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: This podcast was recorded for publication on the 16th of May, 2024 by HSBC Global Research.
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Speaker: Hello and welcome to the Macrobrief.
Speaker: I'm your host, Piers Butler.
Speaker: What a difference two years makes.
Speaker: It doesn't seem that long ago that we were discussing a potential energy crisis here in Europe.
Speaker: In 2022, gas prices were surging on the back of Russian supply cuts, leading to fears of possible blackouts.
Speaker: Fast forward to today, and it's been a striking turnaround with the potential glut of natural gas poised to come on stream.
Speaker: I'm joined by Kim Fustier, Head of European Oil and Gas Research.
Speaker: Kim, welcome to the podcast.
Speaker: Thank you.
Speaker: Glad to be here.
Speaker: So, Kim, it wasn't that long ago that you and I were on this very podcast, and I was in shock at the prospect of my gas utility bills almost doubling.
Speaker: Can you remind our listeners as to why we got into that position at that time?
Speaker: So what happened was in 2022, as I'm sure many will recall, at the start of the war in Ukraine, Russia cut off a large part of its gas supply to Europe.
Speaker: So just for background, Russia was as much as 35 to 40 percent of Europe's entire gas supply, and about 85 percent of that disappeared over the course of a few months in 2022.
Speaker: So effectively, at that point, Europe lost its
Speaker: nearly a third of its entire gas supply and the only source of flexibility for Europe was to import a lot more LNG.
Speaker: So Europe imported vast amounts of LNG from the US in particular, a little bit from other places as well.
Speaker: Russian LNG continued to flow, but really what's happened as well is the collapse in European gas consumption.
Speaker: So both of these effects on the supply side and the demand side have helped to kind of rebalance the European gas market.
Speaker: So from our discussions two years ago, you were pretty bearish about the demand outlook.
Speaker: You felt that this shortage of gas in Europe was structural and it was likely to last for some time.
Speaker: From your report, it sounds like it isn't supply that's changed, but more demand.
Speaker: Has demand fallen so dramatically that we're now in what you call a new normal?
Speaker: It has, and I think this is one of the things that has surprised observers the most.
Speaker: European gas consumption is turning at about 20% below pre-Ukraine levels, and that's really remarkable.
Speaker: Just for context, in 2020 during COVID, right, European gas consumption fell only 3%.
Speaker: So 20% is a huge amount of demand destruction.
Speaker: And although gas prices have nearly normalized, if you look at gas prices today in Europe, they're only 20% above their long-term historical averages.
Speaker: And yet, consumption is 20% below normal.
Speaker: And if you look at what's been happening, industrial gas demand fell about 20% and it hasn't recovered, even though prices are a lot lower.
Speaker: So there's been permanent damage effectively to the European economy, but there's also some good things happening, such as increased energy efficiency.
Speaker: There has been some electrification, some switching to other fuels as well.
Speaker: So it's a combination of things, but we think the majority of that 20% basically will not come back.
Speaker: And then if you look at gas usage and the power sector, again, a pretty good story there.
Speaker: Demand is a quarter below where it was pre-Ukraine, and that's because of growth in renewables output, good wind generation in particular, and also the return of French nuclear.
Speaker: So yes, Europe has found a new normal, and it is really remarkable to see that European LNG imports are now back to pre-Ukraine levels as well.
Speaker: So, Kim, would it be fair to say that the Ukraine shock accelerated a shift in energy consumption to alternative sources?
Speaker: In a way, it has, yes.
Speaker: But we have plenty of examples of certain European industries that have permanently relocated elsewhere.
Speaker: So for example, I think the European chemicals industry has been hit pretty hard by the crisis.
Speaker: And so that capacity is simply not coming back.
Speaker: It is very tempting to say that we're out of the energy crisis for good.
Speaker: You look at those gas prices, only 20% above normal.
Speaker: You look at electricity prices.
Speaker: They've also returned to near normal because of lower gas and lower CO2 prices.
Speaker: That being said, Europe has been lucky for two winters in a row.
Speaker: We've had pretty mild weather and there's still one more winter to go through.
Speaker: So, you know, clearly we can't count in mild winter.
Speaker: But if we get through the next one and if we get to 2025, then there's actually going to be plenty of new gas supply coming on stream, particularly from the U.S. and Qatar.
Speaker: So, yes, that was going to be my next question about the knock-on effects.
Speaker: In that price spike you mentioned, that there are a lot of LNG imports.
Speaker: And I guess that simulated the production of LNG.
Speaker: But has that gone too far?
Speaker: You're not talking about an LNG glut now?
Speaker: That's right.
Speaker: There's so much new LNG capacity coming on stream from 2025 through to about 2029.
Speaker: So LNG production capacity will go up 50% globally.
Speaker: in just four to five years.
Speaker: Some of that, yes, has been accelerated by the global gas crisis, but to be frank, a lot of that was already in the works well before Ukraine happened.
Speaker: And so we think this new capacity is highly likely to lead to a glut of gas.
