Trump and trade wars

Amid concerns of a global economic slowdown, this week’s pod discussed the energy market implications of the China-US trade war, Trump’s tweet and the latest Brexit developments. 

What are the key pointers to look for in an increasingly uncertain gloomy macro environment? 

Host:

• Richard Sverrisson, Editor-in-Chief Europe, Montel. 

Guest:

• Richard Mallinson, senior analyst, Energy Aspects. 

Transcript

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:06

Hello listeners and welcome to the Montel Weekly podcast, bring you the most topical energy matters in an informal setting. I'm Richard Sverrisson, and joining me today is Richard Mallinson senior analyst at Energy Aspects. Welcome, Richard.

Richard Mallinson, senior analyst, Energy Aspects: 0:19

Thank you. Great to be here.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:20

Pleasure to have you. We want to talk a little bit about the, the global macroeconomic environment and what it means for, for energy. If I can start by saying, I think the only thing that's certain really is uncertainty. Would that be fair? And so you'd say we could live in uncertain times. I think that's absolutely right. Uncertainty just seems to predominate whether it's across politics, trade or the economy itself. There's so much mix. During confusion in what's coming out of political capitals, what's coming out in data releases, and I think that for businesses in particular is just prompting them to be cautious about investment, to think about where they can defer critical decisions or how to prepare for downside scenarios. Are we pointed toward a global slowdown rather than a recession? And what, what are the implications here for, for our various sort of globalized energy market?

Richard Mallinson, senior analyst, Energy Aspects: 1:13

Well, we've just had the IMF release their October update, and they have downgraded their forecast for GDP growth and they've pointed to a synchronized slowdown, and I think that's a re a good way to describe it. What we're seeing is across the world, a weakening of economic activity. Some regions are going into recession. I don't think we're looking at the kind of severity of a decade ago in the financial crisis, but what we aren't seeing is any regions where they're really powering ahead. And providing that offsetting support, as was maybe the case a few years back with the US economy or with Asia, when Europe was struggling earlier in the decade. So it's definitely a slowdown for parts of the world and probably Europe's one of those parts. It is. We're heading into recessionary territory.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:55

Does that then mean a slowdown in energy demand, a slowdown in industrial activity? What, what are your, what's your outlook here? What your, what's your thinking

Richard Mallinson, senior analyst, Energy Aspects: 2:03

on a global basis? We think it means slowing demand growth. Yeah, we still think in absolute terms, across oil markets, across natural gas markets, uh, and across primary energy there is growth. And that's kind of inevitable because you have population expanding. You have rising middle classes in Asia particularly but in the advanced economy, so here in Europe and elsewhere, that economic slowdown does translate. Into outright declines in oil demand. Probably certainly some weakness in natural gas demand and electricity demand led by the industrial or the manufacturing sectors.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:37

Actually, you know, reducing output, et cetera. So what, in terms of numbers, what could you say, could you say in any sort of percentage numbers? We are here at this in a, in a hotel reception and it's a little bit the background noise, so I hope that's not putting you off, Richard. Not at all. Live from a Monte event. Next

Richard Mallinson, senior analyst, Energy Aspects: 2:52

place to be. So we're certainly, I mean, we think that European oil demand probably falls by about 150,000 barrels a day this year. We think it's likely to see something similar in 2020 around the world as a whole. We think global oil demand still rises by about 0.8 million barrels a day this year. About a billion barrels a day next year. That's really heavily driven. By emerging economies. On the natural gas side, we're seeing China as the absolute critical source of support for the global LNG market. But even there, the growth that we saw in LNG demand in 2018, it's slowing materially in 2019. Underlying gas demand is still growing healthily. Some of that's being met by domestic production, some of it by pipeline import. And what's left for LNG is probably more like 9 million tons. Which is much slower than we

Richard Sverrisson, Editor-in-Chief Europe, Montel: 3:38

saw last year. This is maybe exacerbating a glut or an oversupply of gas into Europe, especially then.

Richard Mallinson, senior analyst, Energy Aspects: 3:46

Yeah, that's right. So Europe still acts and becomes the, the sink for LNG and we've seen TTF and. L and g prices very closely interconnected. But pushing each other downwards over the summer. As we get into the winter, we do see Asian l and g prices a little bit stronger, assuming winter demand, but we've got Europe coming into winter with very high natural gas. Stocks, it's got some winter risks in particular, whether Russia, Ukraine, negotiations about a pipe about transit roots break down. But if that doesn't materialize and we do think there'll be some kind of resolution, then you'd need a very, very cold winter to really clear those stocks. If we exit this winter with. Still reasonably high levels of European and global gas storage. You're looking at very, very weak pricing in the summer, and you're trying to find mechanisms to handle that oversupply because it's not all being done on the demand side.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:40

Sure. I mean, that was gonna be my next question really about the Ukraine, Russia gas talks. I mean, how do you see that panning out because that's holding up the winter and quarterly price is quite substantial. There's quite a. Large spread with, with a spot which has been driven down quite, quite majorly over the summer and into, into the start of the autumn.

