Europe is facing an energy crisis and there are some dire predictions about how it will deal with the upcoming winter, when demand for electricity and heating oil are expected to surge. But commodities trader Pierre Andurand sees a path for Europe to survive without Russia's fuel. He suggests that LNG imports can make up a significant amount of lost Russian oil and gas, while simple actions like turning down the thermostat and turning off the lights, can make a big difference to the region's overall supply and demand imbalance. He also talks about the "broken" oil market — where prices may move by $10 on seemingly little news — and how that's impacted his own trading. This transcript has been lightly edited for clarity.
Points of interest in the pod:
Steps that Europe can take — 0:246
On Europe’s LNG import capacity — 09:02
How will price caps on Russian oil work? — 11.43
Will factories have to shutdown this winter? — 13:41
Why he’s critical of the UK energy subsidies — 17:22
The impact of the SPR release — 20:08
Where he sees the price of oil going now — 23:14
Why the oil futures market is broken — 28:25
Why he’s focusing on survival — 31:10
On balancing renewables with energy security — 35:54
Why he’s less bullish on carbon credits — 38:31
The big uncertainty for energy prices — 42:32
---
Tracy Alloway: (00:10)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway
Joe Weisenthal: (00:15)
And I'm Joe Weisenthal.
Tracy: (00:16)
So, Joe, I feel like we need to do an episode on European energy once a month now.
Joe: (00:21)
There are so many developments happening, so fast. German electricity prices, price caps in the UK, the French nuclear industry. And it all relates to geopolitics and inflation, how it fits with the ECB and everything. It’s really like a nonstop story that we have to be covering more or less all the time.
Tracy: (00:42)
Yeah. And I feel like we had some interesting conversations on this topic earlier in the year, definitely throughout the summer and even way back into the spring. And the difference now is that we really are starting to see governments take some steps to try to limit the impact of the energy crisis.
Joe: (01:02)
Right, but here's the thing that I don't really get. Sure. The government can, you know, cap prices theoretically, or they could provide subsidies to homeowners, theoretically, etc. But nothing, nothing actually provides more molecules. None. There's nothing that's on the government's balance sheet that could be done to like actually, in my mind, get at the core issue, which is a shortage of natural gas molecules or oil, etc. And so the question of how Europe gets through the winter, how much of a recession [there] will be, how it's going to ration energy, etc., is still to my mind, a huge question mark. And I think a lot might even depend on the weather.
Tracy: (01:41)
Yeah, that's exactly right. And there's so much to discuss on this topic. But I am happy to say that we really do have the perfect guest for today. We are going to be speaking with the commodities trader Pierre Andurand about this topic. We spoke to him, I think it was back in March or April of this year, when a lot of these energy concerns were just kicking off. And we're going to catch up with him and see what he's thinking about the market now.
Joe: (02:05)
Can't wait.
Tracy: (02:06)
Pierre. Thank you so much for coming back on Odd Lots.
Pierre Andurand: (02:09)
My pleasure. Hi Tracy. Hi, Joe. Good to speak with you again,
Tracy: (02:12)
Pierre, maybe just to begin with, you know, we've spoken to some of our colleagues, some people in the energy market recently back in August, just about how dire of the situation in Europe could get this winter. At least one of them was pretty pessimistic about the outlook, but you had a Twitter thread recently where you were suggesting that maybe things aren't that bad. Maybe there are steps that society as a whole could be taking to try to offset some of these commodities pressures. What do you think Europe can do here?
Pierre: (02:46)
Yes, I think, you know, we have more leverage than we think we have. We've been, you know, used to living in a very abundant world and now we have to switch into a war paradigm. And once we understand that, I don't think the steps we have to make are too difficult. But first, we have to plan number one for no Russian gas, you know, pretty much ever for the foreseeable future. Once politicians understand that we have to plan for no Russian gas, then it is much easier than, you know, assuming that it'll come and then it doesn't come.
So far a lot of steps have been taken. So first, you know, at the moment Russian gas exports to Europe, have gone down by 75% and I think they will go down. I mean, for me, I think we have to assume that we will not get any Russian gas from now on, pretty much from next week in Europe. And think about how we can live without Russian gas altogether. So the good news is that Europe has been able to import a lot more LNG, so liquid natural gas, than expected this year. So they pretty much almost doubled the import of LNG, and that increase in LNG supply corresponds to about two thirds of the Russian losses so far. So that's a good news. We managed to import a lot more LNG and there's more import capacity that's being built and that will come online over the next few months. So it looks like LNG import capacity will not be an issue for Europe. The problem is how much, you know, LNG can Europe really manage to attract because the rest of the world is competing for that supply.
