Energy, Geopolitics & Money - 2024.02.01
Providing our readers with unique insights based non-partisan, objective & neutral analysis of intersecting global developments in energy, business & geopolitics curated from leading global sources
In this roundup, we look more closely at the official confirmation of our assertion the US and Iran have aligned behind the scenes to prevent the attack on the US military base in Jordan from escalating to War on Gaza to a wider, regional conflict.
EPM believes, while the US prepares its (military) response to the attack in Jordan, US and Iranian alignment on preventing the crisis from boiling over is of critical importance to oil market investors and participants. The US response will undoubtedly be presented by observers as “firm”, “significant”, “overwhelming” etc. Iran’s response to US actions will also be equally robust, include harsh words, and include a threat or two. The result, in particular among oil investors less aware of what is really happening geopolitically behind the scenes in the region, will be generalized fear in the oil market.
As such, we see another opportunity coming for oil investors resulting from EPM’s unique analysis of geopolitics.
Furthermore, we look at:
Shell’s reported earnings of $7.3bn during the 4th quarter
A potential second round of listing Aramco shares
The very optimistic comments by US Fed chair Powell regarding interest rates peaking and moving lower in coming months because inflation has been tamed
The US’ positioning of three of its eleven carrier strike groups around China, near the “first island chain”, connecting Okinawa and Taiwan to the Philippines (EPM wonders where US submarines are lurking?)
The continuing, massive insurmountable gap between Israeli and US objectives for Gaza, with Israeli actions and statements indicating it wants to clear the area while the US continues to talk about a preferred “2 state solution”
The activist investor pressure on BP to end its green investments
The aggressive expansion plan of Chinese electric vehicle maker BYD in ASEAN
The selection of veteran Democratic strategist John Podesta as the US top diplomat for climate talks to succeed John Kerry
Farmers’ protests across Europe against by taxes, green rules, and what they feel is unfair competition from abroad
General Energy News
Shell has reported adjusted earnings of $7.3bn for the final three months of 2023, writes the Financial Times, bringing its annual profits for 2023 to more than $28bn. Shell’s $54.2bn in cash flow from operations was the second highest in the company’s history. The biggest contributor to group profits was once again the integrated gas division, which reported quarterly earnings of $4bn. Shell’s oil division also performed well, generating profits of $3bn underpinned by higher production than the previous quarter, but its refining operations suffered. In a worrying sign for the global economy, Shell’s chemicals and products division, which produces refined fuels, reported adjusted earnings of just $83mn
Bloomberg writes that Saudi Arabia is looking to list more of Aramco. The Kingdom is working with a group of advisers and seeks raise at least 40 billion riyals ($10 billion) from the share sale on the Saudi stock exchange. There’s no final decision on the timing of the sale and the deal may be delayed. The challenge for any new Aramco offering would be attracting new investors. Many had balked at the Saudi government’s valuation expectations and Aramco’s low yield compared with industry peers during the firm’s 2019 IPO. That left the deal mostly relying on local retail investors and wealthy family offices. Although the company has introduced a new mechanism to boost dividends in an attempt to attract more investors and improve liquidity, it still lags peers. The price-to-earnings ratio of Aramco is the highest among peers including Shell, BP and ExxonMobil.
Macroeconomics
Federal Reserve Chair Jerome Powell says interest rates have peaked, will move lower in coming months as inflation continues to fall, combined with an expectation of sustained job and economic growth, writes Reuters. Powell says while the inflation target has not been met yet, which is why the Fed, in its latest decision, left rates unchanged in the 5.25%-5.50% range, and that he could therefore not yet specify a date when the first rate cut would be implemented. But during a 48-minute session with reporters Powell offered an un-hedged round of good news about the US economy and the fight against inflation, suggesting it was just a matter of time before the belief a rate reductions is due kicks in.
Geopolitics
The US military has doubled down on its effort to deter China by deploying three aircraft carriers to the western Pacific, writes Nikkei Asia. According to the US Naval Institute, the occasion appears to be the first time in two years that three US carriers have been positioned near the so-called first island chain, connecting Okinawa and Taiwan to the Philippines. While plans to deploy carriers are believed to have been finalized months ago, a series of demonstrations has served as a reminder that the military is not distracted from the Indo-Pacific, at a time when a regional war could erupt in the Middle East. Rob Wittman, a Republican House representative from Virginia and vice chair of the House Armed Service Committee, told Nikkei Asia
China is very opportunistic and they are looking at what efforts we are putting in the Indo-Pacific… We know that presence there is a deterrence, capability there is a deterrence, and we don't want to lose focus on that, because deterring a temptation by the Chinese to take Taiwan by force is something that we need to keep in mind every day.
