tv The David Rubenstein Show Peer to Peer Conversations Bloomberg December 15, 2018 2:30am-3:00am EST
alix: that's 30 minutes of andy hall. or hedge fund closers, higher capex budgets. we sit down with legendary oil investor andy hall. why it is so hard to be a traitor now, and how to fix it. now, and be a trader how to fix it. ♪ i'm alix steel. welcome to a special edition of "bloomberg commodities edge." it is 30 moments focused -- 30 minutes focused on the hottest commodities with the smartest voices in the business. our topic today is crude. it has gotten a lot harder for traditional market participants to trade oil. just ask one of my guests, andy
hall. he has worked at many companies before running his own hedge fund. he closed that flagship fund in 2017 after suffering losses now he collects art and traits oil with his own money. he is also a board member at orbital insight. orbital insight is a solution -- traditional traders by kevin o'brien also joins us here on set. thanks. so great to see you. i can't believe andy hall is here in person. you have the analysis and you have the trading expertise. let's dive right in. the question in the market is that 1.2 million barrel a day cut from opec plus, is that going to make a significant difference in the markets and to prices? from the lens of your data, have you figure it out? >> the basic basic problem that we have is when people talk about opec cuts or out of the u.s., what is the aggregate number you're speaking about?
what we did is we said, let's map out the total storage across the planet. it is about 24,000, 25,000 tanks in the u.s., china, and opec. when you look at opec, what is the actual supply level that you are seeing in opec but distill that down to the contributor countries. you will start to see divergent patterns. if the saudis say they are going to cut back, you can see increasing supply levels. or those inventories going elsewhere. what are the iraqis doing? what are the iranians doing? to get a more complete picture. that will help folks like andy and others to make a better decision on what to do. carol: -- alix: how would you use that data? >> your market is all about supply and demand. if supply exceeds demand, prices go down and if demand exceeds supply, prices will go up. the easiest way to determine whether the supply exceeds demand or vice versa is by looking at inventories.
whether they are rising or falling. in the 30 years that i have been in the business, we have never had a good window on what is happening with global oil inventories. we get this weekly data from the u.s. government. the weekly statistics. and people look at these things, scrutinize them. but the fact is, they only cover the u.s., which is 25% of the world oil market. the data available for inventories elsewhere in the world is poor at best. the iea produces data for the oecd countries but it comes out on a monthly basis. one or two months after the event. it sends subject revisions for china and known oecd countries, we have essentially no information.
the data is not very reliable and comes out with a two-month flag. up until now, 80% of the world's oil market, we have been in the dark as to what is happening with inventory levels. but now, orbital insight is producing timely, reliable global inventory data which basically gives a window on the whole world oil market. alix: how did you meet? kevin: we trialed our product previously. andy: we were always looking at new sources of information. i don't know whether i contacted orbital insight or they contacted me, but it was an interesting idea that you look down on the world, you can see what is going on in real time. alix: in real time, what are you learning right now? what are you learning, and where is the market wrong? kevin: local inventories are
building year on year. the market did not think that was happening. we look at a building year on year. the markets said, where did that come from? we said, this is the methodology we have been using. when you look at china, they are buyer right now in terms of lower prices. the u.s. is steady. with opec in the example, you have 28 billion barrel build year on year. 20 million of that has come from iran. it comes down to the distilling down to country level and tank level, to be able to look at where are the draws and where are the bills? -- the builds? that is the interesting thing we have seen in the past few months. going back to the fall around september, we were looking at an incremental continued build. there is a big delta that is developing here from a latency effect. you can either trade off of that well or have an exposure. we have seen that pattern, these divergent builds versus draws and to be able to help people
distill that down. alix: does a 1.2 million barrel per day cut next year do it? andy: that is the important question. you had opec cut by 1.2 million barrels per day. you have other things going on as well. on the negative side, there are headwinds regarding demand. worries with threat of trade wars, how robust is emerging-market country demand? stronger dollar is generally not constructive for oil demand and commodity demand in general. on the other hand, not only have you had opec cut production, there is no question that lower prices will have an impact on production growth here in the u.s. i think when you look at 2018, the biggest surprise has been the rapid growth in u.s. oil
