HYCM is an established and regulated forex and CFD broker providing a first-class trading experience in the UK, Europe, Asia, and the Middle East. Finance Magnates spoke with Stavros Lambouris, CEO at HYCM International for his perspective on the future of the energy market.
Energy is taking a centre stage at the moment, how do you view the current situation?
I agree that energy is central to much of what’s been going on in markets lately. It’s the input cost that’s driving a lot of the inflation we’re seeing but I think the root of the issue is deeper than just the pandemic itself. There’s what’s happening in the short term, which is largely driven by the pandemic and global responses to it and also the conflict in Ukraine; but there’s also the longer-term backdrop that these events are exacerbating.
Coming out of the pandemic, we saw a huge global increase in demand and supply chains still struggling. This led to commodity inflation as countries came out of lockdowns and started consuming en masse. The Ukrainian conflict has evidently not helped matters and Russia appears to be using its resources as both a carrot and a stick.
To cap it all off, we’ve had a general tightening of financial conditions as global central banks withdraw liquidity and embark on a coordinated cycle of interest rate hikes specifically designed to destroy demand. The short-term outlook is negative for these reasons, and we’ve seen many of the hard commodities falling back to their pre-covid levels as this demand destruction takes effect.
Oil has fallen too, but it’s still a way off from pre-pandemic levels, as are the soft commodities that are so sensitive to energy inputs as well as to knock-on effects from the ongoing conflict in Ukraine.
What is the main cause of the energy crisis?
What we have now is a supply issue, but most of the tools being used to address it are focused on bringing down demand. Jerome Powell has been explicit about this, and while he obviously wants to avoid pushing the US economy into recession, his actions at the moment are emphatically prioritising pain at the pump over everything else.
The problem is that you can bring down demand, even to the point of engineering a recession, but as soon as things start to pick up again, consumption increases. And if the structural issues causing the supply constraints in the first place haven’t been addressed, then you’re left with the same problems. So, while energy has come down and could continue lower in the short term, I think there are very real supply issues that could lead to even higher energy prices going forward.
What other issues is the energy market facing?
The under-investment in drilling is by now well known. It has come about through a combination of factors, from the financialisation of companies, where they have to play the Wall Street game of buying back stock and enticing investors with dividends rather than investing in new exploration.
On the other hand, there’s the ESG narrative, which, though important, may have contributed to the problem, with policymakers blocking the commencement of new wells and creating unrealistic expectations around the imminent electrification of our transportation grids.
Everyone running on a green platform has made promises to their voters about green energy that they just can’t afford to keep at the moment, evidently in the interests of being voted in by a more eco-conscious voter base, but also perhaps due to a fundamental misunderstanding of what’s required to have a civilization suddenly pivot away from one energy source to another.
You can see it now with the energy crisis in Europe, and with the United States being forced to keep dipping into its strategic reserve while petitioning the Saudis to increase production. My point is that when the bills come in and people feel the pain at the petrol pump, or when it comes to the heating or cooling of their homes, suddenly ESG isn’t such a hot topic anymore. Unfortunately, the transition between the age of oil and the age of green energy won’t be as quick or as smooth as many hoped it would be.
What are the short-term and long-term outlooks for the energy market?
I think the short-term and long-term horizons are at odds because one factor to consider is that the pivot from oil to green energy is perhaps more costly in terms of fossil fuels than expected. In the short- to medium-term, the outlook is bearish because the Federal Reserve and other central banks have succeeded in tightening financial conditions and destroying demand.
In the longer term, when these over-corrections between monetary looseness and tightness iron themselves out, I think we’ll still be dependent on oil, a sector that remains under-invested due to a recognition that we have to move away from it. But extracting and refining all the metals and minerals that are a prerequisite for the upgrading of our global electrical grids, as well as replacing every vehicle currently powered by fossil fuels with one that runs on batteries, is no small operation, and will require fossil fuels.
There are also concerns around OPEC’s ability to meaningfully increase supply, as well as questions around whether its members are as aligned in their interests and outlooks as they were when it was first created. I think there may be reasons to support the theory that the UAE and Saudi Arabia are not exactly on the same page any longer. I believe energy will be an ongoing issue moving forward due to a combination of the reasons I previously mentioned, and I don’t think the green transition will happen without bull markets in the underlying required commodities.
At HYCM, we’re very focused in supporting our clients by providing them with regular insights on how all these factors may affect the markets from different angles, available on our blog, HYCM Lab.
What are some of the uncertainties in the road ahead for the energy market?
Well, there is the ongoing crisis in Ukraine, and we have yet to see how Russia plans to handle its energy resources and deals. This could make the situation significantly harder for the West, particularly in Europe. We have the China lockdowns, which are important for different reasons than they were in 2019-2020. Today, there is even a theory that lockdowns are actively being used to destroy demand in more centrally planned economies and, if so, what does this mean for the smooth supply of goods and materials going forward?
Then there’s the US, its diminishing strategic petroleum reserve and its changing relationship with former allies in the Middle East. All these unknowns precede any ESG considerations because what we’re talking about is a fundamental redrawing of global allegiances, with energy as one of the primary bargaining chips.
Despite the current bearish outlook, it is a very interesting time in the markets because these uncertainties create trading opportunities. In situations like this, with many future unknowns, it is becoming more and more important to choose a reliable broker, like HYCM, to trade with. At HYCM, we have decades of experience, expertise and knowledge in the financial markets, and we provide a safe environment to protect our clients during times of uncertainty.
What about nuclear power?
It is possible that nuclear power will act as a stopgap between the age of fossil fuels and the age of renewables. Let’s look at the situation in Europe. Germany is the nation currently being hit the hardest by the conflict in Ukraine because it is dependent on Russian natural gas. It also happens to be Europe’s industrial hub and a country that only gets around 11% of its energy from nuclear power.
France, on the other hand, is much more insulated from these concerns than Germany because over 70% of its energy is generated via nuclear. France is actually third in the world for gigawatt hours generated by nuclear reactors, behind the United States and China. So, if countries want to still have an industrial base in 10-20 years, then achieving some degree of insulation from the changing price of fossil fuels, and more importantly, the shifting political allegiances required to get them is a must. Nuclear could play that role, but let's not forget what a huge undertaking that would be for any nation seriously considering it, both in terms of resources and time.
To sum up, what is the future of energy?
Despite nuclear power being absent from the conversation due to the bad name it got in decades gone by, it could be one of the better bets at the moment for nations weaning themselves off fossil fuels until a point where the renewable infrastructure is there to support a global civilisation’s energy needs. It’s certainly greener and cleaner than many of the other alternatives.
Hydrogen, is also one of the bi-products of nuclear power, so, as our hydrogen requirements increase, nuclear power may also prove to be an efficient carbon-neutral source of hydrogen. It could be used as a clean solution for fuelling vehicles as well as heating buildings. Its clean usage makes it an ideal candidate but the price of hydrogen needs to drop below $1 to start forming a competitive edge against fossil fuels. It is also currently complicated to store, transport, and deliver, so it may still be early days for it.
Meanwhile, we should strive to encourage markets to switch to greener and renewable energy sources via direct investments, increased awareness, and applicability of new projects, so our future generations can live in a better world.
At HYCM we’re always endeavouring to provide our clients with a wide choice of relevant asset classes and individual symbols in an ever-evolving market, whether its oil and fossil fuels, ESG or renewable energy.
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