The Derivative - Crude Oil goes Negative… What^%$#

Episode Date: April 21, 2020

Yesterday was a historic day for crude……and the trend continues today. With crude oil going negative for the first time ever. That’s right – May Crude Oil futures went to -$37/barrel. Essentially saying you would get paid $37 per barrel to own  this Oil. This has left seasoned, new, and non-futures traders scratching their heads wondering how something like this could even happen. We turned to two of the top energy guys we know – Emil van Essen of Emil van Essen, LLC and Brent Belote of Cayler Capital, LLC to get some expert opinions on how and why something like this has happened, and what the future looks like after this. In today’s episode we’re covering oil storage, whether anyone’s actually out there getting paid to own oil, very large tankers, whether brokers can even process negative prices, Russia vs Saudi Arabia vs US Shale, demand for oil, and will we ever get back to $100/barrel? Follow Brent Belote on LinkedIn and Twitter and check out Cayler Capital’s website & fund tear sheet; and follow Emil van Essen on Twitter and LinkedIn And last but not least, don't forget to subscribe to The Derivative, and follow us on Twitter, 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. It's insane. And there's so many scenarios that I could foresee that are so almost unheard of in both directions that I don't think you can underestimate the volatility that could occur for the rest of the year, maybe even into next year.

All right, welcome back to The Derivative. This is your host, Jeff Malley. We did a bit of an emergency pod recording today. Got some of the best energy guys we know on the line here on the Zoom to get into crude prices going negative today. Recording from my upstairs second room in my house due to coronavirus. And we've got Emil Van Essen from his house down in Tennessee and Brent Belote, who's out in Oregon. For some reason, he can give us a little input into that. But thanks for coming, guys. And thanks for being on the pod. Thanks, Robert.

Yeah, thank you. So a rather historic day today with May crude futures went into negative territory and then massively into negative territory. So, Emil, maybe we'll start with you and just get your off the cuff thoughts on what happened, what that was like. Then we can dig in a little more later. Well, I think most of the players were out on Friday. So you had a lot of physical guys left in the market and guys who are playing that game, the physical market game. The exchange, I heard from some physical guys that there was a notice came out that you

had to prove you had storage to stay long in the market. Typically, a lot of physical guys will do an EFP in exchange for physical. You don't actually have to have the storage on hand to hold the long position, but I think they were forced out. And once that started, I think, you know, with over 100,000 open interest coming into today, as some players, physical players had to exit, it just started a stampede. And of course, normally that would get arbed out. But without any storage and cushioning, the arb just wasn't really there. So kind of the inverse of a short squeeze? Yeah, long squeeze. Exactly.

Brent, what are your first thoughts on the day's action? Emil's thoughts are pretty much a mirror of mine, where that it was the physical guys that really came in and hammered the market and kind of got caught out. And there was CSO expiry for calendar spread options as well. So, yes, this was really the last day where any financial players could have anything to do with the market. And I think they got kind of pinched on that one. Volume had obviously already rolled to the next contract in June and July. Today was obviously a low volume day, but still to see negative screen prices was a pretty big shock for

me. Yeah. First time in history. And so unpack that a little, what you guys mean by physical traders. So we're talking like the BPs and Exxons of the world or what? Yeah, the guys who need it for refiners and also a lot of the trade shops as well. VTOL, Trafigura, Glencore, guys that really have actual barrels to move and need them around the world. Emil, what were you saying? No, I was just saying the same thing. Anybody who's in the business of handling physical barrels typically has storage or

that kind of thing. They can play it to the last minute. Generally, financial funds, things like that, who manage futures are going to be out, would have been out Friday. We were out Friday. And so that's when was first notice days like in three more days? Yeah, it's, well, it expires tomorrow. The contract expires tomorrow. So crude is kind of unique in that the notice happens after the last trading day.

