ANDREAS STENO LARSEN: Hey, I'm Andreas Steno from Real Vision and this is the Daily Briefing. We are sending to you live, Thursday the 25th of August, after another week of absolute mayhem in the energy markets. Today, we're going to ask the question whether there's any light at the end of the energy tunnel, and I guess no one's better equipped of answering that question than my guest today, Tony Greer, the founder of TG Macro. It's very good to see you again, Tony.
TONY GREER: Too kind of you, Andreas. It's great to see you too, man. How are you doing?
ANDREAS STENO LARSEN: All good. Just back from Turkey, actually. But I wanted to ask you initially, Tony, what's been on your radar in the past trading days here. It seems as if energy is on top of everyone's agenda again?
TONY GREER: Yeah, it sure is. It sure is. We just pounded the 2021 highs at $86 when WTI pulled back to its low around $86. And that was a level that we expected to hold technically, because the entire physical market has been very strong. So when we held that level, and then a couple of days later, Prince Abdulaziz, Saudi Arabia's representative in OPEC, came out and said basically that he doesn't appreciate the severe disconnect between paper and physical markets, which he's basically calling somebody out, i.e. the United States, potentially for manipulating the oil paper markets, which seems something that's highly likely and is being timely done for political purposes with elections coming up in November, like everything else that we're seeing.
And I think that that Prince Abdulaziz comment that if he continued to see this, that OPEC would, in fact, cut output and then see crude oil rally over a couple of days to a high at around $95.5, $96. That's the signal to me that that dip is over. And it really is. We've really had everybody pounding the downside looking for the follow in on this recession story. And now you've got breakevens bouncing off of the lows of their move and the curve bouncing a little bit off of the lows.
We got a weak number today in GDP, another quarter of negative GDP growth and yields didn't budge from the highs. I thought that was interesting. I feel like the bond market is focusing on commodity inflation, and not as much on the pending recession like it was a couple of weeks ago. And it feels to me like the next $10 or $15 in crude oil is going to be higher again, because there's simply no inventory anywhere. And the spreads have just been knocked all the way back to $0.30, $0.40, $0.50 backwardated per month.
And that's where they had been trading in a normal backwardated market before things went crazy during the Russia-Ukraine invasion, and the spreads per month blew out to $3 and $4. That's the situation on our hands right now, Andreas, that crude oil today failed at the highs at the 200-day moving average resistance level, something to be totally expected the first time up there.
But I'm pretty sure next time up, it's going to go through because we are running out of room and time to get this much lower on the downside. It feels to me like we're going to have to test the upside in next couple of days. What do you think?
ANDREAS STENO LARSEN: Well, I tend to agree on the short-term outlook, and I have to give you my compliments here, Tony. You've remained very calm during this bearish price action that we saw in crude oil through July and parts of August, so well played. In terms of today's overall question, Tony, is there any light on the supply side of the energy question? What's your take on that? Do you sense any light at all right now?
TONY GREER: I really don't, I really don't. And when I take a step back and read some notes and some pieces that look at the world from 30,000 feet up and go over the lack of and continued diminishing investment in drilling and exploration and production in oil, it's not going to be until we reverse that, that oil prices will really be able to move much lower for any kind of an extended basis.
And when I look at the timeline now, Andreas, I look at the fact that we just sent-- the US just sent another $3 billion to the Ukraine and a lot of military assistance and some of it is just spread out the calendar. As in, they're not going to be sending stuff until 2023 and 2024 and 2025. I'm trying to understand how an oil bear is going to look at this and say, well, we're going to be in a prolonged conflict now assisting Ukraine versus Russia, how in the world is the oil price going to stay close to $90?
That's what I'm trying to figure out right now. And to me, the answer seems like it's not going to, because now the oil market feels fairly balanced between trading on either side of $90. And now, we've got any one of the 1000 supply disruptions or bullish episodes that we can live through heading into winter. That's what leads me to believe that the downside i s limited right now and that I'm going to continue to play for the upside, especially after having lived through this attack, where all of the equity, energy equity names all pulled back to their really steep pullback to their 200-day moving average support, the last lines of support for technicians.
And it looks scary down there, but it held the whole way. The story was in the fact that there was no spare capacity out of Saudi Arabia, limited inventories, and really no spec long to be flushed out of the markets. I'm getting fairly constructive again, Andreas. I don't think that the-- I'm in the camp where the fears of a recession are maybe exaggerated a little bit. And we'll see what happens to gasoline demand.
But right now, it seems to be hanging fairly firm, we just got another big draw in WTI this week that helped to test the upward bound to the range there. And I feel like that market is fairly healthy and looking to go higher, but no, I don't see any end in sight to the war on supply that we're seeing right now. They're still trying to push people toward electric vehicles. That's what the whole entire Inflation Reduction Act was about. It's got nothing to do with reducing inflation, it's all about offering incentives to change people's energy consumption habits.