And some other countries have, you know, long-term contracts. But I will assume that, you know, Europe being one of the most, one of the wealthiest continents, that they'll be able to outbid most of the competitors for LNG. And I think the hard part is mainly behind us. I think now the global supply of LNG is still going up every year and will, should have a big bump in 2025. So if we assume that Europe could attract about 40% of the LNG additions, that will already go a long way in solving the crisis, but that's not enough, right? We can't replace over the next two years, all of the Russian gas. We can replace a big part of it with LNG, but not all of it. So we need to have some kind of demand response.
Some of it already happened. So basically if you think of demand for natural gas, about 50% is coming from residential/commercial demand. That’s for heating and cooking, but mainly heating. About 25% is coming from industrial demand and about 20% of power. So far we've seen a switch of about 35% from natural gas to oil in the industrial demand. So already today, we have lost a lot of gas demand from the industry because natural gas prices are much higher than oil prices. So some of that switching from gas to oil has happened and I expect to see more switching happening, just because some of it needs a bit of lead time, so that’s in Europe and Asia. So I think we will lose some natural gas demand worldwide due to very high natural gas prices. And then what's left to do is really bring residential demand and power demand down to really balance the market.
And the steps that have to be taken are not so dramatic. Basically, I think that, I mean, it looks like in my supply-demand model that we need to bring the international and commercial demand down by 15% over the winter and that corresponds to lowering the thermostat by three degrees from 22 degrees Celsius to 19 degrees Celsius. So it might sound a bit, you know, chilly relative to what we are used to, but it's not very cold. It's basically an indoor temperature that we had in 1996 in Europe and the UK. And we were living with 15 to 16 degrees in the seventies, you know, during the, the energy crisis of the seventies. So already that will go a long way in solving. And then we need to bring power demand done by 5%, which is, you know, basically just switching off the lights in rooms that are not used. Switching off buildings at night when they're not used and stuff like that. That should be enough to bring power demand down by 5%. So there are steps to be taken.
In that situation, we don't need any Russian gas at all. And actually Russia would not get 100 billion of European money as a result. So I think for us, basically, we just need, you know, to be three degrees cooler in the winter, but still in very comfortable temperatures and, you know, switching of some light here and there. And that’s enough to not need Russian gas at all. So I think we have more leverage than we think. I think the fear mongers and the Russian propagandists, you know, when they say that we are all going to freeze death in the winter, it's actually not true. But we need to plan, you know, I mean, it could be true at the end if we don't plan for it, if we don't make steps to date to lower demand, then we will have some issues, some shortage, before the end of the winter.
Joe: (08:24)
I keep having to remind myself that three degrees doesn't sound like that much, but you know, for listeners, bear in mind, you know, that’s Celsius and Fahrenheit, it's something. But it is interesting too, that as you point out and you said it on Twitter, that actually was more the average in the nineties. So it's not a huge backstep. Just on the question of getting adequate LNG imports, is it about essentially outbidding the rest of the world versus expanding the physical infrastructure to take in that LNG? Is there an acceleration of LNG import terminal construction that will start to move the dial in the medium or short term?
Pierre: (09:02)
Yeah, there are some, so I'm not worried about the import capacity of Europe because we already have some floating platforms that can import LNG, that are coming online in the next few months. And already today, like the LNG imports represent 71% of the import capacity of Europe, but we need a bit more import in the north of Europe and that will happen over the next few months. So it doesn't look like, you know, the import capacity is a constraint in Europe. So what we need is we need the global supplier of LNG to grow up. So to give you some numbers, global supply of LNG is about 550 BCM. So that's billion cubic meters, and it's growing, for the next few years, at around 50 BCM for the next two years. And then it goes to 60 or so, 60 BCM per year. And so if we assume, basically with the current volume that Europe is importing, it'll just need to import about 40% of the additions on top of the import today to balance the market. As long as, for the next two years, we accept slightly cooler temperatures in the winter.