In yesterday’s EPM update on the subject of the attack on the US military base in Jordan, we said that all signs were that the US and Iran had aligned behind the scenes to prevent the event from causing an escalation in conflict. CNN has since confirmed our assessment, writing that the most powerful Iran-backed militia in Iraq, Kataib Hezbollah, has announced the suspension of its military operations against US forces in the region.
In a statement released by Kataib Hezbollah, it said
We are announcing the suspension of military and security operations against the occupation forces (US troops) – in order to prevent embarrassment to the Iraqi government. We will continue to defend our people in Gaza in other ways.
This is of critical importance to investors in the oil market, EPM believes, as the US currently preparing its (military) response to the Jordan attack.
As to the War on Gaza, the seemingly insurmountable gap between Israeli and US objectives was on display yesterday. Israeli Prime Minister Benjamin Netanyahu called for the closure of the UN’ Palestinian refugee agency (UNRWA) writes Reuters while the IDF stepped up air strikes on Gaza City in the north and Khan Younis in the south. In EPM’s view, this signals Israel intent to leave Gaza utterly uninhabitable. All key elements of critical infrastructure are in the process of being destroyed - utilities, education, healthcare, roads, and housing - and the UN’s organization providing aid to assist people who have lost everything must close shop. At the same time, Reuters also writes about the US’ active pursuit to establish an independent Palestinian state. Matthew Miller, the State Department’s spokesperson, declined to provide details on the department's internal work on the issue, but he did tell a news briefing the effort has been an objective of President Joe Biden's administration. Miller said:
We are actively pursuing the establishment as an independent Palestinian state, with real security guarantees for Israel, because we do believe that is the best way to bring about lasting peace and security for Israel, for Palestinians and for the region.
In other words, both want a fundamental change in the situation on the ground, but very different ones!
Energy Transition & Technology News
Bluebell Capital Partners, a London-based activist investment firm, has taken a stake in BP in an effort to drive formulation of a new corporate strategy, writes the Financial Times. But it’s not what you’d expect: Bluebell wants BP to drop green commitments and increase production of fossil fuels. Bluebell believes BP is not set up for success in the intensely competitive renewables market. BP is targeting an internal rate of return of 6 to 8 per cent from its renewables investments — far below the 15-20 per cent returns it typically gets from its oil and gas business. Bluebell says this means the return could easily fall below BP’s cost of capital, which it estimates at 7 per cent. It also criticised the company’s strategy of pursuing clean energy growth through expensive acquisitions and aggressive bidding in auctions.
Climate Politics
Veteran Democratic strategist John Podesta will be appointed the top global climate talk diplomat representing the US, succeeding John Kerry writes Bloomberg. Podesta is already a top adviser to Biden on climate, working at the White House to shepherd implementation of the Inflation Reduction Act (IRA). Podesta championed environmental policies while working in President Bill Clinton’s White House as chief of staff, and later, he advocated climate action as founder of the left-leaning Center for American Progress and chair of the board of the ClimateWorks Foundation.
Farmer protests in Europe are spreading. In EPM’s view, they effectively started in 2022 and 2023, and are predominantly energy transition policy related. Protests started in The Netherlands with farmers protesting new government rules related to the country’s decarbonization objective. Now, Europe is seeing large scale farmer protests in Germany, against the government’s decision to raise the price of diesel, as well as France and Belgium. They will soon be joined by Spanish and Italian farmers , Reuters writes. Farmers complain they are not paid enough, are choked by taxes and onerous green rules, and face unfair competition from abroad.
EPM sees these protests as directed against two of the EU main policies: the energy transition and the EU’s position regarding the Ukrainian War which led it to waive import quotas and duties on Ukrainian agricultural products. According to The Guardian, farmers have already won a first concession from the EU. It has announced a delay in rules that would have forced farmers to set aside land to encourage biodiversity and soil health.
The Electrification of Transport
Nikkei Asia notes Chinese electric vehicle maker BYD aggressive expansion plan for ASEAN. In mid-January, China's top EV maker launched three passenger models in Indonesia, introducing its Seal sedan, Atto 3 sports utility vehicle and Dolphin hatchback. In Singapore and the Philippines, BYD works with local distributors to sell its EVs, having struck partnerships with the automotive group Sime Darby Motors in the city-state and the Philippine conglomerate Ayala to grow its sales network for passenger cars. Next, the company wants to open its own sales outlets in these countries, more than a dozen this year alone.