Speaker 1: You're listening to a CNA podcast.
Speaker 2: Hi, I'm Andrea Heng, and this is Money Talks Explains. Now,
Speaker 2: Money Talks Explains is where we have a burning question,
Speaker 2: and then we go find an expert to break it
Speaker 2: all down for us. So one of the headlines that's
Speaker 2: come out from the conflict between Iran and Israel or
Speaker 2: any kind of geopolitical standoff really is how oil prices
Speaker 2: are affected.
Speaker 2: But have you ever wondered why? What is the correlation
Speaker 2: between war and oil prices? Well, that's exactly what we
Speaker 2: are getting Vanana Hari to do for us today. She's
Speaker 2: founder and CEO of Vanda Insights, which monitors the global
Speaker 2: energy markets, and she's going to help us connect the dots. Hi,
Speaker 2: welcome to the show.
Speaker 2: Oh, thank you, Andrea. My pleasure to be here. The
Speaker 2: pleasure is all ours in hosting you. So set the
Speaker 2: context for us here, Vanda. Oil is something that every
Speaker 2: single person needs more than we know, actually, whether we
Speaker 2: see it or we know it. Why is this so? OK,
Speaker 2: great place to start. So oil is the lifeblood of
Speaker 2: the global economy.
Speaker 2: When we look at the world's primary energy mix, 82%
Speaker 2: of it is what we call fossil fuels. The remaining 18%
Speaker 2: or so is renewables and the more new energy stuff.
Speaker 2: Now oil alone is the single biggest component of that
Speaker 2: energy basket, 32%.
Speaker 2: And it has reduced. The share has reduced a little
Speaker 2: bit over the past 678 decades, but not by that much. OK.
Speaker 2: And for the foreseeable future, the coming decades, it is
Speaker 2: expected to remain the primary source or the biggest source
Speaker 2: of energy in the world basket. So when we read
Speaker 2: about the oil market, we often hear the names OPEC,
Speaker 2: OPEC plus, OPEC spelled OPEC, which stands for the Organization
Speaker 2: of Petroleum.
Speaker 2: Exporting countries and they get mentioned a lot, right? So
Speaker 2: who are the biggest suppliers and why are they so
Speaker 2: influential to oil prices? So OPEC and which has in
Speaker 2: recent years become OPEC plus because about 10 members that
Speaker 2: were not traditionally a part of OPEC. Now OPEC has
Speaker 2: been around for, I think, at least 6 decades now.
Speaker 2: So they were joined by these 10 other countries, the
Speaker 2: biggest
Speaker 2: Of which is Russia. So they came to be known
Speaker 2: as the non-OPEC collaborators of OPEC. Now, as a result
Speaker 2: of this collaboration, now we have this group of countries,
Speaker 2: which account for nearly 40% of global oil supply. So
Speaker 2: that is a big deal. So whatever decisions they take
Speaker 2: with regards to their production policy is obviously critical for
Speaker 2: the supply demand.
Speaker 2: Balance of the markets for sure. As with any other
Speaker 2: trade in the world, how do the supply demand dynamics
Speaker 2: of these specific players affect us small guys, the consumers
Speaker 2: at the end of the day? So let's just go
Speaker 2: back about 5 years to 2020, when COVID happened, and
Speaker 2: we all know what life was like and how our
Speaker 2: roads looked and transportation came virtually to a halt.Road transportation,
Speaker 2: air transportation. Our lives didn't.
Speaker 2: Stop. We were still getting air conditioning, cooling our houses,
Speaker 2: warming our houses, electricity, and what have you, but we
Speaker 2: did stop moving around, right? That led to a huge
Speaker 2: collapse in global oil demand consumption, essentially, almost overnight. And
Speaker 2: that's when this group stepped in and said that, OK,
Speaker 2: this is not a good thing, short, medium to long term,
Speaker 2: such shocks are not good for producers.
Speaker 2: Because first of all, if you continue producing, prices will
Speaker 2: continue going down, right? Because there's no demand for that.
