Dissecting Headlines and a Slice of Economics

Well, welcome to the Erdos Miller Technology Podcast. I am your host, Zach Gaston, filling in for Mr. Miller today, because he just had his second baby boy. So, congrats to Ken but for now you will be enjoying the next 15 minutes of your life with ideas from my mind. Our podcast today sponsored by Gibson Reports, they provide excellent MWB and Directional Drilling market share reports. You can check them out at gibsonreports.com. You can find our podcast on Spotify, iTunes, or on YouTube, just search for Erdos Miller.

It's fancy seeing you across the tables Zach, what are we talking about today?

Well, I was thinking we would talk today about commodities.

Commodities. What are commodities?

Commodities are exchanged slightly different than the way we do it up there in New York. They're done often in Chicago and basically commodities are things people trade. It could be pigs or cows, in this case I'm guessing we'll all talk about crude oil today.

Mm-hmm (affirmative). Good old West Texas intermediate?

That's right. So I hear some things about how the price of oil is affected by supply and demand and the trade war with China. I mean, how does that actually happen? That's kind of the topic for today's podcast.

Okay. Yeah. That's an interesting one. Just a disclaimer, neither of us are experts on the topic so excuse us for ignorance but we do dabble, and if you are an expert and want to come on the show and let us know.

Here's something that really gets to me, right. Supply and demand or is it? So you've got a guy, let's say it's just Joe Blow. He lives off in, the Midwest somewhere. And he reads some article. He's a speculator in the commodity market. He reads an article. We are in some kind of trade war, and that's going to be bad for business. And then he doesn't want to buy a futures contract for oil. And all of a sudden futures contracts for oil are going down in price.

So how does, how does the actual like production and supply and demand and the futures price relate?

So I think the supply and demand are both inputs into that market. And there are more informed folks, obviously that take plenty of inputs into that market. But basically at the end of the day, it's all speculation, right? It's the same as the New York stock exchange in that regard, but slightly different because on the commodities exchange market, you can actually accept receipt of goods and delivery of a thousand barrels of oil. If you let your contract expire.

That's right. You can take delivery of your oil if you happen to not trade off into the future.

Yeah, well actually I read an article in Bloomberg, which came out in 2015 about a guy who tried to take delivery of a barrel of oil but later his contract expired. But apparently he encountered, all sorts of hurdles with safety and with, nobody would, his broker was telling him it was a stupid idea. He ended up not actually trying to take delivery of a barrel of oil, just a sample, but there were all these concerns with hydrogen sulfide. And he did eventually get a little sample from the Bach. And he was, one of the engineers was telling him, if just the dangers of hydrogen sulfide, for example, if you inhale a 0.1% by volume of ethyl alcohol for eight hours, you might get drunk. But if you inhale the same concentration, 0.1% by volume of hydrogen sulfide for a few seconds, you'll be dead.

Yikes. I guess that's why they have the safety monitors out in the field.

Yeah. So you don't want to mess around with raw crude is the moral of that story.

You could try to accept delivery because the commodity market allows for it, but it sounds like there will be quite a few hurdles.

Yeah. And kind of going along with the supply and demand, the futures prices of oil, there was actually around the 2008, late 2008 financial crisis. There were a lot of people actually just buying tankers full of oil and just letting them sit out in at sea until the price went up. And, there were lots of articles in the media about how "Hey all look at all these evil people holding off, holding their tankers out at sea and driving the price of oil up." But, from an economics perspective, that's, that's what made sense at the time, given the spot price and the futures, price of oil.

I mean, part of me thinks that perhaps if we could help inform the public more or give more information into the oil industry, we might be able to debunk some of these, flashy news lines like that, that you're mentioning, or when it says that we're in a trade war. I mean, it's like, how exactly does that affect that barrel of oil coming out of the Permian? Right. I mean, that...

Right.

So I think we could do a better job as an industry, as a whole to kind of help guide the message, debunk some of these articles that come out and hopefully let people make more informed decisions when they're trading on the commodity or future market.

Yeah. Well, it's an interesting dichotomy between consumers and people in the oil and gas industry. When the oil price goes up, we're all happy, but obviously most consumers who just drive around in their cars and are not in the oil industry and other industries don't like that. So it's kind of interesting political game too, because sometimes, the president or the government will want to, lower the price of gasoline before an election to show that the economy strong or to appease consumers. So in my economics class, I learned that, if there's perfect information in the market, the price of the commodity or the equity will be exactly at the supply and demand point. Why is that not the case with oil?

To one point that I'm going to have two points on this to one point, I don't want that to happen because if everyone has all the same information, there would be no incentive to exchange on the commodities market. I would think because there couldn't be any winners or losers. It sounds like a bunch of communism to me.

The second thing I want to say is that I think we do need more information for people that speculate in the oil and gas market, because those speculators have more impact on all of our jobs in the oil industry, then supply and demand does outright. I mean, because those people's opinions on the future of this industry affect the price of oil today. And that affects whether or not our oil rig is drilling whether or not that pump jack is pumping. So I would love to inform those people more and try to get our message out there that, Hey, we're not bad guys destroying the environment and, and holding tankers off shore just for our own benefit, those reasons for the things that we do. And I think if we could just bring them into our view of the world, maybe it would help us out.

