Energy, Politics & Money - 06 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 look at:
Why interest rate hikes have incentivized traders to sell oil held in storage, and thereby contributed to the weakness in oil prices
United Arab Emirates decision not to make any further voluntary OPEC+ oil production cuts
ExxonMobil’s signaling of a strong decline in profits during the second quarter
Asia’s return to coal, as Europe gobbles up its LNG
China’s warning that its export controls on the rare earth minerals gallium and germanium are "just a start"
US Treasury Secretary Janet Yellen visit to China for formal talks, which EPM does not expect to deliver anything of substance
The US Fed plan to raise interest rates again in July, after pausing in June
The criticality of SAF to decarbonize aviation, where EPM notes the supplies of SAF are unlikely to reach the needed levels until at least 2050
The suggestion for the marine sector to go nuclear, in order to achieve net zero
The view that the world remains in need of disruptive clean technologies that fundamentally change the competitive order and displace existing dominant technology, in particular in pivotal sectors such as buildings, industrials and agriculture
General Energy News
One of the most aggressive rate-tightening cycles by central banks in decades has incentivized traders to sell oil held in storage, writes Bloomberg. That boosted short-term supply to the market at a time when Russian and Iranian oil exports also ballooned, and thereby contributed to the weakness in oil prices. The additional costs of storing oil during a period of sustained high interest rates are significant. Take a two-million barrel cargo with prices at, say, $80 a barrel. Based on an interest-rates at 5%, it would cost a trader an $8 million per year in financing to hold onto the consignment. That effectively means it costs an extra 30 cents per barrel per month to keep supplies.
The United Arab Emirates won’t be making further voluntary OPEC+ oil production cuts at the present time, said the country’s energy minister according to Bloomberg. The UAE is “doing enough” to contribute to the OPEC+ supply curbs, Energy Minister Suhail Al Mazrouei told reporters in Vienna. He noted the large difference between the nation’s current output — seen at 3.07 million barrels a day last month according to a Bloomberg survey — and its full capacity of 4 million barrels a day.
ExxonMobil has signaled that second-quarter operating profits will fell sharply, on lower natural gas prices and weaker oil refining margins, writes Reuters. Operating earnings dropped to about $7.8 billion, from a first quarter profit of $11.4 billion and from $18 billion a year earlier, when surging oil and gas prices after Russia's invasion of Ukraine boosted global energy results to record levels. On the same subject, Bloomberg writes the ExxonMobil’s earnings would come in below the consensus forecast of $9.43 billion. A drop in gas prices hurt profits by about $2 billion, while lower refining margins accounted for about $2.1 billion. The lower earnings were partially offset by a $600 million gain in unsettled derivatives and $300 million in chemicals. Lower oil prices will only reduce earnings by about $100 million, the company said.
Surging European demand for liquefied natural gas to offset the loss of piped Russian gas has pushed prices for the commodity beyond the reach of many buyers in lower income regions such as south and south-east Asia, driving some of them back towards a heavy dependence on coal, writes the Financial Times. Russell Hardy, chief executive of Vitol, the world’s largest independent energy trader, said:
Europe’s thirst for LNG has taken some permanent supply from Asia, plus all the new supply from the US and absorbed it all
Michael Stoppard, global gas strategy lead at S&P Global added:
Asia in 2023 will still be accessing [LNG] . . . but the price will be much higher. The message from European policymakers is, ‘We handled this situation well, we avoided blackouts’. But actually there were blackouts. The blackouts were in certain markets in Asia, particularly in south Asia, where the LNG was diverted away to the higher-paying European markets.
Macroeconomics
Federal Reserve officials signaled they intend to resume interest rate increases amid a growing consensus that more tightening is needed to stamp out high inflation in the world’s largest economy, writes the Financial Times. According to minutes from June’s meeting of the Federal Open Market Committee, “almost all” officials who participated said “additional increases” in the Fed’s benchmark interest rate would be “appropriate”.
According to Energy Intelligence, the world economy matters more than oil (supply) for oil prices. As such, considering the major central banks intention to tame inflation by restriction economic growth, oil markets will be a major casualty of their actions. Oil optimists are in for a huge, painful surprise, therefore.
