>> let's talk. russia says opec plus could cut cutsso why cuts -- supply as oil nears 80. spread out. midland houston differential blows out as stockpiles build in the u.s. we hunt investment opportunities in the oil patch. revving into china. electric vehicle growth will help drive the adoption rate over the next two decades. a new report breaks down what company wins and when we hit peak oil demand. alix: i am alix steel, and welcome to "bloomberg commodities edge." it is 30 minutes focused on the companies, physical assets, and trading behind the hottest

commodities and the smartest voices in the business. on.s kick it off with spot today the spotlight is oil. joining me is the founder and ceo of warwick energy group, and michael tran, managing director within the energy strategy research team with rbc capital markets. the news, apparently russia will discuss with opec in june whether they should scale back from those production cuts. does that mean $80 is not sustainable? mike: this is an interesting question. how quickly does sentiment change in this market? it feels like it was the same people in this market who were pointing fingers at opec saying you trashed this market. the same people are saying are you actually going to put more barrels on because prices are so high? when we think about the $18 question, we think it is sustainable because when we look at the saudi breakevens on a fiscal basis, you need a low 80, mid $80 price. i am not sure the saudis will rush the market and bring barrels back on. the main thing is the saudis are

producing under their compliance quota, which means you still have wiggle room for the saudi's to bring their quota to raise production and still maintain compliance. alix: we have a chart that shows how much they are in terms of compliance. kate, do you agree? kate: i think the barrels in venezuela are at risk. you have 2.5 at risk thanks to the return of sanctions from the u.s. for iran likely. and we have permian production growth in the u.s. that is going to be constrained. the world has counted on 70,000 barrels of production growth a day out of the permian. if that does not happen, each month you lose 70,000 barrels a day of production, so if we are off due to this permian infrastructure restrictions this year, we have lost a quarter of a million barrels. alix: i buy it, but the equities, not so much. if you look at the chart of oil prices versus oil equities, oil equities have not been raised to the same extent as the oil prices have. is that gap starting to close?

mike: one thing that is interesting is, over the past couple of weeks, there has been much general investor interest back in this space. over the past number of years, we know the equities s&p has been very strong. oil and gas, that sector has underperformed. what we are seeing is, over the past number of years, there are all these tech names that everyone is gravitating towards. now what we have seen, iran, venezuela, permian bottleneck, i think this has captured the imagination of the market and is pulling investors back into the space. while oil prices have led the complex, you are seeing equity investors starting to play catch-up. alix: i question if it is sustainable or not. if you look at the spot price versus the forward curve, the forward curve is starting to rerate, up 11% versus the oil price. kate, what does that tell you about interest? kate: i think part of the thing is as you saw oil prices rallied from $48 to $70. you could discount it, because

it was at the front of the year. investors need to see a rewriting of the entire curve. if you look at the past year, crude is up 40%. if you look over the past year, the e&p index is up 20%. you have some ways to run, which is interesting. the other thing interesting is that e&p as a percentage of the s&p was 12% in 2015, and today it is 6%. there is some movement, and that goes to that rotation out of oil and gas and the rotation back from the tech companies and back to oil and gas companies. very interesting to watch. how do you play that? the nuance is understanding hydrocarbon flows, production growth, and inhibitors to hydrocarbon flow in the u.s. the most obvious example of that is what is happening in the permian basin. alix: let's get to the permian. one of the hot topics is the spread between midland and houston. if you are looking at companies, mike, how do you differentiate the winners and losers of that

kind of spread, when everybody i talked to said what, i totally have capacity. i am good, the other guy is not. mike: there are going to be winners and losers. if we describe the scenario of the winner, who is that? you have allocated pipeline capacity, and you may have houston or midland pushing the spread half a step. you are a winner there, because oil prices are $70 a barrel. you are getting that much for a permian barrel because you can move it down. on the other hand, what has happened is that, in the run-up of oil prices, we saw a significant amount of producer hedging late q4 and early q1, when prices were around $52, $55 a barrel. worst-case scenario is a lot these producers ended up hedging wti. this is a proxy hedge because this does not protect you from the midland differential. if you have production hedged at $52 a barrel, you are still fully exposed to that midland

dip. it has been anywhere between flat to $15, and potentially widening over the course of the year. if you are hedged at $52 a barrel, and the differential goes to $22 a barrel, you are now getting $32 a barrel. that is underwater $40 from your competitors. alix: and not even when you calculate brent at the end of the day. kate: if you have a two to five year time frame, the permian basin is interesting. there are four to five formations of thickness you can drill. there are fantastic operators in the permian, everybody that you want to be investing with. it will take two years for this pipeline situation to resolve. it is a super low-cost basin. if you have a two year to five year time horizon, if you can look through these differential issues, you can look through the hamper structure issues and these differential issues which are a big deal. the differential issues are material. basically the producers have not participated in a crude price rally because of these differentials.