Richard Mallinson, senior analyst, Energy Aspects: 4:58

Absolutely. And I think we aren't seeing much in the way of urgency perhaps from, particularly from the Russian side. We've got relatively long gaps between the negotiating rounds. I think the last negotiating round was reportedly only lasts about 45 minutes. So it doesn't suggest they're yet feeling that proximity of the deadline. We do think, that there will be some kind of resolution. I think Gazprom is still aware of the downside or the risks in terms of its reputation with European buyers if it's unable to find any kind of settlement. But of course it does have root alternative routes and it can redirect a lot of that gas, which will mean more localized challenges. But in overall volume terms, it could make up a lot. But I think if the market is pinning its hopes on a prolonged breakdown of Ukraine transit flows that's a thin amount of support to be building winter pricing on.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:53

Okay. So you would expect to deal by the, by the end of the year,

Richard Mallinson, senior analyst, Energy Aspects: 5:57

more likely, some kind of, at least temp interim resolution in advance of 1st of January. But even if there's some disruption, I'd still expect to see. This being resolved sooner rather than later, or at least a workaround found

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:09

if we can. We we're here in London today. We heard some major breakthrough in, in, in Brexit. That a deal. Could be imminent. How do you expect this to pan out? I mean, uh, when we go on air, when we go live we may be out of date very quickly. But parliament is due to to to, to discuss and vote on this deal on on on Saturday. That's great. Yeah. Absolutely. So how, how, so how do you see this panning out?

Richard Mallinson, senior analyst, Energy Aspects: 6:34

So, as you say, events can move very quickly, but what we're seeing I think is the Europeans, having said there will be no reopening of the withdrawal agreement they have exceeded, there is some kind of compromise when it comes to replacing the Irish backstop with what feels like more of a fudge. So both sides have given some concession. What's gonna be critical now is the British parliamentary arithmetic. Boris Johnson has lost a number of his own mps. He's lost his majority. He's lost his first six parliamentary votes. You'd argue all of that doesn't stack up very positively. And yet he has perhaps done more than Theresa May manage to do to, for instance, keep the DUP on side. He has better relationships with Brexit rebels, and I think there is even a concern amongst some labor backed benches who represent leave constituencies of being caught on the wrong side. Of this issue if there is gonna be an election shortly after a Brexit vote or shortly after another extension, because I think inevitably we need now a new election to resolve and to bring some workable government in. Maybe Boris can. Push this across the line. I think it's gonna be very tight. I think the the detail mps are gonna wanna see the legal text, which has just emerged'cause we're recording. I think there's gonna be some frantic negotiations, but perhaps he has a better, he has better chance at least. Than Therese May, but he's staked an awful lot on this. If he can't get this vote through, then he's gonna have to break his pledge not to extend. That's gonna be very damaging for him. He's almost certainly gonna have to do an election before Brexit occurs. And that is not gonna be a comfortable position. So. Still a lot is up and uncertain. A resolution, a deal that does get approved by whatever majority in Parliament would be really positive for UK and European economic sentiment. But I think what we'd see is once the dust settles a recognition that there are plenty of other challenges for Europe. Beyond Brexit and even if Brexit's resolved, there's other challenges remain. Look at the health of the German economy. Look at ongoing trade disputes with the us

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:43

In the car sector. We'll come to that later. But but sticking with Brexit and what is the impact here on energy and energy markets? If, if there is a deal, if Parliament does decide it likes the detail, or you get the labor rebels or the leave the mps from the leave constituencies that vote for the deal. So that goes through. What happens then? What are the ramifications for energy markets, especially in Europe?

Richard Mallinson, senior analyst, Energy Aspects: 9:03

So for us, the biggest implication has always been around European emissions markets. The et s. A no deal exit would have a very bearish effect on those markets, and we've seen a lot of the price volatility in those ETS prices and eua, sorry, EUA prices directly related to Brexit headlines. This is all about whether UK installations are withdrawn, whether they're reselling their holdings into a market in short order, or whether they at least participate in a structured transition period of an x. So if we have a deal it's more positive for UA prices. If we have no deal then it's pretty bearish for UA prices broadening out most physical energy flows looked relatively protected, whether we have a deal or a no deal. I think one area that. Has been highlighted. This came out in the Operation Yellow hammer. So the UK government's assessment of no deal risks. Was UK refinery competitiveness? Because the UK has said it would not impose tariffs, then imports of refined products coming into the UK would be tariff free. But U UK refiners trying to. Thought to Europe would be facing the equivalent WTO or third country rules, and that means several percentage points of tariffs. So that was gonna be a competitive hit, but probably not a crippling blow for most UK refiners. But actual physical infrastructure and flows natural gas. Oil, electricity, we never saw high risks because those are so critical. We always recognized that there was a lot of preparatory work and a lot of commitments made on both sides. To keep those routes open, particularly, of course, Ireland and its interdependence on the UK

