Listen: APPEC to shine spotlight on how Asia is navigating a multi-faceted energy future

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Sambit Mohanty:

Hello and welcome to Platts Oil Markets Podcast, a series by S&P Global Commodity Insights, navigating a multifaceted energy future enhancing energy security, emerging trends in oil consumption centers, as well as decarbonization strategies that Asian countries will be pursuing will be some of the key themes that will be in focus at the Asia Pacific Petroleum Conference or APPEC 2024, organized by S&P Global Commodity Insights and scheduled to take place in Singapore from September 9th through 12th. APPEC will be attended by senior industry executives, CEOs, government officials and market experts, and will serve as a platform to provide deep insights on the markets at a time when the energy landscape is changing fast. APPEC delegates can also look forward for discussions on how geopolitical turbulence will be reshaping shipping routes, the impact of US elections, as well as the demand road map for transportation fuels amid high EV usage.

I am Sambit Mohanty, Asia Energy Editor and your host for today. To discuss some of the key themes, I'm pleased to welcome Dave Ernsberger, head of market reporting and trading solutions, Calvin Lee, Lead of Asia Content, and Kang Wu, Global head of Oil Demand Research. Welcome all. Dave, let me address the first question to you. You'll be addressing the delegates at APPEC as well as holding multiple discussions with some of the top energy leaders at the event. What do you think will be some of the key factors for the market to watch as of now, both in the oil and gas piece as well as in the renewable space in Asia?

Dave Ernsberger:

Yeah, thanks, Sambit and nice to be here with you and with Kang and Calvin as well. So I think when we think about oil and gas and renewables as being three thematic points of interest for APPEC this year, each of those market sectors will be wrestling with different questions. Oil and gas will face uncertainty around oversupply at the end of the day. In the oil market, I expect participants in the event and in bilateral meetings to be trying to piece together against a backdrop of supply growing more quickly than demand, which I'm sure we'll hear a bit more about from Kang and Calvin today, will OPEC bring production back and how will it do so and when will it do so? Will it be before the end of the year? Will it be next year if it's going to happen at all? So in the oil markets, there's a lot of discussion that I think will happen around what would be the impact of OPEC coming back in an already oversupplied market.

In gas as well, we've seen periods of softness where LNG in particular has at times been oversupplied. At the moment, things seem to be pretty steady in the LNG market. But LNG, when we think about natural gas, LNG is the special focus of interest for buyers and sellers and industry players in Asia. And what will happen with Europe as we head into a third winter with no Russian supplies or limited Russian supplies coming into Europe. That's going to be a key theme, I think, for Asia.

And in renewables, lastly, the big topic there is how do Asian end users increase their consumption of renewable energy in a space where that can typically be quite difficult? And I'm expecting to hear a lot of discussion around sustainable aviation fuel, renewable diesel, and the feedstocks to go into those markets.

Sambit Mohanty:

Sure. Thank you, Dave. I think that's a nice overview. I'll stay with you for the next question. To what extent do you think the market narrative has changed for the energy market, especially since our last APPEC 2023? Do you think markets today have a much bigger headache navigating especially geopolitical turbulence, which we are witnessing across the globe?

Dave Ernsberger:

Well, APPEC is famously a time of the year when big things often happen, for better or worse, so there can be big developments in the global space in geopolitics or even just in market dynamics. We see that every year. I remember a couple of years ago, there were big developments in China, export quotas that roiled the markets, particularly for refined products, even while APPEC was happening all around us.

I actually think that the headaches of these markets have subsided greatly over the past 24 months, and probably for me the biggest difference between APPEC 2023 and APPEC 2024 is just how calm everything is and how steady everything is. Which doesn't mean that the market will take that for granted or even that we're going to see necessarily steady prices, either flat prices or spreads, going into the end of the year. But there's no doubt with everybody I talked to one-to-one ahead of these meetings, there's a sort of a sense of calm, and even some traders are talking about retiring because there's nothing left to do anymore. That's the kind of conversation that's going on behind the scenes. So it's not so much a headache as kind of a headache that's going away in some ways when we think about some of the factors that have been driving these markets.