Tracy: (10:36)
So you mentioned this idea of Europe, you know, giving a hundred billion dollars of money to Russia for its commodities exports. And one thing that you wrote after we last spoke in March was about how price caps on Russian oil could work and add pressure to the Russian economy. And you kind of focused on a problem in the current situation, which is that Russia is exporting less oil and gas, but it's selling that oil and gas at higher prices. So it's still getting a substantial amount of money from those exports. And fast forward to this month, we have the G7 endorsing that price cap on Russian oil. I should say, we're recording this, on September 21st, which is the week of the UN General Assembly, so there might be some news on this, but talk to us about what you would like to see from the G7 in order to make these price caps work, because it does seem like it's kind of a delicate balancing act and presumably the west wants to pressure the Russian economy without sending commodities prices way higher.
Pierre: (11:43)
Yeah. So I think it's possible to enforce, but you need, and I think a lot, you know, all the consumers have an incentive in playing a game and, you know, buying oil cheaper than what they've done in the past. So I think the key is to find a cap price that is lower than current prices, obviously, and lower than where China and India are buying it. And I think somehow there will be game, at least unofficially, to do that. But then it's a question of how they will want to enforce it, right? There will always be some cheating, but I think on the large part, it's possible to enforce as far as, you know, because it's a large flow. If you have to replace all the oil exports to Europe and move them to India and China, you need a lot more ships. So basically you have some constraints in terms of shipping and a lot of those ships are Greek. So I think there will be some, you know, the devil will be in the detail, I think it's possible, but hopefully they're speaking with enough people to understand what has to be done to really minimize the cheating so that we can really put a damp on Russian revenues.
Joe: (13:01)
Can we just go back a little bit to the rationing? And some of the rationing seems straightforward in Europe. It's like, okay, turn down the thermostats in the winter, turn off lights in rooms when you're not in them, but in terms of like industrial demand, you know, it almost seems like a guarantee that there is a deep recession coming to Europe. If factories just can't afford to operate profitably at current prices, how much demand destruction [will there be], what's that going to do to Europe's industrial sector and how much of a bite will that take out? How much will just sort of like factory shutdowns essentially contribute to getting demand to the necessary levels?
Pierre: (13:41)
So basically there are some industries that use natural gas as a feed stock. So not only for power generation, but as a feed stock. So some examples would be chemical manufacturing, you know, glass making, some would be, you know, the petrochemical industry. So for some processes you need natural gas as a feed stock and you cannot change it. But some of them, you can, for example, for the petchem industry, you can use Naptha instead of natural gas. So you can have some switching from natural gas to oil. Also in terms of natural gas demand for the industry, a lot of it is also to generate their own power, and for that, they can actually use oil instead of natural gas. So you can have quite a lot of switching in the industry.
And already today, we are seeing a switching of 35% from natural gas to oil, so that’s the good news. In the industry that does have to take natural gas, well, I guess we'll have to see which ones are strategic and which ones are not. And the strategic industries will have to be helped by the government, to be able to afford, you know, gas and power prices until the matter resolves. And it'll, you know, over the next two to three years, it'll be resolved through more LNG. And as far as there's enough incentive for consumers to reduce their unnecessary consumption of energy.
Joe: (15:18)
I know this is a slight turn or detour, but can you give us a little perspective, what's going on with French nuclear?
Pierre: (15:27)
Well, basically, you know, a nuclear park, you know, at first had the life expectancy of 40 years and we are getting towards the end of those 40 years. So there's some issues, some maintenance that has to be done. You know, they can, they see some corrosion, some, you know, some issue here and there that they have to fix. But it looks like, you know, the work, mainly those power prices, the work will be done for some of that capacity to come back online. But I think there should be a switch to really invest massively into nuclear, like around Europe. And I hope that will come because we need that base load, low carbon capacity. It takes a while to build plants, right? Nuclear plants, but they have to today decide to go for it. If I can add also, you know, like the warmer temperatures in the summer make it more difficult to cool nuclear reactors. So that's why some of them have to shut down as well. And that happens not only in Europe, but around the world, right? So most of them are built around waves or around the sea. And when the water becomes too warm, they have to shut down until the water gets cooler, you have that issue as well.
Tracy: (16:43)
So you mentioned, perhaps some support for certain industries who cannot easily substitute fuels, but you've also been publicly critical of some government support schemes for energy usage, specifically the UK's capping of electricity and nat gas prices. I think it's something like 2,500 pounds for UK households. What's the issue there? And I'm curious if that criticism also extends to the US, where the big effort that's been underway here when it comes to lowering energy prices, is the release from the US’s strategic petroleum reserve.
