Energy, Politics & Money - 03 April 2023
In this roundup, we take a closer look at the surprise OPEC+ production quota cut. In the EPM view, the move speaks volumes about OPEC+’s outlook for demand. While Goldman Sachs continued to push its “bull theory” that oil had only one way to go, op, clearly OPEC+ believed it needed to reduce supply in order to support prices moving in that direction. The bull theory was grounded in strongly higher Chinese demand and lower Russian supplies, neither of which have materialized so far. With this in mind, we suspect the banking crisis might have caused concern in the capitals of the major oil producers. Though the crisis itself appears to have been brought under control, OPEC+ is likely to believe its economic impact – though less lending by more cautious banks – is still likely to play out. A view, which we note, appears supported by manufacturing activity in Asia, which is on the decline due to weakening demand from western markets.
Furthermore, we look at:
Japan’s purchases of Russian oil at prices above the price cap
The US’ push at home and at the G7 for further economic restrictions against China
The competition between China and India over leadership in the developing world
The visit of French President Macron and European Commission President Von der Leyen to President Xi of China
The milestone achievement of renewables in the US, as over 2022 for the first time it provided more electricity to the grid than coal
India’s target to install 250 gigawatts (GW) of green energy capacity by March 2028
The (long) list of challenges facing the wind industry
The present and future of the “petrodollar”
General Energy News
OPEC+ has surprised the market with an oil output cuts of around 1.16 million barrels per day. According to Reuters’ calculations, this brings the total to 3.66 million bpd, equal to 3.7% of global demand. Top OPEC producer Saudi Arabia said it would cut output by 500,000 bpd. Iraq will reduce its production by 211,000 bpd, according to an official statement. The UAE said it would cut production by 144,000 bpd, Kuwait announced a cut of 128,000 bpd while Oman announced a cut of 40,000 bpd and Algeria said it would cut its output by 48,000 bpd. Kazakhstan will also cut output by 78,000 bpd. The voluntary cuts start from May and last until the end of the year.
Russia will also extend their 500,000 barrels per day (bpd) oil production cut until the end of the year, reports Reuters.
A Saudi energy official said that the voluntary cuts represent a “precautionary measure” aimed at “supporting the stability of the oil market,” according to Energy Intelligence.
Oil prices immediately surged during Monday morning trading, writes Reuters. Brent crude traded at $84.26 a barrel by 0347 GMT, up $4.37, or 5.5% after touching the highest in a month at $86.44 earlier in the session. WTI was at $79.90 a barrel, up $4.23, or 5.6% after earlier hitting the highest level since late January.
In EPM’s view the move speaks volumes about OPEC+’s outlook for demand. While Goldman Sachs continued to push its “bull theory” that oil had only one way to go, UP, clearly OPEC+ believed it needed to reduce supply in order to support prices moving in that direction. The bull theory was grounded in strongly higher Chinese demand and lower Russian supplies, neither of which have materialized so far. With this in mind, we suspect the banking crisis might have caused concern in the capitals of the major oil producers. Though the crisis itself appears to have been brought under control, OPEC+ is likely to believe its economic impact – though less lending by more cautious banks – is still likely to play out.
As to how this will impact the global macroeconomic environment, obviously the move will support oil prices, which should be expected to affect inflation. As such, it could motivate central banks to raise their rate targets, or maintain them for longer. As such, the OPEC+ move is very likely to be negative for global economic growth – which probably explains why the White House has called it “ill-advised”, according to Bloomberg.
Macroeconomics
Asia's factory activity weakened in March as soft overseas demand hurt output, reports Reuters. Export-reliant Japan and South Korea both saw manufacturing activity contract in March while growth in China stalled. Vietnam and Malaysia saw factory activity shrink in March, while that of the Philippines expanded at a slower pace than in February. India was a rare bright spot in the region, with its manufacturing sector expanding at its quickest pace in three months in March
In what can only be considered an interesting development, Chinese firms are more and more looking for opportunities to establish manufacturing capacity in the US, writes Nikkei Asia. The primary reason is that US buyers, which China wants to continue to serve, are asking that their supply chain be moved away from China
Geopolitics
While the US has rallied its European allies behind a $60-a-barrel cap on purchases of Russian crude oil, it has allowed one of its closest allies in Asia to buy Russian oil at prices above the cap. Japan got the US to agree to the exception, writes the Wall Street Journal, saying it needed it to ensure access to Russian energy. The concession shows Japan’s reliance on Russia for fossil fuels. In the first two months of this year, Japan bought about 748,000 barrels of Russian oil for a total of ¥6.9 billion, according to official trade statistics. At the current exchange rate, that translates to $52 million, or just under $70 a barrel.
