Global demand destruction is the talk of the town since the spread COVID-19, but the interplay of various interdependent and complex markets presents a real challenge in forecasting the climb towards recovery. Mixed signals coming from the media and heads of markets further complicate matters as we all do our level best to keep our businesses running and our families healthy.
In this podcast, Mark Rossano of C6 Capital Holdings LLC takes us on a journey around the world to review key data trends he follows to run his analysis on the health of the economy and the global oil market. An exceptional data analyst at heart with a knack for understanding the big picture, Mark’s unique awareness of the markets is the source of a lively conversation about the present and future of the global supply/demand system.
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Transcript
Adam Cohen: Mark. Thanks for coming on the show today.
+1 516-***-**59: Sure, it's at thank you for having me. It's a pleasure to be on.
Adam Cohen: Yeah, and you and I had a good long
+1 516-***-**59: on
Adam Cohen: chat yesterday and I think I was just impressed by how detailed you are at, you know looking at all the different metrics that go into the global supply and demand cycle and and where we're at presently in the world.
+1 516-***-**59: No, I appreciate it. Yeah, we we definitely ran the gauntlet on some of those different topics and and one of the interesting things that wouldn't when you look at the supply demand metrics, you know, demand is becoming such a moving Target, you know, it's always been fluid but now with covid-19 and and the issues that we're seeing as countries and companies really struggle to restart. We're seeing this this counter balance of well where Supply going. Where should It Go And then who's buying it like, you know, if you think about refiners pet chems as the natural buyers of a huge chunk of this oil. What are they doing? Like what are they seeing on their end? And it's definitely A Tale of Two Cities and it's kind of hard to balance the two in terms of which economic data matters most, you know, which refiners going to make money and then what for finer like what crude is that refine are going to buy which is always a fun topic.
Adam Cohen: Yeah, so I just up front here. I just want to let everybody know all the listeners that will be sharing marks presentation that he had prepared for C6 Capital Holdings his company LLC where he CEO and founder and I think it's an incredible piece with a ton of metrics that you should definitely download. If you're even a little bit interested in you know, where we stand globally but Mark, can you tell us just a kid? Off what are some of the most key data points for you on a day-to-day basis like you only have so much time in the day and kind of seems like you're looking at everything what's kind of on your top 3 list of things you like to keep an eye on to to track Trends in the market.
+1 516-***-**59: Yeah, it's a great question. And and the thing that I always check on first is the you know, the refinery crack spreads on a global level. So I've been able to integrate that just to have it on one screen and I can quickly look at it and say okay where is gasoline trading or you'll what are the refinery margins for gasoline distillate and by distillate? I'm looking at heating oil gas oil jet. All and just trying to piece it together because you know, we know that there aren't planes in the air and if there are there's way less than there used to be we also know that trucks aren't moving as much we know trains aren't moving as much ships. But you know gasoline is interesting because you have people who have been cooped up for however many months looking to get out. So it's a matter of looking at that basket and understanding your who's who's going to buy more oil to make those products because Cuz they're going to see a margin and that's how I try to get a sense of. Okay? Well, where is the trend going is the trend changing or is it something that there's going to be a headwind in demand over the next call it six 12 weeks or so?
Adam Cohen: So look at things right now. Do you think we've hit the absolute bottom in demand?
+1 516-***-**59: Yeah II think we've hit a point where you'll we we've talked about it in the past. My initial view was that we were going to get to about a 38 million barrels a day demand destruction, and we could have peaked, you know at about 50 depending on how quickly people started to come back and company started to come back. I think we really take that about 38 and and we've seen some recovery since then specifically out of Europe out of And and then as well out of the u.s. So I think we've kind of come off that bottom. I think the market or you know, let's just call it the financial institutions are sitting there saying that you know, the recovery is here and I just think that the recovery back to normal is going to be much longer than I think the market is anticipating and it's purely because you see this balance. We we had a terrible number and now we have a less. Bet number and there's a view that that's going to continue to go but there's a certain, you know, there's a certain Peak and normalization is people kind of way. Well, the virus is still out there. Do I want to take that risk, or do I want to give it a little bit more time? And what is my employment status? And what is my savings look like and that's where I think you're going to get some of that slowdown in this recovery.
Adam Cohen: So globally what who's kind of leading the front here on recovering demand of hydrocarbon products and Whos the furthest behind and you know the slowest to recover.
