Energy, Politics & Money - 05 July 2023
Providing independent, objective, & always politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment
In this roundup, we note with a degree of satisfaction that the view on the oil market which we at EPM formulated at the start of this year – when China ended its COVID-related restrictions – is now the dominant view among investors on the crude oil futures markets.
The mainstream view at the start of the year was a boom in demand over 2023, which led to Goldman Sachs and others forecasting an average price over $100 per barrel. We were contrarian and said “hold your horses because a global recession is coming that China alone will not be able to offset”.
The market now no longer believes the idea that the second half of 2023 will see a strong rebound in oil demand, in a decisively bearish turn.
Furthermore, we look at:
Why Saudi Arabia is likely to lose customers in Asia, were it to follow up on its production cut with an increase in its Official Sales Price (OSP)
The conversations between Abu Dhabi’s ADNOC and Austria’s OMV to combine Borouge and Borealis
The jump in Russia’s refined hydrocarbon product exports to Africa
Weakening manufacturing activity not only in Asia, but also in the US, which is putting employment under pressure
The Shanghai Cooperation Organization virtual meeting, including the main comments from Russian president Putin, Indian Prime Minister Narendra Modi and Chinese President Xi Jinping
The additional €700 billion ($763 billion) a year which the European Union must invest if it is to green the economy and shut out Russian fossil fuels
The ongoing carbon reduction talks at the UN International Maritime Organisation (IMO) headquarters in London, which has pitted the developed world against the developing world
The Church of England decision to divest from fossil fuels, amid frustration that Shell and other companies are not transitioning quickly enough to low-carbon energy
General Energy News
Initially considered “contrarian”, EPM’s view on the oil market we formulated at the start of this year – when China ended its COVID-related restrictions – is now the dominant view among investors on the futures markets. Reuters writes, investors no longer believe the idea that the second half of 2023 will see a strong rebound in oil demand. China has structural issues, and the rest of the world is starting to see the effects of interest rate hikes on economic activity. Meanwhile, Russia production and exports have been resilient in the face of western sanctions. And US oil production has been on a slow-but-steady increase, forecasted to achieve 12.61 million bpd this year, up 720,000 bpd. We are very satisfied that we have enabled our readers to outperform the market – which is is exactly what we set out to do when we launched EPM.
Apparently, the bet on the basis of the bullish view cost Pierre Andurand half of his flagship investment fund. Bloomberg writes, Andurand earlier this year predicted that oil prices may exceed $140 a barrel by the end of 2023, and as a result lost 7% in June, for a total of -51% in 2023 so far. Of course, this massive drop for Andurand's hedge fund comes after it delivered sky-high returns for its investors from 2020 through 2022. The hedge fund was up 154%, 87%, and 59% in 2020, 2021, and 2022, respectively.
The result of the decisively bearish turn of investors is that the impact of this week’s oil production announcements by Saudi Arabia and Russia lasted for just one day, Bloomberg writes. Announced on Monday, they pushed up oil by about 2% on Tuesday. But during trading early morning on Wednesday, Brent for September settlement fell back to below $76 a barrel, hitting $75.74 a barrel.
There appears to be little tightness in the market for crude oil. The implication is that if Saudi Arabia were to follow up on its production cut with an increase in its Official Sales Price (OSP), it is likely to lose customers in Asia, writes Bloomberg. Traders in Asia said there’s plentiful supply of barrels from producers outside of the 23-nation OPEC alliance — particularly in locations like the US, West Africa and the North Sea.
Abu Dhabi’s ADNOC and Austria’s OMV are exploring a combination of two companies – Borouge and Borealis – to create a chemicals and plastics company worth more than $30 billion writes Bloomberg. Vienna-headquartered Borealis is 75% owned by OMV, with the remainder held by Abu Dhabi National Oil Co. Abu Dhabi-listed Borouge is itself a partnership between ADNOC and Borealis and has a market value of about $22 billion. Combining the entities simplifies the ownership structure and is likely aimed at creating a stronger competitor to chemical rivals like SABIC. A combination would give the companies significant scale to compete, simplify the ownership structure and create more flexibility to invest and expand in Asia, where demand for chemicals and plastics continues to rise. Still, given the various stakeholders, including governments, reaching a final agreement is not ensured.
While China and India have taken in the bulk of Russia’s crude oil exports following western sanctions, Russia's refined product exports to Africa have skyrocketed since the invasion of Ukraine, increasing 14-fold in just over a year, writes S&P Global. Prior to the war, Russia exported 33,000 b/d of refined products to Africa, much of it gasoline. By March 2023, that had soared to 420,000 b/d. At the heart of the new flows is Litasco, the Geneva-based trading arm of Russian oil company Lukoil, which has been active in Africa for decades. Western-owned Vitol and Guvnor have also continued shipping Russian products. In addition, trading entities in the UAE, Hong Kong, and Singapore have sprung up in recent months.