The US is pushing Group of Seven countries to take joint action against China “if Beijing engages in economic coercion against the group's partners”, Nikkei Asia writes. At the same time, the US is taking steps at home. A bipartisan bill introduced in February would grant the president the power to take multiple countermeasures against Chinese economic coercion. In addition to increasing tariffs on Chinese products, the bill would allow the US to offer financial support to an country affected by economic coercion. Under one proposal, the US would decrease duties from the affected country to boost shipments and offset the impact of Chinese bullying. Washington is pursuing a united front with Japan and European partners on this matter.
In EPM’s view this is a – masterful – example of economic warfare. The US would not mind using the economic powers mentioned, as it would support its objective to close China off from the western bloc’s economy comprehensively, especially if doing so would place the US firmer in the center of this bloc. At the same time, China dreads being closed off in this manner, but it also doesn’t want to play economic diplomacy in submission to the US. And as such, this example of US maneuvering provides it with real leverage vis-à-vis China. The implication for our EPM readers is that, as we have mentioned before, your portfolio must be prepared for complete regionalization of the global economy. In addition, we could add that the odds of the US experiencing a true economic revival, with manufacturing returning and new industries being pushed on, are increasing.
Because the above clearly highlights the importance of alliances, EPM also looks at the competition between China and India over the position of leadership among the world’s developing economies, the so-called Global South. China’s current narrative in this is that the West is acting in ways that harm the Global South, with the military support for Ukraine lengthening and worsening the war between Ukraine and Russia, leading to shortages and high prices of critical commodities, and that China will use its clout to protect the interests of the Global South by stopping the West and end the war. India’s narrative is slightly different, writes Nikkei Asia. It says that in addition to supporting military support for Ukraine, the West should also support the Global South to manage the fallout of this conflict, and that India will represent the Global South in negotiations with the West to achieve this.
We mentioned last week that Brazil’s president Lula da Silva would be traveling to China this week to meet Xi Jinping. That meeting was rescheduled to the middle of April, writes Reuters, after Lula was diagnosed with pneumonia.
Nevertheless, Xi will be busy this week as French President Macron traveling to Beijing with European Commission President Ursula von der Leyen, writes Reuters. According to a senior French official, while Washington has taken a hawkish stance on relations with China — with the two countries clashing over everything from trade to technology to the South China Sea — France has no intention to de-couple from China. We at EPM believe the presence of Von der Leyen on the trip might be read as an indication the EU in general is aligned with France on this subject,. France and Europe will also be pushing China to continue its diplomatic efforts to bring peace in Ukraine, as the war is having a devastating effect on the European continent – not only economically, but also socially.
Energy Transition & Technology News
In 2022, renewable energy sources created more than 900 terawatt-hours of electric power in the US, compared to a little over 800 from coal. This is the first time renewables outpaced coal over the period of a full year, reports Statista.
India is aiming follow in the US’ footpath, writes Reuters. The country will issue tenders for the installation of 250 gigawatts (GW) of green energy capacity by March 2028, according to a government memo. India is trying to boost non-fossil capacity – solar and wind energy, nuclear and hydro power, and bio-power – to 500 GW by 2030. Coal currently accounts for over half of India's 412.2 GW power generation capacity.
In the wind power industry, it is the best of times, and the worst of times, says an opinion piece over at Bloomberg. The world’s demand for the clean energy it provides is very strong, but the supply side is a mess that has yet to be untangled. The trouble is that, even as the technological and financial situation for wind power has improved, the regulatory landscape remains stuck in the past. Take local-content requirements. Every country wants to establish itself as a powerhouse of wind manufacturing by requiring developers to source a share of their equipment domestically — but many places simply don’t have the scale to do this competitively. Getting permission from local authorities and grid operators to actually build generators is a further problem. These issues are compounded by supply-chain bottlenecks. Key components such as blades and generators are going to start running short in the second half of the decade. And all of that is putting pressure on project expenditure, as rising interest rates also force up finance costs.
Other
A meaningful look at the present and future of the “petrodollar” over at Forbes. Recent international deals and new alliances that are raising questions about the future of the petrodollar, but it is not easy to change a practice that has such a long and established history, and itself it part of a major geopolitical alliance. The EPM view is that the geopolitical reality the world is moving toward – from hegemony to multipolar – will undoubtedly weaken the role of the US dollar in global trade, including oil and gas. But a major dislodging of the US dollar? We don’t see this happening any time in the near future. As with all transitions from “old” global reserve currency to “new” global reserve currency throughout modern history, this will play out over decades – if, that is, the US were to indeed lose its competition with China, for if not, the US dollar’s life as the global reserve currency will be extended.