Energy, (Geo)Politics & Money - 2024.04.29
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 of the weekend’s news, we look at:
Pemex’s change of heart regarding its earlier announced intent to cut crude exports by at least 330,000 barrels per day (bpd) in May
The EU’s intent to implement sanctions on Russian LNG; where EPM discusses how this is likely to impact the global LNG industry
The most recent inflation data coming out of the US, which indicates that the Federal Reserve’s policy rate is unlikely to be cut during 2024, contrary to expectations from the 1st quarter
The IMF’s views on the regionalization of the global economy, which is occurring at an accelerated pace and is likely to lead to structurally lower growth rates over coming decades; as well as on the impact debt growth over recent decades will have on economic growth during future decades
The situation on the frontlines in the Ukraine War, where Russia is pushing forward, putting pressure on Ukraine’s military headquarters and main supply artery
CATL’s new lithium iron phosphate (LFP) battery with a driving range of more than 1,000 kilometres (621 miles) on a single charge
Why the IEA believes that thanks to the continued innovation in battery technology, renewable energy systems with storage are about to become cheaper than fossil-based energy systems
The ambitions of BYD, which go far beyond cars, and China’s borders, to becoming “an energy ecosystem company”; and how it plans to get there via a focus on “vertical integration”
Why the EU needs punitive duties of more than 50% if it wants to make Chinese cars uncompetitive on its market; which in the EPM view highlights the massive cost advantage China’s OEM’s have established
Elon Musk’s surprise trip to China, to discuss the rollout of Full Self-Driving (FSD) software and permission to transfer data overseas; where EPM discusses why this is an important development
Photo by CHUTTERSNAP on Unsplash
General Energy News
PEMEX TO REVERSE DECISION TO CUT 330K BARRELS FOR EXPORT
Mexican state oil company Pemex is reversing crude exports cuts of at least 330,000 barrels per day (bpd) planned for May, writes Reuters. Upon announcement of the original intent EPM noted it would further tighten the market for heavy sour crude, and we expect push back from the industry is at least in part behind the change of heart in Mexico. Officially, though, behind the new decision is planned maintenance at some refineries and a slower-than-expected startup at the new 340,000-bpd Olmeca plant which will reduce the need for domestic crude in May.
EU RUSSIAN SANCTIONS PACKAGE TO RESTRICT RUSSIAN LNG
A next Russian sanctions package of the European Commission is expected to include restrictions on Russian liquefied natural gas (LNG), writes Reuters. The proposal would not ban imports of Russian LNG to Europe, but instead target trans-shipments, which move LNG from one vessel to another that then sails onto its final destination. The transfers are usually done in port areas. The other proposed measure would be to impose sanctions on three Russian LNG projects - Arctic LNG 2, Ust Luga and Murmansk - that are not yet operational. Imports of Russian LNG to Europe have increased since the war began. EU statistics and Reuters calculations show the rise in LNG has pushed the share of Russian gas in EU supply back up to around 15% after pipeline imports from Russia's state-owned Gazprom (GAZP.MM), plunged to 8.7% from 37% of EU gas supply.
The proposed sanctions would be a boon for LNG companies, said Patrick Pouyanne TotalEnergies chief executive according to Reuters. It will cause prices to spike and thereby profit global gas sellers, in his opinion.
EPM’s PERSPECTIVE
In the EPM view, any sanctions on Russian LNG are most likely to have the same impact on the global LNG market as the crude oil sanctions have had. Countries such as China and India will ignore the sanctions, and Russia wil offer them discounted cargoes. In particular China will then resell cargoes it has procured under longer term contracts with other suppliers (Qatar, Australia, US). The end result will be a global reworking of trade flows; lower export prices for Russia and lower import prices for China; higher export prices for Qatar, Australia and US, and higher prices for importers from the West (EU, Japan, South Korea).
COMMODITY TRADING HIDDEN PROFITS
Testimony by a former head of Shell's U.S. crude trading division filed in a Texas state court has offered a rare look at the huge profits of its trading operations – one of the oil industry’s best guarded secrets. Reuters writes that the documents show that the crude trading unit typically made between $950 million to $1 billion a year.
Macroeconomics
US INTEREST RATES LIKELY TO REMAIN UNCHANGED FOR MOST OF 2024
The most recent inflation data coming out of the US indicates that markets may have to brace for a few more months of disappointment, and that the data will probably keep the Federal Reserve’s policy rate at its current 5.25%-5.5% for most of 2024, writes Bloomberg.
GLOBAL ECONOMY CONTINUES TO REGIONALIZE
Nikkei Asia interviewed the International Monetary Fund's first deputy managing director, Gita Gopinath. One of the main subjects of the conversation was the regionalization of the global economy. Gopinath says,
We are seeing that trade is holding up much better within politically aligned blocs, as opposed to across blocs. So, that is true for trade, that's true for foreign direct investment. And this is all happening in an environment where we are concerned that growth is weak. So, we have a projection that medium-term growth is going to be the weakest in two decades. And this kind of fragmentation will only weaken that growth number.
Nikkei Asia further notes that about 3,000 restrictive trade measures were imposed last year around the world, nearly three times the number imposed in 2018.
CHINESE SME’s TURNING TO GREY MARKET FINANCE TO TRADE WITH RUSSIA
On the subject of regionalization, Reuters writes that Chinese companies are more and more turning to service providers in the grey financial market in order to enable continued trade with Russia. Formal banks fear US sanctions if they facilitate this trade. Small banks and currency exchangers in the border areas are filling the gap.
