Over a barrel - what’s next for oil?

Last year’s carnage in global oil demand would have been a lot worse for oil prices without the deep production cut agreement by Opec and non-member partners. But how will current geopolitical tensions play out?

Will Iran keep selling to China? Is Saudi Arabia likely to maintain production cuts, or will Russia continue to boost output?

Listen to a discussion on how the complex web of intrigue and realpolitik is driving the world’s most liquid commodity market. 

Host: 

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

Guest: 

• Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities

Transcript

Anna Siwecka, freelance journalist/podcaster: 0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:34

Hello listeners and welcome to the Montel Weekly podcast, bring Energy Matters in an informal setting. Today's pod returns to the oil market, the most global and most traded energy commodity. Prices crashed to $15 a barrel at the height of the COVID-19 pandemic in April last year, but have since recovered to trade over $70 a barrel in recent days. However, they've been a little bit more shaky. My name is Richard Sverrisson, and here to help us understand current market dynamics and the outlook going forward is Nadia Martin, vegan partner and energy analyst at Pareto Securities. A warm welcome to you, Nadia.

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 1:12

Thank you very much.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:13

How are you doing in these COVID times? It's, I know it's not it's not easy. More lockdown in Norway.

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 1:19

Absolutely. And it will be very interesting how Easter is. Of course that's meant to be a family time, but we can't all meet together, so just have to pull through and hope we can enjoy the outdoor skiing.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:30

Absolutely. I'll second that Nadia. So there is a little bit of a light maybe at the ti end of the tunnel, but we are seeing now that benchmark, Brent, crude prices are hovering around $62 a barrel down from over 71 earlier in March. So they've given up some of their pre pandemic gains, should we say, in recent days. So what's the reason? What, what's going on? What's driving prices at the moment?

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 1:51

I think the top concern to the world immediately in terms of headlines is the vaccine rollout and what that means in terms of policy. And this is where. We've seen that, for example, Angela Merkel has canceled the Easter holidays for the German population, which then everyone worries, okay, will other countries follow suit? And that of course will delay the recovery in terms of oil demand for the European Union in general, especially as we including Norway, are in a shared vaccine rollout to date. The other thing that I think first set off the weakness though, in, in the oil market in the last week or so, or even two weeks, has been that we've seen less buying from China in the oil market. And when we look back to how the pandemic has gone, China was the first country to show a recovery and China even posted. GDP growth last year during the pandemic of plus 2.3% versus the us', negative 2.3%. So we've been very reliant on China in getting ourselves off the ground in terms of oil demand. Now, we've seen China slow down in buying right now in the last couple weeks, driven partly by refinery maintenance and also by the fact that they are buying. Iranian crude illegally, and that is displacing some of the North Sea crude, especially Norwegian crude that they have been buying, which has propped up the really the prompt prices and what we end up seeing in the physical market and on the futures market. Side. Then we also had OPEC deciding not to increase production at all in the last OPIC meeting at the start of March for the following month. And that, of course, got all the oil bulls extra excited because then the market would draw much faster than had been expected. And so we ended up having. Prices really shoot higher. We had the attack on the Saudi refinery, which basically pushed out the rest of the shorts, and that's when we got up to above $70. And then the market was very heavy to the long side. And so then when we see the slowdown in Chinese buying in the main recovery market. That weaken the physical side and then this vaccine rollout starts to affect all the paper players and the investors that start to think, oh, we'll have demand destruction. So that, that has really been, I think, the main driver of recent price volatility.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 4:16

So the market's getting very nervous. So a about the third wave of COVID infections in Europe and beyond, but also maybe concerned about the slowness of this vaccine rollout in Europe, but maybe also elsewhere.

