Energy, Politics & Money - 12 December 2022
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive or survive these chaotic times.
In today’ roundup, EPM takes a closer look at the question why crude oil prices did not spike following implementation of the Russian crude oil price cap but instead declined further. At EPM we mentioned before that the price was being pulled sideways by competing concerns, with the Russian sanctions affecting supply, and the global recession and China COVID affecting demand. Now that the Russian crude oil price cap is no longer an uncertainty, and certainly much less disruptive than feared earlier as we explained last week, the factors on the demand side are now at the forefront, driving the crude oil price. And while the China COVID developments are positive, they are not yet affecting demand while the global economic recession is.
If you don’t have time to read today’s column right away, here are some main points of today’s roundup:
Accusations by Amos Hochstein, president Biden’s energy envoy, that the refusal of US shale investors to ramp up drilling is “un-American”
The further indications China is earnestly moving down a path of gradually opening up, to a post-COVID society
The US permission for Pakistan to buy Russian crude oil, diesel and fuel oil
Expectations around the Fed announcement scheduled for this coming Wednesday: another 0.5% increase
The speech by China’s president Xi at the China – GCC summit last week, which laid out what exactly China is trying to get out of its relationship with the key energy exports in the GCC region
The warning by TSMC founder Morris Chang that globalization and free trade are almost dead and unlikely to come back
The announcement US government scientists have achieved a net energy gain in a fusion reaction, for the first time in history
The report arguing that despite electricity costs increases, the cost of owning and running an electric car is now lower than petrol or diesel in almost every country in Europe
The worries of the ECB about a potential gas price cap in Europe
The outlook for diesel in Europe, as the next round of EU sanctions on Russia would halt monthly imports of around 2.5 million metric tons
General Energy News
Julian Lee of Bloomberg offers a theory as to why the price of crude oil did not spike following institution of the Russian crude oil price cap. He says, the step has forced more Russian crude oil away from Europe into Asia, where these new barrels are now competing with Middle Eastern crudes, pushing prices down. At the same time, the lower flows to Europe are not causing a supply – demand crunch there because, one, people prepared, and two, the recession is hitting hard in Europe, driving overall energy demand down.
This is also the analysis by John Kemp of Reuters. The collapse of spot prices and spreads is consistent with a cyclical downturn in the oil market and the onset of a business cycle slowdown or recession, he says. Global oil and energy consumption have been falling since the third quarter under the impact of exceptionally high prices and a slowing economy. But the impact was initially masked by concerns about the planned introduction of the price cap on Russia's crude and refined products exports. Now that the cap is in place, and at a level significantly higher than initially feared ($40 per barrel), meaning much less disruptive than anticipated earlier, it is the demand factor that is driving the oil price.
The White House’s chief energy adviser has described as “un-American” the refusal of US shale investors to ramp up drilling, even as Moscow’s invasion of Ukraine causes havoc on global oil and gas markets, writes the Financial Times. “I think that the idea that financiers would tell companies in the United States not to increase production and to buy back shares and increase dividends when the profits are at all-time highs is outrageous,” said Amos Hochstein, President Biden’s international energy envoy.
A top medical adviser to the Chinese government has said the fatality rate from the omicron variant of the virus is in line with influenza, writes Bloomberg. The death rate from omicron is around 0.1%, similar to the common flu, and the infection rarely reaches the lungs, Zhong Nanshan was quoted in an interview with state news agency Xinhua. Most people recover from the variant within seven to 10 days, he said. Our EPM view is that this is clear indication China will be opening up, in a controlled manner, over coming months. But, we repeat our warning that this should be expected to be a bumpy ride. There will be surprises, and at a minimum, the supply chain will get disrupted again as large parts of the labour force are forced to stay one due to get being infected by Covid.
