Gerald Ashley: 0:00

Hello and welcome once again to Equital Conversations. My name is Gerald Ashley and on this occasion I'm joined by my colleague, nick Rogers, who is an equity analyst at Equital. Nick, welcome aboard. Thanks, gerald.

Gerald Ashley: 0:17

We're going to tackle a small topic today global energy or the global energy markets, and our usual sort of challenge is how much we can talk about that in 30 minutes or so, and in fact more precisely. We're going to talk about what I think of as the big three in energy, of oil, natural gas and maybe the one that sometimes gets a little forgotten, coal In this podcast. We're not really going to talk about nuclear and the renewables. I mean, obviously they're an important factor, but they're somewhat smaller than the big three I've just mentioned that represent really quite a very high proportion of the entire market. Depends where it is, but it's often between 85% and 90% of the overall markets. So let's kick off with oil Perfect timing, I suppose, because we've had the the sort of bombing by the Americans in Iran. Let's start with that newsworthy thought. What do you make of all of this?

Nicholas Rogers: 1:23

yeah, no, it's. Um, it's certainly been an interesting couple of weeks uh, with the middle east, uh the straight of. There's been a lot that's been made uh about the straight of all moves recently. Uh, it was always sort of my view that it was perhaps a little bit overdone. Right, we were unlikely to see oil prices up close to $100 or $130, as some commentators had forecasted, had the strike been closed. The demand picture this year seems to be a little bit softer than the last couple of years. This year seems to be a little bit softer than the last couple of years. The IEA's June forecast was for a rise or a moderate rise versus the last couple of years.

Gerald Ashley: 2:15

Now, all that would have all gone out the window if there'd been a disruption. And one little thing that struck me, which I'm sure you're on top of, is, of course Iran are big exporters of oil to China, so I think your Chinese in the background would have had a lot to say about the Straits of Hormuz and one of my favourite phrases, I think when you read social media I always talk about the armchair admirals, and there are a lot of sudden big naval experts appear on Twitter or X or whatever you like to call it, and, as you say, there was some quite sort of hysterical, immediate sort of estimates as to where the crude oil price could go. But the overall picture then, do you think that it's pretty much in balance, or in fact maybe a little bit of oversupply of oil even.

Nicholas Rogers: 3:12

Yeah, so there's been a couple of, as I mentioned, the US sort of demand picture has been a little softer this year. Coming into the end of the year, the economic pressures are putting a little bit of a dampener on US demand. However, in saying that, with the slide in the dollar, it is pushing up demand in other places globally and we are sort of seeing a more broad-based reaction, particularly in places like China, India and Southeast Asia. We've seen China, what effectively has been called the Beijing put, where they have stepped in to buy excess supply of cheap barrels. They do have quite a significant strategic petroleum reserve. Some estimates are that it is larger than the US, Certainly when you factor in the current utilization of the SPR in the US.

Gerald Ashley: 4:14

So they're kind of taking a sort of geopolitical view here that they don't want any short term disruptions that are going to get in the way of their economy, short-term disruptions that are going to get in the way of their economy, particularly at a time when I think it's fair to say the Chinese economy is slowing down a little. I wouldn't say it's stalling, but the rate of growth has certainly come off a boil, hasn't it?

Nicholas Rogers: 4:45

Yeah, certainly. It's an interesting thought I had this morning and was discussing with George Cooper. The Chinese economy and I think, the Chinese government see GDP growth as sort of an outcome and a target and almost work their way back from that. Given the large manufacturing as a percentage of GDP, the energy intensity and energy demand coming from China, given the quite lofty GDP targets, is only set to grow over the next couple of years.

Gerald Ashley: 5:24

So they're still very much in this sort of booster mode for the, for their domestic economy and, um, I know it would be a whole different topic to talk about china all day, but uh, there is always a feeling that the, the government, really can't allow the economy to slow down too much. Um, they've got to, as once a friend of mine said, they've got to keep this party going, and you know, both as an economic party and perhaps as a political one as well. You mentioned India and Southeast Asia, and I guess they're in pretty much the same boat in terms of looking for growth. So is it fair to say that Europe it's flatlining and you say the States looks a little soft?

Nicholas Rogers: 6:09

So the demand in the US is definitely looking a little bit more soft. Just from an economic point of view, europe is a little bit of an unknown at this point in time. Obviously, economic growth has been fairly flat for quite an extended period, but there has been quite significant talks about official stimulus and rebuilding a sort of an industrial base.

Gerald Ashley: 6:40

Yeah, yeah, but that would take a long time to happen.

