Constructing A Systematic Oil Trader: Fueling growth at Cayler Capital

Brent Belote, founder and CIO of Cayler Capital, joins the podcast to discuss the growth of his now 5 year systematic oil trading strategy. He provides insights into analyzing supply and demand fundamentals and using quantitative models to capitalize on events in the physical oil market. Brent also shares lessons from starting his own fund and managing risk at a smaller scale. Hear about trends in the energy sector, including the impact of geopolitics, refining capacity, and green-flation (just how close are we?). Brent offers his outlook on oil prices and explores other areas of knowledge and experience in the energy sector. This one is an engaging conversation you won’t want to miss, so kick back and explore with us as we navigate through commodity markets and the experience of building a successful investment firm. SEND IT!



From the episode:

Commodities Miami panel featuring Brent

Previous episodes of The Derivative with Brent:

Crude Oil goes Negative… WHAT^%$#

A Crude Oil Cornucopia: Covid, Crack, CSOS & Contango with Brent Belote




Check out the complete Transcript from this week’s podcast below:

Constructing A Systematic Oil Trader: Fueling growth at Cayler Capital

Jeff Malec  00:06

Welcome to the derivative by RCM Alternatives, where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Hello there. We’re back in action this week and wading into the oil patch with my Jackson Hole ski buddy who just happens to also run an energy trading CTA. Yep, it’s Brent Belote of Cayler Capital. And after the mandatory chit chat about ski and snow conditions we get into how his models look at energy markets, whether green inflation is real. What happens dozens of years from now and in oil if and when we’re fully electrified and is the economy and how it’s been for him hanging his own shingle and running a small hedge fund. Send it This episode is brought to you by RCM from clearing to execution portfolio construction to outsource fund ops China to Nebraska. RCM has you covered for all things futures and derivatives, Learn more at, and now back to the show. All right, everyone. We’re here with Brent below. How are you? Brent? Doing great. Good. I had the pleasure of seeing Brent in person on the slope at Jackson Hall. Had his what was she to say your daughter, your son a Camry? Yeah, she’s three, three on a little like, leash. leash is the wrong word harness.


Brent Belote  01:34

Yeah, she’s on a harness since you’ve skied down. She’s already office. So she’s she’s in the right. He’s off to the races on the ski, the ski to ski.


Jeff Malec  01:41

Yeah, she was good. And yet all three kids one in red one and green one and blue. It was a type program you’re in and you


Brent Belote  01:49

got to keep them keep them visible at all times. So that’s good. And then


Jeff Malec  01:53

I was all ready for you to say, Oh, you just missed it. The snow was terrible. Then it all came right after you left. But you said it’s already terrible again.


Brent Belote  01:59

It was great for about a week, we got about four feet of snow over the 10 days. And then the last four days it’s been in low 40s with no rain and melting. So it’s it’s been it’s been a quick quick change in end of winter already.


Jeff Malec  02:13

And then we’re recording this last week of January. So you’re going down to I connections go down to the warmth in Miami soon. Yeah,


Brent Belote  02:20

excited. So I leave on Sunday down there for for four nights. conference just keeps getting bigger. And I’m hopefully it’s still still as great as it was last year. So I’m looking forward to a busy schedule. And hopefully we can get some institutions and looking forward to speak on the RCM panel on Monday night. That’s right.


Jeff Malec  02:46

We’ve had you on the pod a couple times before once when oil went negative, that was fun. Talking through that, that seems like 1000 years ago, when was that? Like May of 20/20 2020 2020.


Brent Belote  02:55

So the day went negative. And I think we did this the day after. So I’ve been 2420 20


Jeff Malec  03:02

was the debt went negative. And then we had you back on talked through the strategy. So we’ll link to that and people can go back there and hear all the ins and outs of what you’re doing in the strategy. So I wanted to start and just talk through kind of how your thinking and strategy has changed over time. We’ve known you and been following you and had accounts with you what for how long has it been four years? Five years?


Brent Belote  03:29

We’ve been running for five years now. So five years? Yeah.


Jeff Malec  03:33

So tell us give us the what’s, what’s the same what’s different over those five years.


Brent Belote  03:38

Most is the same in terms of strategy wise. And what’s changed is this last year in 20 to 2323, we hired Sam Vogel to be our CEO. So now, it’s not just myself, which is nice are building out a little bit more of a team and a bench will likely look to add one more to the employment this year. And we’ve passed over 50 million in AUM with kind of pretty quickly. So right now we’re at just under 55 million AUM and helping grow pretty steadily. So hopefully hopefully we can get close to 100 by the end of this year, if not sooner. So that’s kind of the the guys behind Miami has to go down there and hit fundraising pretty hard.


Jeff Malec  04:19

What those people need to work in Jacksonville or get to work in Jacksonville I should say.


Brent Belote  04:25

They really want standards based out of Houston and he has two young kids so his was kind of a non starter for moving. Yeah, I think good people over location is is priority. If they want to come to Jackson Hole even better, so but it’s not a priority.


Jeff Malec  04:43

And that doesn’t make a good podcast. I wanted to be like well I used to go massively short 600% Not gas and now I’ve scaled it back and we only do this or that so the risk levels everything generally the same the portfolio how you look at it. Yeah.