Pierre: (17:22)
Natural gas, you know, I think I understand that governments want to help households and businesses. And of course they should, you know, but we have to make sure that the demand meets supply as well, because if demand is above supply, eventually you have shortages and we all are in trouble, right? We have blackouts, you know, we can't heat at all. And then, you know, in the winter it gets much, much colder than a three-degree impact. So the key is to do, I think, if you look at the UK, UK prices are a lot more expensive than most European prices. So for example, in France, electricity and gas prices are only up 4% relative to last year. And next year they'll be up 15%, which is way, way below commercial, like wholesale levels. In the UK, they at least doubled, you know, over the year.
So you should have some kind of price response already because it's a lot more expensive than last year and more expensive than in Europe. But I think that the government should do more, you know, you can't just, when I hear Liz Truss saying, ‘well, we don't want to tell you to use less energy.’ Well, actually you do. You know, you can't print energy, right? You can import some of it, but you have limits to how much you can import. You can only import what's available around the world. And if you overbid, like if you try to buy, you know, one extra cargo that another country needs desperately, then you bring prices up a lot. And then the government will have to pay the bills, which at the end of the day, it's taxpayers, right?
So I think governments should do more to motivate, to encourage, I mean, first to explain, to go on the public awareness campaign, to explain to the consumer how to reduce their energy demand while still living comfortably. And that's something that they've started doing in the EU. And I hope the UK will do that as well, because you need to bring demand down. The market will not be able to be in balance if you don't let, you know, consumer prices go up and your supply is going down, then how can you meet? You can't import enough LNG, you can't replace natural gas with all the LNG you need to bring demand down too.
Tracy: (19:49)
And what about the SPR release? How significant has that been in terms of bringing down oil and gas prices? And then secondly, is that a sustainable strategy? Because one of the criticisms is, well, you release all this inventory and then it becomes harder and perhaps more expensive to buy it back.
Pierre: (20:08)
Yes. I mean, so for this year, right, we still have the Russian invasion of Ukraine, but so far we have not lost any Russian oil or very little, basically. Maybe maximum half a million barrels a day, which is a lot less than what we expected earlier in the year. So far Russia has been able, you know, to export pretty much as much as they wanted around the world. But the EU embargo has not started yet. So we are starting crude in early December and then products in early February. But the Biden administration used potential, you know, Russian supply losses as an excuse to release the SPR. And we had the largest SPR release ever. You know, basically by 160 million barrels, I think as of today, over the last six months, which is roughly a million barrels a day from the US and also half a million barrels a day from the rest of the worldly. If we lost half a million barrels a day from Russia, but we got 1.5 million barrels a day extra from the SPR, basically it means that the Russian invasion of Ukraine brought a million barrels a day in more production, more supply on the market.
And I think that's one of the reason why the market has gone down since the summer is the fact that market participants were expecting Russian supply to go down by roughly 2 million barrels a day. And we have not seen that yet, but on the other hand, we saw the SPR release and there are like large worries about, you know, like important worries about a large recession coming with interest rates going up and with the impact of the Russian war on the global economy. So I think it's a mix of that, right? Like the Russian supply hasn't gone down, we had large SPR supply. Demand is probably weaker than what we expected. And then you have all the macro worries about, you know, fighting inflation, getting, you know, higher and higher interest rates while the consumer is being hit with higher commodity prices.
Joe: (22:25)
So when we talked to in the spring, I mean, there were a number of factors and you said, you know, there was a possibility that we could see $200 oil, was I think the number that you put out and obviously now, you know, WTI, I think is somewhere maybe in the high 80s right now. What do you see here? I mean, the SPR release, they can't keep releasing it forever, right? It is a finite amount that they can release. It still the seems plausible that we could have risks to Russian supply. And of course we haven't talked about, you know, China has had hard lockdowns over the last several months in major cities and that has significantly curtailed the country's petroleum consumption for obvious reasons. So I'm curious, which way you see the risks skewed and where could oil go now?
Pierre: (23:14)
Yes. I think risks are skewed to the upside. Clearly, as you say, I believe we're going to lose some Russian supply. I don't know how much, but I would say between one and 2 million barrel a day. The SPR release will have to stop. I mean, already, I think the pace of the release is going to slow down now, quite a lot. And I don't think they can carry on for very long. So that will stop. Then China, at some point will reopen, we don't know when, but they will. And there's probably 2 million miles a day of demand that can come back once China, you know, reopens to the world and you start having people going there and Chinese people traveling again. So I think you have a lot of event risk that, you know, that are positive for the oil price.