You definitely do not want to be in unless you're a physical player in the last day or two. In a typical situation like this, the physical players would, if there was, as you were saying, the arbitrage, they would keep it on a tanker, put it in their own storage. So are we saying like all of those global storage pieces are full what's what's unique about cushing is that it's so landlocked and you can't get to the gulf coast but pretty much all of the arbitrage that'll happen is that is buying this future and just selling the next month or farther out um if you think you could have bought today at minus 40 and sold next month at 21 so now that spread would have pretty much made up

probably for four years of carrying tank costs, maybe a lot more in that regard. Yeah. And just to add to that, it's kind of an indication of how tight things are in Cushing. I understand there's about 7 million barrels of tankage coming off of maintenance in the next week or so. But clearly there was not any tankage available for arbitrage or somebody would have done it. I mean, there was an opportunity there. It just shows that all the tankage is booked and done for for the year. And well, at least for me me what is there a different story what's that amount of tankage look like how many millions of barrels are in

Cushing yeah Cushing has the theoretical 90 million barrels is tank tops they can get to about 81 or 82 percent of that so count at the low 70s and like there's like they're trying to take anything that's in maintenance or whatever they're going to try to get it out of maintenance now and you know get it onto the market so I would say mid 70s is a good number of 70 million barrels yeah like 75 million barrels and what do we that's available what were we producing a day roughly in the u.s well we're more we're not we're producing we're building the cushioning inventories are building at a pace of around 700 to 800 000 a day right now until no more so what. So what happens to that crew when they can't take it anymore?

Are they going to start burning it or the negative prices are implying they're paying people to take it away? Or was this more of just a microstructure thing? Like in the actual real world, are people paying other people to take barrels off their hands? There is a real problem right now, logistically. As storage gets full and

refineries are cutting runs and maybe even shutting down, you get a real logistical problem with like, you may not be able to put oil on a pipeline if there's no storage in between and the refinery is not taking it. So there could be a real logistical problem if there's no storage in between and the refinery is not taking it. So there could be a real logistical problem if there's no storage. And we're getting to the point where even if there is storage, people have booked it and they intend to use it and you can't find new storage. So pipeline companies are saying you can't put oil on our pipeline unless you can prove that you got a place to put it afterwards like when it when it comes out of the pipeline and so there's a lot of logistical problems that are building up

and this thing could be a real mess in the next month that kind of goes i wrote an article last week and it was talking about how a lot of these production cuts are already happening in the physical world because there's nowhere to put the oil. So why wouldn't OPEC and the rest of the world come out and tout these cuts that they've done and how great they are to support the oil price when in reality, half of these countries and even companies are being forced to cut them already just based off of price. So it was kind of a chicken and egg, like they've already cut a lot. They're already being forced to cut a lot.

They may as well promote it as them cutting. Right. So the whole Saudi thing was more of a PR move, you're saying, OPEC? Yeah, absolutely. They were already running out of floating stores. They chartered pretty much everything on the market in January Fed when things started. And they're pumping max they can. Everything's going into storage. And I think they were already getting forced to slow down just because they're running out of places to sell it.

Yeah, it's funny. I was just going to say it's funny because there's an armada of VLCCs coming from Saudi Arabia right now. I think close to 20 VLCCs heading to the Gulf Coast. And one of the problems is, you know, the Saudis max production out for April, April deliveries, and they're sending all this crude. And I think a lot of people are backing out of the deals right now. And so the Saudis are saying, well, maybe we'll cut production actually for late April because they just I think there's no place to boil so it's kind of it's kind of an interesting predicament and and Russia cutting two and a half

million barrels I have a lot of doubts I mean they have a lot of problems in Russia doing shut-ins and I just don't think that they're going to accomplish that or even intend to accomplish it. It's just lip service. And by the way, I got to add, Brent, I heard you're shooting the lights out in your fund recently. So congratulations on that. Thanks, man. Yeah, having a great March and having a good April so far. So hopefully we can keep it going.

Past performance is not necessarily indicative but we'll put the uh terror sheet out on the show notes here for everybody but so a few little definition pieces there so blccs what is that very large crude carrier vlcc got it the ones that don't fit in the Panama Canal? Right. There are 2 million barrels, and then you have ultra-large crew carrier, which is 3 million barrels, and then the smaller carriers, which are a million barrels. And right now, the big issue is how many of these carriers are going to be going into floating storage. The Saudis were smart enough to book up, fix a lot of VLCCs at the beginning of this. So they made it basically really difficult for anybody else to do shipping because they quadrupled the shipping rates for anybody wanting to fix a tanker. They got pretty lucky in that trade since they did the Saudi, Russiaussia opec fallout that whole next week they booked every every vltc that you said so they weren't even thinking covid or corona they just