if you can't, and you're looking at a trade to make money, you need to look for other oily basins in the u.s. that can grow production that make a lot of money at $65 oil. that is oklahoma, eagle ford in south texas, and north dakota. more importantly, to invest in companies that have a delaware position and a scoop sack position, like devon. or a position like continental, or a delaware position and an eagle ford position. you can allocate capital in an optimized way. alix: good stuff. thank you. before we say goodbye, i want to get to some of your takeaways. kate likes continental. and mike is looking at opec as well as the broad oil market. sentiment is the highest it has been in several years. the permian bottlenecks will continue to provided tailwind for the market. kate and mike, thank you both for being with me. as we head to break, we want to look at some of the other big

commodity moves of the week. soft commodities moving higher on the hopes that china will buy more u.s. goods. some of the winners, soybeans, cotton. coming up, a truckers' strike against rising diesel prices has put brazil's government in a corner. the latest from rio. this is "bloomberg: commodities edge." ♪

alix: i am alix steel, and this is "bloomberg: commodities edge." it is time for the data dig where we delve deep into market trends. natural gas inventory numbers out this week. we saw a build of 91 billion cubic feet, but overall inventories below the five-year average. natural gas are still under three dollars mnbtu. the big news for oil inventory was the build surprise. crude stocks built by 5.8

million barrels. exports falling, imports rose, and a result was the wti blowing out. premium rising. i am also digging into power prices. the pgm auction was widely watched in the power market. here is the result. suppliers to the grid are going to get $140 in megawatts per year starting in june 2021. a lot higher than expected, up 83% from last year. you have got prices driven by a slowdown in new gas line construction and nuclear capacity dropping out. you have demand making a comeback. nrg, vistra, also share prices jumped. let's dig even deeper into strikes in brazil. truckers are continuing a multi-day strike, saying a temporary cut in diesel prices was not good enough, and the ripple effect was a shortage of goods and services spread throughout the country. joining me is bloomberg's brazilian bureau chief joining

us from rio. explain what's happening. >> this strike is turning out to be devastating. with every hour, we are getting new reports of companies that are having to shut down their operations or are delaying deliveries, whether it be meatpackers -- today it was the sugar mills, yesterday it was auto manufacturers that cannot get spare parts to put their cars together, and they can't get them to the dealerships either. soybean companies have warned that if this continues, they will not be able to get their shipments overseas. the fourth day of the strike by truckers in brazil turning out to be devastating, and markets are moving on it as well. alix: i was struck by petrobras. the stock got enormously hit despite the fact that the company cut diesel prices by 10%

for 15 days. why is this not good enough for the truckers? >> it is a catch-22. investors are seeing this as giving in to government pressure by strikers, and that petrobras would have abandoned free-market policies which have essentially governed their pricing policies. the strikers want it in black and white. they say a promise is not good enough. they wanted to see taxes on fuels withdrawn permanently, and they say that is the only way they will go back home and start driving their trucks again. alix: the opposite from what petrobras is looking for as well. ray colitt, thank you. bloomberg's brazilian bureau chief. let's get into the ring. we have three charts, three trades of the week. joining me is bloomberg's agricultural market specialist, sterling smith. so good to see you. it has been four years since you have been on air with me. sterling: this is our first time in person. alix: the news this week was

china significantly increasing its purchases of u.s. goods. what are they going to buy? is it going to be soybeans? sterling: they will be buying more soybeans from the u.s. right now, they buy about 35 million tons a year. we could see the number move up -- close to 40 million if this deal does in fact happen. we also have to remember soybeans are a very competitive market. china has been preferring south american soybeans, not just because of the trading situation, but because of the quality. this is not great guns for soybeans. the balance sheet for soybeans is a lot more friendly than it has been. a lot of things need to verify. it took a lot of speculative money and a big problem in argentina to get soybean prices to where they are. that does not mean we will see stickiness. there are delays in the north,

and that will lead to more bean anchors. we saw a cutback in general for corn and soybeans. that could lead to some bearish factors creeping in. alix: china bought $5.8 billion of cotton from the u.s. in 2017, but they kept their import quota unchanged for 2018. could they buy more cotton? would they? sterling: potentially. i see some good things coming in the cotton market. cotton supplies have come down noticeably. that was the big weighting factor on the market for several years. there is a drought in parts of texas where they grow a lot of upland cotton, so there could be supply issues. the economy in general is pretty good, and that bodes well for clothing sales. the higher prices for crude oil definitely affect the prices of polyester fibers. cotton's competitor is having a problem. i do see better potential in the cotton markets. it is certainly more of a frilly -- friendly situation than we have seen in the last four or five years. china was building what was commonly called the great wall of lint. stocks reaching tremendous

levels, some enormous number of t-shirts could have been made. alix: let's look at the next potential frontier of what china could buy, and that would be beef. beef consumption is still low, but eventually we could see a big ramp-up of china buying. sterling: this is going to take time, and i don't want to be shilling for my home state of nebraska, known as beef state, but this is the first time we have allowed chinese to buy u.s. beef. there was a problem with the mad cow outbreak in 2013. it has been 14 years. right now, it is a very small part of their market. they import a great deal of beef from south america and australia. they are going to like the taste of american beef, and this will create a lot of new opportunities in china and the united states. alix: great to have you back on tv with me, sterling smith, bloomberg's agricultural market specialist.