Speaker: And obviously that's quite a reversal from the situation just a couple of years ago, as you said earlier.
Speaker: In practice, what's going to happen is a lot of this gas will be absorbed as prices will go down and that will generate its own demand, right?
Speaker: So that's negative for producers, but it's positive for importers such as Europe and also Asian countries.
Speaker: If energy becomes cheap enough and competitive enough against, let's say, domestic coal production, then it will eventually displace domestic coal.
Speaker: And that's a really good story for...
Speaker: you know, to lower greenhouse gas emissions.
Speaker: It could help to lower air pollution as well.
Speaker: So that's a good story for climate, for the environment, and I think for some of those energy-importing economies, including Europe and some Asian countries.
Speaker: So that's Europe.
Speaker: What's happening in the U.S.?
Speaker: So the U.S. is benefiting from much lower gas and energy prices in general.
Speaker: U.S. gas prices are something like 80 percent below those in Europe.
Speaker: And there's effectively been a glut of gas already in the U.S. for a few months.
Speaker: And that's because some gas-producing basins in the northeast and in Texas are extraordinarily prolific.
Speaker: And production is growing.
Speaker: So I think the question is, what's going to happen in a few years' time when the U.S. economy is growing?
Speaker: It'll need more energy, including more natural gas.
Speaker: And also it'll need more gas for export, right, because the U.S. is going to...
Speaker: to continue growing its LNG exports.
Speaker: We think there's enough domestic supply growth out there in order to meet all of these needs, both domestic and export needs.
Speaker: So effectively, US gas prices will rise.
Speaker: They might even double from current levels.
Speaker: And that's going to narrow the gap between US and European gas prices.
Speaker: That gap will never close completely because it costs money to build liquefaction facilities and then ship that gas across the Atlantic or the Pacific.
Speaker: But overall, it's fair to say that U.S. gas and energy prices in general will stay lower than in Europe or Asia, and that's going to be a big advantage for the U.S. economy.
Speaker: So, Kim, can we talk about oil now?
Speaker: I just wanted to revert back to what you said in your year-ahead outlook for 2024.
Speaker: The point you made was that the impact of disruptions in the Red Sea and rising geopolitical risks will be dampened by above-average OPEC spec capacity.
Speaker: How has this played out so far, and has your outlook changed given the continued geopolitical disruptions in the Middle East?
Speaker: Yeah, so oil prices, I think, have been fairly contained.
Speaker: There was a short-lived spike to $90, but we're now back in the 80 to 85 range.
Speaker: I think there's two reasons for that, despite the events in the Middle East, which are capturing a lot of attention.
Speaker: The first is that there have been no supply disruptions, despite those Middle East events.
Speaker: So oil flows are still flowing through.
Speaker: Yes, a lot of cargo diversions away from the Red Sea.
Speaker: going around the Cape of Good Hope, but we haven't lost any oil, and likewise, we haven't lost any oil production in the greater Middle Eastern region.
Speaker: And the second one is that there is significant spare capacity from OPEC plus around five to six million barrels a day, depending on how you count.
Speaker: That is significantly above the historical average of about three to four.
Speaker: So there's excess spare capacity.
Speaker: And that could be used as a shock absorber if anything were to happen, if any supply were to be disrupted.
Speaker: And then on the other hand, you've got still good non-OPEC supply growth, including from the U.S., but a few other places as well.
Speaker: And then demand growth has decelerated after the post-COVID rebound that we saw last year.
Speaker: So all in all, the market is solid.
Speaker: The market right now is in a deficit, but only because OPEC has created that deficit artificially, if you will, after five rounds of cuts.
Speaker: So it's got a lot of spare capacity that one day will have to come back.
Speaker: So our thesis is that the oil market will remain range bound for some time to come.
Speaker: Kim, thanks for joining us today.
Speaker: Thank you.
Speaker: Here are some other highlights from global research this week.
Speaker: A few weeks ago, we were joined by Shinela Rajanagam, our trade economist, to look at the potential impact of the US elections on trade.
Speaker: And this week, President Biden announced an increase in the tariffs on a range of strategic goods from China, including EVs, solar cells and lithium-ion batteries.
Speaker: However, Shinela says that the higher duties are more symbolic than substantive and are likely to have limited impact on bilateral trade.
Speaker: She does not expect China to retaliate significantly.
Speaker: James Pomeroy, global economist, argues in his latest report that demographics remain a crucial factor shaping the world we live in.
Speaker: He looks at how changes to populations could affect not only government policy, but also the pace of technology adoption, the energy transition, and shifts in trade flows.
Speaker: And don't forget that our next Live Insights is taking place on Thursday, the 23rd of May.
Speaker: Mark McDonald, our head of data science and analytics, will be answering your questions on the outlook for venture capital, private equity, and high growth sectors such as tech and healthcare.
Speaker: If you'd like more details, then please email askresearch at hsbc.com.
Speaker: So that's it from us for this week.
Speaker: Thanks very much for listening to The Macrobrief.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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