Energy, Politics & Money - 01 November 2022
Independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated for you!
In this roundup, EPM analyzes continued US verbal attacks on OPEC+. EPM believes the US is playing politics here and that it is mostly designed to deflect blame for the economy to external parties in the run up to US midterm elections (next week). We base our analysis on the idea that if the US were really concerned about a lack of oil and natural gas supply it could quite easily adjust its sanctions policies and the domestic energy agenda. The OPEC+ quota cut was designed to prevent a price decline not for driving a price increase. We forecast that the global recession and the supply disruptions that will result from the next round of US & EU sanctions on Russia will pull oil in opposite directions, and that if the upward pressures resulting from the sanctions disruption win out, OPEC+ will increase production to keep the peace with the US.
Furthermore, we look at:
Sinopec’s (the Chinese refiner) short-term strategy and what it says about the company’s expectations for Russian crude oil sales to China and China’s policy on refined fuel exports
US crude production that is edging to over 12 million barrels per day
BP’s earnings announcement and humbled by Aramco’s earnings
Japan’s decision to remain in Sakhalin - indicating a priority for energy security over unlimited support for Ukraine (unlike the Europeans)
China’s forays into the manufacturing of LNG carriers
Fresh warnings of a severe recession coming by leading economists out of the US (months after we at EPM first forewarned this)
Occidental’s plan for a DAC project targeting 30 million tons of CO2 per year
The “climate change gap” between rich and poor countries, as well as the rich and the poor in rich countries
The first analysis of the Chinese Communist Party’s recent congress - which we at EPM fully agree - that concludes nothing is certain regarding China and most western predictions about what will result are likely to turn out to be inaccurate or wrong
China’s new “Global Security Initiative (GSI)”
Germany’s impossible position - where EPM explains why and how the country has maneuvered itself into an impossible position vis-à-vis Russia, China, and the US
Warnings that next year’s energy crisis will be significantly worse than this year’s (echoing a point we EPM have made repeatedly)
UOB’s (a Singaporean bank) announcement that it will not provide new loans for future oil and gas projects
Bloomberg’s continued criticism of the practice of offsetting
General Energy News
The US continues to argue with OPEC+ over the recent quota cut. At the annual Abu Dhabi International Petroleum Exhibition and Conference, Amos Hochstein, the Biden administration's special envoy and coordinator for international energy affairs said, according to S&P Global. “Energy prices have to be priced in a way that allows for economic growth. If they are not, then they will accelerate the oil price decline, and accelerate an economic downturn, which is one thing that will be terrible for energy demand, as well”.
EPM continues to believe the US is playing politics with Saudi and OPEC+ and is designed to deflect blame for a poor economic environment to external parties in the run up to the next midterm elections in the US. Our main argument for this position is that if the US were really concerned about a lack of oil and natural gas supply it could namely, and quite easily,
Cancel its “Russian oil price cap” plan (and ask Europe to cancel its next sanctions package),
Find agreement with Iran that brings Iranian oil back to the market,
End sanctions on Venezuela which poses no real threat to US interests domestic or international,
Listen to US domestic oil & gas producers’ requests regarding energy policy, licensing and permitting,
Urge Wall Street to provide the necessary financing to US domestic oil & gas producers.
As to the OPEC+ quota cut, we want to repeat that it is designed to prevent an oil price decrease rather than drive an increase – and exactly this it has achieved (with some help from additional Chinese purchases over recent weeks). Looking ahead, as we discussed earlier this week, EPM expects the developing global recession will start to bite into oil demand over coming weeks and put downward pressure on crude oil. However, upward pressures will come from the disruption the next round of US and EU sanctions on Russia will cause (Bloomberg reports crude oil could rise to $100 a barrel again on Russian supply losses once the EU tightens sanctions, according to the International Energy Forum). We forecast that if the upward pressure clearly wins out, then OPEC+ will intervene through additional barrels to prevent the oil price from increase too much (above $100) and to keep the peace with the US.
US Crude production rose 0.9% to 11.98 million barrels per day in August, the highest since March 2020, the US Energy Information Administration (EIA) said in monthly figures reported on by Reuters.
