Energy, Geo-politics & Money - 2023.11.10
In this roundup, we look at:
Why EPM believes Saudi Arabia’s energy minister Abdulaziz bin Salman is fundamentally incorrect in his assessment of the current state of the global oil market, which he describes as artificially weak due to speculators
The month-on-month increase in OPEC oil production
Russia’s lifting of its export ban on refined fuels
How the world’s big traders are position themselves to bring Venezuelan crude oil to market
China’s impact on the global manufacturing sector
Why the European Central Bank will not go down the path of monetary tightening through shrinking its balance sheet
Further support for the original EPM thesis regarding the Gaza War, which was that it would be used to establish the formal recognition of Israel by the countries of the GCC, in particular Saudi Arabia; this time from Israeli prime minister Netanyahu who says he believes a deal is being made more likely given the Gaza War
Why US – China relations are unlikely to improve over the shorter-to medium-term
The progress on a major COP28 theme, to triple renewable energy investment while phasing out “unabated” coal power
The European parliament’s vote against plans for big cuts in petrol engine emissions
Occidental’s ambition to build out its Carbon Capture business through licensing of its DAC technology to 1,000 plants globally
Saudi Arabia’s ambition to become a global player in battery and EV manufacturing, an area in which it has seen some successes but also seen some (expensive) failures
General Energy News
Prince Abdulaziz bin Salman, Saudi Arabia’s Energy Minister, believes the drop in crude oil prices over the past 3 weeks is due to speculators, writes Bloomberg. He responded “It’s not weak” when reporters asked the Prince about the decline in oil prices in Riyadh. “People are pretending it’s weak. It’s all a ploy.” EPM fundamentally disagrees with the minister’s perspective. First of all, we do not believe oil prices above $80 per barrel are a sign of weakness. In fact, in a historic context, this is a very healthy level from an oil producer perspective! Secondly, we say, if there was any speculative action influencing the oil price recently it was the betting on higher oil prices after the start of the Gaza War. Thirdly, however, there is real weakness in the oil markets that is camouflaged by Saudi and Russiam voluntary production cuts. But, we don’t see that fundamental weakness as something the minister should be overly worried about, as it is not the resultant of something like and energy transition, but by weakness in the global macroeconomic environment, which is something that eventually will sort itself out.
OPEC+ crude oil output grew 180,000 b/d in October, writes S&P Global, led by Iran and Iraq. OPEC's 13 members pumped 27.89 million b/d, up 130,000 month on month, while 10 non-OPEC allies, including Mexico, which is not subject to a quota, boosted production by 50,000 b/d to 14.82 million b/d. The increases narrowed the OPEC+ alliance's quota shortfall to 827,000 b/d in October, including voluntary cuts implemented by the group. Many African members still struggle to hit their targets.
Fuel producers in Russia have been told by the government to prepare for the scrapping of all remaining internal restrictions on the export of diesel and gasoline, writes Reuters. Russia, the world's top seaborne exporter of diesel, introduced a ban on fuel exports on Sept. 21 to tackle high domestic prices and shortages. The government eased restrictions on Oct. 6, allowing the export of diesel by pipeline, but kept measures on gasoline exports in place. Overseas supplies of gasoline by trucks and railways are also prohibited. One Reuters source is quoted as saying "They promised to lift the exports ban next week. In regards to this promise, we have formed an export schedule and a plan for refining,"
As the US is in the process of lifting sanction on Venezuelan oil, the world’s big traders are position themselves to bring it to market, writes Reuters. At least two trading houses – Trafigura and Gunvor – in recent weeks have gained access to Venezuelan cargoes by buying from intermediaries approved by state oil firm PDVSA. The unusual arrangements have led to large differences in terms, leading margins for the middlemen as big as $15 per barrel.
Macroeconomics
China's economic slowdown is dragging down the performance of the global manufacturing industry, writes Nikkei. In addition to the slump in smartphones, semiconductors and other electronics, demand for machinery has also been sluggish due to weak capital investment. The net income of about 240 non-Chinese manufacturers whose ratio of Chinese sales to total sales is estimated at 30% or more, decreased by 30%, it says. This low performance is even more pronounced when compared to companies less reliant on China. The net income decrease was 1% for companies that depend on China for 10% to 30% of their sales. For those that get no more than 10% of their sales from China, net income grew 7%.
The European Central Bank must avoid shrinking its balance sheet too much, says its Chief Economist, warning this could impair lending and threaten financial stability, writes the Financial Times. Officials in the Euro Zone and elsewhere have started to debate the degree to which balance sheets should return to pre-2008 norms. “There is a transition going on,” Philip Lane told an ECB conference on Thursday. “I don’t think we should go back to the world of very low bank reserves we had before the global financial crisis.” Maintaining a larger balance sheet would encourage commercial banks to lend more, provide the financial system with a liquidity buffer to cope with future shocks and give the ECB more “headroom” to avoid interest rates falling back towards zero in future, he said.
