 And welcome back to the trading floor on the AmpliMe podcast. It feels like it's been a while. It does. But Piers has returned. He's been on, I feel like he's been Frodo Baggins out on his journey through Middle Earth and he's returned to the podcast. So how's it going Piers? It's going well. Yeah, I've returned to the Shire to the comfort of the podcast seat. Yeah, no, it's been good. Been on a bit of a trip, not too far. It's still a European road show, Paris and Dublin. So yeah, good to be back. Yeah, well, welcome back. And look, no other person better than to break down what is our main topic today. Because we're going to talk about one thing, because when you actually take the lid off this subject, it starts to unpack a number of contributing factors. And that is the one that you probably would have read a lot about this week, which is oil prices. And from a consumer level, I guess, just when you thought, oh, we're on the other side of inflation now. It's looking good. Interest rates in the UK. Maybe we're not going to go higher. Well, you might have to hold your horses at the moment. Because inflation is back on the table. But mainly oil prices. We know energy is very volatile. But oil does look destined for $100 a barrel again. And if that is the case, it's the first time in more than a year. But what exactly has been supporting this consistent run-up in prices? Because we've been going up now for a number of consecutive weeks. And we know Saudi Arabia and Russia. And we will touch a little bit about OPEC. That is a major contributing factor to why oil has been doing what it's been doing, i.e. moving higher. But what we're going to talk about is a couple of other things to kind of deconstruct this. And that's talk about the bigger, broader macro scene. So since Piers was last with us, we've had a hawkish-fed materialized. And we've had some really super interesting moves across global markets. When I say that, I mean multi-asset. And actually looking at correlations gives you a really good snapshot of market sentiment. And we'll look to have a look at what that snapshot is telling us right now. Then we'll look to talk about things like infantries in the US. This thing called Cushing in Oklahoma you may not have heard of. But it's critical really to understanding oil prices. We're also going to have a look at the shape of the futures curve and this thing called backwardation. Again, may not have heard that. I'm really going to test Piers' ability to try and explain that in as simple terms as possible. And I'm sure he can even touch a little bit on his own experience of having traded spreads many years ago when he used to trade for a US firm. And then we're going to look at, more importantly, the impact that this could have then on forward-looking monetary policy. And therefore, as a consequence, the wider economy. So that's what you're in for. So to kick us off, why don't we start Piers with the bigger picture? And then we'll look to drill down. Well, it's been an interesting week and month. And of course, we're sliding into the end of quarter three here. So from a trading point of view, this is the last trading day of quarter three. So it's always a bit of a moment to go right, how things been performing across the quarter and then year to day. And it is a fact. Here we are on this final day. And right now, the S&P is down 5% on the month. And it's heading for its first quarterly decline in over 12 months. So stocks have really come off the boil. In combination with that, treasuries, so US bonds, their prices are also dropping. So you've got stock prices going down. You've got bond prices going down. And actually, from a yield point of view, with bonds, yields move in the opposite direction to price. And right now, 10-year yields at the highest level they've been since 2007. Two-year yields, highest since 2006. Oils smashing it up through the ceiling. You've got some really, really big action going on across global markets. And it's all about, I mean, what happened last week, what happened on Wednesday evening last week, which was the Fed's meeting. And the Fed were more hawkish than expected. And ultimately, you'll have been reading in the press, its interest rates higher for longer. And it's just that message being hammered home by the Fed. And it's really led to a sharp adjustment of future interest rate expectations. So what do we think's going to happen to US interest rates? It's quite dramatically changed. If you go back a few weeks, then markets were basically pricing in and expecting that by the end of 2024, the Fed are going to start to cut interest rates. And by the end of that year, rates would be down to 4.2%. That was the expectation. Now, given what's been happening, the US economy has been strong, much more resilient than expected. Oil prices are now rising, leading to fresh concerns that inflation, the inflation saga isn't over. Maybe we'll get another bout of inflation, which hawks back, by the way, to the 1970s. Because in 1970, or in the 70s, sorry, we had a big inflation scenario. And there was a double oil spike. Oil went up just as we thought inflation was coming back down and it's back under control. There was an oil price spike that led to a second bout of inflation. So people are starting to think, oh, hang on a minute, this oil move, is that going to lead to the same scenario? But ultimately, those interest rate expectations, as I said, it used to be we thought, right, cuts next year, like four interest rate cuts to take rates to 4.2%. Now the expectation is that rates will be at 4.8% still by the end of next year. Also, so there's a thing called the dot-plot matrix. This