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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: This podcast was recorded for publication on the 16th of January, 2025 by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Speaker: And remember that you can follow us wherever you get your podcasts.
Speaker: Just search for The Macro Brief.
Speaker: Hello, I'm Piers Butler and welcome to the Macrobrief.
Speaker: On today's podcast, we're assessing the outlook for the oil market.
Speaker: Oil prices have rallied since the start of the year from just above $70 per barrel to above $80 this week.
Speaker: But with competing supply and demand forces, where could prices go from here?
Speaker: To discuss this, I'm joined in the studio by Kim Fustier, Head of European Oil and Gas Research.
Speaker: Kim, welcome back to the Macrobrief.
Speaker: Thank you.
Speaker: Glad to be here.
Speaker: Oil prices look to have rallied due to this announcement of additional U.S. sanctions announced on the 10th of January, I believe.
Speaker: So maybe first explain what these additional sanctions are about and to my mind, why have the markets reacted to them given that there is a general perception that existing sanctions have not been that effective?
Speaker: You're right.
Speaker: So the outgoing Biden administration did announce a whole new set of sanctions on Friday afternoon.
Speaker: There was talk of new sanctions as early as December, but no one really took that talk seriously at the time.
Speaker: And so this really came as a bullish surprise for the market last week.
Speaker: The market has been jaded about the Western sanctions on Russia because so far they've had relatively little impact on Russia's ability to export oil primarily to Asia.
Speaker: But this time it could be different.
Speaker: These are the broader set of sanctions we've seen from the U.S. since 2022.
Speaker: Also, it's unclear if the incoming administration might be able to reverse these sanctions.
Speaker: So it has been the main driver of the rally in oil prices to above $80.
Speaker: And the entire narrative has shifted now in the oil market.
Speaker: Four months ago, people were talking about a surplus going into 2025 and weak oil demand and the return of OPEC barrels.
Speaker: And now we're facing supply risks once again.
Speaker: So indeed, let's come back to this supply and demand equation.
Speaker: The last time we had you on the podcast, we focused on
Speaker: this aspect of overcapacity from OPEX plus producers, and that despite their efforts to constrain production, that overcapacity would be a drag on the market, on the outlook for the oil price.
Speaker: And now are we, in effect, facing a tug of war between geopolitical risks and this capacity overhang?
Speaker: That's right.
Speaker: I think it's a good way to describe it.
Speaker: The context is that OPEC has been trying to come back to the market.
Speaker: There's 5.8 million barrels a day of headline supply cuts that need to be unwound at some point.
Speaker: But the market has been pretty weak, and so OPEC has had to delay plant output hikes multiple times because it just couldn't find the space to return to the market.
Speaker: Now that we're facing the risks of big supply disruptions, effectively what we're saying is those supply disruptions, if they happen, could be absorbed by OPEC spare capacity.
Speaker: If you exclude Russia, there's still about six million barrels a day of spare capacity out there that could be used.
Speaker: And so we think that OPEC is now more likely than not to go ahead with its plan to increase output on the 1st of April, especially if there's evidence of losses in Russia or if oil prices stay around current levels of $80 a barrel.
Speaker: And so effectively, they'll be capping oil prices around those current levels.
Speaker: On the other hand, you can't get too bearish about oil prices.
Speaker: As I said, there are multiple sources of supply risks, not just Russia, but also Iran and the broader Middle East.
Speaker: And so we're left with a fairly range-bound oil market within an OPEC-created range of maybe $70 to $80 a barrel.
Speaker: And that range is wide enough to create uncertainty for policymakers and for investors.
Speaker: In looking at the outlook for the oil price for 2025, I guess you would have looked at our economists' economic forecasts.
Speaker: Growth, global growth isn't going to be gangbusters.
Speaker: Was that an important component in your outlook?
Speaker: It certainly doesn't help.
Speaker: And so 2024 oil demand growth certainly surprised to the downside at less than 1%.
Speaker: We're forecasting a very modest improvement to just 1% this year.
