What if... Oil surges back to $120/bbl?

Hello and welcome to another webinar from us in Global Research. James Smith here London. An Economist with ING. Today we're talking about oil prices which let's be honest they've been on quite a journey haven't they over the last few weeks Back a month ago, prices were going down and down and down, down towards $70 a barrel on Brent crude. But of course... That didn't last long before tensions re-escalated in the Middle East. And here we are. very close to $100 a barrel on oil, natural gas reaching a new high. highs as well. So the question we're asking today is how bad can it get for oil prices, for energy markets? How do we get back to those previous highs of $120 a barrel from earlier? this year and what does it mean for us in Europe? We've got an ECB meeting today we'll talk about what that decision might mean and what energy prices are going to do to the outlook for interest rates and the eurozone. Economy. I want to do all of that. I've got two esteemed colleagues from our research team. I've got Warren Patterson. He's... Our global head of Commodities Strategy in Singapore and Bert Klein. He's the chief Economist for the Netherlands and he's. coming to us from Amsterdam. This is part of summer series of webinars that we're putting on for you. over the next few weeks, looking at how Markets consensus could be turned on its head. head and clearly starting to beat with the big topic of oil prices and let's start with what you're thinking about with oil. We're going to start with a poll question for you. And the question is very simple. Where do you think oil prices are going to be at the end of this year? We've provided various ranges for you from... below $70 a barrel. up to, what have we got, above 120. So let us know what you think. We'll come back to the results a little bit later on. Warren, let's start with you. Warren, head of Commodities Strategy Singapore. Let's cast our minds back a month or so. ago we had that memorandum of understanding between the US and Iran and Price has just kept falling right i think it surprised most people in Markets why did prices come down so quickly? I mean, the short answer, I think, is just false optimism, right? Markets. Basically treated that MOU as almost a final deal. and seem to have largely ignored that there was still a massive gap. between Iran and the U.S. Now, fundamentally, we did see a flood of oil coming out from the Persian Gulf. following that deal. with obviously all those tankers that have been sort of trapped in there for months. making a quick exit. And that was sort of coinciding with. continued releases of oil from government stocks. So ultimately... The supply recovery that we were seeing in Markets was happening at a much quicker pace than the demand recovery. So the physical market was actually pretty weak. I think there was also an element of Markets. believing out the pace of oil flows that we were seeing. sort of from the Persian Gulf. could be sustained. And I think that's also where Markets was probably being too optimistic, right? Because... Yes, we were seeing plenty of tankers leaving. the Persian Gulf, but they're a little bit more reluctant to go back in. So I believe we could have probably seen a slowdown. in oil flows. even if the deal had held, but obviously just not to the degree that we've. seeing them slow down in recent weeks. Let's talk about those oil flows and sort of where we are now, because I think one of the challenges throughout this crisis has been really putting your finger on. How much oil is coming out of the Middle East? We get this data on tankers, but there's a lot of questions about how reliable it is. It is. I mean, do we have a decent sense of where we are right now in terms of the amount of oil? coming through, coming out of the Strait of Hormuz in the Middle East more generally. And I suppose... Related to that, fresh headlines today, you know, strikes in the Red Sea on... on tankers as well. How big an issue is that going to be? Yeah, I mean, on sort of monitoring flows through the Strait of Hormuz. very difficult at the moment. If you look at sort of ship tracking data it basically shows that tanker flows have essentially grown to to a halt and again no surprise given the fact that we have been seeing tankers being targeted in the Strait of Hormuz. But basically as has been the case since the start of the wall right we are seeing a number of of vessels moving in the dark so basically turning off their transponders when they uh when they transit the straight to poor moves. So actual flows will be higher. than what official data is suggesting. Now, we did see oil flows basically go back up to around... 12 million barrels a day following the deal. We're basically assuming now that those flows have fallen back. to somewhere between two to three million barrels a day. So basically back where we were for large parts of the second quarter. As for the Red Sea, yeah, obviously a very real risk for Markets. As you say, we've seen the Houthis taking risks. responsibility for a couple of strikes on tankers overnight. Obviously, the Red Sea has become increasingly important for the Markets. Given the fact that since the war, we've been seeing Saudi Arabia diverting a lot of its crew to the west coast. in order to bypass the straight to form moves. So in June, flows were about 4.6 million barrels a day. And so clearly that's sort of the supply that we see at. risk. I wouldn't say it's... at that basically that full volume is is potentially lost given the fact that Saudis can always basically ship. through the Suez Canal. Yes, it obviously adds to voyage times into Asia and it also makes Freight is a little bit more expensive, but it certainly doesn't mean that the oil is shut off. from Markets. And let's talk about inventories, Warren, because you mentioned