is Fed officials at the end of each quarter. They adjust their forward guidance. And they tell us where they think rates might be at the end of this year, the end of next year, 2024, end of 2025, and then in the longer run. And really that is the dot-plot matrix that set the cat amongst the pigeons and why all these markets are pinging off to levels we haven't seen for years. And ultimately, the Fed have told us through that dot-plot that there's maybe one more rate hike this year. We thought we were done, but they're telling us there might be one more to take to rates up to 5.75%. And then more importantly, because we're basically at the top, right? One more hike, yeah, okay, it's not going to make too much difference, but we thought we're at the top when maybe not quite, but the big point is about 2024. We thought they would have to start cutting rates and basically the Fed are telling us that they're not going to. So connect the dots for me here then. What's this domino effect? You're saying the odds are up. They're the highest they've been in a long time. How does that impact all of them? Well, I mean, I would say, so basically everything's gone down, right? I mean, apart from actually oil and the dollar, I mean, your question, how does all of that impact oil? It actually, it doesn't. Oil's actually doing its own thing. Oil is rallying for a set of entirely different reasons. And actually the oil price rally is exacerbating our concern that inflation is going to go back up and the Fed aren't going to be able to cut rates and rates will be higher for longer. So oil's doing its own little thing here and we'll talk about that in a sec. But, you know, yield's going up. This is like, I want to talk about this because this is really, it's really important what's happening out there. And you need to go and if you can dig out like a long-term sort of US 10 year yield chart, go on to like tradingeconomics.com or something like that. And yields have really spiked and they've smashed up through 4% on a 10 year basis. They're up above 4.5% now. I mean, the move in the last seven trading days has been awesome. I mean, for bonds, it's like one of the biggest moves, certainly the biggest move maybe of the whole year, right? And this has put us at levels we haven't seen since pre-crisis now. So we had a big move up in yields in 2022, but we got to 4% and then that was the kind of ceiling and then we pulled back down. But this is a proper move into territory that we just haven't seen now for over 15 years. And so what does that mean? Well, it means borrowing's more expensive, right? Because the US 10 year yield is a classic benchmark upon which yields for corporate debt is really set, right? So if a company wants to borrow money, a big company, they'll issue bonds. And right, that's borrowing money. You've got to pay interest on that. Well, what's the interest rate? So this is the yield on these bonds, right? And the yield is really a function of that US treasury. And so companies will borrow at a rate that's higher than the US 10 year yield. And so, yeah, ultimately this rate move is quite extraordinary. And it's been actually on the longer end of the curve. So if you listen to our podcast regularly, we haven't mentioned it for quite a while, but we've been talking about things like yield curve inversion where shorter yields, so let's say a two year yield is higher than a longer yield, let's say 10 year. It's an unusual scenario and it's, we call it the classic recession indicator, right? So it hardly ever happens, but basically I think the last, whatever the stat is, the last seven times we've had the yield curve inverting every single time we've had a recession, except for this time, maybe. It's always the first time, Piers. There is always the first time, but at the moment we haven't seen that recession yet, but the thing is these yields moving higher, I would say make the recession risk higher, because right, borrowing costs are greater, so people are gonna borrow less, then they're gonna invest less, they're gonna spend less, and that kind of starts to erode away at that consumption story, which ultimately then could possibly lead us down the path of a recession. And at the same time, you've got oil ramping higher and then, oh no, is inflation back? And actually the Fed gonna have to hike rates and then yields will go higher again, and we might be caught maybe into year end here for quarter four, maybe we might get caught in this little bit of a kind of negative feedback loop. If oil does continue to rise, then yeah, we could be in for an interesting end of the year. Well, just sticking with central banks to continue this line of questioning then before we go into what happened so much this week. One being then, I saw a comment out of Standard Chartered and they suggested that a hawkish Fed could turn out to be a blessing in disguise this time round, since it's likely to cause OPEC producers to be more cautious for longer. What do you take of that? Um, so what do they mean by that? OPEC producers being more cautious, do they mean that the OPEC producers will continue to maintain their production cuts? So I'm not sure what they mean by the caution word there. Yeah. I just try to see if I can dig out the full piece and what they're referencing. But I guess maybe what they're saying is that ultimately if the Fed stay hawkish, that's a negative for the whole sort of broader growth story. Right. That would mean that demand for oil dampens, because one of the contributing factors to this oil price rise, and there's a few, but one of them is that, well, the economy's, the economic situation's been way better than