tv The David Rubenstein Show Peer to Peer Conversations Bloomberg November 11, 2018 5:30am-6:00am EST
alix: opec dilemma, the pump or cut? questions arise on the market impact with iranian oil sanctions. surviving the midterms. spending millions trying to defeat proposition 112. we break down the ballot in commodity winners and loses. colorado and water. investing in water can be tricky. we sit down with investor chad brownstein who calls colorado the permian for water.
i am alix steel. and welcome to "bloomberg commodities edge." we focus on companies, physical assets and the smartest voices in the business. first, our take on the big story. joining me here is michael tran, energy strategist at rbc capital markets and the founder of the energy word. our spotlight is a big slide in oil. wto down nine days, the longest since july 2014. hit an intraday bear market this week. mike, what happened? mike: it is amazing how quickly sentiment shifted. it was only a month ago there was a significant corner on the market calling for $100 crude. now sentiment in the market has soured to the point the last time investor positioning or investor length in wti was this low was when oil was at $30 a barrel. there is a disconnect. when you look at how contango
has come back to wti in brent, it is the market showing us either number one we reverted back to a materially oversupplied market, or number two, the financial community is trading off a fundamentally trade driven headlines, which we do not think is true. if you look at the physical market, it is clearing. the physical market is not that bad and does not warrant 20% pullback over a three-week period. alix: dan, is it your fault? [laughter] andrew: 100%, it is all my fault. [laughter] it has been one of the most typical of the vomiting of speculative positions in this market in the 30 years i have been in it. you see big volume on the day down, small volume on the days it is trying to digest the last move down. then you look your screens and turnarounds, grab your cup of coffee and the market is down another dollar. that is not what i believe is a systemic problem, but a temporary and financial problem.
we have a lot of specs deciding global growth will be way down, the iran sanctions will not have a big effect on supply, and oil in general is too high priced at $70 a barrel. alix: let's look at this chart, it shows all the countries that import iranian oil. the orange ones are the countries that received waivers. isn't there something fundamental to this that we are worried we will get a zero on iranian exports? and then that leads to extra short-term oil? mike: i do think there is a misconception between how people interpreted the headlines. when you think about where we are now versus where we were back in the spring -- if you told me in the spring trump would take a million barrels a day of iranian exports off the
market before sanctions kicked in in september, we would agree that is bullish. that happens. why are they trading below the highs? as a market looks at the headlines of waivers, a lot of investors think this is a hall pass. that is absolutely not the case. they still have to continue to wean their way off of iranian crude. the trump administration, their goal is to take iranian imports -- exports down to zero. whether you believe that is obtainable or achievable, what we do know is this week was the start of iranian sanctions, certainly not the end. and the market is pricing like the worst-case scenario is in the rearview mirror. alix: that poses a different get -- difficult problem for opec. the head of the iaa said at some point you will have upstream investments not coming in time. at some point next year, we will arrange a reduction in the production. which is it, dan? opec is not used to this kind of
whipsawing every couple weeks. dan: i think there was a deal made between pompeo and mbs, the last time they met, because of the khashoggi incident. there was a bearish announcement al-fali later that they would open the spigot. that goes against the strategy opec has had the last two years and what they need for two years going forward. they just had a big conference, davos in the desert. they inked another $50 billion in foreign deals. you will need $85 oil. the saudis will need $85 oil to make their vision 2030 reality. alix: mike, you agree? mike: yes. it is too soon to know what opec will do a month from now. a month ago they were talking about how q4 would be one of the tightest quarters in years. a lot can change in a month.
we believe opec, saudi action will be price-dependent. $80 is the magical number because number one, at that level producers make a lot of money, break even. number two, you start to incentivize global investment back onto the scene if you are able to stabilize. number three, $80 is high, but not high enough to destroy demand. alix: is it over? more volatility? dan: volatility is very high. this sounds stupid, but it's the best advice i can give people watching the market. the market will stop going down when people stop selling. i know it sounds silly, but there is an avalanche of selling in the market. the pressure is everywhere. i see them on screens every day.
