Energy, (Geo)Politics & Money - 2024.04.16
Providing 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:
Why oil prices ended Monday higher, after initially declining during morning trading
Why China’s rapidly expanding petrochemicals industry is making life increasingly difficult for other producers in Asia
The view that the EU needs a wholistic review of its energy strategy
The 5.3% growth of China's gross domestic product over the first quarter of 2024; where EPM looks in more detail at the structural challenges facing the Chinese economy in the shorter-, medium- and longer-terms
Why (developing) countries across the globe are becoming increasingly wary of the growing might of the U.S. dollar
The backtracking by the US on how Israel should respond to the Iranian attack over the weekend; where EPM explains why we believe this is a very dangerous development
China’s explicit support for Iran following its response to the Israeli attack on its embassy in Syria; where EPM notes how far-reaching the consequences of a further escalation of hostilities in the Middle East can be, because the geopolitical situation today is similar to that in run up to World War I
China’s diplomatic answer to last week’s trilateral meeting between the US, Japan and the Philippines
Eni’s "satellite" approach for funding its new energies growth, which is about creating independent units specialising in specific activities, to enable the attracting of investors who focus on those businesses
Photo by Andreas Gücklhorn on Unsplash
General Energy News
END OF DAY OIL TRADING HIGHER ON MONDAY
Oil prices ended Monday trading higher, writes Reuters. After initially declining, during morning trading, the release of strong economic growth data from China, with the increasing risk of a Israeli response to the Iranian attacks (which would indeed be escalatory, as EPM explains under Geopolitics), caused Brent futures for June delivery to rise 48 cents, or 0.5%, to $90.58 a barrel, while WTI futures for May delivery rose 49 cents, or 0.6%, to $85.90 a barrel.
CHINA PETROCHEMICAL PRODUCERS HAVE CREATED A GLUT
China’s rapidly expanding petrochemicals industry is making life increasingly difficult for other producers in Asia, writes Bloomberg. Asia’s largest economy used to be the major market for South Korean companies like LG Chem and Lotte Chemical. But the exporters of the chemicals used to make everything from nylon to disposable bottles and car interiors are now being forced to downsize their operations after a frenzy of petchem-plant building in China over the last few years created a supply glut. The trend is continuing unabated, with China set to account for almost three-quarters of global capacity additions this year.
EUROPE’S ENERGY STRATEGY CRITICIZED BY IEA
The International Energy Agency (IEA) chief has criticised Europe for falling behind China and the US after making “two historic monumental mistakes” in energy policy, by relying on Russian gas and turning away from nuclear power, writes the Financial Times. Fatih Birol, the agency’s executive director, told the Financial Times that European industry was now paying the price for these errors and that the bloc would need “a new industrial master plan” in order to recover. EPM disagrees with the IEA analysis of the errors – we believe the biggest error is not the utilization of Russian gas, but rather the EU’s dealing of the issue of the Ukraine – but we do agree that in the current situation, the EU needs to wholistic review of energy strategy. We would add that this should be done as part of a wholistic review of the EU’s geopolitical strategy, but since the EU seems to have lost all capabilities for thinking geostrategically, we fear this will not happen and it will continue with an energy strategy that is “second best”, serving the interests of others more than that of the EU itself.
Macroeconomics
CHINA’S GDP AT 5.3% FOR 2024
China's gross domestic product growth accelerated to 5.3% on the year in the January-March quarter, writes Nikkei Asia based on official data from China’s National Bureau of Statistics. The number is well ahead of the average forecast of 4.5% by 31 economists in a poll carried out by Nikkei last month. Manufacturing and the supply of utility services -- including electricity, thermal power, gas and water -- drove a 6.1% expansion in industrial production. Agricultural production, value-added information services and transport-backed services also saw sustained growth. Total retail sales of consumer goods, a gauge on household spending, grew by 4.7%, mainly supported by food catering. But growth in demand for consumer products slowed to 3.1%. However, a 19.4% drop in new housing sales continued to weigh on fixed-asset investment, which grew by 4.5%. Excluding property, the reading swelled 9.3%, thanks to infrastructure and manufacturing spending. The data reflects "broad manufacturing outperformance, festivities-boosted household spending, and the feedthrough of easy policy settings onto investments," according to one analyst quoted.
CHINA’S GEN Z CHALLENGE
In another report, Nikkei Asia focuses on one of the underlying challenges the Chinese economy will be facing over the medium- to longer-term, which is the mindset of the country’s Generation Z. In the EPM view, the country’s current challenges relate to excessive spending on infrastructure, which has caused a bubble in real estate and overextended balance sheets among government entities and property developers. As Ray Dalio has explained, solving this challenge requires the engineering of a “beautiful deleveraging”, which balances deflationary debt defaults/restructurings with inflationary printing of money/debt monetization to spread out the burden. Looking slightly further out, China will be dealing with a shrinking and aging population; and a young and middle-aged segment of society, which typically drives consumption, that is turning not less but more frugal. The Chinese between the ages of 15 and 29 account for 18.4% of the population of 1.4 billion. The jobless rate among people ages 16 to 24 stood at 15.3% in February, well above the national average of 5.3%. This is making the young in society pessimistic about their future, leading them to a mindset of “spend less and save more”. "Reverse consumption", “lying flat” and the "stingy economy" are now buzzwords on Chinese social media, reflecting how young people raised in an era of rapid economic expansion and rising living standards are adopting a more rational approach to spending. Another term gaining traction is "narcissism," which is interpreted not as "selfishness" but as a positive form of self-care and self-acceptance. EPM notes that what China needs is an upgraded social security system, to address some of the pessimism and fear. But this requires an overhaul of the tax system. Neither are easy feats to deliver.
