Equity Bull Case and Commodity Outlook

**SPEAKER_1** (0:02)
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**Tom Keene** (0:27)
This is the interview of the day. Francisco Blanch joins us in studio driving all of commodity coverage worldwide for Mr. Moynihan and his bank of America.
This is a hugely sophisticated note. I want to get away from what's a gallon of gas in America. I'm going to look here. It's something I don't understand called NWE, Low Sulfur Gas Oil Cracks to Brink Crude, in that if you look at the refinery and distillates in, say, Europe, it's a moonshot. Am I close?

**Francisco Blanch** (1:01)
It is a moonshot, Tom. We have the difference between diesel and crude oil wider in many places than the crude oil price itself, which has almost never happened before. We have a major refining shortfall, which is happening across three main areas.
As you mentioned earlier, we got Russian refineries being struck by Ukraine. We have the Middle East still on a double blockade, and of course, with refineries also being struck. In the last but not least, the Chinese have been curtailed their exports to a region to protect the domestic market, the exports of products, of fuels.
And so that leaves the US of A as the only place open for business, Tom. If you need gasoline or diesel, you got to come and buy it here, which means inventory is here dwindling very quickly.

**Paul Sweeney** (1:58)
What is the refining story here in the US? Are we adding refining capacity here in the US? Are we not?

**Francisco Blanch** (2:03)
Where are we? We really aren't for a long time. And part of it, of course, is the transition to electric vehicles, plug-in hybrids, all that, fuel efficiency, which means that frankly, neither the US nor many developed markets are really demanding more fuel. It's just that we are destroying supply at an alarmingly high rate. That's the story.

**Tom Keene** (2:25)
So across the Bank of America spectrum, what are you studying to see, quote unquote, if the market breaks or recovers, it snaps? Whatever the drama is, which of the myriad of things you look at matters?

**Francisco Blanch** (2:41)
Well, so I think the most important thing here is inventories, right? Because if you think about inventories and the role they play in commodities, that's what makes them different than, let's say, currencies or bonds or equities.
Inventories are the glue that keeps demand and supply together. I would say that if you think about the last six months, we've had this massive negative supply shock in oil, and many people are surprised that it hasn't created a collapse in economic activity. But part of the reason is we have very high inventories that we've been drawing for a good amount of time. We've lost about 12 to 1,300 million barrels of oil as a result of the Iran War. And again, about two-thirds of that has been met, two-thirds of that gap has been met by the inventories, which means GDP growth has only come down maybe 30, 40 basis points globally as opposed to 1, 2, 3 percent.

**Paul Sweeney** (3:39)
Right?

**Francisco Blanch** (3:40)
That's the story.

**Paul Sweeney** (3:40)
How long can we play that game for? How long?

**Francisco Blanch** (3:44)
Well, so we can play that game for a little longer, but we're getting close to the end of the rope. I think for this, it's to Tom's question, i.e. diesel and jet fuel, we are almost there. We got a month, two months before we run out of rope.

**Tom Keene** (3:58)
And then what happens?

**Francisco Blanch** (4:00)
Well, then what we are saying happens in a more extreme, magnified way.

**Tom Keene** (4:06)
It's just shown in price.

**Francisco Blanch** (4:07)
It's shown in price and you need the demand rationing. You need a lot of volatility, Tom. That's what needs to happen. You have very sharp movements up and down in the price to force people out or maybe to create, I don't know, maybe we had Spirit Airlines earlier in the year. Maybe we have another couple of airlines or truck companies.

**Tom Keene** (4:25)
Francisco Blanch, who is driving all of commodity coverage for the Bank of America in studios with us with our question, our interview of the day. Good morning across America, the way you choose to listen to us. Good morning in Spain.
Good morning, I have to say that. Good morning across Europe and of course, the evening of the Pacific Rim. I want to go to the, in Madrid, to the Merck and Madrid effect, which is the food juggernaut that comes in in Madrid. I mean, you go to the Prado, the best museum in the world. We all know that. The lighting in the Metropolitan Museum of Art was copied off the Prado. That's how successful it is. Give us a granular view of diesel in Spain.