got lucky with the russian saudi spat and unpack that a minute for me so the saudis are pumping oil like crazy they've run out of places to put it on their physical land so they go and book these carriers that are owned by whomever, shipping companies, MLPs and whatnot. And they're saying- Well, no, I, yeah, I wanna like say, I actually think they were way ahead of the curve because what they did is when they had this dispute

with Russia is they sent, is they took a lot of their storage and put it on BLCCs. put it on VLCCs. They booked all the VLCCs. They jacked up the VLCC day rates. They got all their storage and essentially cleared room for future storage. By the way, everybody says this was a big feud between Russia and Saudi. I think this was the time they stopped feuding. They agreed

on what they should do, which was, hey, we're the low-cost producers. Why are we letting the high-cost producers run us out of town? We should take a stand. And they couldn't exactly do it in such an obvious way. So they pretended it was a feud and they're killing the shale industry, at least temporarily. But what's Russia's cost of production compared with Saudi's? Well, Saudi's obviously got the cheapest cost of production, but Russia's cash costs are pretty low too. So they can compete, I I think with with anybody and so you're saying they were kind of colluding behind the scenes to say hey let's fight the shale Wars well you either have to absorb the you either have to as OPEC

Plus absorb the cuts you know okay demand is down we absorb it or we say no we're gonna keep producing because we're the low-cost producer and let everybody else uh see see how well you can do with ten dollar oil and now we're finding out so essentially when they cut when they force um all the world's production in this situation there's going to end up being a lot of shut-ins, and some of those shut-ins won't come back, and theirs will. I don't think Russia can afford to do a lot of shut-ins, so I think they're going to keep producing, probably only reduce minimally. I don't know, Brent, if you agree with that or not.

Yeah, I do, and I think you're bringing up a great point with Russia and Saudi. Just getting tired of the U.S. growing at a million. You know, when they look when all these companies come out and they tout their production up 30 percent year on year and what their growth is going to be. Meanwhile, OPEC is still in the previous cut from what they did and they never got that market share back. So when you see stuff like that, it kind of you kind of saw some dislocation about six to nine months ago where the saudis were getting a little fed up of the us continuing to grow continuing to drill continuing to dive into it and i absolutely think you're right they just decided enough's enough and what's interesting is i think as you start to shut in production and have it put it away it's a lot of times difficult to bring it back in a timely manner some of of them are pressurized, some of them are more expensive, the wells are more expensive to bring back.

So I think this could end up in a scenario once you have COVID demand start to rebound, hopefully here in the next month or two. What happens is you'll see almost a snapback where OPEC will be in their production, will be demanding way more. And I think you'll see some big draws towards the back half of the year. What define for the listeners, viewers here, shut-ins? Just either capping a well or closing, you know, kind of slowing it down. Cutting production. Yeah, just basically cutting out a well. Yeah, I mean, shutting down the well so it doesn't produce. Brent, I think you hit the nail on the head that what I could see happening here is storage fills, logistics start getting to

be a problem. People are forced to shut in at any cost because otherwise the oil is going to spill out onto the ground if refineries are cutting you may actually see more shut-ins than than you need and so what then happens is all of a sudden you're not producing as much oil and maybe things relax a little bit demand comes up and you could see storage draining very quickly and maybe too quickly and prices could rebound back dramatically after that. Yeah, I think that that's absolutely correct. I think this could be a fairly quick snapback. And I even think today's move was bearish or it was, I'm sorry, it was really bullish, believe it or not, like Emil said, because when you go to minus $60 on that front spread right

now between May and June, any single person is going to book as much storage as they can. So I had Cushing filling in my model early May. I think it could fill even faster than that as soon as they can start taking delivery of the barrels. So this could even be a almost speed up and shorten the time that it would take where we might've had four to five weeks of pain. Now it might just be two weeks of really, really bearish builds in Cushing and even the Gulf Coast. And then from

there, it could just be off the races. And explain that dynamic a little bit. So I guess the two types of trade, when oil's in contango and oil's in backwardation. So either you want to sell it as quickly as possible or stick it in storage and sell it later, basically, depending on the curve. Yeah, exactly. Exactly. And there's a lot of, this has been very profitable for call it three or four months now. So this wouldn't, people wouldn't have been, it's almost impossible to find tank storage in Cushing up until, you know, probably six months ago. It was very, very expensive. Why doesn't Bezos or someone just come out and say, hey, I'm going to spend $2 billion and build all this storage? Years of work or what's that look like? Yeah. At a certain point, they probably

would. It probably makes sense. You can probably lock in a pretty nice profit for it, but just by hedging on day one, I think just the ability to build permits, et cetera, is already there. And for the most part, Cushing is becoming a byproduct within a pass through anyways. It's much more of the Gulf Coast. It's becoming the hub of oil these days in the US.

