Oil Risk Returns, but Do Markets Even Care?

As the ceasefire between the U. S. and Iran falters, bringing oil flows back under pressure, Andreas Steno Larsen and Mikkel Rosenvold break down the geopolitical fallout, from jet fuel shortages to shifting supply dynamics. 🔥 Get 𝗙𝗥𝗘𝗘 𝗔𝗖𝗖𝗘𝗦𝗦 to Real Vision https://rvtv.io/3YOZZUe Today’s sponsor is Plus500 US. Take your trading to the next level with cross-market contracts, from precious metals to key indices, and more. Whether you’re a seasoned trader in the Futures arena or brand new, Plus500’s user-friendly trading platform offers you the advanced tools, market insights, and quick execution you’ve been looking for. Get started with Plus500 for as little as $100 at https://us.plus500.com. Trading in futures involves the risk of loss. Learn more about your ad choices. Visit podcastchoices.com/adchoices

• 0:00Speaker 00

  New week.

• 0:04Speaker 00

  Big moves.

• 0:08Speaker 00

  You ready? Andreas on the data, Mikkel on the floor. Turn the headline into trades you can know. From yields to inflation, every chart, every trend. Get the story, get the setup from the open to the end. They try to be as actionable and as honest as possible, but keep in mind that their predictions might be. Sometimes maybe good.

• 0:35Speaker 01

  Sometimes it's maybe good.

• 0:37Speaker 00

  Sometimes maybe shit.

• 0:38Speaker 01

  Sometimes it's maybe shit. Shit, shit, shit, shit, shit, shit, shit, shit, shit, shit. Sometimes it's maybe good, sometimes it's maybe shit.

• 0:46Speaker 00

  It's Macro Mondays, big picture. Clear play, stocks, bonds, FX, crypto on the way. Get context with the strategy right now on your screen. Macro Mondays, level up your week, oh yeah.

• 1:06Speaker 02

  Oh yeah, it's Monday again. Welcome to Real Vision, welcome to Macro Mondays. My name is Mikkel Rosnall. I'm joined as usual by my co-host Andreas Steiner. We have a great show for you today. Is the war back on? Do we have jet fuel shortages in Europe? And what is keeping markets afloat anyhow? Welcome to the show Andreas, how are you this morning?

• 1:28Speaker 03

  I'm feeling a little bit better. You know, I've had a rough weekend, so I actually at some point couldn't care less about the Iran war during Saturday and Sunday because I was in bed. But well, I think on Friday afternoon, I managed to tweet the crisis is over, period.

• 1:51Speaker 03

  Looks a little bit wobbly that message today, doesn't it? But let's see.

• 1:56Speaker 02

  Yeah, we'll get back to that, Andreas. I have to say I'm in a great mood today, mostly due to psychedelics.

• 2:02Speaker 02

  We had a great weekend as investors in Definium, Cybin Compass, other compasses, companies as well, after Joe Rogan stepped into the White House and Donald Trump delivered an executive order. Obviously, we don't do legislation anymore in the US, so an executive order on psychedelics. So a great mood for me here, anyway. It's gonna look quite neat on our portfolio as well, but we will touch on that in our Macro Meets Micro Show. I can't remember if that's next week. I should have prepared that. But anyway, enough about psychedelics, Andreas. Perhaps, as you mentioned, things have been really, it's been quite the rollercoaster over the weekend in Iran. And, you know, I had some of the same feelings on Friday,

• 2:47Speaker 02

  and now we're here. So that's perhaps a good occasion to just mention our usual catchphrase here, Andreas, that our takes, even on crises, might be...

• 2:57Speaker 01

  Sometimes it may be good, sometimes it may be shit.

• 3:02Speaker 02

  Yeah, I think we got that. So, Andreas, before we get started, just a quick rundown of some of the great content we have for you this week on Real Vision. I released the Drill article today and tomorrow I'm doing, and ask me anything for Alpha members at Real Vision. So not only the approach here, but also for Alpha members. It's mostly gonna be geopolitics, but take your shot, ask whatever you want. I'll see if I can answer. Happy to talk psychedelics as well, clearly. So get your questions in there. Join us tomorrow at 11:00 Eastern for that. Thursday at 9:00 AM Eastern, we have the very first Chining Macro Show with Joe Bland for free on YouTube. So if you're one of those guys just following

• 3:45Speaker 02

  Macro Mondays on free every week, you can go watch Joe Bland's great Chining Macro Show. He's been doing some banger trades lately, and you can track these episode by episode if you get into it. So do check that out, Thursday at 9:00 AM Eastern. And finally, Friday at 10:30 AM Eastern, we have Jim Bianco joining Ash Bennington, and that's for the Alpha Group and above. So lots of great stuff. We have a couple of articles coming up, Andreas, including our Friday portfolio update, which is always one to look out for. So lots of great content, Andreas. Wow, what a weekend, Andreas.

