Energy, (Geo) Politics & Money - 2024.04.23
Non-partisan, objective & neutral analysis where global developments in energy, business & geopolitics intersect & sourced from leading global sources.
Welcome to EPM, where we take our daily look at the interconnected worlds of Energy, (Geo)Politics and Money. Curated from the world’s leading sources of information, we provide you both the information and the objective, neutral commentary that you need to make sense of it all – and beat the market.
In this roundup, we look at:
The view that oil markets are relinquishing the Middle East risk premium too fast; which EPM fundamentally disagrees with
The interest of the European majors in ADNOC’s Ruwais LNG project
Where the strong US dollar is creating the biggest macroeconomic risks
China’s harsh attack on US complaints about industrial overcapacity; which in the EPM view indicates that earlier talk of a “thaw” in relations is not aligned with facts, and that a Chinese response, similar to its earlier constraints on the export of rare earths, are likely to take place
The meeting between Russia, China and Iran in Sint Petersburg with the aim of further strengthening ties
The penultimate round of UN negotiations to broker a deal likened to the 2015 Paris climate agreement for plastics; where ExxonMobil is leading the petrochemical’s industry resistance to the proposed deal; and where EPM notes why we believe ExxonMobil is conceptually right, but practically wrong, for moral and business reasons
The International Energy Agency (IEA) forecast that almost one in three cars on the road in China and more than one in five in the U.S. and Europe will be electric by 2030; why China is likely to be the big winner of this transition; and what this will mean for global oil demand
Photo by Andrew Roberts on Unsplash
General Energy News
The oil markets are relinquishing the Middle East risk premium that nearly propelled prices to $100 a barrel too fast, writes Bloomberg. On the one hand, the pullback is entirely rational, Bloomberg says. Tehran and Tel Aviv have advertised they’re conducting limited, face-saving acts of retribution rather than initiating a wider war. Oil supplies remain unaffected. But, Bloomberg says, while Iran and Israel haven’t indicated they plan further offensives, the enduring violence in Gaza remains a flashpoint that may trigger escalation.
EPM’s PERSPECTIVE
In the EPM view, this is an emotional rant rather than an informed analysis. The risk premium should be set based on the risk of escalation, and the fact indicate that Iran and the US do not want this, only Israel does. The risk premium over most of the past two weeks assumed a bigger interest in escalation among these mentioned parties, which is why EPM said from the beginning it would come down rapidly again. Additionally, we say, the OPEC+ production restraint has left ample unused capacity in the market. Does that leave the market without risk? Obviously not, and EPM has explained how escalation could still take place (because of Israel’s geostrategic interest in escalation).
SHELL AND TOTAL TRY TO BUY IN ADNOC’S NEXT LNG PROJECT
Shell and TotalEnergies are among several global energy companies in talks to buy stakes in Abu Dhabi National Oil Company’s next liquefied natural gas export project in the United Arab Emirates, writes Bloomberg. The two oil majors, as well as Japanese trading house Mitsui, are looking for equity in the Ruwais facility, as well as contracts to purchase LNG from it. The Ruwais project, which is currently fully owned by Adnoc, will have the capacity to export 9.6 million tons of LNG per year, more than doubling the UAE’s total output. The UAE’s only other LNG export plant, the 5.8 million-ton-a-year Das Island facility, is owned by Adnoc LNG, of which Adnoc, Mitsui, BP and TotalEnergies are shareholders.
Macroeconomics
STRONG US DOLLAR CREATING GLOBAL MACROECONOMIC RISKS
Last week, EPM reported on how the strengthening US dollar is creating macroeconomic risks around the global. Reuters now reports on where it believes these risks are greatest. Japan’s yen is the worst performing G10 currency this year, having fallen 9% against the US dollar. Even after Japan ended eight years of negative rates last month, the gap between Japanese and U.S. rates remains wide and is set to remain so for some time, keeping the yen weak. The dollar has risen around 7% on Korea's won in the last month alone and is at its highest in a year. Last week, the United States, Japan and South Korea agreed to "consult closely" on currency markets, a rare warning indicating the severity of the issue for mentioned countries. Over in Asia India's rupee and Vietnam's dong are at their weakest ever, while Indonesia's rupiah is at its softest in four years. Traders are also watching China's yuan, onshore and offshore which has depreciated much less than peers. A weak yuan would help Chinese exporters but could encourage capital outflows. The euro is trading just above $1.06, but banks have recently downgraded euro/dollar forecasts. If the euro continues to weaken to below $1.05, inflationary risks increases, which would leave the ECB in a position of not being able to lower interest rates.
Geopolitics
CHINA ATTACKS US’ COMPLAINTS OF OVER CAPACITY
As US Secretary of State Blinken is set to travel to China, Beijing launched its harshest attack to date on US complaints about industrial overcapacity, writes Bloomberg. The US accusation contains “the malicious intention of curbing and suppressing China’s industrial development, aiming to seek a more favorable competitive position and market advantage,” a Chinese diplomat said at a recent briefing, according to a Foreign Ministry statement. “It is naked economic coercion and bullying,” added the official. “We firmly oppose and counteract this”, the diplomat added.
