Trump looms as geopolitics hots up

Richard: 0:00

Hello listeners and welcome to the Montel weekly podcast. Bring energy matters in an informal setting. In today's pod, we will again turn our attention to the global gas market and geopolitics. I know we've discussed this already in depth in previous episodes. Topic is so timely and important that I think it's worth revisiting. Are gas market participants complacent about the worsening crisis in the Middle East? Or have all scenarios been priced in? Are we on the brink of another energy crisis? Or is the situation Been over Exaggerated, helping me, Richard s Swen to discuss these matters. And the current state of affairs in global gas markets is our old friend, Nadia Wiggin. Now, Oslan Capital, a warm welcome back. Uh, Nadia,

Nadia: 0:45

thank you very much. Great to be back. Um,

Richard: 0:48

now I think before we go into depth about certain issues that I've, that I mentioned in the intro, Naly, I, I'd like to sort of talk more generally about about. the gas market in Europe. Um, what are the main drivers?

Nadia: 1:02

Number one right now is the inventory level in Europe. And entering this winter, we had very high inventories. We have finally now in February dipped below the 70 percent inventory level despite some cold snaps. And this is when the market can actually start to move, you know. When we're below 70 percent inventory levels, you start to also lose efficiency in your drawdowns on how much gas you get out. Critical levels of course, are when we drop even lower and this is where we finally see that potential.

Richard: 1:39

But we're coming to the end of winter, are we not? I mean, in some parts of Europe, I mean, it doesn't feel like that. We're recording this in Oslo and it's minus 15 outside. But in other parts of Europe, it's been quite, quite a mild winter again. So we've been quite lucky in that respect, wouldn't you say?

Nadia: 1:52

And absolutely. But always the effect in terms of natural gas comes when it's a prolonged winter. Right, when you're at full storage and then it's cold, it doesn't really matter. It's when we're starting to draw down that storage where we have this difference. And you know, when we think about what has happened in the market in particular, you know, in the peak of winter this year in particular, we had a lot of LNG vessels held by traders sitting off the coast of Europe. Waiting to refill that storage. We have finally drawn down that floating storage, and now the spot market is actually starting to move. So we've lost that buffer, and now we're starting to really draw down the storage.

Richard: 2:35

I mean, you mentioned, um, LNG imports into Europe. I mean, we've seen. Would it be fair to say that there's been a glut of LNG coming into Europe and this is likely to continue over the coming weeks and

Nadia: 2:48

months? I would say a glut is overstating it. I would say we've been overprepared relative to the weather. Um, Uh, on a historical basis, and that is why we're, you know, TTF has been trading below 30. When we saw that happened during this past summer, as in summer of 2023, traders actually diverted cargoes that were due to arrive here. So six cargoes that were meant to arrive. Didn't and then that caused a spike in natural gas prices because everyone had expected in their balances for that to come in. It was at the same time as field maintenance. And then that was exacerbated by the potential strikes in Australia. But really the first mover was the fact that we didn't have those arrivals of LNG cargoes. And this is where we are now in terms of the Red Sea.

Richard: 3:38

Exactly. Yeah. Um, so I mean, we'll get to the Red Sea issue a bit later, Nadia, but in terms of, um, LNG imports into Europe, what are your expectations for the, for the coming, uh, weeks and months, you know, we've saying, okay, inventories are being drawn down. There's a bit of a cold snap around, uh, certain parts of the world. Northern Europe in particular, but what's the outlook for the months

Nadia: 4:01

ahead? Well, so normally we would start to refill storage, but the impact of the Red Sea is starting to have an effect. So when initially LNG cargos were not going to travel through, um, The Red Sea, Qatar just stated a moratorium that they're not moving those cargos. And part of that has to do with the fact that they have long term contracts and they are destination specific. So the European contracts were just, just halted. And we saw that cargos didn't arrive that were due to arrive, uh, into Europe. Now, this week we've started to see some divert, the first diverted arrival, but that adds quite a lot of travel time. And that requires more ships. So now Qatar is in the situation that they have to decide if they're actually going to book additional LNG vessels in order to fulfill these deliveries to Europe. Qatar is not a trading company like, uh, VTOL, Trafigura, Equinor in terms of how they do things. They just. book the vessel, and then that's it. It's meant to deliver. So they're not as flexible, um, in terms of, uh, their fulfillment of contracts. Having stated that, you know, if we look at the historical average of the last five years, only about is 74, 75 percent of contracted, um, LNG. To Europe actually arrived, so we're still taking that into account, so it's not that 100 percent is due to arrive, even if we take that 74 to 75%, it still means they need to book more vessels, and when we look at the timeliness of this, this week. We've seen that physical market start to fly because we haven't had new deliveries as in brand new LNG vessels come into the market this week. And now that bidding has really started up, um, on those physical desks. And it's not only about Qatar and Europe. It's also about Asia. It's also about. The U. S. And this is where you know, we're finally getting this situation in natural gas through LNG, where these markets are more liquid and more connected than they have been historically. So this

