Energy, Geo-Politics, & Money - 2023.11.03
In this roundup, we look at:
The shorter-term outlook for oil prices, which will be heavily influenced by Saudi Arabia’s decision regarding its voluntary production cut
Shell scaling back of investment in New Energy solution, and ruling out of mega acquisitions, in order to finance its increase in share buybacks
The IMF warning that the liquidity risks presented by life insurers linked to private capital groups could lead to “contagion” affecting the wider financial sector and real economy
Why BlackRock sees benchmark US borrowing costs hovering around 5.5 per cent for the next five years
Why you should spend a considerable amount of your time reviewing and analyzing geopolitics
The planned meeting between Xi and Biden, which in the EPM view is destined to disappoint most analysts
Why the South China Sea is criticality important for the energy security of the countries that border it
Why SAF prices are likely to stay high, and why in the EPM view this means the aviation industry will have to choose between decarbonization and growth
Sales of Ferraris with hybrid engines, which have overtaken those of traditional models for the first time
The efforts by China’s EV brands to enter the Middle East car markets
Why natural gas could be much worse for the climate than coal, in particular when supercooled and shipped as LNG
General Energy News
Oil prices are heading for their second straight week of losses, writes Reuters, as the US central bank left the door open for possible future rate hikes and worries that the Middle East conflict would disrupt supply eased. Brent crude futures are at $86.91 a barrel, while US West Texas Intermediate crude futures are at $82.58 a barrel.
Looking ahead, most analysts expect Saudi Arabia to maintain its voluntary production cut of 1 million barrels per day into December, writes Reuters. Saudi Arabia first made the voluntary cut for July as an addition to a broad supply-limiting deal reached in June by OPEC+. The kingdom said in September it would extend the cut until the end of the year, and review the decision monthly. Based on the kingdom's practice in previous months, the decision on keeping the cut for December will likely come in an early November statement. Any moves regarding 2024 would be unlikely ahead of the next OPEC+ meeting on Nov. 26 in Vienna.
An analysis by Reuters highlights that Shell will be cutting back on investment in New Energies to enable the increase in share buybacks it announced yesterday. In the first nine months of this year, Shell invested about $1.7 billion into wind and solar, hydrogen and carbon capture and storage, down 30% from the same period last year, Reuters calculations based on Shell filings show. That puts Shell on track to hit the lower end of its $2 billion to $4 billion guidance for such investments in 2023. Outside that, Shell spent about $2.3 billion in what it calls "Marketing" that includes biofuels and EV charging, down from the $2.8 billion in the same period of 2022. That doesn't include a $2 billion purchase Shell completed in February to buy biogas producer Nature Energy.
Shell’s CEO Wael Sawan is truly dedicated to the mission of returning as much cash as possible to shareholders, and therefore rules out a “mega acquisition” such as Pioneer and Hess, writes the Financial Times. “We are not trying to imitate others,” Sawan told the Financial Times, adding that big acquisitions were not a priority between now and 2025. “We continue to believe that we are undervalued as a company, so incremental dollars will more likely be channeled to share buybacks rather than to mega acquisitions.”
Macroeconomics
The IMF has urged regulators to bear down on the liquidity risks presented by life insurers linked to private capital groups, warning of potential “contagion” to the wider financial sector and the real economy after a shift in ownership in the sector, writes the Financial Times. Groups including Apollo, Blackstone, Carlyle and KKR have flooded into insurance since the global financial crisis. Almost 10 per cent — $850bn — of the US life insurance industry’s assets were owned or managed by private equity firms by the end of 2021, the IMF said. More than 40 per cent of the assets of private equity-linked US insurance companies are allocated to illiquid strategies including structured credit, mortgage loans and mortgage-backed securities, compared with 30 per cent for other US insurers, according to the IMF. Private equity-linked life insurers were “more vulnerable” than their peers if there was an increase in corporate defaults and credit downgrades due to rising interest rates, the IMF said.
BlackRock, the world’s largest asset manager, sees benchmark US borrowing costs hovering around 5.5 per cent for the next five years, writes the Financial Times. This much higher long-term borrowing cost comes from ageing populations, fractious geopolitics and costs associated with the energy transition. “We talk about a world being shaped by supply rather than a world shaped by demand, which was the case between 1980 to 2020,” Jean Boivin, head of the BlackRock Investment Institute and a former deputy governor of the Bank of Canada, said, citing crucial drivers including “ageing populations leading to tight labour markets, geopolitical fragmentation making global production more expensive and the energy transition meaning a more expensive energy mix”.
Geopolitics
A Bloomberg article explains why we at EPM spend a considerable amount of time analyzing geopolitics. Gone is the relative stability of what historians term the Pax Americana, the 75 years of US economic, military and cultural dominance that followed World War II, it says. In its place is a multi-polar and inherently fragile competition for power and influence over trade, technology and territory. What makes geopolitical risk so vexing is that it defies modeling. The variables are a Rumsfeldian mix of “known knowns”, such as China’s frustration with US curbs on the export of advanced semiconductor technology; “known unknowns”, such as where and when the Russian military may use tactical nuclear weapons in Ukraine; and, worst of all, “unknown unknowns”. Here, the cone of possibilities is infinitely wide.