Sambit Mohanty:

Sure. Thanks, Dave. Calvin, I'll come to you for the next question in Asia. China's energy consumption pattern is increasingly under focus, and one key question for the oil markets is how close the country is now to peak demand when it comes to transportation fuels such as diesel and gasoline. We are surely seeing a sharp growth in EVs there. It's a theme on which APPEC delegates will be keeping a very close eye on. If you want to share your thoughts.

Calvin Lee:

Yeah. Thank you, Sambit. Now, this is a really crucial question in understanding global oil demand as well as Asian demand, because a lot of analysts have actually forecasted an increase in demand this year, largely driven by still continuous growing consumption in China, right? However, when I was in Beijing this July, the local companies I spoke to actually painted quite a different picture. Representatives from state-owned enterprises actually mentioned that they anticipate gasoline demand to peak this year in China because of EVs and LNG trucks, and they believe that the gas-oil demand have already peaked. So I would be very interested in hearing insights and forecasts from experts on China's overall oil demand during APPEC.

Sambit Mohanty:

Yeah, that should be a big area focus at the conference. We are talking about gas-oil already peaking, and gasoline is not far away. Thanks, Calvin. I'll also stay with you for the next question. Another key center of focus for oil and overall energy markets in Asia is India. The country's growing global oil markets is set to expand at a fast pace until the end of the decade, and that's what the IEA says. Refining expansion still remains a priority, but with a tilt toward petrochemicals and the country's upstream strategy aims to realize some of the hydrocarbon potential of offshore regions. What do you think we can expect to hear from delegates from India who'd be attending at the conference?

Calvin Lee:

Yeah. And with IEA's report earlier this year, the forecasting India to become a key driver of oil demand in the second half of this decade with the deceleration expected in China and so on. So IEA is looking at an increase of about 1.3 million barrels per day in oil demand from India by 2030. A major factor behind this growth is actually the population expansion. As we know, India has already surpassed China to become the world's most populous country. So with the population still expected to grow by I think 6% between 2023 and 2030, there will be a corresponding increase in demand for transportation fuels.

However, this sort of rapid economic growth will also present challenges to the country's energy security. So at APPEC, I think delegates as well as itself would be looking to understand what India will be doing to strengthen its capacity and how is it going to respond to potential oil supply disruptions. So they'll be looking at one of the plans coming for refinery and what are the plans coming for the strategic petroleum reserve program.

Sambit Mohanty:

That's very interesting. In fact, I was myself talking to some of the refining CEOs, and they are saying that some of the refining projects will go on as per plan, but they'll be heavy tilt toward petrochemicals. So thanks, Calvin. Kang, I'll go to you for the next question? Delegates, of course, will been looking at some of the forecasts on Asian oil demand and supply, as far as the numbers from S&P Global Commodity Insights are concerned, how the growth of EVs and the use of alternative energy is going to change those numbers. I'm sure you'll speak more on this at the conference, but if you can just share some initial thoughts on this.

Kang Wu:

Thank you, Sambit. Yeah, indeed, asia is a very diverse region, particularly when it comes to the oil demand. You have developing world. You have China, India, the big giant, developing countries and also developed economies in the region. Normally, when come down to the oil demand, people normally talk about the several major factors, right? And those major factors actually affect Asia, all of them. First, we talk about the economic growth. There is all the urbanization, a rising urbanization, industrialization, and economic growth needs oil, needs commercial fuels to support economy. That's one factor, and you will find quite a bit of support in this kind of area in the developing world in Asia. So a lot of delegates and a lot of speakers may talk about the need of the world, developing world to grow their demand.

And then I add a little bit called the economic cost. So even as a fossil fuel, in certain areas, definitely in power generation, but also industrial area, oil as a fuel is not that cheap, right? You have cheaper options. Either you talk about coal or maybe even gas, cleaner and depending on where you are. So that area also will influence the oil demand in the region.

