1 00:00:02,400 --> 00:00:09,920 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I'm Caroline Hebgep and 2 00:00:09,960 --> 00:00:13,200 Speaker 1: this is Here's Why, where we take one new story 3 00:00:13,240 --> 00:00:15,840 Speaker 1: and explain it in just a few minutes with our 4 00:00:15,920 --> 00:00:18,079 Speaker 1: experts here at Bloomberg. 5 00:00:18,360 --> 00:00:20,440 Speaker 2: There's a lot of oil supply that's coming back, and 6 00:00:20,480 --> 00:00:22,800 Speaker 2: so that has brought crude prices lower than they had 7 00:00:22,840 --> 00:00:25,080 Speaker 2: been for the prior period of time. And we're heading 8 00:00:25,120 --> 00:00:29,840 Speaker 2: into a pretty low oil forecast price environment for twenty 9 00:00:29,880 --> 00:00:32,800 Speaker 2: twenty six, Paul, if we get fifty four dollars West 10 00:00:32,800 --> 00:00:34,960 Speaker 2: Texas Intermediate, BLAA. 11 00:00:34,640 --> 00:00:37,839 Speaker 1: Is going to pay you to fill up that gasoline 12 00:00:37,880 --> 00:00:40,200 Speaker 1: prices have been declining by base case of crude oils, 13 00:00:40,200 --> 00:00:42,200 Speaker 1: it still goes to forty. That's not profound. 14 00:00:42,440 --> 00:00:44,160 Speaker 2: It's for the last twenty years. 15 00:00:44,159 --> 00:00:45,240 Speaker 1: It's bottom there there. 16 00:00:45,360 --> 00:00:47,200 Speaker 2: This is a perfect storm for a bear market. 17 00:00:47,240 --> 00:00:48,760 Speaker 1: The question is is how low it goes? 18 00:00:48,800 --> 00:00:51,040 Speaker 2: And like you said, you're paying less than three bucks 19 00:00:51,080 --> 00:00:52,640 Speaker 2: a gallon in New Jersey. 20 00:00:52,720 --> 00:00:54,160 Speaker 1: I mean, I think it's a matter of time it 21 00:00:54,200 --> 00:00:57,400 Speaker 1: gets down to two. Oil prices are sliding and the 22 00:00:57,400 --> 00:01:00,320 Speaker 1: world is now on track for its biggest surplus since 23 00:01:00,360 --> 00:01:05,320 Speaker 1: twenty twenty. Supply is rising as the industry cartel opek 24 00:01:05,440 --> 00:01:09,759 Speaker 1: plus on wines cuts and US production hits new records, 25 00:01:09,959 --> 00:01:16,200 Speaker 1: while demand softens on slower global growth and China's weakening economy. Meanwhile, 26 00:01:16,240 --> 00:01:20,760 Speaker 1: the Russia Ukraine War is injecting fresh uncertainty with sanctions, 27 00:01:20,800 --> 00:01:25,400 Speaker 1: discounts and shifting trade routes are pending where Moscow's crude 28 00:01:25,560 --> 00:01:29,600 Speaker 1: can flow to. And while a lower crude price benefits some, 29 00:01:30,280 --> 00:01:34,240 Speaker 1: it's not good news for everyone. So here's why lower 30 00:01:34,240 --> 00:01:40,360 Speaker 1: oil prices create winners and losers. Julian Lee, our Bloomberg 31 00:01:40,440 --> 00:01:44,319 Speaker 1: oil strategist, joins me now for more. Hello, Julian, are 32 00:01:44,360 --> 00:01:47,160 Speaker 1: oil prices under sustained pressure? 33 00:01:47,160 --> 00:01:50,480 Speaker 2: Would you say yes? At least for a while. You know, 34 00:01:50,560 --> 00:01:53,000 Speaker 2: everything comes to an end, and this will come to 35 00:01:53,040 --> 00:01:56,600 Speaker 2: an end in time as well. But for now, and 36 00:01:57,120 --> 00:01:59,440 Speaker 2: by the looks of it, for next year at least, 37 00:01:59,440 --> 00:02:02,200 Speaker 2: and perhaps into the early part of twenty twenty seven, 38 00:02:02,720 --> 00:02:05,520 Speaker 2: supply does seem to be running well ahead of demand, 39 00:02:06,040 --> 00:02:08,720 Speaker 2: and that is going to put prices under downward pressure. 