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: And now onto today's show.
Speaker: The following podcast was recorded on the 21st of September 2023 by HSBC Global Research.
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Speaker: And don't forget that you can follow this podcast on Apple and Spotify or wherever you get your podcasts by searching for The Macro Brief.
Speaker: Hello, I'm Piers Butler in London and welcome to the Macrobrief.
Speaker: This week we're talking about oil.
Speaker: Prices have been on a tear for the last few months, rising from the low 70s back in July to around $95 per barrel this week.
Speaker: We're going to be assessing what's behind the rise, why the oil producers are cutting supply and where prices could go from here.
Speaker: I'm joined by Kim Fustier, Head of European Oil and Gas Research.
Speaker: Kim, welcome to the podcast.
Speaker: Thank you very much for having me here.
Speaker: So there's a lot in the press about OPEC.
Speaker: Can you just recap as to what they've said and what's the impact on the oil price?
Speaker: Sure.
Speaker: So earlier this month, Saudi Arabia announced an extension of its voluntary cuts, which are one million barrels a day, through to year end.
Speaker: Now, that really surprised the market.
Speaker: The consensus was for a one-month extension until the end of October.
Speaker: So effectively, a three-month extension was more than the market had anticipated.
Speaker: And on the back of that, plus the extension of the Russian cuts as well, which clearly were coordinated with Saudi Arabia, that has helped to lift oil prices to above $90 for the first time since late last year.
Speaker: I guess the way we interpret that was the primary motivation behind that decision was the desire to lift oil prices and to ensure higher prices staying for longer.
Speaker: We do think that OPEC plus aims for a minimum price of about $80 a barrel and really desires even more than that, hopefully something like $90.
Speaker: And that's really due to their fiscal break-evens in many countries in the cartel that are around the $80 mark.
Speaker: So, Kim, that's going to tighten an already very tight market.
Speaker: I mean, after all, in July, we were already looking at a level of production that was three million barrels below where we were at the start of the year.
Speaker: That's right.
Speaker: The market is already tight.
Speaker: We're looking at a 2.7 mil barrel a day deficit already in the third quarter.
Speaker: It looks like the market is going to stay in a deep deficit as well in the fourth quarter of the year with the extension of the Saudi cuts and probably through to the first half of 2024 as well.
Speaker: And I think with that, stronger fundamentals and general market sentiment being more supportive than it was six months ago, I think we can see oil prices remaining at current levels, call that in the mid-80s or more, indeed above $90,
Speaker: for now.
Speaker: And so we are effectively lifting our oil price forecasts to $90 for the final quarter of the year.
Speaker: So on average, we're now expecting brand prices to be $84 on average for 2023.
Speaker: The key question, though, is just how long will these Saudi cuts remain in place?
Speaker: We think at some point, they will be unwound, maybe in the second quarter of the year.
Speaker: But that's enough to keep the market really tight in the first half of 2024.
Speaker: Can I just challenge you on that?
Speaker: From my perspective, isn't there a risk that these price increases are slightly self-defeating?
Speaker: What I'm trying to say here is a higher oil price is a negative for economic growth.
Speaker: In an environment where we've already got quite high interest rates, so if you have a negative impact on growth, does that have a negative impact on oil demand, and therefore do you have to cut your production again?
Speaker: That's a good question.
Speaker: I suppose the OPEC and Saudi cuts are meant to support oil prices and to guard prices against the risks of a weakening global economy.
Speaker: I mean, certainly this is what the Saudi energy minister said earlier this week at a conference.
Speaker: But in essence, they risk becoming a self-fulfilling prophecy, as you suggested, for two reasons, I suppose.
Speaker: The first is that they could stoke inflation and they could prompt central banks to keep raising interest rates.
Speaker: And the second reason is that they could slow down demand growth, which we already expect to slow next year as most of the rebound post-COVID is now behind us.
Speaker: Now, we haven't yet seen any signs of demand weakness in the data, but remember that there is a lag in the data.
Speaker: August demand in China was at an all-time high, and it surprised even our already up to optimistic numbers.
Speaker: So let's see what the data shows in the coming months.
Speaker: Yes, because it's fair to say that the Chinese economic recovery hasn't panned out as people had expected.
Speaker: When do you expect that to start to show through in Aldermonde?
Speaker: It's fair to say that there has been a bit of a decorrelation actually between Chinese oil demand and economic data.
Speaker: Chinese oil demand has really been driven by mobility, so people wanting to travel more after the COVID lockdowns, rather than by pure manufacturing and economic activity.
Speaker: So that is the one thing that surprised us in the data this year.
Speaker: Let's turn to the longer term outlook for oil demand.
Speaker: Some of the scenarios around net zero forecast for a very aggressive decline in the percentage that oil is in the global energy mix.
Speaker: Do you think those scenarios are realistic?
Speaker: It's just worth remembering that the IAEA's net zero 2050 scenario is a backcast scenario.
Speaker: It's based on a whole range of very aggressive assumptions.