And the storage won't help anyway, because by the time they would construct storage, you wouldn't need it anymore. You'd be in the down phase of the problem. So right now, I mean, yeah, true. But they built a lot of storage in the last three years. So I think we built at least 100, 150 million barrels of storage in the last few years. So that's definitely helping the situation. There's some countries that are in much worse shape, where they basically have production

going on a pipeline, going to the coast, loading on ships. And if there's no ships and no storage at the end point, you just have to shut in the well. That's it. And what, so they'll shut it in, but don't they burn it in natural gas sometimes if they can't it's cheaper to jam in the methane got her you think it's the wood they're never gonna burn the oil I think you can do that I think that's an environmental problem but they flared nag gas I think flaring is gonna come down quite a bit in the next couple of months if they start shutting in wells then they're gonna there's gonna be less flaring is going to come down quite a bit in the next couple of months. If they start shutting in wells, then there's going to be less flaring. Actually, one of the results of all this could be a shortage of nat gas in 2021.

So if they shut in a lot of wells after the Marcellus region has already been cutting back, and demand for nat gas is increasing, not decreasing, you could actually see a shortage of nat gas for next winter. What would you say to people who haven't seen it yet on Twitter, just because most people probably haven't read the headline yet, but people might be thinking, oh, this is global warming, and fossil fuels lost oils negative wind solar everyone won what's your thoughts on that it has nothing to do with one another

my understanding is that the uh uh the the carbon footprint has gone down dramatically during the covid so yeah maybe this is the solution to the problem maybe the solution isn't what people were looking for but but certainly the carbon footprint has gone down. I don't think, you know, I think in the long run, oil is still the transportation fuel and will continue to be for a long time. So I don't think we're going to get around that. Electric planes, right? Yeah, I wouldn't trust that. Yeah. It's a lot of, really heavy.

We've actually seen distillate demand still continue to be strong kind of throughout the whole process just from the amount of trucking that's going on from ships and, I'm sorry, from shipping, not from ships, from shipping in the US. And that's just trucks getting all the Amazon goods to where it needs to be? I think so, yeah.

It's been pretty wild, yeah. Gasoline, at the time when it happened, gasoline cracks dropped by $15, and heating oil cracks and distillate cracks were pretty much unchanged for most of Corona scare. And so who's the big winners here like southwest airlines or someone but probably people like that don't have the money to hedge right now but it seems like people could be locking in once in a lifetime oil prices for their for their business for the foreseeable future right yeah the problem is a they have no business the airlines and B they probably already hedge so they're already long jet fuel and they can't even use the hedges because they're not

flying so it's really a bad situation for the airlines the real winners here are anyone who has the ability to store oil so that's the real winners there's some there's some very nice tanker storage plays out there yeah like international seaways euro nav even product tankers um there's you know there's not enough space for product they're storing it on tankers and tankers uh product tankers are going into port not being able to unload their their cargo so yeah tanker stocks are really looking to make a lot of money here and then all the floating storage and so what does that look like on a price per barrel like what what was storage in normal time say two years ago in Cushing on a ship and

what is it today do you think I mean for Cushing I can ship? And what is it today, do you think? I mean, for Cushing, I can tell you, five years ago, it was probably 15 to 20 cents between the spread. So 15 to 20 cents a month per barrel. And I think I saw one trade a couple months ago that was close to 70 cents. So you've seen them really spike up. And that's that trade. So if the contango it just, you've seen them really, really spike up. And that's, that's that trade.

So if the contango is more than the storage per month, you're winning on that trade. Yep. And then the incremental storage is a floating storage. So like we said, storage rates have gone for VLCCs to 150 to 200,000 a day. So let's say at 200,000 a day, that's $6 million a month for 2 million barrels. So that's $3 a month. So you need a pretty big contango to pay for that.

