Energy Politics & Money - 04 May 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
In this roundup, we look at:
The panic on the oil trading floors in Asia
The latest seizure of an oil tanker in the Arabian / Persina Gulf, this time by Iran, leaving the score 2 – 1 in Iran’s tanker seizure match with the US – but more importantly, increases the chances of heightened risk premiums in Arabian crude oil pricing
The US Fed’s latest rate hike, which could well be its last increase for the foreseeable future
The “loss of confidence” – the death stab for a fiat based monetary system – that seems to be underlying the decline in share prices of US regional banks
China’s factory activity, which struggled in April, and could indicate that China’s economic recovery post Covid-19 peaked at the start of this year, calling into doubt whether the country’s economic rebound is sustainable
China’s ability to break free from the stranglehold the US is attempting to place it in, an element of which is the renewed US military collaboration with the Philippines that according to George Friedman should incentivize China to take a more aggressive posture vis-à-vis the Philippines
Shell’s ambitions in SAF
How multinational corporations are preparing for far the reaching supply chain disruptions that are likely to result from an escalation of tensions over Taiwan
The pushback against the proposal to make COP28 focus on emissions reduction, rather than on the phasing out of fossil fuels
China’s significant lead in R&D in areas of relevance to the electric vehicles, such as battery charging and battery swapping
General Energy News
Wednesday saw chaotic scenes on the oil trading floors in Asia, writes Bloomberg. Oil futures endured a roller-coaster ride as Chinese traders returned after a break, first collapsing crude to the lowest level since December 2021 in a chaotic opening spell before erasing losses to trade higher. At one point, WTI was 7.2% lower, before closing 0.4% higher at $68.90. Brent for July settlement in the end advanced 0.6% to $72.78 a barrel. The panic is the result of the global economic outlook, Bloomberg says.
You might recall that last week Iran seized a Marshall Islands-flagged oil tanker in the Gulf of Oman that was sailing from Kuwait to the US under charter by US energy major Chevron. The tanker is being held at the Iranian port of Bandar Abbas. In retaliation, the US seized a cargo of Iranian oil, the Suez Rajan, and redirected it to sail to the US. Now, Iran has retaliated against the retaliation, writes the Financial Times. It seized the Niovi VLCC, a Panama-flagged oil tanker, was sailing from Dubai towards the United Arab Emirates port of Fujairah in the Gulf of Oman. Images released by the US Navy suggest the Niovi was empty at the time of its seizure, as it was sitting high out of the water. Energy analysts have cautioned that if the number of tankers seized continues to rise, then traders could price in a higher risk of disruption to oil flows.
Macroeconomics
The U.S. central bank raised its benchmark overnight interest rate by a quarter of a percentage point to the 5.00%-5.25% range, as expected by financial markets, writes Reuters. But, it says, in doing so it dropped from its policy statement language saying that it "anticipates" further rate increases would be needed. "We're closer, or maybe even there," Powell said of the end-point of rate increases. The EPM perspective is that the US banking crisis will decide whether the Fed will now pause, or backpedal.
As to the US banking crisis, another fall in shares of US regional banks yesterday, writes Reuters. This included a 52% plunge at PacWest and 23% decline in Western Alliance. These falls underscore how investors remain unconvinced about the health of regional banks, despite regulators' efforts to call an end to the banking crisis that started with the collapse of Silicon Valley Bank and Signature Bank in March. Dennis Dick, a trader at Triple D Trading in Ontario, Canada said,
When you lose confidence in the banks, that equals a whole lot of trouble. I haven't felt this scared since the financial crisis.
Whatever happens, Blackrock will come out a winner, writes Bloomberg. The firm’s Financial Markets Advisory unit, a sort-of financial-crisis SWAT team, has been retained by the FDIC to size up and sell investments related to two failed lenders, Silicon Valley Bank and Signature Bank. The task is to find buyers for $114 billion of securities left to the US government by SVB and Signature, all while not further ruffling financial markets. It’s a big job – the biggest of its kind ever, in fact — and one that will entrench BlackRock, the world’s largest asset manager, even more deeply in the regulatory apparatus of Washington. Insiders acknowledge the potential payoff isn’t money. The real reward, Bloomberg says, comes in the form of access, prestige and influence — a seat at the table when the next crisis, or perhaps the next opportunity, arises.
Over in China, EPM reported earlier this week that travel for the May holiday in the country was higher than before the COVID pandemic – certainly a plus for the China’s economic outlook. But there are also minuses, such as China’s factory activity which struggled in April according to Bloomberg. “This suggests that China’s economic recovery significantly slowed after Covid-19 infections peaked at the start of this year,” an analyst said in a statement accompanying the data release. “It remains to be seen if the rebound is sustainable after a short-term release of pent-up demand.”