40 00:02:09,600 --> 00:02:12,920 Speaker 2: Not everybody sees the world that way. The producer group 41 00:02:13,240 --> 00:02:16,240 Speaker 2: sees a different outlook. They see things much more balanced. 42 00:02:16,600 --> 00:02:21,800 Speaker 2: They have a stronger forecast of demand growth and interestingly 43 00:02:22,240 --> 00:02:25,280 Speaker 2: a weaker outlook for supply as well, But that is 44 00:02:25,560 --> 00:02:29,480 Speaker 2: very much an outlier of you. That's not the consensus 45 00:02:29,480 --> 00:02:33,600 Speaker 2: that you see among people like the International Energy Agency, 46 00:02:33,680 --> 00:02:36,480 Speaker 2: the US Department of Energy, or indeed most of the 47 00:02:36,480 --> 00:02:37,760 Speaker 2: big banks. 48 00:02:37,760 --> 00:02:42,480 Speaker 1: Interesting, So who benefits in the world then from lower 49 00:02:42,520 --> 00:02:43,320 Speaker 1: oil prices? 50 00:02:43,880 --> 00:02:46,560 Speaker 2: Well, you'd like to think that it would be you 51 00:02:46,639 --> 00:02:50,960 Speaker 2: and me and the listeners to this podcast who buy 52 00:02:51,040 --> 00:02:55,960 Speaker 2: fuel and buy goods whose price is affected by transport costs. 53 00:02:56,000 --> 00:03:00,600 Speaker 2: But unfortunately it's not that simple. To take a an example, 54 00:03:00,639 --> 00:03:03,520 Speaker 2: I mean, President Trump has made it a big part 55 00:03:03,560 --> 00:03:07,560 Speaker 2: of his re election campaign and his policy to bring 56 00:03:07,600 --> 00:03:11,560 Speaker 2: down fuel prices, and he's a great one for touting 57 00:03:11,880 --> 00:03:14,200 Speaker 2: the fall in oil prices, but if you actually look 58 00:03:14,240 --> 00:03:18,560 Speaker 2: at the numbers, crude oil prices are down by twenty 59 00:03:18,600 --> 00:03:22,600 Speaker 2: five percent since he was inaugurated. That ought to be 60 00:03:22,639 --> 00:03:27,240 Speaker 2: good news, but gasoline prices in the US are down 61 00:03:27,320 --> 00:03:31,600 Speaker 2: by just three percent, and diesel prices have actually gone 62 00:03:31,680 --> 00:03:34,600 Speaker 2: up on a national average basis. And in some ways 63 00:03:34,600 --> 00:03:38,880 Speaker 2: that's the worst of both worlds because the US oil industry, 64 00:03:39,360 --> 00:03:42,000 Speaker 2: which is an important part of the US economy, an 65 00:03:42,040 --> 00:03:45,520 Speaker 2: important part of his base, is suffering from lower prices 66 00:03:45,960 --> 00:03:49,960 Speaker 2: while consumers aren't yet seeing the benefit. So the short 67 00:03:50,000 --> 00:03:53,400 Speaker 2: answer is who sees the benefit at the moment, it's 68 00:03:53,520 --> 00:03:58,480 Speaker 2: really refiners, those people who buy crude oil, process it 69 00:03:58,520 --> 00:04:01,640 Speaker 2: and turn it into the product that consumers buy. 70 00:04:02,360 --> 00:04:08,360 Speaker 1: So then who loses out if crude prices stay relatively low? 71 00:04:09,000 --> 00:04:12,440 Speaker 2: I think there are two big groups that lose out. 72 00:04:12,680 --> 00:04:15,800 Speaker 2: The first is the companies that pump oil out of 73 00:04:15,800 --> 00:04:19,760 Speaker 2: the ground, not so much the exons and the Chevrons 74 00:04:19,800 --> 00:04:24,159 Speaker 2: and the shells, because they are big, integrated companies. They 75 00:04:24,279 --> 00:04:28,040 Speaker 2: operate all the way through the oil supply chain. They 76 00:04:28,880 --> 00:04:32,520 Speaker 2: look for oil, they make discoveries, they develop fields, they 77 00:04:32,560 --> 00:04:35,320 Speaker 2: pump crude oil out of the ground. But they also 78 00:04:35,400 --> 00:04:39,720 Speaker 2: own substantial refineries. So while they make perhaps less money 79 00:04:39,800 --> 00:04:41,680 Speaker 2: out of getting the crewed out of the ground, they're 80 00:04:41,720 --> 00:04:44,680 Speaker 2: making more money out of turning that crude into the 81 00:04:44,720 --> 00:04:48,880 Speaker 2: products that we need, So they are to some extent shielded. 