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00:00THE INVENTORIES AND SURPLUSES ARE PUSHING UP AGAINST INFRASTRUCTURE CONSTRAINTS. THEY'RE CONSTRAINING THE ABILITY OF SUPPLY AND DEMAND TO ADJUST WHICH MEANS THEY HAVE TO START TO DO ALL OF THE ADJUSTMENT. IF THERE'S ONE THING THAT COULD CHEAPEN OIL MARKETS IT IS VOLATILITY. WE HAVE BROKEN THE CASH AND CARRY ENTOURAGE BETWEEN THE SPOT PRICES AND THE FULLER PRICES. MAINLY AT HAPPENS IN LANDLOCKED AREAS LIKE CUSHING, OKLAHOMA OR AUSTRIA AND OTHER PARTS OF EUROPE. IT IS UNLIKELY TO HAPPEN ON A GLOBAL BASIS. >> THIS SOUNDS LIKE A VERY FUNDAMENTAL REASON FOR WHAT IS HAPPENING IN THE OIL MARKET. TALKING ABOUT THE OIL AND THE RELATIONSHIP TO THE FED, THE DOLLAR, ETC.. IS THAT SECONDARY TO THE PHYSICAL CONSTRAINTS? >> I THINK THERE ARE TWO POINTS OF STRESS IN THE OIL MARKET THAT ARE IMPORTANT. ONE IS OPERATIONAL STRESS WHICH DRIVES THE $20 THERE'LL. -- BARREL. WE THINK THE VOLATILITY IN OIL PRICE IS GOING TO BOUNCE BETWEEN $20, OPERATIONAL STRESS ON THE BOTTOM AND $40 FINANCIAL STRESS ON THE TOP. IF THEY CAN GET TO THIS POINT -- THE DIFFERENCE TODAY VERSUS OTHER OIL CYCLES IN THE PAST HAS FLEXIBLE EXCHANGE RATES IN PLACES. THE INVESTMENT GRADE, EQUITY MARKETS. ALL OF THESE ARRANGEMENTS WERE PUT IN PLACE TO DISTRIBUTE THE RISK AROUND THE WORLD. HISTORICALLY WHEN WE HAVE A COLLAPSE IN OIL PRICES IT IS SEVERE AND LOCAL IN TERMS OF ECONOMIC ACTIVITY. I WANT TO POINT SOMETHING OUT. WE PUT THESE RISK SHARING ARRANGEMENTS IN PLACE TO MAKE THE WORLD A SAFER PLACE AND NOT A RISKIER LACE. WE THINK OF WHAT HAPPENED OFF THE BACK OF THE OIL COLLAPSE, YOU HAD THE COLLAPSE OF THE SOVIET UNION IT HELPED FUEL THE SAVINGS-AND-LOAN CRISIS. THESE ARRANGEMENTS ARE HERE TO MAKE THE WORLD SAFER. JON: DO YOU THINK IT IS SAFER? >> WILL FIND OUT. A HIGH-YIELD ANALYST GO FOR THE HIGH-YIELD MARKETS. WE CANNOT CREATE A CONNECTION BETWEEN WHAT IS GOING ON IN THE COMMODITIES SPACE IN CREATING SYSTEMIC RISK. ONE OF THE ISSUES THAT IS A LITTLE BIT LESS CLEAR IS THAT THERE IS A PROGRESSIVE TAX THAT EXISTS. WHEN OIL PRICES COME OFF, THE TAX RATE IN THE PRODUCING COUNTRIES ALSO COMES OFF. YOU TAKE A PLACE LIKE RUSSIA, THE RUBLE HAS ADJUSTED WITH THE OIL PRICES SO THAT THE OIL PRICE IN RUBLES IS RELATIVELY CONSTANT. THE PROBLEM IS THE OIL PRICE COMES OFF IN THE TAX DECLINES. IT SHIFTS THE BURDEN AWAY FROM THE CORPORATE AND ONTO THE SOVEREIGN. THE QUESTION THAT WE HAVE TO ASK AS WE GO FORWARD, WHEN YOU LOOK AT SOVEREIGN DEBT AND WE'RE PLACES LIKE VENEZUELA BECOMING MORE IMPORTANT, DOES THIS BECOME A BIGGER PROBLEM? IT DOES NOT APPEAR TO BE SYSTEMIC. >> WITNESSED IN THE LINKAGE OF OIL AND HIGH-YIELD INTO THE FINANCIALS. HOW IS THAT GOING TO MANIFEST ITSELF. BEGINNING TO WORRY ABOUT THE FINANCIALS