Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: The following podcast was recorded for publication on the 17th of October 2024 by HSBC Global Research.
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Speaker: Hello, I'm Piaz Bartlett in London and welcome to the Macrobrief.
Speaker: Now, geopolitical risks are currently playing a key role in the global economy and one area where that is most evident is in the oil market.
Speaker: Oil is currently caught between long-term market imbalances that have the potential to take prices lower and political risk that could lead to a sharp and disruptive spike higher.
Speaker: So which of these forces is going to win out?
Speaker: I'm joined in the Tudor by Kim Fustier, Head of European Oil and Gas Research.
Speaker: Kim, welcome back to the Macrobrief.
Speaker: Thank you, good to be here.
Speaker: Kim, let's look at the shorter term influences to start with.
Speaker: You say in your report that the geopolitical risk premium is back.
Speaker: And that relates in part to the supply of oil from Iran.
Speaker: And also you talk about trade flows in the Strait of Hormuz.
Speaker: So perhaps paint us a picture there.
Speaker: Sure.
Speaker: So following Iran's missile attack on Israel on October 1st, oil prices rose $8 in the space of a week because market participants started to worry about Israel's response to the attack.
Speaker: So potential scenarios include a strike on Iranian oil infrastructure that could be fields or oil depots or refineries, or a closure of the Strait of Hormuz, through which 18% of the world's oil
Speaker: currently flows through.
Speaker: Both of these things would have very significant impacts on the global oil market.
Speaker: And it's fair to say that before October 1st, very little to no risk premium was priced in.
Speaker: So obviously we don't know what's going to happen, but it's important to keep some perspective.
Speaker: No supply has been disrupted since the start of the Middle East war a year ago.
Speaker: Back in April, oil prices rose $5 and fell back when no supply was lost.
Speaker: And half of that $8 premium has already unwound as we speak.
Speaker: and we'd expect it to unwind further if things don't escalate.
Speaker: Now, the interesting thing is, 10 years ago, a tense situation in the Middle East could have sent prices potentially much higher into the 90s or even above $100.
Speaker: And we think there's two reasons why the market seems to be somewhat less concerned.
Speaker: The first is that over the past five years, we've had multiple instances where
Speaker: geopolitics have failed to actually disrupt physical supplies.
Speaker: One example is the Russia-Ukraine crisis.
Speaker: And the second is that there's a lot of OPEC plus spare capacity, more than six million barrels a day, that could be used in theory to absorb supply shocks.
Speaker: So let's talk about this OPEC plus spare capacity.
Speaker: In your report, you talk about a least bad exit strategy by OPEC plus.
Speaker: What do you mean by that?
Speaker: The context is that OPEC Plus has cut supply five times in the last two years in an attempt to prop up prices.
Speaker: It has signaled more recently that it wants to return to the market and gradually reverse these cuts to release that production back into the market.
Speaker: So from OPEC's perspective, the strategy of supply restraint has by now run its course.
Speaker: It cannot keep cutting.
Speaker: into perpetuity, right, and keep losing market share to other producers, including the U.S. So OPEC Plus is now trying to find a way back while minimizing the downside.
Speaker: An all-out market share war, whereby OPEC releases all of its barrels all at once, would be too dangerous because that would send prices far, far lower.
Speaker: But gradually increasing production therefore looks like a middle ground.
Speaker: And yes, it's probably going to put some downward pressure on oil prices.
Speaker: But to be fair, most OPEC countries can probably sustain a few years of somewhat lower prices and the alternatives are worse.
Speaker: So putting the short-term factors and the OPEC plus situation that you just described, what does that mean for the outlook on your forecasts?
Speaker: So we've recently reduced our brand and WTI price forecast by about 10%.
Speaker: We're now not far off the forward curve, and we're about $5 below the current market consensus.
Speaker: If you look at the fundamentals directionally, supply and demand balances look worse going into 2025.
Speaker: Demand growth is going to be below trend for structural reasons that have to do with the energy transition.