anybody could have possibly imagined in 2023 so far. So that resilient growth story has meant demand for oil has been greater in 2023 than we had expected. So that increase in demand thing has led to prices going up. Maybe they're referring to ultimately the Fed's gonna damage that demand story by being more hawkish and therefore prices will come back down. So OPEC don't have to continue to, or even if OPEC stand pat and continue with their production cuts, it will be the weakening demand story that helps to bring oil prices back down. Maybe that's what they mean. And then what about someone like the ECB where late to the game was always with loosening and tightening of policy. Yeah. And they're facing a more protracted slowdown in economic growth, but a more slightly different prospects in terms of inflation and where they're at with their hiking cycle. Are they the one that you talked about Q4? So is the Eurozone the one to watch in Q4 in particular? Yeah. And to add to that story, of course, the engine room of the Eurozone, Germany is having a shocker at the moment. Economically they are looking, I mean, wow, it's like all of a sudden it's like they've just fallen out of bed and it's the economic outlook is incredibly negative. And again, talking about kind of negative feedback loops, when the economic situation becomes so dire, it kind of feeds the narrative and feeds people's then behavior and they start to prepare for the recession. But of course, starting to prepare for the recession means the recession happens sooner or is deeper. Because when you prepare for a recession, well, you maybe start to save rather than spend. And of course, that's the action that leads to consumption dropping and the recession coming. So the Eurozone, if it's big engine room, Germany being the biggest economy in the Eurozone, of course, if that does falter and stutter and stall, then that's a big issue for the Eurozone. And if you've got oil prices, because obviously, the Eurozone is a big importer of oil. They don't produce much oil. So they got to buy it. And so they're very vulnerable to energy price spikes like this. Which makes me feel like I'm gonna put my Putin radar on. Feels like a Putin-esque time. Yeah. If you're gonna talk a little leverage now. Yeah, just to put the boot on the neck. Yeah. Interesting to watch on that front. But let's take a look then at oil prices this week and particularly mid-week. So from kind of Tuesday through Wednesday, we essentially rallied from around 88 bucks to 95 bucks a barrel. And that's a large move in a 24-hour period. And we've had some pretty seesaw price action actually. After rising that much, we then have declined from 95 and we're trading a just sub 92 handle at the moment. So it has come off the boil a little bit. But when you see a move like that, long trend has been up, but that move has been accelerated over that timeframe. So what was the reason for this week's jump? Because that Wednesday move was the biggest we've seen since early May. Yeah, monster move. Let's just quickly cover up. So the trends higher anyway, right? And that's mainly because of something I've already mentioned, which is the demand story has been much more positive than we have thought because economic resilience, despite interest rates being high, certainly in the US, the economy's still firing, right? So demand's been high. Secondly, OPEC and OPEC plus, so including Russia, cut production. And then they extended those production cuts. So just as demand's been a positive story, then supply has been dropping. So both of those two factors, force price is higher. And just to give you an idea on the supply side, so those OPEC plus, those extra cuts will have basically removed 125 million barrels from the market by the end of September, okay? And then by the end of the year, if they maintain those cuts, which we expect them to, then basically the market from a supply point of view will be 245 million barrels worse off, okay? So that's that supply side. Now, this week, so the market's going up anyway, but then all of a sudden this week, something happened, an entirely different thing, that led to a big spike in a monster rally that took us, yeah, in sight of the $100 mark. We didn't make it to $100 yet, but this is all about US supply. And it's all about really a little place called Cushing, which is a place in Oklahoma. It's basically banned dead center of the United States. And other than being geographically dead center, it's big claim to fame is that it's the biggest storage facility of crude oil in the US. And it's the key facility that the golf of Mexico production, that oil gets piped up to Cushing in the middle. And then right from Cushing, it then kind of fires off in all directions to kind of supply the whole country. So Cushing is an incredibly important, the most important delivery point for crude oil that's been produced in the Gulf of Mexico, okay? So right, the supply of oil at Cushing is a really key factor when it comes to the oil supply. Derivatives markets. So if you trade what's called WTI crude oil futures, okay, so a future being a derivatives contract, then these, when you're trading a derivative where the underlying is a physical asset, so crude oil, a barrel of crude oil. So a derivative, a futures contract is basically a financial agreement between a buyer and a seller where you're agreeing a trade that will take place in the future. You're agreeing price and you're agreeing volume and you're agreeing a date on which the buyer will buy barrels of crude oil from the seller, okay? Now, on that date in the future, that's the delivery date, okay? Now, if you're trading WTI futures