Geopolitics
A blog at investment managers Newton looks at the US’ active efforts to stymie China’s growth and development through a process of containment, to assess whether China can avoid the ‘containment trap’. It notes that investor sentiment is quite negative, as evidenced by the views on China’s medium-term growth outlook. Based on China’s current level of development (globally competitive or close to globally competitive in a variety of industries already), domestic capabilities (large, highly educated and motivated workforce), a capable government committed to utilizing all the nation’s resources to break free from any US stranglehold, and support for China among a significant number of countries around the world (mostly developing) the authors are optimistic about China’s chances. But, he notes, any Chinese success in this area is likely to trigger a doubling down of the US, as in more sanctions against China. At EPM we note that the final and ultimate “sanction” is war.
As to war, the Pentagon has released a fact sheet explaining the defense cooperation agreed during the visit of Philippines president Ferdinand Marcos Jr. to Washington DC this week. The U.S. and the Philippines are moving toward real-time sharing of military information and greater coordination, it says according to Nikkei Asia.
George Friedman of Geopolitical Futures writes that the importance of this agreement is not to be underestimated. Earlier, China sought to build new and better ties with the Philippines, as the country’s waterways could offer China access to the Pacific, one not controlled by the US via Taiwan. Clearly, Friedman says, the latest US – Philippines agreement shows this Chinese plan has failed, leaving the “American wall” (his words!) blocking Chinese access to the Pacific intact. “It’s not surprising, then, that the pressure on Taiwan has continued and even intensified”, Friedman fuether says. And, “It’s also not surprising that China has been increasingly aggressive in the Spratlys and is engaging the Philippine navy and coast guard with increasing assertiveness. Rather than the door opening, it seems to be closing on a fundamental interest of China: having unfettered access to the Pacific. China is also seeking to force the Philippines to reverse its relations with the United States by raising the possibility of conflict, a strategy it has used with Taiwan for years.”
Lastly, multinational corporations are increasingly inserting clauses related to China-Taiwan tensions into commercial contracts, as fears rise of possible Chinese action around the democratically ruled island, writes the Financial Times. Companies are increasingly concerned that in the event of a takeover of the island by force, the US government could impose sanctions on assets in Taiwan if it deems them to be under China’s control. They are also worried about China blockading the island or otherwise disrupting logistics around the strait, a vital shipping route for global trade. “I think in this world, irrespective of where you are from, and irrespective of how heightened you think the risk is, that [this] is an issue that you would probably want to have addressed or at least think about addressing in your longer-term arrangements,” said a legal expert.
Energy Transition & Technology News
Shell expects sustainable aviation fuel to be delivered from its 820,000 mt/year biofuels plant in Rotterdam from 2025, writes S&P Global. The Shell Energy and Chemicals Park Rotterdam plant is using HEFA to produce its biofuels -- a technology Shell called "proven and mature" – by refining vegetable oils, waste oils or fats using hydrogen. The company aims to produce around 2 million mt/year SAF by 2025 and have at least 10% of its global aviation fuel sales as SAF by 2030.
Climate Politics
Yesterday EPM reported about the COP28 president Sultan al Jaber saying that his focus was on reducing emissions, not on reducing fossil fuel usage. He received pushback from a number of countries, writes the Financial Times, who argue the focus must remain on a phasing out of fossil fuels.
The Electrification of Transport
Chinese companies have submitted more patent applications related to electric vehicle charging and battery swapping than rivals from any other country, writes Nikkei Asia. Chinese businesses filed 41,011 patent applications in these areas from 2010 to 2022. came in second with 26,962. Germany followed with 16,340, the U.S. with 14,325, then South Korea with 11,281. Many Chinese companies appear focused on faster charging times, a key step to promote wide adoption of EVs. Of their cumulative patent applications, 17% involved fast-charging technology and 10% covered battery swapping -- much higher than the 1%-3% among Japanese, German and American players. Other areas of focus involved the design and control of charging stations, power transfers and wireless charging.
The Global Energy Crisis
The head of Germany's second-largest steelmaker Salzgitter says the country’s industry still needs energy cost support, according to Reuters. European day-ahead wholesale power stood at 97 euros on Wednesday , having shot up to 548 euros in August, when the loss of Russian gas imports propelled gas and power prices to all-time highs. Salzgitter said:
That (near 100 euros) price is still far too high to keep energy-intensive industry competitive in Germany long-term. We have to be competitive in global markets and need an energy supply that enables us to do so.