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:41

grid. So business as usual for those flows, those physical flows of power and gas. Exactly, yes. How about the environmental credentials of, of the uk? Do you see that being watered down at all through, through. To,

Richard Mallinson, senior analyst, Energy Aspects: 10:53

it's a really good question, and I think one of the consequences of so much focus being on the, the Westminster drama of whether we get this deal across the line or not, is very, very little debate so far about what the UK is going to do with this hard one freedom. How are we going to change our regulations? How are we gonna improve the competitiveness of the, uh, the UK economy and UK businesses? Some listeners might remember earlier promises that the UK was going to have all of these wonderful free trade agreements lined up to sign the day after B. Well, I think we've got a heads of terms with South Korea. We've got a few very small countries, but we're kinda lacking that, that big sense. So there is a vision amongst particular conservative lawmakers and pro Brexit that we will become a Singapore type. Low regulation free trading economy, but I think that is quite at odds with a lot of the public movement towards high regulatory standards, protections for both workers and increasingly from the environment. And now of course, the increasingly active. Political movement and campaign around climate change. So there'll be, I think, a lot of resistance to watering down environmental protections, watering down commitments around workers' rights. And yet those are perhaps the, the elements which some Brexit supporters. Believe are holding the UK economy back or making our businesses less

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:19

competitive. Fascinating stuff. I mean, we'll, we will see how this all pans out, of course, or how this develops. Um, how do you, I mean, moving maybe a little bit more globally now, over the past, well past month really, but over the past few days, we've seen oil prices being moving both up and down on, firstly on, maybe on, on hopes that US China trade deal. Was imminent and then once doubt started to merge, they fell back a bit. What is your assessment now of the negotiations and the, and the ongoing trade war here between the US and China?

Richard Mallinson, senior analyst, Energy Aspects: 12:52

Absolutely. I mean, I think just to start with oil prices, I think they're caught by, in, in the hold of three factors. One is a concern about the global economy and particularly US China trade war. The second is about the potential for a change in policy on Iran sanctions, which can bring a lot of Iranian oil that's currently unavailable back very quickly. And the third is changing attitudes towards US shale production. It's been a huge source of growth and there's now worries whether or not that's. Gonna be able to continue something we think and have been highlighting for some time is a real slowdown. But if we hone in on that US China trade, we've seen the us talking about a phase one agreement. Now, this is a more limited deal that they're proposing, which would only cover some of the issues that are at odds between the US and China. So it would put a halt on tariff increases. It would. See the Chinese commit to, to buying some more agriculture and some more energy products. And it would create a window perhaps for some longer negotiations on the more difficult issues. But I think we're a long way from any resolution on those bigger issues which are around technology. The US has put restrictions on a whole range of key Chinese technology firms. It's about intellectual property protections. And it's really increasingly about the rivalry between the US and China. In the global economy. And, and even in the global political space, China is on the rise. The us, not just the Republicans and the Trump administration, but us politicians of all colors are seeing China as a threat. And seeing this as really a strategic. Battle that's gonna define the next 20 or 30 years.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 14:27

It's a very public battleground between two economic superpowers. I mean, what does that mean, for example, for, for LNG flows or, you know, 'cause obviously a US is a big producer of LNG as well. I mean, how, how does that fit in?

Richard Mallinson, senior analyst, Energy Aspects: 14:40

It does, and I think we absolutely can't rule out both sides, seeing opportunities for transactional arrangements. This phase one agreement or deal is probably one example. We've seen previous cases where China has committed to bar to increase energy purchases. Might be crude oil, it might be l and g. These, I think, are, totally possible in tandem with this big structural conflict that's gonna be very, very hard to resolve because for both the US and China, they wanna limit the downside and the damage this does to their economies. So as I mentioned earlier, Chinese LNG demand growth is. Slowing, it's still increasing and it's still gonna be the biggest source of new demand this year, but not needing to find quite as much and in a very oversupplied market, it's not gonna be too concerned about having tariffs on US LNG, and about the fact that this means China needs to go to other sources. And there's a reshuffling of LNG cargo because there's plenty of LNG around because there's a perception, there's plenty of crude around, even though in fact market fundamentals are quite tight. That. Means, I think that China does feel it can offer concessions, it can offer tactical promises when it comes to purchases. But it can also afford to play hardball when it wants to, and cut off or slow flows of US energy products into China, even if that means Chinese buyers are paying a little bit more to go for the alternatives.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:07

At, at core of this, as you mentioned, is the, the. The tariffs or the restrictions on technology firms, Chinese technology firms, do you see that easing at all? Or, you know, or, or the US rolling back some of those, some of those restrictions there?