Last but not least is energy transition. Everybody's facing this issue, but the OECD countries in Asia, the oil demand has already peaked. For that matter, they have more sort of energy transition topics to focus on. Over the long run, Sambit, as you mentioned, the factors affecting the long-term oil demand in Asia, I want to mention two things. I'm sure these two topics will be heavily covered at APPEC.

One is, of course, EV penetration and Asia is very interesting, right? China is really leading in this area. The other countries, India, will gradually catch up, and actually we see that our inflection case or base case, we see that as early as 2036 globally, the EV sales maybe the same as ICE, the internal combustion engine sales, even though in terms of car fleet, that'll take longer. So this is one of the areas that'll be heavily debated, heavily discussed at APPEC.

The other one is sustainable aviation fuel. Right now, Asia is not quite leading in this area, and the leader is in Europe and North America. But even there, we only talk about fuel percentage of the fuels are in the sustainable aviation fuels area. But going forward, Asia is catching up. Even though that doesn't change the overall demand for jet, it does reduce the portion of the fossil fuel in the jet fuel demand. So we do see that by 2050. I know it is very long, many, many years down the road. We see that globally, aviation fuel can go from a very minor today to something like 25%. Asia is also getting up there, even though it's still behind Europe and North America, but it'll be a sizable portion of the jet fuel demand is in area of SAF. We'll expect people will debate and argue and compare the pros and cons in both EV and SAF during APPEC.

Sambit Mohanty:

Sure. Thanks, Kang. I'll stay on the same oil theme. Let's talk a little more about it. There are other two key topics that will be under discussion at APPEC. One is the rising importance of the Americas in meeting Asia's oil appetite, and the other is the role of Middle Eastern crude in Asia. We have seen in countries like India, it's been declining a little bit due to the inflows of Russian oil. If I can share your thoughts on some of the recent developments on the geopolitical front and how that might alter the oil flow map as far as Asia is concerned.

Kang Wu:

Yeah, very good question, Sambit. I think Dave touched upon the geopolitical issue at the beginning. Asia is very unique, and I often say that's why we're called Far East. So the whole region as the number one oil-consuming region in the world, almost like a 38, 39 million barrels per day of oil demand, and then I think produce only about 9 million barrels. Pretty ridiculous. So it's a huge, huge, about three-quarters of oil import dependence, making this region very sensitive, very vulnerable to many of the things.

So indeed, the two regions you mentioned, the US and North America in general and the Middle East really play a very important role, and that they are the changing. As Dave mentioned, the geopolitical issue, if you look at back two or three years to date, we have the Ukraine war and the change of trade flows of oil, and then you have the Middle East conflict, the attacks, and that is another big, big sort of event influencing the market.

As a result of the Ukraine war and the Russian invasion, the US needs to supply Europe. So there is a high demand for the North American crudes in Europe, but OECD countries in Asia, Japan and Korea and also other countries outside China and Southeast Asia, they need American crude as well. So the importance of American crude is evident in Korea, Taiwan, Japan. In the meantime, Middle East first is highly needed in Europe because as a result of the war in Ukraine, and then with the Middle East conflict, particularly the Suez Canal sort of interruptions, Middle East more required in Asia. So these two regions are really kind of, Middle East is a backbone, always supply to region, and American is very important supplementary. And then of course they are Russian flows to India, to China and to other Southeast Asian countries.

But Asia doesn't need all of them. So at the APPEC you will see that, unlike other regions, which has one way or another geographic location, Far East just needs everything from around the world. So all of the issues, all of the key geopolitical issues that we are facing from Panama Canal all the way to Suez Canal and to Russia, to Europe will have impact in Asia. So Asia is really continue to see a change of flows, and we're going to hear a lot of this kind of discussion at APPEC this year.