I would say the only negative event is a global recession, right? But a large enough global recession. I think overall the risk in the medium term are more to the upside, but it looks like in the short term, people are still very worried about, you know, recession risk and the macroeconomic outlook. So far it's trading, at least on a day-to-day basis, as if it wants to go lower. But when I look at my supple and demand balance for the next few years, to me, it looks bullish, right? And it looks like prices will have to go up. At least for now, I'm happy that Russia is getting less money, at least in the meantime, with lower oil prices, but I'm not sure it's really justified.
Tracy: (24:46)
Who has the upper hand between US shale and OPEC at the moment, because, you know, with prices going higher over the summer, we might have expected to see more of a response from US energy producers. That didn't really seem to happen. They still seem to be kind of cautious about ramping up production. And meanwhile, we have seen some noises from OPEC about how they would like the price to go higher from here.
Pierre: (25:13)
Well, the reality is that there is almost no spare production capacity around the world. So most of the OPEC members are at maximum production. If you look at the Saudis, they’re at 11 million barrels a day production, they've never, you know, managed to have that level of production for more than a month. So now we're expecting them to be at that level for years. US shale, it looks like, you know, US production is still growing, but I think a lot less than in the past. So instead of growing like one to 1.5 million barrel a day, I think they will grow around half a million dollars a day over the next couple of years. So it's still, you know, a bullish outlook of the world, but then it depends if we have a total demand collapse due to a large financial crisis. That's a big question mark.
Joe: (26:02)
You know, something that you brought up on our last conversation that I haven't heard many people talk about it, I was sort of kicking myself for not having followed up on it, but you know, we talked about the economics of us shell producers and is the price signal strong enough for them to invest? But something you said that I haven't heard many other people talk about is available wells. And is the oil there at the same level that it used to be? Or have we sort of picked the low hanging fruit? How much is that, in your view, an impediment? And what do you see specifically on the sort of just available supply part that may be contributing to a sort of less than stellar supply response by domestic producers?
Pierre: (26:48)
Yeah. I think it's a mix of, you know, the low hanging fruits having been taken already. So they go into less, you know, promising parts of the basin, and also like supply, you know, like production part issues that they can't get from, you know, all the elements they need and all the fracking crews to be able to, to grow production fast enough. So I think it's a mix of those of those two, but I would say it's more of a question, and there's also the pressure from shareholders to not grow production too fast. Decline rate operations, the decline rate for shale are like 80% the first year. So they need to really keep on drilling to keep production still or to make it go up. As soon as they reduce the drilling, production can go down pretty fast.
Tracy: (27:45)
So just on incentives for oil production, one thing that we have heard is, you know, the futures curve still isn't in the right sort of shape to incentivize future production. So I'm wondering A) how much you place on that argument? and then B) you tweeted recently, and this is something that we've heard from previous guests too, this idea that the oil futures market is, I think you said “completely broken.” And the fact that you could see a really volatile spot price, you know, big moves for no reason or on very little news. How much economic information is currently embedded in the price?
Pierre: (28:25)
I think you're right. I mean, there are some days where, I think the day I tweeted that the markets were completely broken was a day where we went down $10 a barrel from like $95, from like $105 to $95 in less than 24 hours. And there were no headlines. And somebody comes and like hit bid, hit bid, hit bid for like 24 hours and bring it down $10. And then we have so many days now, nowadays it's normal to go down $5 for no reason, and then back up $3. And the volumes are much lower than in the past as the open interest has gone down a lot. Also in terms of, positions, if you look at the commitment of traders, so data coming from the CFTC, and you look at non-commercial positions, it went from 1.4 billion barrels in 2018 to 300 million today.
So there's a lot less people being long oil in general. And then if you look at the funds that are a bit more active and look at their PNL day today, they will adjust their positions in line with the volatility. So if a market is twice as volatile, they're going to have half of the position in barrels then they used to have. And so that leads to a bit of a snowball effect, in which you have less liquidity, less positioning. But then every day you have still people trying to do something and you have some hedging that has to go through, which is the same type of volumes than in the past, but in a market that is a lot less liquid. And then it moves prices a lot. So I've been very surprised by the price action over the last few months and worried about what the price means.
