C.O.B. Tuesday Veriten

Today we had the pleasure of hosting David Sacks, Fellow for Asia Studies at the Council on Foreign Relations (CFR), for a comprehensive discussion on China and the intricate dynamics of US-China, US-Taiwan, and cross-Strait relations. Prior to joining the CFR in 2017, David served at the American Institute in Taiwan focused on political military affairs. David’s research spans Asia, China, Taiwan, defense and security, as well as political history and theory including the political thought of Hans Morgenthau. The CFR is an independent think-tank and publisher committed to providing insights into global affairs and serves as a resource for its members and the broader public in navigating the complexities of international relations. We have been interested for quite some time in finding an expert on China and were thrilled to visit with David.
 
In our conversation, David first shares background on China’s evolving role globally and the changing dynamics of US-China relations, the security-related and economic implications of conflict between China and Taiwan, the challenges in managing tensions in the Taiwan Strait, escalating tensions in the South China Sea, US-China rivalry in the region and its effects on maritime activity, and China’s assertive foreign policy under Xi Jinping’s leadership and its implications for global power dynamics. David shares his perspective on similarities and differences between the Trump and Biden Administrations’ approaches to China, the feasibility and implications of decoupling from China economically and the interdependence between the US and China in the global economy, the potential for future leadership changes in China, and how other countries are responding to China’s assertiveness including how European perceptions and policies towards China have evolved. We explore China’s economic and demographic outlook and the country’s overall strengths and weaknesses, potential implications if China were to become weaker in the next 10-20 years, the potential export of low-cost EVs from China, trust issues in US-China relations, Taiwan’s perspective and defense strategies, the CFR’s role in international diplomacy, and much more. Thank you, David, for sharing your insights with us all! We learned a tremendous amount and could have gone another hour we were so intrigued with the conversation.
 
Mike Bradley kicked us off with a few updates. He noted the 10-year government bond yield looks to have found some temporary support at ~4.6% but will likely move on Friday’s PCE deflator report. WTI (~$83/bbl) pulled back this past week on what looks to be temporary cooling in Mideast tension. Oil trader sentiment seems to have shifted to one that could be underestimating future geopolitical risks, which could send oil prices materially higher, and force OPEC to push barrels back into the market. Q4 earnings are kicking into high gear with ~35% of S&P 500 companies reporting this week, which should result in elevated broader market trading volatility. S&P 500 relative strength has recently reversed from overbought to oversold levels, and S&P 500 volatility has also spiked to 1-year highs. On the energy equity front, he highlighted that Q1 results are also beginning to kick into high gear with a barrage of results from E&Ps, Oil Majors, Oil Services & Refiners. Electric Utilities were by far the best performing S&P sector last week and there will be many companies reporting this week. He ended by discussing YTD Asian equity market performance, noting that Japan and Taiwan are the top two regional equity market performers. Arjun Murti discussed the concept of geopolitical risk premiums in oil prices, noting three key factors: structural changes in major producers, civil strife causing production fluctuations and difficult forecasting, and the impact of war. Sharing examples for each element, he noted the complex nature of geopolitical risk and its influence on s

Today we were delighted to host Matt Parker, Managing Director and Head of Strategy, alongside Alex Melvin, Commodity Risk Analyst, with Mobius Risk Group for an extensive discussion on commodity and power markets, as well as volatility and risk management in particular. Matt joined Mobius in 2018 and oversees fundamental analytics, decision strategies, financial trading, and physical marketing teams. Alex is the author of Mobius’ Intel Briefs and Energy Shots research and brings prior experience in data analysis and technical writing. Mobius Risk Group is a risk advisory firm offering market guidance to producers, consumers, and capital market participants, influencing transactions totaling over $100B across more than 50 commodities annually. We were thrilled to visit with Matt and Alex.
 
The catalyst to our discussion stems from a report Mobius recently released titled “Eclipse Power Prices Hit $471/MWh: Tracking the Texas grid during the 2024 Total Solar Eclipse” (linked here). Matt and Alex first share background on the Mobius team and their research, natural gas market volatility and its impact on hedging strategies for producers and consumers, and the role of speculators in commodity markets and the influence on pricing dynamics. We explore factors influencing the growth of LNG markets and its implications for energy markets, the challenges and opportunities in renewable energy variability and its impact on grid stability, and regional energy market dynamics, including the reluctance to build pipelines and storage facilities on the West and East Coasts of the US. We discuss key themes from the Eclipse report including the inspiration behind writing the report, storage dynamics and the impact of gas prices on production, the potential shift towards LNG as a solution to market imbalances, the effectiveness of market mechanisms versus centralized control in addressing energy challenges, how consumers are adapting to increased volatility in gas prices, efforts by gas producers to manage volatility in prices and production decisions, the potential for increased gas exports to Mexico, risk management strategy differences between public and private companies, and much more. Thanks to Matt and Alex for joining us today!

