay in it. So it's kind of a breadth first step thing where they can be very, very siloed and very nuanced because they're trading such large size and they have so much support. But trying to find a fund manager who captures all that, I think is a little tricky. And that's been something that I'm proud of. And then we'll compare yourself then to like Andy Hall or Andaran, who we mentioned before, right?

And we're making huge macro months long bets on prices. Yeah, I think that's also, I think that that can spin two ways. You know, last year, obviously Andaran had a great year and there's no, you know, there's no lying that, that's just facts. And I think what's interesting though, is that, you know, I obviously onduron had a great year and there's no there's no you know there's no line that that's just facts and i think what's interesting though is that you know i look at my returns from last year and i think they were almost evenly split 50 50 between relative value and directional so you know my question is is you know was it you know i i don't know his returns i don't know his breakdown but it you know was it he got one trade don't know his two returns i don't know his breakdown but it you know

was it he got one trade right and he got it really right or was it more of a kind of you know spread out return profile that hey the models are capturing six different aspects of the energy space and kind of nailing it you know because there's you only have to be right once if you if you want to get get big returns like that but i'm curious how how you know how the breakdown would look like was it we'll try and get him on the pod and ask him yeah yeah because i've read stuff it seems like he just swings for the fences right like i think it's going here and i'm loading up to be honest if you look at his returns i mean his returns were great last year but i think his annualized volatility is somewhere in the 40 45 percent range and if you look at his drawdowns he's had multiple 50 percent

drawdowns you know i lose clients at 10 and i'm like yeah you know apple stock has gone down 10 what 30 times in the last 10 years i can yeah you're probably you're probably still holding that so it's uh um and then you just mentioned option overlays. What does that look like? I run a, it is a option model that essentially says, what is the odds that we are at certain X percent at certain prices in the future?

So, you know, a good example would be in three months, we're at $62 in the front of oil. What are the chances we're at $80? And then I take what my models are saying is that percentage, and I apply it to what the option models are saying in the volatility market. So the option models, let's say the market is saying there's a 12% chance in the option models. But my models are saying, hey, supply-demand forecasted for three months, wow, this is 50%.

We'll enter into essentially what's called an ad-expert digital option where it says at three months, if it's above this, we get this amount of payday and can go from there. And you do those, are they're cheaper because they you can't get out beforehand well you know you can get out beforehand but you know typically the way that i like to trade that is because it was the only way i could quantify quantify it in terms of the models and giving a percentage so it was really the only apples to apples that i could create okay they're basically pricing it exactly as a percentage instead of like you

having a model. Yes, exactly. Cool. So then they, yeah, I like that. And that's in your directional bucket then?

Yes. Yeah. And then the other directional is, so you'll go long or short oil. What else? Gasoline? No, just oil.

Yeah. So oil is the, oil is the only directional one that we will um take take long short on like there will be times where two models will kind of offset each other does that make sense so if i'm long gasoline crack right i'm long gasoline and i'm short oil but then if the oil market comes in and says we're long oil directional those two oil will just offset and i'm just long gasoline got it but in my mind i look at this is that's two model trades that's not just i'm long gasoline yeah i like it and

then vice versa if they kind of could double up at some point then you're it's kind of a confirmation bias right yeah yeah exactly at least on the oil side so you're doing wti and brent or just wti uh both yeah yes that correct. So it'll look at, the models will look at each one independently. The WTI one is more focused on the US flows, pipeline flows, cushion storage, Gulf Coast economics, and also the oil refineries here. The Brent model is more of a macro model, looks at more OPEC kind of world flows that we've had. And I think that's been not the biggest issue, but I'd say it's caused problems in terms of my overall bullishness versus the models, because the Brent model has kind of been muddling

around between flat, long, short, and the WTI model has been fairly bullish for the last couple of months. And I think we've seen, like I said, you've seen that in the stock market, you've seen it in the dichotomy, but it's one of those aspects where I put out notes and I tell people I'm bullish and then the models are bullish US,

but bearish Brent, and they're kind of going up together and one's kind of leading the other and it's uh so it's been frustrating in that regard where's brent right now has it lagged because of the kind of global no i mean we've kind of gone up but the models have not caught the move higher um but you think what's going on in india and europe right the rest of the world you think brent maybe would show some of that demand. Yeah.

Yeah. Yeah. That's exactly right. And that's been, like I said, it's been a frustrating aspect and I get notes about that from clients. But there's also an ARB there, right? So it can't get too far dislocated. That's right.

That's right. And so that's why it's been kind of, you know, the TI, the WTI strength has been in the US has been kind of pushing higher, especially with the, know kind of backdrop of inflation money into the system it's you know kind of we've had huge inflows in the retail space um so yeah like i said like it's been i'd say the last six months have been frustrating just from that standpoint where i've been bullish but at the returns haven't been there in in the oil program just from the standpoint of, like I said, WTI has been kind of long and Brent's been kind of muddling. And what do you think? Like Saudis tried to launch their own futures contract to kind of get a little more granularity on the demand right out of there?