Or at least give them a little peek into it.

A little peek into the world of oil and gas.

One of the other factors that we haven't really talked about yet that can significantly affect the price of oil is, is OPEC. And like the geopolitical situation going on, for example, with Iran, whether there were sanctions against Iran, whether they can sell their oil or not. And all of that affects the price of oil. And back in 2016, I was reading several articles about how actually Saudi Arabia is wildly. It requires a really high price of oil to actually stay profitable. Whereas producers in West Texas can, be profitable even at like $40. And in that range, whereas Saudi Arabia needed $80, $90, a hundred dollars bill all of oil at that time to be profitable.

Yeah. All right. So I did see some recent articles where for once it's not us, it's the Great Britain right? If not Great Britain, then the UK. They're out here exchanging fire or seasoned oil tankers and having it happen to them as well, right there in the Gulf with the oil tankers and, headlines like that. I have to wonder, I mean, does it cause that average, commodities, speculator to think twice about investing in it later? I mean, do they want to see the oil tanker gets seized and think, Oh, wow. That could cause some strife, let me go speculate and increase the price of oil or does it make them go, Whoa, I don't know what's going on over here. Maybe, I don't want to buy oil into the future. I'll sell.

I don't. I mean, I would, I would think that that kind of tension would, would cause the price to go up, but maybe not.

Yeah.

Not significantly.

Or maybe it's just the unknown that's causing people to kind of sit and wait and that money's not changing hands.

I think generally it's just political uncertainty and turmoil causes oil price to typically increase. So we definitely want to keep an eye on, global tension that if war breaks out, hopefully not ever in the near future with Iran, but that could certainly cause a bit of a shockwave in the oil and gas commodities market.

I'll talk About some more, we'll talk about some trade war, trade China. We've got Mr. Trump over there and he's got his boxing gloves off, duking it out with China. And right now you, you see tons of headlines about it, but it seems to be negatively impacting the market as a whole. It seems. Is it the positive? Is it the negative? Is it the uncertainty? I mean, what's going on with that? Do you think? I mean, because it affects us.

Yeah.

Yeah, it does because we might think that, what happens on Wall Street in New York with invent, these big hedge funds doesn't really affect oil and gas here in Texas. But at the end of the day, there a lot of those private capital companies in New York or what's funding the drilling in West Texas. And so if there's uncertainty in the financial markets and stock market overall, they're going to, cut back on their investments, which we actually, I think we're starting to see a little bit of that this year with all the turmoil with the China trade war and, interest rates and just all the financial things going on. I think a lot of the big private equity firms have started cutting back on their investments in oil and gas. And we've seen, I think a little bit of that slowing down, but we'll just have to see kind of what happens over time.

You know what my opinion is on when other investors pull out?

What's your opinion?

You double down, you do the Warren Buffett, you got to jump into a market that looks like it's bad and that's when you really make the money. So you see a lot of people holding out and actually making more investments through the market, even though I'm guessing maybe less informed investors are pulling out. Because it's too unknown for them. Maybe it's too risky for their portfolio, but for folks that need that risk in their portfolio so that they can, have some kind of a profit on their holdings, maybe they are investing more into oil and gas. So it's...

Yeah. And it all depends on your timeframe. It could be more of the short timeframe investors that wanted their quick returns backing out. Whereas on the long timeframe, in many years, you'll still be quite profitable.

Yeah. I've noticed something all the big guys, like Shell, Exxon and Chevron, it seems like they have now coming full force into the Permian or it looks like they're there to say, I mean, they don't seem to be panicking with a change and a dollar right. On the price of oil. I think that's a good sign. I mean, those guys have been around for a hundred years. So you would think that they've got some kind of guy back there with some information.

I'm sure they do some pretty good risk management.

That's right. So, but even if they don't share with us all the facts that go into their decisions, I think you can look at some of those decisions and think, okay...

Just see the fact that they're still in there they're doubling down.

That's right. So instead of the headline being that trade war or something, maybe the headline is okay. The big oil producers that have been around for forever are pushing full force into the Permian. I would say that's a positive indicator. Maybe they're seeing it mature. And maybe they're seeing it as a nice stable investment now and less of the wild West.

Yeah. Well, and you certainly want to be buying in at a lower price.

Yeah.

The deepest they saying.

That's right.

When the price goes down is when you want to be buying and selling when it goes back up.

That's right. Buy low, sell high, buy low sell high. But we're talking about all sorts of economics today.

Yeah.

Supply and demand, buy low, sell high.

Futures contracts.

Yeah Futures. In conclusion, I would say we need to inform the public more about the oil and gas industry as a whole using information that we got. We know that maybe the average American does not when they're speculating on the commodity market. And I think in general, that would help us during times of flashy news articles that may be create doubt. We could maybe free up some of that doubt and allow people to make better informed decisions on what they want to speculate in. And, and hopefully it'd be, oil and gas.

Yeah, well that's all the time we have for today. I'm David Erdos.

And I'm Zach Gaston.

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Thank you.