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 4:29

Yeah, this is where we've had very different stories. We've had the UK go out absolute gangbusters and vaccinating, I think half the population now. At least in the older age brackets and. They have really led the way, but then other countries have not been able to do the same. We have the US that has also done very well comparatively on vaccinations, and we see gasoline demand there. For example, only about 10% below where it was in February, pre C 19 pandemic. Of course, it hit Asia first, then it hit Europe, then it hit the us. So we're only around 10% below that, and we can see that the US is really starting to move forward. Also helped by Biden spending package. When you see pictures like what happened in with spring break in Miami, you, it starts to look like over combustion. That okay? Maybe the US is ahead of itself. My favorite Norwegian word over 10, it's that maybe we need to be a little bit more nervous that things aren't as rosy as they seem and there might be a bit of a pullback and also in China. Now, China for the first time actually responded quite negatively to the Biden stimulus package. Now, the Central Bank actually put out cautionary statements that they're as in the Chinese Central Bank, that they're very concerned that there's too much liquidity coming from the US and the European Union, and that this could lead to overheating in the Chinese economy. The Chinese. Historically have not allowed foreign investors into their economy. And when we look at the chart since last year, you know it's a steep line higher in terms of the amount of foreign investors in China. So when we have all of this additional liquidity coming into the market, that makes China especially attractive when they're the first ones out of the pandemic. But then that makes China nervous that come the second half of the year once the US is really going because of this infrastructure spending and package. We get that money pulled out of China and that kind of instability makes the Chinese nervous. And when they announced their GDP growth target for this year, it was only 6%. Which is quite by a lot of analysts, very easy to meet. Most have them at a Brown 8.5%. So that shows that they could actually be a bit tighter and pull back on policy. And they actually have not been injecting liquidity into the markets for the last month, for example. And we've seen a real crash in the Chinese stock market as a result, relatively speaking, versus where it's been. So this is where. So much is hinging on China right now than the us. Europe right now is not picking up that oil demand, and the next big country that is hugely important is India. And India has been very slow out of this pandemic one because of the slow vaccine rollout, despite the fact that they have manufacturing themselves. And secondly, the Modi government has put enormous tariffs on gasoline and diesel. So consumer spending on the oil side is way down because it is quite expensive. And then we have a strong dollar, which also is making it harder for India to really jump in. So Pato, we had expected that India would come into the market come April. But now, that might be a bit delayed. In come May, we start to have them monsoon, which is when you tip by mid-May, which is when you, in into June, when you typically have a dip in oil demand. So India may fail to perform versus some of the more bullish expectations the market had in terms of oil demand in the near term. So this is where we're in that tricky, entering the second quarter.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:06

Absolutely. I wanna return to some of those headwinds that you mentioned earlier, but if we can stick with China or go back to China. Yes. So you're seeing some of this kind of revival of Iranian crude oil exports going to Yes. Chinese, primarily teapot refineries, if I understand that correctly. Or and you mentioned illegally. What, why is China doing this? Why is it buying this oil in such a manner?

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 8:26

I think it's really trying to play the Biden administration. The Biden administration hasn't quite decided what it's going to do about Iran. Iran is saying we're not gonna sit down and talk about the nuclear deal unless you pull back sanctions first. And Biden hasn't done that. So I think Iran feels they have some leg room because Biden hasn't decided what he's doing. On the other hand, Biden has been quite aggressive actually to China. He is looked to specific allies as in the EU and Canada and China after these talks has been quite negative and is looking to raise and is raising tariffs to the European Union. So for all of this, Trump was destroying the relationship with China and creating all these trade wars. We actually have. A bit of that risk. Now with Biden, he's also established a group, including Japan and Australia, and India as the neighbors of China, and I think China doesn't like that. So China is increasingly going towards Russia. Iran, they had been already buying Venezuelan crude before that, they, they hadn't really been buying last year, but since the start of this year, they have been buying uranium. But the Venezuelan, they had been buying all along. And of course North Korea, they continue to talk to.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:38

So it's all really, it's all geopolitics and a continuation in a different form of the trade war and the scenarios we saw under the Trump administration.

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 9:46

Yes, it's a lot to work through.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:47

Yeah, absolutely. Makes it very complex. Of course. And that's why where your role is crucial here, Nadia. But if I can turn to demand maybe more in the medium term, we had a. Port this month from the I a saying that that oil demand globally was unlikely return to pre pandemic levels until 2025. Due to the ongoing impact lockdown slow vaccination, et cetera, and the reduction the use of fossil fuels. What's your view about that kind of scenario? That came from the IEA?

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 10:14

We believe that we will reach the pre pandemic oil demand sooner. Likely. Next year, if not by the end of this year. So many unknowns in terms of how quickly vaccine rollouts happen. We, of course, expect substitution to continue, and this is where we had European oil demand on a decline already for the last year and a half. They were coming down year on year, and the US was looking like it would just eek out a little bit of a gain before it also started to come lower. And this is where it's actually quite exciting that US gasoline demand now is only 10% lower than it was in February last year because. We actually had in 2019 a decline in oil demand in the US in 2019, and then in the start of 2020 it was a bit higher. So that is actually really very good news in terms of media oil demand. Then the vaccine rollout is a big concern when we look at a lot of the other emerging markets, countries like. Thailand, Vietnam, a lot of these Asian countries that together add up and add to the demand side. And then we have the climate question. So a lot of these governments are facing this question of, okay, do we want to modernize and raise the standard of living when at the same time, in the slightly longer term, not say two to three years forward or four years forward? We have, because of climate rising sea levels, which will of course adversely affect. Our own emerging economies the most, and so this is where. It is something that we continue to watch and we see a lot of encouragement in a lot of how the carbon pricing is working and things like that to really encourage development in a lot of these emerging markets. So if a company does a climate positive investment in an emerging market, that can be far more valuable than if it were in, say, Norway, which is, already such clean environment. So that's where we expect these shifts to continue. But we still think that the peak in global oil demand will come well, as in the will be. The previous peak will be surpassed in oil demand already in 2022. So not as far out as the IEA thinks

Richard Sverrisson, Editor-in-Chief Europe, Montel: 12:35

if we're gonna turn to prices, certainly for the outlook this year and next year, where's the main risk? Is it on the upside or on, on the downside. Could we fall below 60 or so above 70 in the coming months?