You know, if you can go down from $100 to $90 in one day for no reason, why not go down to $50 in the day for no reason? You know, if nobody is willing to come and think it's cheap enough to buy it, nobody has any risk appetite anymore. Then the price doesn't mean anything. And I'm afraid that, you know, that’s another issue to deal with, right? On top of getting the financing, you know, having the right asset, worrying about, you know, the shareholders and activists and all kind of stuff, then they have to worry as well on the price of oil that can move down for no reason. I mean, generally it's been down more easily than up, I would say.
Tracy: (30:59)
What has it actually been like for you to trade energy and commodities over the past few months? What is it like on a day to day basis and how has it changed versus say a year ago?
Pierre: (31:10)
Well, you know, we've had a structural bullish position on energy and that worked well in the first half of the year. And then we gave back some gains over the last few months. So basically when it happened, we just reduced positions because, you know, I accept that I don't understand really what's going on in the market. You know, I might disagree, but I don't understand. So I don't want to be too stubborn and I want to reduce my positions, to focus on survival. So for me, it's a period of time where I focus on survival. I'm like, okay, well, I don't really get it. I don't really agree with it, but you know, it is what it is. I have to accept it. Let's reduce positions because I don't want to, you know, lose a lot more money than what we gave back over the last few months already.
Joe: (32:10)
I actually have another natural gas question. And, you know, I'm just thinking very long term, like, okay, we've been talking about this winter and how Europe will scrape by, but it's not often that we see a continent completely rearchitecting, essentially, how it gets energy. So of course the pipelines from Russia to continental Europe were huge. And now it looks like in the sort of aftermath, or the sort of ongoing -- however long this goes -- that there's going to be this huge shift towards demand towards US natural gas. And you mentioned that, okay, maybe Europe itself is not particularly limited by import capacity, but we know that the US is limited by export capacity and that domestic producers could sell all they wanted if we had more export terminals. Is this going to be a fundamental long-term change to the energy story that ultimately benefits domestic US gas producers in a massive way for years to come?
Pierre: (33:12)
I think so. I think it's very positive for the US, right? I mean, a large part of what we're going to lose from Russia, going to Europe is going to be replaced by LNG coming from the US, from other countries as well, but a large part from the US. Because I think the US is probably going to be close to half of the LNG growth, the LNGs additions, over the next three to four years. So yeah, the US will benefit from it, and the fact that I think energy prices in general will remain high. There will still be, you know, a lot of money in moving cargos until the US has export capacity, which I think is not before, you know, 2026 or 2027. Even [then] I'm not sure that they will have excess capacities then.
Tracy: (34:10)
So if we're talking about a big redesign of the global energy market that's basically happening in real time, you know, more LNG coming out of the US potentially, more emphasis on renewables, or maybe even nuclear in Europe. How do you position for that?
Pierre: (34:28)
Well, I think you have to look either in equities in the stock [market] that will benefit from that, right? So I think it's quite positive for, you know, all the natural gas producers that can export, hat have, you know, also some export capacity. I think that’s the one that will benefit the most. And then uranium. Just being long uranium is probably a good trade, being long. The companies that build nuclear reactors will be a good one. And I think still solar, solar and wind, will benefit from it. So I think it's, yeah, nuclear, solar, and wind, ad natural gas in the US.
Joe: (35:09)
Do you see any short-term or medium-term tensions between essentially energy security and climate goals? And of course, you know, we know that coal production is up, as you mentioned. In Europe, factories are switching to oil, which I believe is worse for climate and CO2 emissions. Can you talk a little bit about like, is someone going to have to make a sort of priorities sacrifice, you've talked about the industrial or the sort of economic sacrifice, but at some point to make this work, will there have to be a more explicit acceptance? Like, ‘oh, maybe we push our net zero goals out a few years’ or some sort of rethinking of the emphasis on decarbonization?
Pierre: (35:54)
I mean, somehow if we decarbonized earlier, we wouldn't be in that issue, right? We would use less natural gas and Russia couldn't, you know, do what they're doing. So I think the issue is not decarbonization. It’s actually probably that we haven't done it fast enough yet. And this energy security issue it only, I think, should accelerate the transition because when you deal with nuclear, wind or power, you are, you know, you are not giving that money to autocratic regimes. And so I think if anything that will accelerate the energy transition, as it should. But in the short term, to keep the lights on, to make sure we don't have, you know, social unrest, we have to accept that more coal is being used and more oil is being used. But, you know, in the very short term -- for like couple of years, maybe three years. But what they need to do is really focus on bringing more generation capacity, right? From, you know, nuclear, from wind, from wind and solar, as much as possible, as fast as possible, because we cannot say, ‘okay, well, you know what, we're going to stop having oil and coal and with nothing to replace it.’ Because then we really freeze to death and have social arrest.
