Fact Check: Oil Prices, Tanker Costs, and Bond Market Analysis with Jim

What's been on your radar lately? >> Rates, rates, rates, rates. I like bonds.

Um, you know, for the first time I'd been turned bearish on bonds in 2020-ish.

And uh or beginning of this month I said, "Okay, it's time to buy them."

And I think what's important to understand about that is I think that bonds were expensive or

yields were too low. And now the expensiveness is gone. I'm not making a case that they're cheap,

you know, and that there's going to be a big rally in bonds. But what I am making a case for is that

I'll go back to the beginning of the month when I made the statement. Uh from the three-year to the 30-year, all the

yields started with a five. You know, 5% to about 560. >> Yeah.

>> And that at this point, if you want to buy bonds, I think you can hold on to that 5% coupon, and the risk of capital

loss, the price goes down and yields go up dramatically higher, is a good risk-reward ratio. Now, of

course, there's always that possibility that they can go higher in yield. You know, a good example of that would be

$200 crude oil. If we got something like that and it pushed the inflation rate up, but that's about what you would

need, I think, to see the risk of bond yields going higher. I think a lot of the risks that we face, uh whether or

not it's a bubble bursting or the economy slowing, those would all be constructive for bonds. You know, they

would cause a rally in bonds, and you would actually wind up seeing um much lower yields. Uh so, I think that from a

risk-reward standpoint that they've really become a good place to start looking at for the first time in about

six years. >> You know what's interesting about that is you could almost argue

if we get $200 a barrel oil, the long end might come down. Because if you get hawkish, that would

be aggressively hiking rates, you know, we've seen that in the past where the long end of the curve is doing the

opposite of the front end of the curve because as they're hiking growth and inflation expectations over long term go

down. >> You're you're right. And as a matter of fact, speaking about $200 crude, let me

let me throw out this argument at you. We're there right now. And the And how do I how do you arrive at that? The

price for crude coming out of this out of um the Persian Gulf is about $110. About the same as Brent.

>> Yeah. >> The price per barrel the price per barrel to ship it out because of the the

hostilities and shooting at all those tankers is running it around 30 to $35 a barrel right now. It used to be in

normal times, it would cost you $1 to $2 a barrel a 2 million barrel supertanker, it cost you you know, $1 to $2 a barrel

to ship it. Today it's costing you about $35. So there you go. You're already at $145 for crude oil. So because the price

is the price of crude oil that we see is called FOB free on board. That means it's $110. You pay to ship it. That's

basically where the price comes from. So it's $110 plus 35. And how do you get to 200? Well, how we even getting no ships

out? Two air two carrier strike groups, 75,000 troops, 13 destroyers, uh and and the logistics to supply all of that. Now

no one has put a price on what it's costing per barrel to get that oil out. But the estimates I've seen are running

between 50 and $75 a barrel that the taxpayers paying in all of that military support to be able to have those convoys

go through the straits. So you might argue we're already there at $200 crude oil. It's just it's $110 is the price,

35 to deliver it, and the taxpayers picking up the other 50 bucks in security in order to get those to get

those ships to move through in the first place. So you know, um if you were to get the price to go to

$200, you would almost have to argue that some of those other things would have to come

down uh because if the price went to $200, I don't uh think that the price of the tankers is going to go down. I don't

think that we're going to we're we're actually talking about putting a third carrier strike group in in um

in the Middle East. Those those those prices would actually go up uh at that point. So, it is already a enormous more

expensive than people think. >> And probably what's even more important than that for the real economy would be

the crack spreads. Because if you combine 200 or 150 with a $100 crack spread, now you're talking

about I don't know what the diesel price would be, but I know right now it's roughly 10 bucks in like San Diego parts

of California. So, you're approaching maybe $10 diesel nationwide if that were to play out, not necessarily because of

the oil, but because of that crack spread. >> Well, that's part of the reason why that

you know, the crack spread is so high to begin with because a lot of people have said, you know,

that the effective price of the the national average of diesel in the United States as of 2 days ago was like $6.32

a gallon. Of course, you're right. It's pushing nine bucks in in um California. But, the reason that that number so high

is cuz it's because the tanker market's broken. And so, a lot of when you when you look at those wide crack spreads,