Richard Mallinson, senior analyst, Energy Aspects: 16:21

I think that president Trump has signaled some willingness on, for instance, huawe, but there are a lot of advisors within his administration who are more concerned. About technology and about the role that Chinese firms are starting to play in things like 5G networks, as well as probably in intellectual property theft than in fact they are about the tariffs in the balance of trade. So I think a, a war that began. About trade has evolved and is much more now about technology and about the structural underpinnings of the economy. And so whilst you might see some tactical concessions and easing to get these limited deals across the line, because neither side wants to do too much short term damage to their economy, when it comes to the big fundamental issues, neither side's gonna be ready to give a lot of ground or give a lot of concessions. And that's why it's very hard to see some kind of comprehensive deal. Emerging that would put these tensions to rest.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:17

There's an election blooming in in America next year. I mean, it could be an eight year Trump term, it could be a new president. Do you see if there is a new president, a, a Democratic candidate, an ease off in the, in the trade war issues here, do you think it could still be hardball on both? On, on, on from the Americans? It's

Richard Mallinson, senior analyst, Energy Aspects: 17:35

a really good question because I think clearly. This trade war and the way that it's being fought is wrapped up in Trump's personal style and his personal policy focus. And yet when you look at across the aisle in Washington, you see real concerns about China and about the threat that it poses to the US economy, to US workers and many Democrats are. If anything, cheering on this tough stance on China, pushing for measures on various issues, maybe more framed around human rights issues and the suppression of minorities in China. Maybe more framed about Hong Kong protests, maybe more framed around workers and, standards than outright trade. But I think there are a lot of these concerns. A new Democratic president, if we see a change, may well adopt a different tactical approach. But I don't think we're gonna see a fundamentally easing of tensions because I think what we've now done is. Accelerated this confrontation between the rising Chinese economy and the dominant US economy. And this is gonna have to be resolved. You might be able to defer and slow the pace of that process somewhat, but I don't think you can halt it entirely until we reach some kind of new equilibrium.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:51

Fascinating stuff. I mean, there's a, there's a lot to keep track of here. What, on, on, on the, on the global scale, so. What, what would you say over the coming sort of year, the main pointers to look out for apart from Trump's Twitter, Twitter feed?

Richard Mallinson, senior analyst, Energy Aspects: 19:05

Well, I think we are gonna have to watch the US election. Clearly. There's gonna be an awful lot of coverage and noise. Firstly from the Democratic primaries. We've also now got the impeachment battle. That's gonna rumble on in the background and then we're gonna get into the election proper. I think it's gonna be a. Very ugly campaign. I think it's gonna potentially be quite a close one right towards the end, and so we're gonna have to keep an eye on that, but it's easy to get lost in the detail. I think the second thing we'll be looking at, what are the other key threats and vulnerabilities to the global economy? We've definitely seen a big slowdown in manufacturing industrial activity. It's synchronized slow down as the IMS. Says, so there's no one region that's gonna pull us out of this deceleration. But I think what's critical now is to watch consumer confidence indicators. So far, they've held up much better. We've got low unemployment, we've still got reasonably strong consumer spending in most regions. If those numbers start to shift, and if we. See a contagion from the manufacturing weakness into the service side of the economy, then that's definitely a concern. And I think here in Europe, clearly, let's see what happens with Brexit. Let's see what happens with the parliamentary vote and the 31st of October. But then the Europeans have a big agenda. They're launching the new European Parliament, the new cycle. You've got Ursula Ian, who's got big ambitions in terms of the environmental green agenda, the first a hundred days. You've also got Germany and a big political transition that they're trying to look at in a slowing economy. You've got a Macron presidency that I think has been trying to really take advantage of this period to a. Establish and strengthen a presence across Europe and beyond that could continue. He could gain momentum or he could stumble along the way. And so I think how European politics unfolds, not just Brexit, but once we get beyond Brexit is going to be really critical because unless it can provide some more confidence and clarity for European businesses and for European consumers, we may be one of the regions that. Slows down the most, even if other parts of the world manage to maintain some momentum.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:14

Richard, thank you very much for joining the Montel Weekly podcast, the Fascinat fascinating overview of the, the global macro factors that we need to keep in a keep a close watch on in in the coming weeks, months, years even. So thank you. My pleasure, listeners. You can follow all the latest news on montel news.com and you can follow us on Twitter and LinkedIn and subscribe to the podcast on Spotify and Apple Podcasts. Thank you very much for listening. Goodbye.