So you need society to keep on functioning for that. We still need enough, you know, enough energy. I think we can deal with 10% or 15% less, there’s enough fat in the system, but you can't really deal with 50% less, right? Without having massive social interest and huge, like a really huge financial crisis. So I think what we have to focus on in is bringing more low carbon generation capacity as quickly as possible. And then naturally you will not use the coal and oil if you don't need it right? Then you have the choice. But you can’t say, ‘okay, you know what, don't use oil and don't use coal,’ if that is the only option you have.
Tracy: (37:51)
So just on this topic in Europe, one of the other big trends that we've seen is nationalization of energy companies, you know, some things going on in France and in Germany just today, when we're recording, there was this announcement that Germany is nationalizing its big utilities company Uniper, I think they're putting in something like 8 billion euros worth of equity into the company. How significant is that for Europe's energy market? How does it change it? And then secondly, if governments are suddenly shareholders in energy companies or utilities, does that accelerate the shift to renewables or does it slow it down?
Pierre: (38:31)
I think it'll accelerate it. I mean, because it's an energy security issue, right? You need to, and that's why like early this year I became less bullish on carbon. So on carbon prices, the US, carbon credits in Europe, because I think now the mandates will come, you know, from the top down -- from government saying, okay, you know what, we need X percent extra solar this year and wind, and we're going to go for nuclear. At some point we're going to have those headlines and governments will have to look at the long term and go quicker because we cannot stay dependent on autocratic regimes for too long. We know what that money can be used for.
Joe: (39:16)
So you talked about the fact that to get through this winter right now that Europe could do it in part simply by outbidding the rest of the world, which is good for Europe, I guess, because Europe is incredibly rich and it can afford to outbid the rest of the world, but it's basically a sort of zero-sum thing. Can you talk a little bit about where you see the most stress emerging, essentially from the countries that are on the losing side of these bidding wars?
Pierre: (39:44)
Well, it's, you know, it's generally the countries that have the most issues to start with, right? So it's more like emerging markets and importers of natural gas. You saw it earlier this year with, you know, the collapse of Sri Lanka. Pakistan, you know, is obviously having lots of issues due to the floods that are linked to the climate change. But also for all those countries, natural gas imports become a lot more expensive. So they become more energy poor. And generally that's what will happen, but I don't think it's only a bidding war. Basically, you have like, it's a bidding war in the short term, in the first year also. And then you have enough switching hopefully in the rest of the world from gas to oil or all the things, yeah, generally gas to oil is the cheapest actually, because now oil is even cheaper than coal.
And then that will support oil demand, to some extent that will be marginally bullish oil, but it'll displace natural gas demand. So basically you'll have a bit less demand for natural gas. That will, you know, open more LNG cargos to export to the countries that need it. So eventually you get price. I do suspect the natural gas prices to stay high generally for the next two years. And then go down, stay elevated, but I think the first step down will be if we can manage this winter properly, and realize that actually, you know what? We did it with no Russian gas, already psychologically there will be a large price impact to natural gas. And then all the switching and the extra LNG we will get, will carry on putting pressure on natural gas. So I think it's really paramount that governments, you know, use those public awareness campaigns to bring that demand that we don't absolutely need down, because not only we can avoid strategies, but also it'll bring prices down significantly. And that will be good for the global economy in general.
Tracy: (42:00)
So you mentioned that you're still bullishly positioned when it comes to energy. I mean, broadly. And maybe less bullish on carbon credits than you were at the beginning of the year. But what's the big wild card when it comes to the energy market at the moment? What's the big thing that you are potentially on the lookout for that could unsettle some of those positions? Is it simply Europe losing its appetite to, you know, stomach some pain when it comes to reducing energy demand?
