Episode Transcript
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Speaker 1 (00:00):
This is Tom Rowlands Reese and you're listening to Switched
on the podcast brought to you by bn EF. On
April second, the introduction of the Trump administration's Liberation Day
tariffs caused indices measuring US business and consumer sentiment to
fall and global GDP forecasts to be trimmed. Sensitive to
such fluctuations, oil price has declined steeply, with the Brent
index even reaching as low as sixty two dollars per
(00:21):
barrel on April fourth, and here at BNF we have
cut our forecasts for global demand growth of oil. This
decline in demand comes an nor quit time for global
oil markets, as recent announcements from OPEC plus members and
other major oil producing nations have signaled they are set
to join the US in ramping their production. What does
this mean for the near term future of the global
oil sector and the all important price per barrel? Today
I'm joined by bn EF's head of Oil Markets Research,
(00:44):
Wayne Tan and we discuss findings from his note Oil
Markets Monthly Tariff's OPEC Plus hike structural shift, which b
and EF clients can find at BNF go on the
Bloomberg terminal or on BNF dot com. All right, let's
get to talk about global oil markets with Wayne. Hi. Wayne,
(01:07):
thanks for coming on the podcast today.
Speaker 2 (01:09):
Thanks for having me.
Speaker 1 (01:11):
It's not exactly ever a particularly stable market. Oil is
always interesting. It's always subject to various geopolitical backs and
forth as well as the global economy. And so then
with that backdrop, we then have the Trump administration's Liberation
Day announcement, and so, I mean, my first question is
(01:31):
how has that been changing the market, particularly from a
demand perspective. We'll get to supply in a moment, but
how have these tariff announcements been impacting the demand risks
that impact oil?
Speaker 2 (01:41):
Yeah?
Speaker 3 (01:41):
Thanks Tom. I'd say that, like obviously, the world we
are heading into in the coming years would be quite
different from the one that we are quite accustomed to.
We are probably entering an era of de globalization. We
are all quite aware of the Liberasi and data tariffs
that Trump announced, and also the escalation of the trade
war between US and China, and so our job is
(02:05):
to quantify how those terraffs would impact oil sector for
oil demand, the way that we think about it is
WACH countries and WACH sectors are most reliant on.
Speaker 2 (02:17):
Trade for growth.
Speaker 3 (02:18):
So that would be developing countries in particular because those
countries are more dependent on trade for growth, and the
sectors that are more dependent on trade are manufacturing sectors.
And because the manufacturing sector, and we know automobile manufacturing
is a segment that has been hit pretty hard, the
consumption of raw materials also drops. So the consumption are steel, iron,
(02:41):
ore and whatnot also drops. And that also heats metals
and mining. So because the metals, mining and manufacturing sectors
are sectors that are energy intensive, so that has a
pronounced impact on oil demand and the type of oil
products that you will typically use in intric manufacturing sector
as well as the mining sectors are diesel, an AFTA,
fuel oil basically industrial fuels, but also bunker fuels.
Speaker 2 (03:04):
So we are a.
Speaker 3 (03:06):
Little bit more precautious in our outlook for diesel, fuel
oil and AFTA. We have cut so far three hundred
and ten thousand barrels per day of oil demand from
the libration day tarrafs alone.
Speaker 1 (03:19):
And what is that as a percentage of global oil demand?
Just for those of us who are not following the
market as closely, it's.
Speaker 3 (03:26):
Something like zero five percent. However, there was an escalation
of the TIFO tet terriers right between US and China,
and so a key segment of growth for oil demand
has been China's petrochemical sector. So the petrochlamical sector consumes
a lot of LPG, which is liquified petrolum gas as
well as ethane, and China imports a lot of natural
(03:48):
gas liquids from the US which they will then convert
into petrochemical fists such as lpgn ETHNE. So because we
no longer expect China to import much, if any natural
guessloicids from the US, we think that they would struggle
to replace.
Speaker 2 (04:03):
NGAIL imports from the US. They would have to look
to our Middle Eastern suppliers.