production. everyone knew it was going to grow, but i don't think many people expected it to grow by as much as it has. right now, year-over-year growth in crude production in the u.s. is about 2 million barrels per day. back in january, the u.s. government eia was forecasting growth of half a million barrels a day. that is a staggering difference. but of course, prices have now dropped $25, $30 per barrel. that will presumably have an impact on production growth here in the u.s. alix: we are going to dig down deep in that. are you more bullish or bearish right now? andy: with prices hovering at a little over $50 a barrel, i think you have to have a pretty negative outlook on the global economy to believe the prices will continue their downward trajectory. i don't think we are on the verge of a global recession or
and this alix steel, is "bloomberg commodities edge." we saw the first victim of lower oil prices, parker drilling. the company has filed for bankruptcy. are we at the breaking point for u.s. shale producers? my guest are still with me here on set. the chart i want to bring up shows what you are talking about, which is the discrepancy between forecast for production in shale versus the reality. there is a big difference. how do you follow that and what does it wind up looking like going forward? what does the number look like going forward? kevin: the big delta that you have here is that you have the eia coming out with numbers then do an initial release, then they will do a revision. you immediately have a seven day lag. then revisions can come out 30 or 45 days later. imagine that if you were an equity trader. trying to be able to put your trades on, do your research, do your analysis with latency like that. that is what is happening in the oil market. you are seeing that in shale as well. what we think is going to be
happening is that compression. to be up to say, you can look at a release from eia and the information we are releasing on a daily basis. better decision-making going off what is coming in. so you don't have so much guesswork going into whether it is in shale or oil globally and then you merge those two together to get a tighter thesis to actually put capital at risk. that is something we have had numerous clients come to us saying, i don't have confidence in what i am seeing, coming from government organizations. the u.s. has pretty good disclosure, but it is survey based. you have the natural latency effect, then it is revised and revised again. then you go see what the supply and demand impact will be coming from opec or china, that is where it gets really difficult. alix: also interesting, the big banks and their forecast, they were blindsided by shale and how much it grew between august and september. universally, all of them. first of all, how do you deal with that? how do you manage it and what is your view for the production in
the u.s.? andy: again, that is one of the big imponderables. alix: the second $64,000 question. [laughter] andy: the range of forecasts of u.s. oil production is quite remarkable. everyone is groping. there are a lot of variables here that we don't have a good handle on. how do shale oil operators respond to lower prices? are they going to drill within their cash flows? what are those cash flows going to be? of well a function productivity, rig productivity. the data is either anecdotal or produced with significant lags. the biggest producing state in america is texas, and data from texas is published by the texas railroad commission.
but it comes out with a lag of one or two months. and then that data is subject to huge revisions going on for the next six to 12 months. we are trying to forecast the future based on today's data. but actually, we don't have today's data. we are basing our view of the future on data that is actually maybe six or 12 months out of date. alix: using the data you get from kevin, how do you make a longer-term view? andy: that to me is so intriguing about what orbital insight is doing. because they are looking at the world in real time. but allows one to make more precise and confident predictions about the future. you are not relying on data that is already out of date. alix: what do you think the oil producers will then do? andy: talking about the shale oil producers, they indicate
that at $50 per barrel, that is where the brakes start going on. even when oil prices were over $70 per barrel, they were not actually adding rigs. the rig count stayed flat. when you look at their financial returns in the aggregate, they were nothing to write home about. industry as a whole. there was an article based on bloomberg data recently. alix: thank you for the plug. andy: it showed that in the aggregate, the oil industry had barely positive cash flow in the third quarter. $75,hat's with oil prices $85 a barrel. alix: kevin? kevin: just listening to what andy said, which is fascinating. we talked about oil and opec and the u.s. but if you are a shale operator, you also want to know what is going on inside of opec and the other markets because that will impact some of your decisions.