when i see alleviation of the pressure and the reports from the commitment of traders. they are not down as far as speculative loans. i will know it is time to get back in again. the kickback i think will be enormous. alix: thank you. let's get your takeaways. mike, you're saying the markets are overly bearish. crude quality matters. it is too soon to write off oil demand growth. dan, you're saying it is financial, volatility off the charts. we are getting close positioning to end all that selling. thank you so much, michael tran and dan dicker. grenoble energy moving through a state ballot measure. what it means for fossil fuels. here's a look at one of the big moves of the week. occidental petroleum with earnings at a record amount. permian shale output will go 35% next year, boosting its cash flow. this is "bloomberg commodities edge." ♪
alix: i am alix steel. this is "bloomberg commodities edge." time for the data dig. we dig deep into the data trends. oil inventory numbers, no bull in sight. u.s. production hit another record last week. digging in more into brazil as well. the current president jair bolsonaro, petrobras has already made some big discoveries which means less risk. the country could raise as much as $27 billion. moving to ags. not good news for soybeans. american inventories reaching 955 million bushels.
plus the agency cut its metrics for outlook. i want to dig deeper into the question of peak oil demand. exxon mobil chief executive darren woods talked about how emerging ev technology is affecting oil demand. >> let's assume by 2025 every new vehicle in the world sold is electric. by 2040 the entire vehicle fleet is electric. what is the impact on world demand for the world? if you look at that projection, demand in 2040 for oil is what it was in 2013. what people miss is the demand in transportation is driven primarily by heavy-duty commercial transportation, which is driven by economic growth. alix: exxon still thinks oil will play a big role in energy
demand, even as the energy mix evolves. the average growth per year from 2016 to 2040 is over 6% for wind and solar versus 0.7% of oil. let's get into the ring. commodities duked it out at the ballot box in the midterm elections. there were some winners and losers. one winner was oil companies in colorado. voters defeated proposition 112, which would have prohibited oil drilling in the state. walk me through who won in this. >> this election was a big win for companies like anadarko, noble, extractions, the players who have a lot of assets here in the bj basin. these companies saw their share value drop since august, and now they are back up again after the election. it has been really good for them so far. alix: was it just a matter of dollars and cents? did they spend more money lobbying on this issue?
>> they outspent proponents of the measure 40-1. there was not a lot of environmentalists in support of this measure could do without the same amount of funding. alix: there were also proposals, washington had a carbon fuel initiative that was defeated. arizona had a push to make electric car companies use more wind and solar. that also defeated as well. walk me through the why about gaining traction. catherine: it is similar to the story here in colorado. folks who put the money behind what they wanted got what they wanted. in arizona, you had utilities that were opposing this clean initiative, outspending tom steyer who was supporting it. what was supported passed because it did not have major opposition. in washington you had something similar.
alix: it goes to 2020. thank you so much, good to see you. time for our notes of the week. this is from goldman. they say, we remain convinced commodities will once again rally strongly off this trough. we believe brent is oversold, and in metals we see too much pessimism priced in. we view chinese demand is relatively healthy. they are convinced commodities will rally. investing in water, i will talk to chad brownstein about why he thinks colorado is the permian of water. that's next on "bloomberg commodities edge." ♪
alix: i am alix steel. this is "bloomberg commodities edge." the story, natural gas saw a monster rally this week, the biggest in two years. you can see it in this thread. the february to march premium expanded from four cents to more than forty cents in a matter of days. joining me is anastasia. why? anastasia: whenever you're talking about winter, the answer is always weather. winter is the big season for heating, and everyone is worried, what will the weather be, what does that mean for gas demand, will there be enough supply to meet demand? this year is interesting because there is record numbers of gas production.
we have 85 cubic feet of gas being produced in this country per day, plenty for an average day of gas demand, but when you have those really cold days, will we have enough to meet a surge in gas demand? that is leading markets to worry there may be spikes this winter. alix: a big story is storage. storage is so low versus the seasonal average of five years. we knew that for a while that we have been below the five year average. how tight are we going to get? anastacia: storage in some sense is becoming less relevant to gas markets now. storage is important when you are only producing a set amount, a smaller amount per day. you rely on storage for those later months to supplement every day. you pull some out of storage on a daily basis and for the end of winter you may not be able to
meet the supplemental volumes needed. that is why march is such an important month in gas. this year, people are not worried about supplementing daily production. it is just on one day you might need a time. that is going to cause prices to rise. the big question here is demand. you have a ton of demand coming from power. more gas being burned for power and a lot of lng exports this year. there are two lng projects that may come online toward q1. that could cause competition for gas demand. alix: there is also the other part, which is transportation. you may have a lot of demand. how much is that in the market right now? anastasia: that is always another big question. you will see a lot of regional variations in gas prices. the east coast is a traditional demand driver.