Speaker 2: You're going to run out of storage. Where are you
Speaker 2: going to put that oil? And if you live with
Speaker 2: this kind of a price shock for a long time,
Speaker 2: what is it going to do to the future sustainability
Speaker 2: of your company? That's true of any company because you
Speaker 2: don't want to bleed money. No, and certainly not for
Speaker 2: this kind of an unanticipated, unforeseen shock that all company
Speaker 2: was prepared for, right?
Speaker 2: So this group played a vital role in rebalancing. So
Speaker 2: overnight they decided they're going to slash production.
Speaker 2: By about 10 million barrels a day, which rebalanced the markets.
Speaker 2: Prices gradually came up. Of course, the world gradually getting
Speaker 2: back to normal was obviously on the demand side was
Speaker 2: a big factor. But the immediate step that was needed
Speaker 2: to save a lot of companies, oil producers essentially, from
Speaker 2: going bankrupt and perhaps never resurfacing.
Speaker 2: This group played a big role. Before that, they have
Speaker 2: continued to play a role, and after that, they've continued
Speaker 2: to play the sort of balancing role. There's a lot
Speaker 2: of controversy around it. There are a lot of fingers
Speaker 2: routinely pointed. It gets labeled a cartel. It gets pinpointed
Speaker 2: as this is the group that is essentially trying to
Speaker 2: keep oil prices high.
Speaker 2: The very critical role they play in balancing supply with
Speaker 2: global demand and which they are able to play, especially
Speaker 2: now accounting for 40% of supply. Had it been a
Speaker 2: smaller proportion, they may not have been as influential. So
Speaker 2: it's a very critical role they are playing, which often
Speaker 2: gets overlooked. Well, if they're trying to keep oil prices up,
Speaker 2: why aren't we at $80 today instead of 60?
Speaker 2: right? And on that note, I wanted to talk to
Speaker 2: you about that, the prices that they are at now,
Speaker 2: what's going on here? How is this group managing the
Speaker 2: situation with the oil prices vis a vis supply and demand?
Speaker 2: Sort of two themes here, right? What's happening in the
Speaker 2: Middle East? Why is it always in the news? Why
Speaker 2: is it the biggest shock to oil when something breaks
Speaker 2: out over there?
Speaker 2: And how able or not is OPEC or OPEC plus
Speaker 2: able to manage a situation when there's a flashpoint in
Speaker 2: the Middle East. So let's zoom out. So when you
Speaker 2: look at the world's major oil producers, Saudi Arabia, Iran, Iraq, Kuwait, Oman, UAE, Qatar,
Speaker 2: all of these are based in the Middle East. The
Speaker 2: other sort of issue that keeps the markets on edge
Speaker 2: with regards to the Middle East is there's definitely.
Speaker 2: And potentially two crucial choke points through which most of
Speaker 2: this all of the oil that I talked about a
Speaker 2: moment ago flows through. Now what happens when we talk
Speaker 2: about a choke point is essentially it's a very narrow waterways.
Speaker 2: So should any kind of hostilities break out, any country
Speaker 2: in this case, Iran, sitting very close to the Strait
Speaker 2: of Hormuz, which accounts for about 20 million barrels per
Speaker 2: day of about 50% of the world's oil supply size.
Speaker 2: On the other side of the Arabian Peninsula you have
Speaker 2: the Bab al-Mab Strait at the mouth of the Red Sea,
Speaker 2: which is very close to Yemen and the Houthi rebels
Speaker 2: of Yemen. The major oil producing countries for the most
Speaker 2: part other than Iran, which has been under US sanctions
Speaker 2: on and off and Western sanctions, and Iraq, which has
Speaker 2: some other internal problems. So you have this region which
Speaker 2: is the world's single biggest concentration of oil and gas production.
