Energy, Politics & Money - 14 October 2022
Hard hitting and insightful independent analysis of interconnected global developments in the world of energy, geopolitics, and money curated for you!
In this roundup, we review the extensive coverage the OPEC+ quota cut received from politicians and analysts the world over. Yesterday we explained why the Biden administration’s anger is unjustified (their own sanctions policy is driving energy prices much more than few hundred thousand barrels per day of OPEC+ cut), today we discuss the view that OPEC+ should have focused on rebuilding inventories (that’s not among the objectives of the cartel), and the view that OPEC+ risks causing a recession with its decision (that risk was already there, OPEC+ is responding to it, and one should not focus too much on the headline number of the cut).
Furthermore, we look at:
The first indications that the US might actually pull back from its Russian crude oil price cap plan (now that the likely implications of the plan are clear ad hard to deny)
Russian LNG exports hit a record, partially offsetting lower pipelines gas to Europe
Persistently high inflation coming numbers coming out of the US, which are likely to incentivize “higher for longer” interest rates
ExxonMobil’s first venture into “carbon capture as a service”
The topic of Carbon Intensity, how it is measured, what drives it in the refining world, and what this means for refining strategy
General Energy News
OPEC released the update of its 2022 forecast for growth in world oil demand on which the most recent quota decision was based. According to Reuters, the updated forecast cut projected oil demand growth for a fourth time since April. Oil demand will increase by 2.64 million barrels per day (bpd) or 2.7% in 2022, OPEC now believes, down 460,000 bpd from the previous forecast. At EPM we note that 460,000 bpd is pretty close to the real production reduction that is likely to result from the 2 million barrels per day OPEC quota reduction announced last week. Next year, OPEC sees oil demand rising by 2.34 million bpd, 360,000 bpd less than previously forecast, to 102.02 million bpd. OPEC still expects demand in 2023 to exceed the pre-pandemic rate of 2019.
In our view here at EPM, this oil demand outlook supports the OPEC+ claim – as reported on by Bloomberg – that its quota reduction decision of last week was purely based on economic considerations, not on politics. If indeed you expect oil demand to weaken, you would reduce production pre-emptively if your objective is to avoid (strong) downward pressure on the oil price.
Over at Reuters John Kemp disagrees that cutting production proactively is the rational thing to do. Rather, he argues, OPEC+ should maintain production in the face of weakening demand, such that stocks can be rebuilt. At EPM we say that from a “global optimizer perspective” that might be correct, but the perspective of OPEC+ is more limited – it exists to manage its interests, which are primarily a steady supply of crude oil, at prices no so high they incentivize a move away from crude oil, nor too low that the budgets of the cartel-countries suffer. With these objectives global inventory levels should feature in OPEC+ thinking, but they should not be an objective of its actions.
The IEA believes the OPEC+ cut will be a “self-fulfilling prophecy”. The higher crude oil price that is likely to result from the OPEC+ decision is likely to cause exactly the recession the cartel fears, says the Paris based institution according to The Financial Times. In our view, the IEA is focusing too much on the headline number of the cut. That number is indeed “massive”, as the IEA says. But as we explained earlier, the actual production cut that will result is likely to be much lower – a few hundred thousand barrels per day max, right about the amount OPEC+ expects oil demand to be lower due to the monetary tightening policy of the central bankers around the world.
Jamie Dimon of JPMorgan Chase is of the opinion the US should itself pump more oil to address concerns about supplies and prices, rather than complain about OPEC+, writes CNBC.
Meanwhile, the conversation on the price cap for Russian crude oil is about to get underway, reports Bloomberg. But, says another Bloomberg report, after the OPEC+ production cut last week, Biden administration officials are growing concerned that their plan may backfire. The official objective of the plan is to maintain stability on the oil market by maintaining supplies of Russian crude oil. We at EPM have said from the very start the plan would cause mostly instability, as Russia is likely to live up to its threat of not selling any oil to any country that supports the price cap plan. We expect the Biden administration has begun to realize this also, and is now using the OPEC+ quota cut as an excuse to backtrack.
Russian LNG sales will hit an annual record high in 2022, writes Bloomberg. We at EPM dug up the facts in the piece (and left out the long list of emotional opinions): Between January and September, shipments have averaged 2.78 million metric tons a month, compared with an average of 2.62 million for the full 2021 year and an average of 2.56 million in 2019, before the pandemic. Almost 80% of the Russian LNG exported so far this year has gone to European and Asian nations that have imposed some sort of punitive measures against Vladimir Putin.
Macro-Economics
The Financial Times reports, the US consumer price index core measure of inflation, which strips out volatile energy and food costs, rose by 6.6 per cent on an annual basis last month, faster than the 6.3 per cent rate in August — and its fastest pace in four decades. Our EPM view is that this will likely convince the US Fed it is on the right track with its monetary policy, and minimizes the chances of it “whimping out” that we discussed earlier. In conclusion, higher rates are here to stay for longer.
Energy Transition & Technology News
“Carbon Capture As A Service” moves forward with ExxonMobil agreeing to capture and permanently store up to 2 million metric tons of CO2 emissions annually from CF Industries’ manufacturing complex in Donaldsonville, according to Business Report. The project will be ExxonMobil’s first effort to help a third-party company decarbonize its operations.
Climate Politics
Indonesia may only need $37 billion to shut down its coal-fired power plants, climate analytics company TransitionZero said and reported on by Bloomberg. This bill that doesn’t include building renewable energy to take their place. The assessment speaks volumes about the Indonesian government’s plan, which says the country needs $600 billion to retire its coal-fired power plants and build the renewable energy infrastructure to take its place.
The UK must better regulate voluntary carbon markets to ensure that companies don’t use credits as a substitute for curbing emissions, according to the government’s climate watchdog says Bloomberg. Politicians should provide a clear definition of what a net-zero business is and tell firms to disclose their reliance on carbon offsets in order to increase transparency, the independent Climate Change Committee said.
The Electrification of Transport
In EVs, Chinese manufacturers have become cutting edge. This assessment was further evidenced by BYD on Wednesday receiving the coveted five-star Euro NCAP safety rating for its electric ATTO 3 crossover SUV, as reported by Reuters. For reference, the eCitroënC5 X built by Europe’s Stellantis received “only” four stars.
The Global Energy Crisis
The Indian government announced a one-time grant of 220 billion rupees ($2.67 billion) to help three state-run fuel retailers – Indian Oil, Bharat Petroleum and Hindustan Petroleum – cover losses incurred by selling liquefied natural gas below market prices, writes Nikkei Asia. From June 2020 to June 2022, international LPG prices increased by around 300%. To insulate consumers from fluctuations in international LPG prices, the cost increase was not fully passed on to consumers of domestic LPG.
ESG
An overview of the main “complaints” regarding ESG by The Sustainability Institute. They are expensive, the different raters contradict eachother, often intentionally, and can not be predicted. In short, they tend to be subjective and biased.
Other
S&P Global deepdives into the subject of Carbon Intensity, which is the measure of how much CO2 and the CO2 equivalent of other greenhouse gases are emitted per unit of production. It is a critical measurement for organizations to assess the total footprint and impact of their operations. The most important thing to remember is that not all elements of CI are actually measured – parts of it are calculated. With that in mind, in the refining world more processing typically equates to higher CIs, meaning that basic hydroskimming refineries typically outperform highly complex cracking and coking focused refineries when it comes to the CI of their products. Beyond refinery configuration the crude used as feedstock plays an important role, as well as the CI of the electricity used in operations.