Energy, Politics & Money - 14 June 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 Chinese-Arab business gathering in Riyadh, Saudi Arabia, this week. Some see it as further evidence that Saudi Arabia is moving away from the US geopolitical orbit, which would indeed have important implications for energy, politics and money. At EPM we do not form geopolitical views based on isolated events, but rather based on observed trends, we respectfully disagree with this view.
The US – Saudi collaboration has a 70+ year history, and such bonds do not change overnight.
The US has officially communicated that it has no issues with its partners in the Middle East doing business with China. It has warned, however, that cooperating with China on security is off limits, a red line they should not cross.
The event was purely economics focused, not major as some $10 billion of business deals were struck during the event, none of which were in the areas of defense or security. In other words, we caution against reading too much in the event.
Because the broader geopolitical coordination between the US and Saudi Arabia is alive and well as evidenced by the Saudi Arabia position in Syria, the war in Ukraine, and coordination between the two countries during the meetings between Saudi and Iran in China.
Furthermore, we look at:
OPEC’s unchanged, and in the EPM view unreasonably optimistic, outlook for 2023 global oil demand growth, at 2.35 million barrels per day (bpd)
The assumptions underlying Citibank’s bullish, and in the EPM view more realistic forecast for oil
The cooling of US inflation, which gives the Federal Reserve room to take a breather from further interest-rate hikes
China consideration of a broad package of stimulus measures, to boost the world’s second-largest economy
The unbalanced nature of the energy transition, which is going as planned in the power generation segment of energy, but is severely behind schedule in the heat and fuel sectors which account for more than three quarters of global energy use
The World Bank’s promotion of private investment in climate change mitigation / prevention in the developing world, which in the EPM view is part of a wider effort to make the original promise by the developed world of $100 billion in aid to the developing world disappear from public consciousness
General Energy News
OPEC has left its forecast for 2023 global oil demand growth steady, for a fourth consecutive month, though the producer group warned that the world economy faced rising uncertainty and slower growth in the second half of the year, writes Reuters. Global oil demand this year will rise by 2.35 million barrels per day (bpd), or 2.4%, OPEC said in its latest monthly report, virtually unchanged from the 2.33 million bpd forecast last month. EPM has been covering the economic outlook, and our assessment is that the macro-economic outlook is worse than commonly assumed. That is why Goldman Sachs has had to downgrade its crude price outlook 3 times over the past 6 months. We do not see the unchanged OPEC outlook as likely, therefore.
The global oil market’s euphoria at China’s reopening has shifted to a realization that righting the economy after three years of pandemic restrictions is going to be a much harder slog than people first thought, writes Bloomberg. At EPM we hasten to say, “than most people first thought”, because we have said from the first announcement of an end to COVID19 restriction that a resulting economic recovery in China would be slow to materialize – which we hope served you well as you positioned yourself in the market. What is happening on the ground now is that people are watching their spending as the economy slows. China’s industrial recovery has fared worse than consumer-facing sectors and trucking activity hasn’t really picked up. Progress in unwinding years of travel restraints has been slower than expected. Geopolitical tensions — including disruptions to flights caused by the war in Ukraine — mean that China is still relatively isolated, especially from the west. All of this has severely affected Chinese oil demand.
Citibank is with EPM when it comes to the outlook for oil: bearish. According to the Financial Times Citi’s main oil analyst Ed Morse says:
Our basic judgment is that supply is going to outstrip demand in the second half of the year
China is not going to ride to the rescue, as the government will not provide the support to increase economic activity that is commonly assumed, while underlying trends such electrification of transport mean that Chinese demand will not reach the peak levels commonly assumed, he says, with the latter being a global phenomenon in Citi’s view. The supply potential, meanwhile, remains significant according to Morse:
If world demand is not increasing at 2mn barrels a day, and you add up what’s happening in the US and Brazil and Guyana and Australia and Argentina and Norway and Canada and even Venezuelan numbers . . . there’s a lot of oil around.