I think that was more of a money grab and kind of a way to have them, you know, have them, and that's kind of like with China, like when China launched their, their curve, it was just an easier way for them to buy. It's just an easier way for them to buy oil and kind of be in the game. So I'm sure they're tired of paying in dollars too. So, yeah. But in your, what you see and who you talk to, like traders aren't really moving into those markets.

No, no. I mean, it's a nice basis market to be able to trade and have it, but people aren't, you know. So you just use it kind of to hedge your basis. Yeah, exactly. And then mention China. So you're working with, or Sam, do some models on China. What's that look like? Yeah, so we trade 13 models. It's more of a macro portfolio. And I was actually able to, one of the last hurdles that I use in my Kaler Capital US-based models is term structure. And there's an algorithm that I created that looks at term structure in the final one. And I was curious, when it was first approached by RCM, I thought, you know, I could wonder if this algorithm, the last one, which doesn't look at any fundamental data, it's really just price data would work on those. And

it's been doing great. So we trade 13 models over there, more of a macro portfolio kind of ranging from glass and chemicals to financial instruments to, you metals um so it's been it's been really fascinating it's doing really well and then what are your thoughts just on the crude curve i don't even know what it looks like right now but is it i mean at back in march right it was super steep yeah i i think we're gonna end up in a scenario i mean right now we're still let's see december 21 is about two dollars and 20 cents below where we are right now in the front your quote screen is very high it's the double it's the double the double screen yeah uh sorry so these 21s where how much higher about two two dollars lower so we're back so right now

it's telling me that the demand here in the front we need it more than we do to store it right because people are being incentivized to store oil um i think that's probably about right and it might even expand higher as as the summer driving season picks up um you know we're about to hit i think we have about two to three weeks and then i'd anticipate we'll know by the fourth of july whether you know i'm right or wrong let's put it that way. Because we're either going to be sitting at $75 in the front or it's going to be kind of just right around here and buttling. And then that will be something that will tell me that, hey, it might be lower for longer and we're right there.

Switching gears for a minute like a lot of renewed interest in inflation fears and commodities as an inflation edge i don't even think most people who think that realize that what they're really saying is oil as an inflation edge right yeah yeah commodity indices made up of mostly oil so just do you what are your thoughts on that? Is it a good inflation? My thoughts are oil is probably the worst inflation hedge. You know, if you look at the other futures that, yeah, that's come out. I'd argue lumber has been a bigger barometer for me of what we're seeing. I'd look at the softs. I think all corns and grains are much better.

You know, when I look at inflation in my personal life, I don't know about you, but I feel it more at the supermarket and more in rents and home prices than I do whenever I go to the gas. It's an interesting dynamic. Private school and property taxes for me. Yeah, exactly. Interesting. In theory, then that, right. But in theory, then that's going to remove, well, what are your thoughts on just macro levels that it's going to drive some demand, some buying pressure, right? If we go back.

Yeah, absolutely. I mean, there's some there we saw, I think in, I'm trying to think like in February and look at when it was, we had huge, strong buying in oil just from a standpoint of every single person was putting out inflation pieces golden sacks bank of america merrill lynch every single person was we're in inflation we're in inflation it's going to be you know buy oil buy oil and you saw it in yeah january february where he went from about 48 to 62 so we went up you know about 14 dollars in. And I think a lot of that was driven. I mean, it was a lot of it was studies too, but a lot of it was also driven by the macro push of inflation. So I think it went a little too high. We got up to about 68 in the front in oil and WTI in March. And that's kind of a shoulder month, demand slumps because no one's really driving. You know, it's getting warmer, so you don't need heating oil. So it's surprising that

March was kind of the high of the, so I just thought it got a little bit too far ahead of itself. So I think it's kind of normal that we're hovering between 60 and 65 in oil for the next six weeks. And then I would expect something higher. What, how is heating oil still a thing do you know anyone that uses heating oil everyone said everyone says you know it's just it's diesel fuel so it's uh you know it's kind of fascinating who's using diesel to heat their homes or is that from the you know you know what's interesting about that is is you could take heating oil from your home put it in your in your car in your diesel car so there's

they they have they actually are forced to dye it a certain color so that there's a differential between there but for the most part you could take one there's only they're essentially one to one because it's low sulfur fuel low sulfur heat distillate now so kind of interesting historically that's been like northeast right that? That kind of uses heating. Yeah, yeah, yeah. It's Northeast. You know, but again, like it's diesel fuel. So like when you think about like trucking,

you think about everything that's kind of gone on over the last year and a half and how much trucking and you forget that most of the world is still diesel fuel, especially ULSD. So, and, but to produce produce electricity we're saying to heat homes not a drive like if you go over you know you go to you know you go to europe it's a uh you know most people have a drive most people drive diesel steel so you know the u.s is kind of the weird one but um and then what are your thoughts on well a few things while we're kind of talking about the whole world here.