But if it's at 60, you can get a lot of room there, right? Yeah. Or if you can buy distressed barrels in Midland or different places and pipe them to a port and put them on a, on a BLCC, uh, and you know, an old BLCC and maybe get a bit of a better rate for floating storage. Uh, that that's where the money is buying a distressed barrels, let's say at a discount. All right. Is there a website for that? Yeah. Bloomberg, I guess. Yeah. let's say at a discount all right is there a website for that yeah bloomberg i guess yeah that's call around business of like hey i've i've got somewhere to put it and that's like what the glen cores of the world or whatever are operating in that space

likely yeah sure i mean they're gonna be they're gonna be out there seeking barrels from balkan or midland or or have you, seeing who has the biggest discounts. You know, they might be taking it to a location, you know, for storage or maybe floating storage. But I think all those opportunities are starting to run out. So I think the options are starting to get small. And also, I think a lot of the physical guys are having trouble just doing their business. And so sometimes finessing an arb like that is sort of something that gets forgotten in these difficult times. And they might have bigger issues of they're sitting on already a bunch of barrels that they can't offload or something of that nature. Yeah. And we just had a bankruptcy or an impending fraud in the tanker market just, I think, this weekend in Singapore.

So things like that can cause a big disruption. So let's take it back. If I'm just Joe Schmo slinging around crude oil futures in my interactive brokers account or whatnot, like this is kind of like the people that got taken to the cleaner in the VIX trade when all the ETPs blown out. Like if you don't know everything you guys are talking about, you're at a huge disadvantage trading crude futures, right? Yeah, I think the cash markets and underlying fundamentals drive everything. And we saw a lot of the cash markets

really weaken up over the last couple of weeks to where everyone kind of thought that this was going to be a bloodbath into expiry just from the standpoint of no one's going to be there to buy it because no one has storage. To the tune of what did it hit? What was the low? Negative 60 today? Yeah. It was moving so fast my screen froze for about $10. That's why you don't trade the front month unless you can take delivery in the last couple of days. What did it settle at? Minus 37. I think minus 37.63. There you go.

So what does that even look like? Yeah, minus 37.63. Sorry, what does that even look like? Do you think the clearing firms and banks and everyone even has the ability to plug that into their system and make good P&Ls? Highly unlikely. I mean, Emil can talk about this probably better than I can, but I don't think the option markets, most people's option and risk metrics probably crashed today. Luckily, options have expired on that, but I'm curious what will happen if we go negative in a month where option

futures and options are still pretty prevalent and high volume. Right. But now everybody's looking for it, so it probably won't happen. The other big thing is USO. You know, there's been a flood of money into USO, and people don't realize that USO is getting eaten alive by the rolls in WTI. And then you have a new group of funds that are shorting USO to take advantage of the little guys entering USO and getting getting eaten up so that's an interesting trade too in theory you'd want to be short USO to capture that contango right yeah to capture the role because they're

well right now they're 80 percent in the front month and 20% in the second month. But they definitely pay a high price for that role. June-July spread is already over $5. So what's it going to be when they roll again? And let's face it, everybody front runs their role. So they're kind of at a real disadvantage and yeah i wonder if there'll be any uh etf etp big oh i guess we would have seen it at the close already but you know we didn't have a blow up like in the uh vix back well that's also because

that was the percentage so i i was having a talk with a friend today about that. And if you get oil down to a month that they're trading in, I would say if it hits $10, it should have nothing to do with the SO because there's a chance that if oil drops another seven, eight bucks, they're going to have what they had to do with the VIX, which was their forced liquidation if they close this below a certain net asset value for it. Right. Basically, the issuer at some point will say, we'd rather not go out of business. We'd rather just shut this fund than give you exposure

and risk our balance sheet. Which would be wild because it would basically be a sell on market, however many futures they have at that point. It would be pretty crazy. Like 150,000 futures. If that happened today and they had to do that on May, it probably would have been minus 200 oil. Wow.