Speaker: One of the big aspects within the sort of analysis of global growth is obviously China and the Chinese economy, which is that recovery is taking some time to materialize.
Speaker: But interestingly, in your report that I was reading ahead of the podcast, you talk about this idea of peak oil demand in China.
Speaker: What do you mean by that and how significant is that?
Speaker: So the context is that China's oil demand growth has been slowing rapidly.
Speaker: In fact, it was the single biggest disappointment in 2024.
Speaker: Interestingly, China's own state-owned oil company, Research Arm, predicted that oil demand in the country would peak this year, and that's five years earlier than its previous forecast.
Speaker: And that's quite new because we'd previously heard about Chinese oil demand peaking, but only in one segment, road transport fuels.
Speaker: So that's diesel and gasoline.
Speaker: But why is China's oil demand peaking if we're still expecting the Chinese economy to grow, albeit at a slower pace than it has?
Speaker: Is it a change in the structure of the economy?
Speaker: It's really about structural forces at play here.
Speaker: You're seeing EV penetration surprise to the upside.
Speaker: EV penetration hits more than 50% in the second half of last year.
Speaker: You're also seeing the trucking fleet shift more towards LNG or gas-powered trucks, and that's taking market share away from diesel.
Speaker: So there are a number of structural forces here at play.
Speaker: that in fact could overwhelm any cyclical recovery in China's oil demand.
Speaker: And so we forecast a peak in China's oil demand around the end of this decade.
Speaker: But again, for context, China used to add about half a million barrels a day of new oil demand every year.
Speaker: We think that falls to less than 200,000 barrels a day going forward.
Speaker: Wow, that's quite a shift.
Speaker: Yeah.
Speaker: And Kim, what about the sort of drill baby drill camp?
Speaker: And by that I'm referring to U.S. shale oil production.
Speaker: So I know that there have been discussions about trying to encourage oil producers to drill more for oil.
Speaker: But in practice, I don't think anybody can really incentivize producers to increase activity.
Speaker: So the key determinants of U.S. activity will still be, number one, oil prices by white margin.
Speaker: And then corporate strategies, geology and technology all have much, much bigger roles to play here than I think even domestic policy, right?
Speaker: And you were saying, I think, that some corporates have actually implemented environmental policies which they are unlikely to want to roll back?
Speaker: Yeah, that's right.
Speaker: We've heard from some large U.S. oil companies that actually have said that they're not keen on rolling back environmental regulations that have been put in place already.
Speaker: And for instance, take the methane regulations.
Speaker: Those large U.S. oil companies have already made the necessary investments.
Speaker: to reduce their own methane emissions.
Speaker: So they don't want those investments to become stranded, right?
Speaker: And so they're very unlikely to change their behavior as a result of any possible changes in policy.
Speaker: At least not in the short term.
Speaker: That's right.
Speaker: Yeah.
Speaker: But to be fair, faster well-permitting might have a small marginal impact on activity levels.
Speaker: And broadly speaking, I mean, the U.S. oil shale boom has been going for some time.
Speaker: How much shale is there?
Speaker: It has been going on for more than a decade and a half now, right?
Speaker: And I think we're in the last innings.
Speaker: So growth continues, but certainly at a much slower pace than previously.
Speaker: Two years ago, U.S. shale grew by a million and a half barrels a day in one single year in 2023.
Speaker: This year, we're looking at less than half a million barrels a day of growth, but it's still growing.
Speaker: Now, in terms of the outlook for oil prices, you mentioned earlier this range.
Speaker: But for 2025, is it more near term and we sort of go back to the bottom of the range by the second half because this sanctions effect starts to fade?
Speaker: Yeah, we've increased our Brent forecast for 2025 by 4 percent, and particularly for the first half of the year, because we think that's when the new U.S. sanctions on Russia will be more keenly felt.
Speaker: By the second half, we think trade links to Asia will be re-established, allowing Russian oil to flow again.
