Oil Markets on Alert as Geopolitical Risk Builds

0:00Welcome back to Market on Clothes. I'm Sam Bartis on the floor of the New York Stock Exchange. Join by Alex Koffee over in our Chicago headquarters today. So let's just talk energy markets with Ben Cook, portfolio manager over at the Hennessy Funds. Ben, when you woke up this morning, did you think you'd be coming on just after 4 p.m. Eastern with WTI trading at 87 bucks? No, and I'm probably not the only one. Honestly, it's as volatile a market as I've seen in my career. I think, you know, not just the peak and oil prices overnight, but the decline we've seen today, and the decline in time spreads. I think the market, this is a market that's keenly focused on geopolitical risk and the threat of supply disruption, and will likely continue to be volatile as headlines continue to drive expectations either of escalation or de-escalation and what it might mean for global supplies. Ben, it seems like everybody consensus is, hey, we're going back to where we were if this gets resolved in crude oil, or we're going back to where we just were overnight

1:03if it doesn't. Do you feel the same as it that binary? You know, even though we've got encouraging commentary from the president this afternoon, and it's not clear what the off-ramp as it's described is in, you know, exiting this conflict with Iran. I mean, Kamenie's son is now the proposed leader of Iran, and, you know, it's remains to be seen whether or not he's an acceptable stand-in for President Trump, and ultimately, you know, whether or not he remains in power, and the degree to which Iran continues to cause problems with the Strait of Hormuz and launch rockets into neighboring countries and territories. That clearly is, you know, that's on the minds of commodity traders now, and probably for the foreseeable future until some longer-lasting conflict resolution is in place. Until then, again, I think volatility will be the watchword. Now, if we do see de-escalation, would we trend back towards the price range we saw

2:08leading into the end of February more than likely, we would, although I think a geopolitical premium is merited in the marketplace, and we probably would stay in the $65 to $75 range. I just want to unpack the comments further, because, you know, I hear what you're saying right now about, obviously, the devil being in the detail here. I mean, obviously, we've seen a nice positive response, but we're obviously going to have to wait to see how this plays out. I mean, Trump obviously saying that the war could end soon, considering taking control of the Strait of Humors. This is something we're watching very closely, but also saying that the war is pretty much complete. I'm just wondering what is complete. I don't want to get political here, but I'm just wondering is you as analysts, market participants, what sort of indicators are you looking out for right now as to what exactly is the intent here as to how to make decisions on which way things go, because the direction very much depends on the duration of how long this all drags out for.

3:11No, that's right. I think the magnitude and the duration of this potential supply loss on the crude market is when the commodity markets minds. No question. You know, more directly to answer your question regarding, you know, the war being pretty much complete. That's deliberately vague, I think. Look, I think the reality is, is that there's a question whether or not the proposed leader of Iran ultimately will be acceptable to President Trump. And if he's not, if there's an alternative, how is the Trump administration going to install that their own version of leadership there in Iran? These are all questions that are difficult to answer even for geopolitical risk analysts. But I would tell you that longer term from the commodity markets perspective, there is an expectation that this conflict will be resolved. If you look out six, nine months, we've got October crude oil pricing, WTI, right around $70. And then next year, we're looking at commodity prices in the $65 range. And that would take us back towards the trend

4:15where we were prior to the conflict starting. So whatever pretty much complete means, I think there's there's a matter of timing and a question of that timing. But ultimately, I think the market is expecting de-escalation and some resolution in this Middle East conflict. All right, Ben, I'll ask a similar question, but I'll frame it a little bit differently. We'll keep it more market-related. Knowing both of these are very important to the story. Which in your mind is the bigger contributor? The actual price volatility of what's going on in oil right now or the actual level that it's trading at? Yeah, clearly, it's tough to make decisions with price volatility. I think for most producers in the marketplace, when you're talking about equity valuation, very few producers are going to change their capex decisions based on a short-term spike in prices. The impact of pricing being elevated over a longer period of time, that might come with significant declines in inventory. Those are more durable pricing declines in the

5:20increases. And those ultimately will foster or prompt companies to change their spending patterns and their behavior towards growing production volume. Look, the reality is, is that we're elevated today. And with the price we are right now in the mid-80s, it's unlikely it's going to alter consumer behavior in a meaningful way. But if we were to get prices much higher, $90, $100 and beyond, ultimately, that has an impact on not just consumers and their ability to spend in the broader economy, but also a more durable lasting supply disruption, ultimately, is going to invite more supply into the market. And that could change consumer behavior. And prompt a reversal on the drilling activity levels we've seen here in the lower 48 and outside the US as well. Yeah, look, Ben, Alex and I started this day talking about the potential for the short-term demand destruction. And obviously that is something the markets are watching very, very closely. We've seen it in some of the consumer-facing stocks, like airlines

6:20and cruisers as well. I wonder where this all leaves the G7 meeting on coordinated oil release tomorrow morning. We'll have to wait and see. But we're going to have to wrap it up there, Ben, really appreciate it. Thanks so much for joining us today in getting your analysis. Ben Corker, portfolio manager at Hennessy Funds.