And what are you seeing in terms of actual execution of trades in the different months? Is the liquidity still there, or has it been dried up a little during the crisis here? I think it's been pretty normal, pretty standard. I haven't noticed any dip or slippage. Like I said, if you're trading May expiry right now, you know where the physical is going to go

and you can probably take delivery. So that was pretty wide, but you shouldn't be in there anyways. Right. What were the spreads there? Probably like five bucks a tick or something. Yeah, I think when it first gapped through, my CQG froze for literally three minutes on May futures and it was a $5 wide when I came back.

So I'm not sure what everyone else did. Unbelievable. So Emil, being a- I found a problem with liquidity. Just to add to your point on liquidity, I found liquidity has dropped quite significantly. So it's pretty hard to trade size on spreads and things like that. I mean, you're kind of relegated to doing like fives, tens, and twenties.

You can't really do hundreds at a price anymore. You need a good execution algorithm. I know some guys who can help you with that. And Emil, being Chicago area, although not right now, but let's just talk for a second. Chicago's probably going to be $2.80 a gallon here for gas with negative crude. Why does Chicago in particular always have such a huge disconnect with the actual gas price?

Well, I think it's what they charge you. You know, I mean, I think the gasoline, I mean, New York Harbor is the delivery point for gasoline futures. But how it heads out to the different areas from the refineries. I think, you know, the prices you pay in Chicago are really just a Chicago markup. I'm sure they have the same thing in New York. Yeah. Big taxes as well. I think Chicago has about 60 cents in taxes tacked onto it. Federal, state everyone so which to me wouldn't this be a great time to throw on like a 10 cent a gallon infrastructure tax or something nobody's going to notice yeah no notice well that's also that's also part of the game with gas stations

though right like they get pricing immediately yet they take their time to deal with trying to get it to pass it on. Yeah, and as soon as it goes up. There's always a spread there. When it goes up, you'll see it raise quick. But if it goes down, a little slow to get out there and change the price. Yeah, I remember back in like 07, I was arbing with my wife and my cars. I could sit there during the day and see crew go up eight bucks and be like, go fill up tonight. They're going to jack it tomorrow. What else do I got here? So

I think that's about it. I just wanted to get your guys' quick thoughts. What else you want to tell me? Anything? I think both of us, for how bearish this sounded for us, both see light at the end of the tunnel in the second half of the year and i think as long as we're not stuck in quarantine through you know august i think that the 29 million per day we've lost in demand should come back to at least a normal number even if it's down four or five million we'll still be in a deficit and start drawing and i don't think the back half of this year looks true to bearish oil. I'm not as optimistic on that side.

I think the shut-ins might balance the market. But I would say this. Everybody is looking for storage to fill and some catastrophe to happen with prices. And I think when you actually get there, prices might go the opposite way. Right. So this is the rumor right now. And then when we're there, it'll be sell the news. Sell the rumor, buy the news in this case. You said the spread between June and July is minus $5.

I think you could make the case that we might fill stores this month and then no one's there to buy that indefinitely and everyone who's longest has to exit. So I think it'll be interesting to see what happens with June-July spread going into the close. So May-June is negative 60? Yeah. Or was it at some point today?

And then June-July is only negative 5? Or was it some point today? And then June, July, only negative five? Yeah, only. Yeah. What's a normal spread there? 20 cents or something? Yeah. I mean, maybe in extreme times you get to a dollar, but these prices are unheard of. Brent, you mentioned that negative 20 something million demand what what's that from just we're all we're not driving we're not flying what are the main drivers of yeah mostly driving um and flying pretty immaterial in the grand scheme of things but it it has having a significant impact on the jet market but it's really just really consumer

driving has been the big factor india shutting down, even China slowing as well. So I think, yeah, I think 29 is probably right around where it is. And I think towards the second half of this year, you should be close to back to normal. Maybe if flying's down, that's fine. But I do think that trucking and trucking and driving logistically for people will be back up. Do you think there's permanent damage to people's driving habits and whatnot? You think we'll see a little permanent demand? I think it's too early to tell that. I think you could make the case that work from home will have a more prevalent place in people's lives.

