Energy, Geopolitics & Money - 2024.02.07
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 at:
BP’s forecast-smashing Q4 2023 earnings of $3 billion
TotalEnergies’ below expectations earnings result, making it the only IOC with disappointing results last quarter
Speculator sentiment on the oil markets, which has turned bullish based on the view that the business cycle slowdown is coming to an end
Why the European Central Bank plans to slowly decrease interest rates this year
The growing confidence in the global economic outlook for 2024, with the OECD following the IMF in upgrading its growth outlook
The view China’s economy will forever remain “number two” and where EPM discusses the unfounded geopolitical view that a Trump presidency would be worse for US – China relations (we believe its not founded in facts)
Israel making continued threats against Hezbollah and Lebanon (where we at EPM continue to maintain a close eye as this the most likely cause conflict escalation in the Middle East, unlike in the “war of words and occasional rocket” between the US and Iran’s allies in Yemen and Iraq)
The difference in the US approach to Israel and Iran and how it risks escalating the conflict in the Middle East
The bleak 2024 outlook for global wind power, which is a continuation of the “very bad year” of 2023
The origins of the concept “hydrogen economy”; Germany’s $17 billion plan to subsidise hydrogen-based power plants; who is spending what on R&D for the technology; and why despite all this, the “hydrogen economy” vision is on its way to extinction
General Energy News
BP reported forecast-beating earnings of $3 billion in the fourth quarter, writes Reuters. That compared with a $3.3 billion profit in the third quarter and $4.8 billion a year earlier. The quarterly results, lifted by strong gas trading but offset by "significantly lower" refining margins, weak oil trading and exploration impairments, took the energy giant's 2023 profit to $13.8 billion.
TotalEnergies net adjusted income in the fourth quarter of 2023 was $5.2 billion, writes Reuters, down from $7.6 billion in the same quarter a year earlier. Among the IOCs it is the only one to come in below expectation ($5.4 billion). For the whole of 2023, adjusted net income was $23.2 billion, about a third below 2022 as oil prices fell back from the peaks hit in 2022 at the beginning of Russia's invasion of Ukraine.
Speculator sentiment in the oil market is turning, writes John Kemp for Reuters. The dominant view is now that the business cycle slowdown is coming to an end, while fears about attacks on tankers near southwestern Arabia are subsiding. Hedge funds and other money managers purchased the equivalent of 97 million barrels in the six most important petroleum futures and options contracts over the seven days ending on Jan. 30. Fund managers have purchased petroleum in five of the most recent seven weeks increasing their position by a total of 296 million barrels since Dec. 12.
Looking slightly further ahead, the IEA believes India will be taking over from China as the world’s main growth engine for oil demand, writes Reuters. The world's third-largest oil importer and consumer is expected to post an oil demand increase of almost 1.2 million barrels per day (bpd) between 2023 and 2030, accounting for more than one-third of the projected 3.2 million bpd of global increases in the period. the IEA said
In the case of India, compared with China or other parts of the world, the Indian economy still continues to need more transport fuels so we expect India will continue to grow in transportation fuels. So that's something different from countries like China
New electric vehicles and energy efficiency improvements in India will avoid 480,000 bpd of extra oil demand from now to 2030, it added.
Macroeconomics
The European Central Bank is planning to slowly decrease interest rates this year, writes the Financial Times. Lower borrowing costs could reinvigorate the eurozone’s stagnant economy, but also cause inflation to “flare up again”, said Isabel Schnabel of the ECB executive board.