Richard: 6:17

is the bidding war between different regions of the globe for these primarily these Qatari's cargoes, right? Well,

Nadia: 6:23

it is in, well, it's more about needing the ships to transfer the Qatari, uh, natural gas, the LNG, but also for the U S because the U S in the short term has been, of course, delivering more to Europe. But this is when we look at kind of the expectations for this year in terms of year on year growth, it's only around 4 percent additional Export growth year on year out of the U S expected this year. And that is because they've hit that kind of export capacity level. And, you know, so even if they go at max, it's only 4 percent higher year and year, we start to see that accelerate again in the coming years. Um, so it is about all, all the basins together. And when we think about the demand side, you know, this is where China, you know, if we think of last year. The number one kind of bearish story, um, for most of the year was that China is on the brink of collapse, things are going very poorly. Second most popular for the first half of the year was, is the U. S. going to enter a recession? Both of which have been proven to be false in our view. When we look not only, only on natural gas, but when we look at Oil, right? Crude oil imports into China last year were 1. 2 million barrels per day, higher than 2019 levels. China's back when we look at the metals market, you know, they've changed how they're treating inventories so that it's just in time inventories. But when we look at iron ore and we look at copper, they're very low inventories. But things are really moving, and this is where we're starting to see that upswing. The biggest laggard has actually been in terms of LNG. So we saw a drop off in LNG imports in China of 20 percent with COVID, and we're only 10 percent back as of last year. Now we're starting to see that accelerate. So this is where we really see things improving on that side, and it's not only China, it's the surrounding. Non OECD Asian economies as well that are actually improving and they're driving that LNG demand. They're driving that oil demand. And they're not, because natural gas prices aren't where they were, you know, kind of in the peaks of this conflict. It's much more affordable for them to again, by LNG. It's an option for them.

Richard: 8:51

The non OECD countries, such as where Vietnam, Vietnam or Pakistan.

Nadia: 8:55

And Vietnam in particular is absolutely going from strength to strength. And this is, you know, when we think about which part of the sectors, you know, it's, it's AI, it's, uh, renewables. All of these sorts of things are really flying in China and also in the surrounding countries. And when we think about, you know, the semiconductors situation and, and, uh, you know, the trade war that Trump really started, it's now, you know, these other countries that want to get involved. Japan wants to get involved. And so it is this kind of diversification. So it's not just about China and Taiwan. It's these additional surrounding countries that want to get involved in all of this is. super positive, um, in terms of, uh, energy demand. And this is where natural gas and LNG is a critical part of

Richard: 9:45

that. So if I understand you correctly, and now that you'd say 2024 is the year when China will come back a big time in terms of LNG demand. And as the industry, as industry in the country picks up, um, compared to what it has been over the past few years.

Nadia: 9:59

Yeah, I, I think we can't just think of in terms of calendar years, right? Because this is where, when we think about winter, right? So this is where we're starting to see that real, uh, improvement. And I think that will continue to happen through next winter. Absolutely.

Richard: 10:16

So it's more, it's more seasonal than in terms of January to December. It's more, you know, in terms of winter,

Nadia: 10:21

summer. Yeah. Yeah. But we will also see, you know, less of this fall off. Um, I think in the summer. And

Richard: 10:28

what does that mean then in terms of

Nadia: 10:30

use it in terms of cool, right? Of course. So that is if it's a hot summer that definitely also impacts things. But it's that industrial side, I think, is really picking up. Um,

Richard: 10:43

that's very interesting. Let's stay with demand for the time being. The night and what what's happened? What's happening in Europe? What are you seeing on the demand side in Europe? And certainly some of the biggest