Brent Belote  04:59

Everything’s still been the same. We haven’t changed any strategies over the last five years, we’ve launched a commingled vehicle on Galaxy platform. So we do have kind of fun to access for lack of better words, I have noticed a change in the last call it two years in our investor base, we’re seeing a lot more in institutional fund of funds, and even, you know, kind of the multi strats of the world have have started looking at external allocation. So as we grow, I think that’s that’s kind of the next evolution of Kaler capital fuel.


Jeff Malec  05:29

Yeah, I think I’ve seen a little bit more of that to have people looking and being more interested in discretionary and not even discretionary but systematic and discretionary commodity traders. Yeah. So take us a step back if it hasn’t changed, and tell us how it’s the same. And give us the 30,000 foot view of Yeah, what you’re doing for people who don’t want to go listen to the old


Brent Belote  05:53

one. So we still run a systematic oil strategy, our kind of two pronged approach is we look at what is the supply demand look like over the next six to 12 weeks for each oil product. And then we have a quant overlay that looks at the physical market. So we have the various bases markets in each one, we run about 70% of our var and relative value and 30% directional. So we do have exposure to long term oil, which has been good of late. And it’s something that that a lot of people have kind of been gravitated towards, because our correlation to oil is fairly, you know, close to zero. Just because you know, we have the ability to get get short and get long. When we do really well. I like to think of it as a event driven systematic. We do very well when events happened in the oil market that kind of pushed the physical market to a brink, obviously COVID 2020 was a great year for us and 22 of Russia, Ukraine was another great year for us kind of what when the physical markets had to kind of react to satisfy some of the oil flows that weren’t assessed to date around the world. And


Jeff Malec  06:53

what do you attribute that to that the the fundamentals align with your technicals. And basically, everything’s rowing in the same direction,


Brent Belote  07:01

over 1000 Different daily data points on the supply demand. And we’re able to kind of see those forecasts, I’m I guess, fairly well, like with COVID, we could see that we were filling oil storage globally, demand hadn’t caught up in terms of, you know, either bouncing back. And we can see that if we were kept filling up oil storage at this level, we would hit a point where we had to either cap it off or cut supply. And that’s pretty much what happened when all the negative was they had to cap supply, because oil storage was pretty much full at that point. And same with Russia, Ukraine, you know, we saw oil flows, still actually coming out of Russia, pretty good clips, and they were still getting getting on ships and finding a home. And, you know, we were able to see that. And they kind of call BS essentially on on the $140 spike that we saw in oil. So we were long going into that, but we ended up exiting as a result of seeing those flows. And the models got a pretty good job of seeing that the physical market actually wasn’t that tight.


Jeff Malec  08:03

And do you? Do you think of it more as like a this is smarter access to oil prices? Right of like we should capture? If there’s a big run up, we should capture some portion of it.


Brent Belote  08:16

Yeah, I mean, that’s that’s my thing with oil that I think people get a little wary of as the geopolitical risks. But you know, we’ve done a very good job of playing that over the last five years. We haven’t had any down years in five years. And you know, yeah, well, you get caught offsides on certain days or certain weeks in relation to moves. Absolutely. But I don’t think in the long run, you know, we’re catching the bigger moves for sure. And I think that, you know, a good example was, you know, we had a drawdown last six months of last year, and we were pretty much maxed short going into the weekend when Israel almost situation exploded, and oil was up pretty big. And all the products were pretty big since then, and kind of took us out of a lot of our short positions in that. And I think the next day on that Monday, I think we were down only about 80 basis points. But it we missed a huge decline in oil as a result of that. And that happens sometimes sometimes the physical markets take you out, and it changes kind of the landscape of oil for the next three to six months. What


Jeff Malec  09:14

do you feel like your investors would rather you be almost a long flat profile, like if you miss the big down move? So be it. Like we really want you to capture more? If, if there’s,


Brent Belote  09:24

I would say so I would say I think I think that’s probably a fair assumption just from the standpoint of you know, if oil goes to 200 the s&p is going to take a hit your house is you know, there’s there’s going to be knock on effects of 200 $300 oil if it gets there. And it’s nice to have us as a kind of catalyst for that if we catch that on way higher, so definitely, you’re gonna


Jeff Malec  09:45

love it. And then so over that five year period, what oil is basically flat, right?


Brent Belote  09:50

Pretty much yeah, yeah. It’s kind of crazy to say well, yeah, it’s it’s pretty close to


Jeff Malec  09:54

just kind of pull it up real quick. Yeah, I guess here and Yeah, in late 18th, it was right about 65. Yep. Now about 75. So when we went,


Brent Belote  10:07

it’s not not too crazy, not too far off. And what’s


Jeff Malec  10:11

what’s that range between 65 to negative 20 to plus 140? Back to 70?


Brent Belote  10:18

Yeah, there’s a lot a lot a lot and you


Jeff Malec  10:21

stand you don’t have gray hair yet. So good work.


Brent Belote  10:25

Yeah, it’s gotten. So yeah.


Jeff Malec  10:33

So changing subjects little bit, and we’ll come back to what’s going on in oil. But talk. So those five years right, you came out of a bank, you were a trader, you said, hey, I want to go do my own thing, hang my own shingle. For any young people, or old people or whoever listening who were thinking of maybe starting their own fund or something? What? What was harder than you thought? What was easier? And you thought, what lessons did you learn?