The Organisation for Economic Cooperation and Development (OECD) upgraded its growth forecast for the global economy to 2.9% for 2024 from its 2.7% forecast late last year, writes Nikkei Asia. EPM notes this effectively means the OECD has followed the IMF, which also upgraded its growth outlook. Underlying the OECD outlook is the view that inflation is declining more quickly than expected, and the OECD expects it to fall within targets by the end of 2025 in most G20 countries, which allows for a reduction in interest rates faster than originally expected. It upgraded US economic growth to 2.1% in 2024 and 1.7% in 2025, thanks to strong consumption and high employment. The 2024 forecast is an improvement from its previous expectation of 1.5% growth, although its 2025 figure is unchanged. The organization still expects the Chinese economy to grow 4.7% this year, but sees that figure falling to 4.2% in 2025. A significant European slowdown is expected to be balanced by steady growth in emerging economies. Among them, India is benefiting from improved economic policies and solid investments in infrastructure, the OECD said. With growth of 6.7% last year, India is expected to see a smaller expansion of 6.2% in 2024, followed by a rebound to 6.5% in 2025. Indonesia's economy is seen growing 5.1% this year and 5.2 in 2025, from 4.9% in 2023.
According to former International Monetary Fund official in charge of China, Eswar Prasad, a professor at Cornell University, the likelihood that China's GDP will one day overtake that of the US is declining, writes Nikkei Asia. Especially if former US President Donald Trump returns to the White House, as he expects global protectionism and geopolitical tensions to escalate in such a scenario. But, with renewed American isolationism, Beijing will be offered a chance to enhance its influence globally, he says.
In the EPM view, the idea that Trump will be better / worse than “anyone else” is unfounded. We note that it was Obama who announced the Pivot to Asia, which clearly defined China as the US’s main adversary. It was Trump who introduced sanctions on China, which were focused on getting China to buy more from the US. But it was Biden who announced economic warfare against China, sanctioning different, critical sectors of China’s economy, most importantly in semiconductors. This tells us the US geopolitical plans vis-à-vis are not the product of a single president. Rather to the contrary. The only thing Democrats and Republicans seem to agree on these days is keeping China down. As such, the EPM’s view is that the most likely outlook is continued escalation in the US’s trade war against China, irrespective who becomes president. It is only the styles and means, as well as the accompanying language, that would be different.
Geopolitics
Israel continues to threaten escalation of its war on Gaza through an attack on Hezbollah in Lebanon. Israel’s foreign minister Israel Katz said time’s running short to find a diplomatic solution to the presence of Hezbollah fighters along the country’s northern border with Lebanon, writes Bloomberg. From an international law perspective, the Israel demand is unreasonable, EPM notes, since Israel’s demands relate to what happens on the Lebanese side of the border. But that is not what is relevant from an energy markets perspective.
What is important, in our view, is the fact that Israel continues to make these demands while ignoring the international community’s views on its War on Gaza. This means that there is a real possibility that Israel will escalate through Hezbollah in Lebanon, irrespective of whether its demands are justified by international law or not. We note that Israel made its comments to the French foreign minister while on a visit to Jerusalem. The French have historically been influential in Lebanon, and as such these comments mean that Israel wants the international community to choose its side and use its leverage in Lebanon to get Israel what it wants.
Again in our EPM view, if the international community indicates willingness to do so, then Israel will continue to increase pressure on Lebanon and Hezbollah until it gets what it wants. As such, escalation would be prevented by the international community – in particular the US – taken a clear stance against this Israeli demand. But since that has not happened yet in the fourth months of the War on Gaza, we will continue to keep a close eye on this subject as it comes with a real possibility of escalation – unlike the “war of words and occasional rocket” between the US and Iran’s allies in Yemen and Iraq.
So far, the US approach vis-à-vis Israel has been “little carrot, no stick”, EPM notes with surprise. (Compare this to the US approach vis-à-vis Iran, which is mostly stick, as in military attacks, and little carrot, as in reduction of sanctions.) This is why we were incorrect in our original assessment as to how things would develop in the Middle East post October 7. We said at the time that the US would drive the Israel response toward its coveted “Two State Solution”, and that as a result the Israeli military response would be limited. What has transpired, however, is that Israel has refused to go along with the US vision, and is doing what it wants to do. Probably because it has noticed that the US is unwilling (or unable) to forcefully lead Israel. So Israel is acting based on its interests and ignoring US interests, because it feels it can. The recent formal announcement by Saudi Arabia that it will not agree to formal diplomatic relations with Israel without an independent Palestinian state, reported by Reuters, is a further example of this US weakness. This is a very small carrot, as Israel already has informal diplomatic relations with Saudi Arabia As such, it will not incentivize Israeli to do anything in accordance with the US vision. As long as this is the best the US can do to drive forward its vision in the Middle East, a significant risk for escalation of the conflict in the Middle East remains.