Speaker 3 (04:08):
But ultimately we think that they would struggle to replace
US in parts of NGLs. And so we further reduced
China's or demand, particularly in the petrochemical sector, by another
two hundred thousand verse perdy. So overall, our new es
demate right now is a little over half a million
verus per day of impact to demand.
Speaker 1 (04:24):
And I mean, I know you mentioned that a lot
of this impact is concentrated in emerging markets. How much
downside risk for demand do you see in the US,
which is obviously itself a huge consumer of oil products.
I've got in my notes here that makes up over
twenty percent of global demand volume in twenty twenty four.
So I realized that there's how these tariffs affect everyone
(04:44):
who is in the US. But how does the tariffs
and the counter tariffs we're hearing about potentially effect demand
from the US.
Speaker 3 (04:50):
There was actually like two over arching scenarios for this,
for the trade war or other, how every country in
the world would react to the libration day tariffs. First reaction,
which will be kind of good for the US, is
if everyone is sort of looking to make a deal
with the US right. The second outcome is if the
(05:12):
rest of the countries, particularly the media trading partners, are
a little bit more combative, so they are looking at
retatory measures such as from China, but also to some
extent the EU and Canada, and in that scenario US
actually gets hit a lot harder than the first scenario.
Speaker 1 (05:29):
So the first scenario is where Trump's tariffs go according
to plan, and so US demand is a lot more solid.
And the second one is that the world responds aggressively,
and that would have a downside impact on US oil
demand and therefore global world demand precisely.
Speaker 3 (05:46):
So it does seem like the second scenario is more
likely to happen in some shape or form, and so
we think that the risk to oil demand in the
US is pretty high. We actually estimate a demand impact
of around one hundred and fifty thousand births per day
downside to all the money in the US, and it
will be across different sectors because when you know, prices
(06:08):
increase due to the terriffs, people spend less and people
spend less, particular retail consumers span less, gasoline demand falls,
people lose their jobs, and people would also spend less
on air.
Speaker 2 (06:19):
Travel and whatnot. So the impact will be across different segments.
Speaker 3 (06:22):
And so you can see from our estimates and the
monthly report published that the negative impact of demand is
is pretty well distributed across the barrel.
Speaker 1 (06:31):
Before we started to talk about the US, I think
you said we've gotten estimated downside of was it two
hundred thousand barrels per day?
Speaker 2 (06:38):
That's to North America.
Speaker 3 (06:39):
So, because Canada is also very exposed to the US economy,
and if the US doesn't do very well moving ahead,
Canada would also.
Speaker 2 (06:47):
Be hit pretty hard as well as Mexico.
Speaker 3 (06:49):
Actually, so Mexico and Canada gets hit very hard if
the US economy is loose.
Speaker 1 (06:54):
So Wayne, we talked about the demand risks and the
sort of the downside from the tariffs. That of course
ignores the fact that also these tariffs could potentially impact supply,
or this brilliant global trade war could impact supplies. So
tell us about that a little bit.
Speaker 3 (07:09):
So when de month falls, oil prices fall, and that's
a natural headwind for oil production because where oil prices
are load producers are less incentivized to produce more right,
they'd rather keep you know, oil underground if they can,
or in storage. However, our analysis suggest that a lot
of the break events, particularly in the US, the show
(07:29):
oil plays well in the fifties or forties, even the thirties.
Speaker 2 (07:33):
Some of the.
Speaker 3 (07:34):
Other fast growing producers at Guiana, they have break events
of that is even lower than that.
Speaker 2 (07:39):
It's like in the twenties and thirties.
Speaker 1 (07:41):
Can can you just explain quickly what we mean by
break events, what these numbers mean.
Speaker 3 (07:46):
So break even is the price point where a producer
is able to cover its operating costs of producing a
betre of oil.
Speaker 1 (07:55):
So if we say a break even the twenty five
you mean when the oil price is above twenty five
dollars borol per day, that producers should be able to
operate profitably.
Speaker 2 (08:05):
Is that right?