• 4:24Speaker 02

  I want to start maybe going back to Friday a little bit because we had had two and a half weeks of complete, almost building ecstasy, you know, a rally culminating in announcement that now the Iranians were going to open the Strait of Hormuz. And I had much of the same feeling as you Andreas, that at least for markets, this was mostly over. We still had a peace deal to get signed, but that was mostly it. Then, we don't know exactly what happened over the weekend. It's likely that we had some internal disagreements in Iran, or maybe the Iranians discovered that when you're in a sort of, I think it's called a Mexican standoff, where you're like in a western movie, when you have two guys

• 5:06Speaker 02

  holding a gun at each other, it's a really bad idea to put down your gun unilaterally. And that is essentially what the Iranians did by opening the strait without the US lifting their blockade. So the Iranians somehow realized this, or made the decision to close the strait again. And we even had ship on ship, or attacks on ship over the week in the US. Reportedly, we don't have all the details yet, boarding an Iranian tanker as well. So, in my opinion Andreas, we're actually at a worse point than we were before Friday, because now we've actually seen action, kinetic action as we like to use that phrase, against ships. That's not good. We're heading into the deadline and

• 5:50Speaker 02

  the ceasefire on Wednesday. We're not really hearing a lot about positive movements on talks, and it's getting late in the day in Pakistan as we speak here Andreas. So, did we jump the gun too early, or what's your take on the situation here?

• 6:06Speaker 03

  So, I just saw a headline coming in three, four minutes ago. Trump was asked whether Iran is doing the talks, and he says he don't know, but they're supposed to be there. Those are the headlines from PBS here. So let's see.

• 6:22Speaker 02

  It's comforting.

• 6:23Speaker 03

  Let's have a look at the actual flows through the strait first Megal, because we did actually have a new peak post-war during this weekend. So, there was a window of opportunity. It wasn't long, but it was there.

• 6:40Speaker 02

  You didn't have a cruise ship going through, apparently.

• 6:43Speaker 03

  And I take some comfort.

• 6:47Speaker 03

  In the fact that they do not destroy these ships. They they either bought them, seized them, or, you know, fired some guns at them to get them to turn around. But in the early stages of the war, they destroyed them. So I still think there is sequential progress here. But as I said last week, we obviously need the flow to improve, say, over this week or next week to continue this narrative. Having said that, I've spent countless hours trying to figure out how severe this scarcity is of various products of of energy. I still think it's manageable, and we can get back to a few concrete examples in a second.

• 7:29Speaker 03

  But I'd like to start with a chart that I've taken

• 7:36Speaker 03

  tremendous amounts of insult from from tweeting on page five.

• 7:43Speaker 04

  Yeah.

• 7:43Speaker 03

  So what I wrote, and I stand by every single word of it, is that the US economy, the Western economy overall,

• 7:53Speaker 03

  is less dependent on oil than it once was. I'm not saying that it's not dependent on oil, just to underscore that, but it is less dependent on oil. Look at how much GDP we create per energy unit today compared to, say, two or three decades ago. Obviously, a part of this is that we've moved manufacturing out of the West, and we've created service economies instead. And, I mean, you and I, we don't use a lot of oil doing our daily jobs, Michael, right?

• 8:28Speaker 03

  Of course, at some point, we'll feel the heat from various import scarcities and import price hikes. But the domestic economy is not particularly sensitive to energy anymore.

• 8:41Speaker 03

  And I stand by every word of that. And that is probably also the reason why a hundred dollars a barrel is not particularly harmful right now. So in that sense, to get the domestic consumption down, you probably need even higher prices.

• 8:58Speaker 02

  To the US economy at least.

• 8:59Speaker 03

  Yes.

• 8:59Speaker 02

  We are seeing damages across the globe, especially in developing countries. But, but, but I mean, talking about the US economy is the engineer. And there are sort of two layers to this, Andreas, as well. Just a quick side note here that the US economy is less dependent on energy and the US is less dependent on oil, because the US has built up alternative, their own oil production and alternatives in form of shale gas and what have you. So, so, so that's US, fair enough, Andreas. But what about Europe? We keep hearing about jet fuel shortages. And I'm, I'm traveling to Italy in a few weeks' time here, a month and a half. But should I fear from a vacation or what's the situation?