Nadia: 10:52

economies in Europe. I mean, this is where Germany in particular has really struggled, right? Since COVID. And when we look at last year, we still saw 20 percent less, uh, demand year on year in terms of the power market feeding in directly into gas demand. We're finally now in January, meaning in the last month seeing that. Germany is back in terms of gas demand, um, versus where we were pre, pre COVID. And when we look at the DAX, you know, it's at historic highs. So things do not look, uh, recessionary and as terrible as, uh, behavior has suggested in terms of that industrial sector. The next catalyst to move things higher in terms of gas demand in Germany Is China because of the export of German goods, manufactured goods into China. And this is again, where we see that catalyst improving and we expect that to continue moving higher. And so that will, will make a big difference. So what does this

Richard: 12:02

mean for. For the competition at a global level between, you know, China, Northeast Asia, you know, even Asia more generally and Europe said, will European consumers, will European market participants have to pay much, much more for that, for that, for, for, for LNG and for gas? Well,

Nadia: 12:20

not necessarily much, much more. I mean, we've seen huge spikes in prices. And right now, as I said, you know, TTF, uh, below 30, it is a low price. And if that's inflation adjusted, you know, it's like the low 20s. So things are much more improved. And when we look at what's happened in the U S right. In terms of as a, you know, an exporter of LNG, we. I've seen a real drop off in the last two weeks in Henry hub prices. So it's more that we're now in these price levels where it can drive demand. And so, you know, we're not near these kinds of spikes, uh, where, uh, it hits demand. And, you know, when we think, you know, Ecuador presented, uh, they had their capital markets update, uh, this week, you know, they. Have much lower gas price expectations going forward. Mm. You know, for the coming years. And so this is where I think we, we've hit the, this new situation where, okay, now we can start to have demand come back. Mm. We don't need to have these massive price spikes. Mm. Um, because we're adjusting. But, uh,

Richard: 13:31

this week again, you know, some of, you've seen the results being presented by, by the global oil and gas major, total energies. They also said that they expect Chinese demand to really, uh. push and squeeze the market globally. Um, but you know, I think if we then move to some, you know, what's happening currently in the Middle East, I mean, that's, isn't, is that that, that the situation there, if it does escalate, if it creates, becomes a wider military conflict, what does that mean for. you know, not only the, the LNG cargoes and shipments, um, uh, to Europe and, and, and to other parts of the world, but also for production in the region, because it's quite a booming, uh, gas production off the, off the coast of Egypt and Israel. Yeah.

Nadia: 14:19

I think, uh, you know, the first thing that happened when this conflict started was that, you know, Israel shot one of their gas fields. So that was the immediate impact. Um, since then, in terms of production, there hasn't been an impact. Um, but in terms of transit there has. So I think the first question is before we talk about escalation or ceasefires is about duration and the longer this lasts. The greater the impact and you know, the market was actually a little bit lucky in terms of the timing. I mean, on the one hand you can say, well, it was going into winter. So is that lucky? But what I mentioned about these traders, having all these cargoes of LNG sitting off the coast of Europe, that made it very lucky in terms of timing. Now we're finally hitting the point where that impact comes. So if this lasts through the end of the year, We see a massive impact, right, because that means everything going out of Qatar, um, you know, coming out of the Middle East has to have this additional impact, right, uh, these additional sailing days. And so then this is where, you know, the, the impact, uh, you know, in terms of percentages of ships becomes much longer lasting. On the other hand, you know, we've seen in the last week, big discussions of a ceasefire. And crude price came off last week, 3 as soon as it came out, that maybe there would be a ceasefire. Interestingly, as we get seemed to more concrete, uh, points on these talks, crude hasn't, hasn't, uh, come off, you know, very interesting. It only comes off. It seems when the U S is actually bombing things like on Monday. So things are working in a very, uh, in the short term in a. You know, not, not necessarily the most logical way on the other hand, when we talk about escalation, one thing in our view is quite clear, the U S, um, Iran, Saudi Arabia do not want an escalation, you know, because a closing of the Strait of Hormuz would be absolutely catastrophic to the global economy and flows. So they are trying to do everything they can to prevent that. However, if that were to happen, you know, it's off the chart pricing for the entire energy complex. So they're trying to do everything they can to avoid that, but I think what is happening right now is they have a, uh, a chance to negotiate what they actually want, right? It's about Saudi Arabia. Okay, well, you have to recognize Israel formally, which is where we kind of were before. Well, we literally were there on October 6th before the attack happened on October 7th. So these things are back on the table and that's why I think the ceasefire talks are taking a bit longer because everyone says Okay, things are quite hot now so we can actually get um our playbook across in these negotiations and that's why they're taking uh, quite a bit longer Do

Richard: 17:20

you think The risks of an escalation or of a wider conflict have been underestimated?