Speaker: And non-OPEC production growth, including from the US, Brazil and other countries, continues to look pretty strong.
Speaker: And against this backdrop, if OPEC Plus does decide to add more barrels, then we will be looking at a market surplus, which does point to lower prices.
Speaker: Now, I remember talking with you at the start of the Russia-Ukraine war about gas prices in Europe.
Speaker: I mean, there were sort of really apocryphal headlines about our utility bills going through the roof because gas prices were going to shoot upwards on concerns about supply.
Speaker: As we head into this winter, where are we with that now?
Speaker: So storage levels in Europe are very high.
Speaker: They're 95% full at present.
Speaker: So they've exceeded the 90% target that was meant to be reached on November 1st.
Speaker: And that was reached as early as late August.
Speaker: So we're in a pretty good position going into effectively the third winter without Russian gas.
Speaker: Gas prices have risen a little bit lately, mainly for geopolitical reasons again.
Speaker: There are concerns around the end of Russian gas transit through Ukraine.
Speaker: That's going to happen at the end of this year, and that represents 4% of Europe's gas supply, and also about Middle East risk.
Speaker: So again, transit through the Strait of Hormuz.
Speaker: So we think these risk premiums should unwind, but in any case, gas prices should remain above their pre-Ukraine levels for another year or two.
Speaker: One of the things we talked about in the context of gas was the fact that in a supply and demand situation, if supply gets restricted from one source, the demand stimulates supply from others.
Speaker: And LNG was part of the answer.
Speaker: Is that still a strong factor for European gas prices?
Speaker: Absolutely.
Speaker: So Europe has actually needed less LNG this year than in the past two years because demand has been dropping for a few reasons, including the growth of renewables and the rebound in Asian LNG demand.
Speaker: But we are about two years away from a strong growth in LNG capacity out of the U.S. and Qatar in particular.
Speaker: So we're still looking at that as the key factor that will rebalance the global LNG market and bring prices down.
Speaker: Now, taking an even longer term view, I was very struck by the IEA's annual long term report to quote, the world is set for cheaper energy on a shift from oil and gas.
Speaker: The age of electricity is upon us.
Speaker: How do you look at that statement in terms of your view on the oil price?
Speaker: Oil and gas markets are inherently cyclical, right?
Speaker: That's always been the case.
Speaker: And a period of high energy prices in the past few years have encouraged more supply.
Speaker: And as that supply comes on stream, that should lead to lower prices for both oil and gas, as I've just talked about.
Speaker: So that's not new.
Speaker: But what's new in this particular cycle is the effect of the energy transition and electrification in particular.
Speaker: So electrification of road transport, EV sales notably, is eating into global gasoline demand.
Speaker: And on the gas side, the rise of renewables and electrification of commercial, residential heating, as well as industrial gas demand is eating into that gas consumption too.
Speaker: So we do agree.
Speaker: that long-term trend rates of demand growth for oil and gas no longer apply going forward.
Speaker: And as we've said before, we do expect a peak in global oil demand somewhere around the end of this decade.
Speaker: So it does look like it is different this time.
Speaker: On that note, Kim, thank you very much for joining us today.
Speaker: Thank you.
Speaker: Our economists are tracking these oil developments closely.
Speaker: And one region that is particularly sensitive to oil price moves is the Middle East.
Speaker: Simon Williams is our chief economist for Central and Eastern Europe, Middle East and Africa.
Speaker: He's been in Europe meeting clients, and he caught up with our global chief economist, Janet Henry, earlier this week.
Speaker: Janet began by asking about the potential impact of the oil price on the region.
Speaker: Politics is a proximate issue.
Speaker: I think the oil price outlook is a much more substantial concern for the region's outlook.
Speaker: As for all the movement on structure reform, this is still an oil story.
Speaker: And like you, I see threats to the oil price on both sides, demand.
Speaker: does feel heavy and supply well supply is is abundant right now the geopolitics have been sufficient to hold all prices around 80 dollars a barrel but roll that into next year and i think it's likely the prices settle lower and that doesn't have an immediate
Speaker: impact on economic activity, but with time it does begin to take a toll.
