Energy, Politics & Money - 02 August 2022
Curated news from the ever evolving worlds of energy, geopolitics, and money just for you!
Welcome to the Energy, Politics & Money news feed of Tuesday 2 August 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we review:
Oil price fluctuations, the coming OPEC+ meeting to review production targets, shrinking US strategic oil supply,
World wide efforts to fight the economic recession
Continued tensions in the Taiwan Straight and the impact on non-Chinense advanced Chip manufacturers
Chinese and Japanese efforts to reduce emissions
The World Energy Crisis - technical issues with Nord Stream continue, African countries seeking energy investments to meet demand, and Gazprom Marketing and Trading Singapore (GMTS) can’t supply its Indian customers with LNG.
General Energy News
The sell-off in oil we reported on yesterday (Monday) continued throughout the day, as not only China reported weak economic data but, according to Reuters, several other countries as well, firmly pushing traders’ focus on the demand outlook. In the end, Brent futures fell $3.94, or 3.8%, to settle at $100.03 a barrel, having fallen to a session low of $99.09 a barrel. US West Texas Intermediate crude fell $4.73, or 4.8% to settle at $93.89 a barrel, after hitting a low of $92.42.
Tomorrow, Wednesday, OPEC+ will gather online on Wednesday to calibrate production levels for September. According to Bloomberg, US officials are confident it will agree a production boost. We see that as a possible outcome, because it would “keep the peace” politically and allow Biden to say to the American voter “I delivered”. We don’t see it as likely, though, because Russia would probably protest / veto such a decision. As to whether a potential OPEC+ quota increase would translate into meaningful increases in oil supply, we also see this as very unlikely. Russia, Iran, Venezuela could increase supplies significantly, but are under sanctions, something OPEC+ can’t fix. As to the other countries, a few have a little spare capacity left, but that won’t dramatically move the needle on the global supply the demand balance. The economic recession underway globally will, however…
Bloomberg carries an analysis by Liam denning of how the US majors are using their massively positive cash flows, “Combined capital expenditure in the second quarter was just $7 billion, less than half the outlay in the summer of 2014. Priorities have changed. Back then, the mindset of peak oil supply lingered with both companies engaged in enormous, multi-year growth projects. The damage this did to profitability forced a reckoning. Dividends plus buybacks now far exceed capex.”
Reuters reports the US emergency crude oil stockpile fell to its lowest level since May 1985 last week. There are two ways to look at this. One could say this leaves the US more exposed to shocks in supply. But one could also argue the emergency crude stockpile is much less relevant today as the US developed its shale potential – whose production could, given the will, be turned up significantly in a matter of months.
The Macro Environment (economics & geopolitics)
A very interesting analysis of the “new commodity supercycle” theory over at S&P Global. Since early 2020, more and more analysts have been championing the idea of a new commodity super-cycle, with an economic recovery turbo-charged by low interest and pandemic-led fiscal stimulus measures, and as investment into decarbonization projects accelerated to meet net-zero targets. This vision is now cracking under the current economic reality of rising interest rates and re-prioritizations (security of supply versus decarbonization) in energy policies around the world.
Over at Bloomberg, an opinion piece argues “whether the Fed has crashed the economy into a recession or still manages to engineer the soft landing, we are likely to emerge from this episode into a difficult economic landscape that presents problems with no straightforward solutions. The problem is that the new normal will return us to a version of the hole we’ve been in: a morass of shrinking work forces and low investment, stagnant wages and rampant inequality that gummed up prosperity for years. The critical economic question – where does growth come from?– will get even trickier if energy remains expensive and China stops growing like an emerging market and starts slowing like a developed one.”
Nikkei Asia today carries an interesting deep-dive into China’s real estate problems, arguing “China mortgage strikes threaten property sector's house of cards”.
As to geopolitics, the potential Pelosi visit to Taiwan highlights (again) the tense relation between the US and China. We cover it here at EPM as it is one of the drivers behind the de-globalization trend, which will affect all businesses, everywhere. According to Bloomberg, Pelosi is expected to visit the island today. Though the Financial Times believes it will be Wednesday. China’s threat that its military would “take action” if she did, without specifying how exactly, makes this a very tense moment that could have unintended consequences.
