The Derivative - Constructing A Systematic Oil Trader: Fueling growth at Cayler Capital

Episode Date: March 7, 2024

Brent Belote, founder and CIO of Cayler Capital, joins the podcast to discuss the growth of his now 5 year systematic oil trading strategy. He provides insights into analyzing supply and demand fundamentals and using quantitative models to capitalize on events in the physical oil market. Brent also shares lessons from starting his own fund and managing risk at a smaller scale. Hear about trends in the energy sector, including the impact of geopolitics, refining capacity, and green-flation (just how close are we?). Brent offers his outlook on oil prices and explores other areas of knowledge and experience in the energy sector. This one is an engaging conversation you won’t want to miss, so kick back and explore with us as we navigate through commodity markets and the experience of building a successful investment firm. SEND IT! Chapters:  01:31-02:59= Skiing and family growth 03:00-10:32= Advances in the strategy, event driven success & Oils gone flat 10:33-27:47= Building a business, podshop thoughts & multi-strat models 27:48-36:02= Oil in ’23 – warmer temps means spiking refining numbers 36:03-43:42= Greenflation – are we ready, are we even close? 43:33-47:33= Biden administration issues and the Red Sea From the episode:  Commodities Miami panel featuring Brent Previous episodes of The Derivative with Brent: Crude Oil goes Negative… WHAT^%$# A Crude Oil Cornucopia: Covid, Crack, CSOS & Contango with Brent Belote Follow along with Brent on Twitter @brentbelote, on LinkedIn and check out Caylercapital.com for more information! Don't forget to subscribe to ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Derivative⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, follow us on Twitter at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@rcmAlts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and our host Jeff at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠@AttainCap2⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, 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

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. Hello there. We're back in action this week and wading into the oil patch with my Jackson Hole ski buddy, who just happens to also run an energy trading CTA. Yep, it's Brent Belote of Kaler Capital. And after the mandatory chit chat about ski and snow conditionings, we get into how his models look at energy markets, whether greenflation is real, what happens dozens of years from now in

oil if and when we're fully electrified in his economy, and how it's been for him hanging his own shingle and running a small hedge fund. Send it. This episode is brought to you by RCM. From clearing to execution, portfolio construction to outsource fund ops, China to Nebraska, RCM has you covered for all things futures and derivatives. Learn more at rcmalts.com.

And now, back to the show. All right, everyone, we're here with Brent Belote. How are you, Brent? Doing great. Good. I had the pleasure of seeing Brent in person on the slope at Jackson Hall. Had his what, what was she two? So your daughter or your son at Kim? Yeah, she's three. Three on a little like a leash. Leash is the wrong word. Harness.

Yeah. She's on a harness and she was skiing down. She's already off it. So she's, she's in the right. She's off to the races on the ski, the ski team. Yeah. She was good. And you had all three kids, one in red, one in green, one in blue.

It was a tight program you're running there you've got to keep them uh keep them visible at all times so it's good and then i was all ready for you to say oh you just missed it the snow is terrible then it all came right after you left but you said it's already terrible again it was great for about a week we got about four feet of snow over the 10 days and then the last four days it's been in low 40s with kind of rain and and melting so it's uh it's been it's been a quick quick change and end of winter already uh and then we're recording this last week of jan here so you're going down to eye connections go down to the warmth in miami soon yeah excited so i leave on sunday down there for four nights. Conference just keeps getting bigger and hopefully it's still as great as it was last year. So I'm looking forward to a busy schedule

and hopefully we can get some institutions and looking forward to speaking on the RCM panel on Monday night. That's right. We've had you on the pod a couple times before. Once when oil went negative. That was fun. Talking through that, that seems like a thousand years ago.

When was that? Like May of 20? May 20th, 2020. So the day went negative. And I think we did this the day after. So it would have been the 21st. Yeah, for 2020 was the day it went negative and i think we did this the day after so it would have been the 21st yeah for 2020 was the day it went negative um and then we had you back on talk through the strategy so we'll link to that and people can go back there and hear all the ins and outs of what you're doing

in the strategy um so i wanted to start and just talk through kind of how your thinking and strategy has changed over time we've known you and been following you and had accounts with you. What now for how long has it been? Four years, five years. We've been running for five years now. So five years. Yeah. So tell us, give us the what's, what's the same, what's different over those five years. Most is the same in terms of strategy wise. And what's changed is this last year in 22, 23, 23, we hired Sam Vogel to be our COO. So now it's not just myself, which is nice. So we're building out a little bit more

of a team and a bench. We'll likely look to add one more to the employment this year. And we've passed over 50 million in AUM with kind of pretty quickly. So right now we're at just under 55 million AUM and have been growing pretty steadily. So hopefully we can get close to 100 by the end of this year, if not sooner. So that's kind of the guys behind Miami is to go down there and hit fundraising pretty hard. Do those people need to work in Jackson Hole or get to work in jackson hall i should say uh they can work wherever they want sam's based out of houston and he has two young kids so his was kind of a non-starter for moving yeah i think good people over location is is priority

um if they want to come to jackson hall even better so but it's not a priority uh and that doesn't make a good podcast i wanted to be like well i used to go massively short 600 percent nat gas and now i've scaled it back and we only do this or that so you the risk levels everything's generally the same the portfolio how you look at it yeah everything's still been the same we haven't changed any strategies over the last five years we've um launched a co commingled vehicle on Galaxy platforms. So we do have kind of fund access, for lack of better words. I have noticed a change in the last two years in our investor base.