contracts in the contract, you can only take delivery at Cushing. Now, you can only take delivery at Cushing if there's enough supply at Cushing. And what happened, the trigger point for this big rally to the upside last Wednesday was inventory data being announced from Cushing and Cushing showed that inventory yet again had dropped and actually it's fallen 12 out of the last 13 weeks. Inventory levels in Cushing have been falling and stocks are now down 19 million barrels and that puts it at a 10 year, that puts it at below the kind of 10 year seasonal average basically and we've got a big deficit of, yeah, here we go. So it's the Cushing stocks are actually the lowest they've been since 2014 and then again a moment in 2008, all right? So these are extreme, extreme levels. And by the way, just a side point, the last time Cushing inventory levels were this low in 2014, what was the price of oil? $121. And then in 2008, the other time Cushing inventories were this low, what was the price of oil? $148. $148. So those out there that are gunning for oil to smash the $100 barrier and move higher, well, there's some pretty compelling evidence that would suggest that that may well happen in the days to come. But so you've got this supply issue in Cushing, right? Now, go back, I've got to tell the story, go back a few months now because the whole macro picture was, well, the Fed's been hawkish, the rate hiking cycle accelerated, surely we're gonna have a recession, the yield curves inverted, right? So some hedge funds were starting to build some pretty big short crude oil positions using WTI crude oil futures contracts. They were short oil because they thought the demand story, which had been amazingly resilient, well, that story's over, we think demand's now gonna drop and fight, let's get short crude oil futures. But the problem that these hedge funds have had is that actually the demand stories continued to stay resilient and now there's a chronic supply issue at Cushing and basically they've been forced and as the price is going up, they're losing money on their short position and they're being asked to post more margin and they can't take delivery anyway because there's no oil at Cushing and they're basically being forced to cover their short positions, which means if you're short and you need to take that position off, you need to buy. So on Wednesday, the Cushing data was the trigger point, it was like the last nail in the coffin for these hedges to go, oh, God, we've got to get out. So huge buying volume with not much sell side volume on the book led to a big spike. So the upside and we got, yeah, WTI got up to what was it, like $95 basically. So that would explain then the mechanics of that short covering, then finishing, why the price then drops pretty immediately down $3 after it gets pumped. Yeah, well, that's right. So what's happened overnight, like, oh, yesterday, so it wasn't it, yeah, we dropped from $95 down to $92 or actually lower, sorry, $91 or yeah, we got down almost to $91, so big, big move. So that, like, once all the hedge funds are out, well, prices, I guess you could say, you could argue that price is artificially and temporarily too high because you've had a rapid move to the upside purely based on this slight technical trade situation with these hedge funds. And so once all that's played out and the price skyrockets, well, then you get other speculators coming in going, well, hang on a minute. It shouldn't be that high yet. So you've probably got some short-term money coming in and selling, you know, as you expect a mean reversion because that move was so rapid, you're like beyond the two standard deviation away from the mean and you're probably gonna get, so this is like a short-term mean reversion now that's going on, which is why the prices dropped back to 92. But look, I think the long-term trend is, well, we've obviously added to the upside, you know, over the last few days and yes, it dropped back yesterday, but I think, yeah, the trend, you know, the trend's gotta still be higher over the weeks to come. You would have thought given all the fundamentals. So just touching on OPEC and then maybe that kind of leans into a little bit the political side to talk about Biden and the SPR. One thing I read this week was that OPEC might actually want to be careful about overtightening the oil market for the reasons being that they'd be shooting themselves in the foot, essentially. So if, as they have done, kind of everything comes together. So originally, oil was declining consistently. They took that action and we've gone up 30 odd percent. But now all these other things are starting to crystallize. Are they shooting themselves in the foot? If they push price levels too much, they start to see an increased risk of demand destruction. Then the price, maybe this is what they were talking about, standard charter with that cautious nature is that maybe we need to come off this a little bit because if the price goes too high inflation kicks off too much. The Fed starts tightening too aggressively again. Yeah, it's actually gonna, in medium term, go against us. Yeah, I mean, I think, well, remember, if you go back to June, oil's camped out at $70. If you're looking at WTI, we kind of spent the summer at 70 bucks. And that's too low, right? You often talk, people talk about, what's the right price for OPEC? What was their ideal price? And it's kind of thought to be about $90. And so, right, they cut production. Now, not in their wildest dreams, did they expect us to get to $90 so fast. And that's what they'll be concerned about. I think the current price today was $91.50 right