• 9:35Speaker 03

  No, you're safe. Thankfully, you ordered an early vacation.

• 9:39Speaker 02

  I did.

• 9:40Speaker 03

  I actually, I actually asked you to go on early vacation because we have a project coming up first of August. Enough about that for now. But if we look at the jet fuel currently on water, you could basically see the trend over the past six weeks, right? So, two things here. First of all, this is obviously a symptom of storages being drawn upon, right? When, when there's a scarcity of supply, you obviously use what's already being supplied, right? That's, that's point number one. Point number two is that, look at last year, you typically see a tick up in the amount of jet fuel on water over the course of the travel season, right?

• 10:21Speaker 03

  Because, yeah, essentially from six weeks from now and then the subsequent eight weeks there, you, you basically have the peak jet fuel consumption season there, right? How severe is the scarcity? The European Commission talks about an issue already in six weeks from now, but they need to. So let me highlight that when, when you're in. When you're an institution in charge of the supply or of being held accountable for the supply of fuel, you obviously need to sound the alarm now because you want people to take action, right? So they make it worse than it is.

• 11:03Speaker 03

  If you look at the jet fuel consumption in Europe and the origin of the jet fuel, seventy percent issue is refined within Europe, often with imported crude, but refined in Europe. And I don't see any hiccups there. We do import some jet fuel from the US. The green bar here will likely grow in size over the course of the summer, but the issue is obviously the orange one here. So roughly twenty, twenty-five percent of the consumption of jet fuel stems from Hormuz, or the Strait of Hormuz, right? Not much is leaving currently, we just have to accept that fact.

• 11:44Speaker 03

  So, worst case, roughly one-fifth of the jet fuel used in Europe will not be available this summer. Is that manageable? It sounds like a lot, it is a lot, but I had a look at the airfare prices for a two-hour flight to France. I've booked the holiday home already in July, but I haven't booked the plane tickets, which was... That's the game, yeah. Which was probably a big blunder, but having said that, four tickets, so two tickets

• 12:23Speaker 03

  for my wife and I, and then for two kids, above six thousand euros now for a two-hour flight. And I'm, you know, I'm used to traveling these two, three-hour flights during the peak season every summer. This is three to four X the usual price. Yeah. So... The situation takes care of itself largely. Because if airfares are up three to four hundred percent, you'll obviously see less travelling, you'll see more people deciding on a staycation and so on and so forth. So I think the most vanilla takeaway here for Europe is that southern Europe will have a bad summer, northern Europe will have a pretty decent summer.

• 13:08Speaker 03

  Because northern Europeans travel south and they'll stay home to a larger extent than usual and spend domestically. And hey, thereby you use less jet fuel. So yes, there will be flight cancellations, we already see them incoming in Europe. And that's how you solve this. Is this a macro driver? Is it something that we should expect to see in GDP? Sure, to some extent. I mean, if you look at tourism. Tourism is probably worth one-fifth of GDP or something like that in many of the southern European economies. Say Portugal, Greece, those countries. While it is a nothing burger in the northern part of the Union, right?

• 13:52Speaker 03

  So some countries will face a few rough quarters as a consequence of this. But the region as a whole will likely get through this without any major issues. I did some calculations on the current state of the of the storages of jet fuel in Europe on pitch nine here. And assuming a fifty percent blockade of the strait from now and until August to September, the dotted line here in red, will probably get to depleted storages by August. And remember, you cannot run storages fully empty, right?

• 14:33Speaker 03

  So we will run into trouble unless there is a demand side drawdown. And there will be a demand side drawdown. If we see a reopening this week,

• 14:45Speaker 03

  everyone will probably get on vacation, but still at higher prices. I think that's the fair takeaway here. One thing I'd like to remind people of when you look at it from a macro perspective, you know, the broader context of this, on page 10, remember we have a very good empirical study of what happens when we see a sudden scarcity of energy in Europe or elsewhere from just a couple of years ago. In 2022, after the invasion of Ukraine, the imports of gas to Europe, so nat gas, right, dropped more than 25%. So worse than what I'm depicting for jet fuel here. And remember, nat gas is substantially more important to the economy

• 15:30Speaker 03

  than jet fuel overall. Europe got through 2022, 2023 with admittedly some initiatives in place to limit the demand for nat gas, et cetera. But we didn't even have a recession.