WEALTH TRANSFER FROM AGING POPULATION IN THE WEST UNDERMINING FUTURE GROWTH
A further “structural change” recently highlighted by the IMF is reviewed by New Normal’s latest blogpost. Over the past 20 years, the world has been borrowing from future generations via debt creation, the IMF notes. As the populations in the developed economies are aging, this will eat away at the ability of future generations to consume and invest, which will lead to structurally lower growth.
Geopolitics
RUSSIA GAINS MOMENTUM ON UKRAINE FRONTS
Russia is pushing forward hard in Ukraine. Since capturing the bastion town of Avdiivka, it is pushing to capture Kramatorsk, where the headquarters of the Ukrainian eastern command are located, writes the New York Times. Russian forces have set their sight on Chasiv Yar, a hilltop fortress town which, if the capture it, will provide them with “commanding heights” that will allow them to directly target the main agglomeration of cities still under Kyiv’s control in the Donetsk region, including Kramatorsk. It would also put Russian troops within around 10 miles of Kostiantynivka, the main supply juncture for Ukrainian forces across much of the eastern front. Around 20,000 to 25,000 Russian soldiers are engaged in the offensive, NYT writes, and assaults continue “around the clock”. Reuters adds that over the weekend, Ukrainian troops were forced to fall back in response to this assault, as a result of a lack of weapons, ammunitions and manpower. Russian troops are further being amassed in the area of Kharkiv, Ukraine's second largest city.
Energy Transition & Technology News
CATL’S NEW EV BATTERY TECHNOLOGY PROMISES VERY LONG RANGES
CATL, has unveiled a lithium iron phosphate (LFP) battery with a driving range of more than 1,000 kilometres (621 miles) on a single charge, writes Reuters. The Shenxing Plus is the world's first LFP battery boasting such a range. EPM considered reporting CATL’s achievement under The Electrification of Transport, but a recent IEA report highlighted why it is more appropriate to discuss this it here under the more general Energy Transition category.
According to the IEA, renewable energy by itself is already much cheaper than coal and gas-fired plants, writes Reuters. But the inclusion of storage technology in the renewable energy system, for 24 hours-a-day reliable electricity supply, causes overall costs to be higher. But this is about to change as battery technology costs continues its rapid downward trend, says the IEA. Fatih Birol, IEA Executive Director, said
The combination of solar PV (photovoltaic) and batteries is today competitive with new coal plants in India. And just in the next few years, it will be cheaper than new coal in China and gas-fired power in the United States. Batteries are changing the game before our eyes.
Lithium iron phosphate (LFP) batteries accounted for 80% of new storage batteries last year, the IEA said. Even cheaper sodium-ion batteries will account for less than 10% of electric vehicle batteries by 2030, but they will make up a growing share of energy storage batteries, it added. Overall global energy storage capacity is due to soar six-fold by 2030, with batteries accounting for 90% of the rise and pumped hydropower for most of the rest. Pumped hydropower is a system that involves pumping water to a higher reservoir during off peak times to generate electricity at peak times.
The Electrification of Transport
LONG TERM PROSPECTS FOR CHINA’S BIGGEST EV MAKER LOOK GOOD
The Financial Times analyses the longer term ambitions of China’s leading EV company, BYD. The company now rivals Elon Musk’s Tesla for the world’s most dominant EV company. In China, by far the biggest auto market, BYD’s low-cost pure battery and plug-in hybrids account for about one-third of all new electric vehicles sold. But the ambition of BYD goes far beyond cars, and China’s borders, FT says. The company has positioned itself as a manufacturing powerhouse across a suite of green technologies. This ranges from its flagship lithium batteries, solar modules, electric-powered buses, trucks and trains to complex artificial intelligence and software used to control and connect transport and power systems. One analyst summarizes the strategy as an ambition to become “an energy ecosystem company”. To get there, the company is looking at vertical integration. BYD owns stakes in mines in at least six countries across three continents, guaranteeing long-term access to lithium. It produces its own computer chips, has its own construction subsidiary for building new factories and develops its own software for increasingly sophisticated vehicles and energy systems.
EUROPE UNABLE TO COMPETE WITH CHINESE EV MANUFACTURERS
As to the advantage Chinese carmakers now have over western counterparts, the Financial Times writes that the EU would need to introduce a tariff of no less than 50% on Chinese cars. Researchers at the Rhodium Group say duties in the 40-50 per cent range — arguably even higher for vertically integrated manufacturers like BYD — would be necessary to make the European market unattractive for Chinese EV exporters. BYD’s Seal U, for example, sells for €20,500 in China and €42,000 in the EU. The estimated profit is €1,300 and €14,300 respectively.
MUSK’S SURPRISE VISIT TO CHINA PAYS IMMEDIATE DIVIDENDS
Over the weekend, Elon Musk made a surprise trip to China to discuss the rollout of Full Self-Driving (FSD) software and permission to transfer data overseas, writes Reuters. Musk met Premier Li Qiang in Beijing. FSD is the most autonomous version of Autopilot software and was rolled out in 2020. Its features include self-parking, auto lane changes and traffic navigations. Since 2021, Tesla has stored all data collected by its Chinese fleet in the country, as required by Chinese regulators, and has not transferred any back to the United States. Musk is now looking to obtain official approval to transfer data collected in China abroad to train algorithms for its autonomous driving technologies. This would allow Tesla to better compete with local rivals in the world's largest auto market where driver assistance and other connected car features are prized. And, EPM adds, provide significant amounts of data for Tesla to leverage in its efforts to move forward with autonomous driving, since the company has sold over 1.7 million cars in China already.
Bloomberg says Musk’s visit to China paid immediate dividends. Tesla passed a key data-security and privacy requirement from the Chinese authorities, and US carmaker will partner with Chinese tech giant Baidu for mapping and navigation functions to support Full-Self Driving.