Brent Belote  10:59

I think the lessons coming for me out of a bank was how to manage risk on a very micro level, you know, we have a huge balance sheet of bank and you’re able to trade a little bit differently. You know, we have far levels, and we have set amounts, but I never thought of margined equity, or you know, what’s my annualized volatility look like? Or even drawdown for that matter? You know, I had a hard finite number of drawdown in my, you know, JP Morgan, but say I was up $30 million on the year, my drawdown could have been, you know, 35 At that point, and no one would care, right? Because they just care about the positive numbers on it. Whereas,


Jeff Malec  11:35

Kaley 35%, you’re saying, what’s


Brent Belote  11:37

it No, 35 million. So like, you know, they, they just think of it in terms of dollar numbers.


Jeff Malec  11:41

So if you’re up 30 million, and you draw down 35 million, like, alright, this guy’s fine, he’s only down 5 million, pretty


Brent Belote  11:47

much yeah, like, so that’s how you’re able to kind of, you know, build a buffer that you’re able to trade against. Whereas with Kaler capital, you know, we’re constantly getting new accounts, you know, monthly, quarterly, etc. And each one is essentially starting at zero. So your drawdown, you know, the, the, if you have an account that started it, that that, you know, on, and you happen to be the high watermark, you know, like, your example was last year, we were up, you know, 20%, through the first six months of the year, we had a couple of counts come in, and then we subsequently lost about 12. Now, we still finished the year up on it, but those guys are kind of, you know, longer term investors, which is nice, and they believe in what we do and how we do it. But timing is kind of everything with it, which is why with us, now, we run a higher volatility portfolio. And it’s nice to have people who are in it for the longer term, you know, like we’ve we’ve made money every year, but we still have people that come in, we’ll be in our program for three to six months and then decide it’s not for them and clothes, whether that’s a profitable or negative, it’s, it’s different. So that that was a big change was was in terms of how I take risk and how I think about kind of the overall strategy.


Jeff Malec  12:53

Right? It wasn’t just end this period with the, as much money as you can,


Brent Belote  12:57

and actually exactly, think of daily returns daily, you know, daily var, and he can’t have, you know, you think about like a big option portfolio, you can’t have a day where you’re down 15% Even if the next day, you’re 25 Because just the the amount of volatility that it speaks, spitting off is not palatable for 99% of the investor base. What took longer? And what I kind of underplayed was I thought having a 10 year background in a bank would allow me to either come out and be able to raise seed capital on day one. And that was far from the case. Yeah, pretty much people view a bank like they don’t trust it. Yeah. Yeah, they think they think that we just have so much information, so much systems at the bank, we call it seat value, where, you know, each trading house has, you know, each each place or city has a seat value. And that’s, that’s something that you kind of have to get around that, that stigma. And so it really took me almost two or three years of track record before, before it happened. And then, you know, 2019, we came out and had a good year, but not a great year. 2020 20 was a good year, but then every call I’m having after that says, well, was this just a flash in the pan, were you really. And so it really took 22 to validate that, hey, we we’ve making like we’re catching bull markets, we’re catching bear markets, we’ve done this, and that’s where I think like our next growth is coming and now, you know, crossing 50 million, which, you know, we have some investors that have taken that off capacity, right. So that will expire and, and they said they’re gonna use them. And what that’ll do is we’re going to grow pretty substantially from here. So I think, you know, I think just getting to that critical mass standpoint is kind of where we’re at.


Jeff Malec  14:40

And so the one thing leads into another there with the bank, right? Like I think people might not trust track record because they know that you didn’t have the same risk profile and it was just about making money. It wasn’t about the path of how you make that money. And


Brent Belote  14:56

even then, I had a great call with you know, a I like to call it a multi-shot investor. And they said, you know, like, we like you. We like what you do. We like returns we like, like how you’re thinking about the markets. But we need to see that you can manage big money outside of a bank. Now whether I had, you know, $100 million years at JP Morgan or whatnot, they want to see that we can manage Kaler capital can manage 50 100 200 million to make it count. And they want to see that scalable, and it’s it is an interesting thesis, because it does, it does change things when you’re dealing with such large numbers. You know, like, how do you mentally think about how do you sleep at night knowing that if you have $3 million, if you have a 10% drawdown, you just lost $30 million. The numbers get big and that’s, you know, again, though, you know, you’ve one of the advices advice I got from one of my, one of my bosses back at JPMorgan was, if you’re going to lose, lose early, because it teaches you learn a lot about yourself in your career, when you have these big losses or drawdowns. And I think it’s really true of how you bounce back from them. How do you mentally handle being down? Are you second guessing yourself? Are you conviction? Like, what’s your conviction rate? You know, so I think for us, being a systematic, actually has really helped with that. It’s helped me, you know, keeps us on a strict guidelines of risk tolerance keeps us on the strict guidelines of how we think about the market and where it’s going. So it’s, it’s definitely something that keeps us on the railroad tracks for sure. I


Jeff Malec  16:25

was gonna say, how do you handle that, but by being systematic, but Right, in theory, and the math of it, the systematic part of it does, I’m doing 30 contracts. I’m doing 300 contracts. Yeah, it shouldn’t matter. Right.