But I still think that in the short term, people will be driving a lot more and have to do that. I think what will be fascinating and what will drive a lot of that is how fast people get back to work, whether they are rehired or if we're just in a consumer led recession for the next seven to nine months. And what, and so this whole talk is, sorry, go ahead, Emil. No, I was going to say that one of the fears is that you know maybe as we get into the summer things start bouncing back slowly people drive a little bit more probably still not flying a lot and then uh you know the covid

comes back so as people start mingling again, it starts spreading. And then next thing, you know, we're in another lockdown and we're in the same position all over again. I think that's the fear. And what is the, I lost my train of thought, but let's talk about the volatility for a second. So it sounds like everything you guys are saying, no matter which way it goes, it seems like for sure there's going to be more volatility in the oil markets for the foreseeable future as all this shakes out. Like what's the oil VIX equivalent today versus a year ago or whatnot? Implied volatility is running, I don't know, between 100 and 250. Which is like Bitcoin levels right it's insane and I

there's so many scenarios that I could foresee that are so almost unheard of uh in both directions that I don't think you can underestimate the volatility that could occur for the rest of the year, maybe even into next year. Yeah, I agree with that. Give me one or two of those wild foreseeing possibilities. you may force so many cuts because of prices going to zero that when things come back, you don't have enough oil anymore. And if you don't have enough oil, I mean, you could really run into problems and in the net gas side too. And you could see an unprecedented rally that would be more than a war scenario. Which is basically what we've just seen in reverse. Like now there's huge demand and we have no more oil because we just drained it so fast

out of storage. Right. It'll take time to start drilling again and fracking. It's probably going to take six to 12 months to really get up to speed. And there could be a gap there where there's just not enough oil and storage starts draining, could get close to zero. I mean, I'm not saying it's going to happen, but it's definitely a possibility. Yeah, I definitely agree. It seems like those producers would prefer that, right? Like they'd rather be late than early, it seems. Maybe Russia and Saudi are planning on that.

Yeah. And we've talked before, Emil, about the big offshore rigs that were some millions of dollars a day just to keep them idle. Or to start them back up is not something you take lightly. That's a huge undertaking, right? Yeah. So shut-ins in some cases are very difficult and in places, in some places, shut-ins, you'll never get the wells back. So you have to be in a position where you have no choice. So if you have no storage, if you have a shuttle tanker going from an offshore rig to an onshore terminal and there's no space left, I mean, you may be forced to shut in that rig. Onshore, I think it's the older wells they're going to have a problem with because I don't think they're going to have the pressure to bring them back. So they're going to be, you know, probably only

going to be able to shut in wells that have been drilled in, you know, fracked in the last year or so. I mean, there's all kinds of problems, but there's nothing like prices or negative prices or no storage to force that. Yeah. And Brent, you were early. Was that end of February when you were like, can crude go below 10 bucks, I think? Or was it 15 bucks? Yeah, it was 15. It was right after the Saudi-Russian OPEC fell out. And like I said, the cash markets immediately priced a lot of that and just got hammered from day one. And I always thought that they're going to pump it to zero. And then coronavirus crept up as well.

And what's interesting is the Saudi Russians killed oil price and Corona killed products. So, you know, before before, you know, when it was the Saudi and Russians and the OPEC spat, they were just flooding it with oil. We were just going to fill up with oil.ineries were still going to run but when corona knocked out all of the demand everyone just kind of went oh my god like now because then refinery started cutting and it was a big domino effect of uh like i said i think refinery margins dropped around seven dollars in the gulf coast so they went from making a ton of money to making no money and all of a sudden it was a big big thing so it needs to come from the top to the recovery need to have demand to pick up first and foremost and if people get back to driving and having summer holiday drive around the states during driving season i think i think i'm with the meal

i think it could it could be but bullish i did my part we uh we were getting sick of quarantine here so i packed up the family, put the paddleboards on top of the truck, and we drove down to Kentucky. We rented some private camping space on a guy's land, right on the Cumberland River, hiked around, did some stuff. We didn't see anybody. And then we just slept in a tent, packed up, drove back. So it was a little odd with the paddleboards and the bikes on the back, people looking at us as we're driving down the road. So hopefully Lori Lightfoot doesn't arrest me for saying that.

But yeah, I think people are going to, even if it's something like that where you're not driving to a crowded place or whatnot. And remind me of that timing. So the Russia-Saudi thing was end of Feb, mid-Feb? No, it was March. I want to say I thought it was March 8th or March 9th, around there. It was kind of bang, bang.