• 15:47Speaker 03

  So that was clearly worse than what we're currently faced with. And that was not enough to prompt a recession or to trigger a recession. And that's why, you know, pundits like Luke Grom and keep replying to all of my tweets saying, the economy cannot stand energy prices at current levels. And that is, pardon my French, empirically speaking, utter nonsense, utter nonsense. We had a way worse situation in 22 and the recession didn't arrive. Sure, it wasn't a good year, but it wasn't a landslide. So what I'm trying to say here again, and I want to reiterate that, this situation is manageable.

• 16:33Speaker 04

  So a quick break in your regular programming. If you're serious about your future, grab my free report called Prepare for 2030. I think you've got five years to make as much money as possible, and this guide will help you navigate what's coming. The link is in the description. Download it now.

• 16:50Speaker 02

  I agree with you Andres, you know me, I'm in the recessions have been outlawed camp essentially. That is to some extent what we saw in 2022, we're already seeing European companies subsidizing to keep energy prices low, we will see more of that in the coming weeks. That's obviously gonna work against the demand thesis, but let's see if we get close to the holiday season. But I agree with you completely, I mean, we probably should have had a recession for this, but we solved it. And then obviously there is a bill to pick up at some point, and we'll pick it up as inflation or

• 17:27Speaker 02

  fewer vacations, but yeah, I agree with you, this is not the doom stage scenario, it's laid out to be. So, big disruption, big bill to pay, but probably not a catastrophe. Especially also as the US economy should be relatively okay out of this Andres. And so, the big question right now Andres, we've had a rally for two and a half weeks here, we called the bottom quite well.

• 17:53Speaker 02

  I'm confident that we're gonna see a lot of volatility over the next few days, a lot of fear mongering around these negotiations. If we look aside from that, what's your feeling, can this rally go on?

• 18:04Speaker 03

  Yes. So, okay. It's, it's, it's one of those very used phrases, right, that this is a hated rally, but I actually think it is.

• 18:20Speaker 02

  It feels like it.

• 18:21Speaker 03

  Yeah, a lot of people

• 18:25Speaker 03

  are not on board this train, first of all. If you look at the most recent Bank of America Fund Manager Survey from mid-month, we had the most bearish allocation since June 25, so basically right in the aftermath of the tariff debacles and all of that. We see the CTA, so the trend following funds buying equities in basically all scenarios here. So they've been wrong footed and now their trend following strategy will have to buy into this, whether they like it or not, that's basically by design.

• 19:04Speaker 03

  And if you look at various long short books, for example from UPS or Goldman, the prime books, the net allocation to equities among long short hedge funds is incredibly low.

• 19:20Speaker 03

  By all means, this is not an over-owned market, if you know what I mean. It's rather under-owned still, at least if the crisis fizzles or dissipates slowly but surely over the next two or three weeks.

• 19:39Speaker 03

  And a lot of technicals speak in favor of markets continuing higher here. Having said that, sure, we're in slightly overbought territory right now. We'll probably get a red day in Nasdaq today, but nothing to really alter the trajectory here. So I remain bullish, given this, especially given the overall positioning out there. And maybe that's a good way to enter the discussion on why is the market actually rallying? Because it is slightly odd, I have to admit to that. But it goes very much hand in hand with what I've now casting as told us, basically in the run-up to the war, but also amidst the war. And I'd like to start with a few considerations on liquidity.

• 20:24Speaker 03

  And I don't think we can, you know, I don't think we can understate how important this has been to the recent rally. For the first time in a long while, we've had the so-called narrow dollar liquidity back above pain levels. And what do I mean by pain levels? Well, you need a certain amount of dollars available for transactions between banks to ensure that money markets run smoothly. And we've basically been through, say, four or five months where we've had too few dollars. That was the exact reason why the Federal Reserve started this Reserve Management Program

• 21:06Speaker 03

  back in December, basically a light QE program. So they're now buying. And at the same time, at least up until last week, where we had some big tax payments coming into the TGA, the US Treasury also Slowly but surely added liquidity to the market by hoarding less dollars. That is the red line on the chart here. We had a big tax payment last week, but on a trend basis, we will slowly but surely move lower from here. So all in all, that led to the SOFR rates pricing below Fed Fund rates last week and the week before that again, for the first time since the debt crisis and the debt ceiling crisis back in October and the government shutdown and all that.

• 21:53Speaker 03

  And that is major news because essentially you can see the spread between SOFR and the effective Fed Fund rate in yellow at the bottom of the panel here as some sort of gauge of the price of leverage. So is it cheap or expensive to get leverage? And it is now normal again, I'd say, maybe even slightly cheap. So that is obviously big news. Once you get a direction in the market, it's cheap to add leverage to that and we'll probably see that in coming weeks. On top of that, basically something that most pundits missed the train on, except us, we've been banging the drum on this and I'm actually very proud of that.