We're seeing a lot more institutional fund of funds and even, you know, kind of the multi strats of the world have have started look to external allocation. So as we grow, I think that's that's kind of the multi-strats of the world have started to look to external allocation. So as we grow, I think that's kind of the next evolution of Taylor Capital, if you will. Yeah, I think I've seen a little bit more of that, too, of people looking and being more interested in discretionary and not even discretionary, but systematic and discretionary commodity traders. Yeah. So take us a step back. If it hasn't changed and tell us how it's the same and give us the 30,000 foot view of what you're doing for people who don't want to go listen to

the old one. So we still run a systematic oil strategy or kind of two pronged approach as we look at what does the supply demand look like over the next six to 12 weeks for each oil product. And then we have a quant overlay that looks at the physical markets. So we have the various basis markets in each one. We run about 70% of our VAR and relative value at 30% directional. So we do have exposure to long short oil, which has been good of late. And it's something that, you know, a lot of people have kind of been gravitated towards because our correlation to oil is fairly, you know, close to zero just because, you know, we have the ability

to get short and get long. When we do really well, I like to think of it as a event-driven systematic. We do very well when events happen in the oil market that kind of push the physical market to a brink. Obviously, COVID 2020 was a great year for us and 22 22 of Russia Ukraine was another great year for us kind of when when the physical markets had to kind of react to satisfy some of the oil flows that were necessitated around the world and what do you attribute that to that the the fundamentals align with your technicals and basically everything's growing in the same way we track

over a thousand different daily data points on the supply demand. And we're able to kind of see those or forecast them, I guess, fairly well. Like with COVID, we could see that we were filling oil storage globally. Demand hadn't caught up in terms of either bouncing back. And we could see that if we were kept filling up oil storage at this level,

we would hit a point where we had to either cap it off or cut supply. And that's pretty much what happened when oil went negative was they had to cap supply because oil storage was pretty much full at that point. And same with Russia and Ukraine, you know, we saw oil flows still actually coming out of Russia at pretty good clips. And they were still getting, getting on ships and finding a home. And, you know we were able to see that in a kind of called bs essentially on on the 140 spike that we saw in oil so we were long going into that but we ended up exiting as a result of seeing those flows um the models caught

a pretty good job of seeing that the physical market actually wasn't that tight. And do you think of it more as like, hey, this is smarter access to oil prices, right? Of like, we should capture if there's a big run up, we should capture some portion of it. Yeah, I mean, that's one thing with oil that I think people get a little wary of is the geopolitical risk. But, you know, we've done a very good job of playing that over the last five years. We haven't had any down years in five years. And, you know, yeah, well, you get caught off sides on certain days or certain weeks in relation to moves. Absolutely. But I don't think in the long run, you know, we're catching the bigger moves for sure. And I think, you know, a good example was, you know, we had a drawdown in the last six months of last year, and we were pretty much max

short going into the weekend when Israel-Hammaz situation exploded, and oil was up pretty big, and all the products were up pretty big against that, and kind of took us out of a lot of our short positions in that. And I think the next day on that Monday, I think we were down only about 80 basis points, but we missed a huge decline in oil as a result of that. And that happens sometimes. Sometimes the physical markets take you out and it changes kind of the landscape of oil for the next three to six months. But do you feel like your investors would rather you be almost a long flat profile? Like if you miss the big down move, so be it. Like we really want you to capture more if there's an up move. I would say so. I would say i mean i think i think that's probably a fair assumption just from a

standpoint of uh you know if oil goes to 200 the s&p is going to take a hit your house is you know there's there's going to be knock-on effects of 200 300 oil if it gets there and it's nice to have us as a kind of catalyst for that if we catch that on way higher so i would definitely agree with your comment a little bit and then so over that five-year period what oil is basically flat right pretty much yeah yeah it's just it's kind of crazy to say but yeah it's pretty close i'm just gonna pull it up real quick yeah i guess here and yeah in late, it was right about 65. Yep. Now we're about 75. So what we went. It's not, not too crazy, not too far off. And what, so what's that range when we were 65 to negative 20 to plus 140 back to 70.