EPM’s PERSPECTIVE
EPM believes that (a) Blinken in in for some tough conversations; (a) earlier talk of a “thaw” in relations is not aligned with facts; and (b) a Chinese response, similar to its earlier constraints on the export of rare earths, are likely to take place.
RUSSIA, CHINA AND IRAN MEET TO STRENGTHEN TIES
Russia, China and Iran are meeting in Sint Petersburg with the aim of further strengthening ties, writes Bloomberg. Involved in the meeting are Russia’s Security Council Secretary Nikolai Patrushev and China’s security chief Chen Wenqing are meeting with Iran’s National Security Council chief, Ali Akbar Ahmadian, on the sidelines of an international conference of intelligence chiefs. Other countries with attendance are Brazil, South Africa, China, India and Iraq.
Climate Politics
PLASTIC WASTE CONFERENCE - BIG OIL AGAINST DEALING WITH THE PROBLEM
More than 4,000 country delegates and observers will gather in Ottawa, Canada on April 23 in the penultimate round of UN negotiations to broker a deal likened to the 2015 Paris climate agreement for plastics, writes the Financial Times. ExxonMobil is leading a fightback by the petrochemicals industry against the proposed plan to cap the production of plastics. The company says, “The issue is pollution. The issue is not plastic.” And, “A limit on plastic production will not serve us in terms of pollution and the environment.” The ExxonMobil argument is that by limiting plastics production, global carbon emissions are likely to go up because alternatives to plastics have, in many cases, a higher lifecycle carbon intensity.
EPM’s PERSPECTIVE
EPM believes ExxonMobil is conceptually right, but practically wrong. It is right in the sense that the focus should be on pollution, i.e. the management of plastic waste, rather than the production of plastic. At the same time, however, the company is practically wrong since the reality is that the “lower carbon solution: that is plastics (compared to packaging alternatives) is creating a different problem named “waste” because it doesn’t degrade. Furthermore, EPM believes, the petrochemical industry at large is not doing enough to get to the situation where plastic waste is properly managed around the world. Until it does, by working with local and regional authorities, in particular in the developing world, to get waste management processes (including the necessary facilities) up and running, the industry’s call for unlimited growth to petrochemicals production will always be seen as an attempt to get a license to produce more waste. That is why we at EPM believe it is in the petrochemical’s industry interest to get involved in waste management: because it addresses the fair and valid criticism of the waste problem its products create, and because it would provide access to the feedstock that will be critical to any efforts at building a recycling business.
The Electrification of Transport
GLOBAL EV DEVELOPMENTS
Almost one in three cars on the road in China and more than one in five in the U.S. and Europe will be electric by 2030, the International Energy Agency (IEA) forecast, writes Nikkei Asia. This year alone, around 20% of cars -- or 17 million units -- sold worldwide will be electric vehicles. This comes on the back of a record year for EV manufacturers, which sold 14 million such vehicles in 2023, a rise of 35% from the previous year. EVs accounted for 18% of car sales worldwide in 2023, a rise of four percentage points over 2022. IEA Executive Director Fatih Birol said in a statement
“Rather than tapering off, the global EV revolution appears to be gearing up for a new phase of growth. The wave of investment in battery manufacturing suggests the EV supply chain is advancing to meet automakers' ambitious plans for expansion. As a result, the share of EVs on the roads is expected to continue to climb rapidly.”
Chinese companies such as BYD are the biggest winners in the growing EV market, given their large manufacturing capacities and government subsidies that allowed them to undercut prices and swamp some markets, Nikkei writes. The IEA estimates that 60% of EVs sold in China are already cheaper than combustion engine cars. Elsewhere, it expects price parity only by around 2030.
Perhaps more significantly, Reuters writes, the IEA sees China's influence and lead in EVs spreading throughout Asia as it leverages its vast industrial resources to invest and promote cheaper EVs in countries such as Thailand, Vietnam and Indonesia. The key to success for China's EVs, when compared to vehicles made in Europe and North America, is cost. China is pursuing a different path with EVs compared to Europe and North America, choosing to emphasise smaller and cheaper city cars that can compete, and even out-compete equivalent internal combustion engine (ICE) vehicles. In contrast, the bulk of European and U.S. EVs have been larger, more luxurious and more costly, with automakers seemingly targeting a wealthier demographic of early adopters of new technologies.
S&P Global adds to the above that electric vehicles (EVs) will displace up to 6 million b/d of oil demand by 2030, and 11 million b/d by 2035. If countries fully meet all their announced energy and climate pledges, the amount of oil displaced by electric vehicles will rise up to 12 million b/d.