Pierre Andurand on How We Might Get $200 a Barrel Oil

Tracy Alloway (0:05)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:10)

And I'm Joe Weisenthal.

Tracy Alloway (0:11)

Joe, have you looked at the price of oil recently?

Joe Weisenthal (0:14)

No, is it doing something? Has oil been moving lately?

Tracy Alloway (0:19)

You hadn't noticed?

Yes, it has. I think we're recording this on March 10th, but just in the past couple of days, oil spiked almost 20% and then came down by almost 20% as well the next day. So just incredibly volatile times for commodities across the complex.

Joe Weisenthal (0:37)

Yes, in fact, I think within the last week, we both had the biggest upday for the Bloomberg Commodity Spot Index since 2008 and the biggest down day for the same index since 2008 Unreal volatility, because you have the combination of an extremely tight market across the board combined with geopolitical events that of course are inherently uncertain, nonlinear and unpredictable.

Tracy Alloway (1:02)

Yeah, and you kind of have to wonder what it's actually like to be trading commodities at the moment, because not only do you have this massive price volatility, but you also have everything that's going on in the background with financing and exchanges, them having to deal with this intense volatility and sometimes sort of canceling trades, which is something we saw from the London Metal Exchange.

Financing has become an issue. People taking physical delivery of stuff, is there actually going to be enough to settle some of these contracts? There are so many questions around the space right now, in addition to actually what's going on with Russia and Ukraine.

Joe Weisenthal (1:40)

Yeah, the degrees of uncertainty or the vectors of uncertainty, just because there's the pure price question, then as you mentioned, the physical availability, the ability to move the oil, the interaction between oil and sanctions or self-sanctions, unbelievably complicated times.

Tracy Alloway (2:00)

Well, I am very pleased to say that we are going to be talking about all of this with really, I know we say this all the time, really the perfect guest, someone who has basically made a career out of trading oil and other commodities at very volatile times and has been very good at it in recent years. We're gonna be speaking with Pierre Andurand, the founder of Andurand Capital Management, a big commodities hedge fund. So Pierre, thank you so much for coming on.

Pierre Andurand (2:27)

Hi Joe, hi Tracy.

Joe Weisenthal (2:29)

Hi.

Tracy Alloway (2:29)

So I'm trying to think where to begin, but maybe we just ask you how have the past couple of weeks been for you?

Pierre Andurand (2:36)

Well, I mean, it's been a lot of work. I mean, clearly it's a market that's driven by geopolitical events. There's been a lot of reading, trying to understand how the war will pan out and the kind of sanctions that will happen and they'll keep on being added every day. So it's been lots of work and very stressful and also obviously very sad to witness that we have such a war now in the 21st century.

We didn't expect that. We don't, clearly it's a very unnecessary war and really tragic. So there's a lot of emotions and a lot of work and a lot of stress actually.

Joe Weisenthal (3:14)

So obviously we've seen this incredible, well, we've seen this huge surge in the price of oil that goes without saying this steep contango, which signifies the market is extremely tight. Are there any historical periods? Maybe let's start there. Like how novel does this feel in terms of the market?

Or does it feel like the sort of general conditions are something you've seen before? Like how much is everyone in new territory here?

Pierre Andurand (3:43)

Yeah, I think it's a new territory. I can't speak of an event that was similar over the last few decades really. So we started the year already with very low inventories, with the low spare capacity in the hands of OPEC and in general, low production capacity, spare production capacity, a low expected supply growth and high expected demand growth thanks to the week of we from COVID. So we already started the year before the invasion with very, very strong fundamentals and the level of inventories are very low, the level of back correlation. So actually, the stronger the back correlation, it means the front end, the first contracts are much higher than the back contracts, and it means that the market is very tight, physically.

So we were already at $2 a month back correlation before Russia invaded Ukraine. And now it's between $4 and $5, depending on the day for the first three months.