Yeah. There's a lot, a lot of Alvin. And you don't have gray hair yet. So good work. Yeah. It's coming. It's coming it's coming so changing subjects a little bit and we'll come back to what's going on in oil but talk so those five years right you came out of a bank you were a trader you said hey i want to go do my own thing hang my own shingle for any young people or old people or whoever listening who were thinking of maybe starting their own fund or something what what was harder than you thought what was easier than you thought what lessons did you learn um i think the lessons coming for me out of a bank was how to manage risk on a very micro level. We have a huge balance sheet at a bank and you're able to trade a little bit differently. We have VAR levels and

we have set amounts, but I never thought of margin to equity or what's my annualized volatility look like, or even drawdown for that matter. I had a hard finite number of drawdown in my, you know, JP Morgan, but say I was up $30 million on the year, my drawdown could have been, you know, 35 at that point and no one would care, right. Cause they just care about the positive numbers on it. Whereas, uh, 35% you're saying what's that? No, 35 million. So like, you know, they, they just think of it in terms of dollar numbers. So if you're up 30 million and you draw down 35 million, like, all right, this guy's fine. He's only down 5 million. Pretty much. Yeah. Like, so that's, you're able to kind of, you know,

build a buffer that you're able to trade against. Whereas with Taylor capital, you know, we're constantly getting new accounts, you know, monthly quarterly, et cetera. And each one is essentially starting at zero. So your drawdown, you know, if you have an account that started it at, at, you know, and you happen to be the high watermark, you know, like your example was last year, we were up, you know, 20% through the first six months of the year. We had a couple accounts come in and then we subsequently, you know, lost about 12. Now we still finished the year up on it, but those guys are kind of, you know, longer term investors, which is nice. And they believe

in what we do and how we do it. But timing is kind of everything with it, which is why with us, you know, we run a higher volatility portfolio and it's nice to have people who are in it for the longer term, you know, like we've, we've made money every year, but we still have people that come in, we'll be in our program for three to six months and then decide it's not for them and close, whether that's profitable or negative, it's different. So that was a big change was in terms of how I take risk and how I think about kind of the overall strategy. Right. It wasn't just end this period with as much money as you can. Exactly. Exactly. Think of daily returns, daily, you know, daily VAR, you know, you can't

have, you know, you think about like a big option portfolio, you can't have a day where you're down 15%, even if the next day you're up 25, because just the amount of volatility that it's spitting off is not palatable for 99% of the investor base. What took longer and what I kind of underplayed was i thought having a 10-year background in a bank would allow me to either come out and be able to raise seed capital on day one and that was far from the case yeah pretty much people view a bank like they don't trust it yeah yeah they they think they think that we just have so much information so much systems at the bank we call it seat value where you know each trading house has a trading house, each place you're sitting

has a seat value. And that's something that you kind of have to get around that stigma. And so it really took me almost two or three years of track record before it happened. And then 2019, we came out and had a good year, but not a great year. 2020 was a good year. But then every call I'm having after that says, well, was this just a flash in the pan where you were, you went off. And so it really took 22 to validate that, Hey, we we've making,

we're catching bull markets. We're catching bear markets. We've done this. And that's where I think like our next growth is coming. And now, you know, crossing 50 million, which, you know, we have some investors that have taken that have capacity rights that will expire, and they said they're going to use them. And what that'll do is, is we're going to grow pretty substantially from there. So I think, you know, I think just getting to that critical mass standpoint is kind of where we're at. And so the one thing leads into another there with the bank, right? Like, I think

people might not trust track record because they know that you didn't have the same risk profile and it was just about making money. It wasn't about the path of how you make that money. And even then I had a great call with, you know, a, I would call it a multi-strat investor. And they said, you know, like, we like you. We like what you do. We like your turns. We like how you're thinking about the markets. But we need to see that you can manage big money outside of a bank. Now, whether I had, you know, $100 million a year at J.P. Morgan or whatnot, they want to see that we can manage,

Kaler Capital can manage $50, $100, $200 million to make it count. And they want to see that scalable. And it is an interesting thesis because it does change things when you're dealing with such large numbers. You know, like how do you mentally think about, how do you sleep at night knowing that if you have $300 million,

if you have a 10% drawdown, you just lost $30 million. You know, and the numbers get big. And that's, you know, again, you know, one the numbers get big. And that's, you know, again, though, you know, we've, one of the advices, advice I got from one of my, you know, one of my bosses back at J.D. Morgan was, if you're going to lose, lose early, because it teaches you learn a lot about yourself in your career when you have these big losses or drawdowns. And I think it's really true of how you bounce back from them. How do you mentally handle being

down? Are you second guessing yourself? Are you conviction? Like what's your conviction rate? You know, so I think for us being a systematic actually has really helped with that. It's helped me, you know, keeps us on a strict guidelines of risk tolerance, keeps us on a strict guidelines of how we think about the market and where it's going. So it's, it's definitely something that keeps us on the road tracks for sure. I was going to say, how do you handle that, but by being systematic? But right in theory, in the math of it, the systematic part of it, I'm doing 30 contracts, I'm doing 300 contracts. Yeah.

