Energy, (Geo)Politics & Money - February 28, 2024
Non-partisan, objective & neutral analysis where global developments in energy, business & geopolitics intersect & curated from leading global sources & resources.
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:
OPEC+’s review of the voluntary oil output cuts, and the view that increased production would make sense
The ECB net result over 2023, a loss of euro 7.9 billion
The expectation of Russel Hardy, CEO of oil and gas trader Vitol, regarding the oil price in 2024, as well as the energy transition
The discussion among NATO members on sending not only weapons and ammunitions but also soldiers to Ukraine
The electrification of India’s 3- and 2-wheelers, which is asking questions about the country’s oil demand over coming decades
Apple’s decision to cancel its decadelong effort to build an electric car
Honda’s plan to launch a hybrid-hydrogen SUV
Photograph by @markusspiske
General Energy News
OPEC+ TO EXTEND VOLUNTARY CUTS
OPEC+ will consider extending voluntary oil output cuts into the second quarter, to provide additional support for the market, and could keep them in place until the end of the year, writes Reuters. Last November, the Organization of the Petroleum Exporting Countries and allies led by Russia agreed to voluntary cuts totalling about 2.2 million barrels per day (bpd) for the first quarter this year, led by Saudi Arabia rolling over its own voluntary cut. Extending the output cuts into the second quarter is "likely".
EPM notes the oil price has over recent months been supported by the geopolitical risk premium, as at the same time it battles an uncertain economic outlook and increased production from US Shale and other non-OPEC regions of the world. In a worst-case scenario (from the OPEC+ perspective), the global economy weakens further under the influence of high interest rates, including in the US where consumer spending could potentially run out of steam as most of it has been funded through debt over the past 18 months, while oil production from non-OPEC countries continues to climb and the risk premium evaporates under the influence of a deal for Gaza. This case would absolutely necessitate a continuation of the current OPEC+ agreement, if oil is to remain in the $70 – 80 per barrel bandwith.
CONTRARY VIEW: OPEC+ SHOULD REDUCE PRODUCTION CUTS
Javier Blas of Bloomberg is of the opinion that OPEC+ should reduce its production cuts and make more oil available to the market. Refining margins are high, which indicates a strong underlying demand for oil, he believes. Strategically, pumping more oil has another benefit, he says. By putting a lid on oil prices, the group can slow the expansion rate of the US shale industry. This is an old argument that OPEC, around for decades, which the cartel has not listened to even once. Hence EPM does not expect it to feature in the decision market process this time either.
CRUDE OIL PREDICTED CONTINUE TO TRADE AT $80
Russel Hardy, CEO of oil and gas trader Vitol, expects oil prices to continue to trade around $80 per barrel in 2024, writes Reuters. Additionally, Hardy discussed the energy transition. He expects global oil demand to peak in the early 2030s. The sales of electric vehicles in developed economies has knocked 500,000 barrels per day off oil demand, or roughly half a percent of global consumption, in his view. Nevertheless, he said that oil demand still has a good number of years still to climb, before it plateaus.
Macroeconomics
ECB LOSES €7.9 BILLION
The European Central Bank delivered another large financial loss in 2023, writes Reuters. The loss before the release of provisions was 7.9 billion euros, after a loss of 1.6 billion euros in 2022. "The ECB is likely to incur further losses over the next few years as a result of the materialisation of interest rate risk, before returning to making sustained profits," the bank said. The root cause of the issue of the previous years of expansionary monetary policy. The ECB printed money to buy government debt, assets which in the current higher interest rate environment have declined in value. Additionally, the loose monetary policy increased liquidity in the market. As a result, commercial banks across the euro zone sit on 3.5 trillion euros worth of excess liquidity, which the ECB is now paying interest of 4.0% on. Reuters separately looks at the implications of the issue. First, there is the implication for national government finances. The owners of the ECB are used to receiving a dividend from the ECB, which now stops. The loss is carried forward which means that there will be no dividends over the foreseeable future. This raises the risk of legitimacy of the ECB, as the owning governments and general public start to question the ECB about its losses.
