Alix: I’m Alix Steel and welcome to Bloomberg Commodities Edge. It’s 30 mins to focus on the companies and physical assets and the trading behind the hottest commodities with the smartest voices in the business. Let’s first kick it off with ‘spot on’ our expert and investor take on our big story and this week, the big story is President Donald Trump’s decision to pull out of the Iran Nuclear Deal.
“In just a short period of time the world’s leading state sponsor of terror will be on the cusp of acquiring the world’s most dangerous weapons. Therefore I am announcing today that the United States will withdraw from the Iran Nuclear Deal.”
Joining me now is Chad Brownstein, the CEO of Rocky Mountain Resources who called $70, I thought he was crazy, and Richard Matthews, senior research scholar at Columbia University’s School of International and Public Affairs. Richard formerly worked at the U.S. Department of State and was involved the Iran Sanction negotiation.
Guys welcome, good to see you.
So Richard, what happens to Iran’s production and exports.
Richard: Well I think at least for the near term, nothing really changes. The Iranians have absolutely every incentive to try and put as much oil on the market as they possibly can and to keep the numbers high while the US gets its sanctions act together. But they can work around it? I think they can. First off they have an advantage that the rest of the world didn’t want us to this and maybe helping the Iranians to evade sanctions and resist them. But I think in the end, the Iranians are going to have some export losses. It’s really just a question of who are they going to find to buy up that extra oil and will they offer discounts to do it.
Alix: And … Will they wind up actually finding those buyers like as you mentioned.
I wanted to pull a quote Chad from the treasury issuance that came out earlier that said “whether the price and supply of petroleum and petroleum products produced in countries other than Iran is sufficient to permit purchasers to reduce the significantly in volume their purchasers from Iran”. Is an addendum to that potential reduction in imports. How tight is the market then?
Chad: Today, we are tight but the story really coming out of this as Winston Churchill said, protect your most important truths with a bodyguard of lies and the truth today that came out with Israel, fighting with Iran is that the Saudi’s, the U.S. and Israel are the new axis of the oil economy. Integrating towards work were the Saudis’ will deliver to the east and I’m making a call for 2028, the US will be effectively independent. and you said at 70 I may not be right, maybe I’ll go 2 for 2 with that.
Alix: So, with energy independence what does that mean for the oil price? Bank of America has a potential $100 call depending on what the Saudi’s does.
Chad: I think we have enough production now and enough rigs up, 2015 and 2016 year was the first time since 1983 that we had year over year production in this country. And for the next 5 years I see rig growth, I see institutional dollars put to work and a lot of it is equity dollars. You know, the leverage ratios are down to 85% for loans that are going on in the market today so you have a big equity component. The drillers are well financed, you’ve got a 5-year program running in front of us. We are going to have a tight market, it’s going to hang around 70 for an extended period of time and then when the independence comes between the two regions of this world, you are going to see a differentiation between Brent and WTI.
Alix: Ok, so let’s get to what can make up what. So, the U.S. is not going to be able to make up necessarily what we lose from Iran. There are a lot questions about Saudi Arabia’s spare capacity is. Richard, what do you see it as?
Richard: Well I think at this point the Saudi’s have been making a very clear that they are most concerned about market share. So in terms of actual numbers to spare it’s kind of unclear how much room they really have to go as they don’t necessarily want to use all that room if they can instead deal with other producers. That especially counts with the Iranians. I think their objective with all of us with the Iranians is to edge them out and damage them geopolitical and make sure their economy is as damaged as possible.
Alix: Meaning pump at lower prices.
Alix: So, we got a tweet today from the Saudi energy minister. He said, “I’m in close contact with OPEC’s presidency, Russia and the US and will be contact with other producers and major consumers over the next few days to ensure market stability” What does that mean?
Chad: He is just protecting the Saudi RamCO IPO in the coming months because the reality is that the world is confused, they don’t know if the offline and online product of Iran will hit the markets or effect the prices so he is trying to stabilize and buoy the current prices which benefit them considerably in today’s markets.
Alix: Do you buy that Richard?
Richard: I think that is right and we are now going to start see the contradiction and disagreements that already are under the service starting to come out between long term Iranian, long term Russia, long term Saudi interests here.
Alix: So, you lay out your big thesis Chad, and it has implications you are going see above 70 but it’s not going to be the kind of huge range that we necessarily saw. How do you invest with that, what is your big call right now.
Chad: Well the most exciting part of the U.S. possibility of energy independence of by 2028 is the infrastructure that is going to be built in this country. So, if you imagine that oil is consistently be plus minus around the $70 mark, building terminals, rail infrastructure aggregates, the real inner workings of the roads the built this country are going to be the exciting parts of the infrastructure that will create value. You will get cash on cash yields in the mid-teens today in that aggregates space.
Alix: You talking about MLP’s or something more basic than that.
Chad: More basic than that, fundamental growth of the roads, the infrastructure, the bridges, tolls, but you are also going to see terminals being built You are going to see Mississippi River terminals, Louisiana terminals, Florida terminals, everything that goes into energy infrastructure, as well as aggregates and infrastructure related to building.
Alix: Richard, what is your biggest question you have right now.
Richard: Well, I think it is going to be were the Europeans is going to come out on the Iran and the imposition of sanctions. They have said very clearly that they intend to push back on the U.S. decision to walk out on the agreement and we have to see what that looks like. Are they actually going to introduce legislation that allows them to push back or even retaliate against the United States or not. Because that will drive a lot of things. Both politically and diplomatically with the Iranians, and economically like the oil supply.
Alix: Guys, thank you so much. Let’s look at your take away right now. Chad sees a new world oil superpower, Israel, America and Saudi Arabia and he is investing in infrastructure and gross land positions. Richard does think that congress could consider increased sanctions, U.S. partners may retaliate, and he is watching Europe.
Chad and Richard, thank you so much. It was a real pleasure to be with you guys.