coming up, java jolt, the ceo of colombia's national federation of coffee growers talks about the price pain facing coffee farmers. we discuss next. ♪

alix: i am alix steele. this is bloomberg commodities edge. it is time for what you need to know in the world of alternative energy. bloomberg new energy finance issued their latest electric vehicle report, and one

standout, china. it will continue to be the largest ev market in the world through 2040. joining us now with more is bloomberg's new energy finance analyst who covers tesla and the u.s. electric vehicle market. why is it going to all the about china? >> two reasons. china sold half of all electric vehicles last year, about 500,000, so it is, in relative terms, a large market. the car market is growing very fast, 23 million growing to 35 million over the next five -- 10 years. the sheer size of the market is large. secondly, the regulations in place in china are extremely stringent. we are expecting strong electrification there. alix: you also see strong growth overall. you basically say in the report by the mid-2020's you could actually pay for the car without having subsidies. what does that do for oil demand? >> what we are thinking about is how much ev's are displacing out of the market. currently about 23 million to 25

million barrels a day are being used in the car market. we think it is going to fall, both as a result of electrification and electrical combustion engine improvements. -- internal combustion engine improvements. demand for oil will fall by 2040. alix: we have a bar chart to show how it changes through 2040, if we can bring that up. what do you think the end result is going to be? what companies will win or lose? >> we hear about tesla, but a lot of other companies are doing interesting things. the vw group, bmw. the chinese companies. they are releasing a large amount of electrical models. 300 ev models for sale by 2020. the incumbent oems are putting a lot of capital behind this. we will cac change from the

niche market that tesla created to a more mass-market. alix: thank you very much. definitely check out that report. let's turn to commodity in chief, where we focus on one executive in the commodity world, and today it is roberto velez vallejo, ceo of colombia's national federation of coffee growers. first, let's take a closer look at the coffee problems in the country. for every $3.50 cup of coffee you buy at starbucks, a colombian farmer makes three cents. colombia is the world's second-largest producer of arabica beans, and it has big coffee problems. prices are down 10% this year, short positions are high, and a global surplus is on its way. plus, costs are rising. labor is hard to find, productivity is weak, and the colombian peso rallied with oil this year, which dragged down domestic coffee prices. and you have a weak crop.

cloudy, humid conditions have production down 8% this year and exports down 14%. all of this is killing farmer income. the government will not provide subsidies, and farmers are desperate. i recently caught up with roberto velez vallejo. roberto: we need to do a great effort to increase coffee consumption in producing countries. consuming countries are doing well. the general picture of coffee consumption is doing fine, 1.5%, 2% per year, yet we still have too much room among producing countries' consumers to really increase the number of coffee cups served. we just coming from ico -- and i was meeting with a representative from india, and he was telling me the middle class is starting to drink coffee. i said, that sounds great.

he said, you know how many people? 450 million. if you count india and take a country like indonesia with over 200 million people, you take vietnam, and columbia itself, all the producing countries, that is the key. to be able to grow reduction in consumption at the same time. alix: is there a price, though, where farmers have to close up shop? roberto: there is a price. there is a price. alix: are we close to it? roberto: the cost of production, we are now more or less even or under the cost of production. alix: is that only because of low coffee prices, or are they also paying more for labor? you mentioned the peso. roberto: we are receiving less income. we are increasing the cost. that is a bad mix.

since july of last year, the coffee producers gathered in beijing. we are talking to the industry, telling the industry that we should start cooperation between the whole coffee chain, making ourselves co-responsible. therefore the guys that are serving the cups and the guys that are importing the coffee, everybody in the chain should be co-responsible for the sustainability of the whole chain. alix: how is that going? roberto: it's not easy, but it is something we need to keep talking with the industry. if the industry does not care about what is happening in producing countries, we may have a bad situation for the future. alix: the finance ministers said there is not enough for subsidies for farmers, so how do they survive? roberto: that is our problem.

we will have to deal with the new government. we have this may 27, there will be an election. august, we will have a new government. we will have to discuss with the new government what to do. in colombia, we had two bad situations. one is the international prices, the other is the reevaluation of the colombian peso, due to the oil prices going up, and it is starting to reevaluate, which is a tricky situation. coffee prices don't depend on the price of coffee itself but the prices of oil. and the geopolitical situation, rather. alix: here's what's on my commodity radar. gas prices on the rise for the u.s. holiday weekend. if you want to fill up at the pump, it is going to cost you three dollars a gallon.

that does it for "bloomberg commodities edge." make sure to tune in to us each thursday at 1:00 p.m. new york time and 6:00 p.m. in london. ♪

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