AND EVERY OTHER TWEAKERS WENT TO MAKE LIFE A LITTLE BIT MORE DIFFICULT. >> IF YOU LOOK AT THE NUMBERS IT IS 162 BILLION DOLLARS IN THE U.S. OF HIGH-YIELD ENERGY DEBT. LOOK AT THE BANKING LOSSES IN THE 1980'S. THEY WERE AROUND 10% AND RIGHT NOW THE MARKET IS PRICING IN 12.5%. THE WORLD IS MUCH MORE FLEXIBLE TODAY IN TERMS OF COST, WAGE RIGIDITY AND SO FORTH. I WOULD ARGUE THAT THE LOSS RATES ARE LIKELY TO BE LESS THAN THEY WERE THIS TIME OF ROUND. >> WHEN PEOPLE TUNE IN AND WATCH THIS PROGRAM THIS MORNING, THEY WANT TO KNOW YOUR THOUGHTS IN THE PRICE ACTION. THE MOVE TOWARDS AN EQUILIBRIUM. THE CONVERSATION WHERE HAVING, YOU WILL SEE THAT LEVEL ALREADY WHERE WE ARE SEEING THAT RISE IN VOLATILITY. WE THINK IT IS NOT ENOUGH. YOU GO DOWN TO MAKE THIS HAPPEN. >> WE SAW THE MARKET FIRST GO DOWN AND 26 LAST MONTH. WE ARE DEFINITELY IN THE ZIP CODE. IT'S BASED ON WHAT WE CALL CASH COST MEANING ONCE YOU BREACH STORAGE CAPACITY, PRICES HAVE TO SPIKE BELOW CASH COST BECAUSE IF TO SHUT PRODUCTION IN ALMOST IMMEDIATELY. FOR US TO NAIL THAT NUMBER DOWN PERFECTLY IS VERY DIFFICULT. I WOULD NOT BE SURPRISED IF THIS MARKET GOES TO THE TEENS. WE GOT TO THAT $26-20 EIGHT DOLLAR RANGE WE STARTED TO SEE ACTION. WE STARTED TO SEE PRICE VOLATILITY TURN INTO FUNDAMENTAL VOLATILITY. THE MOST STRIKING FEATURE OF THIS MARKET IS THE LACK OF A SUPPLIER RESPONSE OR EVEN CUTTING AND BUDGET EXPENSES BY THE SOVEREIGNS IN THOSE PULLBACK IN ISIS BUT NOW WE ARE BEGINNING TO SEE FUNDAMENTAL MOVEMENTS. THE 20 PER DOLLAR -- $20 PER BARREL NUMBER WAS BASED ON FISCAL DIFFERENTIAL, LOCATION DIFFERENTIAL, ALL THAT'S VERY DIFFERENT. >> AS HE LOOK AHEAD TO THE REST OF THE YEAR IS YOUR MESSAGE TO EXPECT MORE AGGRESSIVE DOWNSIDE MOVES TO GET THE MARKETS TO REBALANCE. >> WE LOOK AT THE LATE 90'S AND EARLY 2000'S. IT WAS LITTERED WITH FALSE STARTS. WE TRADED 10 DOLLARS, $15. >> WE THINK IT WILL CARRY ON SIX TO NINE MONTHS. THAT IS WHAT YOU DID ALMOST ALL OF 1998 IN THE FIRST PART OF 1999. WE CAN ARGUE THAT THIS SURPLUS IS LIKELY MORE EXTREME. IT REALLY DOESN'T CHANGE THIS OUTLOOK OF A TREND LISTS HIGH AT PRICE VOLATILITY. JON: COMMODITIES RESEARCHER AT GOLDMAN SACHS. IT ISN'T OVER. AFTER THE BREAK WE WILL TAKE YOU FROM ENERGY TO THE METALS MARKET. BRENT CRUDE TRADING HIGHER UP $33 PER BARREL. STOCKS ARE LITTLE BIT LOWER. THE DAX DOWN BY 0.3%. ♪

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Goldman’s Currie Expects Oil Volatility to Go Higher

Jeffrey Currie, global head of commodities research at Goldman Sachs, discusses volatility in oil, and why he thinks it is cheap and will go higher. He speaks with Jonathan Ferro and Guy Johnson on Bloomberg Television’s “On The Move.” (Source: Bloomberg)

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