Nadia: 17:28

Absolutely. I mean, when we look at how the prices are trading, um, on oil and natural gas, the assumption, you know, the only thing that's moving the market is actual outages and halts, right? So this is where we've seen the shipping markets really affected. We've seen gas oil. Really affected because right now it's refinery maintenance season in Europe and the U. S. So all of these cargoes that would normally flow from the Middle Eastern refineries to fill that demand, they now have to go around the Cape of Good Hope. That's where we've seen the impact, right? And it's on the shipping prices and it's on gas oil. No one is thinking about the fact that, Oh, something might happen. And the crude market had argued that wasn't priced in. And then we traded down 3 last week. And now it's really not priced in, you know, so that risk, uh, you know, and I think that this is something that has really changed. It's about this just in time mentality on metals. on, on crude, on natural gas and so we're, we're looking at this so long as we have inventories to cover things as we need right now, we're lackadaisical

Richard: 18:45

about it. Yeah. So if something big does happen, then prices will move, but not really before something major, uh, does, does occur. Um, let's talk a little bit about, um, What's happening in the U. S. as well, Nadia, um, you know, we've seen Biden, the Biden administration, step back a bit from, from, from LNG projects. What's that all about?

Nadia: 19:10

Yeah, so the U. S. has a three step permitting process for LNG exports, and the critical point that is being paused now by the Biden administration is that They're not going to issue, the Department of Energy is not going to issue export permits for non free trade agreement countries until they assess the environmental impact on, on the globe. Right? And this is critical because these non free trade agreement countries are Europe, they're Turkey, they're China. And those are the main purchasers. Um, when we think about it from a geopolitical perspective, the timing of this is really difficult to stomach because the U S has been telling Europe, you know, we will provide natural gas for me, for you, for you to step away from Russia. And now this is directly. Impacting that relationship with Europe, of course, in terms of when this would have an effect. We're talking about 2028 2029 right in terms of supply and demand because of how long it takes. For these, uh, you know, for the infrastructure and not, uh, you know, for the actual production to come online. But this is about that long term agreement. And so it's basically pushing Germany back into Russia's arms if they were to actually follow through on this. But of course the key wording was it's a pause on the, so there are two. lobbies or groups that benefit from this. Number one, which is what, uh, the Biden administration talked about officially was the environmental group, right? The environmental impact of having more LNG in the world versus potentially renewables. This work carbon capture comes into it, you know, uh, things like that. Um, the other lobby and, and that's a little bit strange. I would say in terms of where we are in the election year. The Biden administration because this really, yeah, the environmentalists were never going to vote for Trump. So and, and then where these LNG, the impact is it's in states like Texas and Louisiana, which we're going to go for Trump. Anyway, the other lobby that benefits from this is the U. S. manufacturing law, and these are more important states, you know, when we think about the rest states and, and things like that. And what we've seen is since this announcement is the Henry Hub price has plummeted. So it's. Building America's competitive advantage to have cheap energy prices to maintain manufacturing so then you can still potentially pay higher wages because you don't pay anything for energy and that is where it is a bit of a win. The problem with it being politically motivated is that if that is the case. It suggests that this pause is not going to be, you know, undone until after the election, which sets back the market a year. Um, it also, you know, you have certain projects that have already been approved and have permits, but there's a seven year maximum. So if you're not up and running within those seven years, you have to reapply. So it puts, you know, pushes a gas on some of these projects that are under construction to get everything up and running, um, this year. But on the other hand, it can create, create a bit, a little bit of this kind of, uh, Lag, when we think about the S and D balances though, for natural gas, the timing of 20, 28, 29, isn't bad because that is, you know, starting, you know, that, that is when we're also getting additional natural gas out of Qatar, you know, that's already starting end of, uh, 2025. And that continues each year. Um,

Richard: 23:15

so it wouldn't be, would it be right to say it's kind of an isolationist move then as well? Absolutely. Yeah. Yeah. I mean, you,

Nadia: 23:23

you, you mentioned. But it really counters the strategy in terms of NATO. And this is where if we think about the change in administrations, the Trump administration was, you know, from the beginning, Trump was the one calling out, you know, NATO and Stoltenberg and saying, why are you building these gas pipelines with Russia when we're supposed to protect you from Russia and energy security is a different thing. So Trump has always been pro the U. S. Providing natural gas to LNG to Europe instead of Russia, Biden has been super supportive of Ukraine. He also doesn't want to push Germany back for Ukraine. So, sorry, Germany back towards Russia. So this is where it's extremely unlikely that, uh, this would actually, uh, you know. be maintained for more than this one year. I mean, you mentioned

Richard: 24:18

Trump. Um, I mean, it looks like where we are at the moment that there's going to be a return of the Trump presidency. We don't know what, there's a long way to go yet. Um, but what would this, um, would he end this pause on LNG products, do you think? Or a Trump administration? Would that, um, would that mean more exports of the fuel?