Geopolitics
FRANCE PROPOSES SENDING TROOPS TO UKRAINE
French President Emmanuel Macron opened the door on Monday to European nations sending troops to Ukraine, writes Reuters. "There is no consensus at this stage ... to send troops on the ground," Macron told reporters. "[But] nothing should be excluded. We will do everything that we must so that Russia does not win." He added, "I can confirm there are countries that are prepared to send their own troops to Ukraine, there are countries that say never, among which Slovakia belongs, and there are countries that say this proposal needs to be considered". EPM notes that this remark by Macron is most likely to achieve a specific political objective, and not reflective of a serious debate within NATO on the subject, as it is well known that France has provided only very limited weapons and ammunitions support to Ukraine. According the a report by Le Monde earlier this month, France ranks only 15th in the list of Ukraine military donors with transfers and financial support valued at €540 million. If Germany or the US had raised the issue, we would have said the risk of escalation in this manner – which in our view would effectively cause World War 3 – is serious.
OTHER NATO ALLIES THROW COLD WATER ON FRANCE’S PROPOSAL
The United States, Germany, Britain, Spain, Poland and the Czech Republic distanced themselves from any suggestion they might commit ground troops to the Ukraine war, Reuters writes. "There will be no ground troops, no soldiers on Ukrainian soil sent there by European countries or NATO states," German Chancellor Olaf Scholz said on Tuesday. The White House reiterated that it too had no plan to send ground troops, instead urging U.S. lawmakers to approve a stalled security aid bill that would ensure Ukrainian troops got the weapons and ammunition needed to continue their fight.
The Electrification of Transport
INDIA TO LEAD IN OIL DEMAND OVER NEXT DECADE
Bloomberg looks at India, the country expected to lead in oil demand increases over the coming decade. It notes that the country’s rickshaws are rapidly electrifying, and that its 2-wheelers are likely to be next. E-rickshaws took a 54% share of India’s three-wheeler market last year, driven by zippy, longer-range models and running costs that are a fraction of petroleum-powered alternatives. Buy a Bajaj Maxima with an engine and you’ll pay about three rupees per kilometer (5.8 cents per mile) for diesel — a significant slice of earnings that average out around 10 rupees per kilometer. A Piaggio Ape E City with a lithium-ion battery charged at home, on the other hand, might cost just 0.27 rupees per kilometer. As a result, e-rickshaws aren’t just cleaner and quieter — they’re more profitable, too. That’s a decisive consideration for drivers. This hard financial logic that’s caused e-rickshaws to take over is starting to play out on two wheels, too. All this could start to cause real pain for oil producers. The International Energy Agency’s latest estimates for the country’s oil demand are already being trimmed. Its latest report reckons 6.6 million barrels a day will be consumed in 2030 — above 5.5 million barrels last year, but well down from a central forecast of 6.8 million daily barrels in its global outlook last October.
APPLE CANCELS EFFORT TO BUILD AN E-CAR
Apple is canceling a decade long effort to build an electric car, writes Bloomberg. The announcement comes after an earlier one delaying the car release until 2028 and reducing self-driving specifications from Level 4 to Level 2+ technology. The project will begin winding down and that many employees on the car team — known as the Special Projects Group, or SPG — will be shifted to the artificial intelligence division. The decision to ultimately wind down the project is a bombshell for the company, ending a multibillion-dollar effort called Project Titan that would have vaulted Apple into a whole new industry. The tech giant started working on a car around 2014, setting its sights on a fully autonomous electric vehicle with a limousine-like interior and voice-guided navigation. Apple was still years away from producing a car and contemplated many different designs. Beyond the look of the vehicle, cracking self-driving technology was a major challenge. Apple had road-tested its system since 2017 using a Lexus SUV exterior, putting dozens of vehicles on roads in the US. The company also tested more secretive components on a gigantic track in Phoenix that was once owned by Chrysler. In the EPM perspective, this news highlights the amazing achievements by Elon Musk and Tesla, but also the Chinese car companies. If Apple can not pull it off successfully, it should be clear that those who did delivered an extraordinary feat.
HONDA TO BUILD HYDROGEN HYBRID
Honda will give hydrogen cars another go, this time in the form of a hybrid-hydrogen SUV, writes Nikkei Asia. The CR-V e:FCEV hybrid-hydrogen vehicle can drive up to 60 miles on a plug-in rechargeable battery, and was debuted on Wednesday at an exhibition for renewable energy technologies in Tokyo. The new model will be manufactured at Honda's plant in the U.S. state of Ohio and launched in western California as well as Japan this summer. The price has not been announced. Honda launched the FCX, its first fuel cell passenger car, in 2002 but discontinued production of its latest model Clarity in 2021 due to weak demand. EPM notes that this announcement comes after Shell decided to close it hydrogen recharging station in California. EPM considers hydrogen vehicles, due to their inherent higher complexity than plug in EVs, and the immense investment required to build the hydrogen supply chain, an absolute dead end.