Geopolitics
Bloomberg continues its theme of “geopolitics as the new frontier for international business”, with a look at how recent events (Ukraine & Gaza War) have impacted oil and semiconductors, as well as where and how the next battlegrounds could be of impact. Nothing in the article that regular readers of EPM are not yet familiar with, but Bloomberg’s conclusion is a good summary: “the big picture, though, is that the return of geopolitics adds a significant risk to the global outlook”.
Israeli Prime Minister Netanyahu actions provide further support for EPM’s original thesis regarding the Gaza War, which was that it would be used to establish formal recognition of Israel by the countries of the GCC, in particular Saudi Arabia. After Saudi Crown Prince Mohammed bin Salman said that despite the Gaza War, he still believed an agreement between the countries could be reached, Netanyahu now echoes the same sentiment, writes Bloomberg. “I think it [and agreement with Saudi Arabia] will be a reality,” Netanyahu said. “I think conditions will be ripe. In fact, after a victory, I think they’ll be even riper.”
As the leaders of the US and China prepare for a meeting this month, China's ambassador to the United States Xie Feng said relations have shown positive signs of stopping a decline and stabilizing but still face challenges, writes Nikkei. This align with the EPM view on US – China relations, which is that the likelihood of an improvement in relations remains unlikely over the shorter- to medium-term, as the Chinese believe the US is actively working in the economic, military and diplomatic arenas to hinder the country’s progress. And until the US changes its behavior, the American words will receive a polite Chinese reply – but nothing more. As such, we believe the real relation continues to decline, and the best that can be achieved via bilateral meetings is a halt to this decline.
Energy Transition & Technology News
A day after winning investment for its first large scale DAC plant, Occidental CEO Vicki Hollub said it wants to sell technology licenses to enable partners to build up to 1,000 projects globally, writes Reuters. "We will be licensing a lot of this out," Hollub told investors in a webcast to discuss third quarter earnings. In the franchise-like model, Occidental would charge a licensing fee and turn over management and construction to partners. Its first large-scale DAC plant, a $1.3 billion project, is set to start in mid-2025. "We are just going to build a partnership to make this happen at a pace that is much faster than what we could do ourselves," Hollub said. Occidental expects to spend about $600 million per year through 2026 to build its own projects, which could eventually number 100. EPM understands that Occidental’s project will require some 250 MW of renewable power capacity to power the operations that are to remove 500,000 tons of CO2 from the air annually. This means that Occidental’s vision for hundreds of DAC units will absorb an absolutely massive amount of renewable power. We greatly wonder, if reducing CO2 emissions really is the objective, could these green electrons not be put to much more effective use, i.e. prevent emissions?
Climate Politics
More than 60 countries have said they back a deal spearheaded by the European Union, United States and United Arab Emirates to triple renewable energy this decade and shift away from coal, writes Reuters. Some major emerging economies like Nigeria, South Africa and Vietnam, developed countries like Australia, Japan and Canada, and others including Peru, Chile, Zambia and Barbados have said they will join the pledge. The draft pledge says the greater use of renewables must be accompanied by "the phase down of unabated coal power," including ending the financing of new coal-fired power plants.
The European parliament has voted against plans for big cuts in petrol engine emissions, but agreed to regulate the amount of microplastics that vehicle tyres and brakes can shed for the first time, writes the Financial Times. The main argument is that further reductions would force carmakers to spend money developing new fossil fuel engines, which are being banned in 2035, instead of on development of electric vehicles.
The Electrification of Transport
Saudi Arabia, the world’s biggest oil producer, is aiming to become a key hub for making batteries for electric vehicles, writes Bloomberg. Th country is looking at investing in the production of EV batteries and manufacturing hydrogen-powered vehicles as the next step in its plans to build a nexus for carmaking in the Middle East. Saudi Arabia has already set a target for producing 500,000 electric vehicles by 2030, and efforts are now zeroing in on renewable energy and mining minerals needed to develop battery chemicals. Progress is being made. The Saudi wealth fund has agreed on a deal with Pirelli to build a more than $550 million tire plant that would serve companies including EV maker Lucid and Hyundai, which are developing plants on the west coast of the country.
But Bloomberg reports that Saudi Arabia has alos experienced setbacks. It appeared to have found a winner when US luxury electric vehicle manufacturer Lucid went public in 2021, at which time the Saudi wealth fund PIF’s 60% ownership of the carmaker was valued at $55 billion. But the excitement didn’t last: The Saudis’ holding is now worth just $5.4 billion, as Lucid has learned how hard it is to become a global carmaker. While that is the same amount Saudi Arabia originally invested, Lucid remains miles away from becoming cash-flow positive, meaning the Kingdom will have to keep propping it up with equity and loans.