Brent Belote  16:37

Yeah. I mean, our program is scalable, easily to five, five, $600 billion. It’s more a function of how much infrastructure do we want to build out? And where do we want to go with it? You know, as you grow, you need more people, as you get to bring on larger LPs, they will request additional, whether it’s chief risk officer, whether it’s legal vehicle that we have to house ourselves. So there’s a lot of kind of nuances to growing and that’s what we’re trying to do right now is just grow smart. You know, we want to grow consistently we want to grow during returns that are, we can show that we can make money during this time and lose money during this time. And that it’s still the same program, whether it’s 30 million, 50 million, 500 million. And so that’s kind of where we’re, we’re at right now. So


Jeff Malec  17:19

the harder part is, you can’t just blow through 30 million, and everyone still goes out for a beer after work. What’s the easier part there’s got to be an easier part was, what’s the good part about going out on


Brent Belote  17:33

my own? Yeah, I’ve always liked in trading, that it’s a very, you know, it’s a meritocracy. If you make money, there’s a scoreboard. And, and if you do that, and if you make money, you get paid on it. And that’s, that’s something that I’ve always liked. And also, it’s heavily scalable, like you’ve mentioned, whether it’s 30 contracts or 300, the process and the way I think about it in the business is all relatively similar. So just being able to kind of build a business and have something that we’ve done and, and kind of building a legacy of things that that that, you know, I’ve worked my whole life or something I really enjoy. So I’ve really enjoyed kind of the entrepreneurial aspect of it and building a business and finding different partnerships. And, you know, we’re kind of at a point now, where it’s been really fun, we’re starting to, you know, look at different partnerships, and possibly, it might make sense to create a joint venture with another fund, or it might make sense to launch a multi strat or, you know, we’re kind of hitting critical mass where we can start thinking about different avenues and different partnerships that are that are really exciting.


Jeff Malec  18:35

You know, you missed the obvious answer, which is you get to live in a place like Jackson Hole.


Brent Belote  18:39

That is true. Well, that was that was my main thing was when we so back to the bank, we were living in my wife and I were living in New York in 2016. And in February, we found out we were pregnant my first daughter, Kaler. And, and it was kind of a make or break where Okay, well, I’m from San Francisco. She’s from LA, we both went to school in LA, we thought we were going to move back to LA. So it was okay, well, what job can I get in LA? Yeah, it wasn’t a ton of finance, especially in commodities. You know, commodities is very, very localized to New York, Chicago, Houston in London. And it was kind of a situation where we either have to live in one of those three, four, or I could try to use my own and we could live in California. And as luck would have it, we got to California and turn around and came back to Wyoming so it kind of worked out that way but it was a it was definitely something where I was I decided that I was gonna give it three years to make it work. And if it didn’t work, then I probably have to I probably would have been back in either Houston London


Jeff Malec  19:42

and DC Do you ever see if some pod shop or some energy group came Colin said hey, we want to give you this huge check to come trade back inside the group and you can do it remote,


Brent Belote  19:53

that there’s there’s a price for everything and my my answer is always I had an offer to go to use In last year, but it would have been awesome Houston to be part of a larger team. But the it’s I want autonomy, a Red Mountain company now for five, five and a half years, I built a good business,


Jeff Malec  20:14

that’s a tough job.


Brent Belote  20:15

If you want to come there, like I’ll come build a business, but I want to be my own pot. And I want to be able to bring in hire people and grow it. And I’m not leaving my own. So those are my terms. Usually at that point, they say, like, okay, let’s, let’s keep in touch. So what


Jeff Malec  20:31

what are your thoughts? I don’t know how deep you are in that world. But on some of those jobs in particular and energy, right, there’s been a few energy groups that have trader in different electricity markets are different one oil trader, one gas trader, what are your thoughts on how those guys run a book and what they’re doing?


Brent Belote  20:50

I think what they do is great, I think it’s, you know, it’s kind of the, it’s just the multi strap model. And you’re seeing that more. So there’s not a lot of, you know, twin, like $5 billion commodity funds these days. And the reason behind that is, it’s just makes more sense to go to these pots and go to these shops. Now, if I now, you know, if we lived in Houston, or we lived in New York, I don’t think I’d be, I probably would have ended up jumping to one of those. But the autonomy of Jackson really made it a non starter for us. You know, and I think that’s why a lot of these pod shops are ones that are now looking at external capital. And I think it’s because they realize that hiring a guy like me who it’s easier to almost it cheaper for them to just give Kaler capital money than to try to hire myself and a team away and give me the amount of capital that I would require. And the amount of you know, I would, I would say, the initial sign on as well. They’re like, well, we’d rather just give you money instead. So that’s been where a lot of our interest in the last six to nine months, I’ve come from some more extreme capital capabilities are calling us up asking if if if, you know, we’ve had more of a


Jeff Malec  21:58

lease, lease your performance first buy it outright.


Brent Belote  22:03

And especially, especially when I say, you know, when they hear my request of I’m not leaving Wyoming and and I want my own pot and autonomy, and then they go.


Jeff Malec  22:16

And given those all those guys, and right there, what are they paying some of those guys to come out of those banks like, millions?


Brent Belote  22:23

It just depends, like, it’s interesting, because, you know, I’ve talked to a lot of my friends about this, and especially like, we’re still in Wall Street, and they’re not really paying them huge sign on bonuses, they’re just buying out their existing equity that they have. So the way like our bank pay was was we would get two thirds, two year deferred, and then 1/3, three year defer. So if you have like three good years, JP Morgan, Goldman Sachs, whatever, you’re gonna end up with a very large chunk of equity that’s kind of rolling off over the next two to three years. So most of these would would would end up in a situation where you had to, you have to make them bold, and just walk away from that, because it’s just too much. So a lot of the large numbers you see when it says, you know, Millennium pays this guy, $20 million.