Beyond the Pelosi visit to Taiwan, Reuters reports the US is considering limiting shipments of American chip making equipment to memory chip makers in China, including Yangtze Memory Technologies Co Ltd (YMTC). This is part of broader US efforts to limit China’s ability to design and manufacture cutting-edge semiconductors (Previously we reported on the US’s request to the Netherlands to ban ASML from selling its technology to China). The Reuters report also says, “If President Joe Biden's administration proceeds with the move, it could also hurt South Korean memory chip juggernauts Samsung Electronics and SK Hynix... Samsung has two big factories in China while SK Hynix is buying Intel Corp's NAND flash memory chips manufacturing business in China.” This highlights how the US – China tension are forcing companies to choose sides – “you either do business with us, or with them”.
According to Nikkei Asia, in an article which agrees with the view we set out above as to how the geo-strategic tension between the US and China will affect the global economy, southeast Asia will be one of the regions most affected by this trend in geopolitics.
On the topic of the US – China geo-strategic conflict and semiconductors, Bloomberg found another interesting piece of information in the recent US $52 billion federal program to boost domestic chip making capabilities. Apparently, companies that receive any funding from this program need to promise they will not to increase their production of advanced chips in China.
Energy Transition & Technology News
S&P Global reports China's Ministry of Industry and Information Technology (MIIT) yesterday released its carbon action plan for industrial sectors. It confirmed that industrial sectors are required to peak their total carbon emissions by the end of 2030. The newly launched action plan developed a tailored set of guidelines for the related authorities and companies in different industrial sectors, pointing out what needs to be done by each party to ensure both efficient decarbonization and sustainable economic growth. The plan encourages companies in the industrial sectors to establish captive solar PV power plants equipped with energy storage capacities, boost hydrogen usage in industrial decarbonization, and use natural gas to replace coal for power, heating, and as raw material. Companies in steel, building material, refining and petrochemical sectors, meanwhile, must accelerate the deployment of Carbon Capture, Utilization and Storage (CCUS) facilities. State-owned companies must be the first mover for developing and deploying advanced technologies, and to make voluntary decarbonization commitments beyond the government's compulsory targets. For refineries and petrochemical plants, the plan called for enhancing their ability to process feed stocks with less carbon content, such as natural gas, ethane, and propane, while limiting production capacity from coal to gas and oil. It also encouraged producing ethylene from crude oil, which oil major Sinopec has developed the technology and set to apply.
According to Nikkei Asia, Japan's Ministry of Economy, Trade and Industry intends to deliver something similar. It will create a decarbonization road map for steel, chemicals and six other industries, setting specific emissions reductions targets and projecting the development of greener technologies with the help of outside contributors. The hope is this will provide investors with more clarity and certainty, and thereby increase green financing available for companies operating in these sectors.
Reuters reports Eni has set up a new company, called Eniverse Ventures, that will develop new technologies in the energy transition sector. The new company will support Eni's own projects and also be open to collaboration with external partners including startups, technological companies and universities. The company will focus on technologies that could reach the market in less than three years.
The Global Energy Crisis
As you know, Russia cut gas supplies via Nord Stream 1 to just 20% of capacity last week, because of the “turbine issue”. European pressure to bring production back up does not seem to be having an effect on Russia, however. Reuters reports Kremlin spokesman Dmitry Peskov on Monday said “There are malfunctions which require urgent repairs and there are certain artificial difficulties which were caused by sanctions”. Our perspective is that Russia will not cut off Europe completely, but do all it can to prevent Europe from building up the inventories of natural gas it needs to get through winter comfortably. Without such inventories, namely, Russia will maintain “leverage” over Europe – and Europe continuous to be incentivized to drop its sanction on Russia.
The arm of Gazprom nationalized by the German state - Gazprom Marketing and Trading Singapore (GMTS) and is now a subsidiary of nationalized Gazprom Germania - has failed to deliver some LNG cargoes to Indian energy company GAIL. Lower gas supplies will affect India’s urea production, and thus affect agriculture, but also other industries that use gas for energy. Gazprom Germania also said it may not be able to meet supplies under their long-term deal. Read more about the issue over at Reuters, highlighting how India being directly impacted by Europe’s sanctions policy vis-à-vis Russia. This turn of events is unlikely to go down well in New Delhi.
According to a report by the Guardian, leaders of African countries are likely to use the current energy crisis to push for massive new investment in fossil fuels in Africa during next UN climate summit in November. Last year at COP26 such a move would have triggered condemnation from Europe. This year it is likely to receive a completely different response from the very same people – offers of financing and technical support!