Macroeconomics
US inflation continues to cool, giving the Federal Reserve room to take a breather from interest-rate hikes this week, writes Bloomberg. The consumer price index rose 4% in May from a year earlier, marking the smallest advance since March 2021. Core inflation — a measure excluding food and energy items, which the Fed views as a better gauge of underlying price pressures — has been persistently elevated. Those prices rose 0.4% for a third-straight month, according to the data from the Bureau of Labor Statistics, which is roughly double the pre-pandemic pace. But the details underneath that number were encouraging. Rising prices of used cars were a major factor preventing the core measure from slowing in May, and leading indicators compiled by the private sector suggest going forward, those prices are set to decline. Rents, which make up the biggest portion of the index by weight, also posted monthly increases smaller than over much of the past year.
China is considering a broad package of stimulus measures to boost the world’s second-largest economy, writes Bloomberg. The stimulus proposals include at least a dozen measures designed to support areas such as real estate and domestic demand. Further interest-rate reductions are also among the policies under consideration.
Geopolitics
Bloomberg believes the Chinese-Arab business gathering in Riyadh, Saudi Arabia, this week is further evidence that Saudi Arabia is moving away from the US geopolitical orbit. Because at EPM we do not form geopolitical views based on isolated events, but based on trends, we respectfully disagree. First, the US – Saudi collaboration has a 70+ years history. Such bonds are not ended overnight. They run deep, not only at the level of heads-of-state but also deeper down in the institutions of the concerned states, including the military, and the economy. Secondly, in 2022, Undersecretary of Defense Colin Kahl at the Manama Dialogue in Bahrain warned America's partners in the Middle East that cooperating too closely with Beijing on security issues could damage their cooperation with Washington. In other words, business ties are okay, but security ties are off limits. As such, the Chinese-Arab business gathering is really irrelevant for any attempt to assess geopolitical relations, because Saudi doing business with China says nothing about its geopolitical relation with the US, as the US allows its Middle Eastern partners to do business with China. Third, the event was purely economics focused, inviting the Chinese to invest in Saudi Arabia and the wider Middle East, and inviting the sovereign wealth finds of the Gulf countries to invest in China. As per Al Arabiya, some $10 billion of business deals were struck during the event, which is not significant in any way, also because these deals were in the areas of defense or security. Fourth, because Saudi Arabia has taken the US position in the major geopolitical events of recent years, such as Syria and the war in Ukraine, while the US and Saudi Arabia also coordinated during the meetings between Saudi and Iran in China, and Secretary of State visited Saudi Arabia shortly before the event took place, all of which indicates the broader geopolitical coordination between the US and Saudi Arabia is alive and well.
The US and its Quad allies UK, Germany and France are pursuing a multilateral agreement with Ukraine that will allow western powers to provide long-term security assurances to Kyiv, instead of a concrete promise of NATO membership for the war-torn country, writes the Financial Times. The Quad’s offer falls far short of Ukraine’s demands for NATO membership or some form of timeline for that, which would bring Kyiv under the alliance’s Article 5 mutual defence pledge, FT notes.
Energy Transition & Technology News
Reuters quotes Rana Adib, executive director of Paris based think tank REN21's, as saying
What we are currently witnessing is a power transition rather than an energy transition. Most policies and regulations have mainly focused on developing renewables in the power sector
As a result, while the share of renewable energy in global power generation hit 30% last year, little progress has been made when it comes to decarbonising the heat and fuel sectors which account for more than three quarters of global energy use.
Climate Politics
The World Bank must use "informed risk-taking" to encourage private investors to get more engaged in helping developing countries deal with climate change and leapfrog fossil-fuel energy sources, its new president Ajay Banga said according to Reuters. Private sector capital was critical since funds from governments, philanthrophy, the World Bank and other multilateral development banks (MDBs) would never suffice to help poor countries adapt to and mitigate climate change, Banga said. EPM sees this as another small step away from the original promise of $100 billion in aid from the developed to the developing world. We foresee the $100 billion will continued to be touted, but more and more of it will be in the form of interest bearing, profit generating loans, rather than aid.