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 12:47

We are very close to below 60 right now. Based on technicals and things like that, we could dip slightly below. But I think in terms of an actual trend. The risk is much more to the upside and above $70. And the main reason for that is OPEC in Saudi Arabia, which we haven't really discussed in terms of their strong policy initiatives, we haven't had OPEC meeting monthly before, so that is very exciting. And so yes, we've had this dip now in the last week and half, but we have OPEC meeting already on April 1st, 31st of March through April 1st, and deciding policy for the next month. And, our view is that they're absolutely willing to cut production to shore up prices. And the March meeting made it very clear that Saudi Arabia wants stronger prices and when we compare the situation now versus where we were a year ago, so meaning. End of March, 2021 versus the OPEC meetings pre-Easter in the start of March of 2020. The biggest problem there was Russia, is that Russia really did not want to participate in cutting the market. Ahead of necessity, and that's when the whole relationship fell apart. And this is again, where geopolitics come into play because Putin's situation now versus where he was last year is vastly different. He is under so much pressure politically, internally, in addition to the fact that, oh, he's resorted to near name calling with the Biden administration. Which is quite shocking after we're used to Trump. Our view is that Putin is in no position to stir the waters and adversely affect. Russia's relationship with Saudi Arabia and Saudi Arabia wants stronger prices, so Russia will just go along with what Saudi says. Now, Russia has been treated very nicely by the Saudis in that the last two agreements Russia has, as in the last two meetings, Russia has been allowed to slightly increase production 75,000 barrels per day, hundred thousand barrels per day, month on month, to not scream too loudly. So that is a big difference. So that deal should hold up. The other aspect is that US Shale is actually in a much worse situation now than we had forecast last year. Not only because of funding, but in terms of this freeze in Texas infrastructure problems. And because the Biden administration is one. Under a lot more pressure to pollute less, which raises their break even costs. So Russia's main concern has always been that comeback in US shale. Saudi Arabia has never been that worried about that. That's been Russia's main concern. But we actually see that even with $70 a barrel, WTI, which then would be even higher. And Brent, it still limits the amount of upside we see from us production. Until really coming back end of the year into next year. So things are far more to the positive.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 15:49

So you expect the OPEC group, OPEC plus group next week to maintain current production or to cut further? What do you think here?

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 15:58

I think they will at least maintain, we've had the peak. The peak in refinery maintenance in Asia Pacific means, which is refinery maintenance is really the demand for their crude oil. Has been. We'll be in April, but they of course, have to buy ahead because of by the time the oil actually arrives. So we will see that uptake in demand. And then we see non OECD oil supply sorry, non OPEC oil supply down around 400,000 barrels per day for the next two months. They don't really need to cut deeper when we have less coming, especially because of North Sea Fuel Maintenance and Canada. And a rollover is enough, but of course to make the market more bullish, they would like to see maybe an additional cut and so they will likely maybe hold something back from the market in the pre communicate versus the post communicate.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 16:50

Yep. There's always a bit of a difference there. Absolutely. But what do you think, we talked about Iran and the US. Do you think the Biden administration will allow Iran to continue to quietly export in the way it has done?

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 17:02

I think that they definitely won't like it allow, it comes down to a question, what does allow mean? Are they gonna involve themselves in a war or things like that? I don't think so. I think they will really try to focus on the buyers. India is the next risk. If they were to start buying from Iran. So I think this is part of why Biden is engaging with India to make sure that they do not go along that route. And you can always have the Iranian oil kind of rebranded as Oman or Malaysian, which is what China we believe has been doing, or Iraqi crude in the past has been Iranian crude. I think they don't like it. But on the other hand, if they continue to go harder on China, on other things in Hong Kong, then China may just say we will continue buying. The other risk, I think, to OPEC is Libya, Libya just passed their new spending budget for the. New government and one third of that is to go towards oil production. If they things go along Rosalie, which of course with Libya's never known thing, we could see an additional 300,000 barrels per day coming from Libya and they're not part of the OPEC agreement. So they're a part of opec, but they're not subject to these cuts. But this is something that we think Saudi Arabia would be willing to cut production to compensate they themselves, and absolutely if we saw demand collapse. We believe that Saudi Arabia would be ready to jump in and say, okay, we have to cut ourselves another million, the group, another million or two or something like that, which they were not in a position to do last year. So that is why the market is so different this year.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 18:40

Fascinating. You mentioned earlier, Nadia, about. The huge injection into the economy the flood of liquidity coming from the US and also from Europe. But we've also seen, traditional oil and gas companies the majors have suffered huge losses last year and many are moving into the renewable energy space. Shell, for example could be the world's biggest renewable energy company next year. What does this mean for both the oil majors? How do you view this? And also for traditional. Electricity utility firms, is this gonna shake up the whole, energy market if we like, in, in Europe?

