Energy, Politics & Money - 17 November 2022
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you understand these chaotic times.
In this roundup, EPM examines the divergence of oil forecasts by the IEA, EIA and OPEC. While the IEA and EIA recently increased their demand assessments, OPEC has grown more bearish with its forecasts – which explains the latter’s decision to cut its quota. At EPM we continue to believe the OPEC+ cut quota is not a major issue; the cut is practical and is much less than the headline number and EPM sees that demand really is under pressure from the growing global economic recession. But, there’s another dimension to this story. By (slightly…) cutting supply, OPEC+ prevents an increase in global crude oil inventories which are presently at multi-year lows. This makes crude oil prices more susceptible (greater price swings) to changes in supply and demand. And EPM ventures that this could very well be one of the contributing factors that led to the OPEC+ quota cut decision ...
Furthermore, we look at:
Ray Dalio’s analysis of the macro-environment in China – probably the best we have seen on the subject in quite some time and a must read in our view at EPM if your business has any exposure to China
An analysis of how India might respond in case of a military conflict between the US, its allies and China – which will really decide the outcome of this conflict if India were to pick a side
The billions flowing into the US battery sector, following the push from Biden’s Inflation Reduction Act, aka the climate law
The outlook for the lithium price, which could be “higher for longer”, based on the assessment of SQM, the world’s number 2 lithium producer
The engagement of the Middle East’s major oil and natural gas producers at COP27 & India’s very clear message affordability of energy will remain its priority
What could happen to ESG during a global recession
General Energy News
Oil demand forecasts for 2022 from the International Energy Agency, the US Energy Information Administration and the Organization of Petroleum Exporting Countries disagree, writes Bloomberg. While the IEA an EIA increased their assessments of demand, forecasters at OPEC continued to grow more bearish and are now the most pessimistic of the three groups for the first time this year. This has implications for global inventories. At present, commercial oil stockpiles in the OECD countries are sufficient to meet just 58 days worth of forward demand. That’s about four days less than the pre-pandemic level of cover. Emergency stockpiles controlled by governments are about six days lower using the same measure. If OPEC sticks to its production cut plans – which we at EPM believe would only marginally reduce actual supplies of crude oil to the global market – chances are these inventories will not be rebuild to pre-Covid levels. This, in turn makes the crude oil price more susceptible to changes in supply and demand. At EPM we’d say, you probably consider that a good thing, if you are part of OPEC+.
EPM reported yesterday flows on the Druzhba pipeline that supplies eastern Europe were interrupted following the rocket incident in Poland. S&P Global now reports crude is flowing again.
Iraq plans to increase its oil production capacity to around 7 million barrels per day in 2027, reports Reuters. The country’s current crude production capacity is close to 5 million barrels per day, but it produced 4.651 million barrels per day in October. The capacity increase will come from Iraq's giant fields currently undergoing development including Rumaila, managed by a joint venture of BP and PetroChina, as well as from Lukoil’s West Qurna 2.
Macro-Economics
One of the best things that you can read today, is Ray Dalio’s analysis of the macro-environment in China. It is titled “China’s “Dangerous Storm” Coming: The Eight Big Challenges Facing China and the People Chosen to Deal with Them”, and some of its key passages are:
“I believe that the debt problems in the China case were allowed to spread too far but are still manageable, and it probably will take two or three years to successfully manage and get past them.”
“While important changes are in the works to get the balance between capitalism and communism right, many people who aren’t informed mistakenly view this move as an abandonment of capital markets and entrepreneurship. That couldn’t be farther from the truth. It is now well-accepted among Chinese leaders that entrepreneurship and efficient capital markets are good for China.”
“The United States and China are now in a trade war, a technology war, a geopolitical influence war, and a capital/economic war, and they are now dangerously close to a military war…. No one should doubt that [war] is a possibility”
“I have heard that in a new Republican-controlled House there is some possibility there will be a bill passed supporting the independence of Taiwan, which would be for the Chinese tantamount to a declaration of war and would very likely lead to some sort of military conflict with China.”
“Demographics are an exceptionally big financial and economic issue in China that is hurting growth in China”
“…in addition to President Xi eliminating opposition, he appears to be eliminating the reformist-globalists and is replacing them with conservative-nationalists who are loyal to him.”