now. Perfect, right? But what they need to be concerned about is the speed of the trend higher. And the problem is, if the speed of the trend higher now continues from this point, smashes $100, $110, right? Well, then it's too high. Then you're gonna get a negative economic outcome from energy prices being so high. And ultimately that leads to that demand destruction story. And ultimately you'll get global recession. And you'll see oil prices seesaw and swing all the way back down to too low again, right? So it's a super fine line, that kind of sweet spot between prices being high enough but not too high. So, yeah, I think the next few weeks are quite critical with this whole cushing thing, the futures contract that all this trading's been going on in. It's been the October expiry contract. So that contract will expire. I think it's on the third Thursday in October, if I'm right. And so I think once we get to that point and past that point, maybe this slight technical scenario in the oil futures market will kind of play out and come to an end, at least for a period. And then that might help to calm things down. But yeah, so the next few weeks you've got to be watching oil, that's where it's going to be at. And then kind of tying this in then to the US and their structural issues and then therefore the government's problem, I guess. Particularly with an election year looming. So one of the things was the US as we have been seeing leaning on OPEC, whether or not that relationship can yield results any more to have the desired outcome for the US administration. But the lack of drilling activity in the US has meant, and you've talked about this a lot, this kind of chronic lack of investment because of the economic climate and so forth. But it means then the US are only seeing modest supply growth and therefore not enough to offset these large deficit forecasts. And that forecast to give it some meaning, I read that the balance at the moment shows a deficit of more, this is physical, of more than 2 million barrels a day deficit through the fourth quarter of this year is what's forecasted at the moment. So when you talk about supply and demand dynamics, you're 2 million short on a drilling basis. It's interesting, that's the number because what was the OPEC cut? It was 2 million, wasn't it? I thought it was one. And I suppose Russia did top it up though and actually when you throw all the bits in. Not far off. Yeah, OPEC have got a tricky couple of months ahead. Do they maintain these cuts or actually not? So ultimately US supply is not really gonna help here. That's not gonna go up in any meaningful way to plug that gap. So if the US don't have a lever, or let's say a more of a circular wheel to crank, to open up the floodgates of oil, then they do have this thing called the strategic petroleum reserves, the SPR. So how does that play into this? Cause at the moment, if I'm right by my stats, after significant drawdowns last year, so this being the fact that when we were going through this price crisis, and when oil was surging higher as a byproduct of COVID compounded by the Russian invasion of Ukraine and so forth, they dramatically took action as much as Biden was putting the heat on the lights of Saudi to pump more, to flood the market. So it's the opposite kind of where we're at in the OPEC strategy at this point. He then dipped into these reserves, this SPR. But that SPR is now the lowest levels since a very, very famous year, 1983. The year I was born. Infantry levels have never been so low. So the strategic stockpile the Americans have. Yeah. Is incredibly low in historical measure. So what, can he not just dip into that again? It's a dangerous game. I mean, how many times you dip into the cookie jar before the problem. Yeah, I guess. So just thinking politically. Yeah, Biden's got an important 12 months, of course, where we just don't, whatever, 12, 14 months away from the election, right? And one thing that's incredibly important to the US population is the price of gasoline at the pump, okay? And it's, if it's really high, then everyone's annoyed and they blame the government, okay? So Biden tapped the SPR summer last year, when by the way, that's the last time oil got above $100. So this $100 level, that is a very, very key like psychological level. So if we get above 100, will he tap the emergency reserves like he did last time? But the big, huge risk with that is the more that you tap it, the less those reserves become. And imagine a moment where we've got oil above $100, you've got, you know, a structural deficit in terms of supply in the market and there's no emergency reserves to tap. Well, then where does the price of oil go? $150, $200, I don't know. So short-term, fine, you could go, oh, well, I wanna win the election, I'm gonna tap it. He probably will, because that's the problem with politics, right? It's such a short-term. You know, all he can see is I've got to win the election, I'll do whatever I can. But of course, long-term, that could cause some massive pricing, energy pricing issues like in the years to come. So it would be a super high-risk game, but he's probably gonna be desperate and might well go for it. Wow, watch this space. Okay, cool. Well, look, I think we should look to wrap it up there. So quite a few things that were going on. I do know that on the Spotify platform at least, there is an ability to leave questions directly on the episode. So please do make use of that function. If you joined in conversation, wherever you're watching this, don't forget to follow, like or subscribe, whichever one it is, and we will catch you again next week. But thank you, Piers. Have a great weekend.