Energy, (Geo)Politics & Money - 2024.04.22
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 the upward price spikes over recent weeks have been less than during earlier periods of significant Middle Eastern upheaval
Why jet fuel demand has not kept pace with the increase in flight activity
The focus of the world’s largest trading houses on harnessing the capabilities of Big Data and AI
The IMF view on the US economy, which is that it is being inflated by government deficit spending
The likely Israeli attack on Iran, which was downplayed by Tehran; where EPM provides its assessment, highlighting both what is reassuring and what is concerning in this latest event
The new $95 billion support package for Ukraine, Israel and Taiwan approved by the US House of Representatives; where EPM explains why we believe it is unlikely to change momentum on the Ukrainian battlefield; which came around the same time that the US announced it will warn China not to support Russia with weapons-related technology; where EPM explains why this (clearly hypocritical) US position is unlikely to change the Russia – China relation
JPMorgan’s view that the world needs a “reality check” on its move from fossil fuels to renewable energy
Scotland’s decision to shelve its goal of cutting greenhouse gas emissions by 75 per cent by 2030 from 1990 levels
The new EU law to place methane emission limits on Europe's oil and gas imports from 2030
Tesla’s most recent price cuts in the US, across the board of its range of vehicles, including its self-driving software
The US plan to developed and implement advanced carbon offset standards to prevent greenwashing
Photo by Anne Nygård on Unsplash
General Energy News
AMPLE OIL CRUDE SUPPLIES LIMIT IMPACT ON OIL FUTURES
Plentiful supplies of some of the biggest crude grades are limiting the impact on benchmark oil futures prices of conflict in the Middle East, writes Reuters. As an example, Africa's top crude exporter Nigeria has struggled to offload cargoes scheduled for May loading. The fact that the OPEC+ producer group has ample spare production capacity is furthermore helping to keep oil prices in check. Additionally, a fair degree of geopolitical risk (is) already priced in, Reuters says. Nevertheless, while lighter, sweeter crudes that have lower density and sulphur content and underpin Brent futures are well supplied, heavier, more sulphurous - or sour - grades typically produced in the Middle East are tighter.
FUEL DEMAND WEAK DESPITE FLIGHT ACTIVITY SURPASSING PRE-PANDEMIC ACTIVITY
Global flight activity passed pre-pandemic levels for the first time in four years last week, but jet fuel demand growth has not kept apace, Reuters writes, as newer fleets of aircrafts become more fuel efficient and carry more passengers. Jet fuel has been the single biggest contributor to oil's post-pandemic bonanza, accounting for almost half the increase in total oil demand. That makes jet fuel's pace of growth critical in forecasting how long it will take for fossil fuel demand to peak. Global demand growth this year is expected at 230,000 bpd for a total of 7.4 million. Explaining the observed, Reuters notes that efficiency gains alone have reduced jet fuel demand by around 10% versus the same level of activity before 2020.
AI AND DATA ANALYTICS TO PROVIDE COMMODITY TRADERS WITH EDGE
The world’s largest commodity traders are investing heavily in data processing and analysis in a race to develop a technological edge over rivals, writes the Financial Times. Groups such as Vitol and Trafigura, which traditionally relied on political connections, handshakes and logistical skill to move natural resources from remote locations to willing buyers, are increasingly focused on how to apply artificial intelligence in the most physical of industries. The trading houses were seeking to use AI in two main ways, to improve business efficiency and to develop a trading “edge” by having more analytical power than competitors. Oil and refined products is one area where the available data on supply levels, demand patterns and logistical variables has ballooned in recent years.
Macroeconomics
US ECONOMY RESILIENT OR BEING SUSTAINED BY HUGE DEBT LOADS
The US economy has been praised extensively for its “resilience” over recent quarters, as it has continued to show strong growth while the EU and China have been struggling. In EPM’s view, however, underlying the US growth performance over 2023 is massive – and unsustainable – government debt spending. International Monetary Fund First Deputy Managing Director Gita Gopinath has raised the same issue, when she recently said, according to Reuters, that the United States needs to raise revenues to bring down high budget deficits, even though they are helping to fuel global growth by stoking domestic U.S. demand. The IMF's fiscal monitor estimates that the U.S. deficit for 2024 will reach 6.67% of GDP, rising to 7.06% in 2025 - double the 3.5% in 2015. Gopinath said:
The high levels of deficits are also supporting growth and demand in the U.S. that have positive spillover to the rest of the world. But along with that growth, you're getting higher interest rates and a stronger dollar and the second two are creating more complications for the world.