Jeff Malec  23:07

It’s like, Yeah, but he had a team coming to him or coming to him


Brent Belote  23:12

over three years at Goldman Sachs. So they at least had to make money. And


Jeff Malec  23:18

they’re still paying it right. They’re not getting it from


Brent Belote  23:20

  1. What’s interesting is I had a call, I won’t name names, but I’ve had calls with those people before. And I’ve told them, I said, Listen, we’re growing fast, you know, like, hey, their capital is at 50. If we get to 200, you know, the number for me to buy, my team come becomes exponential at that point. And their response was, we would rather spend 10 times as much money to buy someone who’s running at 200 or $250 million fund, then an emerging manager, like yourself Sivan. I found that fascinating. They have so much money that they’d rather wait till you’ve made it and then


Jeff Malec  23:55

yeah, they probably know what they’re doing. They’re like,


Brent Belote  23:58

no plan to close killer capital or steal fundraising. Life’s good.


Jeff Malec  24:05

Nice, good. And then I think we’ve talked about it before and some other but I’ll just, again, for some of the younger peep listeners out there, like, how hard is it to get those seats? Right, and to be successful in them at the banks at these bad shops? I mean, one precludes the other. Right. But


Brent Belote  24:22

yeah, yeah, I mean, really hard these days, because there’s less of them. What’s there’s less of them, and they’re, they’re less risk oriented. Most of the banks these days, think of their commodities traders as almost, they’re more market makers, they want to satisfy their clients because they we make way more money on on the financing and hedging operations and investment banking than they do on the commodity side and actually trading around it. So there’s still some very large risk takers out there. Obviously, the largest is V tall. And what’s funny is when I left JP Morgan, I was in a final round interview with vitalant You Justin, and my, one of my good friends was the other one and he got hired. And now like, we joke about it, we still talk a lot, like five years down the road. And I’m like, Man, I can’t imagine my life if I got that over you and you, you know, versus and I’m like, I’m so thankful you were better qualified for this. And, and, and did it just from a lifestyle perspective with with Houston and time and kids and everything? So, you know, certain things kind of end up being a blessing in disguise, but those seats are very, are very difficult. And, and, and


Jeff Malec  25:30

is it the right schools, the right connections? I mean, the interview all the above,


Brent Belote  25:35

I don’t even know what JP Morgan is and how but when I started, you know, I got out of grad school, and they were only hiring MBA interns from I think it was like Forbes, like NYU, Harvard, MIT, and I forget the other one. And then even their undergrad was even more stringent of, of like five or six. And I don’t know, where they’ve kind of gone from there. And they had a whole piece where two years after 2008. They made a rule where they’ll only hire if you were an intern. So you have to intern and then you transition. So you know, and that was when I when I came out, you know, when I did my internship, I entered on the natural gas test in my boss at the time that I’m sorely missed, was like, Listen, you know what, I want to hire you but I don’t need you in a year, I need you to start now. He’s like, I can’t like, you know, the typical, the typical MBA at that time was you go to one year, you go intern, you get hired, and then yet you kind of piss off and screw around for your entire second year of MBA knowing that you have a great job. And he and he was like, No, I need you now. So it kind of changed my second year MBA a little bit. But I wouldn’t change anything. You know, I got I got such great exposure to different opportunities. And


Jeff Malec  26:49

do you think whether you’re in those seats, or whether you’re where you are now like it’s this? Is energy trading the hardest trading? There is?


Brent Belote  26:57

I don’t know, I’ve never had much exposure to the other ones. I can’t say that. I would say, you know, I would say no, I think I think there’s probably other ones out there that carry anyone who wants the more. You know, but I think


Jeff Malec  27:11

I’ll rephrase the most competitive there is right, because you have these huge shops, feet tall on the bank.


Brent Belote  27:18

Like if you’re a race? Yeah, true. There’s only so many, like, what makes commodity trading a little bit more manageable? is the amount of money needed to start it were a $50 million, you know, essentially Oil Fund, you know, oil program, how many $50 million credit funds do you find out there? How many $50 million, you know, rates like there’s, you’re just don’t have those outside of some of these large, you know, the blue press that have 10 $15 billion of Credit Allocation. So it’s it’s a smaller sandbox when you get larger because you need more money for him. So it’s, I don’t want to say it’s, it’s the most difficult but I would say it’s probably one of the more accessible and if I wasn’t, I don’t think I would have been able to go the CTA route.


Jeff Malec  28:07

Switch tax again here. So let’s talk about oil in general energy sector in general. Kind of we touched on a little bit, that five year range has been basically flat, but a lot of volatility in there. So wherever you want to start, but want to start what we saw in 23. What kind of stood out to you the year gone by?