In our continued review of earnings announcements, Reuters reports BP delivered a bottom line of $8.2 billion. 60% of the excess cash flow will be used for shareholder returns. Aramco, however, said “move over” to BP, Shell, ExxonMobil, Chevron and everyone else combined, as it announced a quarterly profit of $42.4 billion, again according to a Reuters report.
According to S&P Global, China’s state owned refiner Sinopec short-term strategy will focus on optimizing feedstock costs, and leveraging plentiful oil product export quotas handed out by Beijing. In our view here at EPM, this indicates two really important things. Firstly, that China will continue to buy discounted Russian barrels. If anything, these purchases should be expected to increase. So, China should be expected to remain in its relation with Russia, but will use the Russian’s problems for leverage to get bigger discounts on crude oil and natural gas discounts. Secondly, China’s refining industry being where it is, it has the potential to add substantial volumes of refined products to the global market. Beijing has so far largely held back from giving the industry the export quotas needed for this. But it has handed out substantially “more than usual” for the 4th quarter of this year and Sinopec seems to expect 2023 to be higher than usual as well.
The Japanese government has decided to remain involved in the formerly Exxon-led Sakhalin-1 oil and gas project in Russia, Nikkei Asia reports, as it seeks a stable supply of energy despite international sanctions on Moscow over its invasion of Ukraine. In a related report in The Financial Times, the head of one of the country’s big five trading houses, Masahiro Okafuji of Itochu, has said Japan cannot “survive” without continuing to buy oil and gas from Russia.
And, as for natural gas, Nikkei Asia reports the China State Shipbuilding Corporation (CSSC) will start building a roughly 20 billion yuan ($2.76 billion) shipyard in the city of Dalian to manufacture LNG carriers. In EPM’s view this is mostly likely not just about economic (taking a profitable business away from South Korea). But also the result of a comprehensive view on energy security, including not only production of the energy but also transportation to the centers of demand.
Macro-Economics
As the Fed convenes this week, inflation remains at the highest level in decades and is becoming more embedded, meaning policymakers are set to ratchet up their response and implement the fourth 0.75 percentage point increase in a row while also signaling more tightening ahead. The Financial Times writes, leading economists now echo our EPM view (months later, we add…) that this policy of monetary tightening will cause a severe economic downturn.
Geopolitics
An opinion piece in Nikkei Asia says most conclusion about the direction China is likely to take following its most recent Communist Party Congress are premature. It says: “Chinese elite politics has always been a black box to outsiders. What we think we know is either too little or too inaccurate to be the basis for in-depth analyses of top-level Chinese decision-making.” Consequently, “many … analyses are based on guesswork”. As a result, most predictions turn out to be wrong: “Before the official announcement, many China watchers offered predictions about who would be on the new Politburo Standing Committee and virtually all of them were proved wrong. Analyses of individual leaders' policy preferences have been similarly inaccurate.” EPM believes this is something to consider when you plan for the future – uncertainty is the only certainty. This does not mean there is no value in trying to understand the direction China is likely to take. Just do that through Scenario Planning exercises rather than forecasting.
With the above said, Nikkei Asia carries an analysis of China’s new “Global Security Initiative (GSI)”. Mentioned during President Xi Jinping’s speech at this year’s Communist Party congress, it is supposedly to “provide a framework of principles for global affairs and diplomacy that could make the world a safer place”. The GIS is based on six commitments:
staying committed to comprehensive, cooperative and sustainable security;
respect for the sovereignty and territorial integrity of all countries;
abiding by the principles of the United Nations Charter;
taking seriously the legitimate security concerns of all countries;
peacefully resolving disputes through dialogue; and
maintaining security in both traditional and nontraditional domains.
What exactly this means, or how China intends to achieve its stated objective, is not clear at this point in time. Analysts speculate it is about trying to propose an alternative regional security architecture one that moves away from the historical, or the postwar system of US alliances and partnerships. EPM is of the view that China’s main weakness is its inability to build relationships of trust with international partners. Somehow, it tends to disrupt its own efforts in this regard, either through “wolf warrior” diplomatic statements, or through military maneuvers (for example in the South China Sea). As a result, we expect Chinese efforts to build international partnership are likely fail.