+1 516-***-**59: So here we have China your first in first out type situation where China was obviously the first where this originated and and how it kind of spread so they were that first in component and then you look at some of the others in terms of South Korea, Japan and that Asian component that really got hit hard. So China has come back more, but the problem is and you know something that we were talking about Yesterday there's a big Divergence between Monday to Friday and Saturday Sunday Monday to Friday. I have to go to work. You know, the government is telling me I have to go my company's telling me I have to go even though they're not producing at any real level given new orders exports Etc. You know, you're seeing that there is an industrial slow down, but they're still going to work. So the demand is there on the gasoline level not so much on distillate and Diesel, but then on the Ends when it's their decision you still have a huge head headwind in terms of actual Demand on a personal level. And that's where I think that is a recipe of how things are gonna play out throughout the world where look I'll go to work and because I have to you know, I need the money. I can't I can't be furloughed. I need to get back to employment. But what am I doing with my discretionary Capital? Like what am I doing on my vacation? And and I think that's where You're going to see those headwinds over the longer term. So I would say China was the first out and I think they're starting to peek a little bit and actually come back down in terms of that demand. And even though Europe was one of the second in if you will if you think about how it kind of went from China to Italy I think that you're going to see a lot of headwinds in Europe over the longer term just because they kind of went into this and on the weakest economic footing Ting so it'll take a lot longer for them to kind of dig themselves out and kind of restart their economy to see that demand start to you know, that demand resurgence.
Adam Cohen: So when you're looking at the data now and trying to project into the future, you know, I it seems like history historical references are really important. And from what I understand and I could be wrong here. But a lot of the fintech is based on algorithms that take historical case models, but it seems to me in this case, you know all the historical case models that we have for something of this global scale. Gail we don't really have all that great of data. Is that it is that true and if it is, you know, what what can we use as what what can we use as historical us some meaning and looking forward meaning and looking forward into what what might also be some, you know might also be some, you know pitfalls you know upset us and be some potential black salons in the
+1 516-***-**59: Yeah, the it is interesting because
Adam Cohen: salons in the market.
+1 516-***-**59: we've never seen things like Zoom or work from home really kind of roll out in the way. It's being integrated into the everyday life. Now given if you work at a at a car factory or a meat processing plant, you know working from home isn't an option, but for people that are sitting at a desk or that have to take mass transit or sit in an open floor plan all of a sudden The world is changing and there's really like you said that's on precedent. Like we've never had the interconnected nature that we have today and people are actually finding there's a lot of value and there you can actually create more face time instead of traveling as much so I think on a go-forward level I think corporate travel is going to change which is going to be a long-term impact to the airlines because let's be fair Airlines make money on first class. Class not the guy sitting next to the bathroom. Like that's just the way their model works. And if you don't have those kind of tickets being sold that's going to be a huge head wind towards their margin, but also just general demand for airplanes an airplane capacity. So then you kind of drill down and you say well, what are the Algos looking at? Like what are the things looking at? Where can you go back and try to find what the depth looks like and I think unemployment is a big. To look at and the reason why I say unemployment, even though it's considered kind of a lagging indicator because typically you have an event the event creates unemployment. And so you're already behind the eight ball, but I think the magnitude of the unemployment is interesting because when you have this many people who were going from furloughed to all out on employed what's going to happen on the back end and it's I will now accept a lower wage. Wage to go back to work. But if I'm accepting a lower lower salary, but you know Powell and some of the others within the fed or saying oh, but we're going to keep asset prices elevated. Well now my real wage and my discretionary capital is shrinking and I think that is going to be a long-term impact into the way people spend and spending is going to adjust in hyogo. We've we've We've joked that, you know, everyone wanted the newest iPhone. on the newest Air Jordans the newest, you know TV and it's well why and what was the reason because they got rid of a button because it's a half a millisecond faster, like maybe maybe
Adam Cohen: Yeah.
+1 516-***-**59: Like maybe maybe you don't need that cycle. And I think that's where you're going to start to see those adjustments.
Adam Cohen: Yeah, and I definitely I mean I kind of sense that in myself even and I don't know if it's reflected that everybody else. But you know when I'm looking at the things around me, I'm like do I really need this? Is this really and it's something that's always been important to me. I think is just, you know, qualifying what makes me happy. But I think this moment in time has really accelerated that reflection, I mean one because kind of stuck at home and can't go anywhere. So I think that just Inherently makes you look inwards and figure out what's going on. And then also just economically because of the uncertainty of things and because of that just makes you think it's like we're a my really placing value in my life. And is that a good place of value in time and energy or is that just something that I was doing automatically that I wasn't even aware of
+1 516-***-**59: II absolutely and that's where I think you get a a stabilization and this and this kind of pull back, you know, pulling this back all full circle to energy. It's if people aren't buying as much I don't need to ship as much I don't need to move as much by ship train rail Air Freight and then if that changes will then also how we're spending patterns changing your am I going to Disney World or am I going to a camp grounds because I don't want to be near people.