Brent Belote  28:29

Yeah, I think I think what’s interesting to me has been in the knock on effects of Russia, Ukraine, even from 22 they created such a distillate, you know, shortage globally, that it was something that we were really focused on and chewing through over that entire year. And 23 sauce similar where distillate was kind of in the forefront. And I think that’s why, you know, if you look at some of the high returns that you’ve seen in in it, I think that’s why a lot of the natural gas guys had had not large natural gas pumps did really well on 2223. It was kind of a combo of a little bit of everything. Where we are currently I think this year is really fascinating. OPEC still has a ton of spare capacity. But the fundamentals right now are very strong. Obviously everything we’re seeing in the Red Sea is bullish. Realistically, if we if OPEC had if OPEC didn’t have the cuts they currently have on and we were seeing what we’re seeing right now we probably be around $100 Oil already. But because of the headwinds, and that that looming effect that that’s still there, I think they will put a cap on it. If we rally. I probably say we’re at around $80 Brent oil here, I think anywhere close to 8590. I think you’ll see Saudi talk about releasing some of the cuts that they had to try to meet it. So you know, I do think that everything is looking pretty bullish. But the headwinds are just someone can turn the spigots on pretty pretty quickly is going to put a cap on it. I’m not saying we can’t get through there, but I just don’t think it’s a demand story that’s going to back it to get to the high Above 100 this year. So I sadly think that we probably will be fairly, we will be fairly kind of range bound for oil, at least in the short term. Now gasoline and distillate are still fairly interesting. But the fact that now we got past the cold. I don’t see any cold on the horizon. Really, it actually seems like winters kind of warming up even here. So I’m curious if distillate if we’re just not going to have the heating degree days and demand to keep it kind of going and


Jeff Malec  30:30

explain distillate real quick for this, I don’t know, diesel


Brent Belote  30:34

fuel and also heating oil. So it’s kind of a combo that you can use to refer to both of them. And in jet fuel for those three. And so what you see is, you know, in the winter, obviously, a lot of the East Coast, they’ll heat their home with heating oil, and then also as diesel demand as well. So you get a lot of demand from trucking and from kind of global macro upticks. And when the when you have really warm winters like this, it just allows you to build up stockpiles pretty quickly.


Jeff Malec  31:02

And so is that heavily tied in with refining? Absolutely, yeah. Yeah, exactly. So what would Russia Ukraine, and you said this let’s spite? That’s because the refined product wasn’t coming out of there.


Brent Belote  31:13

Exactly, exactly. And then in the last kind of couple of weeks, what we’ve seen is because of the cold weather that we had in the Gulf Coast, and really all over the United States, I think they lost about 15% of the refining capacity in the Gulf Coast. So distillate and gasoline have been very strong over the last couple of weeks. Something that we’ve we’ve got pretty well this this month, I think this month, we’re up just a little over 2%. But it’s been something that we’ve we’ve done very well on being being long on this.


Jeff Malec  31:42

And so as oil trader, but your portfolio is more than just oil, so you trade all the Bislett. So walk through all the products


Brent Belote  31:50

oil products is the easiest way to think about it. So the two primary ones are gasoline and distillate. So we trade WTI, Brent, gasoline and heating oil and kind of every combo in there, and gasoline to kind of bring it back up a gasoline crack and it just looked crack is the amount of money you make by refining a product. So you know right now, this is the cracks around $30. Which means that if you took a barrel of oil, and say for some reason you had a magical refinery that only made 100% distillate you make $30 By putting it through this kind of third margin on refining, for lack of better words.


Jeff Malec  32:28

And what’s the overall right I’m harking back to California was like, we’re not allowing any new or the, the California Refiners Association wrote that letter of like, it takes us 10 years and a billion dollars to plan out a refinery and you’re saying you’re not gonna have gas cars in 10 years? Like why would we build a new refinery and increased refining capacity


Brent Belote  32:52

takes themselves in the junk even more by a special kind of gasoline called car Bob, which is very expensive and difficult to make. So that’s why you know, another reason why gasoline in California is expensive.


Jeff Malec  33:04

And what is it? Yeah, good. Go ahead. I was just gonna give us that outside of California, like, the whole refelting capacity, what


Brent Belote  33:12

does it look like in the United States, we have different pad regions is how we kind of break it down. I shouldn’t know that acronym. I definitely do. But it’s definitely lost me. But you know, pad one is the northeast, pad two is made con mostly Chicago. Pad three is the Gulf Coast. And then pad four is more kind of Denver area. And that in that whole kind of space. And the past five is California. And what’s unique about California is there’s really no oil, you know, it’s really difficult to get oil over there. There’s no pipelines that kind of flow east to west. So actually, they ended up either importing a lot of their oil or their gasoline that they need from from Asia. So it’s kind of a unique island that pad five is usually its own own kind of microcosm, whereas pads one, two and three really drive the oil, the product markets.


Jeff Malec  34:06

And so, pad, excluding pad five, what is the refining look like? And the rest of it are P Are we building refining capacity? Or is there this overhang of like, No, and I needed in 50 years, we’re all going electric.


Brent Belote  34:20

And that’s where, you know, that’s what everyone tracks is. Every refinery is really complex. And you have to plan these outages like months in advance. And so most of the refineries will come out say, okay, hey, we’re gonna go down for six weeks to, you know, clean this or redo this or, or fix this. And there’s engineers, there’s people you got to plan for, you know, you got to reconfigure your refinery to not run in that specific unit. So what we’ve tracked very closely as refinery turnarounds, and we track that on a unit level basis. So, we look at each refinery unit, what goes into that refinery unit and then what would come out of that so how much a unit


Jeff Malec  34:55

like the the Ag the whole refinery, or


Brent Belote  34:58

like SAP refineries made up of 10 or 12 different units, when he does a different thing, whether it’s create more gasoline, whether it’s kind of get to fuel oil, whether it’s to blend it, you know, a they create,


Jeff Malec  35:12

each one can easily switch units, but they’re very, they’re


Brent Belote  35:15

very complex and very large and very, but in the you know, it’s a flowchart and so little breaks, you can’t just go around it, you can at time, but


Jeff Malec  35:23

hey, jet fields were more profitable. Let’s switch over this.