Mike Bradley started the show by highlighting this week’s spike in the 10-year government bond yield to ~4.65%, mostly due to a hot Retail Sales report on Monday. He noted the next big economic report will be Initial Jobless Claims on Thursday, and if that report prints hotter than expected, odds for a rate cut (anytime soon) would appear very low. On the commodity front, Brent (~$90/bbl) & WTI (~$85/bbl) prices barely budged on the recent Iranian/Israeli conflict, mostly because it was pretty well announced, and to a certain degree already dialed into oil prices. A 2H’24 global oil S/D deficit could position OPEC to begin adding back barrels into the market, potentially as early as June. On the broader equity market front, equities continue to take their cue from interest rate volatility, potential additional Mideast conflict, and Q1 EPS results. Q1 earnings season has begun (with mixed results) and it’s important, given lofty valuations, that S&P companies deliver solid Q1 results and guidance. He ended by flagging that Q1 energy results begin this week with Kinder Morgan and Liberty Energy reporting on Wednesday and SLB on Friday. Liberty Energy should provide investors with an early glimpse of U.S. pressure pumping dynamics while the SLB call should be predominately focused on international and offshore growth. Todd Scruggs emphasized recent analysis from Mobius regarding global coal generation, particularly in China, India, and Indonesia, and compared it to renewable energy development in the US. Globally, approximately 50 GW of coal capacity was added, while the US saw an addition of around 30

Today we were thrilled to be joined by Maya MacGuineas, President of the Committee for a Responsible Federal Budget (CRFB), to discuss a critical yet often ignored topic: the US national debt and budget deficits. Prior to her tenure at the CRFB starting in 2004, Maya served at the Brookings Institution and on Wall Street. Maya is a native Washingtonian, Harvard Kennedy School alumni, and frequently testifies before Congress as a leading budget expert. Founded in 1981, the CRFB is a bipartisan nonprofit dedicated to educating the public on issues with significant fiscal policy impact. The organization offers independent policy analysis, engages with policymakers to improve the country’s fiscal and economic condition, and serves as an educational resource. At over 100% of GDP and in the range of the all-time high last seen during World War 2, the US national debt looms large as a significant macroeconomic and overall risk factor to the nation and the world. We were so excited to hear Maya’s insights on this very important and very complex subject.
 
In our conversation, Maya shares historical context on past efforts to address fiscal issues and how interest in fiscal policy has fluctuated (from Ross Perot to Simpson-Bowles to today), the current economic situation, the impact of recent events like COVID-19 on government borrowing and spending, how the increase in interest rates has highlighted the structural nature of the problem and gained the public’s attention, and the current polarizing political environment and how it has halted efforts to address fiscal challenges. We discuss the responsibility of political leaders to acknowledge and address long-term budget concerns, challenges with addressing entitlement programs including Social Security and Medicaid, political leaders’ refusal to address issues that are headed towards trust fund insolvency, proposed solutions including establishing a fiscal commission to tackle the issue comprehensively, the idea of inflating away the debt or selling assets to reduce the debt, major threats posed by the growing national debt including loss of fiscal space, economic slowdown, national security risks and intergenerational inequity, and much more. We covered a great deal of territory and can’t thank Maya enough for joining. As you will hear, we offered to help Maya in any way we can, including helping her salute the “fiscal heroes” who are leaning in and trying to make a difference. 
 
Mike Bradley kicked us off by flagging that this is an extremely important week for markets given both the March CPI and PPI will be released on Wednesday and Thursday respectively, and that if these stats print hotter-than-expected, the FED will not be cutting rates anytime soon. He noted markets may be underestimating inflation given sharp YTD gains in a variety of commodities. On the commodity front, WTI is trading at ~$86/bbl (highest level since Oct’23), WTI time spreads continue to trade in huge backwardation and the 2H’24 oil S/D deficit positions OPEC to push barrels back into the market. He noted that even though we remain pretty constructive with the 2H’24 crude oil setup, we’re a bit concerned the recent crude oil bullishness is becoming too consensus. On the broader equity market front, equities continue to take their cue from both interest rates and an obsession with AI equities. If CPI and PPI readings print cooler-than-expected, it will result in a huge bond and broader equity market rally. This Friday will also be a heavy Q4 reporting week for U.S. major banks. He ended by highlighting that Exxon Mobil Corp. recently hit an all-time stock price high and that its market-cap and enterprise values (~$500B) finally rebounded back to their late-2007 levels. In late 2007, energy’s weighting as a percentage of the S&P 500 was ~13% (peaked at ~16% in mid-2008) and today is at ~4%, leaving the energy sector plenty more room to run in the years ahead. Arjun Murti dis