It shouldn't matter, right? Yeah. I mean, our program is scalable easily to five, $600 billion. It's more a function of how much infrastructure do we want to build out and where do we want to go with it? You know, as you grow, you need more people, as you get to bring on larger LPs, they will request additional, whether it's chief risk officer, whether it's a vehicle that we have to house ourselves. So there's a lot of kind of nuances to growing. And that's what we're trying to do right now is just grow smart you know we want to grow consistent we want to grow you know during returns that are we can show that we can make money during this time lose money during this time and and that it's still the same program whether it's 30 million 50 million 500 million and so that's

kind of where we're we're at right now so the harder part is you can't just blow through 30 million and everyone still goes out for a beer after work. What the easier part, there's got to be an easier part was what's the good part about going out on. Oh, about going on my own? Yeah. I've always liked in trading that it's a very, you know, it's a meritocracy. If you make money, there's a scoreboard. And if you do that, you know, if you make money, you get paid on it.

And that's, that's something that I've always liked in it. And also it's heavily scalable. Like you mentioned, whether it's 30 contracts or 300, the process and the way I think about it in the business is all relatively similar. So just being able to kind of build a business and have something that we've done and, and kind of building a legacy of things that, that, that, you know, I've worked my whole life for, um, something I really enjoy. So I've, I really enjoyed kind of the entrepreneurial aspect of it, of building a business and finding different partnerships. And, you know, we're kind of at a point now where it's been really fun. We're starting to, you know, look at different partnerships and possibly it might make

sense to create a joint venture with another fund, or it might make sense to launch a multi-strat or, you know, we're kind of hitting critical mass where we can start thinking about different avenues and different partnerships that are, that are really exciting. You missed the obvious answer, which is you get to live in a place like Jackson home. That is true. Well, that was all, that was my main thing was when we, so back to the bank, we were living in, my wife and I were living in New York in 2016. And in February, we found out we were pregnant with my first daughter, Kayla. And, and it was kind of a make or break where, okay, well, I'm from San Francisco, she's from LA, we both went to school in LA, we thought we were going to move back to LA. So it was, okay, well, what job can I get in LA yeah there wasn't a ton of finance especially in commodities you know commodities is very very localized to you know New York Chicago Houston and London and it was kind of a situation where we either have to live in one of those three before or I could try to use my own and we could live in California. And as luck would have it, we got to California and turned around and came back to Wyoming.

So it kind of worked out that way. But it was definitely something where I decided that I was going to give it three years to make it work. And if it didn't work, then I probably would have been back in either Houston, London, or New York. And do you ever see if some pod shop or some energy group came calling and said, hey, we want to give you this huge check to come trade back inside the group and you can do it remote? There's a price for everything. And my answer is always, I had an offer to go to Houston last year, but it would have been hos houston to be part of a larger team um but the it's i i want autonomy i've ran my own company now for five you know five and a half years um i've built

a good business yeah that's a tough drug dick if you want me to come there like i'll come build a business but i want to be my own pot and i want to be able to bring and hire people and grow it and i'm not leaving Wyoming. Right. Those are my terms. Usually at that point, they say, like, OK, let's keep in touch. So what are your thoughts? I don't know how deep you are in that world, but on some of those pod shops in particular and energy, right?

There's been a few energy groups that have a trader in different electricity markets or different one oil trader, one gas trader. What are your thoughts on how those guys run a book and what they're doing? I think what they do is great. I think it's, you know, it's kind of the, it's just the multi-strap model. And you're seeing that more. So there's not a lot of, you know, 20, like $5 billion commodity funds these days. And the reason behind that is it just makes more sense to go to these pots and go to these shops. Now, if I, now, you know, if we lived in Houston or we lived in New York, I don't think I'd be, I probably would have ended up jumping to one of those,

but the autonomy of Jackson really made it a non-starter for us. You know, and I think that's why a lot of these pod shops are ones that are now looking at external capital. And I think it's because they realize that hiring a guy like me, who it's easier to almost in cheaper for them to just give Kaler capital money than to try to hire myself and my team away and give me the amount of capital that I would require. And the amount of, you know, I would, I would say the initial sign on as well. They're like, well, we'd rather just give you money instead so that's been where a lot of our interest in in the last six to nine months have come from is some more i didn't even know have external capital capabilities are calling us up asking if if you know more of a lease lease your performance first buy it outright

yeah and especially especially when i say like you know when they hear my request of i'm not leaving wyoming and uh and and i want my own pot and autonomy and then they go yeah um and given there's all those guys and right there what are they paying some of those guys to come out of those banks? Like millions? It just depends. Like it's interesting because, you know, I've talked to a lot of my friends about this and especially that we're still on wall street and they're not really paying them huge sign on