Pakistan has agreed with Russia – and the US – a purchase of 4.3 million tonnes of Russian crude oil, diesel and fuel oil at discounted prices, writes Nikkei Asia. The reason the US has accepted the deal is that it understands it has to maintain balance in its dealings in the South Asian region, and since the US has allowed India to import Russian energy for domestic purposes, the same opportunity it should allow Pakistan.
Macroeconomics
On Wednesday the Fed will announce the latest step to its monetary policy, and economists are expecting a 0.5% increase, rather than the 0.75% earlier in 2022, writes Bloomberg. That a move would lift rates to a 4.25% to 4.5% range, the highest level since 2007. The Fed is also likely to signal another 50 basis points of tightening next year, according to the economists surveyed by Bloomberg, which would get the rate to around 5% and leave it there for 2023.
Meanwhile, as of December, container box rates into both US coasts from North Asia have all but returned to pre-pandemic rates. According to S&P Global, market participants attribute the drop to weakened buyer sentiment due to economic woes, overstocked warehouses from a volume boom in 2021 into early 2022, and increased carrier capacity to meet those volume needs. In our EPM view, this is another indication from the real economy that demand is slowing down fast and the world is heading into recession.
Geopolitics
During his trip to the Middle East, president Xi of China was quite clear as to what he would like to achieve, says Reuters. In a speech at the China-GCC summit, he said “China will continue to import large quantities of crude oil from GCC countries, expand imports of liquefied natural gas, strengthen cooperation in upstream oil and gas development, engineering services, storage, transportation and refining”. He also aspires to use the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade – something we at EPM believe is very unlikely to happen as this would be crossing the US defined “red lines” (which we discussed last week). Other areas for cooperation in the next three to five years defined in Xi’s speech included finance and investment, innovation and new technologies, as well as aerospace, and language and cultures.
The father of Taiwan’s chip industry, Morris Chang, founder of Taiwan Semiconductor Manufacturing Company (TSMC), said geopolitics have drastically changed the situation facing semiconductor makers and warned that “globalization and free trade are almost dead”, and unlikely to come back, writes Nikkei Asia.
Energy Transition & Technology News
Another day, another fusion breakthrough. US government scientists have achieved a net energy gain in a fusion reaction for the first time, writes the Financial Times.
Indonesia, home to the world’s largest geothermal energy potential, is opening tenders seeking investors to develop this giant resource, as it aims to expand the use of renewable energy to meet its net zero goals, writes Energy Voice. The country has identified more than 300 sites across the archipelago, which has an estimated 23.7 GW of geothermal capacity.
The Electrification of Transport
Rising fuel prices this year mean that the cost of owning and running an electric car is now lower than petrol or diesel in almost every country in Europe, according to data from automotive lease provider LeasePlan, writes the Financial Times. Battery vehicles remain more expensive than traditional engine models to buy, but have lower running costs because of less maintenance and cheaper refuelling. Despite energy price inflation, fuel costs remain significantly lower for electric cars than petrol and diesel cars, LeasePlan found.
The Global Energy Crisis
The European Central Bank is worried about the potential risks to financial markets from an EU-wide cap on natural gas prices, writes CNBC. Or EPM analysis is that, the cap was set fairly high at euro 275 per MWh, triggered in case this was breached over an extended period of time, with mechanisms built in to allow it not to kick in even if the price met all the requirements, including an ECB “veto”. Nevertheless, the ECB says it “considers that the current design of the proposed market correction mechanism may, in some circumstances, jeopardise financial stability in the euro area, writes CNBC, which makes it very unlikely in or view that this plan will actually be implemented.
S&P Global looks ahead at the next round of European sanction on Russia, which will halt imports of Russian refined products on February 5, 2023. This is scheduled to take place while diesel and gas/oil stocks in the Northwest European hub of Amsterdam-Rotterdam-Antwerp are at 1.716 million metric tons, 24.9% below the five-year average late November and their lowest since 2008 for the time of year. The sanctions could halt a monthly import of 2.5 million metric tons of Russian diesel into Europe, meaning Europe could see diesel prices spike as a result of the measure.