Energy Politics & Money - 10 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 take a closer look at the US diplomatic successes all over the world this week. The Gulf countries are open to working with the US to integrate their economies and connect them with India – which means, rather than with China, and which would increase US standing with and leverage over India. South Korea and Japan, meanwhile, are willing to let forget about old grudges in order to facilitate closer cooperation against China. And in Europe, Italy is pulling out of China’s “one belt one road” initiative. In other words, China is slowly but steadily being isolated.
Furthermore, we look at:
The two most recent OPEC+ policy decisions, which appear to have been based on a correct understanding of market dynamics
Goldman Sachs’s view that “soon” oil will breach $100 again
Glencore’s plan to build Europe’s largest battery recycling plant
The UAE view that at COP28 countries should agree to phase out fuel emissions, not the production or use of oil, gas and coal
The largest debt-for-nature swap so far, involving Ecuador and the Galapagos Islands
General Energy News
Regarding the last two OPEC+ quota cuts, both OPEC+ said were about “balancing the market”, rather than a manipulation to (unnecessarily) drive up prices. Looking back at, OPEC+ seems to have understood the market dynamics correctly, as despite the quota cuts, prices have trended down under the influence of lower than expected demand (from China primarily, but also from western markets such as the US where inflation and interest rates are starting to affect economic activity); higher than expected supplies (due to ineffective sanctions on Russian oil), and speculator fears for a looking economic recession globally. Today, Brent crude dropped is at $77.28 a barrel, while WTI is at $73.51, writes Reuters.
In a new analysis, Goldman Sachs nevertheless reiterated its long-held view that “soon” oil will breach $100 again. It says that most of the recent sell-off is due to near-term demand fears, related to US banking stress, China industrial weakness, and falling diesel margins; and headlines about Russian supplies being higher than expected. But, it says, “Our forecast remains that Brent rises to $95/bbl by December and $100/bbl by April 2024 as we expect large deficits in H2”. EPM notes that forecasts of course depend on assumptions. And one can forecast on the basis of a severe economic recession, resulting from the interest rate hikes and the banking stress it is causing. Or one can assume it will all be okay, and this current situation is not a harbinger of things to come but rather a bump in the road. Goldman is clearly in the latter camp. EPM tends to be a bit more pessimistic in its outlooks, as our readers know.
Geopolitics
The U.S. is talks with Saudi Arabia, India and the United Arab Emirates about a massive transport infrastructure project, to counter China's influence in the Middle East and India, writes Nikkei Asia. The project would include a network of railways among Gulf and Arab states, to be connected to India via shipping lanes from ports in the region. It was discussed Sunday by Saudi Crown Prince Mohammad bin Salman, U.S. national security adviser Jake Sullivan, and Sullivan's Indian and Emirati counterparts. The idea was first raised at I2U2, a forum established in 2021 for India, Israel, the U.S. and the UAE to discuss infrastructure projects in the Middle East. Riyadh was brought into the discussions more recently. The I2U2, which held its first summit in July 2022, was created to tackle challenges involving water, energy, transportation, space, health and food security. The United States Institute of Peace think tank has likened it to the Quad security grouping of the U.S., India, Japan and Australia.
Further east, the US’s two main allies Japan and South Korea are looking for ways to come closer together. Japanese Prime Minister Fumio Kishida visited South Korean President Yoon Suk Yeol in Seoul for a summit last Sunday, after an earlier visit in March by Yeol to Kishida in Japan – the first official bilateral visits for 12 years. The two men agreed that their countries were on the right path toward improved relations. South Korea’s political leadership has decided to resolve the issue of compensation for those of its citizens that were forced to labour for Japan during WWII. The main objective of the closer ties is military collaboration to confront China, writes Nikkei Asia, here and here. energy is another area where the neighbors can work together for mutual benefit. The U.S. government has welcomed the recent rapprochement between Seoul and Tokyo, both U.S. allies. Washington has steadily claimed that the two countries should work together to counter growing challenges posed by China and North Korea.
Over in Europe, Italy has signaled to the US that it intends to pull out of a controversial investment pact with China before the end of the year, writes Bloomberg. Italian Prime Minister Giorgia Meloni reassured US House Speaker Kevin McCarthy during a meeting in Rome last week that while a final decision hasn’t been taken, her government is favoring an exit from its role in China’s massive Belt and Road Initiative. The fact that Italy is “signaling” this step to the US indicates, in the EPM view, that the decision was made under (severe) pressure from the US, i.e. by Italy to preserve its relation with the US. As such, we’d say, US diplomatic successes all over the world this week. China is slowly but steadily being isolated.
Energy Transition & Technology News
Glencore has plans to build Europe’s largest battery recycling plant, as it seeks to grow its natural resources business on the back of the switch to electric cars, writes the Financial Times. It is launching a joint study with Canada’s Li-Cycle into building the facility in Italy by 2027, aiming to repurpose its zinc and lead smelter in Sardinia to produce lithium, nickel and cobalt.
Climate Politics
The United Arab Emirates on Tuesday again reiterated its position that countries should agree to phase out fuel emissions, not the production or use of oil, gas and coal, at the upcoming COP28 it is hosting, writes Reuters. "The renewable space is advancing and accelerating extremely fast but we are nowhere near to be able to say that we can switch off fossil fuels and solely depend on clean and renewable energy," UAE Minister of Climate Change and Environment Mariam Almheiri said on the sidelines of the Agriculture Innovation Mission (AIM) for Climate conference in Washington.
Other
Ecuador has entered into financial deals with UBS / Credit Suisse, under which it promises to invest in environmental conservation in return for lower debt payments. In short, a slump in Ecuador's bond prices triggered by an ongoing political crisis meant the Swiss Bank was able to pay just $644 million for Ecuadorian bonds with a face value of $1.6 billion, Reuters writes. Thereafter, UBS / Credit Suisse issued a new bond for Ecuador worth $656 million, at a lower rate made possible by a credit guarantee from the Inter-American Development Bank and a political risk insurance from the U.S. International Development Finance Corp (DFC), through which Ecuador could settle the older bond. As part of this deal, Ecuador promised to invest at least $12 million in conservation of the Galapagos islands, again Reuters writes.