Oil Above $100 Could Be Coming After the Midterms

SPEAKER_1 (0:00)

Joining us now is Simon Lack, Portfolio Manager of the Catalyst Energy Infrastructure Fund. Thank you so much for your time, Simon. What do you make of where oil prices currently sit?

Simon Lack (0:10)

Well, there's been a lot more coming out of the Gulf, which I think has been surprising. But I think there's still a lot of upside risk to prices from here on in. I think we're in this period of time before the midterms, when Trump is happy to not have anything that's gonna push up prices. And I think after the midterms, it could be all very different. So I think that this is sort of tempering.

SPEAKER_1 (0:31)

Okay, so you've got some of the exports recovering, particularly from the Gulf, obviously the Saudi Arabia's Red Sea ports as well. That seems to be the catalyst for why we've come back down into sort of the low 90s range. But why do you think it's temporary? I mean, what would be the catalyst then for more upside?

Simon Lack (0:52)

Well, it's the midterms. So I think the calculation of the White House is, they clearly are under a lot of pressure from diesel prices and gasoline prices. They don't want to do anything to make that worse.

Once the midterms have passed, Trump's even said this, after the midterms likely to attack, and there'll be a window there and maybe a very important one because it's probably going to lose the House, maybe even the Senate. So he'll have sort of six to eight weeks there with the lame.congress before there'll be really more oversight on what he's doing. So I think you could see that's going to be when I think the US could be the most aggressive and be most willing to risk high energy prices after the midterms before the new Congress gets sworn in. So I think the midterms is really sort of a threshold date. And after that, you could see a lot of military action.

SPEAKER_1 (1:41)

Yes. Okay. Well, there had been some suggestion, at least in media reports, that the bombing could resume post the midterms. That's something we've been watching very closely. So when you say there's further upside, what could we be looking at on New York crude, do you suspect? I mean, could we be looking at triple digits again and for a sustained period?

Simon Lack (1:58)

I think you could certainly see above $100 or up 10 to $15.

And there's always the risk that it goes up more. The Iranians have always surprised with their ability to, even though all of their offensive capabilities taken out, they seem to find ways to fire missiles and they could start hitting infrastructure again along the Persian Gulf. You could see attacks come from Iraq, from paramilitary groups there. And so there's this sort of optionality around that. So from a trading standpoint, you're unlikely to get a $15 drop in crude oil. There's a lot of chance you get $15 move up. And so I think that's the way to trade that.

SPEAKER_1 (2:36)

And what about the China component to all of this? Because there has been some talk about the fact that the sort of lack of appetite this year has kept a sort of cap on prices, at least for now. We did see somewhat in recent months of a nascent recovery, but that already seems to have faded. I was just reading some reports this morning. So how much of that is factoring into what we're seeing in the price?

Simon Lack (2:58)

I think China has done a really good job of sort of managing their crude oil demand. And I think that was one of the big surprises earlier this year, was that they just cut back their consumption or cut back their buying a lot because they had such stockpiles. So they managed that really well. I think they're pretty good at moving when prices suit them. I would imagine that at today's prices, they're probably inclined to buy a bit more.

And if you get oil going up above $100, they'll buy a little less. So I think China is sort of a swing buyer. In some respects, they have as much control over prices as OPEC themselves because of their ability to calibrate their buying based on where prices are. So they've done a pretty good job at China.

SPEAKER_1 (3:39)

Okay. So then, you know, as a PM, Simon, I'm just wondering then how does that factor in to the portfolio? I mean, as far as, you know, higher oil prices expected to continue, I mean, do you remain diversified amongst upstream and downstream companies, particularly when you consider where crack spreads around?