Sambit Mohanty:

Sure. Thank you, Kang. You've nicely summed up some of the key themes that we are going to witness at the conference, basically. Calvin, I have a couple of questions for you. First is a policy-related question, and then I'll ask you a price-related question. But let me first turn to the policy-related question and its impact on market trends. Do you think the policy pushed to strike a balance between energy security and energy transition is affecting the demand for oil and overall energy consumption in Asia in a big way? What do you have to say about the emerging trends in Asia compared to other regions in the world?

Calvin Lee:

Yeah. Thanks, Sambit. And we talked about, and Dave mentioned this earlier, which is how the market has been largely been fairly stable over the last 24 months, but all it takes is just to have one escalating geopolitical tension as pointed out or any event. Then we are going to see nations actually retreating from their energy transition targets or plans and start focusing on energy security. And we've seen elsewhere as well, like local communities pushing back against accelerating energy transition, which means that security has once again been a top priority for a lot of these nations as they combat economic and inflationary pressures.

So the debate over balancing security with transition will continue on. APPEC would be the right occasion to hear from experts and debates over this important question, particularly for Asia. And as Kang has also pointed out, that different countries are at different stages of development, but we've seen some nations retreating from the energy transition commitments, which would have a significant impact on global net-zero targets.

So recently, we've seen some announcements on energy transition developments in Asia. For example, we saw agreements between Asian nations on CCUS. Is that a way forward for Asian countries to come together to collaborate on energy transition going forward, or what about developments in renewables, right? Would there be any key developments that we can actually hear during APPEC? So those are kind of interesting questions and developments that we'll be keen to learn more about during the APPEC conference.

Sambit Mohanty:

Sure. Thanks, Calvin. We'll stay a little bit on the same energy transition them, and I'll ask you a price-related question. This more about price discovery. As energy transition gathers these, we are going to see and hear more on obviously hydrogen, renewable solar and other forms of cleaner energy. But with the development of new markets also comes the need for better price discovery. If you can share some of the developments that we are seeing in the price discovery and benchmarking space in Asia and across the globe, if you want to talk about it.

Calvin Lee:

Sure. And some of these markets are still in its fairly infancy stage, but we have started to see emergence of certain trade routes or trade flows indicating where the production center will be, where the consumption centers will be, and how they will be shipped and how they'll be traded. For example, in hydrogen, we've seen how some of these initial test cases or initial agreements that have already been presented to market, showed to the market, and what kind of production methods would actually yield a different price for hydrogen.

For example, we know that low-carbon or blue hydrogen production pathways using steam methane reforming renewable power would actually be cheaper than green hydrogen that are produced from renewable power and electrolysis methods. So the blue hydrogen would reach the market first, and as such, you may see some spot trading that actually go on.

Price transparency is not evolving in the spot market, but based on willingness to pay contract prices for long-term contracts, that's also have started to emerge in Asia. And from there, we can see where the prices will be for hydrogen in this case. But slowly but surely, we will start to see this kind of emerging market commodities start to trade more in a true fashion spot market, and with that, we will start to get more price transparency. And going forward, there will be a demand for spot price, and that's where some PRAs such as us come into play where we have been assessing these markets for some time now.

Sambit Mohanty:

Sure. Dave, do you want to speak a little bit about some of our recent developments across the globe, whether it's battery metals, or do you have anything to add to what Calvin has said?

Dave Ernsberger:

Sure. So on top of all of that, we see a lot of interest in some of these emerging markets and energy transition markets for different kinds of price insight and information at different kinds of benchmarking opportunities. So just to give you two examples, in the battery metals markets, the attention is shifting ever more towards the very upstream part of the lithium market, particularly where lithium spodumene prices might be. So we've been launching a suite of assessments around the spodumene market to help give people to get a very clear idea of what the raw material input values really are for the battery metals chain at the beginning.

The other is the value of components. So we launched these assessments for the value of solar panels, which is helping people to understand where the solar panel market is, which is a really interesting way to think about renewable energy and how electricity prices into the market. So these emerging markets around energy transition are both dynamic and creative in the sort of price information that people are calling for to help to understand the economics that Calvin's talking about.