Speaker 2: And is geopolitically unstable and has these flash points and
Speaker 2: has this conflict between Israel and Iran, which has been
Speaker 2: going on for decades and have you found a real
Speaker 2: solution to that conflict? I don't think so. You talked
Speaker 2: about how the Middle East concentration makes up about 40%
Speaker 2: of global supply, about a quarter, about 25% plus is
Speaker 2: about 40%, right? Who makes up the rest?
Speaker 2: OK, if you look at the big producers and the
Speaker 2: rest of the world, and thankfully relatively politically geopolitical stable places, OK.
Speaker 2: So the US today is the single biggest producer in
Speaker 2: the world. It's not Saudi Arabia, it's not Russia. So
Speaker 2: today the US pumps about 13.5 million barrels per day
Speaker 2: of oil. Canada is also a major producer. And then
Speaker 2: you have a.
Speaker 2: In South America, Venezuela, which is a member of OPEC plus,
Speaker 2: but you have Brazil and Mexico, which are not members
Speaker 2: but also major producers. What about China? What about in Asia? Yes,
Speaker 2: Asia used to be a much bigger producer than it
Speaker 2: is now. So the main producing regions, of course, Malaysia
Speaker 2: and Indonesia, right? You mentioned China. It's interesting. So China produces,
Speaker 2: give or take about 5 million barrels per day.
Speaker 2: The reason it doesn't get talked about much is that
Speaker 2: China consumes needs all of its oil production and more.
Speaker 2: So China pumps about 5 million barrels per day. It
Speaker 2: imports close to 11 million barrels. Oh, so not even
Speaker 2: enough for domestic consumption, nowhere and that is pretty much
Speaker 2: the story of Asia and Southeast Asia and Australia that
Speaker 2: all of these are basins that have been producing oil
Speaker 2: for a long time, for decades that haven't been any.
Speaker 2: major new discoveries. So we are in this region sitting
Speaker 2: on big basins which are mature, which are in perennial decline.
Speaker 2: This region contributes to the biggest demand growth globally. So
Speaker 2: it is a very interesting dynamics here, declining production, no
Speaker 2: new discoveries, demand leaping ahead. So this region is actually
Speaker 2: very import dependent, going to become increasingly more so. And
Speaker 2: as a result,
Speaker 2: Also very vulnerable to shocks in the Middle East. Yeah,
Speaker 2: and that's also what contributes ultimately to how oil prices move.
Speaker 2: So therein lies the question, why exactly are oil prices
Speaker 2: so sensitive? I mean, since it's a necessity, why can't
Speaker 2: it be fixed? A lot of commodities, very important commodities,
Speaker 2: including coal and metals until very recently have traded on
Speaker 2: a fixed price basis. So what we mean by that
Speaker 2: is
Speaker 2: The major producers, major consumers get together and say, OK,
Speaker 2: for the next 1 year or 5 or 10 years even,
Speaker 2: we're going to trade on the basis of this number.
Speaker 2: Now what happens is if there is more demand and
Speaker 2: less supply, which needs prices to go up to incentivize
Speaker 2: more production, that wouldn't happen.
Speaker 2: So essentially in a fixed price regime, the market is
Speaker 2: highly inefficient in that any signals of oversupply, more supply,
Speaker 2: and less demand, which should depress prices and prompt producers
Speaker 2: to cut production to restore the balance, those signals are
Speaker 2: absent in today's world, so it's actually interesting pros and
Speaker 2: cons of having so-called spot prices or prices moving.
Speaker 2: Forget day to day, minute to minute basis, right? Responding
Speaker 2: to the demand supply balance. There are some cons, but
Speaker 2: the biggest pro is this that it is an efficient,
Speaker 2: effective channel to transmit signals to producers and consumers. So
Speaker 2: not just producers, consumers as well. So prices were, let's
Speaker 2: say crude was to jump into the 90s and 100s today.
Speaker 2: Yes, producers will produce more, but it's limited how much
Speaker 2: more they can quickly bring on in the current environment.
Speaker 2: They will get the signal from the price, we will
Speaker 2: be getting more price, so let's invest more, let's pump more.
