The Trump hand grenade

Hello listeners and welcome to the Monza Weekly Podcast, bringing you energy matters in an informal setting. Given the tumultuous events of recent weeks in the Middle East and Russian advances in Ukraine, we return to the topic of geopolitics. The world around us is getting ever more uncertain and dare I say it, unsafe. What are the main concerns and what impact could they have on energy markets in Europe? I'm Richard Svarrison and helping me to discuss the ramifications of the current geopolitical situation and uncertainties are Tobias Federico of Montel Analytics and Wayne Bryan of London Stock Exchange Group or ELSEC for short. A warm welcome to you gentlemen. Thank you Richard. Thank you Richard, good to see you again. Absolutely, good to have you back Wayne. Now, just before we get into the geopolitics, I just want to talk about about where we are in the markets and the fundamental situation. In terms of wholesale gas prices, Wayne, where are we? Well, what we saw was over recent weeks, we saw that geopolitical influence in terms of prices, sorry, in terms of prices. Prices were heading towards that sort of 23 euro support line. And of course we had that, you know, say trifecta, if not more of news outbreaks, mostly geopolitical that really sent us back up. But what we've seen over the last probably few days is kind of return to fundamentals. We've seen some easing of the geopolitical risk premiums. And what we see now is gas markets returning more to fundamentals, which for this summer are quite bearish. What's your view, Tobias? I mean, lower gas prices are driving power prices down, right? Well, absolutely. Gas prices and CO2 emission prices are the main price drivers right now. It's gas prices. And we really saw an upward trend in the electricity markets. We came from 70 euro reach. We reached almost 100. We didn't really hit them, but now it also came down parallel to the gas prices. And, you know, we're ahead of the summer, you know, it feels bitterly cold at the moment. But, you know, I think prices are going to remain in this level, would you say, for the coming weeks and months? Well, we are speaking about a year ahead contracts. So the current weather really doesn't impact that. But nevertheless, you see always a correlation between spot market prices and year head prices, even though at least in the power market and the gas market is different, but in the power market, you see it has no fundamental impact, but it has a psychological impact. Sure, absolutely. And demand, Wayne, we hear almost on a weekly basis stories of demand destruction, industry potentially thinking about relocating. Would it be fair to say that demand has fallen by 20 % since pre -COVID levels? Depending on your metrics, it's around that level. So we model demand destruction in both LDZ slash residential and also in the industrial sector. And what we've noted is firstly, the EU mandated target of 15%. We've been comfortably hitting that. For example, I'll take Germany because it's stronger usage. they're around 12 and a half percent, 12 % in terms of LDZ. You've got the Netherlands and Belgium, which are higher. So yeah, we're still seeing demand destruction, but I wouldn't just frame it as demand destruction. I would also frame it as behavioral changes. We've seen a shift in how consumers think about their energy usage, and I can put myself in that bracket as well as not just myself, friends, family, et cetera. So yes, there is demand destruction, but for me now, it's more about awareness of prices. adjusting your behavior as well as demand destruction. That's the residential industrial sector, still heavy levels. And again, we have a model for that. And we're looking at Germany, it's around 13 % at the moment of demand destruction we see in the industrial sector and varying levels in different countries as well. So we see that present in both residential. And that's mainly for gas, right? I'm just talking about gas. So if I turn to you then Tobias, talk about power and Germany in particular. you know, is some of this demand destruction, as we call it, or, you know, a massive fall off in industrial electricity use. Is any of that going to come back? Well, definitely not so quickly, honestly, because we are seeing in the industrial sector a few clouds on the horizon and big companies are planning to lay off people right now. We saw that, for example, Tesla, which is not, it's a nice example. It's not a big... energy consumer in total, but it is a nice example to show that. And we are also seeing this in other heavy industry sectors that they at least planning to lay off people. So I think the worst is to come looking into the electricity reduction consumption from the industry sector. And this is not due to efficiency, this is due to really less demand and less productivity and less production. And would you say then that the threats? of relocation or sort of offshoring as you called it there in the break when is that a real one? Well, it is there honestly, and it's not only driven by energy, it's also driven by other factors, general increasing costs, general increasing interest rates, what we saw there. So refinancing some loans you had, this is also a parameter. So it's not only energy, but maybe it's caused by energy. And that's obviously there, you're talking about the macroeconomic clouds, as in very sticky high inflation, interest rates, low historically, but still very high for some industries and especially, we're