Macroeconomics
Last week EPM reported on manufacturing weakness in Asia. This week, Reuters reports U.S. manufacturing slumped further in June, reaching levels last seen when the nation was reeling from the initial wave of the COVID-19 pandemic. Shrinking activity left factories resorting to layoffs, the survey from the Institute for Supply Management (ISM) showed on Monday. ISM Manufacturing Business Survey Committee Chair Timothy Fiore described the practise as happening "to a greater extent than in prior months." This is what EPM sees as the biggest risk for the global economy, namely that the economy recession, through its effect on employment, causes forced sell-offs in residential real estate. With interest rates where they are, this would cause a crash in prices, with the potential of inducing a financial crisis akin 2008.
Geopolitics
The Shanghai Cooperation Organization is meeting, virtually. It is hosted online by Indian Prime Minister Narendra Modi, and involves Russian President Vladimir Putin as well as Chinese President Xi Jinping. Nikkei Asia writes, during the meeting Putin told fellow leaders that his country stands united and thanked them for their support during the attempted mutiny by the Wagner paramilitary group. Putin also called for deeper security cooperation among the bloc, while insisting that Moscow would stand up against "illegitimate sanctions." Modi, for his part, told the eight-nation grouping that the world faces a critical juncture amid global tensions, stressing that ensuring sufficient supplies of food, fuel and fertilizer is a major "challenge" for all countries. Xi called on SCO members to reject protectionism and decoupling -- an apparent reference to efforts by the U.S. and its allies to reduce trade and investment with China in sensitive areas. "We should make the pie of cooperation bigger, so that the fruits of development can benefit people of all countries," he said from Beijing. The loose China-led grouping was founded in Shanghai in 2001 with Russia and the Central Asian countries of Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. In 2017, archrivals India and Pakistan were inducted as full members in the first expansion of the organization, which aims to counter Western influence in the region. Iran completed its membership process at this summit, becoming the ninth full member.
Climate Politics
The European Union must invest an additional €700 billion ($763 billion) a year if it’s to green the economy and shut out cheap Russian fossil fuels, according to a draft report from the bloc’s executive arm writes Bloomberg. The vast sum — significantly higher than that proposed by Commission President Ursula von der Leyen less than two years ago — underlines the escalating costs of reaching net zero goals. The EU has already earmarked €578 billion, almost a third of its multiannual budget, for climate-related action from 2021 to 2027. In November 2021 — before Russia’s invasion of Ukraine triggered an energy crisis and runaway inflation — von der Leyen said an additional €470 billion a year would be needed. That figure is dwarfed by the commission’s latest recommendation. Given the limited resources of the EU’s budget, the bulk of the new investment will have to come from the private sector, while member states must also tap their own funds, according to the report.
Ongoing carbon reduction talks at the UN International Maritime Organisation (IMO) headquarters in London are reportedly divided between wealthier nations, who want to see stronger shipping emissions targets, and developing countries concerned by the economic impact of green measures, writes Euractiv. Under a 2018 agreement, the shipping industry must reduce its emissions by 50% compared to 2008 levels by 2050. However, as the impacts of climate change become increasingly apparent, a coalition of developed nations is pushing for that target to become net-zero. Many of the world’s richest nations are also pushing for a levy on planet-heating pollution from ships, including the EU, the US, Great Britain, and Norway. Nations at the greatest risk from sea-level rise, like the Solomon Islands, are also strongly supportive of higher targets and a possible pollution tax. But not all countries share the environmental zeal of the predominantly Western nations. China, for example, the world’s largest exporter, has used its considerable diplomatic might to try to water down the text.
Other
The Church of England has decided that its investment arms will divest from fossil fuels, amid frustration that Shell and other companies are not transitioning quickly enough to low-carbon energy, writes Energy Intelligence. The Church of England is a small investor and not the first among "ethical" ones to divest, but its move is nevertheless significant because its Pensions Board has been actively interacting with oil companies over the past decade on climate issues. Until recently, it was involved in "very intense engagement" with Shell as one of the Climate Action 100+ lead investors. Back in 2020, the board's chief responsible investment officer Adam Matthews, who is also TPI's chairman, called the UK-based major's Scope 3 emissions reduction targets "really groundbreaking." Shell then said it would proactively support decarbonization in sectors such as aviation and road freight while indicating "willingness to decide not to provide energy" to companies in those sectors that are not aligned with net zero, Matthews told Energy Intelligence. But last month, in an opinion piece in UK newspaper The Telegraph, he wrote that he had "lost confidence" in Shell as "short-term is now influencing longer-term horizons" and the company's "enormous profits" will not translate into "significantly scaled investment in the transition." Matthews also expressed disappointment at BP's recent announcement that it was "weakening its climate targets." The Pensions Board will now focus engagement on energy demand and policymakers "to explore a phased moratorium of oil and gas that ensures fairness for emerging and developing economies."