Further as to China, The Financial Times has a report on Germany’s efforts to reduce the dependency of its economy on the country. Rarely has a country maneuvered itself into a corner like Germany. The country linked itself too closely to Russia for energy, to China for exports, and to the US in all matters of geopolitics (a completely unworkable hoshposh because US geostrategic interests do not align with those of Russia and China). There is no way out of this situation without Germany offending at least one these three strategic partners – and suffering severe economic consequences as a result. If Germany were to choose protection of its economic interests by maintaining energy and export ties, it will have to abandon the US in all matter of geostrategic importance, making the country a target for (potentially devastating) US sanctions. If, on the other hand, it remains aligned with the US, its economy will be destroyed by a lack of affordable energy and a gradual closing off of its main export market.
Energy Transition & Technology News
According to a press release, Occidental is moving forward with its large-scale Direct Air Capture (DAC) project in Texas. A new agreement provides the company with access to land for the potential to remove up to 30 million metric tons of CO2 per year through DAC, and pore space estimated to store up to 3 billion metric tons of CO2 in geologic reservoirs.
Climate Politics
According to The Guardian, Lee White, environment minister of the African state of Gabon, had harsh words for western politicians pushing the climate change agenda. White said the world will only take meaningful action on the climate crisis once people in rich countries start dying in greater numbers from its effects. He warned that broken promises on billions of dollars of adaptation finance have left a “sense of betrayal”. He said the $100 billion of promised climate finance from rich nations was not reaching poor countries, which was driving distrust in the UN climate process.
The “climate change gap” (promises versus actual actions, responsibility versus the consequences) is not just between rich and poor countries, The Guardian also reports. Apparently, within the rich countries, new data shows that the rich are responsible for significantly higher emissions than the poor. In the UK, top 1% of earners are responsible for the same amount of carbon dioxide emissions in a single year as the bottom 10% over more than two decades.
The Electrification of Transport
Tesla aims to start mass production of its Cybertruck at the end of 2023 which was unveiled by Chief Executive Elon Musk in 2019. This is two years after the initial target for the long-awaited pickup truck according to Reuters quoting two people with knowledge of Tesla’s plans. The company has pushed back initial production three times: from the initial launch date in late 2021 to late 2022, then to early 2023, and most recently to the mid-2023 target. We at EPM cheekily add that hopefully this latest delay will a harbinger of things to come, as in a permanent cancellation of production of what we consider a monstrocity of a truck.
The Global Energy Crisis
An opinion piece in Time argues that “This year’s energy crisis is going to look mild once next year’s kicks in. It is winter 2023-2024 that is going to be the real crisis. Any current energy planning that fails to account for next year and beyond is jumping out of the frying pan and into the fire—where this winter is a problem, 2023’s may be a catastrophe.” As to why, the piece says “The immediate problem is simple: There is not enough fuel, and therefore not enough electricity, so prices have skyrocketed for both.” For next year, it says “there is a high probability that China will finally come out of COVID-19 slumber. It will rock and roil energy markets when it does.” It also argues Russia is likely to decrease energy exports even further (in part due to production issues that are bound to result from the current sanctions).
ESG
Major Singaporean lender United Overseas Bank will end new loans to oil and gas developments as part of long-term goals for net-zero emissions, the company said Monday according to Nikkei Asia.
Bloomberg, meanwhile, targets emissions reduction claims by some of the world’s largest companies. They declare breakneck progress in decarbonization, but these gains often fail to materialize in the atmosphere, it says. Procter & Gamble vowed to cut its heat-trapping emissions in half by 2030, before announcing it had surpassed its target a decade early. Cisco Systems said it had exceeded a goal to reduce its climate pollution by 60% over 15 years. Continental, the German tire and auto parts company, claimed it had reduced greenhouse gases by 70% in 2020. A substantially different picture emerges when using a different accounting method that more accurately measures the pollution from a company’s operations. Procter & Gamble more realistically cut its emissions by 12%, Continental’s pollution fell a more pedestrian 8%, and Cisco’s actually climbed 22%. The difference result from the companies relying on something called “market-based accounting”, which allows for offsetting which according to Bloomberg “allows companies to report emission reductions that are not real”. At EPM we note this coverage is an example of the growing resistance against the practice of offsetting. And we have mentioned before that your decarbonization strategy should not rely on offsetting, as it is likely the practice will become socially unacceptable – with only reforestation projects having a chance of survival.