bonuses. They're just buying out their existing equity that they have. So the way like our bank pay was, was we would get two thirds, two year deferred and then one third, three year deferred. So if you have like three good years of JP Morgan, Goldman Sachs, whatever, you're going to end up with a very large chunk of equity that's kind of rolling off over the next two to three years. So most of these

would end up in a situation where you have to make them hold and just walk away from that because it's just too much. So a lot of the large numbers you see when it says you know millennium pays this guy 20 million dollars it's like yeah but he had 18 coming to him yeah i had 18 coming to him over three years of golden sacks so they at least had to make them and uh um but still they're still paying it right they're not getting it from gold and what's interesting is i had a call i won name names, but I've had calls with those people before. And I've told them, I said, listen, we're growing fast. You know, like Hayley Capital's at 50. If we get to 200, you know, the number for me to buy my team becomes exponential at that point.

And their response was we would rather spend 10 times as much money to buy someone who's running a 200 or 250 dollar fund than an emerging manager like yourself sub 100 i found that fascinating they have so much money that they'd rather wait till you've made it than than right yeah yeah they probably know what they're doing there like it's not just we have no plan to close kaylor capital or we're still fundraising life's good Life's good. Life's good. And then I think we've talked about it before and some other, but I'll just, again,

for some of the younger listeners out there, like how hard is it to get those seats, right? And to be successful in them at the banks, at these pod shops. I mean, one precludes the other, right? Yeah, yeah. I mean, really hard these days because- Yeah, there's less of them.

There's less of them and they're less risk-oriented. Most of the banks these days think of their commodities traders as almost they're more market makers. They want to satisfy their clients because they make way more money on the financing and hedging operations and investment banking than they do on the commodity side and actually trading around it. So there's still some very large risk takers out there. Obviously, the largest is VTOL.

And what's funny is when I left J.P. Morgan, I was in a final round interview with VTOL in Houston. And one of my good friends was the other one, and he got hired. And now like we joke about it, we still talk a lot, like five years down the road. And I'm like, man, I can't imagine my life if I got that over you and you, you know, versus this. And I'm like, I'm so thankful you were better qualified for this and, and, and, and did it just from a lifestyle perspective with, with Houston and time and kids and, and everything. So, you know, certain things kind of end up being a blessing in disguise, but those seats are very, are very difficult. And, and, uh,

And is it the right schools, the right connections, facing the interview, all of the above? I don't even know what J.P. Morgan is now, but when I started, um, you know, I got hired out of grad school and they were only hiring MBA interns from, I think it was like four, it was like NYU, Harvard, MIT, and I forget the other one. And then even their undergrad was even more stringent of like five or six. And I don't know where they've kind of gone from there. And they had a whole piece where two years after 2008, they made a rule where they'll only hire if you were an intern. So you have to intern and then you transition. So, you know, and that was when I, when I came out, you know, and I did my internship,

I interned on the natural gas desk and my boss at the time, Adam Soylemes was like, listen, you know, I want, I want to hire you, but I don't need you in a year. I need you to start now. He's like, I can't like, you know, you know the typical the typical you know mba at that time was you go to one year you go intern you get hired and then you you kind of piss off and screw around for your entire second year of mba knowing that you have a great job you know right and he and he was like no i need you now so it kind of changed my second year mba a little bit um but i wouldn't change anything you know i got i got such great exposure to to different opportunities and you know and do you think whether you're in those seats or whether you're where you are now like is this it's energy

trading the hardest trading there is i don't know i've never had much exposure to the other ones i can't say that i would say you know i would say no i think i think there's probably other ones out there that carry more nuance and more um you know but i think i'll rephrase the most competitive there is right because you have these huge shops feet tall all the banks like if you're a rates trader yeah true there's only so many like what makes commodity trading a little bit more manageable is the amount of money needed to start it we're a 50 million dollar you know essentially oil fund you know oil program how many 50 million dollar credit funds do you find out there how many 50 million dollar you know rates like there's you just don't have those outside of some of these

large you know the blue press that have 10, 15 billion dollars of credit allocation. So it's it's a smaller sandbox and you get larger because you need more money for them. So it's I don't want to say it's it's the most difficult, but I would say it's probably one of the more accessible. And if I wasn't, I don't think I would have been able to go the CTA route. Switch tax again here. So let's talk about oil in general, energy sector in general. We touched on a little bit that five-year range has been basically flat, but a lot of volatility in there. So wherever you want to start, but you want to start what we saw in 23, what kind of stood out to you the year gone by? Yeah, I think what's interesting to me has been the knock-on effects of Russia-Ukraine, even from 22. It created such a distillate shortage

globally that it was something that we were really focused on and chewing through over that entire year. And 23 saw similar where distillate was kind of in the forefront. And I think that's why, you know, if you look at some of the high returns that you've seen in it, I think that's why a lot of the natural gas guys had large natural gas funds did really well in 22 and 23. It was kind of a combo of a little bit of everything. Where we are currently, I think this year is really fascinating. OPEC still has a ton of spare capacity, but the fundamentals right now are very strong.