All this means that for the first time in our lifetimes, geopolitics drives fundamental uncertainty, and investors need a deep geopolitical insight in order to make the right decisions. In our EPM opinion, a regular review of the headlines is not sufficient for this. In fact, even detailed review of what is available in common news sources is unlikely to cut it, as these news sources tend to look at event from the same (western) perspective. Our EPM approach is, therefore, to review a wide variety of news sources, covering a wider variety of perspectives, such that we can provide you the deep understanding of geopolitical events that is required to position for success in the market.
Preparations are well underway for a meeting between Biden and Xi on the sidelines of the Asia-Pacific Economic Cooperation summit later this month, writes Nikkei. If it materializes, it will be their first summit in approximately a year. The goal is to "stabilize China-US relations and return it to the track of healthy, stable and sustainable development," Foreign Minister Wang Yi said regarding the planned meeting, Nikkei believes the meeting, if it takes place, is likely to disappoint. Because China is not aspiring to become the nation that the West would like it to become. And because Chinese leaders think differently than do many of their western counterparts, it says. The EPM view is slightly different. We mentioned before that we believe China is deeply upset by the US’s current economic and military policies regarding China. There is no doubt in Chinese minds that the economic sanctions are designed to hold back the country’s development, while the US military alignments across Asia are designed to control China’s access to the world. If any country would do such things against the US, this would undoubtedly – and justifiably – be seen by the US as “acts of war”. As such, China expects the US to first prove “good intentions”, by undoing some of its acts in the economic and military spheres, before China will commit to real dialogue.
As to one of the hotbeds for conflict in the Asia region, the South China Sea, Canadian Ambassador to Vietnam Shawn Steil last week explained why there is so much tangling over lines of demarcation in the area. Nikkei writes that thanks to the region's monsoons, researchers from the Canadian Center of Science and Education, Guangdong Ocean University and other institutions are finding abundant wind levels over the sea, especially in winter. Additionally, rare earths represent untapped business opportunities in the sea.
Energy Transition & Technology News
Travelers will have to stomach a permanent increase in airfares if the industry is to successfully transition to sustainable aviation fuel, writes S&P Global. SAF, an alternative to fossil jet fuel produced with renewable feed stocks, has been earmarked as one of the only options for air travel to decarbonize. Yet with limited global availability and several industries banking on biofuels solutions, high costs are unavoidable. SAF prices must stay high to compete for feedstocks. In the EPM perspective, this is a critical piece of information when thinking about the future of aviation. Fuel costs account for around 30% of airfares, meaning any pivot from conventional jet fuel will see prices rise exponentially. This means, in our EPM view, that the aviation industry will have to choose between decarbonization and growth. With SAF prices where they are likely to be, it simply can not achieve both at the same time.
The Electrification of Transport
Sales of Ferraris with hybrid engines have overtaken those of traditional models for the first time, writes the Financial Times. Some 51 per cent of Ferrari’s cars sold between July and September were hybrid, compared with 43 per cent in the previous three months and just 19 per cent a year ago. Four of the 13 models offered by Ferrari in the quarter were hybrids. Ferrari’s three-month sales were driven by the 296 GTB and GTS supercars, which are hybrids that also use a V6 engine, as well as the top-end SF90 hybrid. The supercar brand does not expect to launch its first fully electric model until 2025. The company has promised that 40 per cent of its line-up will be battery-only cars by the end of the decade, but has refused to put an end date on production of engine-only models. Chief executive Benedetto Vigna said Ferrari wanted to give its customers the “freedom” to choose how their cars are powered. “Some of them will not take electric cars, some others will take both, some others will get into the Ferrari family because of electric cars,” he added.
China’s EV has their eyes on the car markets of the Middle East, writes Bloomberg. Amid sanctions, tariffs and investigations in the US and the EU, the Middle East is considered easier to penetrate, it says. Chery is planning to launch at least two new hybrids or EVs, while Xpeng and Geely’s premium Zeekr brand are making plans to expand into Qatar and Bahrain (which to be honest are extremely small markets but with consumers with extremely deep pockets). The Chinese firms’ efforts face a raft of challenges, from simple economics — gasoline is generally very cheap in major oil producing countries — to a lack of brand awareness among potential buyers, a barely there charging infrastructure, and concerns about how well car batteries can handle the brutal heat of a Middle East summer.
Other
The New Yorker reports on research by Robert Warren Howarth, a professor of ecology and environmental biology at Cornell and one of the world’s premier methane scientists. Howarth has demonstrated that in the US, domestically used natural gas is no better for the climate than coal, largely owing to the methane leaks associated with it. As to the exports of US natural gas, it appears that because of the extra leakage of the supercooled gas during transit, even larger amounts of methane escape into the atmosphere and, hence, much more damage is done to the climate than coal does. Once the gas is compressed aboard ship in insulated tanks, some of it “boils off” as heat leaks through the insulation. Newer tankers try to burn that boiled-off methane for fuel, but even then, Howarth says, some of it is emitted unburned in the exhaust stream. He notes, “It all adds up.” According to his calculations, even when the gas is delivered with the most modern ship, taking the most direct route, the greenhouse-gas emissions from the entire ground-to-combustion life cycle of L.N.G.—from the fracking wells, to the pipelines, the liquefaction stations, the ships, and the final combustion—are twenty-four per cent worse than those caused by digging up and burning an equivalent amount of coal.