remember crude is free on board. Somebody's got to pay that enormous tanker cost, and that's embedded within

those spreads, those refining margin spreads. So, the delivery of that is in there. And why is it broken? Why is the

tanker market broken? Because a lot of tankers are stuck in the Middle East and that they're they're sending tankers and

they're doing ship-to-ship transfers. You're tying up a tremendous amount of tankers to do this right now, and you're

slowing down the overall movement of tankers. Tankers work like the circulatory system of uh

for oil. They have to be on their routes, they have to keep moving, and when you create blockages, just like,

you know, with the medical analogy that I'm using, you wind up having problems, and you could run up with the risk of a

heart attack if your blockage gets bad enough. So, that's why I think that, you know, these crack spreads are so high.

That's why you always hear people say the price of crude oil or the price I'm sorry, excuse me, the price of gasoline

or the price of diesel is like effectively at $160 or $180. Yes, because because of those tanker

costs and stuff. >> Yeah, so I always try to figure out where is the line

when you go from higher energy prices being inflationary to disinflationary? And I think a lot of that depends on the

underlying economy. And I always go back to 2008 and use that as an example, not necessarily for a big stock market crash

or something like that, but the point out the fact, and most people forget this. They remember how that movie

ended, but they forget how it started. And it And I'm sure you remember, Jim, how it started. It started with the CPI

going from roughly 3%. In fact, I think in the summer of 2007 it was sub 2% the CPI. And then you fast forward a year to

July of 2008, and it's at 5.6. And that's because oil prices went to 140

a barrel in nominal terms. And so everyone was worried about inflation, inflation, inflation 1970s. And that was

in the middle of 2008. And then of course we get to the tipping point where that inflationary pressure

acts as such a massive tax on the economy that it actually is the straw that breaks the camel's back and leads

to that disinflation. And I'm sure you've given this a lot of thought. So, where do you think that line in the in

the sand is now in 2026? >> You know, you brought that up, and it was July of 2008 and all-time high in

WTI was $147 and that is still the all-time nominal high. Uh my my one anecdote was I remember I was on a plane

in July of 2008 and the pilot said, you know, it's summer, it's hot and the pilot said, you know, we have to wait in

line to take off and we've been instructed because of high crude oil prices that we have to turn the engines

off and oh my god, it got to like 90° in the plane in like 2 minutes, you know. And and I was like I I'm sitting there

going, man, I'm uncomfortable and I'm looking over and there's like this couple in their 70s. I'm like, they're

not going to make it if you don't turn on the air conditioner here real soon. I mean, this is not Europe. We need air

conditioning in the United States. >> Yeah. >> You know, so uh

but yes, um I think really what you want to look at is the um the Energy Information Agency, the EIA, puts out a

statistic which is called crude oil demand. And it's a it's a derived statistic,

right? They look at the change in inventory, they look at the amount of production, they look at

uh excuse me, they look at how much we've produced, how much we've imported or exported and the change in inventory

and they go, okay, so then when you net all that up, then the rest of that must be in demand, that we used that much

crude oil cuz it either went into inventory or it didn't and how much did we produce? And that implied demand

number is pushing all-time highs right now. It's well over 20 million barrels a day. And so you're right. When the price

goes up and you see that implied demand number start to crater, then you say, okay, now we're getting to the point

where it's really causing demand destruction and it's really starting to hurt the economy and that becomes

disinflationary. That happened soon after July 2008. But as of right now, last time I looked

at the number was 2 weeks ago, we're pushing the highest levels we've ever seen And that's doubly unusual because

it's October and there's a seasonality to the how we use crude oil. We use more of it in the summer cuz we drive more in

the summer than we use in the fall. So, we haven't seen that demand destruction. But, if we ever do see that demand

destruction, that would be the sign. Now, if you want a a quick and dirty way to measure that demand destruction,

watch inventories. And if inventories start to surge, okay, we're still we got the pumps open, we're pumping out this

crude oil, and we're not using it. It's just going into you know, it's just going into storage

tanks and the inventories are going up. That would be a sign that uh-oh, we've gotten to the price where people have

just stopped. Right now, $9 diesel, we about it and we fill up and we continue to move on. And as long as we

do that, it's just inflationary. It's when we stop bitching about it and say park the truck, we're not driving it

anymore, then it becomes deflationary.