Pierre: (42:32)
I'm not too worried about that. I think Europe will, you know, the more aggressive Russia becomes the easier it is to accept some pain on our side. And because we, you know, all psychologically, we understand it's a war paradigm and we need to take a hit as well. So I'm not too worried about that. So I would say there's two conflicting forces. One is how much oil we will lose from Russia, because we will lose some and once the price cap goes through, we'll have to see how Putin we react to it, if it cut production and if yes, how much. So we'll have to understand how much oil we will lose for Russia. And the second is, you know, the global economy in general, right? If you look at the impact of higher interest rates around the world for the consumer and businesses and countries, we don't know yet what impact it will have for interest rates to have gone up so much over the last few months, for now, you know, it's like things that add up and eventually, we have some kind of some kind of issue.
So I think the mix of much higher interest rates and still high energy prices, and the worries about the war and all that, you know, makes people want to spend less, that could also have a negative impact on demand and eventually on prices. So I think these are, you know, it's not that easy to forecast because on one hand you're going to lose some supply. On the other hand, we're going to lose some demand. So yeah, overall with time, it should go up. Price should go up, but in, you know, clearly the markets have been telling us that it's not as obvious.
Joe: (44:17)
All right. I have two short questions. So the first one is on Russian oil exports, which you mentioned have not dropped off like they expected. Setting aside sanctions, one question that's come up is essentially whether Russia can import equipment to maintain its oil sector, or whether Russia loses expertise and knowhow from the departure of foreign energy companies. Is that still a risk out there for Russian supply -- setting aside the politics and price caps -- that the quality of the Russian oil infrastructure degrades?
Pierre: (44:53)
I think it will. And on top of that, I mean, with the mobilization that Putin announced today, all that will have an impact, I think, on oil supply going forward. So it'll go down due to the sanctions or due to Putin wanting to cut to show that he doesn't agree with the price caps. But also eventually with time, production will go down anyway, due to the lack of investment that will go into the system.
Joe: (45:23)
And then my final question is how did you get that stat about what average temperatures in homes were in Europe in the nineties? How do you track that? And why have European homes gotten warmer over the last 20 years?
Pierre: (45:38)
I think it's generally energy has been, you know, relatively cheap, I would say, for some time. I mean, we have some period of time for a few years where it gets to be expensive. But over, you know, a 20 year period, even like almost a 30-year period, if you look at consumption as a percentage of income, has been going down in general. So energy has been relatively abundant and cheap. So, you know, we could live a more comfortable life, basically. I think it's due to that. And in terms of where I got the stats, some of them is just the IEA. The IEA showed that one degree, moving the thermostat down by one degree has an impact of 10 BCM for Europe. So that's about 5% or so. And, so basically, you know, you just think it's kind of linear. It says three degrees will be 15%. And then about knowing what the temperatures were in the past, it was actually some medical journal, actually, it was the [unclear] -- that's a magazine and that's a study that was made in 2014, basically to look at the impact of winter indoor domestic temperatures on health in general.
Tracy: (47:08)
I love that you're looking at those sources for these stats. All right. So, slightly cooler winter or colder winter in Europe, but hopefully not a frozen one. Pierre Andurand from Andurand Capital. Thank you so much. Appreciate you coming on.
Pierre: (47:22)
Thanks very much.
Tracy: (47:37)
Well, Joe, it’s always good having Pierre on the show, really good just to get an update of how he is thinking about the market at the moment. I do think this idea that the price disconnect from fundamentals, or, you know, maybe not completely disconnected from fundamentals, but the idea that it's so volatile right now, the moves are kind of unexpected. There's lots of illiquidity in the market and that makes it harder for everyone to deal with what's happening.
Joe: (48:03)
Yeah. And of course that was a point that Alex Turnbull made in our conversation a few months ago with Javier Blas. Talking to Pierre is great. I like that he provides a sort of non-hysterical take, which are kind of rare these days. Because a lot of that, you know, it's like, how does he have that stat about temperature in the nineties? Well, there's a reason why he's a massively successful hedge fund manager. And most people aren't, like, putting in the work like that and having, you know, putting in the effort to learn about these things. Lots of really interesting insights. And to your point about, I'm glad you asked him, what’s it like been trading? Because you know, it's one thing to look at a screen and price is going up, but actually like how is that price on the screen being arrived at is a really interesting question.
Tracy: (48:47)
Right. Or just get it directionally right, but then how do you actually execute on that idea? So energy markets are tight, but how do you actually put that into practice and are the prices that are flashing up on your screen, actually reflecting what you think is going on in the market? Shall we leave it there?
Joe: (49:03)
Let's leave it there.
You can follow Pierre Andurand on Twitter at @AndurandPierre.