Speaker 3 (08:05):
Yeah, at a break even, So any higher than a
break even point it would be in an operating profit
to be precise, Currently prices are still well above sixty.
Speaker 2 (08:14):
When we look at WTIM brands.
Speaker 3 (08:16):
We do not see a lot of negative impact to
global oil production at least as of right now, but
we do think that it would impact growth a lot
for next year, although we haven't really come out of
an estimate, but because prices are by and large are
lower now and they are much closer to break events now,
so it's quite likely that our companies will practice prudence
(08:37):
when it comes to expanding their production, and they could
more likely prioritize other things like dividend payouts, share buybacks,
that kind of stuff.
Speaker 2 (08:45):
Physical discipline. So that's one part of the equation.
Speaker 3 (08:48):
But on the supply side, the biggest factor so far,
and the main reason why oil prices haven't really crashed
as much as we anticipated, is because of President Trump
basically ended any foreign entities ability to export oil from Venezuela.
So we've actually cut our estimates of Venezuela's OI production
(09:10):
by about three hundred thousand barros per day from May onwards.
And any country that that intends to import Venezuelan oil
will be subjected to twenty five percent import terrifs from
the US. So they called that secondary tariffs.
Speaker 1 (09:23):
So three hundred thousand barrels per day effectively cut from
the global market from Venezuela. And can you just remind
us what the number you said was the downside for
supply with all of this global turmoil.
Speaker 3 (09:36):
It's roughly equivalent to half of the downside to demand
due to the terriffs as well as the tip for
tet between China and the US.
Speaker 1 (09:45):
So it was around six hundred thousand was the downside
in demand, And we just think just from Venezuela and this, Yeah,
three hundred thousand. Also I read a new report that
there's also been threats to do something similar for Russian
oil and around as well, So yeah, took us through that.
Speaker 2 (10:01):
Yeah, so I think it's more the res is higher
for Iran.
Speaker 3 (10:05):
So basically President Donald US President Donna Trump is threatening
similar terrors on Iran and Russia, and so the market
is gradually pricing in that risk, which is why I
price US sticked up in the last few days. Basically,
traders are gradually pricing in risks of supply disruption from
those two countries, in particularly Iran.
Speaker 1 (10:25):
This is so interesting it kind of will lead on
to my next question, which which I'll get into it
in a moment. But in effect, US foreign foreign policy,
specifically President Donald Trump's foreign policy has had an impact
on the outlook for global oil demand via his tariff
strategy and how that is going to affect global economy
generally and the disruptions there, and then also through specific
(10:48):
geopolitical leavers. His policies are impacting the outlook for supply
by about an equal amount. So the price outlook I'm
presuming isn't changing that much in the near term. Certainly,
the US's impact on the market is a lot more
significant than it was, which kind of leads me to
(11:08):
asking about OPEK and their decision of OPEK plus to
accelerate the easing of production cuts for the month of
me and I want to just pick up on something
you said earlier about suppliers practicing fiscal discipline, returning dividends
to shareholders, and that became the paradigm for the oil market,
(11:30):
to my understand particularly the shale industry, which was at
the time the marginal barrel around twenty twenty, because there
was a drop in global oil demand because of the
COVID pandemic, and then OPEK plus agreed to increase output,
which absolutely crashed the oil price and was sort of
devastating for those shell producers which up until that point
(11:51):
had been getting cheap capital with the understanding that expansion
of supply was the goal. Son after that it was
they were very much rained in and were operating in
a much more conservative fashion and following that paradigm that
you described, fiscal discipline, return value to shareholders. So where
I'm going with this is, at the time, it really
felt like, in this moment of chaos and the COVID
(12:13):
pandemic and the US at the time exerting itself more
on global oil markets, OPEK did this thing that kind
of really reminded everyone who was in charge and sort
of set the narrative along terms that were favorable to
OPEK and in particular sort of really slowed down this
expansion of US shale. Do you think this is a
similar kind of play that in the middle all of
this chaos that's happening, all of this this change and
(12:35):
a lot of it centering around the US, OPEK is
increasing output and really reminding the oil market. You know,
who's in charge.
