Energy, Politics & Money - 19 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 this roundup, EPM takes a closer look at the impact of the Russian price cap to date. The discount on Russian crude oil has increased, with the price for Urals in Indian ports falling to around minus $12-$15 per barrel versus a monthly average of dated Brent. This is down from a discount of $5-$8 per barrel in October and $10-$11 in November. As a result, the average price for Urals oil blend was $57.49 per barrel between November 15 and December 14 – well below the cap of $60 – leaving Russian crude oil “free to trade” in the market. But the Kremlin is finalizing the last details of how it will respond. Since Russia has surprised many with its responses to the sanctions on numerous occasions during 2022, it is certainly too early to declare victory in this case – crude oil supplies (namely, to the West) can still be significantly disrupted.
Here's a summary of what we look at in this edition:
OPEC’s decision to cut its outlook for US Shale production growth
The start of the US’s efforts to refill its Strategic Petroleum Reserve (Which we at EPM believe will lay solid foundation below the market price for crude oil)
The latest projection regarding COVID cases in China, which says the peak will be around April 1, 2023
The IMF warning that property prices across Asia are likely to head down, which will have marked impacts on the broader economy
Bloomberg coming to the conclusion that the EPM analysis of the “rift” between the US and Saudi over the OPEC+ production quota cut was just politics and not a true divergence between the long-term partners. (We at EPM concluded this from the outset)
Henry Kissinger’s view that the Ukraine War needs a negotiated settlement, without offering a view on what a negotiated settlement could look like, as it only discusses what Ukraine should and should not get while largely ignoring Russian demands
The outcome of the US-Africa Leaders Summit which took place in Washington DC last week, leaving many African leaders feeling underwhelmed
The outcome of the United Nations biodiversity summit in Montreal, Canada: more promises to provide funding while avoiding any kind of legally binding restrictions
The view that a lack of upgrades to the electricity grid is holding back the energy transition – leaving us at EPM wondering why governments around the world stand ready to subsidize hydrogen projects with billions of dollars but are largely neglecting upgrading their existing electricity system although the latter would be significantly faster and more cost-effective way to decarbonize the economy
The International Maritime Organization decision – the UN’s global regulatory body for shipping – will soon introduce its first set of emission regulations
The Bloomberg report which says that to deal with the outcomes of its sanctions policy regarding Russia, Europe has spent an additional US$1 trillion on energy by now concluding (exactly what EPM said from the very beginning) it is unlikely Europe will be able to continue this policy designed to soften the blow for households and business much longer.
General Energy News
Reuters writes Russia’s Finance Ministry reported the average price for Urals oil blend was $57.49 per barrel between November 15 and December 14 a price below the Western cap of $60 and where Brent averaged $80 per barrel over the same period. The implication is that as things currently stand, shippers and insurers in countries that have imposed sanctions on Russia over the Ukraine conflict are still able to provide services to cover shipments of Russian crude without fear of being sanctioned, enabling a “normal functioning” of Russian crude oil in the market.
The reason for the above is that following the sanction, as we foresaw at EPM, the discount on Russian crude oil has increased. For some deals this month, the price for Urals in Indian ports, including insurance and delivery by ship, has fallen to around minus $12-$15 per barrel versus a monthly average of dated Brent, down from a discount of $5-$8 per barrel in October and $10-$11 in November. Obviously, as we explained previously also, this provides a macroeconomic advantage to those countries that import a significant share of their crude oil need from Russia, i.e. China and India. This is also what the Financial Times now concludes.
Meanwhile, Reuters reports the Kremlin is finalizing the last details of how it will respond to the price cap on Russia’s oil exports. It has repeatedly said it will not sell oil to countries that comply with the cap and has promised to publish a presidential decree outlining Russia’s full response this week. Our EPM view is that so far, there are no indications that Russia has limited exports in line with its earlier warning. But of course, this can change. Russia has surprised with its responses to the sanctions on numerous occasions during 2022, so it is certainly too early to declare victory in this case – crude oil disruptions (to the West) can still be significantly disrupted.
Reuters reports OPEC has cut its outlook for US Shale production growth, indicating the cartel feels more confident that it will be driving the crude oil price henceforth.
