Energy, Geopolitics & Money - 2024.02.09
Providing you with a non-partisan, objective & neutral analysis where global developments in energy, business & geopolitics intersect & curated from leading global sources & resources.
In this roundup, we take a closer look at Putin’s interview with Tucker Carlson. In the EPM view, it was all diplomatic messaging by Putin. By referring to the Russia – Ukraine peace negotiations from April 2022, he effectively said that Russia has already proven that it is willing to talk peace. He thereafter explicitly offered to talk peace again. At the same time, he warned the US and Europe not to seek their solution in escalation of the Ukraine War via a horizontal escalation of the conflict into Poland and the Baltics.
Fundamentally, we believe that resolving the War in Ukraine requires both sides to compromise, that is, leave absolute demands (“Russia to leave Ukrainian territory unconditionally!”, “Ukraine to be cleansed of Nazis!”) behind and be willing to give in order to take. It seems to us that Putin has just offered talks on such a basis.
Furthermore, we look at:
The 6% increase in oil prices this week, which is risk premium associated with the situation in the Middle East; and regarding which EPM continues to believe it is an overestimation of the real risk of a wider conflict in the region
The US slow but steady replenishing of the SPR; where EPM provides its view on the impact this is likely to have on oil prices
Saudi Arabia’s hiring of Citigroup, Goldman Sachs and HSBC for a secondary share sale in Aramco worth $20 billion
Why China’s current economic struggles are likely to be good news for the global fight against inflation in 2024
Why Evergrande’s liquidation is unlikely to benefit foreign investors in the company
Israel’s outright rejection of the ceasefire proposal on the table; its simultaneous attack on the southernmost tip of the Gaza strip, the Rafah area; and the why the US response indicates it is continuing its policy of following Israel rather than leading it
Ukraine’s replacement of its army chief
Shell’s permanent closure of its hydrogen stations in California
India’s focus on economic development, for which it will build out a fossil-based energy system
The backtracking by the UK’s Labour party on its green plans in response to the macro-economic environment; which in the EPM view highlights the fact that if and when green ambitions run up against economic realities, the latter is likely to win
General Energy News
The EPM shorter term forecast for oil prices was an increase, due to a heightened risk premium in response to development in the Middle East, followed by a decrease, due to traders realizing their fears for a wider war involving the US and Iran were overblown. The first part of that thesis has indeed materialized. Bloomberg writes Brent crude is now trading just below $82 a barrel, after climbing more than 3% on Thursday for 6% on the week. West Texas Intermediate is now above $76.
The administration of US President Joe Biden is slowly replenishing the Strategic Petroleum Reserve (SPR), after selling a record amount of oil from the emergency stockpile in 2022, writes Reuters. The Department of Energy said Thursday it hopes to purchase about 3 million barrels of domestically-produced crude for delivery in July. EPM did not comment much on the topic before, so let us do so now. We believe most of the commentary on the subject is outdated, as in, still living in a world that is behind us. The SPR is a relic from the era when the US was structurally short of oil and gas. Thanks to share, the situation is now very different. That does not mean that there are no more strategic reasons to hold a SPR. But it does mean that the needed volumes for such a SPR are significantly lower than what they were before. As such, we do not see the US SPR as something that will have a significant impact on the oil price (in the Americas).
Apparently the rumors of Saudi Arabia wanting to list more of Aramco were true. The country is set to hire banks including Citigroup, Goldman Sachs and HSBC for a secondary share sale in Aramco, a deal that would raise about $20 billion, writes Bloomberg.
Macroeconomics
Global investors expect falling prices in China to push down inflation rates worldwide this year, as excess capacity in its slowing economy prompts Chinese exporters to cut prices on goods they sell abroad, writes the Financial Times. Prices of Chinese exports have been falling at their fastest rate since the 2008 financial crisis, it says. China’s consumer prices fell at the fastest annual rate in 15 years in January, losing 0.8 per cent, while the country’s producer price index dropped 2.5 per cent year on year.
According to Nikkei Asia, Chinese banks have a direct claim on most of Evergrande's assets, pledged as collateral for domestic loans. When it comes to divvying up the remainder of the group's assets among unsecured creditors -- including domestic bondholders, unpaid suppliers and staff owed back wages -- overseas bondholders will be at the back of the line. Not for political reasons, but just economics. Foreign investors have historically invested in the Chinese property sector by lending to developers' offshore holding companies. The offshore entities held equity in the mainland operating companies but did not own any mainland property assets themselves or generate their own operating revenue. In short, investors who bought bonds issued by the Hong Kong-listed entities were lending to companies that lacked their own physical, revenue-generating assets. By contrast, most of the Chinese developers' onshore creditors have valid claims directly on the mainland operating units and assets.