82 00:04:49,480 --> 00:04:54,000 Speaker 2: The companies who extract oil from the ground and sell 83 00:04:54,040 --> 00:04:56,560 Speaker 2: it as creued they're the ones who are really hit. 84 00:04:56,640 --> 00:04:59,799 Speaker 2: So these are typically a lot of the shale producers 85 00:04:59,800 --> 00:05:06,479 Speaker 2: in US, smaller independent, what we would call upstream focused companies, 86 00:05:06,520 --> 00:05:09,960 Speaker 2: those who drill and produce crude oil, they will suffer. 87 00:05:10,440 --> 00:05:13,520 Speaker 2: The other group that will suffer are the petro states, 88 00:05:13,839 --> 00:05:18,880 Speaker 2: the countries whose economies depend on oil prices for national 89 00:05:18,920 --> 00:05:24,320 Speaker 2: income and for government expenditure, so Saudi Arabia, Iraq, Kuwait 90 00:05:24,839 --> 00:05:28,480 Speaker 2: to some extent, the United Arab Emirates, although they're diversified 91 00:05:28,520 --> 00:05:31,679 Speaker 2: a little bit. And it's those countries who will see 92 00:05:31,920 --> 00:05:34,800 Speaker 2: bigger budget deficits. They'll have to cut spending, they'll have 93 00:05:34,880 --> 00:05:37,919 Speaker 2: to borrow. Those really are I think going to be 94 00:05:38,040 --> 00:05:39,920 Speaker 2: the two big groups of losers. 95 00:05:40,240 --> 00:05:43,920 Speaker 1: What about Russia then, in terms of its oil output, 96 00:05:44,400 --> 00:05:47,000 Speaker 1: how much does that affect global prices. 97 00:05:47,440 --> 00:05:51,520 Speaker 2: I don't think Russia has had a huge impact on 98 00:05:51,960 --> 00:05:56,880 Speaker 2: prices globally. If you look at what's happened with Russian 99 00:05:56,880 --> 00:06:01,200 Speaker 2: oil production since its troops invaded, you can in early 100 00:06:01,240 --> 00:06:06,880 Speaker 2: twenty twenty two, its oil exports have stayed relatively stable. 101 00:06:07,480 --> 00:06:10,960 Speaker 2: And this was quite a deliberate policy on the part 102 00:06:11,080 --> 00:06:15,080 Speaker 2: of the US and European governments in the way that 103 00:06:15,160 --> 00:06:19,480 Speaker 2: they have developed sanctions aimed at the Russian economy. They've 104 00:06:19,480 --> 00:06:24,359 Speaker 2: been very much an attempt to reduce the flow of 105 00:06:24,880 --> 00:06:29,719 Speaker 2: dollars back to the Kremlin without hitting the amount of 106 00:06:29,760 --> 00:06:33,240 Speaker 2: oil that's coming out, so they've tried to hit the revenue, 107 00:06:33,360 --> 00:06:36,320 Speaker 2: not the volume, and that's been relatively successful. What we 108 00:06:36,440 --> 00:06:39,720 Speaker 2: have seen is a big shift in the flow of 109 00:06:39,800 --> 00:06:42,840 Speaker 2: Russian oil, most of which used to go a very 110 00:06:42,880 --> 00:06:46,800 Speaker 2: short distance into Europe. It's now going much longer distances 111 00:06:47,200 --> 00:06:51,000 Speaker 2: to India and to China, so that increases the costs 112 00:06:51,000 --> 00:06:55,320 Speaker 2: for Russia without disrupting the flow. If we do get 113 00:06:55,320 --> 00:06:59,040 Speaker 2: a piece deal and an end to the Russia Ukraine War, 114 00:07:00,120 --> 00:07:03,839 Speaker 2: it will depend how those flows ease up, whether European 115 00:07:03,920 --> 00:07:07,360 Speaker 2: countries start to buy Russian oil again, but I don't 116 00:07:07,480 --> 00:07:10,800 Speaker 2: think that it will