Energy, Politics & Money - 15 February 2023
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive in these chaotic times.
In this roundup, EPM takes a closer look at the outlook for OPEC+ policy in 2023. The cartels’ strategy can best be described as: “maintain current production levels for as long as possible”. This risks an increase in crude oil prices, if indeed Chinese demand recovers, which would push up inflation, and thereby force central banks to further raise interest rates (or maintain current elevated levels for longer), which would be hurtful for the global economy and thus return to OPEC+ in the form of lower crude oil demand.
Our view at EPM is, however, that OPEC+ is likely to prefer erring on the side of “too high prices” over erring on the side of “too low prices”, and thus increase production only after demand has been shown to outpace supply.
If you don’t have time to read update right away, here are some of the main points we cover today:
Global earning in the oil and gas industry, which shows that the much-discussed IOC earnings were just the tip of the iceberg
The changes that occurred in the global LNG market over 2022: same sellers, but new buyers, new destinations, and unprecedented levels of government market intervention
The latest US consumer price index (CPI) report, which sees inflation slowing, but still at levels significantly above the Fed’s target, and not trending down fast
The impact the US orchestrated global ban on semiconductor technology, equipment and expertise to China is having in the latter country
INEOS’ €3.5 billion investment in what is calls “the most environmentally sustainable” cracker in Europe
Tesla’s plan to open part of its US charging network to other companies’ EVs
The cost of protecting European households and companies from soaring energy costs, which has now climbed to nearly 800 billion euros – and is likely to climb higher unless policies are adjusted, because LNG prices are set to remain structurally higher in 2023 than they were before the Russian invasion of Ukraine
General Energy News
The global oil and gas industry's profits in 2022 jumped to some $4 trillion from an average of $1.5 trillion in recent years, the head of the International Energy Agency (IEA), Fatih Birol, said according to Reuters.
S&P Global has a great summary of the changes that occurred in the global LNG market over 2022. As you can imagine, following the cutting off of (a majority of) Russian pipeline gas to Europe, they changes were nothing short of massive: same sellers, but new buyers, new destinations, and unprecedented levels of government market intervention.
Javier Blas of Bloomberg writes that OPEC+ feels it called the market correctly back in October 2022, when it reduced its quota, attracting angry words from the US. Now, it plans to leave its production quota untouched throughout 2023, despite a forecasted increase in demand from China. Blas offers an excellent risk analysis: the strategy risks an increase in crude oil prices, which would push up inflation, and thereby force central banks to further raise interest rates (or maintain current elevated levels for longer), which would be hurtful for the global economy. Our view at EPM is that OPEC+ would probably rather err on the side of “too high prices” than on the side of “too low prices”, and thus increase production only after demand has been shown to outpace supply.
Macroeconomics
The US consumer price index (CPI) increased 0.5% in January, compared to December 2022, in line with economists' expectations according to Reuters. In the 12 months through January, the CPI increased 6.4%. The market’s response was summed up in the following statement: “The Fed will not make decisions based on just one report but clearly the risks are rising that inflation will not cool fast enough for the Fed's liking”.
UK inflation, meanwhile, remains stubbornly high as well, writes the New York Times, and is worsening in the area that most affects households: food.
Geopolitics
Sweeping export bans imposed by the US have held up plans by major Chinese computer chip makers to expand operations, writes Nikkei Asia. The bans on exports of technology and gear for making advanced semiconductors, as well as restrictions on US nationals providing support to Chinese chip makers, are proving a challenge for companies such as Yangtze Memory Technologies (YMTC) and ChangXin Memory Technologies (CXMT).
Energy Transition & Technology News
INEOS says it has secured €3.5 billion in funding for construction of “the most environmentally sustainable” cracker in Europe, the largest investment in the European chemical sector for a generation, writes Hydrocarbon Processing. The plant will have the lowest carbon footprint in Europe, three times lower than the average European steam cracker, and less than half that of the 10% best performers in Europe. The plant also has the capability of operating entirely with low carbon hydrogen as well as room for a carbon capture facility and future electric furnaces.
The Electrification of Transport
Tesla will open part of its US charging network to other companies’ EVs, writes Bloomberg. The step is the result of White house intervention, which has the IRA subsidies carrot to dangle in front of Musk, and regards 7,500 of Tesla’s charging stations across the US. The White House aim is to give EV owners more freedom to travel, and it will include at least 3,500 of Tesla’s Supercharger stations — which tend to be near highways — as well as its slower Level 2 “destination chargers” at locations such as hotels and restaurants.
The Global Energy Crisis
A few weeks ago, during September 2022, at EPM we reported on the amount European countries spent to protect households and industries against the rise in energy price, at which time the overall bill was approaching half a trillion dollars.
Our view was then that our EPM assessment at the start of Europe’s energy crisis was being confirmed: eventually, the money will run out, governments will have to retreat, and European households and industries will feel the real pain of what has happened in their part of the energy market. We said, therefore, that 2023 would be significantly worse than 2022. Reuters now reports that the European countries’ bill to protect households and companies from soaring energy costs has climbed to nearly €800 billion, and that the assessment of the institute behind the analysis is that states are running out of fiscal space to maintain such broad funding.
Considering the above, the news that European natural gas prices are set to move higher through the rest of the year, a sign that the energy crunch is far from over reported on by Bloomberg, is important. Prices are likely to remain structurally higher than they were before the Russian invasion, for the simple fact that Europe is now competing with Asia for a LN supply that has not structurally changed.