Nadia: 24:39

Yeah, I think he would be very pro that. Um, You know, and this is about really developing that industry. There's a lot of potential in the U S in terms of growing a natural gas supply and building out that infrastructure. It is a lot of jobs, so it doesn't have to be one verse the other, just because there are exports that it drives up prices. I mean, the U S used to not allow. crude exports, right? And now the U. S. is in this situation that they're really standing up to OPEC. And this is what they should be doing in natural gas, a hundred percent. So this is just a temporary move in our view.

Richard: 25:18

Interesting. I mean, I think But what you're, you're saying about the potential for, for Germany and Europe being pushed back towards Russia in terms of, um, imports of gas, is, is that ever going to be likely given what's happened in the last two or three years? I mean, given the Ukraine crisis, the war, um, you know, Nord Stream 2 being, being blown up. I mean, is there any way back to Russia for Europe and for, for, for gas deliveries?

Nadia: 25:45

I, I, unfortunately it is entirely possible. And I think this is where the German elections will be critical because there is definitely a part that believes that, uh, you know, this is, uh, the future because it's Germany is so dependent. On cheap energy for that manufacturing model to work. And this is where they're also, you know, looking at alternatives beyond natural gas in the renewable space. We look at the North fold deal, right? Yeah. 5 billion. That is a lot of money. And that is to have that capability within Germany, right? So they can have. Control of it, uh, you know, in terms of batteries and, and so forth. So they are absolutely investing in this infrastructure. And I think, uh, they're pragmatic and they, all options are on the table. And this is also a negotiating tool with the U S they have this threat. So you need to protect us or we will, you know.

Richard: 26:49

And this week, you know, the, the German government announced, uh, these big ambitious plans to put a, put a, put a number on the amount of gas plants that they want to build up. They call them hydrogen ready gas plants, um, but in effect, they're going to be, they're going to be burning gas as a fuel. So, so there is. The country needs gas and if it's not going to come from the States, if there's a pause on that, then it needs to come from somewhere.

Nadia: 27:10

Yeah. And it's especially strange because, you know, Europe hasn't wanted to sign long term gas contracts, right? And with Middle Eastern suppliers, that is the way you do it. In the U. S., in some cases you can, but they're not, you know, the U. S. is much more open to the spot market, spot trading, sending cargos. Wherever they may be, this is where the impact of China's come back. You know, they were the biggest spot buyer and really changing things. And then they haven't been in the spot market. Now they're coming back and this is where you, you start to see that impact. It's very strange for Europe not to have that strong relationship with the U S LNG market, because that's how they want to operate on both

Richard: 27:53

sides. Absolutely. I mean, we're running out of time, Nadir, but I feel we can, we can discuss this for, for hours. But, um, uh, you know, in, in terms of an energy crisis, are we on the brink of another energy crisis? Or, you know, you mentioned that people are getting a bit more complacent, that things aren't really priced in, you know, if something really does move, we could be We could be in a very, um, precarious situation quite quickly. Could we

Nadia: 28:20

not? I mean, things heating up in the Middle East, uh, is a big impact. I think, uh, when we look at crude, you know, the U S production has really saved the day there and expectations for that to continue, that could really help things, uh, on the margin. Of course, you know, the Middle East is sitting on spare capacity. That's why we don't see a steeper backwardated curve. In oil, but if we lose that, that's a big impact. I think on natural gas, same thing, you know, this expectation that everything will be fine flowing out of the middle East when we see those impacts. And let's not forget, you know, last year we were looking at potential strikes in Australia. Taking out tons of natural gas supply. Um, so that is, I think when we see things are improving, uh, in terms of demand, we can definitely hit this situation where things get really tight very quickly, and then we cannot handle a crisis of supply. This feeling that we're just in time on commodities, inventories, and everything. We'll create more volatility and more spikes when there is unrest and wars are the top source of unrest.

Richard: 29:33

Well, fingers crossed. Let's hope for the best and hope that really things don't escalate in the Middle East because then I think we're all in trouble. But Nadia, thank you very much for being a guest on the Montel Weekly Podcast. As always.

Nadia: 29:44

Thank you. My pleasure.