significantly increase the amount of Russian 117 00:07:10,800 --> 00:07:14,440 Speaker 2: oil that is available on the market. The one thing 118 00:07:14,520 --> 00:07:18,360 Speaker 2: that might change is the amount of diesel fuel that 119 00:07:18,440 --> 00:07:21,880 Speaker 2: Russia exports, because it's quite an important supplier of diesel, 120 00:07:22,360 --> 00:07:25,320 Speaker 2: and if the sanctions and the trade bands around Russian 121 00:07:25,360 --> 00:07:29,280 Speaker 2: diesel ease, then we might see diesel prices come off 122 00:07:29,320 --> 00:07:31,480 Speaker 2: a bit. And of course we would hope that with 123 00:07:31,600 --> 00:07:33,480 Speaker 2: an end of the war we would see an end 124 00:07:33,480 --> 00:07:37,640 Speaker 2: to attacks on Russian refineries and oil export infrastructure. 125 00:07:38,920 --> 00:07:42,280 Speaker 1: What about lower oil prices when it comes to helping 126 00:07:42,600 --> 00:07:45,080 Speaker 1: or hindering the energy transition. 127 00:07:46,160 --> 00:07:50,280 Speaker 2: If you'd asked me this question five years ago, maybe 128 00:07:50,320 --> 00:07:55,440 Speaker 2: ten years ago, when the energy transition was really beginning 129 00:07:55,480 --> 00:07:59,640 Speaker 2: to get off the ground, I would have said that obviously, 130 00:08:00,280 --> 00:08:03,760 Speaker 2: lower oil prices make that more difficult. There's much less 131 00:08:03,760 --> 00:08:07,680 Speaker 2: of an economic incentive to develop what were at the 132 00:08:07,720 --> 00:08:12,400 Speaker 2: time more expensive alternative sources of energy. But I think 133 00:08:12,440 --> 00:08:15,200 Speaker 2: things have moved on quite a bit. I think there 134 00:08:15,280 --> 00:08:20,240 Speaker 2: is a groundswell behind the energy transition. It may not 135 00:08:20,360 --> 00:08:24,080 Speaker 2: be or it's almost certainly not going fast enough to 136 00:08:24,160 --> 00:08:26,960 Speaker 2: meet climate goals, but I think now there is a 137 00:08:27,000 --> 00:08:29,760 Speaker 2: momentum behind it. And even in the US, where the 138 00:08:29,800 --> 00:08:33,640 Speaker 2: sort of political support has shifted away, I think you're 139 00:08:33,679 --> 00:08:38,360 Speaker 2: still seeing underlying economic support for it. The transition makes 140 00:08:38,440 --> 00:08:43,040 Speaker 2: sense economically now for many countries. It certainly makes sense 141 00:08:43,200 --> 00:08:48,520 Speaker 2: from an energy security perspective, at least for power generation. 142 00:08:49,000 --> 00:08:53,240 Speaker 2: So I think that, yes, it creates an environment where certainly, 143 00:08:53,280 --> 00:08:57,000 Speaker 2: I think in developing countries, if you see the follow 144 00:08:57,160 --> 00:09:01,840 Speaker 2: through from lower crude oil prices into product prices, there 145 00:09:01,920 --> 00:09:04,680 Speaker 2: is less of an economic incentive for the transition, but 146 00:09:04,720 --> 00:09:08,120 Speaker 2: I think there are sufficient other incentives there that the 147 00:09:08,200 --> 00:09:09,960 Speaker 2: transition will continue. 148 00:09:10,240 --> 00:09:13,640 Speaker 1: My thanks to Julian Lee are Bloomberg Oil Strategist, and 149 00:09:13,720 --> 00:09:16,240 Speaker 1: for more explanations like this one from our team of 150 00:09:16,280 --> 00:09:19,280 Speaker 1: three thousand journalists and analysts around the world, go to 151 00:09:19,320 --> 00:09:25,080 Speaker 1: bloomberg dot com slash explainers. I'm Caroline Hepkeet. This is 152 00:09:25,160 --> 00:09:28,040 Speaker 1: his why. I'll be back next week with more. Thanks 153 00:09:28,040 --> 00:09:28,600 Speaker 1: for listening.