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 19:14

I think it absolutely will. And shell is a great example that they believe they are great at serving the consumer. So their strategy has been okay, if it's gasoline or it's diesel, or if it's electricity, we understand how this works. We understand how to run stations, we understand infrastructure. We're not just going to invest in solar power if we do not see how that can be connected to the engine consumer. So that has been their strategy, and I think that they have a lot of strengths. Going into that. They also, a lot of these companies are under a lot of pressure, both from shareholders to produce cleaner energy from buyers. So for example, if you buy V Power Petrol from Shell, part of that goes to replanting forests. Part of that premium, that they actually use towards that. But then also shareholders in some cases are putting pressure on them. And this is where we see like biodiesel and all these, you have the Finnish company, Nesta for example. They invested already in the pre-credit crunch in 2006, 2007, that period in having much more renewable based refining and their share price has. Perform far outperform the other refiners and majors. And so I think that there is definitely something to be learned there and a lot of the companies are going into that now. If we look at bp, they went through the whole Beyond Petroleum revamp. In the pre-Credit Crunch era, it was an enormous group. My roommate in London, she worked for them. By the end there were, I think, eight people in it. She's still at bp. She's a biodiesel trader. Now they are growing it again. But, you have this idea that from some shareholders, they would prefer to choose themselves. Who are the winning EP companies and oil producers, and who are the winning renewables companies? And so I think there is. For both, both the pure play, but also for the companies that play both sides. And especially there are a lot of government subsidies and a lot of government potential penalties, because of carbon taxes that if you don't make up for your downstream. Sales, and this is something that I think is quite important to understand about the Paris Accords, and it's not about the production of oil except for the emissions that you cause when you're producing the oil, it's about when you're also selling distillate and selling gasoline. It's that end user. Pollution and that is the part that is being fined if it's not offset by European governments to these producers. And this is where pure upstream companies aren't really subject to so much of this, but the downstream companies are, and this is causing a lot of investment because otherwise they just spend it in a fine if they didn't actually find a project to offset that investment. So it's making a real change in the makeup of these companies. So all the majors are really in, in Europe going into that. Whereas we've had the US companies standing further aside. And I think they remember the historic relationship. Exxon, I think he famously once said that, we don't wanna waste our shareholders' money when things go the other way.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 22:32

Absolutely. Ly So it's a combination of sort of top-down pressure in terms of, the carbon pricing and the climate policy,

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 22:37

which we to continue to go higher. I mean that carbon prices will continue to go higher in the next year, really springing up more of this investment

Richard Sverrisson, Editor-in-Chief Europe, Montel: 22:44

and also the grassroots pressure from, from shareholders to population NGOs, et cetera. So it's a combination of the two that I think, this momentum certainly will not slow down much. But if I can just ask you a final question Nadia. Do you think, there's a lot of talk about, some of these oil and gas majors pledging net zero emissions by, 2040 or 2050. Are these goals realistic? Fossil fuels still make up a huge amount of their revenue stream.

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 23:09

It doesn't mean that they eliminate them. It means they offset them and so I, it doesn't mean they will no longer be involved in this space at all, but I think it is possible for them to actually reach these goals. They've set them quite far ahead, but I think we are experiencing real change now, and this is where I think also the extraction methods. Are very important. And this what we've seen with you on Frederick Group, which is, the cleanest oil field in the world and also in how you close down the oil fields and things like that. These will make real changes on a global basis. And when we get rid of all these methane emissions and flaring and things like that, that will really change the situation for the industry quite a lot.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 23:55

Nadia, thanks ever so much for being a guest on the Montel Weekly podcast this week.

Nadia Martin Wiggen, Partner and Energy Analyst, Pareto Securities: 23:59

Thank you very much.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 24:00

That's about all from the Montel Weekly podcast. This week, we'll now take an Easter break and return for more topical energy matters on the 9th of April. We wish you all a very relaxing Easter period. You can now follow the podcast on our own Twitter account, the Monte Weekly podcast. Please direct message any suggestions or suggested guests or questions to podcast@montenews.com. Lastly, remember to keep up to date with all that's happening in the energy markets on Montel News. You can subscribe to this podcast on Apple Podcast, Spotify, or wherever you get your podcast from. Please rate and review us if you can. That helps us to improve. Thank you. Bye.