Obviously, everything we're seeing in the Red Sea is bullish. Realistically, if OPEC didn't have the cuts they currently have on and we were seeing what we're seeing right now, we'd probably be around $100 oil already. But because of the headwinds and that looming effect that that's still there, I think they will put a cap on it. If we rally, I'd probably say we're at around $80 Brent oil here. I think anywhere close to $85, $90, I think you'll see Saudi talk about releasing some of the cuts that they had to try to meet it. So I do think that everything is looking pretty bullish, but the headwinds of just someone can turn spigots on

pretty, pretty quickly is going to put a cap on it. I'm not saying we can't get through there, but I just don't think it's a demand story that's going to back it to get to, you know, the high above 100 this year. So I, I sadly think that we probably will be fairly, we will be fairly kind of range bound for oil, at least in the short term. Now, gasoline and distillate are still fairly interesting. But the fact that now we got past the cold, I don't see any cold on the horizon, really, it actually seems like winter is kind of warming up even here. So I'm curious if distillate if we're just not going to have the heating degree days and demand to keep is kind of warming up even here um so i'm curious if distillate if we're just not going to have the um heating degree days and demand to keep it kind of going um and explain

distillate real quick for those who don't know diesel fuel and also heating oil so it's kind of a combo that you can use to refer to both of them and um inject fuel for those three and so what you see is you know in the winter obviously a lot of the East Coast still heats their home with heating oil. And then also is diesel demand as well. So you get a lot of demand from trucking and from kind of global macro upticks. And when you have really warm winters like this, it just allows you to build up stockpiles pretty quickly. And so is that heavily tied in with refining? Absolutely. Yeah. Yeah, exactly. So with Russia, Ukraine, you said distillates spiked. That was because the refined product wasn't coming out of there. Exactly. Exactly. And then in the last kind of couple of weeks, what we've seen is because of the cold weather that we had in the Gulf Coast and really all over the United States, I think they lost about 15% of the refining capacity in the Gulf Coast.

So distillate and gasoline have been very strong over the last couple of weeks. Something that we've caught pretty well this month. I think this month we're up just a little over 2%. But it's been something that we've done very well on being long on those. And so as oil trader, but your portfolio is more than just oil so you trade all the distillate to walk through all the products that you could have is the easiest way to think about it yeah for us um so the two primary ones are gasoline and distillate um so we trade you know wti brent gasoline and heating oil and kind of every combo in there. And a gasoline to kind of bring

it back up, a gasoline crack and a distillate crack is the amount of money you make by refining a product. So, you know, right now distillate cracks are around $30, which means that if you took a barrel of oil and say, for some reason, you had a magic oil refinery that only made a hundred percent distillate, you'd make $30 by putting it through there. It's kind of like your margin on refining for lack of better words. And what's the overall, right? I'm harking back to California. It was like, we're not allowing any new,

or the California Refiners Association wrote that letter of like, it takes us 10 years and a billion dollars to plan out a refinery. And you're saying you're not gonna have gas cars in 10 years. Like billion dollars to plan out a refinery. And you're saying you're not going to have gas cars in 10 years. Like why would we build a new refinery and increase refining capacity? California also kicks themselves in the junk even more by,

they have a special kind of gasoline called Carbob, which is very expensive and difficult to make. So that's why another reason why gasoline in California is expensive. And what is it? Yeah, go ahead. I was just going to say what, given that outside of California, another reason why gasoline in California is expensive. Yeah, go ahead. I was just going to say, given that outside of California, like the whole refining capacity,

what does it look like? In the United States, we have different pad regions is how we kind of break it down. I should know that acronym. I definitely do, but it's definitely lost me at this point. Yeah. But, you know, pad one is the Northeast.

Pad two is MidCon, mostly Chicago. Pad three is the Gulf Coast. And then pad four is more kind of Denver area in that whole kind of space. And then pad five is California. And what's unique about California is there's really no oil. You know, it's really difficult to get oil over there. There's no pipelines that kind of flow east to west. So actually they end up either importing a lot of their oil or their gasoline that they need from Asia. So it's kind of a unique island that pad five is usually its

own kind of microcosm, whereas pads one, two, and three really drive the oil, the product markets. And so pad excluding pad five, what does the refining look like in the rest of it? Are we building refining capacity or is there this overhang of like, we're not going to need it in 50 years. We're all going electric. And that's where, you know, that's what everyone tracks is every, you know, refineries are really complex and you have to plan these outages like months in advance. And so most of the refineries will come out and say, okay, hey, we're going to go down for six weeks to, you know, clean this or redo this or fix this.