So alternative energy, wind, solar, everything, is that going to dent demand? Yeah, I mean, I think I'll stay on that note. I think the electric car revolution that we're seeing will, you know, at a certain point, we will end up in a scenario where I don't want to say oil is the new natural gas but you know if you look at natural gas you know in 2007 and 8 it was 10 12 dollars and now it's a byproduct right and it still is tradable there's still I still plenty of hedge funds there's still plenty of risk to go around it's just at a lower base and I think that could be the scenario for oil you know down the road but i'm talking 10 15 20 years you know the adoption rate of these is very

very slow does that worry you from like a career business standpoint or like whatever no even if it's in a five to twenty five dollar range it's still tradable yeah it's still totally fine like i said like if you look at natural gas this is a blueprint right like we had massive supply fines the supply demand imbalance shifted we go to three dollars we've been at what three dollars for six years now yeah i can name off the top of my head a couple different billion dollar hedge funds that have either started or are still around or still trading the natural gas desks are still some of the largest at the banks. So it's needed, and I don't think it will be there. I do think that it was interesting that we have kind of crossed the threshold of solar,

where for the first time, solar is cheaper to do. So you will see more adoption of that. And I think like the micro— What was that? Real quick, my wife's uncle's house. We were there a couple months ago in Miami And he's like you want to see my new Tesla I'm like sure and we like go out the back into his garden I'm like you have a car back here and around his side of his house He had the to the roof like battery packs on the side of the house. He's got solar all on the roof. Yeah

Right and he was yeah, he pulls it up on his app and he's showing me he's putting it back into the grid so it's kind of yeah well i've never seen that yeah i think that'll be i mean our our electricity grid as a whole is garbage so it'll be interesting to see how these kind of startups and things come in and do it um and take it but you know i think oil is here to stay what's that next question of your thoughts on the whole te debacle. And I know you don't trade power per se, but you're tangential. I mean, yeah, it was bad. These things are tricky, right? Because you have spot, a lot of them are spot energy markets.

They, you know, people can trade them. And I mean, it's one of those things where it's hard because our grids aren't good. And when freak storms like that happen, you forget that people are still going to need it and they're going to pay it. And it's an essential commodity, essentially. You know, so. And I've seen some reports that net net over like five years, they've still paid less than the national average. Yeah, for sure. I mean, that's getting $11,000 bills or whatever.

Yeah, that's where like I don't feel that bad is those those, you know, that's getting $11,000 bills or whatever. Yeah. That's where like, I don't feel that bad as those, those, you know, the people who did that, they probably didn't know the risks associated with it, which isn't fair because they didn't know that there's, they get spot, you know, they get the spot rate of prices, which to be honest can spike. Like you said, you saw it spike incredibly high and you know, now it's back to lows and it's went from like $4,000 or something. Yeah. But people forget that, that in the commodity prices, you know now it's back to lows and it's went from like four to four thousand dollars for something yeah but people forget that that in the commodity prices you know like when people need

something there's no there's no price they won't pay especially electricity right like just imagine what you do if you're somewhere and you need to like charge your phone right there's like certain things like electricity water you know like you're gonna pay whatever it is that you need to do that for that time at that time if you need it and gasoline's another one like that you know like oh gasoline's seven dollars no no but it's like if if there's no if there's no oil or no gasoline you can go to 20 you can go to 30 who cares like there's just no number for it so yeah which i've been thinking, I don't know how the power market works exactly. I'm trying to get some power guys on here to talk through it, but why not spend 1% a

year on calls? It seems like once a year it spikes like that. Yeah, I don't know how that would work in terms of, I don't know if the option prices will go that far out. But yeah, you could. I recall, I think it's shorter. I think a lot of the power contracts are very short. Or even a day, I think.