it in your first answer that has been very helpful for Markets. throughout this crisis. And I think you mentioned the US. a strategic reserve and how that's kind of been. helping matters. I think... Correct me if I'm wrong, I think that was kind of winding down or it's kind of reaching the end of that initial. release, right? I mean, is there scope given that the US is kind of... escalating things in the Middle East. Military strikes aren't winding down. And is there scope for that to be extended? So on the surface of it, I mean, if you look at it, the US has released more than 100 million barrels from. from the SPR so far. It leaves the US SPR at about a little over 300 million million barrels, which is the lowest levels we've seen since the early 1980s. So yeah, on the surface of it, you could look at that and say, oh, the US might be reluctant to tap. more into those reserves. But I think it's also important to remember. how these releases are structured, right? They're basically structured in the form of an exchange. So for every barrel that we've been seeing. released from the USS SBR. At a future date, we'll see on average about 1.2. barrels returned. So ultimately at the end of all of this the US SPR should actually end up larger. than where it is when it started, when the war started. So I think if the government were to structure further releases as an exchange. they certainly would probably be willing. to announce further releases. And we have to talk about China as well, who've played an enormous role in sort of price backdrop throughout. for the crisis a big cut in demand for oil over the last few months i suppose The big question is, can that continue? Yeah, I mean, I think China has probably been the biggest surprise in the Markets. throughout the school, right? I think just... The degree to which they've cut their imports is just astonishing. If we look at sort of June imports. They fell 40% year on year. In barrel terms, that's a 5 million barrel day reduction. So just amazing. And that's really been crucial. in helping to try sort of rebalance Markets. Obviously, a large part of that's been driven by demand destruction, if you think sort of feedstock availability for the peck. The chem industry has been disrupted, so we wouldn't see the logic. amount of demand destruction there, but also when it comes to sort of road fuels demand. So demand destruction certainly played a role, but also inventory drawdowns. That's also helped too. to sort of make up for some of this decline in in imports. Now I'm of the view that China could sustain sort of these lower imports. for some time more. China sits on sort of more than 1.2 billion barrels. of reserves and to be honest with you through this war, what they've released from that reserve. well, it hasn't really dented that number too much. So I think we could go for a few more months. with these lower import volumes if needed. And then China could look to restock in 2027. when Markets is expected to be in large surplus. Now, the big issue. and uncertainty of course is obviously the longer this disruption persists the more careful China will want to be. about tapping too heavily into its reserves. Now Warren, the whole sort of premise of this webinar is what happens if oil prices go back above? $100 a barrel. But for diesel, we're kind of already there, right? You know, it's already a very extreme situation in the diesel market. Spreads have widened out considerably. Why are things so bad? Yeah. And to be honest, it's not just diesel, it's the refined products Markets general, but Clearly, I think diesel is sort of the poster child for that tightness when it comes to refined products. You started off saying we're... We're sort of edging towards $100 on Brent. Well, if we look at ice gas oil, we're trading at almost $170 a barrel. right, the gas oil crack It's gone from... a little under $40 in June. to record levels of $65 at the moment. There's a number of factors at play here. Clearly, the Persian Gulf is certainly a... bullish factor here around 11 to 12 percent of global refining capacity sits in the Middle East. and obviously a large amount of this will be disrupted. due to the war. Refinery runs in Asia obviously would have also been impacted. due to feedstock availability issues with crude from the Middle East. And then I guess sort of the real big factor. and maybe doesn't get as much attention as one might think it should. is the impact of Ukrainian attacks on Russian energy infrastructure. It has led refiners cutting run rates significantly in Russia. As a result of that, we are seeing diesel exports from Russia coming under significant pressure. Just in June, exports were down 50% year on year. July they will come under even more pressure given the fact that the Russian government announced a temporary ban. on diesel exports. And this is very important for global for global diesel markets because Russia is the second largest. diesel exporter globally. And unfortunately, I think for the refined products market and diesel as well, there's there's only really one way to fix all of this and that's sort of to get a normalization. from the Middle East in terms of refined product flows from there. and crude flows as well so that Asian refiners can see sort of increases in their run rates once again. What is the one bit of relief or what's the one part of Markets that can offer some relief, should I say, to the refined products market? Well, it has been the U.S. to a certain degree, right? They have been ramping up. exports of refined products. The issue is that U.S. refiners are now essentially operating at capacity. So any sort of additional relief that they can provide to Markets is very limited. Now, Warren, let's check in with the poll that we answered. I asked you earlier, where do you think oil prices are going to be? at the