Speaker 2: But equally high prices also give a signal to the consumer, right?
Speaker 2: So the consumer says, OK, where can I tighten my belt?
Speaker 2: Where can I use, can I be more efficient?
Speaker 2: With my use of oil, where can I save and
Speaker 2: use less oil. So that's what happens with spot prices
Speaker 2: or prices moving on a day to day basis and
Speaker 2: start being fixed for long periods. So there's fixed prices
Speaker 2: and there are spot prices and a good way to
Speaker 2: understand spot prices is that
Speaker 2: They're dynamic, right? They are responding. They're moving with signals
Speaker 2: that the market is picking up on supply and demand.
Speaker 2: We go back to what's happening in the Middle East
Speaker 2: and how there's a conflict there, right? Now, when there's
Speaker 2: a conflict, the first thing we tend to look at
Speaker 2: is oil prices because that's almost always the first thing
Speaker 2: to react apart from stock prices on Wall Street. Why
Speaker 2: does this happen and when should we really worry about
Speaker 2: oil price movements being too far up or down?
Speaker 2: So I think taking Ukraine and the Gaza wars would
Speaker 2: be a good example, sort of compare and contrast them.
Speaker 2: So in the case of the Ukraine war, Ukraine is
Speaker 2: not a producer, not a major consumer, but Russia is, right,
Speaker 2: the 3rd largest oil producer, major exporter of crude and
Speaker 2: refined products. Whenever a conflict breaks out, the first thing
Speaker 2: the oil market looks at is, is this likely to
Speaker 2: impact oil supply? Because if there is a chance, even
Speaker 2: if it hasn't directly impacted, if there is a
Speaker 2: Chance that it could interrupt or disrupt oil supplies, then
Speaker 2: we're going to have some sort of a disruption shortage
Speaker 2: all the way from some shortage to a major supply shock,
Speaker 2: which means oil prices are going to go up when
Speaker 2: that happens, typically that's a signal for producers and buyers.
Speaker 2: The problem is that buyers and producers need time to
Speaker 2: adjust to any price signals.
Speaker 2: So the immediate response has to be what are we
Speaker 2: going to do if you're going to lose 5-7% or
Speaker 2: whatever of our supply overnight and then if we are
Speaker 2: to live with higher prices, that is a huge blow
Speaker 2: to the global economy because oil powers everything. Now of
Speaker 2: course for the lay person you identify it as, oh,
Speaker 2: what am I paying for my taxi fare because the
Speaker 2: taxi is buying fuel, diesel or petrol or whatever or
Speaker 2: I'm putting it into my car or what am I
Speaker 2: paying for public transportation.
Speaker 2: A more sort of unseen part of oil prices percolating
Speaker 2: is all our goods are moving on public transportation, right?
Speaker 2: So it could be cargo planes, it could be trains, buses, trucks,
Speaker 2: and so on. So high oil prices percolate into every
Speaker 2: part of the economy and cause inflation. That worries and
Speaker 2: then in turn central banks as well.
Speaker 2: Now, when inflation happens, typically the central banks tend to
Speaker 2: raise interest rates. That means you and I have to
Speaker 2: pay higher for our mortgages, for our car loans, or
Speaker 2: corporates have higher borrowing costs. They tend to then hire less,
Speaker 2: they tend to cut costs. So the corporate world suffers,
Speaker 2: the individual suffers.
Speaker 2: So high oil prices can be a major shock, which
Speaker 2: is why the world is so sensitive to any signs
Speaker 2: of disruption in oil supply. That is quite the domino
Speaker 2: effect that I think many of us don't immediately think about. Now,
Speaker 2: while governments, they are buyers of oil as well, big time, right?
Speaker 2: What do
Speaker 2: as consumers need to worry about when prices turn volatile.
Speaker 2: Is this something that we really need to watch as
Speaker 2: closely as governments do, for example. So governments and consumers
Speaker 2: get affected slightly differently. Both have reasons to worry unless
Speaker 2: you're the government of a major oil producing and exporting nation.