STRONG US CURRENCY CAUSING GLOBAL ECONOMIC STRUGGLES
(Developing) Countries across the globe are becoming increasingly wary of the growing might of the U.S. dollar, and started to defend their currencies against the possibility of renewed inflation and downward pressure on growth through higher import prices, writes Nikkei Asia. Both developed and emerging economies have seen currencies weaken at an accelerating pace, with the Australian dollar, Canadian dollar, and euro falling 4.4%, 3.3%, and 2.8%, respectively, in developed economies. The decline since the beginning of the year has reached 8% for the yen, 5.5% for the South Korean won, and 8.8% for the Turkish lira. The source for the dollar's strength is the receding prospect that the U.S. Federal Reserve will soon cut interest rates. Emerging economies are particularly sensitive to the negative effect, as the burden of dollar-denominated debt increases along with larger interest expenses due to higher rates. According to the International Monetary Fund, a 10% rise in the dollar on the currency market would push down real gross domestic product in emerging economies by 1.9% after one year, with adverse economic effects lasting more than two years.
Geopolitics
UPDATE - WAR ON GAZA AND MIDDLE EAST TENSIONS
Following Iran’s response to the Israeli bombing of its embassy, the next thing to watch is Israel’s next course of action. Reuters writes that Israeli Military Chief of Staff Herzi Halevi said Israel would respond, without providing no details. But the international community is not signaling any support for an Israeli reaction. As EPM noted yesterday, the US on Sunday formally communicated it will not support such an act. But, in the schizophrenic manner that has been typical for the US response to Israel’s War on Gaza, it appeared to backtrack yesterday when White House national security spokesman John Kirby declined to say if Biden urged Netanyahu in talks on Saturday night to exercise restraint in responding to Iran.
"We don't want to see a war with Iran. We don't want to see a regional conflict," Kirby told a briefing, adding that it was for Israel to decide "whether and how they'll respond." In the EPM view, this backtracking by the US is very dangerous. We explained in our updates from Thursday April 11 and Monday April 15 that Israel crossed a “red line” when it attacked the Iranian embassy, and that Iran responded in a manner designed to save face but prevent escalation. This is also how the US sees it, judging by US president Biden’s comment to Israel that “You got a win, take the win”. Therefore, an Israeli response now would effectively be a further escalation. EPM believes there is a real risk of this further escalation IF the US does not use its leverage to restrain Israel, because Israeli prime minister Netanyahu has an interest in prolonging Israel’s current war, while members of his government believe Israel has an interest in a broader Middle Eastern war, with the US playing an active role on Israel’s side, as this would weaken Israel’s neighbours and thus enable Israel to achieve better terms in future Abraham Accords.
In what EPM sees as a reflection of the continuing breakdown of the geopolitical order established by the United States, Bloomberg writes that following Iran’s military response to the Israeli attack on its embassy, China’s top diplomat told Iran that the nations can continue to work together across a range of areas in the future. “China is ready to steadily advance practical cooperation in various fields with Iran and promote greater development of China-Iran relations,” Foreign Minister Wang Yi told Iranian counterpart Hossein Amir-Abdollahian in a phone call on Monday. Wang also said China noted Iran’s position that its military action was “limited” and the country was “exercising its right of self-defense,” according to a statement from the Foreign Ministry in Beijing. China also believed Iran could handle the situation to “avoid further turbulence,” he said. EPM further notes how far-reaching the consequences of a further escalation of hostilities in the Middle East can be. Similar to the run up to World War I, the various regional and world powers have established alliances that could drag them into local conflicts, transforming them into world wars almost overnight.
WALL STREET’S SCENARIO FOR ISRAEL - IRAN CONFLICT
On the subject of the Israel – Iran conflict, CNBC (paywall) has summarized Wall Street’s scenarios for the Israel-Iran conflict, and its possible impact on the oil market. EPM readers can review and compare with the analysis we have been providing on the subject.
US AND CHINA WORK THEIR ALLIES FOR SUPPORT
While U.S. President Joe Biden invited leaders from Japan and the Philippines to the White House this week to enhance regional alliances, China was busy tightening its own ties with key partners on the other side of the globe, writes Nikkei Asia. Zhao Leji, chairman of the National People's Congress, landed in Pyongyang, North Korea, on Thursday for a three-day tour. The No. 3 official in the Chinese Communist Party hierarchy brought a delegation of party and state representatives on an "official friendship visit," including commemorations of the 75th anniversary of relations. The lurry of Chinese diplomacy last week also included hosting dignitaries from Vietnam, Russia and Micronesia along with Taiwan's former President Ma Ying-jeou. EPM notes that this week, China is hosting a German delegation led by Chancellor Scholtz.
Energy Transition & Technology News
ENI’s (ITALY) STRATEGY TO FUND NEW ENERGY BUSINESS
Italian energy group Eni has a very specific strategy to fund its growth in new energy business. Eni is applying what it calls a "satellite" approach for funding its new energies growth, which is about creating independent units specialising in specific activities, to enable the attracting of investors who focus on those businesses. Earlier, it sold a 9% stake in its low-carbon and retail unit Plenitude to Energy Infrastructure Partners (EIP). Next, the company aims to sell by year-end minority stakes in its biofuel and bio-plastic units, writes Reuters. These deals could fetch around 1.3 billion euros in total. The company has initiated preliminary discussions with funds and industrial investors to find a partner interested in a stake of up to 10% in biofuel unit Enilive. Enilive groups together multi-fuel service stations and biorefineries in Italy and abroad. Separately, Eni is in talks with two suitors to sell up to 30% in its bio-plastic business Novamont.