Energy, (Geo)Politics & Money - 2024.04.18
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 take a closer look at how the Israel – Iran conflict is likely to develop the day after oil prices experienced a significant decline of almost $3 per barrel, as the market reassessed geopolitical risks and lowered the geopolitical risk premium. This, EPM notes, is exactly as we predicted last week Thursday, April 11.
There is at present a diplomatic effort underway to prevent Israel from responding. The US is working under the umbrella of the G7 to implement additional sanctions on Iran, to punish it for its retaliation against Israel’ attack on its embassy in Syria and thereby placate Israel. Additionally, the foreign ministers of the UK and Germany (which has previously acted as a go-between for the US in communication of politically sensitive messages to Israel) have traveled to Tel Aviv in attempt to dissuade Israel from responding. Meanwhile, Jordan's Foreign Minister has articulated the reasons why the US wants Israel to back down, saying
The situation is too dangerous … The chances of regional explosion are real, and that has got to stop.
The EPM base case outlook is, therefore, that there will be no significant Israel response, as in one that would be escalatory in the conflict. However, we do not fully discard the possibility of escalation, as the US continuous to act in the schizophrenic manner that has typified it during Israel’s war on Gaza. Namely, by sending signals to Israel that a further attacks on Iranian targets may be allowed.
Therefore, continued close monitoring of geopolitical events will be required, and we at EPM will be providing you that service!
Furthermore, we look at:
The US decision to reimpose sanctions on Venezuela’s oil industry; where EPM notes this further adds to the supply side support for oil prices we discussed last week; which are in part offset by an increase in Iranian oil exports to China
The EU’s realization that it is falling behind the US and China in the technologies that will be driving the global economy, primarily due to the bloc’s focus on “regulating” rather than supporting new industries
The inaugurated the world’s first demonstration plant for large-scale electrically heated steam cracking furnaces
Why time is running out for Europe if it wants to achieve its ambitious 2030 hydrogen production targets
The significant fall in the EU carbon price, and the implications this has for EU green transition funds
Photo by Jason Blackeye on Unsplash
General Energy News
CRUDE DROPPED 3% OVERNIGHT
Oil prices experienced a significant drop on Wednesday. Brent futures for June settled down $2.73, or 3%, at $87.29 a barrel, while WTI crude futures for May settled down $2.67 or 3.1% at $82.69 a barrel, their biggest fall since March 20, Reuters writes. Driving the decline is a re-estimation of geopolitical risk following Iran’s attack on Israel over the weekend, exactly as EPM forewarned would happened last Thursday, April 11. Additionally, U.S. crude inventories data indicated a rise of 2.7 million barrels last week, to 460 million barrels, nearly double analysts expectations. The economic outlook remains murky, meanwhile, due to diverging inflation data across the developed world. EPM notes that the next thing to watch on the geopolitical risk premium front is Israel’s reaction to Iran’s attack. We cover this in more detail under Geopolitics.
AN ISRAELI-IRANIAN WAR COULD RESULT IN $40 HIGHER CRUDE PRICES
On that topic, CNBC writes that according to Bank of America, a direct war between Israel and Iran could lead to substantially higher oil prices through 2025, by $30 to $40 per barrel, if hostilities escalate into a months-long war that impacts energy infrastructure and causes disruptions to Iranian crude supplies.
US TO REIMPOSE SANCTIONS ON VENEZUELA
The US will reimpose sanctions on Venezuela’s oil industry, writes Reuters. The Biden administration said it would not renew a license that had broadly eased Venezuela oil sanctions, choosing instead to reimpose punitive measures in response to what is called President Nicolas Maduro's failure to meet his election commitments. Affected companies now have 45 days to "wind down" their business and transactions in the OPEC country's oil and gas sector. The license had allowed Venezuela's state oil company PDVSA in the last six months to recover a portion of its lost crude output, reaching 874,000 barrels per day (bpd) in March, and thereby enabled Venezuela to increase crude exports to 900,000 barrels per day, Reuters adds. These numbers are now set to decline again, which, EPM notes, increases the upward supply side pressures on oil prices that we discussed last week, which are primarily OPEC+ production quotas, voluntary production constraint of Saudi Arabia, Mexico’s decision to reduce oil exports, and the Ukrainian attacks on Russian energy infrastructure.
IRAN’S OIL EXPORT HIGHEST LEVEL IN 6 YEARS
Meanwhile, Iran is exporting more oil than at any time for the past six years, writes the Financial Times. Tehran sold an average of 1.56mn barrels a day during the first three months of the year, its highest level since the third quarter of 2018, and almost all of it went to China.
Macroeconomics
EU FAR BEHIND US AND CHINA IN GREEN AND DIGITAL TECHNOLOGIES
The EU is beginning to realize just how far behind the US and China it is in the green and digital technologies needed to drive the global economy. Reuters writes the EU has tasked former Italian Prime Minister Enrico Letta with assessing the shortfalls of the EU single market, and today (Thursday) he will report back. Letta says one of the main reasons the EU is falling behind because of Brussels regulatory focus, as opposed to US and China subsidy approach. EPM notes Letta’s analysis does not provide new insights. What we will be watching, though, is whether it actually changes the mindset of the EU’s leading politicians.