Speaker 2 (12:42):
That's a great question.
Speaker 3 (12:43):
Actually, I mean the way that we think about it
is the OPEK PLUS, which stands for the Organization of
Petroleum Exporting Countries history over arching strategies.
Speaker 2 (12:53):
So the first is what you mentioned.
Speaker 3 (12:55):
We just to protect market share or even to expand
the market share by increasingduction, which crashes prices oil prices
so that non no pepe plass producers will be more
careful right with exercise fiscal discipline.
Speaker 2 (13:08):
There are two other oter strategies that we can think of.
Speaker 3 (13:11):
So the second one is actually cutting production, right the
obvious one, and that's to support prices to hopefully increase
overall revenue. And that is what OPAC class has been
doing for almost the entire period since COVID hit, so
they have been basically putting a restraint on production since then.
There's actually a third one, which is to preserve unity
(13:33):
within OPEC plus. So what we've seen in especially in
the last two months. Is Kazakhstan overproducing significantly against their
production quotas. The problem that Kazakhstan is facing is actually
because they have a lot of independent oil producers. Basically,
they have US and European oil companies operating in the
country and they do not have any incentive to abide
(13:54):
by Kazakhstans or black class targets, right they are like
they only care about profit and loss. So Kazakhstan has
been overproducing and they actually had new capacity coming online
in its largest oil field, the tank Is Feel and
that actually boosted production in the last couple of months.
Since February and March it grew by even more, and
so that created a lot of feelings of unfairness within
(14:16):
old back Plus, why is Kazakhstan able to overproduce by
so much? And so I think the group as a whole,
particularly Saudi Arabia, which which kind of leads the group
and has most to lose if O back plast unity
falls apart, a push for an easing of production cards
so as to kind of preserve that unity within the
member countries, because we've seen what happens when the unity
(14:39):
falls apart. So back in March or April twenty twenty,
Saudia and Russia couldn't agree to a production target, and
so overnight they produced however much they wanted or supplied
rules by I think it was something like ten million
barrels per day just overnight, and that obviously was inconvenient
timing because demand was also crashing, and so that led
to negative aidprisers. So I think what OPEC PLUSZ is
(15:01):
trying to do is to avoid that from happening. And
that really stemmed from Kazakhstan overproducing.
Speaker 1 (15:06):
So that's interesting. So it's not really like I was,
you know, my theory, which was this is another decisive
move to bring oil producers globally in line. This is
more of a gentle concession to some of OPEC plus's
own members to try and have targets that are achievable
that everyone can say is fair. It may very well.
Speaker 2 (15:25):
Be partly due to preserving market.
Speaker 3 (15:27):
Share, but the key, I would say, the key change
is that Kazakhstan started to really ramp up production in
the last two months. I mean, you could argue that
OPEK plus could have increased production last year, right, why
didn't they do so earlier? Because non OPEC plus suppli
has been growing over the last few years already. Why
didn't OPEK plus do anything right? Why do the opet
(15:48):
plas only choose to take action one day after the
LIB version day tarries were announced, which is such a
sensitive timing. And I think that that's slightly because Kazakhstan
started to ramp up production a lot, and that is
a pretty recent devent, got it.
Speaker 1 (16:01):
I suppose sort of a broader question I have before
we move on to was we're on the topic of OPEK,
but this idea of you know, OPEK has operated on
unity and discipline, and I wouldn't say, you know, it's
ever been perfect, But I've always wondered whether that unity
and discipline is possible in a world of falling oil
demand or slow or slower growth, because that organization has
(16:23):
always existed in a world where year on year oil
demand pretty much every year has grown. So maybe this
sort of discipline around production is has always been maybe
easier to stomach because the growth has enabled high prices
and without having to cut too hard. I realized, you know,
there's this specific issue around non government independent producers operating
in Kazakhstan, But is it maybe a omen of what
(16:46):
could potentially happen with OPEK as oil demand growth slows
with you know, the electric vehicles revolution and maybe even
peaks and starts to decline. Is this unity really going
to persist? Is it possible for OPEC to continue to
operate the way it has in the last have many
decades for the next you know, two or three decades
given what we we fail about you know, global oil demand.