Brent Belote  35:26

This Yeah, yeah. So they can do that to a certain extent. And that’s exactly there’s you know, petroleum engineering, that’s, that’s their entire job is trying to optimize the refinery for return. So, you know, if for some reason, distillate cracks went to $60, and gasoline was 30, there’s a wiggle room where you can change it a little bit and produce more distillate versus gasoline by putting in a different type of crude. So each crude when you put in into refiner, actually produces a different, you know, kind of distribution of products. So if you took one, you know, one oil out of one barrel of oil out of Midland and put it in an oil refinery, you’d get XYZ, whereas you take one heavy sour out of Mexico and put it through an oil refinery, it’d be very different breakdown. So there’s all this breakdown. And there’s there’s entire entire teams dedicated to buying the right amount of oil to try to get that blend, right. So you’re in the sweet spot where you can kind of maximize your profit.


Jeff Malec  36:28

And let’s talk green inflation. Where do you stand on it? Right, we touched on a little bit here, but is this move towards electric this move towards everything’s got to be green, more wind more solar more everything? Short term bullish for energy’s long term bullish for long


Brent Belote  36:47

term bullish for energy. And I think what you said is a great a great, you know, lead in that why would I build an oil refinery that takes 10 years to recover the costs, when you’re telling us we’re not going to need Oh, and 10 years, and you’re seeing that across the whole energy space, whether it’s even oil exploration in Texas, Gulf Coast, wherever you’re seeing this, their demand, oil demand is still increasing, and it likely will increase for the next decade, just global demand that is yet future investment and supply is declining. And there’s going to be a point where demand passes supply on the on the yearly basis. And that’s going to spike oil, very materially high. And it’s going to be a situation where they’re not gonna be able to turn it on. Because typically, you know, people always say the best, the best cure for high prices is high prices. Yeah. And you know, how, like, when does a $250 oil all of a sudden, people are exploring everywhere trying to find oil. But if you still have the belief that the government is either a gonna tax without, or be, you know, just legislated out where you’re not allowed to drill or take it away? Why would you be involved? And why would you put money to work? Something that you’re not sure is going to be around in 10 years? So, you know, I think you’re in the sweet spot where, this year, not so much, but I think probably by next summer, you know, I think demand will have caught up to kind of the overhang I think OPEC will have released their supply. And I think that’ll be start to be the turning point where demand will outpace the future supply growth that we’ve seen in the last two years,


Jeff Malec  38:16

that supply growth was still COVID Hangover.


Brent Belote  38:20

No, the supply is going pretty good here in the United States. I forget, we’re we outgrew last year, pretty substantially, you know, mostly in Midland, but you know, some roads uncoded kind of a little bit of all over. But but the growth was still pretty strong. We’re just getting more efficient in the efficiency factors are getting really good at it. But there’s a point where it’s just not going to be there anymore. And even if you get more efficient, you’re still not going to be able to kind of squeeze the barrel out of the ground even more without massive infrastructure investment, and at $70 oils. And the fact that your your recovery time, there’s not a 1015 year PE project, it’s now you’re trying to squeeze all your turns into five years, you know, on your DCF analysis, it’s looking like wow, we need XYZ $90 oil to break even because we have to get all our money out of it. And five years before they you know, electric vehicles takeover and the demand go the kind of craters so it’s


Jeff Malec  39:17

what do you know, off the top your head what those numbers look like, like shale was is what’s its cost of production, like?


Brent Belote  39:24

People ask us all was low 60s. Again, the


Jeff Malec  39:28

Saudis like 10 or something Saudis irrelevant.


Brent Belote  39:30

Yeah. Yeah.


Jeff Malec  39:34

Hey, here’s some oil, pick it up. And then how do you square all that with like the, as we talked about before, Saudis could just turn on the spigot whenever they want. Yeah. But eventually that won’t even be enough to outstrip demand. You’re


Brent Belote  39:47

saying? Yeah, yeah. And also, I mean, the big the big thing you’re thinking about with all these is, is every well if you’re not either drilling or is really declining. Like most of the decline, the declining rates on shale is massive. meeting, I think it was something like it produces 90% of the total oil over the first 18 months and that steep decline curve out that but which is why they were great, because everyone want to invest in them, because you’re getting so much back right away. Yeah, you get your money out fast, but then that you know, but then they it just decreases so fast. Now they’ve gotten better at kind of smoothing out and getting the long term out there. But it’s still a situation where if you want to get long term investment into the oil space, I think it’s really hard.


Jeff Malec  40:29

From a from a infrastructure standpoint,


Brent Belote  40:32

from an infrastructure recap raise, I mean, even at where we’re at now rates, you know, with rates where they are getting funding for these longer term oil projects. It’s just getting really expensive. Yeah.


Jeff Malec  40:42

And then you’re also at the, like, social pressure, right? Like, if you’re Harvard, or some of these schools, you mentioned like, Hey, we’re going to take the endowment money and invest in oil exploration people like what you crazy. Yeah. You’re not allowed to do that with our, with our schools. Mine.