Nicholas Rogers: 6:55

You know you can't just do that, just do that on the spin of a coin. It would be a long-term project. In recent years coal has sort of basically declined to next to nothing as a portion of their overall energy mix. Oil is still a big component, particularly around sort of freight and shipping. Yeah, and when we think about China obviously being the manufacturing hub for the rest of the world, shipping is a big component of that. The tariffs in the US bring in an additional element. If Chinese manufacturers are sort of shipping to the US, that perhaps they're shipping via another country and obviously that adds incremental demand to oil.

Gerald Ashley: 7:49

So, as ever, there's never a simple answer to is it going up or going down? I can never talk about oil without wanting to wheel out something I think I've heard nearly every year for the last 30, if not 40 years, which is our old friend of peak oil, and I think some people have been trying to say it's 2029. That seems probably was something written last year and then five years forward. But I see you mentioned the IEA, the International Energy Agency. They're pushing it out to 2040. So the cynic in me says it's always 10 or 15 years away. What's your take on that?

Nicholas Rogers: 8:34

Yeah, absolutely. I mean, the IEA's track record is shaky at best. They've called it many times in the past. It's quite a while away in my view. It's difficult to put a number to it, given demand is still growing and, as we talked about, particularly from the global south, petrochemicals, aviation freight they aren't slowing down, if anything that they're increasing, as, uh, you know, growing middle class comes from places like latin america, africa and asia.

Gerald Ashley: 9:11

Yeah, we get a distorted view sitting in in western europe or even north america, as to what is going out and that part of the world. I mean, I was out in southeast asia earlier this year and things are absolutely booming. I mean, the atmosphere and the, the sort of background is so different from certainly london and, I imagine, europe as well. Um, whilst you're talking about booms, there is a little bit of a boom I think you mentioned to me before we came on, um, about offshore production. Is that right?

Nicholas Rogers: 9:42

yeah, absolutely. Um, and just just adding to what we were just talking about, that demand for oil is only going to grow. As the dollar slides and oil becomes more affordable for emerging economies, their incremental demand will increase. But, as you said, offshore projects are getting a lot of buzz at the moment. Offshore has very low-cost barrels relative to some of the continental US, particularly the Permian.

Gerald Ashley: 10:22

And that slightly surprises me, because the old adage was that you know that um offshore, certainly deep, deep drilling was extremely expensive. But as technology opened up a lot of fields in offshore now, that just didn't work before yeah, absolutely, absolutely.

Nicholas Rogers: 10:39

Some of the new major projects, for instance in brazil, um in the pre-salt oil fields and uh, some of the the west african oil fields, are um profitable at as little as 30 a barrel oh wow, now that that is really low um and that it that you know, 30 a barrel has all sorts of implications all over the place.

Gerald Ashley: 11:08

We could just do a program on that price because that will have big impacts in terms of uh economies and again, geopolitics and um revenue coming into opec states and all the rest of it. Um, before we leave, all because they say we could do at least three or four hours on this, it might, might sort of take on on. Your view here is that obviously oil is not going away quickly. I mean, I latest numbers, I see it's 32 percent of global energy, you know. So people say, oh, we're going to be winding down fossil fuels quickly. I mean, I just think they're flat wrong. But if I was to put you on the spot, do you think we will have a softer oil price? I'm not saying we go to $30, but do you think we could slip a fair bit over the next year or so?

Nicholas Rogers: 12:03

There's been a lot of talk about excess capacity, in particular in Saudi Arabia. Saudi is generally known as the swing producer. In saying that over the last two years the Saudi government has taken quite significant dividends from Aramco In particular. Last year it was about 119% of free cash flow.

Gerald Ashley: 12:28

Which is the state oil company, and I don't know if they've ever floated it yet. They're always having talk of trying to float some of Aramco, but I don't think that's ever transpired yet. So they're kind of relying on revenues, and if revenues do drop a lot I suppose they will try and cut supply.

Nicholas Rogers: 12:52

Yeah, so they actually floated a ramp car a couple of years ago on the local exchange. Oh, they did. Saudi hasn't been spending the necessary capex to expand some of their existing wells or even explore, and that's sort of evident by the dividends that the government has taken over the last couple of years. So in a long-winded answer, I think the floor on oil, uh, or nearer uh to where we are now, than and then uh than sort of some of the lower estimates you know in the low 50s so um I, I I can't get used to lots of cheap motoring then, uh, by the sounds of things.

Gerald Ashley: 13:39

Um well, I think we've given oil a little bit of a run there. Let's go on to um natural gas, and the phrase that let leaps out of me about natural gas is it's sometimes known as the bridge fuel. Um, can you enlighten me a little bit on that?