Geopolitics
As to Gaza, Israeli prime minister Benjamin Netanyahu formally rejected a proposal to end the war in the Palestinian enclave, and intensified attacks on the most southern tip of the region, the Rafah border crossing with Egypt, writes Reuters. The Financial Times notes that this means Gaza’s last refuge has now become Israel’s next target. There are now an estimated 1.4mn people crammed into the small pocket of land. The US has opted to do nothing about it. Reuters summarizes its response as “pointed criticism”, saying “civilian deaths remained too high”, without there being anything “to suggest the rhetoric from Washington would be backed by action”. It notes that the US has not tried steps that would exert greater pressure such as restricting its $3.8 billion in annual military assistance to Israel or changing its support for its longtime ally at the United Nations. Critics say this provides a sense of impunity for the country.
Considering the above, a Bloomberg opinion piece argues the US best stop talking about the “international rules based order”, because its (lack of actions) when it comes to Gaza exposes it to the accusation of hypocrisy.
After an extended period of speculation, Ukrainian President Volodymyr Zelenskyy indeed Ukraine's popular army chief General Valerii Zaluzhnyi with his ground forces commander Colonel General Oleksandr Syrskyi, Nikkei Asia writes, which considers it a huge gamble at a time when Russian forces are gaining the upper hand nearly two years into their war.
Meanwhile, Russian President Vladimir Putin has used his interview with Tucker Carlson to clearly define his war aims. He said that Russia will fight for its interests "to the end" but has no interest in expanding its war in Ukraine to other countries such as Poland and Latvia, Reuters writes. Additionally, he paved the way for peace talks to end the war in Ukraine. He devoted a substantial part of the interview to complaining that Ukraine had been on the verge of agreeing a deal to end hostilities at talks in Istanbul in April 2022, but backed away, he said, once Russian troops withdrew from near Kyiv. The Russian leader further said the US had pressing domestic issues to worry about. "Wouldn't it be better to negotiate with Russia? Make an agreement. Already understanding the situation that is developing today, realizing that Russia will fight for its interests to the end," Putin said. In the EPM view, this is all diplomatic messaging by Putin. By referring to April 2022, he effectively says that Russia has already proven that it is willing to talk peace, and offered to talk peace again. At the same time, he warns the US and Europe not to seek their solution in escalation of the Ukraine War via a horizontal escalation of the conflict into Poland and the Baltics.
Energy Transition & Technology News
Earlier this week, when EPM discussed how the vision for a “hydrogen economy” has slowly but steadily died as the techno-economic realities have become apparent, we also discussed that Germany was nevertheless offering billions in state aid for the power sector to switch to the molecule. A Bloomberg opinion piece now echoes our analysis. It says regarding the hydrogen economy, “Hydrogen’s potential has been downgraded in recent years. It was initially touted as the fuel of the future, powering planes, trains and automobiles and heating homes. But when it comes to keeping warm, heat pumps are far safer and more efficient. Hydrogen buses are too prone to failure, while their electric counterparts are now running all over the world. Trains are also being steadily electrified… The list of promises and failures goes on.” As to Germany’s decision it says, “Perhaps the move will secure a positive future for hydrogen’s role in the grid, but it’s far from certain.”
Climate Politics
India’s petroleum minister Hardeep Singh Puri has said that ensuring affordable oil and gas prices domestically by continuing to invest in the sector, is key to making an orderly transition to clean energy, writes S&P Global. EPM just notes that what this really means is, “we delay a transition to cleaner energy and first focus on economic development, for which we need to build out a fossil-based energy system”.
The UK’s labour party has scrapped its target to spend 28 billion pounds ($35.3 billion) a year on green industries if it takes power, writes Reuters. It had earlier vowed to invest heavily in green technologies and jobs to help snap Britain out of a prolonged period of economic stagnation. Due to the worsened economic outlook and high borrowing costs, Labour will now ditch this spending target. In the EPM view this highlights the fact that if and when green ambitions run up against economic realities, the latter is likely to win.
The Electrification of Transport
Shell has this week permanently closed its seven hydrogen refuelling stations for passenger cars in California, citing “supply complications and other external market factors”, writes Hydrogen Insight. This leaves the oil major only operating three H2 filling stations for heavy-duty vehicles in the state. This decision is likely to result from a lack of demand. While California was one of the few markets for hydrogen-powered vehicles to grow this year, only 3,143 were registered in 2023 — less than 1% of battery-electric cars in the same period.