Yeah, it was within the next week, I believe, if I recall correctly. They did that on a Friday. OPEC fell apart on a Friday. That Monday oil was down $10. And I think it was Thursday or Friday was when the market really, really topped out and started realizing, um, all right. Uh, I think we're good. I think they're going to write chapters in textbooks and the near future on, right. This was a double whammy of the, like you're saying the supply got spiked overnight

and then the demand got ripped out overnight so it's a classic supply demand issue not so classic a not classic supply demand issue both sides happening at the same time what's interesting is i think trump will probably go down as the only president in history to want higher oil prices for americans right that's another thing. So let's last topic here of the, right, a lot of people are like with all this, whatever we put in, two trillion in stimulus, they're trying to do the trillion infrastructure plan, basically printing all this money, right? Everyone's like, oh, there's going to be inflation, inflation, but the crude oil markets are saying deflation massively.

So where do you guys land on that? I mean, we've kind of touched all around it. If it switches quickly, it could be inflationary. But you see, just from a standpoint, go ahead. Yeah. No, I was going to say, like, it seems like they're going to throw so much money at this problem. And they're going to keep throwing money until they think they solved the problem. And there might be some very unintended consequences out of all this money. How are they going to finance the debt? I mean, what does it mean when you have a problem that you just can't solve really by throwing money at it? So by the time the problem resolves itself on its own, all this money hits and strange things can happen. Well, you could argue that the whole oversupply was a result of throwing the money at the last crisis, right?

Absolutely. And all the jail got cheap debt to build all their, do the fracking. All right, Brent. The fact remains that the cost to drill for energy in the world will forever be higher, at least until people can forget about this. But banks are not going to lend against proved reserves or anything, any new find. The cost of capital will probably be higher, even though interest rates are probably 2% lower. It's just going to be more difficult to drill for oil. And I think banks will require more hedging to give them lines of credit. I think you'll see a lot of hedging next time we rally up just from there hasn't been

enough bankruptcies yet in the shale play in my mind. And I think the shale patch is in for a world of hurt before it gets better. And you think that'll infect the regional banks, JP Morgan, like everyone involved there? I'm not sure if the regional or JP Morgan Morgan, like everyone involved there? I'm not sure if the regional or JP Morgan will have issues with it. Most of the stuff you have with companies now is cleared on the exchange. So pretty much even, you know, any hedge you're going to do is going to be on the exchange and cleared. I meant more the bankruptcies. Oh, maybe, but again, I don't think they're going to be earth shattering.

The loan's already outstanding. Yeah, I think you're going to have to pay for the cost that two countries can basically put you out of business anytime. So you can go into an investor pitch meeting and show can get together and end your company if they really want. That's a risk. But Brent, wait until oil hits $80 like in 2021 and then see how the attitude is. Yeah, right. And then be lining up to write checks and get credit. What's the... It's true.

What do you think highest price we see in the next 10 years is? You think we'll ever get back $150 oil? Or is this proof that the 100 days are over for good? I think we could get $100 oil by the end of next year. Sorry, Brent. Brent, you go first. I think there's a chance you could be close to 75 to 100 next year. And Brent, I could easily make a case if we don't have more,

if COVID doesn't come back and we have to do another quarantine in July or August. I think it's a pretty bullish scenario. I was going to say the exact same thing. $100 oil is possible in 2021. And then can you imagine the conversation with Trump and the Saudi prince about, well, you said you wanted higher prices. Yeah. Well, the best part is it's going to be $100 oil and then all of a sudden the U.S. is going to come out that, oh, hey, by the way, we're going to grow shale production by $2.5 million.

$2.5 million. 2.5 million barrels per day next year. And then we're right back where we started. Around the merry-go-round. Volatility. That was it. All right, guys. This has been fun.

Any last thoughts? I think we covered it all. Yeah, I wanted a little more argument out of you guys. We can do that. We'll flip a coin for who gets to be bearish, who gets to be bullish. We'll do that next time. Yeah, okay. And so, listeners, we're going to have each of these guys on at some point on the pod for a more

formal backgrounds strategy what they're doing but wanted to get their quick thoughts on the negative pricing today so thanks so much for joining us guys it's been fun we'll talk to you soon stay safe during the quarantine thanks Jeff

thank you Thanks, Jeff. Thank you. 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.