end of this year? Answer, no one knows. A really big range of responses. I suppose not... Surprising given all the uncertainty, most people. about a quarter of you saying between 90 and 99 dollars a barrel which is roughly where we are today and a similar percentage at just over a hundred dollars a barrel Warren, what do you think? And I suppose... On top of that, given the title of the webinar today, what does it need, what would have to happen for us to get back to $120 per hour or even higher. Yeah, I mean, firstly, on that poll, I think it really. Demonstrates just the uncertainty right within Markets and it's a very tough one too. It's a very tough Markets forecast at the moment. It's a good play out. sort of we've seen over the last few months. In the short term, I think it's only a matter of time. Before we break $100 a barrel, easy to say, you know, we're trading close to $98 a barrel. at the moment, but I think it's just a matter of time. given the fact that it's just a little sign of de-escalation in the... Persian Gulf. If anything, we continue to see the situation getting worse. And on top of that, we've also got some supply disruptions elsewhere, right, in the Black Sea. when it comes to crude loadings from Kazakhstan there. So Markets is looking increasingly tight. So I suspect we do see prices moving higher. And then it sort of comes around to the... The, um... I guess sort of having a view of where sort of the pressure point for Trump. Once we get sort of sustainably above $100 a barrel. Is that enough for Trump to sort of come back to the negotiating table and say, well, let's sort of try to get... the steel back on track possibly From the Iranian side as well, we've obviously got the US blockade back in place. the longer that goes on for you think the more willing Iran would also be to come back to the negotiating table. So I think in the short term, we could certainly see spikes. above $100 a barrel. But with the view that potentially we still see. The negotiations getting back on track over the course of August. our base case is essentially that we could still see Brent. below $80 a barrel by the end of this year. Now sort of what it would take to get to $120. well, to be honest, not much. We just need to see. what we're seeing at the moment persist for a bit longer. if we sort of run through with these supply disruptions. through August. It's only a matter of time. I think before we hit $120 a barrel. Remember. The inventory situation now is a lot. tighter than where it was when we started the war. So Markets hasn't got that buffer. So yeah, I think we don't need to see too much. to basically get to that $120. $120 level. And I guess the key question is what could take some of the pressure. off Markets, well, China, obviously, if they continue to do what they've been doing. that could help take some upward pressure off Markets. But I think more broadly when it comes to demand. just given the fact that you know we could see basically uh demand destruction at these price levels and You might say, well, we need to see higher oil prices for that to come through. But at the end of the day, we don't consume crude oil, right? We consume jet fuel. Refine diesel gasoline And as we've touched on already, you know, with gas oil at $170 a barrel. We're already at levels, I think, where you will start seeing sizable amounts of... of demand destruction. So I think the demand side could start coming through once again to try to help rebalance Markets and take some upward pressure of prices. Now we're going to come to what all this means for the ECB in a few moments with Bert before. Before we do that, Warren, one final question for you just quickly. natural gas a big problem for us in Europe Prices are rising. How bad could it get? Why are prices rising here? Yeah, it's certainly not getting as much attention as the Markets, right? And you could argue, as you say, it's... It's probably a more important factor for Europe. At the end of the day, storage is just not filling up quick enough for the EU. It's 54% full at the moment. We're basically tracking levels seen in 2021. And given the fall in LNG imports into the region, it's looking very unlikely that the EU is going to hit its 80% storage target ahead of the winter. I think even hitting the lower target of 75% looks as though it will be. be tough. Now on the import side, those volumes have come off drastically. In June, they were off about 20%. percent year on year it's looking as though that the client's picking up pace through July. The issue here really is that we're seeing Asia competing more. aggressively for supply so that is seeing LNG supply diverted away from Europe. into Asia. And then secondly, on the demand side, Obviously, Europe's been going through a number of heat waves recently. and that has been supportive for gas demand from the power generation sector. And we've also been seeing something similar in parts of Asia. So that's really what's tightening Markets up. I think if we see these supply disruptions really persisting. through pretty much the whole of Q3. Q3, we could certainly see a scenario where TTF sort of averages around 85 euros. over the fourth quarter of this year. But again, that's not our base case. Maybe the one thing, the one saving grace potentially could be weather. We are set to see a strong El Nino. event later this year and while obviously El Nino events don't usually have a strong impact on Europe. If it's a strong alanine, it can lead to sort of milder start. to the winter. So potentially, weather could save Europe. once again, like it did during the 2022 energy crisis. Thanks a lot, Warren. Warren, as I say, our chief energy strategist in Singapore. Paul, now let's talk about the ECB and let's start with what you are thinking about rate hikes for this year. Very simple question. How many