And there's engineers, there's people you got to plan for, you know, you got to reconfigure your refinery to not run in that specific unit. So what we've tracked very closely is refinery turnarounds. And we track that on a unit level basis. So we look at each refinery unit, what goes into that refinery unit, and then what would come out of that. So how much gas. What's a unit? Like the whole refinery? Yeah, so a refinery is made up of 10 or 12 different units. And each one really does a different thing, whether it's create more gasoline,

whether it's kind of get to fuel oil, whether it's to blend it, you know, they create each one. And they can't easily switch units back and forth. No, they're very complex and very large and very, and you know, it's a flow chart. And so if one breaks, you can't just go around it. You can at times. Right, or if, hey, jet fuel is way more profitable, let's switch over this. Yeah.

Yeah. So they can do that to a certain extent. And that's exactly, there's, you know, petroleum engineering, that's their entire job is trying to optimize the refinery for returns. So they'll, you know, if for some reason distillate cracks went to $60 and gasoline was $30, there's a wiggle room where you can change it a little bit and produce more distillate versus gasoline by putting in a different type of crude. So each crude, when you put in into a refiner actually produces a different, you know, kind of distribution of products.

So if you took one, you know, one oil out of one barrel of oil out of Midland and put it in an oil refinery, you'd get X, Y, Z. Whereas you take one heavy sour of Midland and put it in an oil refinery, you'd get XYZ. Whereas if you take one heavy sour out of Mexico and put it through an oil refinery, it'd be a very different breakdown. So there's all this breakdown and there's entire teams dedicated to buying the right amount of oil

to try to get that blend right. So you're in the sweet spot where you can kind're kind of maximizing your profit and let's talk greenflation where you stand on it right we're touching on a little bit here but is this move towards electric is this move towards everything's got to be green more wind more solar more everything short-term bullish for energies long-term bullish for i think it's very Short-term bullish for energies, long-term bullish for oil? I think it's very long-term bullish for energy. And I think what you said is a great lead-in that why would I build an oil refinery that takes 10 years to recover the costs when you're telling

us we're not going to need oil in 10 years? And you're seeing that across the whole energy space, whether it's even oil exploration in Texas, the Gulf Coast, wherever you're seeing this, their demand, oil demand is still increasing and it likely will increase for the next decade, just global demand that is. Yet future investment in supply is declining. And there's going to be a point where demand passes supply on the yearly basis, and that's going to spike oil very materially high. And it's going to spike oil very materially high and it's going to be a situation where they're not going to be able to turn it on because typically you know some people always say the best the best cure for high prices is high price yeah and and you know

like when does at 250 oil all of a sudden people are exploring everywhere trying to find oil but if you still have the belief that the government is either A, going to tax it out or B, just legislate it out where you're not allowed to drill or take it away, why would you be involved and why would you put money to work with something that you're not sure is going to be around in 10 years? So I think you're in the sweet spot where this year, not so much, but I think probably by next summer, you know, I think demand will have caught up to kind of the overhang. I think OPEC will have released their supply. And I think that'll be a start to be the turning point where demand will outpace the future supply growth that we've seen in the last two years. And that supply growth was still all COVID hangover? No, supply is going pretty good here in the United States. I forget. We outgrew last year

pretty substantially, you know, mostly in Midland, but, you know, some are decoded, kind of a little bit of all over, but the growth was still pretty strong. They're just getting more efficient and the efficiency factors are getting really good at it. But there's a point where it's just not going to be there anymore. And even if you get more efficient, you're still not going to be able to kind of squeeze the barrel out of the ground even more without massive infrastructure investment. And at $70 oils, and the fact that your recovery time is not a 10, 15 year PE project, it's now you're trying to squeeze all your returns into five years. On your DCF analysis, analysis it's looking like wow we need xyz 90 oil to break even because we have to get all our money out of it in five years before they you know electric vehicles take over and the demand go to kind of

craters so it's uh what do you know off the top of your head what those numbers look like like shale was is what's its cost of production like oh i think the last i saw was low 60s versus saudis like 10 or something saudis is irrelevant yeah five yeah yeah hey here's some oil pick it up yeah there's oil um and then how do you square all that with like the as we talked about before saudis could just turn on the spigot whenever they want. But eventually that won't even be enough to outstrip demand, you're saying. Yeah. And also, the big thing you're thinking about with all these is every well, if you're not either drilling more, is really declining. The decline in rates on shale is massive, meaning I think it was something like it produces 90% of the total oil over the first 18 months.