east coast prices are the henry hub in the winter months. you see those going up, which means it is a concern on a national level. there will be periods where you have a ton of demand and need to make sure prices are incentivizing gas to meet the demand. alix: i like incentivizing. when you have a rally in natural gas prices, what does it have to do with coal switching? will we see power plants switch back to coal? anastacia: it will probably cause some demand from other sectors. one is coal to gas. a rally in gas prices makes coal more attractive. it incentivizes storage, and that is a big piece, too. we are still injecting gas into storage this time of year. higher prices in winter months will incentivize some producers to store away some of the gas they are currently producing in hopes that can meet those daily demands in winter. alix: i am guessing that means more volatility. anastacia: it seems that way,
yes. alix: thank you for joining us. let's turn to commodity in chief. we focus on one executive in the commodity world. today is chad brownstein, the ceo of rocky mountain resources. let's take a closer look at one of his investment ideas. 322 billion gallons of water per day was used in the u.s. in 2015. there are two places you can find the water -- on the surface, think streams, lakes, oceans, and underground. the water that goes into wells and springs. how do you invest? you can buy utility companies like american water works, water index, etf, or the underlying assets. take colorado. surface rights there are pretty liquid. they can be bought, sold, and traded. older water rights have priority and therefore more value. the underground market is trickier. if the land and underground
water are tied together, it is treated like a surface right. if not, the landowner has to claim the water in a formal come long process. then they are free to buy, sell or trade. and they have to prove the water is being put to good use, no waste, no speculation. it is a small industry, $75 billion market. some investors believe it could grow to $500 billion in a decade. the senate recently passed legislation to give state and water facilities subsidized financing to build water treatment plants and other projects. i sat down with chad to find the best way to invest in water. chad: we think colorado is the permian of water. if you see how those valuations have gone from 1000 an acre to,
most recently, 75,000 an acre, you can see $55,000 an acre foot being paid for significant water positioning. alix: how do you invest in it? chad: you can buy water -- alix: literally? chad: you can buy it, storing is a different business. either buy it because it is an aquifer belowground or in a river. how much you can sell or use is the next question. there is also an opportunity to buy water storage. water storage in colorado is a big issue, particularly with the change of seasons and climate issues. you do not know how much water you will have coming off a bad year of skiing or a good year skiing because of snow. we're working on storage, crops, solar, all different utilizations on top of the large swathes of agricultural lands that are important. you have to have an open mind where the most value is being created. we are working on a
public-private partnership in the solar space with one of our municipalities. we are not only utilizing solar, solar is driving water production. we have a play in the aboveground renewables space that in the natural resources world is going to be probably the model going forward in many states. alix: what kind of return and timeframe for investing would you be looking at with something like this? chad: we always look for cash on cash yield of 15%. broader because of the lack of availability when the opportunity presents itself as having that. ultimately, you have to have customers, oil producers who need water. when you crack a well it is 90,000 barrels to frack a well. there is a lot of unused resource in colorado and throughout the west of that
could be utilized on revenue basis, storage, transportation. you will see infrastructure builds. you will see water treatment plants. all these things will be done in the private sector. alix: what would be your exit strategy for investment? chad: there are some public companies in the water space, but it is limited. the entire market cap is less than $10 billion. five or seven companies. you will look and see that over the next 10 years it is almost going to be like the tech boom and water will be a big driver of that. you saw after 2012 a lot of oil and gas companies go public. private equity dollars poured in with the resources at the bottom of the forward curve. you will see private equity play a big role in building up the water business. the big thing will be taking it public. alix: are valuation creeping up? you are going to see you raw land will take a turn north.
in 2008 if you are going to buy an acre foot of water in colorado, it would cost $9,000. 20 is $32,000. alix: what kind of valuations do you see? chad: if you buy water for $7,000, $8,000 an acre foot, you will be in a position to survive long-term. the big key with water is not having leverage on business. you have to withstand a great year if there is overflow from a great snow season, or you have to be able to provide from a storage perspective, a banner year if there has been an underperformance with the weather. alix: some of the risks, no surprise, include hedging, water quality, and of course, the weather. here is what is on my commodity radar. saturday you get the joint technical meeting of opec in abu dhabi. don't miss that for rhetoric about iranian sanctions. and a global conference in geneva. what it means for trade and
emily: i am emily chang. this is the best of bloomberg technology, where we bring you the best of our interviews. oming elections worldwide, where despite the meddling outcry, facebook and google are the big winners of the night. the most influential tech investor from russia is not overly concerned about facebook and election meddling. we hear from yuri milner.