not going to be talking about that so much today, but about renewables and new renewables growth. Now I'd like to turn to the geopolitics, which is the topic of this podcast. So Wayne. With Ukraine -Russia, where are we now? We've seen, for example, very recently, some serious attacks on their infrastructure, on our gas storage unit. What's the impact that that's having? In terms of the impact, we saw a slight uptick in prices with the attack on the storage facilities in Western Ukraine. However, if you look at the operator, GTSOU, they come out and said that the facilities were still working. But what it does, it raises the specter of further attacks as we get closer to the transit deal. And this is something we've been talking about over the past couple of weeks that I wouldn't call it spiked, but I would say as we get closer to the end of the year and the expiry of the contract, unfortunately, we could see some further attacks with Russia knowing that, you know, things are not gonna go back to how they were. It looks likely there's gonna be no interruptible capacity offered at different points. We've seen different quotes. actually a lot of people in the market are not 100 % sure if we are going to see any redistribution of flows. I think we did a webinar recently and we asked the audience and it's 50, 50, 50 split. So that uncertainty is still looming. But I think for me, what the risk will be is if they do start targeting it, it's going to, there's about, there's still a couple of BCM of foreign traders gas stored inside Ukraine. So that raises some concerns, but conversely, what it could do, we were talking about when we get close to filling storages towards the end of this summer season. there was a lot of talk of gas then being sent to Ukraine. So in essence, that could be counter effective and be bearish for the European gas if there's nowhere to put that gas because now there is premiums. I don't know about the insurance numbers. It's something we want to try and get to the bottom of actually surely have risen if you're transferring gas from Europe into the Ukraine. And that's sorry. And as we get closer to this expiry, then I start to fear what might happen. But on this, on the plus side, as we saw this morning, that huge aid package, 97, 98 billion split between Taiwan, Ukraine, and of course Israel, I think that's gonna enable them to really put more protection on these energy facilities. So perhaps that could counter sort of weigh the threat from Russia, but I still think we haven't heard the last of this story in terms of. attacks on infrastructure, especially gas. We've seen the power plants destroyed, but I think gas they may target more once that relationship ceases. Yeah. So I mean, we're talking on Wednesday and the aid package was ratified early in the early hours on Wednesday. Can you just talk us through the transit deal? I mean, that comes to an end this year. That's the transit deal between Ukraine and Russia. It seems slightly odd as well because these two countries are at war, but yet they have a transit deal. Yeah. It's something that people always ask why they still do. And I think it was... beneficial for both parties, but I think as hostilities have continued to, say, worsen over the last few weeks, it's certainly got a bit stronger in terms of the impact on Ukraine's energy infrastructure and the impact on its population in terms of residential areas as well. So I think for me, that transit deal, yeah, people are now wondering, especially the likes of Austria, Italy, et cetera, how are they gonna get around this? And I think LNG to some degree would be the answer. but I still think there might, something might still happen in terms of we may still see some of that, but again, looking at the EU's latest stance regarding Russian slash Belarusian gas imports pipeline and LNG and recent statements from GTSOU, it's looking less likely as we move closer to the end of the year, but our view is there'll be no renewing of this transit deal. And the GTSOU, that's the Ukrainian transit, gas transit operator. Correct. Tobias, if I can ask you, you know, so what are your expectations from the 1st of January next year? Will we see Russian pipeline gas out of the system completely? Well, I think so. If the contract will not be continued, which is a quite old one, honestly, so it was over years, we won't have any Russian pipeline gas out of the Ukraine. Maybe in other flows could be well possible. but this deal will be finished. I'm quite sure it will not be continued. So the transit flow out of Ukraine will be zero then. Would you expect Russia to also, you know, attack some of the pipeline system or within Ukraine? Could well be, but I think it's a difficult target. Honestly, a pipeline, either it's, if it's on a surface, it's not quite big. It's only a few things, but most of them are not on the surface. They're below earth. So hitting them. as difficult and when you look into pumping stations that might be a target but I think there are much more targets to be hit rather than the pipelines. Storage facilities for me is the one. And these are often traders, you say they're non -Ukrainians who own the storage facilities. They call it the custom warehouse scheme for foreign traders to deposit gas in Ukraine and be exempt from any sort of tax. any other fees. So foreign companies, that's a way of helping the Ukrainians, but also in terms of a tightness of supply for Europe that can be pumped into continental Europe. So