Bloomberg also notes the difference in US approach to Israel and Iran. And, it warns that if the US goes even more “stick”, it risks a real Iranian response. So far, as EPM has also noted, Iran has held back and coordinated behind the scenes with the US to avoid a real escalation. This is what happened after the Qasim Suleimani killing in 2020, as well after the Israeli strikes on Iranian officials in Syria and Lebanon, and after the US strikes on the Houthi and other Iranian-backed armed groups across the Middle East in 2022 and 2023. In the EPM view, it is the difference in the US approach that is the risk to escalation in the Middle East. Israel’s “carrot” is what increases domestic pressures on the elites in the countries that receive the “stick” to respond militarily.
Energy Transition & Technology News
The world's three biggest wind power groups on Wednesday gave a sober view of the year ahead, writes Reuters. They key challenges for the sector remain project delays, equipment issues and inflation. Siemens Energy the world's largest maker of offshore wind turbines, expects a 2024 loss before special items of around 2 billion euros ($2.15 billion) at its troubled wind division Siemens Gamesa. Orsted the world's biggest offshore wind project developer, announced a portfolio review as well as job cuts following major write-downs on delayed projects in the United States. The Financial Times writes that in order to deal with the current issues in the market, Orsted has decided to suspend dividend payments.
Thoughts on Hydrogen
About 25 years ago, hydrogen was the solution of choice for climate-aware technocrats and politicians, writes Michael Barnard for Clean Technica. At the time, with good reason, he says, as there really wasn’t much choice in terms of low-carbon energy carriers. Batteries were good enough for laptops and phones, but not for transportation, heating or grid storage. This is the time the concept of the “hydrogen economy” was born. But now, the problems with this vision have become clear, Barnard says. Most “hydrogen solutions” have proven far too expensive and far too failure prone. At the same time, the quality of battery-electric solutions has greatly increased, while their costs have come down, in some cases even to below the conventional, fossil-fuel based solutions. As a result, it is now clear hydrogen is not a decarbonization solution for trains, cars, busses, home cooking or heating. In trucking, hydrogen focused companies have had little to no success, while battery focused alternatives are on the road in commercial roles proving themselves. In electricity storage alternatives to hydrogen (utility scale batteries, pumped hydro) are developing faster than hydrogen. In aviation and marine every segment other than long-haul heavy duty is looking at battery electric or bio-based fuels, leaving hydrogen as an option to individual segments rather than the entire sector (as originally thought).
Despite the techno-economic realities of hydrogen, Germany's government has agreed plans to subsidise gas power plants that can switch to hydrogen to the tune of $17 billion, writes Reuters. The state support for companies to build and operate the future hydrogen-ready gas power plants will include capital and operating subsidies. The ministry said hydrogen transition plans should be drawn up by 2032 to enable the plants to be fully switched to hydrogen between 2035 and 2040.
Nevertheless, countries around the world continue to focus on hydrogen in their decarbonization roadmaps. Nikkei Asia looks at R&D in the technology. Japan was the top country in global patenting of hydrogen in the 2011-2021 period, accounting for 24% of international patent applications. The EU member states combined accounted for 28%, led by Germany making up 12% of the global total. The US followed the two regions at 19%. On the rise are South Korea and China. Global patenting data shows South Korea growing at a compound annual growth rate of 14% since 2001, now accounting for 8% of the total filed from 2011 to 2021. China already has a grip on key upstream stages of the hydrogen supply chain, overshadowing others for technologies related to making the fuel. It is rapidly developing water electrolyzers -- devices for making "green" hydrogen critical to render the fuel a decarbonization tool.