Adam Cohen: now
+1 516-***-**59: And I but I still want to get out and you I think you start to see a changing pattern. But again, like how do you Matt? How do you measure that? Like what is like, maybe some people are listening to us right now saying I absolutely not I'm going to a toolbar the moment. It's open.
Adam Cohen: shrimp
+1 516-***-**59: It's fine, you know, everything is fine. But other people who I think have small like young families and and older are going to look at this differently and and adjust the patterns in which their spending and traveling and maybe they're tired of living paycheck to paycheck with ten thousand dollars in credit card debt.
Adam Cohen: Yeah, so but that must be really frustrating for someone who's so numbers driven to have so much uncertainty I guess and I think that's part of my sense of things. At least what the market is the market doesn't really know how to deal with the uncertainty so it compensates with overconfidence, but I find you to be a pretty humble guy and and I would think that you know, there's You know so much on presidents here as far as what kind of effect. This has on the market that we can't really look forward and project and and that must make it difficult for for you and your position to create a Clear Vision of what the you know, maybe three months is easy. But when you're looking at like year two years three years things start getting pretty blurry pretty quick. I would think
+1 516-***-**59: Yeah, and and it's you know, if everyone likes to remind me and and you always see commentary where the stock market is in the economy, and that's fine. It's a fair assessment. The stock market is not the economy. That's that's been the case for over a decade and probably more since we started quantitative easing because the market became a means of liquidity a means of like let's just pump dollars in and hope for the best but now when you talk about Looking forward the stock market and the companies that make up that market or going to have head winds on earnings. So what multiple or you willing to buy a stock at? So when I look at the at the the the today and then trying to go out into the tomorrow and Beyond you have the market that reacts to liquidity events, like when Powell spoke on Sunday essentially saying they have a ton of options. They'll buy ETFs, they'll buy stocks and you're sitting there saying well, why would you do that? Like I thought everything was getting better. I thought the we were on a solid footing or you know, and then you get kind of get these is like, oh no, we're not in unemployment going to get much worse. It's going to be sticky. So we have to prop up the economy the economy, but it's you're not then you're propping up the stock market, which is you know, we're seeing that Divergence. So as we try to see when does One Meet the other it's getting difficult because you know, you'll have the headlines. To react and tried to place a narrative like, you know oil rallies and are and the the everyone says oh, well China's recovering. It's like yeah, they recovered a month ago. Like we saw that and now they're actually slowing down some of their refining throughput because there they actually increased exports of diesel and gasoline to new records because they had such they overestimated their local demand. So now you're going To see those purchases slow which is which to be fair. You need supply and demand to make a price and supply has come out of the market. So Saudi Arabia has cancelled shipments to China that did happen. So you're starting to see a little bit of a normalization on both sides, but then the question comes down to well who's buying us oil, you know is US crude going to find a home in Europe in Asia, and that's when we start going back to crack spreads. When you say okay? Well, let's look at the cracks Burns. Let's look at what are the refiners going to make running one versus the other and when you look at the u.s. Essentially we're finer in Europe running us oil is going to lose $6 and make $4 running Saudi crude. Well your that's an easy decision. And then that's something that is going to going to move the export market and we've already seen, you know coming full circle to well. How is this Predictive, you know last the last two weeks. We've seen new orders of Ships coming from the Gulf of Mexico into Europe going to an eight-month low and that's something that just because of this Refinery margin as we look forward that's going to continue because of I'm looking to buy buy oil right now for delivery in six weeks. I'm not buying us crude.
Adam Cohen: So I mean this is big picture question. But what what do you think makes energy so important in you know for casting out everything else all other elements of the market and you know politics and do you feel like energy is is one of those Chief indicators for everything else?
+1 516-***-**59: Yes, I know the environmentalists will hate hearing that but you know energy powers the world so you can make an argument saying well energy is everything which is true. You could say it's solar it's wind it's it but you have to think about what is moving the world right now and it's still diesel. I still have a train that runs on diesel. I have a truck that runs on diesel. I have a ship that runs on diesel. So when Looking at these components I need to appreciate that. These'll is going to be a indicator of how is the world recovering it? Is there more or less demand based on my crack spreads and what ports are doing like our part our Port loadings up or down or they flat you know, it meet flat is the new up at this point, but when you kind of go forward and you think about well, what about the derivatives and then that's when you start getting NG it to enter petrochemicals and you think about what I purchase, you know, and and just it's something simple like, you know, we being at home we bought one of those little playsets for for our kids and and you know, I'm looking at the see what is made out of and it's made out of high density polyethylene. Well, that's an indicator. You know, HDPE is going to be an indicator of your what are people buying. You know, that is that was the high margin value on the on the petrochemicals. And everybody likes to talk about covid as you know, well, well it's an event. This event was Black Swan. We didn't see it...
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