Speaker 3 (17:08):
Well, OPEC class producers are mostly export to growth regions,
particularly in the East of Swiss, so that includes Asia,
which by and large is still a key growth region
for oil demand, so the pie for them is still expanding.
We are right to say that globally oil demand growth
(17:31):
is slowing, but it is still growing and we do
not expect oil demand for geometrically to pay until like
the early to mid twenty thirties as of now our
current estimates, so that's still a long runway until we
get to that point.
Speaker 2 (17:47):
I think that.
Speaker 3 (17:49):
OPAC class would still be incentivized to preserve the unity
in the coming years, even in the coming months, even
in the immediate term, because if they do not do that,
everyone loses out right, well, all.
Speaker 1 (18:02):
Of OPEC plus loses out, I mean, everyone else could
benefit from really cheap oil.
Speaker 3 (18:08):
Yeah, Like, basically, a lot of these member countries don't
have these spare government reserves to tie through an extended
period of very low oil prices, and so as much
as they could go on a more aggressive strategy to
really ramp up production to price out non OPEC past producers,
(18:29):
they may not have the ability to do so. And
it is in ORPEC plus self interest to continue to
maintain united going ahead because it benefits all of them.
Speaker 2 (18:37):
Basically.
Speaker 1 (18:38):
Yeah, So what I'm I'm kind of hearing from you,
We're in this moment of a lot of turmoil around
oil markets. We've got the US both imposing tariffs, also
taking positions on Venezuela, Russia, Iran. It's a very dicey moment,
and then we have maybe on the horizon this prospect
of a slow down in growth and then declining demand.
(19:01):
So right now, the thing that you're saying is critical
to OPEC plus that a lot of it's focused on
is just building that unity because it's going to need
it more than ever as the market dynamics change. Is
that what I'm hearing is OPEC plus's current actions are
not about flexing its muscles for the rest of the world.
It's about growing that sort of consensus among the group.
Speaker 3 (19:22):
Yeah, precisely, when growth are slower, there is less room.
Speaker 2 (19:26):
For chaos right within the group.
Speaker 3 (19:28):
Yeah, because if our demand grows significantly and your production
increas significantly, that impact wouldn't be as bed as if
demand growth slows and supply grows significantly.
Speaker 1 (19:38):
Use an expression earlier, by the way, which I've never
heard before. I presume this is an oil market thing,
but I'm going to try and use this in conversation.
Think you said east of Suez? Is that? Did you
say east of Sewers? So speaking of east of Sewers,
let's talk about China, the world's second largest economy, which
obviously is a significant part of future demand growth, but
(19:59):
is also a major driver of future demand destruction, particularly
because of the country's integral role in the emerging electric
vehicle market. So China's adopting electric vehicles at pace, how
significant a shift are we seeing away from internal combustion
engine vehicles.
Speaker 3 (20:16):
We actually track the seales of cars by different field
type or what we call drive trains in China pretty closely,
and with what we saw is that the sales of
gasoline cars in China actually picked eight years ago in
twenty seventeen, and it's been declining really really quickly since then,
just under ten percent every year compounded, and that is
(20:39):
if you include hybrid non pluging gasoline hybrid cars, right,
So it's falling very quickly, and a lot of that
seals have been replaced by battery electric vehicle and we
include plug in hybrids as well in that category. And
the reason why the seals, we think the sales of
evs have been very strong, obviously, is due to policies
upon in China, particularly something called the vehicle scrab page program,
(21:02):
where the government actually provides this subsidy for consumers to
trade in their old gasoline car for a new EV
or even a smaller gasoline car. And they have actually
extended that program for the rest of twenty twenty five.