Nicholas Rogers: 13:56

yeah, of course. So, uh, natural gas uh is is being utilized as a bridging fuel, fuel between what is being touted as potentially a renewables and nuclear grid base grid. Lng is a lot cleaner than coal, for instance, and we've started to see. Because of the cheap natural gas prices in the US, the US has ramped up its exports of liquefied natural gas to the rest of the world. It's worth noting that there are two contracts there's a rest of the world price and the US price for natural gas. It is my view that over time, that those two prices will converge closer to what they currently are today.

Gerald Ashley: 14:47

So lots of professional arbitrage opportunities for the sort of smart and agile big investment firms.

Nicholas Rogers: 14:55

Absolutely, absolutely. There's been some very large-scale LNG projects over the last couple of years. Scale LNG projects over the last couple of years and those US producers are certainly making the most of the cheaper natural gas prices.

Gerald Ashley: 15:11

And I saw a report by Shell and you know you would say, well, they should know what's going on, but it's still only ever. You know an estimate or you know maybe a very detailed forecast, but nevertheless they're suggesting that natural gas demand could go up by 60%. But, small caveat, it's our old friend 2040, which happens to be 15 years away, and Lord knows what we'll all be doing in 2040, which happens to be 15 years away, and Lord knows what we'll all be doing in 2040. But a 60% increase in demand over 15 years is pretty significant, I would thought.

Nicholas Rogers: 15:49

Absolutely. There's a lot of new gas that's coming online in the next five years from places like Qatar as well, australia also, as we mentioned, the US. China is a big driver of demand. However, in recent years, we have seen coal to gas switching and gas to coal switching, depending on which is more economic Right.

Gerald Ashley: 16:17

And so again, that you can only do if you've got the infrastructure in place. So, unlike Britain, who've been very proudly blowing up their coal-fired power stations and trumpeting the fact that wouldn't be an option in extremists that the UK could go back to, I suppose the obvious disruptor in all of this what looks like a rosy picture if you're bullish of the market is the Ukrainian war, because that, I think I'm right in saying, has pretty much upended a lot of what's happening in the European market and I suppose, by definition, as you say, that's changed the balance a little bit in terms of global imports into Europe as well.

Nicholas Rogers: 17:05

Yeah, absolutely. Russia's position in the Ukraine war obviously threw a bit of a spanner into the works with regards to natural gas supply to the continent. In saying that the US has stepped in as a primary supplier of natural gas now to the continent, over time, it's my view that the Europeans I mean we're already beginning to see the sort of green sprouts of nuclear. But the real, I think, topic of discussion amongst politicians at the moment is energy security, and that plays into all forms of energy, from renewables to nuclear, to oil and gas.

Gerald Ashley: 17:57

And it's that dreaded phrase, supply chains, and one would have thought that the supply chain from north america to europe is fairly stable. Um, people sometimes get more worried about supplies from the middle east because pretty much as we've just been talking about with um, the, the events um in recent weeks, and of course, gatar is, I think, sitting on probably the world's largest gas reserve, if not, they're a very close second. Um, there is, of course, natural gas close to home and it's a little bit more political. I mean, we've got it in the north sea. Um, britain doesn't seem to be very keen on exploiting that, and there's been a political move against fracking in the UK. And so we're in the, I think, unenviable position of having natural resources but buying them in from overseas, and that might be a political disruptor at some point, as you say about security.

Nicholas Rogers: 19:01

Yeah, absolutely. I mean it's a little bit silly when you think through the logic. Having a resource like the North Sea, the UK really should be tapping into that. It would lower prices of energy across the board in the UK and in particular for our energy-intensive industries, which they need desperately.

Gerald Ashley: 19:27

Yeah, I mean we're seeing a lot of closing down of chemical plants and there's talk of you know fewer and fewer places you're going to be producing fertilizer and all these by-products that just spin out. It's not just heating your home. There's obviously a huge industrial element and I think that's also affected the German economy a great deal. Some people have talked about a certain amount of deindustrialization going on in Germany because of the cost of natural gas. Yeah, I think we've got a few minutes left now and we'll talk about the one that everybody forgets.

Gerald Ashley: 20:04

But I should just start by saying natural gas is 23% of the global market, so it's still a big player. But, believe it or not, a market that's bigger than that at 26% is coal. Now, again, I'm giving a rather sort of Anglo-centric view of things here. I mean, we've closed all our coal mines down. They've been pretty much in decline since the 1950s. People think you know the big shift was under Mrs Thatcher in the 1980s, but that industry had been, in terms of tonnage and number of mines and everything had been shrinking for a very long time. But of course that's a completely um, uh, sort of blinker view of the world, because it's fair to say that coal is booming in other parts of the world, isn't it?