how much you will be drilling, how much you will not be drilling, what you think the price is going to be. we feel again this discovery aspect of looking in different parts of the marketplace will benefit a lot of different folks. we are going deeper into the supply chain. but then going into fracking monitoring as well. to look at different fracking locations across west texas and north dakota, to look at, has this ground been disturbed? is it being prepped for drilling? are we seeing an increase in activity in those locations? to be able to do that at scale and synthesize it into more distilled data that can be given -- delivered down directly next to some of the oil storage data. alix: now it is prices get higher, production goes down. it is all connected. it is very different from when you were trading. andy: what has changed in the past five to 10 years, its oil supply and demand have become more price elastic. it used to be on the supply side of the equation, you can predict
with some confidence what the future supply was going to be outside of global political events. planned fivewere or even 10 years in the future. once the decision had been made to go ahead with that investment, it was going to go ahead. it was not going to change as a consequence of changing prices. today, the vast majority of growth in oil production is coming from shale oil. and that is price responsive. it is the result of thousands of smaller decisions to drill or not to drill another well. we don't really know what that functionality is. what that decision-making process is. how sensitive drilling operators are to changes in prices. it is much harder to model. on the demand side of the equation, many markets that used
to be insulated with changes in -- insulated from changes in prices because of government price controls, that is no longer the case. the price controls have been removed. as a consequence of that, demand is more price elastic. for example, we have seen prices fall over the past couple of months by 30%. and undoubtedly, there will be a response in demand because of because ofn prices, end-user consumption but also as kevin noted earlier, the chinese in particular stockpile opportunistically. as prices fall, they tend to accelerate purchases for their strategic oil reserves are it -- oil reserves. all of the things come into play. they make it much harder to gauge what the future supply and demand balance is going to be. whether we are going to have a deficit or surplus, whether
we are here with andy hall, and legend investor, and kevin o'brien from orbital insight, providing data for inventories across the globe. i want to talk about how the world has trade -- changed in terms of trading. i want to get your one sentence on the permian. how transformative is it going to be? how do you look at something like the permian? andy: i think it has already been transformative. i said earlier how production growth here in the u.s. his exceeded everyone's expectations this year. a big chunk of that is the permian. it is a huge resource. it is like this layer cake of benches of potential production. it is a unique natural resource. alix: do you think that is going to continue, that ability? the third $64,000 question.
that is what everyone keeps asking. one of the key variables for me is well productivity and rig productivity. these have continued to grow. the question is, how long can they continue to grow? it is a big resource. but it is not a limitless resource. alix: let's move to the change in trading. i have a chart that shows the change in trading on a person-to-person basis versus automation to automation basis. and the man-to-man is the blue line and the white line is automated trading system services.
when prices get out of bed. andy, how does that change your world? andy: it obviously changes it in a big way. there is a lot of money that is being invested based on algorithms. a lot of these things tend to be self-fulfilling. a lot of the models use the same underlying equations or ideas. there is a certain self reputation or self-fulfilling nature to these things. that can continue for a long time until reality catches up. ultimately, i remain a fundamentalist. ultimately, oil prices are determined by fundamentals. but in the shorter term, they can detach because of money flows which are being driven by anything other than fundamentals. someone once said that the market can stay irrational longer than you can stay liquid. or solvent. that is one of the problems you have to face these days. alix: do you regret shutting down the fund? andy: no.
i don't want to go to my grave trading oil. [laughter] alix: but you are still doing it. andy: yeah, but it is not the same responsibility or the same pressure doing it for yourself as it is doing it when you are investing other people's money. there are other things to do in life and not worry about the price of oil. alix: what? there is? i didn't know that. we talk about it all the time. kevin, as you go forward, what is going to be the biggest thing you are looking at in your business that will be the biggest provider of the stabilization of oil prices? storage, refinery, automation? what is the thing that people need to have? kevin: going back to andy's point, in terms of the quantitative aspects, the way i look at it is even the data we are providing our new -- are providing are new
fundamental factors. the more you can have more accurate precise transparent factors that will lower some of the volatility in those areas. with regards to what we plan to do, i like to simplify things of connecting the dots. i think the further we can provide better transparency to the andy halls of the world. , whether it is based oral supply, refinery activity demand, and tightly link that together to provide, whether it is an operator in texas or a trader on wall street, that same type of data and precision and accuracy and timeliness, i think it will lead to less volatility and better decision-making across the board. whether it is coming out of opec or china or the united states. i think there is a lot of upside and a lot of opportunities to gain from that. alix: such a pleasure. we tackled some big questions. it has been great to spend time with both of you. thank you very much. andy hall and kevin o'brien. great conversation. that does it for "bloomberg commodities edge." check us out every thursday at
carol: ockham to "bloomberg businessweek." jason: we are joining you from bloomberg's headquarters in new york. carol: the u.s. and china continue to talk trade, but are they making real progress? jason: it is the one-year anniversary of president trump's tax bill. the big cuts came with big promises, but the jury is out on what they have done for the economy. carol: theresa may promised th