where do we stand then in terms of LNG import regas capacity at the moment, Wayne? I mean, do we have too much of it, do you think? Maybe, I'll say too much. We've never got enough the way the market is going at the moment. We have strong capacity, but again, we have to think. from next winter, we're seeing this huge influx, or sorry, ramp up of global production, US projects coming online. So I think then we're gonna be in a very good, but now we do have some spare capacity, yeah. And it's about attracting that LNG. And as much as we talk about the summer is quite bearish, which is from a fundamental perspective, you still need to secure that LNG. You still need to maybe be in some competition with Asia, which is Asia's quite loose at the moment as well. So both markets are in a reasonably good position. But I think the fear for us, and I mentioned this, is what's going to happen this winter. It's quite tight. And for us, the summer's bearish. But as I highlighted earlier, for me and for us in our team, we look at the risk for the winter. And it's quite clear that if we do have a cold winter, and this is in our forecast, we do scenarios and we look at the potential for cold winter, we would enter summer 25 with storages around 27%. Think where we were, it's almost half of what we, more than half, how we entered this year. So think about the impacts of that. You've got the loss of some German coal capacity as well this winter. January, as we just spoke about, you've got the loss of these additional Russian volumes. So for me, yeah, the energy capacity is great. We might need more further along down the line once that huge wave starts coming along. And how about Germany, Tobias? Does that have enough fortune to have more or where do we stand? Well, if you want to play the LNG market really right, you need to have overcapacities because you're like a foam, you have to suck up all the surplus gas coming into the system at very low prices. And for my personal opinion, we shouldn't have more and we need more. And again, as Wayne has said, I think we are not ready for two cold winters in a row, maybe for one, but not for two. So we have to play the LNG market correctly and this means working with our capacities, which is a little bit difficult, especially when you look into investments into LNG terminals, where you have an average capacity rate, which might be below 50%. But we need that to play the market correctly. But that's not cheap either. Right, right. But what is security of supply worth? And if you compare that, that's never a stranded investment. Absolutely. And what about... Russian LNG, is that going to be out of the picture? Do you think it's going to be, can you expect to see the EU happen at EU level or more national level? Well, let's say on a shadow level, maybe. I think officially not, but you never know. I mean, molecules don't have a tag and a flag on it. You don't know where it really comes from. So it might be some derouting things, wire, I don't know, India. I don't know where. So. there will be Russian gas in the system, not on purpose, but maybe by coincidence. Through some backdoor, through some loopholes. Completely agree. Completely agree with that. And even people talk about this loss of Russian LNG, but let's just not forget, if Europe does, it's not in a position to do it now, by the way. That's why you've seen nothing since the announcement. People are quite hesitant, oh yeah, we'll ban Russian LNG tomorrow, because we know we need it for at least the next year or so. But I think... what will happen after that. And again, it's just gonna be redistributed into the global energy system. The flows will go, like you mentioned, towards India, towards China. Some of that gas that would have gone there will come to Europe. So it's still gonna be in the system. And like we spoke about, who knows where their molecules that we receive come from. We've seen what's happened in the oil market. We've seen these shadow fleet, they call it. I mean, it's, yeah. Like you said, it's not like we can air tag. Gas molecules. Absolutely. Good point. I'd like to turn to now to the crisis in the Middle East. So, you know, it's obviously it's a total tragedy in human terms, but in terms of the energy or energy supplies to Europe, I mean, what let's talk a little bit about that, because I think we've seen in recent weeks there was a real scare. and a threat of escalation, but that's kind of eased, would you say Wayne? Yes, I certainly wouldn't. I think again, it's something I spoke about earlier. If you look at how this played out, so of course Israel attacked the consulate in Syria. Then Iran was not, I would say, forced, but Iran decided, right, we're going to respond to this. We're going to let our people know that we're going to respond to this. And then of course, and obviously I find it funny because war isn't funny, but what I find interesting is, They launched this huge barrage of drones and missiles. They announced it live on TV. We know these Shahi drones are very slow. So Israel already know where they're coming from, what direction, what sort of time they will arrive. In conjunction with UK, I think, France, America, as these missiles were heading towards Israel, they didn't stand a chance. And I think Iran knew that. So it was kind of symbolic. We saw one missile get through, I think it hit an airfield, but there was no deaths or just a small bit of damage. And then of course we saw Israel respond with a few token drones that