Nicholas Rogers: 20:53

absolutely. I mean being australian. Some of our largest companies on our public markets are coal mines. We We've got something like 1,200 years' worth of high-calorific coal in Australia. Coal is definitely an Asia-centric story, but it's definitely a dark horse for 2025. The IEA is projecting a flat demand this year and it was moderately up last year 1.2%. However, china is bringing on 94 gigawatts worth of new coal-fired power stations.

Gerald Ashley: 21:40

Yeah, I mean, they're building in a big way. Still aren't they?

Nicholas Rogers: 21:43

Absolutely absolutely, and given the supply constraints in places like Australia for high-calorific coal, if we do see any disruptions to production, the price could really take off like it did in 21. Perhaps not as significantly, but certainly we could see some upside to current prices.

Gerald Ashley: 22:14

So it could be a surprise story at some stage. Just to finish off on coal and you have to be of a certain vintage to remember this, but going back to the apartheid times in south africa, where south africa found it very difficult to import oil and natural gas or any, and certainly any, refined fuels, they set up a big operation I don't know if you remember it called sassol, and sassol was a company that um, in very simple terms, um took the oil and the refined products out of the coal, because they're sitting on a lot of coal, and widening that to the general world. There's still a big market, isn't there, in in what we may call coal to uh, to, I mean other than just burning it, I mean turning it into chemicals effectively.

Nicholas Rogers: 23:07

Absolutely so. When we think about coal to chemicals, thinking things like products like methanol and fertilizers, this sector is a bit of a wild card. China has a sort of strategic coal reserve that it utilizes for, obviously, its industrial purposes and is necessary for its manufacturing as well. However, it's also a massive consumer of fertilizers and producer of fertilizers. It's actually swung from a net exporter of fertilizer to basically well, in some recent years it's been an importer, and that's predominantly to satisfy domestic demand, and that's predominantly to satisfy domestic demand.

Gerald Ashley: 24:02

And that just shows how all these three markets sort of interlink, because obviously Ukraine prior to the war was a very big fertilizer producer because of all the natural gas they were sitting on, and so there's been disruptions there. I think, if I wind up a quick run around the global energy market, which has been maybe an ambitious thing to try and a in a different spot, but then that's true of a lot of the global economy outside of energy and of course they're all very linked, um, I think we're going to come back to you in a year's time and, um, if we do an annual review or maybe a bit sooner, and I'm rather hoping the oil prices can be lower, but you haven't given me very much comfort on that. We're going to finish off with our usual little thing, which is book recommendations, and as ever I'll go first and I've come up with a book here called Kings of Shanghai and it's written by an author called Jonathan Kaufman and it's a really good sort of financial history of two of the major sort of trading families that have sometimes been a little bit forgotten now the Jewish banking house of Sassoon, who started, I think, in Iraq, and their close rivals from the same part of the world, the Cadores. Now, the Cadores are probably better known in modern day uh world because they're still a very big, significant uh players in Hong Kong. Um, I think they own some of the power stations there.

Gerald Ashley: 26:00

Um, but it's a really interesting read of how these big trading families became very important in the sort of growth of modern China and all that flows from it. So it's an easy read. It's not a big, boring sort of academic thing. In many ways it's quite racy. So there we go, kings of Shanghai, and it says two rival dynasties and the creation of modern China. So what are you going to hit us with?

Nicholas Rogers: 26:32

So mine's the World for Sale by Jack Farty and Javier Blas. Both those gentlemen are Bloomberg analysts and they discuss what is essentially the origins of many of the commodity trading houses that now will still exist to this day. One well-known one that many of our listeners might know is Glencore. Yeah, very big company Originating from Mark Rich and Co during the 80s and 90s, but a really great sort of book on commodity trading and how sort of commodities have sort of dominated trade over the last century. Really.

Gerald Ashley: 27:19

They seem to have some good sources, because there's quite a lot of how should put it? Wheeler dealery that goes on in some of these markets, and I have read the book as well and I would join with you in saying it's very good.

Nicholas Rogers: 27:35

Yeah, it's a good read and the insights. As you said, I think there's a number of sources that have remained anonymous, and perhaps for good reason.

Gerald Ashley: 27:48

Well, on that note, I think we've done enough to get the big picture on what's going on in global energy. So, nick, thank you very much. Thanks, rob, and we'll hear from you again soon, and no doubt we should get Mr Cooper back at some point as well. Okay, thank you, thank you.