more ECB rate hikes do you expect? over the next 12 months uh none or I suppose implicit in that do you expect rate cuts one, two, three, four or more. Let us know what you think. We'll come back to the results in a few moments. But we'll talk about the ECB more. in a minute, but let's start with inflation. Inflation has actually come down already from, I think, 3.2% in May. It's 2.8% in June. Are we past the peak? Well, not with these prices in the energy Markets not. But it did look like that for a while. Right, so I think what we saw over the past months was something where We were coming past the peak. We saw that we were getting into a more benign environment again. And overall, we also even heard from the ECB something that was. It's a bit of relief. Lagarde said in Sintra last month that the ECB wouldn't need to step in as aggressively as it did in 2022. I think that makes sense. No one's really expecting that it would, but I think that already showed that there was a bit of calm. coming out of the ECB around this current inflation environment. But all hands will be back on deck because if you look at these oil prices and also prices in the gas market, especially as you... we're just talking about. That's a very different type of environment that we could get back into. where potentially you will see inflation shoot back up again. Let's talk about second round effects. I mean, you mentioned that, but this isn't 2022. This is very different for a whole host of reasons. I think you can just... I think most people agree that getting back to that sort of 2022 inflation wave is unlikely, but nevertheless. BCB does worry about higher energy prices spilling into the rest of the inflation basket. And I suppose those concerns will be heightened if we do go. much higher on energy prices. I mean, is there much sign of that so far? So I think so far it's been relatively benign. So of course we've seen the big surge over the... spring and there we saw that businesses were immediately much more keen to price through higher costs to their customers. So we see in surveys from the European Commission, for example, that a large amount of goods producers were planning on increasing their prices in the months ahead. that usually correlates quite well with goods inflation in the consumer basket as well. well so that's definitely something that we will see but We already did see as well that surveys in June and May were already showing fewer. companies that were willing to to increase prices so there's been a small tick down um not that that That means that we're not going to see a further increase in core inflation, but it does mean that sort of the sharp edges are starting to come off or were starting to come off a little bit. Of course, you know, when oil was back at 71 or 70 dollars per barrel. At that point, it becomes a lot more difficult for corporates as well to start to price through higher costs to their customers because If they point to higher Commodities prices and everyone can see that oil is back at. where it was before, then that does make it harder to price through those few months of extra cost to their customers. But now that we're back up close to $100 per barrel again, that... the burning platform becomes larger and of course it means that the chances of businesses trying to pass through those higher costs to their customers increases as well again. So if we look at those direct second round effects of what's happening here, the risks around those are starting to increase again with curbs. prices, even though signs were very encouraging in the months before. But maybe we can take that even broader, James, and also look at the labor market. Which is a much slower second round effect that you usually see happen. in 22 when we had inflation. past 10% in the Eurozone. We did, of course, see that that resulted in a slow but sure increase in wages that that came on the back of that. And the ECB invested a lot in trying to make sure that they understand that labor market. Well, and understand those wage moves quite well as well. So they've introduced a new wage tracker that they didn't have before. before the previous energy shock. And if we look at what that wage tracker is currently showing us, then we are seeing that it's shown very little effect so far. The ECB tracks... big negotiated wage agreements. across the eurozone with that and it's not showing much effect yet even though we are starting to hear that unions are immediately trying to recoup purchasing power. from the increased inflation that we see so far. But let's be honest, I mean, with inflation around 3%, that's not really something that's going to bring about a big wage. Wave on the back of it. Let's talk about the ECB then, today's meeting, but let's check in on that. poll that we just put out in terms of what you guys are thinking. little bit more consensus here in terms of the extent of the ECB hikes. One more hike is the... the majority view 55% followed by two and only a handful of you. filling in three. But nobody's expecting a hike today, I don't think, from the ECB. The ECB doesn't like... surprising us. Is it going to be a bit of non-event or is there indeed some scope for surprises? What you're expecting? So, I mean, just a few weeks ago, before we got back into all this, I was I would have said that this was a non-event and that everyone could safely go on holiday, but now today is going to be Quite interesting still. Maybe not indeed from whether there's going to be a hike or not. It would be a big surprise if they would do something today. but especially in terms of tone of voice and the discussion that we'll is going on behind closed doors at this point. around what the ECB is going to do. I am sure that there will be more pressure from the Hawks now. To push through for a second hike, maybe not today, but then