Today we had the pleasure of hosting our good friend Derek Podhaizer, Vice President of Equity Research at Barclays. Derek started his research career at the firm in 2014 and leads coverage of U.S. Onshore Energy Services and Geothermal. Given the recent flurry of activity within the services sector, including Tuesday’s SLB-ChampionX announcement (linked here), it was fantastic to hear Derek’s observations on the space including overall investor sentiment, emerging trends in services and geothermal, and investor perception and feedback.
 
In our conversation with Derek, we discuss the significant changes in energy services over the past decade, transitioning from a boom-and-bust cycle to a focus on capital discipline and shareholder returns, M&A themes driving consolidation in the oilfield services sector, primarily driven by supply rationalization and synergistic services, and the importance of cultural integration in M&A transactions. Derek shares current trends including emerging and growing power solutions businesses, growing interest in geothermal energy among oilfield service companies, the potential for a divergent market in companies providing integrated solutions compared to others, and how total cost of ownership and efficiency drives investor confidence and differentiation among service providers. We discuss long-term value creation in energy services, Barclay’s research department and coverage, technological advances and production efficiencies, excitement for the potential of geothermal energy to become a significant contributor to the energy mix, investor interest in geothermal, and more. We ended by asking Derek for his thoughts on the state of the energy transition discussion from his vantage point in New York. Thank you for joining, Derek!
 
Mike Bradley kicked us off by highlighting that Monday’s ISM Manufacturing report and Tuesday’s JOLTS Job Openings reports both surpassed expectations, which pushed the 10-year government bond yield to a YTD high of ~4.35%. He noted the current consensus for multiple interest rate cuts (starting in June) is getting challenged by recent strong economic prints, continued record U.S. budget deficits, strengthening energy commodities and accelerating future power demand growth. WTI is trading at ~$85/bbl, marking its highest level since October 2023 and crude oil is continuing to show signs of real physical tightness as WTI time spreads are trading at their steepest level of backwardation since June 2022. OPEC is meeting this Wednesday and most traders expect them to signal continued production constraint through Q2’24. He further noted that OPEC looks to be in full control of crude markets and that the global oil S/D setup looks very constructive heading into 2H’24, both of which should position OPEC to add barrels into an undersupplied global oil market in 2H’24. On the broader equity market front, over the last few days markets have been pressured due to an unexpected surge in interest rates. Tesla was also weighing on markets due to its disappointing Q1 deliveries and providing further proof that U.S. electric vehicle sales are facing some temporary demand headwinds. He ended by highlighting SLB’s agreement to buy ChampionX in an all-stock deal and also noted the solid YTD performance of Oil Services. Jeff Tillery noted the unique dynamics of M&A in energy services and the operational intricacies involved, segueing into our conversation with Derek.
 
It was great luck to have Derek on a day when a major transaction was announced in oilfield services. The OFS space remains super intriguing for its ability to range across classic as well as new energy technologies. We look forward to staying in touch with Derek and thank you, as always, for your friendship!

We had a fantastic session today with Jun Nishizawa, Executive Vice President and CEO of the Natural Gas Group at Mitsubishi Corporation. Jun joined Mitsubishi Corporation in 1986 as an oil trader and has since held a variety of roles in Tokyo and overseas. As CEO of the Natural Gas Group, Jun is responsible for Mitsubishi Corporation’s LNG business globally and leads the execution of the organization’s decarbonization strategy including the company’s involvement in the Breakthrough Energy Catalyst founded by Bill Gates. It was our pleasure to host Jun to discuss Mitsubishi Corporation’s LNG effort and the evolving trends in the global LNG landscape.
 