Geopolitics
IRAN TEMPERS ITS RESPONSE TO ISRAELI ATTACK
Iran’s eagerness to avoid an escalation of the conflict in the Middle East was on display again after Israel struck targets inside the country. Around the Iranian attack on Israel, in response the latter’s bombing of its embassy in Syria, EPM noted that Iran waited for a long time, gave forewarning to the most relevant countries, and then opted for weapons systems that required approximately 6 hours to arrive at their targets following launch – all choices that indicate an intent to not cause too much aggravation on the US and Israeli side, and a focus on saving face. In line with this, Reuters writes, on Friday Iran's foreign minister Hossein Amir-Abdollahian said Tehran was investigating an overnight attack on the country, adding that so far a link to Israel had not been proven as he downplayed the strike. The attack appeared to target an Iranian Air Force base near the city of Isfahan, deep inside the country, but without striking any strategic sites or causing major damage. The drones used in the attack took off from inside Iran and flew for a few hundred meters before being downed, Amir-Abdollahian said. "They're ... more like toys that our children play with, not drones". A Western diplomat, speaking on condition of anonymity, said Israel struck the airbase with missiles fired from outside Iran, and that Iran was downplaying the incident, Reuters notes.
EPM’s PERSPECTIVE:
Thinking about the potential for further escalation, the EPM perspective is as follows. Reassuring (if one’s hope is for no additional wars) are two things: the Iran’s clear desire to prevent all-out war with Israel; and, the limited size of the Israeli attack, because that gives the Iranians the opportunity to ignore it. However, concerning are two other things. First, the fact that Israel is clearly not concerned about further wars – its attack can not be justified as a “response”, since it caused the current series of events with its attack on the Iranian embassy in Syria. Its most recent attack on actual Iranian soil is therefore a further escalation. Second, the fact that the US has not been able to restrain Israel and withhold it from taken another escalator step. EPM’s overall assessment is that Israel did accept some US pressure, and for that reason responded in a way that Iran can ignore it. Our base case outlook is, therefore, for no further escalation.
CONGRESS SUPPORTS UKRAINE, ISRAEL AND TAIWAN WITH AIDE PACKAGE
The U.S. House of Representatives on Saturday with broad bipartisan support passed a $95 billion legislative package providing security assistance to Ukraine, Israel and Taiwan, Reuters writes. The bills provide $60.84 billion to address the conflict in Ukraine, including $23 billion to replenish U.S. weapons, stocks and facilities; $26 billion for Israel, including $9.1 billion for humanitarian needs, and $8.12 billion for the Indo-Pacific, including Taiwan. The unusual four-bill package also includes a measure that includes a threat to ban the Chinese-owned social media app TikTok and the potential transfer of seized Russian assets to Ukraine.
EPM’s PERSPECTIVE:
EPM notes the bill is presented as a “lifesafer” for Ukraine, but we are unconvinced. In our view, the additional monies are unlikely to change the current battlefield dynamic, as it will take time for the money to be translated into actual equipment and ammunition to practically support Ukrainian defenses.
Essentially the same day, the US announced that it will warn China not to support Russia with weapons-related technology, writes the Financial Times. During a visit to China next week, Blinken will tell his counterparts that the US and its allies are becoming increasingly impatient with Beijing’s refusal to stop providing Moscow with everything from chips to cruise missile engines to help rebuild its industrial base. Blinken does not plan to reveal what measures the US will take, but several people familiar with the situation said it is considering sanctions on Chinese financial institutions and other entities.