Geopolitics
Last week we reported on the series by Bloomberg which looks at how the US and its allies are preparing for a future war with China. The latest edition of the series looks at how India might respond in case of such an armed conflict. At EPM we note that earlier remarks by officers from the US military clearly indicated they see India is key – whatever side India puts its weight behind will win. If India remains on the fence, all potential outcomes remain on the table.
Indeed, Kurt Campbell, the Biden administration’s Asia policy czar, has said the relationship with India is “the most important for the United States in the 21st century”. And India could do a lot. The articles highlights, although India can’t project much military power east of the Malacca Strait, India could grant the US access to its Andaman and Nicobar Islands, in the eastern Bay of Bengal, to facilitate a blockade of China’s oil supplies. The Indian Navy could also help keep Chinese ships out of the Indian Ocean. And the Indian Army could distract China by turning up the heat in the Himalayas. Recent developments seem to indicate India has chosen to side with the US, the Bloomberg article writes. It has aligned itself with a reborn Quad — alongside Australia, Japan and the US — and its vision of a “free and open Indo-Pacific.” Washington reportedly provided intelligence support to India during and after the 2020 Himalayan skirmish. India is using naval exercises and arms sales to countries such as Indonesia to deepen its engagement in Southeast Asia. But, Bloomberg notes India can be both a hardheaded and a halfhearted partner. There apparently is no enthusiasm for anything like a formal alliance with Washington.
Energy Transition & Technology News
The Financial Times writes, billions are flowing into the US battery sector, following the push from Biden’s Inflation Reduction Act, aka the climate law. The law has turbocharged interest in US battery supplies, with companies committing about $13.5bn worth of investments since it was enacted. The article lays out where the money has gone, which is very broad across the full battery value chain.
Climate Politics
The Middle East’s major producers of fossil fuels are shifting gears at COP27, veterans of the annual gathering said to Bloomberg. In the space of a few months, they’ve gone from slowing down and blocking climate action in high-level talks behind closed doors, to setting up giant pavilions next to the COP venue in Egypt and deploying an army of lobbyists with a new message, one that seeks to embrace a clean future without giving up on the dirty fuels of the past. “We can do both”, said Adel Al-Jubeir, Saudi Arabia’s climate envoy and Minister of State for Foreign Affairs, on the sidelines of COP27. Pump oil “and at the same time reduce emissions”. Our EPM view is that message probably resonates more now than it did before, due to the Global Energy Crisis caused by the Russian invasion of Ukraine and resulting sanctions policies. But, with the combustion of fossil fuels typically generating twice as much CO2 emissions than their production, the message probably does not stand up to scrutiny – it simply is not possible to deliver the targeted CO2 emissions reduction without reducing fossil fuel usage. Now as to whether that target is the right target is another debate. But the view that the world can “have its cake and eat it to” is simply not correct.
S&P reports on a speech delivered by India’s petroleum minister. The recent energy crisis may have reinforced India’s desire to make the energy transition, he said, but the government needs to make sure that the country can continue to grow, notably in term of GDP per capita. According to him, any shortage of energy would be catastrophic in India, considering that "energy is the lifetime of an economy" and the recent crisis has affected not only the price of fuels, but also of fertilizers and food.
The Electrification of Transport
Lithium has more than tripled in price over the past year, and it’s rallied more than 1,200% since 2020. The extraordinary surge has been driven by tight supplies for electric-vehicle manufacturers, one of the bright spots in China’s struggling economy. The world’s number 2 lithium producer, SQM, said it expects prices for the battery material to stay high into 2023, writes Bloomberg. “On top of the strong demand growth, similar to what we have seen in the past, new lithium supply outside of SQM has been delayed and slow to come online,” it said. That will keep the market tight and means “this high-priced environment could continue for the remainder of 2022 and into 2023.”
ESG
An article in PRWeek looks at what could happen to ESG during a global recession. A growing chorus of CEOs believe we’re headed toward a recession, it says. (Finally, we would say at EPM, but that’s another discussion…) As a result, nearly 60% are reconsidering efforts around ESG to cut costs, and 51% plan to downsize their (ESG) employee base.