entered in Iran, which again was shot down. I mean, there's rumors that Israel actually did hit some targets, but we've seen no confirmation of that yet. And again, at the end of that, it's a kind of both sides of sort of, okay, we've satisfied our people's requirements, we're defending our sovereignty, et cetera. And I don't think either wants to get at the moment dragged into a larger scale war, but it was quite a shock for the first time ever we saw. Iran directly attacked Israel from its own soil, which took it to a whole new level, but that escalation, a lot of people expected and looking at the price curves, the market expected it, has not come to pass. And I think now both sides can say they've won in some respect. So I don't see, unless something else occurs, I don't see a ramp up back to those levels and looking at the market, we've seen the sort of reaction to that. But it's still a tinderbox, as I said. things can change, geopolitics can move at such a rate of knots, we could see some more action this weekend, you just don't know. Yeah, I think just to provide the listeners with some context, we were here at the end of the German Engie day, where you both gave excellent presentations today. So when, you know, with some of these comments, some of these issues were mentioned in your presentations. But Tobias, I mean, we're talking, you know, okay, de -escalation, but and... But there's often been a mention of the closing of the straight homers and that could have a dramatic impact, of course. But is it likely to happen? Is this a realistic concern, would you say, to this? Well, it depends a little bit on the time frame you're looking at. I think, as Wayne has said, in a short period not, because the de -escalation somehow was there. We have been expecting either an overt, really huge attack from Israel, but it was a little bit more covert. And in the end, in fact, it was drones against drone, which is a different type of warfare. And there's a little bit of a danger. But it was also that Iran was kidnapping one of the container ships connected to Israel in the Strait of Hormuz. And of course, that has an impact because compared to the Houthi attacks in the Red Sea, shipping routes could be deviated around the Cape of Good Hope instead of using the Suez Canal. So that would increase cost, but it would... not decrease volumes in total, but looking into the Strait of Hormuz, there we are having the potential impact of decreasing energy supply, which is primarily oil, but looking into Germany, which is natural gas, LNG from Qatar. So if that would have been blocked, then we would have an issue, not only Europe, but all over the world, and the American capacities as far as I can see are not that big to compensate that right now. Absolutely. So that is... still a concern, although given the de-escalation or the not the escalation, we fear that hasn't quite happened. And turning to the Red Sea, Wayne, are LNG vessels likely to resume using that route in the near term? If there's, you know, in the current situation? I don't think we're quite ready for that yet. And actually, again, this is another question that needs to be looked into in terms of how is the insurance premiums now traveling through there? This is another question you need to look at. I mean, are they still at elevated rates? But I think in the short term, I don't think we're gonna see a return to how it was at the moment. But I think over the next few months, if things don't escalate further and we see a quite simmering of the tensions, then, or some resolution, it seems a bit far-fetched at the moment, then yes, we're back to normal. But I don't see that happening in the short term. Maybe into the new year, perhaps. And you both mentioned the US and I'd like to, you know, I think that finally just mentioned there's some key elections happening this year. We'll start off with the one that's happening in November. So the US presidential election. I mean, you know, it's a bit shocking to think that the primary democracy, you know, the land of the free has got, you know, only two options are two men in 80s or near 80s. White men, I should say as well. So... What happens, I mean, it looks likely at the moment, although there's a trial ongoing, but it looks likely that Trump will win the presidential election in two weeks. What kind of, what are the ramifications of that for, we'll start off with LNG, global supply. Well, we are both laughing. We're both giggling. The thing is that it could become the worst nightmare, as you has mentioned today and Richard, this was really great. Donald Trump is like a hand grenade. throwing into the whole geopolitical risks. And we really see that looking into LNG. Well, we might have two possibilities. One is gas first for America, because having low gas prices means an increase for the economy and economic growth, which also means then less gas for the whole world market. And then depends on how we react in the Far East. Might well be that we will get a gas shortage in the first step. Or it could be the other way around. Yeah, we will sell our gas, but on our terms, which means increasing gas prices. So both ways, I think it's quite likely to have increasing LNG prices for Europe. I mean, he's a businessman. He doesn't want to cut off his nose to spite his face, does he really? Yeah, but he wants to earn money. Yeah, exactly. Selling the same volume at a higher price. But you've mentioned as well before, Wayne, about potential tariffs