Brent Belote  40:57

Yeah, exactly. You’re seeing that a lot with fossil fuels are kind of out. But it’s, it’s, it’s a weird scenario, because you’re gonna need it. Right. But eventually


Jeff Malec  41:06

that, in theory, eventually that curve switches, right. Yeah,


Brent Belote  41:10

switches where demand is below and supply, you know, demand decreases. And, well, we push oil, nowhere, I guess, you know, will will gasoline be cheap? Sure. And they’ll there’ll be some byproducts that come out of it. But you know, you’ve seen that with natural gas, like, you know, natural gas has been $15, down to two to a byproduct. And then they’ve had its day in the sun. And, you know, natural gas headphones are thriving. And we basically been in kind of a short term range for the last decade, and they’ve done very well. So it’s a it’s really unique scenario.


Jeff Malec  41:41

But do you think like, 50 years out, whatever that number is some long term out? Right, and everyone’s wildest dreams come true. And we’re solar and wind and everything, all electric vehicles, and yeah, what do like what happens to oil, but there’s still oil on the ground? It’s


Brent Belote  41:58

still gonna need oil, you’re still gonna need it. It’s one of you know, plastics chemicals. You know, there’s still a lot of things that come up with old finery that are needed. Now, will gasoline be a byproduct? Maybe. And maybe they’ll find a way to kind of use the ones that they need and get rid of the other ones. But if there’s one thing I know, I mean, if you look at a lithium mine, and then you know, the refinery, which one looks worse for the environment? Yeah. And then you look at our power grid, and you can do it on it’ll take anyone 10 seconds to google it and figure out how much grid we electricity, we would need to, you know, actually power every car and get it going. And it’s the grid, just infrastructures isn’t there now 20 years from now, maybe with the amount of investment that they could do, but it’s just not there. And that’s where I just don’t see, you know, globally and becoming an issue where it’s going to be something along those lines.


Jeff Malec  42:54

It’s not for your 10 year plan, personally, and for Kaler capital, like we’re, there’s still a trade here for at least 1020 30 years. And even


Brent Belote  43:04

then, I think it’s a situation where, you know, I think if, say, we get to that point, 20 years from now, I still think oil is going to be interesting, it’s just a function of what product will we be trading? Would it be something more maybe we add plastics in the mix, and now was trading plastics, because it’s the sexy part of the only part that they want propane. You know, there’s all these different kind of aspects that you can you can be a part of, and get out. So I mean, we’re trading a very small sliver of the oil barrel. And we could expand that pretty substantially if we if we needed to, or want to


Jeff Malec  43:36

shift to electricity and really go crazy. Power trades. Alright, what else? What else you got on that regard? Anything?


Brent Belote  43:50

No, I think that that’s, I think we saw the world. We solve


Jeff Malec  43:54

the world’s problems, right? Hey, we’re gonna need the oil. We’re gonna need plastic.


Brent Belote  43:59

I mean, do you think this is very interesting year because of the headwind of OPEC, and also the fact that it’s an election year. The last thing that Biden administration wants is Donald Trump getting on a podium and harping on him about $7 Gasoline so they’re going to do everything in their power to try to keep this under wraps in the Red Sea so I mean, I I’m a long term bull but I’m kind of short term agnostic I’d say


Jeff Malec  44:25

and what what we’re speaking about and all the SPR release all that mumbo jumbo was that politics was that needed.


Brent Belote  44:35

It’s always politics is the RS politics. There’s,


Jeff Malec  44:38

you know, how they refilled it. What’s the status? I


Brent Belote  44:42

think they were try they started to Yeah, I think they’re still in the process of doing it.


Jeff Malec  44:46

It seems like you could trade around that note, like they kind of telegraph it then they say where they want to buy it, but that probably


Brent Belote  44:52

doesn’t move the needle substantially on the global oil, oil, you know, overall on it, so you know, when he did it, the first Last time it did a little bit. But in the long run it just it doesn’t have much effect.


Jeff Malec  45:06

And then Russia Ukraine is still going on which going on, but every week a lot of us forget. But I guess are you saying was a non event like the oil kept


Brent Belote  45:15

in here basically buying almost 100% of Russian oil. And they basically said, We don’t care. And they get it for cheap, and it’s boosting their economies. And they’re seeing, hey, we get oil at a 40% discount or 30, whatever it is that they’re buying, and so they just don’t care. And you know, Iran is out here doing their stuff in the Red Sea. And, yes, we have sanctions on them, but they’re still producing almost our max oil. So the sanctions aren’t really helping either. And again, that’s something where, you know, India and China are just saying, Yeah, well, but it’s good. Send it over.


Jeff Malec  45:44

Yeah. And what does that look like? Like, there’s the sanctions, and those are members of UN supposedly, but they can there’s ways they skirt it all. Yeah,


Brent Belote  45:53

I’m not sure the full logistics of it. But I just basically say No, when I can. No,


Jeff Malec  45:59

we’re buying it from Glencore. It’s all good. Yeah. Awesome. Well, I’m sorry to miss you down Miami. But we saw you in Wyoming. But have fun. And good luck on the panel. You’ll do great. And we’ll talk to you soon. All right. Okay, that’s it for the pod. Thanks to Brent. Thanks to our Sam for their support. Thanks to Jeff burger for producing. We’ll be back next week talking logistics with the CEO of trucking company Road Runner. So go ahead and subscribe so you get it right when it drops, PEACE.

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