Geopolitics
China's export controls on gallium and germanium, metals used in semiconductors, are "just a start", influential Chinese trade policy adviser and former Vice Commerce Minister Wei Jianguo has said, according to Reuters. China's abrupt announcement of controls from Aug. 1 on exports of some gallium and germanium products, also used in electric vehicles (EVs) and fibre optic cables, has sent companies scrambling to secure supplies and bumped up prices. "If restrictions targeting China's high-technology sector continue then countermeasures will escalate," Wei added, now vice chairman of China Center for International Economic Exchanges, a state-backed think tank.
Taiwan's TSMC, the world's largest contract chipmaker, has said it does not expect any direct impact on its production from China's decision to restrict exports of gallium and germanium, writes Reuters. TSMC said in a statement
After evaluation, we do not expect the export restrictions on raw materials gallium and germanium will have any direct impact on TSMC's production.
Amidst the above uproar, US Treasury Secretary Janet Yellen arrived in China today for talk with her Chinese counterparts. Yellen is expected to focus on economic issues, writes Reuters, and emphasize the need to work with Beijing on climate change, pandemic preparedness and debt distress, even as Washington continues to take targeted actions over human rights or security concerns, a senior Treasury official said. She will tell her Chinese counterparts that Washington is not seeking to decouple the two economies, which together account for 40% of global economic output, while reserving the right to protect human rights and U.S. national security interests through targeted actions, the official added.
EPM notes that in the Reuters report there is no mention of what the Chinese intend to tell Yellen – something that we think is equally important. Fundamentally, the US is no longer in a position where it can just dictate things to China. As such, in order to develop a view on what the outcome of the talks could, we need to know what both sides will bring to the table at the start of the conversation. Our EPM view is that the Chinese will complain loud and hard about the US export restrictions on “all things semiconductor” to China. Unless the US is willing to backtrack on some of this, we do not believe Yellen will achieve anything substantial.
Energy Transition & Technology News
Bloomberg notes that approaches to reducing aviation emissions include renewable fuels, electrification and hydrogen fuel cells and combustion. While electric air taxis may be able to power some of the commuter market by 2025, and hydrogen could fuel short-haul flights by mid-century, in the most optimistic scenario this would only shrink aviation’s current climate footprint by about one-quarter. Sustainable aviation fuel is the only option available to address the remaining 70-plus percent of today’s emissions from the sector. But, EPM notes, SAF is in short supply, and its feedstock is also demanded by the marine industry. We do not believe production of SAF or any other biofuel will enable full decarbonization and the demand for fossil fuels will remain and not ease up.
An opinion piece in Bloomberg argues that the marine sector faces a similar challenge, and therefore calls for it to go nuclear. Most of the options on the table center on potential liquid fuels that the industry is developing — from biodiesel, ammonia and methanol to synfuels, as well as LNG. None of these have the capacity to supply the need. Using biofuel or biomass-based methanol will push the limits of agricultural land. Synfuels risk embodying recycled emissions in materials badged as green. Powering shipping with green ammonia would require extraordinary amounts of wind and solar capacity, equivalent at a minimum to every turbine and panel that exists in the world today. Nuclear already powers over a hundred military vessels, and as such is a proven technology with a long history. One 2011 US study comparing conventional and nuclear-powered military vessels suggested atomic ships cost more, but only by about 19%. That’s more competitive than the other low-carbon fuel options out there — and, these days, possibly cheaper than the current, diesel-heavy fuel mix in conventional vessels.
The world remains in need of disruptive clean technologies that fundamentally change the competitive order and displace existing dominant technology, says an opinion piece in the Financial Times. Such clean technologies are only disruptive when they find traction in the market, either by bending the cost curve to be cheaper than current alternatives or by creating novel value for which customers are willing to pay a premium. The authors have explored clean technologies in five sectors that generate substantial carbon emissions, transportation, energy, buildings, industrials and agriculture, and offer both optimism and caution. The electrification of transportation is progressing apace. In energy, in a growing number of regions of the world, wind and solar have become the cheapest forms of electricity, and renewables now make up the far majority (up to 90%) of new capacity investments. For other pivotal sectors — such as buildings, industrials and agriculture — green technologies are either available but still too costly to adopt, or are emerging and far from commercialization.