The only savings in there is if you go in and buy some solar panels, you get a tax credit. And if you go in and more efficiently heat your home or cool your home, then you get a credit for that. I don't know how that stuff is going to pan out. And we continue to hit the spending button as often as we can in the Biden administration, and all of that seems to be continually inflationary to me. But we'll see.
ANDREAS STENO LARSEN: Yeah, it's certainly not an Inflation Reduction Act, but rather the opposite. But, Tony, you briefly touched upon the positioning, and I think we can bring up a chart on the positioning across various commodity markets. There is a net long position in the oil market, for example, but it seems as if you look beneath the surface, that the traded volumes are getting lower and lower, so speak to this positioning and whether it's something that worries you in your long bet on energy.
TONY GREER: It really doesn't, Andreas. I've seen the oil market with spec positions of 500,000 and 600,000 contracts long, and I've still seen it go up with that carry, that much length higher when the market is physically strong. I still think that that's a situation where we are now I don't think that the spec length is bloated enough, where it's going to tip the calendar back over from these prices into contango, certainly, because that's what we're talking about now.
And if you look at where inventory levels are at Cushing, and in some of the other pads and in some of the products, you can't imagine how spreads could possibly go contango with the amount of inventory that's there. We're nowhere near that floating storage trade. We're not going contango with the amount of supply that's out there. And I think it's just a matter of time before tightness works its way back in and we see, like I said, one or any 1000 types of supply disruptions that we've been seeing over the last several years.
ANDREAS STENO LARSEN: Tony, if we look at the situation in the natural gas market, I think we remain within spitting distance of fires in the natural gas price in the US, and certainly as well in the European Union. What's your take on natural gas in relation to the oil story?
TONY GREER: It doesn't seem like anyone in Europe has a plan, Andreas, for what they're going to do next. And I just tweeted that out yesterday, when natural gas prices hit a new high. Today, they traded to-- Dutch TTF traded up to $91 or $93 and settled per megawatt hour. Put it this way, there's a couple of things weighing on that positioning in natural. Jared Dillian seems to think that there's a lot of assholes in the natural gas trade, which there may be.
And I'm definitely going to heed that call because the last time he made a call like that in energy, oil fell $30 in a straight line. So no matter what, I'm going to keep my eyes peeled for that. But at the same time, it still feels like I said, with there being no plan, I don't know what's going to reverse this right now. It feels like very spookily related to Macron's recent comment about the end of abundance in Europe.
And he must clearly be talking about the end of abundance of food in Europe as the Netherlands plans to close down thousands of farms to improve their ESG score. And that's going to take a lot of food off a lot of tables, the price of natural gas going higher is not helping the issue at all. They're still entirely beholden to Russia right now, who seems to be turning the tap on and off at his whim.
And we'll see how it continues from here. But I don't even think that we've reached the main event as the point of max pain that Europe is going to see before this is over. Do you?
ANDREAS STENO LARSEN: Well, I think it's tricky right now. We can all agree that Europe is stuck in a huge mess. But if we look at the current storage situation in Europe, it actually seems as if most European countries are at least slightly ahead of the curve in terms of filling up natural gas storages. But there is obviously a big difference between the stock and the flow in this discussion, and the flow is still not super good.
It is an issue that we will continue to deal with in Europe throughout the winter. I personally think that we will peak at some point during the fourth quarter. But it's very, very tricky to time it. And I'm certainly not trying to bet on it right now. Because you can just basically destroy your portfolio before you get the timing right.
But if you look at the discussion on the storage situation in Europe, would it be something that you could say confident, or are you still worried about the issues surrounding the energy complex in Europe heading into the winter?
TONY GREER: Well, I've seen you very astutely point out that their storage is a little bit better than the narrative will allow, and I appreciate that certainly. I do think that the price is going to peak out some point before, I don't know, before hell freezes over over there. I think that you'll see a peak in the prices late in the fall when everybody is so geared up about this. And then there'll be some a political response to manage the optics, which has been the back and forth that we're seeing.
Gas goes to $5. Biden releases the SPR, gas goes to $4, they take a victory lap, they add gas prices going down into the campaign slogans for November and things like that. All of this is really tricky into November. And that's happened to also where the SPR releases are scheduled out to. If they don't renew any more SPR releases for after the election, which may be a point that they're going to let the political optics get a little bit ugly again, oil is going to go straight to $125 again, because that's basically the SPR releases have been what have been stopping it from going there several times over the last few months.
And then we ran into that whole recessionary scenario that really put a real damper on demand and demand growth expectations. But at still, that is the where the rubber meets the road in the oil market right there.