EPM’s PERSPECTIVE:
EPM believes the hypocrisy (“we can arm our allies but you may not arm yours”) will most likely not be lost on either the Chinese nor the Russians. We also believe the US will fail in all efforts to break apart Russia and China. Not because Russia and China have long and deep diplomatic roots, or are “natural allies”. But because both recognize they need each other in their efforts to end the stranglehold the US established (for them) in the “international rules based order”. EPM’s expectation is, therefore, that China will search for ways to provide Russia with what it requires that do not get noticed by the US, while it continues to prepare for the inevitably of US sanctions.
Energy Transition & Technology News
WORLD MAY TAKE GENERATIONS TO MEET NET-ZERO TARGETS
The world needs a “reality check” on its move from fossil fuels to renewable energy, JPMorgan has warned according to the Financial Times, saying it may take “generations” to hit net-zero targets. The US investment bank said efforts to reduce the use of coal, oil and gas had been set back by higher interest rates, inflation and wars in Ukraine and the Middle East. JPMorgan said changing the world’s energy system “is a process that should be measured in decades, or generations, not years”. It added that investment in renewable energy “currently offers subpar returns” and that if energy prices rose strongly, there was even a risk of social unrest. Consequently, the bank says it is not guaranteed that demand for oil and gas would peak in 2030, as predicted by the International Energy Agency, as the populations of developing countries begin to buy more cars and take more flights.
Climate Politics
SCOTLAND DITCHES AMBITIOUS CLIMATE CHANGE TARGETS
Scotland has ditched ambitious climate change targets as being “out of reach”, after the UK’s Climate Change Committee said it would not be able to meet them, writes the Financial Times. The government shelved its statutory goal of cutting greenhouse gas emissions by 75 per cent by 2030 from 1990 levels. Mairi McAllan, Scottish minister for wellbeing economy, net zero and energy said:
In this challenging context of cuts and UK backtracking, we accept the CCC’s recent rearticulation that this parliament’s interim 2030 target is out of reach.
The Scottish government had missed the legally binding annual emissions target eight times in the past 12 years. EPM believes Scotland will not be the last to adjust its decarbonization targets.
EUROPE ADOPT LAW TO LIMIT METHANE EMISSIONS ON HYDROCARBON IMPORTS FROM 2030
European Union lawmakers adopted a law to place methane emission limits on Europe's oil and gas imports from 2030, pressuring international suppliers to clamp down on leaks of the potent greenhouse gas, writes Reuters. The import rules - which will impose limits on "methane intensity values" from 2030 on producers sending fossil fuels into the EU - are likely to hit major gas suppliers which include the United States, Algeria and Russia.
The Electrification of Transport
TESLA CUTS US PRICES OF THREE MODELS BY $2000
Tesla cut the U.S. prices of its Model Y, Model X and Model S vehicles by $2,000 each on Friday, writes Reuters. Elon Musk's electric-vehicle (EV) maker lowered the prices for its Model Y base variant to $42,990, while the long-range and performance variants are now priced at $47,990 and $51,490, respectively. The basic version of the Model S now costs $72,990 and its plaid variant $87,990. The Model X base variant now costs $77,990 and its plaid variant is priced at $92,900. Also, Reuters writes, it slashed the price of its Full Self-Driving (FSD) driver assistant software in the United States to $8,000, from $12,000. Additionally, Tesla cut the U.S. monthly subscription price for the feature from $199. Customers can now pay $8,000 for the FSD feature, or subscribe to use it for $99 a month. Bloomberg writes that behind the decision to cut prices is that fact that disappointing first-quarter sales contributed to swelling inventories.
Other
US LAW MAKERS SOON TO UNVEIL TOUGHER STANDARDS FOR CARBON TRADING MARKETS
The US soon will unveil tougher standards meant to drive greater integrity for carbon markets, in a bid to ensure the trading regimes drive real emission reductions and not just greenwashing, writes Bloomberg. Climate adviser John Podesta said Friday the US will be calling for carbon credits to represent real, additional and permanent emission reductions that wouldn’t have happened otherwise. The US also will make clear the regimes must avoid carbon leakage, where reductions in one area are simply replaced by increased pollution elsewhere. The standards will also make clear companies should not use carbon credits to substitute for or delay in investments in reducing their own emissions.