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 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, 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, thanks for coming on the podcast today.
Thanks for having me.
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 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?
Yeah?
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 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.
Trade for growth.
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, 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.
So we are a.
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.
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.
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 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.
NGAIL imports from the US. They would have to look to our Middle Eastern suppliers.
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.
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
who is in the US. But how does the tariffs and the counter tariffs we're hearing about potentially effect demand from the US.
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 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.
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.
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 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.
Travel and whatnot. So the impact will be across different segments.
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.
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?
That's to North America.
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.
Be hit pretty hard as well as Mexico.
Actually, so Mexico and Canada gets hit very hard if the US economy is loose.
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.
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 oil plays well in the fifties or forties, even the thirties.
Some of the.
Other fast growing producers at Guiana, they have break events of that is even lower than that.
It's like in the twenties and thirties.
Can can you just explain quickly what we mean by break events, what these numbers mean.
So break even is the price point where a producer is able to cover its operating costs of producing a betre of oil.
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.
Is that right?
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.
When we look at WTIM brands.
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 when it comes to expanding their production, and they could more likely prioritize other things like dividend payouts, share buybacks,
that kind of stuff.
Physical discipline. So that's one part of the equation.
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 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.
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.
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.
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.
Yeah, so I think it's more the res is higher for Iran.
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.
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 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 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,
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 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 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 a lot of it centering around the US, OPEK is increasing output and really reminding the oil market. You know, who's in charge.
That's a great question.
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.
So the first is what you mentioned.
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.
There are two other oter strategies that we can think of.
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 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 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 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
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
trying to do is to avoid that from happening. And that really stemmed from Kazakhstan overproducing.
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.
Be partly due to preserving market.
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 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.
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 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 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.
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 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.
I think that.
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.
Of OPEC plus loses out, I mean, everyone else could benefit from really cheap oil.
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, 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.
Basically.
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. 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.
Yeah, precisely, when growth are slower, there is less room.
For chaos right within the group.
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.
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 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.
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 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, 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 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, 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.
So in a way, there's a two ProMED assault on China's gasoline demand. One is electric vehicles, one is energy trucks.
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 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 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 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 the country's gasoline consumption picked in doing dentitry so about two years ago, got it.
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.
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 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.
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 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 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 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 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.
Yeah, thanks for having me. Tom suddenly look forward to the next podcast.
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