• 22:37Speaker 03

  The ESLR reform went live first of April. And you can already start to see some of the impacts here, right? Slowly but surely,

• 22:50Speaker 03

  the supplementary leverage ratio is basically a piece of legislation designed to keep the leverage of banks

• 23:00Speaker 03

  at certain levels. And they've now eased this regulation a lot by first of April, meaning that it is a lot easier for banks to

• 23:12Speaker 03

  Hold a lot of, for example, repos on their balance sheet because it is less punitive from a leverage perspective. A repo is not a particularly risky transaction, so when you allow more leverage, banks will take notice of that. So on page thirteen, you see how important this repo market has been. Say since two thousand twenty-four, we've basically added more than a trillion in this repo market of treasuries since two thousand twenty-four. This ESLR reform will likely add another trillion worth of capacity. And what does it mean in layman terms? It basically means that banks can provide more leverage to those players actively taking positions in markets.

• 23:54Speaker 03

  And on top of that, it also means that the treasury market will run more smoothly since you have more players willing to take on more capacity since they can borrow with these treasuries as collateral. So overall, the ESLR reform slightly improving liquidity dynamics in the transactions between banks, et cetera. I think this has been sort of the quiet hidden driver of what's been ongoing, say, over the past two, three weeks, and it's looking good. It's looking really good from a risk-taking perspective. And then, Michael, growth. I mean, someone forgot to tell the US economy that they're in a war.

• 24:39Speaker 03

  If you look at page fourteen, we've had two of the regional surveys out thus far. So from Philadelphia and New York. And if you take those two at face value and use them to predict the ISM, we'll get to plus fifty-five-ish territory. It's really, it's really promising. So in that sense, I mean, inflation can go up as long as growth and liquidity goes up alongside it and markets can stomach that, right? But it does admittedly smell a little bit like a late-cycle dynamic when you see all three going up at the same time, I have to admit to that.

• 25:23Speaker 02

  So Andres, let's just round off and look at the Central Bank's decision and the Fed here, because we've also obviously had a great fear that this war will lead to inflation, will lead to hikes. Is that completely ruled out now that we have more or less got the crisis under control if we assume that?

• 25:43Speaker 03

  Yes, I can see that CNN now says that talks are planned for Wednesday in Pakistan. So that's basically right around the deadline. But if, say, a few weeks ago, most people

• 26:00Speaker 03

  expected the European Central Bank or the Bank of England to already move maybe this month or in May, right?

• 26:07Speaker 03

  Slowly but surely, the officials from these central banks, and I've basically held the view throughout that they would like to remain in a wait-and-see mode. Some of the officials from these European central banks are now also,

• 26:23Speaker 03

  you know, they're trying to convey a message of patience here because

• 26:29Speaker 03

  it's a very binary outcome for inflation in a sense when you have, it's a deal or no deal scenario in a sense, right? So why take a decision as long as there's hope for a deal here in the short term? And, you know, at least my base case is still that we get some sort of light deal and then they'll probably spend months trying to iron out the details.

• 26:55Speaker 02

  That's very all-out push, yeah.

• 26:57Speaker 03

  Yeah, but as long as we get sequential progress from here, I mean, even dated Brent and that such stuff is lower than it was a couple of months, sorry, a couple of weeks ago. So the prices most urgently

• 27:16Speaker 03

  on top of the agenda in the European Central Bank in London as well, they're currently going down and my best guess is that they'll continue going down. So the fear that central banks will swiftly end this business cycle, they're overstated by now in my opinion.

• 27:40Speaker 02

  Great to hear, Andreas. That is pretty much all we had for you today. Still a positive outlook. Looks even better if we're actually getting talks on Wednesday and then we'll see if a deal can be done. For even more geopolitics, we try to keep that relatively light in this show and keep the focus on macro. For even more geopolitics, tune into my Ask Me Anything on Alpha and Proche tomorrow at Real Vision and follow all our content on an ongoing basis. We have a lot coming on the platform during the week. So, thanks to you, Andreas, for joining. Thanks to everyone for pitching in. We'll be back next Monday.

• 28:17Speaker 04

  You obviously enjoyed the episode because you're here with me at the end. But listen, don't forget to go to realvision.com/join and grab a free membership. It's an incredible community packed with alpha, great investment ideas and the research that you need to help you unfuck your future. So get started now. Go to realvision.com/join.