Speaker 2: A big part of your budget comes from
Speaker 2: Spending comes from oil revenues, you will probably be, OK,
Speaker 2: I don't want to say happy because governments do get
Speaker 2: worried if prices are too high for too long because
Speaker 2: then that dampens demand and nobody wants to buy. There's
Speaker 2: always a sweet spot where all consumers are happy and
Speaker 2: producers are happy. But just going back to our original question, right?
Speaker 2: So as a consumer, your costs are going to go
Speaker 2: up unless it's a case like what happened over the
Speaker 2: past couple of weeks. It was a spike in oil
Speaker 2: prices and a quick dive, which didn't worry too many people.
Speaker 2: But had it stayed that way or continued going higher,
Speaker 2: God forbid, if there was an actual supply disruption.
Speaker 2: Then the consumers would have been quite edgy. Then they
Speaker 2: start saying, OK, now my fuel costs, my electricity costs
Speaker 2: are probably going to go up. Where can I save?
Speaker 2: So that is also a hit for economic growth because
Speaker 2: if consumers are buying less of other products, whether it's
Speaker 2: durable or perishables, that's not good for the economy. Governments worry,
Speaker 2: especially in major oil importing countries, which is most of this.
Speaker 2: Part of the world, Asia, because the consumers buying less
Speaker 2: is going to be bad for the economy. So what
Speaker 2: about if we are savvy investors and we happen to
Speaker 2: have oil or we're thinking about having oil in our portfolio?
Speaker 2: What would you advise there? So first and foremost, a
Speaker 2: word of caution. The thing to keep in mind with
Speaker 2: regard to oil, so you could be investing in a
Speaker 2: lot of derivative products. So there's oil.
Speaker 2: equities, oil and gas companies. But there's a lot of
Speaker 2: products which I would say are highly sophisticated for your
Speaker 2: average layperson investor. So you have options and futures that
Speaker 2: you can trade in crude and some refined products. You
Speaker 2: have what is called exchange traded funds and exchange traded notes,
Speaker 2: ETNs which basically they don't buy or sell.
Speaker 2: On your behalf, but they are tracking the oil price.
Speaker 2: They're tracking what futures are doing, but quite often they
Speaker 2: can throw a curveball at you as well, you know.
Speaker 2: And especially in volatile times, what we've seen over the
Speaker 2: past two weeks, you might just read maybe some social
Speaker 2: media and people are saying, oh, crude is now going
Speaker 2: to triple digits, and you say, oh this is buy
Speaker 2: buy buy. Imagine if you were to buy it at
Speaker 2: $78 of brand futures, you would today be sitting in deep,
Speaker 2: deep in the red, OK, because simply because you followed
Speaker 2: some voices that were saying that, oh, Iran is going
Speaker 2: to close the Strait of Hormuz, and you didn't have
Speaker 2: any independent reliable research.
Speaker 2: You weren't unfortunately able to go to the people who
Speaker 2: know and who know better than to say that the
Speaker 2: strait will be closed. So there is a risk of
Speaker 2: getting burned much more in oil. I would say investing
Speaker 2: in a more passive in mutual funds that are exposed
Speaker 2: to commodities are either mostly commodities or have some abortion
Speaker 2: funds apportioned to commodities. I think that's generally a good idea.
Speaker 2: I would suggest unless you have done a lot of
Speaker 2: research yourself, don't jump into.
Speaker 2: Being an active investor. I think those are very wise
Speaker 2: words indeed. And there you have it. We've made the
Speaker 2: connection between oil prices and what happens around the world.
Speaker 2: Thank you for being our Money Talks explainervanda. Thank you
Speaker 2: for having me. Do you have a finance thing that
Speaker 2: you want explained? We are your people. Send us a
Speaker 2: note and if you want some answers, send an email
Speaker 2: to CNA podcasts at Mediacorp.com.sg. Thank you for listening to
Speaker 2: Money Talks. This is Money Talks Explains. I'm Andrea Hing.