And then it's just a steep decline curve out there, which is why they were great because everyone wanted to invest in them because you're getting so much money. Get it back right away. You get your money out fast, but then it just decreases so fast. Now they've gotten better at kind of smoothing that and getting the long terms out there. But it's still a situation where if you want to get longterm investment into the oil space, I think it's really hard. From an infrastructure standpoint. From an infrastructure, from a cap raise. I mean, even at where we're at now, with rates where they are, getting funding for these longer-term oil projects is just getting

really expensive. Yeah. And then also at the like social pressure right like if you're harvard or some of these schools you mentioned like hey we're going to take the endowment money and invest in oil exploration people like what you crazy yeah you're not allowed to do that with our with our school's mind yeah yeah exactly you're seeing that a lot where the fossil fuels are kind of out but it's a it's it's a weird scenario because you're gonna need it right but eventually that in theory eventually that curve switches right yeah that curve switches where demand is below and supply you know demand decreases and will we push oil lower yes you know will gasoline be cheap sure and there'll be some byproducts that come out of it um but you know

you've seen that with natural gas like you know you know, natural gas has been from $15 down to two to a byproduct. And then they've had it stay in the sun and, you know, natural gas hedge funds are thriving. And we've basically been in a kind of a short term range for the last decade and they've done very well. So it's a it's really a unique scenario. But do you think like 50 years out whatever that number is some long-term out right and everyone's wildest dreams come true and we're solar and wind and everything all electric vehicles and yeah what do you like what happens to oil but there's still oil on the ground still gonna need oil you're still gonna need it it's one of you know plastics chemicals

um you know there's still a lot of things that come out of another refinery that are needed. Now will gasoline be a bride product? Maybe. And maybe they'll find a way to kind of use the ones that they need and get rid of the other ones. But if there's one thing I know, I mean, if you look at a lithium mine and then you look at another refinery, which one looks worse for the environment? Yeah. And then you look at our power grid and you can do it on it'll take anyone 10 seconds to google it and figure out how much grid we electricity we would need to you know actually power every car and get it going and it's the grid just infrastructure just isn't there now

20 years from now maybe with the amount of investment that they could do but it's the grid, just infrastructure isn't there now, 20 years from now, maybe with the amount of investment that they could do, but it's just not there. And that's where I just don't see, you know, globally and becoming an issue where it's going to be something along those lines. Right. And it's not for your 10 year plan personally and for Kaler Capital, like there's still a trade here for at least 10, 20, 30 years. And even then, I think it's a situation where, you know, I think if, say we get to that point 20 years from now, I still think oil is going to be interesting. It's just a function of what product will we be trading? Would it be something where maybe we add plastics in the mix and now we're trading plastics because it's the sexy part of the only part that they want

propane, you know, there's all these different kinds of aspects that you can, you can be a part of and only part that they want propane you know there's all these different kind of aspects that you can you can be a part of and get out so i mean we're trading a very small sliver of the oil barrel um and we could expand that pretty substantially if we needed to or wanted to you could shift to electricity really go crazy always power trades yes all right what else what else you got on that regard anything no i think that that's i think we solved the world we solved the world's problems right hey we're gonna need the oil we're gonna need plastic um i mean i do think this is a very interesting year because of the headwind of opec and also the fact that it's an election year.

The last thing the Biden administration wants is Donald Trump getting on a podium and harping on him about seven dollar gasoline. So they're going to do everything in their power to try to keep this under wraps in the Red Sea. So, I mean, I I'm a long term bull, but I'm kind of short-term agnostic, I'd say. And what, speaking of Biden, all the SPR release, all that mumbo-jumbo, was that politics? Was that needed? It's always politics. Everything about the SPR is politics. Have they refilled it?

What's the status of it? I think they started to. Yeah, I think they're still in the process of doing it. It seems like you could trade around that, no? Like they kind of telegraph it, then they say where they want to buy it, but they probably don't. It doesn't move the needle substantially on the global oil, you know, overall on it. So, you know, when he did it the first time, it did a little bit. But in the long run, it just it doesn't have much effect and then russia

ukraine is still going on which is going on but every wait a lot of us forget but i guess are you saying it was a non-event like the oil kept coming yeah china and india are basically buying almost 100 of russian oil and they basically said we don't care and they get it for cheap and it's boosting their economies and they're seeing hey we get oil at a 40% discount or 30, whatever it is that they're buying that. So they just don't care. And, you know, Iran's out here doing their stuff in the Red Sea. And yes, we have sanctions on them, but they're still producing almost their max oil. So the sanctions aren't really helping either.

And again, that's something where, you know, India and China are just saying, yeah, we'll buy it. It's good. Send it over. Yeah. And what does that look like like there's the sanctions and those are members of un supposedly but they can there's ways they skirt it all yeah i'm not sure the logistics of it but i think it's kind of basically say no we're not gonna no we're buying it from uh glencore it's all good yeah uh awesome well i'm sorry to miss you down miami but we saw you in wyoming but have fun and uh good luck on the panel you'll do great and we'll talk to you soon thanks all right okay that's it for the pod thanks to brent thanks to rcm for their support thanks to jeff berger for producing we'll be back next week talking logistics with the ceo of trucking

company roadrunner so go ahead and subscribe so you get it right when it drops peace you've been listening to the derivative links from this episode will be in the episode description of this channel follow us on twitter at rcm alts and visit our website to read our blog or subscribe to our newsletter at RCMAlts.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments. We'd love to hear from you. 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.