ANDREAS STENO LARSEN: We've seen a few announcements, for example, in Switzerland, that public buildings will use heating oil instead of natural gas as the heating source for this winter. Do you have your eyes on the heating oil trade potentially, Tony?
TONY GREER: Yeah, I just have my ears out for that, Andreas. That's the switch over that becomes bullish WTI side of the trade. And as you know, we're already pretty tight on inventories across all products in terms of diesel gas, oil, heating oil, everything is tight across the board.
So yeah, it seems like that is that would be a natural switchover to go to that and prices there are still on the rise and inventories are still tight. What that does is that helps me a little bit, quite bit, Andreas, because I have a lot more risk in crude oil than I do in natural gas risk. I'm old enough to remember how many times I've gotten burned being long natural gas looking for the moon and the stars.
And I would rather play natural gas at the $5 table, if you will, and have a little bit of risk on there and a little bit of risk in the stocks and play the WTI trade from the Peacock Lounge, which is the High Rollers table where you can bet $2,000 or $3,000 a hand in blackjack, or $10,000 without raising an eyebrow. That's the way that I've been lining up my energy bets and so holding that dip there and energy was huge and I'm coming out the other side looking to play offense.
ANDREAS STENO LARSEN: If we look at the price action in metals, Tony, we've seen a small rebound in, for example, the copper price over the past, say four to six weeks. What do you make of the price actions within that space?
TONY GREER: Well, we got a super steep slide in copper as we priced in that recession again, not to be too repetitive, I'm sorry, but it's part of the story here. Once again, we held the old highs in copper as support. While we do that, breakevens bottomed out at 2.75% or 2.73%, and five-year breakevens. And those are obviously forward-looking market-based inflation expectations.
And then breakevens held because we overshot the economic weakness on the downside, they rallied at the whole-- the curve stopped going down finally, and so whoever got short copper into the lows had to run out and cover. And I still think that the broad supply demand fundamentals in copper are still pretty bullish, at least they may not be 12k LME bullish, but 7k, 8k on the LME certainly seems like more than a fair price for the direction that we're going to go with electronic vehicles and how much copper we're going to need for sure for that transition. And then for any stabilization in the economy is probably also going to put some demand back into copper, so hard to get bearish copper after a 40% selloff.
ANDREAS STENO LARSEN: Tend to agree. I wanted to play a soundbite for you, Tony, in relation to the debate on whether to add exposure in metals to a portfolio. It's from a discussion between Adrian Day and Larry McDonald. Let's listen to the soundbite and get back to that discussion, Tony.
ADRIAN DAY: The point I'm making is that copper to me has very, very powerful supply/demand dynamics, even if you ignore, even if you ignore the electrification of the grid and the electrification of the automobiles, and part of it is not just the demand, but it's also the supply.
There are some commodities where people talk about shortages. And because the shortage doesn't really exist, it's a matter of a shortage of that particular price. But there are some commodities where there's a current shortage, but there's not a shortage of capacity. You could increase the supply if you wanted to. Copper is not in that case, and in the case of copper, copper mines, as we mentioned earlier, are huge. They're big, they're huge investments, half a billion or a billion or even more than a billion dollars.
The point I'm making is that it takes a long time to develop a major new copper mine. Freeport recently said that they have put all new mines on hold for the time being. And they were asked a question about how long it would take him to bring new mines on board. And they said even a shovel ready, shovel ready, where they already have the permits in place, would take five years before he starts producing.
ANDREAS STENO LARSEN: The entire interview is available for Essential, plus, and Pro subscribers to Real Vision already today. Tony, back to you, a very compelling storytelling on the lack of supply also within the metal space. Do you see a fit in your portfolio for being long metals right now?
TONY GREER: Yeah, we're long metals and mining at TG Macro and The Navigator. We bought XME on the dip into support there after having a long run in it from the long side and getting out higher, we got a chance to buy it back so we did. I'm keyed up on the fact that I don't think it's necessarily the right idea to throw in the towel on commodities broadly and metals and mining, very specifically heading into a stagflationary type of environment.
I think we're seeing-- I just read a couple of different reports that were really, really compelling, one of them by Goehring & Rozencwajg, I believe is the pronunciation of the second partner's name in that firm. They put out some really, really thoughtful research in energy and they go back to the 1970s and 1980s, where we saw a lot of inflation and we suffered a lot of recessions during that period of time.
And during that period of time, a portfolio in metals and mining, gold miners, mostly natural resources, dramatically outperformed the S&P, believe it or not. That's the scenario that I think that we're looking at now, where we're going to have fits and starts in the commodity-- excuse me, fits and starts in the economy, it's certainly not going to be a one-way train of improvement with the way the world is changing and the path won't be linear to higher commodities.
But we are set up right now for extremely tight situations across so