it definitely will be for September. Doves are more uncertain about the economic impact. and will try to push back against that and want to see how this new situation is going to go. play out and how long it's going to be in place for. But overall, it will be a very interesting press conference that Lagarde will give. See how much of hint she's going to give towards a September hike. how definite they'll want to make that come across. And I think that's going to be. very interesting to hear also how they view possible second round effects. So I think It's going to be an interesting one for the ECB that could, especially the press conference, have an impact. Markets pricing as well. Yeah. And speaking of that market pricing, but I mean, you mentioned the second rate hike Markets. are indeed expecting not just a rate hike in September. another one thereafter and maybe even another. into next year, a string of hikes priced, and this is very correlated to Markets expectations too. the level of energy prices so not surprising that those are arising. I mean, we don't have a crystal ball on the end, on the, on the, the energy crisis we're not geopolitical experts but given where we are right now on energy prices. Markets wrong? Is that too extreme in terms of the pricing? Well, I think what we see in terms of ECB pricing. when you go beyond just the second other one it means that the ecb would go beyond their own estimates of what the neutral rate is. So essentially, it means that the ECB will actively want to push back on inflation levels. And yeah, I mean, with oil prices rising so fast as they are right now, with gas prices on the move. Of course, that means that you can see scenarios where inflation will move significantly higher. that could require the ECB to step on the brakes more significantly. But at the same time, if... you consider a base case in which this is going to to last for a bit longer, but not all too much, then it could well be that just the one more is going to to be enough for the ecb right so um the Markets to be pricing something where Inflation is somewhat more persistent. than what we're at least expecting at this point. in our base case. Thanks a lot, Bert. Bert, Chief Economist for the Netherlands on the ECB. there. We're almost up for time, but I do want to take one question. We've had lots of really good questions, actually. I think quite a few of them Warren has already answered. But I do want to come to you, Warren, with one. which is a very good question. And it is Markets now accept that. Iran can disrupt the Strait of Hormuz. whenever tensions flare up. Shouldn't oil be trading with a permanently higher risk? premium. In other words, what would need to happen for prices to get to pre-crisis levels. Yeah, I mean, I think that's been the big surprise sort of with that initial sell-off in Markets. okay right um when we when we did see prices trading to the low 70s essentially at that whole risk premium evaporated. Look, I think what we need to see is clearly that there is this. This risk that's going to be hanging over Markets. but what we do need to see in order to sort of get back to pre-crisis levels, I think. is for sort of just a sustained period of un... an London period of flows not being disrupted right so if we sort of go with water or a couple months without disruption. then that risk premium will really start. fading and then I think the Markets attention will really focus. on the expected surplus. in Markets for 2027, which is sizable, right? You're looking at... assuming these disruptions sort of end. sometime this quarter, you're looking at a surplus of in the region of three to four million barrels a day through 2027. So So I think that's when Markets really will focus on that and you see prices going back. sort of back below pre-crisis levels. I think sort of longer term what this does though. it certainly does sort of change dynamics quite drastically in the Markets because we are going to certainly, I think, see investments in infrastructure. to essentially bypass the straight of whole moves, right? You're already... During talk of Saudis looking at expanding capacity for the east-west pipeline. The UAE, which has actually dealt with this war very well. is also expanding capacity of its pipeline to ship out of Hajara and avoid the straight of whole moves that should be ready. next year already. So I think in the longer term, Yes. Iran has demonstrated its ability to basically shut. the Straits of Hormuz, but in the longer run. It's also pushed the Markets pushed Markets to basically I guess. shift its ability to basically avoid the straight of hormones. Thanks a lot, Warren. So many interesting things we could talk about. Lots of really good questions. So thanks for all of those. We're up for time for today, but we are back in two weeks time. This is part of webinar series we're planning throughout the summer. the next episode we're talking about the Markets pricing various Fed hikes over the coming months we're not so sure about that so we're talking about how the Fed could actually end up cutting rates by next summer and sort of stress testing our views a little bit there with... James Knightley, who's our US expert in New York and also Chris Turner here London. He'll be talking about... dollar good news you're already signed up to that by signing up to today's webinar you already signed up to the next series of events just add it to your calendar there's a button on your screen right now on the webpage. It'll take you to let you click a little button and add it to your... calendar so do do that and we of course get more details emailed to you over the next few weeks with more episodes as well coming through the summer. That's it for today. Thanks. Both Warren and Bert and for you. Thank you for joining us today. Speak to you again next time.