And they also did something else, so this scrappage program
actually extends to trucks as well, but previously the subsidies
(21:26):
did not cover energy trucks, but in the recent update,
the government expanded subsidies to lergy trucks as well. So
energy trucks is a key displacer if I could call
it dead of diesel trucks, because obviously energy trucks have
very high energy density, and the cause of operating energy
truck in China has actually been lower than diesel trucks,
(21:47):
which is why energy trucks got so popular recently. And
with the extension of this scrappage program, it is going
to accelerate the shift away from theseel trucks even faster.
Speaker 1 (21:56):
So in a way, there's a two ProMED assault on
China's gasoline demand. One is electric vehicles, one is energy trucks.
Speaker 3 (22:04):
There are also other trends, particularly in the passenger car
segment or in the road transport segment. So typically when
the country grows, or rather in its early stages of development,
the growth in passenger car mileage tends to grow in
tandem with GDP or GDP B capital. And when we
(22:24):
are when we reach a certain stage of majority, which
we think China is right now, you know, people start
to move to cities, and when you move to cities
there are alternative modes of transport. You also get things
like route optimization and whatnot, and growth in vehicle marlelage
starts to fall behind economic growth, right, they no longer
correlate strongly with each other, and this is also a
(22:47):
key hit wind for China. There's also a second one
where we actually found in our research. This is actually
published in our last Electric Vehicle Outlook, where the annual
mileage of an EVY battery electric vehicle it's actually sixty
six percent higher than an Internet combustion engine car, an
ice car, or a gasoline car. So and ev is
(23:07):
able to meet a disproportionate share of road transport demand
as compared to a gasoline car. And that's because a
lot of taxis in China or right hailing services use
an EVY because of the much lower operating costs. So
all of these things mean that gasoline demand in China
is likely to suffer structural decline. And we think that
(23:29):
the country's gasoline consumption picked in doing dentitry so about
two years ago, got it.
Speaker 1 (23:34):
So that's pretty significant the global oil market, with the
world's second largest economy now having entered the phase of
declining gasoline demand, which probably won't reverse ever given technology trends.
Speaker 3 (23:46):
Yeah, most likely for China. Obviously, the transitions accelerated to
the policy, but there's also an interesting argument where because
there is now an excess of supply of fuels which
will be exported to economies around China, like Southeast Asia
in particular, that's going to make gasoline cars or guessing
(24:07):
fuel more affordable, right because there's a structural or capacity
in the production of transportation fuels now. So so that
could that could lower the cost of fuels at a
pump for other regional markets, regional markets where it's still
not yet electrified by a large extent, where where they
still don't really have a lot of charging infrastructure to
make the shift to electric vehicles.
Speaker 1 (24:27):
Yet that's interesting, I mean a final thought that could
lead to a sort of almost like a race, what
what can get cheaper quicker gasoline because of it's it's
a structural oversupply as as demand is eroded versus the
technologies that are eroding that demand, i e. Batteries ev charging,
you know, as those industries continue to scale. And I
(24:48):
don't obviously I don't think we can answer that question here,
but it kind of is a nice point to end on,
I think, because what you talked me through is a
fascinating jigsaw of factors. We have. The short term impacts
of these tariffs of the Trump administrations very I wouldn't
say decisive because they are subject to change, but certainly
(25:09):
very bold moves on the international stage which are creating
uncertainty in the global oil market. Then we have OPEC,
which is trying to go through a I guess a
phase of a family counseling to try and rebuild the
unity that it used to have. Particularly with all of
these challenges, it's that the oil market is currently facing
and are on the horizon. And then we have this
(25:30):
slow burn of Chinese oil demand declining which is just
beginning to get started. And that backdrop is fascinating as well.
And it's really difficult to know how the sort of
the knock on effect will be on both the future
of the oil industry but on industries such as electric
vehicles and so on and so on. So this is
a really interesting time. I hope we get to do
(25:51):
this podcast again in a year or maybe even less
to sort of return to some of these themes and
talk about what happened. But Wayne, thank you so much
for joining us today.
Speaker 3 (26:00):
Yeah, thanks for having me. Tom suddenly look forward to
the next podcast.
Speaker 1 (26:13):
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(26:36):
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