Sambit Mohanty:

Sure. Thanks, Dave, and thanks, Calvin, too. Really nice insight into the pricing developments that we are seeing. Dave, I'll address the last question of this podcast to you on something which is obviously going to have a lot of implications for energy markets. We have recently seen a lot of debate around whether the US economy is heading for turbulent times. In addition, there are also talk and signs of China's economy slowing. Do you think markets have strong reasons to worry at this point due to these developments?

Dave Ernsberger:

Well, we began the podcast today talking about how the market is generally in a stable dynamic. That's a generalized statement. There are always things you can find, increasingly as we talk about today, that can be causes for uncertainty. But at times like these, the market becomes hyper-focused on the fact that the US and China together account for slightly more than a third of oil demand. So if there's going to be a surprise anywhere that's going to move the needle in any way, it's most likely to come from the US or China, because those two countries account simply for so much of the market, increasingly supply as well as demand. So we can see both those countries surprise both on supply and on demand. Interestingly, this year we've talked a lot about demand in China, but actually China's indigenous production of crude oil has been growing, which only adds pressure to the market, which is pretty interesting. Actually, China has a pretty significant crude production of its own, nearly 5 million barrels per day.

But there are really two things that I would expect people to be focusing on at APPEC around the US and China. Firstly, of course, still be a lot of speculation and interest in the US presidential election, which at that point will only be a matter of weeks away, maybe eight weeks or so away, and this has been one of the most intriguing, exciting, unpredictable presidential elections in US history, certainly in living memory, I should say. And at the same time, the outcome, whether it's Kamala Harris or Donald Trump, hard to imagine two more different policy outcomes in terms of how both those executive candidates tend to think about market dynamics, including the oil market and the energy market. So I'd expect a lot of conversation to focus on where the US presidential election might go.

However, since nobody has any idea how that will go, it's still so finely balanced, in the end, there'll be a lot of talk about interest rates in the US and what effect that'll have on energy demand. It looks like the Fed will be getting ready to cut interest rates around the time APPEC happens. That obviously, as Kang would tell you, would have beneficial effects on US oil demand, and I think people would be talking a lot about US interest rates because nobody knows how the election is going to go.

The bigger mystery, though, is China. China has been a bearish black hole for the oil market for about 14 months now. Nobody quite knows what's going on with Chinese oil demand. We saw a lot of restocking this year, a lot of building of inventory we think in China. Imports were relatively low. China seems to be operating on two speeds. There's the industrial speed and the service sector speed. The service sector seems to be doing okay. The industrial sector, less so when you look at it from an energy consumption perspective anyways. So what will happen with China's energy demand? Are we actually entering that period where the peak is behind us? As Kang was talking about earlier, Asian demand has peaked in many economies a long time ago. Why wouldn't China necessarily be already buying as it's a peak? We could be surprised to find that out actually this year and next year.

So is this the beginning of a terminal decline in Chinese hydrocarbon demand and oil demand, or is there a surprise still to the upside still to come? We just don't know. I expect at the end of the day at APPEC that what's happening in China will be the biggest single impact discussion that's happening.

Sambit Mohanty:

Thank you, Dave. Agreed. Those were extremely valuable insights. Thanks, Dave, Calvin and Kang, for joining me in this conversation. In addition to what we have heard in this podcast, you'll hear more from all of them as well as other market experts at APPEC. APPEC will throw the spotlight on many other interesting topics. For example, the evolving world of upstream, the supply strategy of OPEC and its allies, as well as the role of innovation in achieving net-zero targets. You can get exclusive oil market insights from the energy industry's key players and can be a part of the discussions at APPEC this September. Just register using the link in the show notes, and we'll see you there. You can also access our exclusive coverage from the conference by clicking on the topic page link also mentioned in the show notes. This podcast is produced by Asia Digital Editor Shikha Singh based in Gurgaon. Thank you for listening.