Some of them, it's daily. Yeah, yeah, yeah. I'm trying to remember. Actually, I interned on the power desk at JP Morgan for it. I was going to say, have you ever been tempted by the dark side there and be like, let's forget this 20% vol let's go for 150 yeah i just i can't even i can't i can't even i'm trying to remember like how they did it and how it was but yeah some of those guys have monster years my next one we touched on a little bit of

the shale economics so i think we talked back last march of like the banks like the whole ecosystems kind of shifted and dried up of like even though we have super easy money right now the people aren't as willing to lend to drillers so it's yeah yeah so you're still seeing you're starting to see it expand a little bit there's actually been um uh some credit distressed credit funds which are only focused on energy lending which makes sense because you know there's a lot of opportunity. They can charge a higher interest rate for it, for the revolvers and the loans credit that you're doing. So I do think that it's loosened a little bit, but when I look at the CapEx,

I think this quarter will be a big tell because this is the first time we've been above 60. And it looks like we've been here for a couple weeks so i'm curious if when they start releasing earnings if they'll come out and they say hey we revise our capex budget xyz we're gonna we're gonna go for this in 21 and try to capture some of it so and what do you know off the top of your head what their like break evens are is it 60 isn't but oh it's below here we're definitely profitable here for sure um i think it's i think most of them are between 40 and 50 40 and 55 so somewhere in that range yeah it's interesting like i've talked about something else and this might be the first year where all of

these shale companies are dividend companies because they're going to have so much cash coming to them because they're not spending it you know typically it's drill collect reinvest drill collect reinvest and this is the first time where they're just drilling and collecting and they're going to amass quite a stockpile of cash over the next six to nine months and even some of them may have not drilled even right that's right yeah so that's what'm saying. They don't have any expenses. They cut the workforce, they cut everything. So it'll be interesting to see kind of how it all trickles down. But also a lot of them were part of this Russell outperforming the NASDAQ for a bit.

There was a lot of the energy. True. Yeah. Yeah. They've definitely lagged on the way up here. So. way up here so let's go through quickly your favorites hopefully you've uh read up on your star wars characters since last time doubtful oh no um so favorite favorite uh ski spot or thing to do in jackson outside of the actual mountain? Fly fishing. Fly fishing. Nice. Yeah.

You go way out or you just, there's drivable. Wade. Yeah, we know we just wait out. You know, you can, you can actually go on the, they open up the elk refuge right here, which is a really cool Creek. You get to walk out, you know, nothing around Teton's right there. The snake river obviously is the main one which runs straight through it and any any place you can pull over is great fly fishing there's a million creeks around right i mean you're not going like like my brother did something you went for two days on a horse somewhere in idaho or something definitely not no no yeah there's no there's no

disappearing for two days with three kids under five. Hey, honey, I'm going fishing for a week. And your business, right? The models will run themselves. Keep the kids busy. Yeah. And what do you get mostly brown trout, rainbow trout? All kinds of trout. Yeah. We've cut throat. Yeah. Rainbow. We have, yeah. A lot of trout. Love it. trout yeah we've cut throat yeah rainbow we have yeah a lot of trout love it um jackson i think everyone's like out there eating elk and stuff you got a favorite like game type of meat uh i'm not a big fan of the game ones i have i've tried elk and bison

but um you prefer just standard steaks you know the steaks out here are so good i think i saw something and it's like all the restaurants in town, I think the farthest away they buy their steak is like 50 miles or something like that. So it's pretty crazy. Pick one out. When we get there, you got a favorite steak place? I mean, Snake River Grill is the biggest and this is really good it sounds good that's a good

name yeah um favorite commodity book commodity investing book or commodity oil book any of those ah man there's there's a bunch let's see one that i really enjoyed which is kind of an obscure one it's called satan's bushel sadie's Bushel? Satan. Satan's Bushel. Yeah. It's about, it's about kind of like the last, it's an old school commodity one about how the,

you know, kind of the last, it's like the, as soon as you produce one more barrel than you need, and so there's a buyer, it can crash the whole price, you know,

so they call that one like Satan's Bushel, essentially. But I really enjoyed that one and kind of gave me a good understanding of the physical markets and how things can kind of move and go about it and i think we've talked before my one of my favorite books all time was the prize that daniel uredan oh yeah yeah just going into the history of all this stuff i'd never known about like some brit British guy who got 50 cents on every barrel out of like basically the Middle East for a long time and yeah yeah it's just crazy I'm trying to tell

this shell because they basically started in all the Caribbean islands and whatnot yeah I think there was one on uh there was one I read I think it was about Mark Rich um yeah he's just a fascinating guy to me kind of that. I really enjoy just from a standpoint of trading and understanding like what he was looking at and the oil markets, the camera, the name of it. Um,

but it was about Mark rich. We'll find that one. Um, and then favorite star Wars character, baby Yoda, baby Yoda, Mandalorian. He's got a new one um yeah my family's pumped for all

the new spinoffs that they're pulling out of that i don't know how they're gonna mandalorian might take it down a dip down with no more baby yoda but i know you're gonna have to do something so for sure in like the fourth or fifth episode they're gonna bring them in for a quick snippet yeah definitely definitely uh all right brent it's been fun we'll uh for sure plan up a in-person meet in jackson sometime sounds good when there's snow on the ground it should come out of summer it's better i know we we did the summer last year we didn't make it we made it to devil's tower in wyoming but not over almost almost all right buddy thanks again thank you

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