Speaker: around the rate of decarbonization and transport but also all of the other segments that constitute oil demand we've built our own long-term forecast for oil demand all the way to twenty fifty we see a peak around twenty twenty seven and then a gentle decline thereafter
Speaker: So that by 2050, global oil demand is around 30% lower than current levels.
Speaker: If you take the IEA scenario, they see oil demand in 2050 being 80% lower than it is today.
Speaker: Now we think that's unrealistic.
Speaker: The key driver for a peak in oil demand sometime in the next five years would be rising EV sales penetration affecting passenger vehicles demand.
Speaker: That's a segment that's roughly a quarter of current oil demand.
Speaker: Other transport segments will be slower to decarbonize.
Speaker: Take heavy-duty trucks, for instance.
Speaker: But then aviation will continue to grow, probably until the mid-2030s, because sustainable aviation fuel is going to be a pretty scarce commodity until then.
Speaker: And then lastly, some segments will continue to grow, potentially all the way to 2050, such as petrochemicals.
Speaker: Yes, I did see in one of your charts that petrochemicals was going to grow.
Speaker: I was quite intrigued by that.
Speaker: What's behind that growth?
Speaker: Historically, petrochemicals demand has surpassed GDP growth.
Speaker: Demand for plastics continues to rise.
Speaker: It's pretty correlated with GDP per capita.
Speaker: And it's also a key driver of decarbonisation in many segments.
Speaker: Light weighting, for instance, is going to be a trend in many sectors of the economy.
Speaker: You want to reduce the weight of, say, for instance, cars to consume less fuel.
Speaker: There will be a lot of plastic needed for that.
Speaker: Fascinating.
Speaker: Let's turn to gas now.
Speaker: I remember vividly us talking on this podcast back in January, thanking our lucky stars that we'd had a mild winter in Europe and that our utility bills hadn't gone soaring to some of the levels that people were predicting.
Speaker: Where are we looking as we sort of start to head towards this year's winter?
Speaker: I have to say we've been pretty lucky with the weather, as you said.
Speaker: Right now, European storage levels are comfortably above 90%, I think close to 95% at this time.
Speaker: However, that will count for little once storage starts to draw, once we get into the winter heating season, typically on the 1st of November, and then on for the next five months.
Speaker: So as we go into next winter, really the range of possible outcomes is very wide.
Speaker: Storage could be as low as 20% by the end of next winter, or it could be as high as 60, 70% if we have a mild winter.
Speaker: So it all depends on temperatures.
Speaker: And I think that's pretty crucial because the range of prices and the range of outcomes at the end of winter is much wider than in the past, simply because Europe has lost baseload Russian supply.
Speaker: So naturally you would expect
Speaker: much more uncertainty and much more near-term price volatility as well.
Speaker: One of the factors that came about as a result of the disruption of supply from Russia was LNG shipments.
Speaker: And there is some concern given this strike in Australia.
Speaker: Is that going to be an impact?
Speaker: Actually, this is right hot off the press, but it looks like a settlement has been reached between Chevron and the unions.
Speaker: So that's really good news for supplies.
Speaker: It looks like that supply is going to come back to the market.
Speaker: It will reduce risks of price spikes for European gas.
Speaker: Well, I'm very glad we're ending on a positive note.
Speaker: Kim, once again, thank you for joining us.
Speaker: Thank you.
Speaker: Kim Fusje there on the outlook for the oil and gas markets.
Speaker: If you'd like to know more about the outlook for commodities, then check out our sister podcast, Under the Banyan Tree, where on last week's programme, the team took an in-depth look at why prices are staying high, despite slower growth in China.
Speaker: Paul Bloxham, our chief economist for Australia, New Zealand and global commodities, was the guest speaker.
Speaker: Changing direction now.
Speaker: There have been a couple of big central bank meetings this week.
Speaker: Firstly, over in the US, the Federal Reserve kept rates on hold at 5.25% to 5.5%.
Speaker: However, the Fed's projections imply another 25 basis point rate hike later this year, and a slower pace of cuts in 2024 and 2025.
Speaker: The outcome of the meeting supports our view that the US dollar is likely to strengthen over the coming months and into next year.
Speaker: Here in the UK, the Bank of England voted by the narrowest of margins to hold rates steady at 5.25%.
Speaker: The decision followed a big downside surprise in the inflation data for August, with the core measure in particular falling sharply.
Speaker: We expect it to continue to fall, so we think that the BOE is now done with its tightening and forecasts no further change in bank rate this year or next.
Speaker: Elsewhere, just a reminder that our Global Emerging Markets Forum is in full swing.
Speaker: It's taking place online until the 29th of September.
Speaker: We're hosting around 50 panel discussions featuring insights from policymakers and thought leaders on trends that will define the future of emerging markets.
Speaker: If you're an HSBC client, it's still not too late to register.
Speaker: Please get in touch with your HSBC sales representative.
Speaker: You can also watch replays of any sessions that you may have missed.
Speaker: So that's all from us.
Speaker: Don't forget that you can follow the podcast on Apple and Spotify or wherever you get your podcasts by searching for The Macro Brief.
Speaker: Thanks very much for listening.
Speaker: We'll be back next week.
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