Jun first provides background on the massive scale of Mitsubishi Corporation and its various businesses spanning energy, mining, automobiles, infrastructure, and more. We cover Mitsubishi Corporation’s LNG business and the company’s role in establishing the LNG market in Japan in the 1960s, the current LNG market in Japan, attitudes in Japan toward natural gas, nuclear and renewables, the potential for ammonia as a cleaner alternative for power plants and shipping, and Mitsubishi Corporation’s interest in E-LNG. Jun shares insights into the growth trajectory of the LNG market globally, projected LNG demand, factors influencing LNG supply, the impact of AI on power demand and productivity gains, Japan’s energy security and geopolitical concerns, and the importance of long-term LNG contracts. We discuss the role of the US as a reliable energy partner for Japan and other Asian countries, how Mitsubishi Corporation is incorporating AI into its operations across different sectors, and the need for continued investment in LNG energy infrastructure. We end by discussing Jun’s upcoming retirement plans to join the Institute of Energy Economics, Japan (IEEJ) as a Visiting Fellow. Thank you for joining, Nishizawa-san, and all the best for your next chapter!
 
Mike Bradley kicked us off by noting the bond market’s focus on the February PCE Deflator, which is expected to be around 2.5%. Despite the Fed’s decision to maintain interest rates last week and signal three quarter-point rate cuts in 2024, lingering cyclical and secular inflation concerns persist. WTI is finding trading support above $80/bbl and crude oil time spreads continue to remain in steep backwardation due to tight physical crude markets. Additionally, the IEA’s reversal of its 2024 global crude oil stance from surplus to deficit provided further support to crude oil prices. However, U.S. natural gas price continues to stay pressured due to a surplus of ~690bcf and severe damage to a key East Coast bridge in Baltimore will temporarily curtail coal and crude product exports. The S&P energy sector is up ~11% YTD and is outpacing the S&P 500 & Nasdaq despite AI dominating broader market sentiment. Mike also noted high-level takeaways from CERAWeek including an energy transition conversation that’s becoming much more balanced/pragmatic, a substantial number of AI discussions/panels, a considerable amount of “global” electricity load growth discussions, a more constructive energy commodity demand outlook, and an extensive amount of U.S. permitting conversations. He ended by highlighting that the Japanese stock market (Nikkei) is trading at an all-time high and noted that the last time the Nikkei traded at these levels was in December 1989 (35 years ago). Jeff Tillery shared his top takeaways from CERAWeek related to Asia and the energy transition, leading into our conversation with Jun.
 
Thanks to you all. We hope you enjoy today’s session as much as we did. Arigatou gozaimasu Nishizawa-san!

We are thrilled to share this Special Edition COBT episode featuring Peter Orszag, CEO of Lazard. Peter assumed the role as Lazard CEO in the fall of 2023, after serving as CEO of Lazard’s Financial Advisory business. Prior to his tenure at Lazard, Peter’s wide-ranging career includes serving as Director of the Office of Management and Budget and as Director of the Congressional Budget Office during the Obama Administration. Peter also served as Special Assistant to the President for Economic Policy in the Clinton Administration and Senior Fellow and Deputy Director of Economic Studies at the Brookings Institution. Mike Bradley, Jeff Tillery and I were pleased to host Peter and hear his unique insights from his experience spanning both public service and private enterprise.
 
Peter recently co-authored an OpEd for Foreign Affairs entitled “Geopolitics in the C-Suite” (linked here) that explores how corporations are increasingly struggling with geopolitical complexity, an area which impacts capital allocation and long-range investment decisions. In our conversation, we cover main themes from the article, global macroeconomic trends, managing a global corporation like Lazard amidst geopolitical challenges, the potential for a “US-EU Super Bloc” and missed opportunities for collaboration in trade and energy strategies, structural challenges facing Chinese economic growth, and the impacts of political polarization on foreign policy. We discuss shifting dynamics in the Middle East, implications of the Chevron deference case (additional information here), factors influencing M&A and restructuring activity, the integration of AI in various industries, Lazard’s Power, Energy & Infrastructure team/effort, CFIUS, and overall antitrust activity. Peter shares his perspective on managing information overload, the challenge of addressing long-term US national debt, differences he’s noticed between public and private sector planning timelines, and much more. We end by discussing Lazard’s vision for 2030 and their “Banker-Scholar” culture. It was a fascinating discussion.

For additional reading, Lazard’s 2023 Annual Letter to Shareholders is linked here and Lazard’s report on Top Geopolitical Trends in 2024 is linked here. For further watching, we have previously hosted two Lazard guests on COBT: George Bilicic, Vice Chairman and Global Head of Power Energy & Infrastructure (May 3, 2023 linked here) and Admiral William McRaven, Senior Advisor (July 28, 2020 linked here).
 
We hope you enjoy the conversation as much as we did! Thank you again to Peter for joining. Our best to you all.