Speaker: We talked about oil, but I can't finish the podcast without asking a few questions about gas, particularly as we're in the middle of winter.
Speaker: And certainly my fuel bills are going up.
Speaker: Eastern Europe made the headlines in connection with gas transmission ending through Ukraine from Russia.
Speaker: How does that affect supply and demand?
Speaker: So you're right, gas prices have been particularly volatile in the past four to five months or so, just on speculation that Russian gas exports via Ukraine would end at the end of 2024.
Speaker: And in fact, they have.
Speaker: So flows stopped on the 1st of January, very much as anticipated, that should have been priced in.
Speaker: For context, these volumes are about 4% of Europe's gas supply, right?
Speaker: And so the lost Russian gas has got to be replaced by something, and that something is LNG, there's no other way.
Speaker: There's a good chance that Europe's LNG imports will rise again in 2025 compared to last year, just at a time when Asian gas demand continues to increase and recover from the 2020 and 2022 shocks.
Speaker: So it's a pretty tricky situation, actually, for Europe.
Speaker: Gas storage is below, slightly below its historical averages after a couple of cold snaps.
Speaker: It's not a repeat of the 2022 energy crisis, though, because those lost volumes through Ukraine, they're much smaller than what we lost in 2022, as you'll recall, when Nord Stream disappeared, right?
Speaker: And also because Europe's gas consumption has shrunk significantly since 2022.
Speaker: Of course, you made that point on the previous podcast that there is a structural change to the demand for gas as well, isn't there?
Speaker: Yes, that's right.
Speaker: But it still leaves Europe in a slightly tighter situation than, say, last year, right?
Speaker: So just a little more challenging from an energy security perspective.
Speaker: And the other thing to think about, of course, is that higher gas prices will have a knock-on impact on electricity prices too.
Speaker: Yeah.
Speaker: And ultimately, that could also feed into demand and so on and so forth.
Speaker: And just to finish on this point on gas, you mentioned in your report that LNG delays are inevitable and a supply glut is more likely to come in 2027.
Speaker: What's happened with these LNG deliveries then?
Speaker: It's pretty simple.
Speaker: LNG projects take, on paper, four to five years to build.
Speaker: But things always happen, don't they?
Speaker: And it shouldn't be a surprise that these very large infrastructure projects that cost tens of billions of dollars typically get pushed to the right.
Speaker: They go into execution issues.
Speaker: And so when you think about it, we had a wave of new investment into liquefied natural gas in 2022 after Russia's invasion of Ukraine.
Speaker: And so that wave of new supply was expected to come starting in 2026.
Speaker: Some of these projects have been pushed to the right by a year or two.
Speaker: So we're now looking at this new supply coming online more in 2027.
Speaker: And so that's when we now expect the glut to begin.
Speaker: Kim, thank you very much.
Speaker: Thank you.
Speaker: Three points on which to end this week's macro brief.
Speaker: Transport is a substantial contributor to global emissions, but progress to decarbonize has been slow and the outlook is tough.
Speaker: And in a new report, Mike Tindall, head of European Autos Research, has been looking at how its progress can be sped up.
Speaker: In the short term, adoption of electric vehicles is in focus and affordability will be key.
Speaker: And in the longer term, software developments, autonomous driving and mobility solutions such as car sharing will be things to watch out for.
Speaker: Europe faces huge investment needs to improve its digital capabilities and support its energy transition.
Speaker: But with limited fiscal space, how can this be funded?
Speaker: Well, in the latest installment of our Europe of Opportunity series, Fabio Balboni, senior European economist, says more joint funding would help and calculates around €800 billion could be made available by repurposing other EU funds.
Speaker: For any questions or comments about anything we've talked about today, please email us at askresearch at hsbc.com.
Speaker: You can keep up to date with our latest research on LinkedIn.
Speaker: Just search hashtag HSBC research.
Speaker: And remember, you can follow the macro brief wherever you get your podcasts.
Speaker: So that's all from us this week.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
