Jim Bianco: A 'Dangerous Cocktail' Is Brewing and Fed's Hands Are Tied

**SPEAKER_1** (0:01)
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**Jim Bianco** (0:16)
If you look at the video of when he signed it, after he put his big Donald Trump signature on it, he put the pen down and he pointed to the sky and he said, Stocks up, crude oil down. That was the first thing he said after he signed it. Stocks up, crude oil down. Meaning, when you talk about a fragile peace deal, Donald Trump is going to tell you, this has been a fantastic peace deal. And you will point out all of the problems of it. But he'll say, I put my signature on that document and the price of crude oil is $10 lower.
Therefore, it is a fantastic deal.

**Jim Puplava** (0:52)
Well, the markets are having a little bit of a difficult week, especially in the S&P and NASDAQ. Where are we going from this? Joining us on the program is Jim Bianco from Bianco Research. Jim, you and I were talking before we went on the air about oil inventories and this idea. Traders thinking, you know, they're banning the $200 oil scenario.
Maybe it's time to go back to that because you and I were talking about cushioning inventories below 20 million. In the past, every time we got down to 20, there's been a spike. I'd like to get your thoughts on oil here.

**Jim Bianco** (1:24)
So I think there's two things that we need to understand about what's happened with oil. You're right. When the war started and the price of oil hit, you know, at least in the US. 120, Asian oil did get to $170 briefly in mid-March. We were worried that this was going to become the launching point for even higher oil prices, and it never happened. Well, two things largely offset that, maybe three. First of all, there's probably been a lot more oil sneaking through the strait than has been reported, but that's a marginal number. The second thing, and I would also include like the pipelines that they're using to the Red Sea and the Fujairah pipeline that goes around the Strait of Hormuz. So a little bit more oil got out than we thought, but not a lot. The second thing that happened is, I would argue the biggest thing is China. China has reduced its imports of oil by about six million barrels. Why did China reduce them so much? They didn't want to pay these higher prices. And I think what happened was there's a combination of China stopped taking or importing oil, making refined stuff like gasoline and diesel and shipping it to other Asian countries. They kept it for themselves so they didn't have to import as much oil. And I also think that the Chinese economy is much weaker than people think, and their demand for oil wasn't as great. And if you throw on those two things, a little bit more oil getting out, China really going down on their inventories.
Global inventories, the Japanese, the US, Europe, have been drawing down both their strategic stockpiles and their commercial inventories. So we made up for this loss. That's what's kept the price lower. Now the straight is starting to move.
And I think the assumption that has driven all of this for the last two months is traders have concluded everybody wants the same thing. The US wants the oil to flow.
The Gulf states want the oil to flow. And the Iranians want the oil to flow. They want their oil to flow to be more specific. So everybody is of this opinion that no one is trying to block the straight. They're just all trying to work it out so that oil could flow. So we could draw down our inventories like the Cushing Inventory a lot, real hard, because eventually the oil is going to start flowing and later on we could refill it. To this point, it's worked.
The concern is if that assumption, everybody wants the oil to flow, is wrong and for some reason some ships get out, then it starts to slow to a trickle or maybe it reverses, we start shooting at each other for whatever reason, because that's what happens in war. It doesn't go the way that everybody thinks it's supposed to go.
Then we could be stuck in a very precarious situation. Not only does the world short of oil, but now it doesn't have inventories to cushion itself that it can draw down even more. We're very close to the bottom of those inventories now. The reason the market is fine with it, Trump calling for $50 oil, is everybody thinks that all the taps are going to get opened, all the oil wells are going to get going, full on, all the ships are going to start moving, and we're going to get all the oil we need. If that assumption is correct, then yeah, the price will stay down. But if anything comes along that upsets that assumption, in any way, even if it is an uptick in the Chinese economy, then we might wind up finding that we're a little short of oil with very low inventories, and that can be a dangerous cocktail for higher prices.