with China that could come into play. How do you see that playing out? Well, like I said, as I mentioned earlier, I think it's literally a hand grenade into the sort of global geopolitical situation at the moment. And I think nothing's off the table and that's what's concerned. I think when Trump was last in power, I was in my previous role trading. I used to have his Twitter feed up on one of my screens because he would say things that even his team wouldn't know about just straight to the world. And some of that was related to oil, for example, used to move a lot on his comments. Of course, what he did with the gas market in terms of, you know, let's just ramp up and export, tear up all of these environmental agreements, ramp up production and let's get America back in business again. So I think you've got that impact as well. But also like Tobias said, you've got the chance of increased prices, but back to the tariffs, of course, I've already seen, I mean, I've started to watch a few of his rallies now. I'm not a fan by the way, but just to gauge how he is. And I've heard him mention tariffs and China's still playing us and NATO and I'll stop the... he'll walk into office with about 3 ,000 ideas and no one will know which way he's gonna turn next and that for me is the concern and the one thing I associate with Donald Trump, volatility and that's all I will say on that in terms of that's what he brings. Unpredictability, volatility, uncertainty, words that traders don't really like. Volatility, yes, but just the unpredictability of him and what he can do on any given minute and the impact he can have on the global. not just the global energy market, but just the global markets in general, because, yeah, some of his ideas are quite off the chart, should I say, compared to your usual politician. I would like to add something to that, because we are in a world where when you just say words, they suddenly get a meaning and they get an impact. When he spoke about, well, everybody has to contribute to the 2 % NATO tariff, or if not Russia, you feel free to invade. These are just words, but it's so dangerous. And that's something where it could become the versus nice. Absolutely. And around the corner, Tobias, are European elections. And we've seen in certain European countries clawback in terms of the green transition, in terms of some of the policies that were put in place. Hasn't so far happened so much in Germany. Germany has its other issues. But. Do you see that there's a danger there could be a backlash and that could come in the next European Parliament? I know you're not a regulation specialist as it were, but it's part of the political picture here that if the Parliament or the formation of the Parliament contains, you know, maybe not a majority, but certainly a blocking minority of people who are opposed to these kind of green or environmental policies that could really slow down this energy transition and maybe hinder some of the targets. Well, yeah, could well be. If I just can speak for Germany, we see a movement onto the, let's say, extreme wings, right and left. And what they both have in common is that if you look into the right wing, it's strong nationalism. So why should we? We in Germany, so Germany first. And what both have together, and that's a little bit weird, is that they seem to be huge friends with Russia. So if those forces are going to be increased, maybe an agreement with Russia to import gas might be possible if they would be in power, which is quite unlikely. But nevertheless, we do see that the majority of the German voters have the tendency to go to the extreme left and right, because with the German government, they only see most of the negative parts, which is at least that's the impression that this current government, to make this energy transition possible, they are forbidding everything. It's forbidden to run a car on a gasoline motor. It's forbidden to heat with natural gas. You have to have a heat pump. You have to have an electric car. And all this forbiddenness really impacts, I think, the general mood within Germany. And that might have an impact also on the European Parliament. Because it creates problems in the day -to-day life, doesn't it? It puts in obstacles and they have to work around, you know, and I think that's also... Expensive obstacles as well, if you're talking like electric cars and the sort as well. So, yeah. And it's uncomfortable. And I mean, you change something which is today uncomfortable with something which might be in the future uncomfortable, which is climate change. But I don't see that. Yeah, it's a little bit warmer. But just saying this ironically, so you trade two different things and that makes it really difficult in the storytelling against the general population. Absolutely. And just finally, Wayne, India. Is that an action in India, the world's biggest democracy? Will that have any kind of consequence for energy? I think Modi's going to win by all accounts. So if he does, I don't personally see any change to India's current policies. But of course, if the other side get in, there could be some changes, but I just don't see Modi not winning personally. I think one thing is certain in all this. talk of uncertainty that it's going to be a very, very rocky ride and a roller coaster ride in the weeks, months, and probably even years to come. So gentlemen, thank you very much again for being guests on the Montel Weekly podcast. It's always a pleasure. Indeed. Perfect.