Speaker: It takes a toll on sentiment, it takes a toll on domestic liquidity, it begins to feed through into some of those fiscal policy choices that governments have been making, and I think it begins to change, again, external attitudes toward the region as well.
Speaker: We've changed our oil price
Speaker: Assumption, it was a belief that oil would trade $70 to $90 a barrel through the cycle.
Speaker: We're now thinking it's $60 to $80 through the cycle, so $70 as the midpoint.
Speaker: And that's OK for the Gulf, but that really is the end of the comfort zone.
Speaker: Oil prices settle below that level.
Speaker: Well, the questions get that much more difficult for some parts of the region to answer.
Speaker: And in terms of what that means for the oil importers in your region, obviously, we've seen some impact on everyone's inflation forecasts, given what is still a lower oil price than was the case just a few months ago.
Speaker: So if we look at some of the larger economies within your region, are there any tailwinds from what seems to be at least a slightly lower oil price, even if there is uncertainty?
Speaker: Clearly it helps with the inflation outlook, takes some of the pressure off central banks, particularly an environment where global central banks are easing.
Speaker: In Egypt, in South Africa, and there are growth problems that policymakers have to wrestle with.
Speaker: So lower oil price helps and monetary easing will help those underlying structural challenges to growth.
Speaker: They still are going to take quite some time to work through.
Speaker: Yeah, absolutely.
Speaker: And turning to Central and Eastern Europe, a lot of oil importers there, but also some economies very tied into what's still quite a sluggish Eurozone growth story.
Speaker: So no easy lift there from a world trade perspective.
Speaker: Who are going to be the relative winners and losers within Central and Eastern Europe in this uncertain world for the oil price, but also the prospect of some monetary using?
Speaker: It really is a broad split.
Speaker: Poland's one of our favourite stories anywhere in Sydney.
Speaker: Good rates of growth, good bounce growth as well, and some very positive policy choices being made.
Speaker: I guess at the other extreme, we'll show you Romania, where growth has been very strong, but we think growth has been low quality and where those twin deficits to us are going to require significant policy tightening over the next couple of years.
Speaker: And I think growth is exposed as a consequence of that for Czech Republic and for Hungary.
Speaker: Some were...
Speaker: in between more limited policy choices than we have in Poland and at the moment underlying growth stories that are really struggling to generate much momentum.
Speaker: Simon, thank you very much.
Speaker: Thank you.
Speaker: Simon Williams there on the macroeconomic impact of oil prices.
Speaker: If you're a subscriber to HSBC Global Research, you can listen to his full interview with Janet via our website or mobile app.
Speaker: Before we go, here are a few highlights from the rest of the team.
Speaker: In FX, the countdown to the end of the year has begun, with many uncertainties lying ahead.
Speaker: The outlook for the Fed versus other central banks and slowing global growth has put the US dollar back in the game, says Paul Mackel and team in the latest edition of their Currency Outlook.
Speaker: The report also explores the possible outcomes of the US elections and how FX could react.
Speaker: In his latest bond letter, Steve Major, Global Head of Fixed Income Research, assesses whether the recent jolt high in bond yields is the start of a broader trend or just a correction.
Speaker: Steve considers four factors, from the long-term context to cyclical and structural drivers, and concludes that the bull case for bonds remains intact.
Speaker: Finally, the rise of artificial intelligence means that data centers will use more power than before, with those in the US alone said to consume double their current electricity use by 2030.
Speaker: Could nuclear be the solution?
Speaker: Some big tech companies seem to think so.
Speaker: David Jost, thematic analyst, has been looking at their plans, the potential costs and impact on raw materials.
Speaker: If you'd like more details on anything we've discussed today, then please email artsresearch at hsbc.com.
Speaker: You can also follow us on LinkedIn at hashtag HSBC research.
Speaker: So that's all from us today.
Speaker: Thanks for listening and please join us next week here on the Macrobrief.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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