Geopolitics
A WAR BETWEEN ISRAEL AND IRAN THREATENS HIGHER OIL PRICES
As far as oil prices are concerned, the key geopolitical risk area is the conflict between Israel and Iran. As we discussed in our detailed analysis of Iran’s attack on Israel over the weekend, its response to Israel’s bombing of the Iranian embassy in Syria, while Israel has a strategic interest in expanding the conflict, the US and Iran have the opposite interest. For this reason, the US has pressured Israel not to respond, saying it will not support any further Israeli escalation in the conflict. Next to this “stick” the US pulled out a “carrot”, working under the umbrella of the G7 to impose more sanctions on Iran as punishment for its response to the bombing of its embassy, the Wall Street Journal writes.
ISRAEL’S ROGUE BEHAVIOR REWARDED WITH UNWAVERING US SUPPORT
But, EPM notes that throughout Israel’s War on Gaza, the country has repeatedly ignored US requests and demands, and still received extensive US support when it did – which is what EPM sees as the biggest risk as this effectively incentivizes “rogue behavior” by Israel that can set the Middle East alight. On this topic, Prime Minister Benjamin Netanyahu said on Wednesday that Israel will make its own decisions about how to defend itself, Reuters writes. The US is to a certain extent hamstrung by domestic politics – no US politician can afford to be seen as opposing Israel or not providing it “unconditional support”. This is what EPM believes is behind the diplomatic activity currently taking place between Israel, the UK, Germany and Jordan. The foreign ministers of the UK and Germany (which has previously acted as a go-between for the US in communication of politically sensitive messages to Israel) have traveled to Tel Aviv in attempt to dissuade Israel from responding. Meanwhile, Reuters writes, Jordan's Foreign Minister Ayman Safadi articulated the reasons why the US wants Israel to back down and said Israeli retaliation against Iran brings a real risk of dragging the whole region into a devastating war,
The situation is too dangerous. The chances of regional explosion are real, and that has got to stop. We’ve got to make sure there’s no further escalation.
While we see these diplomatic efforts as positive, in the sense that they are targeting de-escalation, as usual throughout the Israeli War on Gaza there are signs the US is at the same time acting against these efforts. Schizophrenia, we called that earlier. For example, it has effectively signaled it wouldn’t mind a limited Israeli response, by not strongly protesting against the potentiality of Israeli strikes against Iran-linked targets outside of Iranian territory, NBC News writes. Additionally, The Cradle writes that the US has even approached Iran asking the nation to allow Israel "a symbolic strike to save face”.
Bloomberg writes the Israeli government is as torn about how to proceed as the US appears to be.
Energy Transition & Technology News
WORLD FIRST DEMO PLANT FOR ELECTRIC HEATED STEAM CRACKERS ON-LINE
BASF, SABIC, and Linde have inaugurated the world’s first demonstration plant for large-scale electrically heated steam cracking furnaces, writes Hydrocarbon Processing. Following three years of development, engineering, and construction work, the regular operation of the demonstration plant is now ready to start at BASF’s Verbund site in Ludwigshafen, Germany. Typically, the reaction is conducted in furnaces at temperatures of about 850 degrees Celsius. Up to now, these temperatures have been reached by using conventional fuels. The demonstration plant aims to show that continuous olefin production is possible using electricity as a heat source. By using electricity from renewable sources, the new technology has the potential to reduce CO2 emissions of one of the most energy-intensive production processes in the chemical industry by at least 90% compared to technologies commonly used today. Linde will in the future commercialize the developed technologies under the new trademark STARBRIDGE.
EUROPE LAGS IN MEETING 2030 HYDROGEN PRODUCTION TARGETS
Time is running out for Europe to get on track with its ambitious 2030 hydrogen production targets, as developers due to take final investment decisions battle macroeconomic headwinds, writes S&P Global. While recent years have seen a multitude of project announcements, pre-front end engineering design studies, FEED studies and preliminary investments, actual FIDs have been scarce. Just 4% of announced clean hydrogen projects in Europe have taken FIDs, according to Hydrogen Council Director Policy and Partnerships Daria Nochevnik.
Other
EUROPE’S CARBON PERMITS HALVED FROM 100 EURO IN EARLY 2024
After soaring above 100 euros per ton of CO2 last year, the cost of EU carbon permits had nearly halved by February as a result of lower power demand and higher renewable power generation, writes Reuters. While the dip in emissions shows the carbon market is helping the bloc meet its climate goals, it also means the EU is raising less than expected for EU green transition funds and to pay for the climate efforts of member states. By the EU's own estimates, the fund should raise 40 billion euros this decade, if CO2 prices averaged 75eur/t in that period. The benchmark EU carbon price has remained below this level for more than three months. It was trading at around 70eur/t on Wednesday.