When the US Department of Energy announced it would start buying crude to replenish the Strategic Petroleum Reserve when the price dropped below $70, we at EPM said this would lay a solid price foundation below market crude oil price. WTI is now trading around $75, but is experiencing significant downward pressure as more and more people begin to see the impact the global recession will have on demand. The US Department of Energy therefore considers the present a good time to start the refill, writes Reuters, which should act to stabilize prices. The DOE has announced its intention to purchase 3 million barrels of oil for delivery in February, 2023
According to projections from the US-based Institute of Health Metrics and Evaluation (IHME), COVID cases in China should peak around April 1, when deaths would reach 322,000, writes Reuters. About a third of China’s population will have been infected by then. At EPM we share this information as it provides insight into how much disruption of daily life still lies in store in China. It indicates a strong resurgence across the board is unlikely for a number of months still. Instead, some segments of the economy will perform better, while other will be severely hampered by the virus affecting the Chinese workforce.
Lastly, Dutch shareholder activist Follow This has submitted motions to BP, Shell, ExxonMobil and Chevron, calling on the companies to set clear targets to reduce their scope 3 emissions by 2030, in order to be “consistent” with the goals of the Paris Climate Accords to limit global warming. The Financial Times writes, the motions have been co-sponsored by investors with more than $1.3 trillion in assets under management. “There’s no single major with plans to reduce absolute emissions by 2030. And that’s what investors want,” said Mark van Baal, founder of Follow This. “We hope to get away from the smoke screens in all of this.”
Macroeconomics
Nikkei Asia writes that Asia’s property markets are poised for a sharp fall in prices, with higher interest rates making housing less affordable for average buyers, according to the International Monetary Fund. The IMF notes that the Asia-Pacific's boom and bust cycles in the housing market have “marked impacts on the broader economy”. At EPM we very much agree with the IMF assessment of direction, while at the same time we want to remind our readers of our long-held belief that the institution is typically behind the curve on insight, and underestimates the impact of events that are negative to the economy.
Geopolitics
Exactly as we at EPM analysed when the “rift” over OPEC+ erupted a few weeks ago, there never was a truly fundamental disagreement between both parties. The “rift” was merely politics, ahead of a US midterm election and ahead of the Saudi’s having big meeting with geostrategic competitors of the US (Russia and China). Bloomberg now realizes that as well, writing the US and Saudi Arabia are closer today than ever before. No more talk of anger over oil. An amnesty for Crown Prince Mohammed bin Sultan. And most recently, an intervention by the White House, threatening a presidential veto, forcing Senators to put off a vote on a bill banning US support for Saudi military activities in Yemen.
Writing for the Spectator on the Ukraine War, Henry Kissinger says “the time is approaching to build on the strategic changes which have already been accomplished and to integrate them into a new structure towards achieving peace through negotiation”. Ukraine has by acquired one of the largest and most effective land armies in Europe, equipped by America and its allies, he says. A negotiated peace should therefore link Ukraine to Nato, in Kissinger’s view. The alternative of neutrality he sees as no longer meaningful, especially after Finland and Sweden joined Nato. Our EPM view is that a negotiated peace can only be achieved if Russia receives at least some of what its demands, which principally were a neutral Ukraine, and no pathway for Ukraine to join Nato, and that Nato scale back its military presence in Eastern Europe to mid-1990s levels. (The New York Times analysed Russia’s demands back in December 2021, and explained why the US, and analysed the Nato decision to ignore these demand in a piece from early February 2022) Kissinger’s piece conspicuously ignores these Russian demands, which on our view displays the attitude which is real root-cause of the conflict, and which will also prolong it.
As to the US efforts to cut off China from the global semiconductor industry, an opinion piece at Bloomberg argues that now the US has brought Japan and The Netherlands on board with its plan, the cut off is essentially complete. As we at EPM highlighted earlier, Tokyo and Amsterdam are set to announce they’ll adopt at least some of the measures the US has already implemented to cut China off from the supply of semiconductor-manufacturing equipment. That means chipmakers in the world’s second-largest economy will need to beg, borrow or steal technology if they’ve any chance of narrowing a wide gap with the US, Taiwan and South Korea. The opinion piece highlights the US had a similar strategy against the Soviet Union, which succeeded.
Also last week was the US-Africa Leaders Summit in Washington DC, eight years after then-President Barack Obama hosted the event for the first time. It was intended to demonstrate America’s re-engagement with the continent following a period of neglect under Obama’s successor, Donald Trump, writes Nikkei Asia. Between 2013 and 2020, the U.S. invested $2.1 billion in the region, about half that of China, according to Statista. According to official figures, between 2000 and 2019, Beijing transferred $153 billion to African public institutions, with the majority of the funds going to infrastructure development in countries that have signed on to the Belt and Road Initiative. The US now pledged $55 billion in development aid to Africa over the next three years, surpassing similar pledges in recent years of $40 billion from China and $12.5 billion from Russia. But, the US is likely to have included its payments to the World Bank and IMF as part of this $55 billion figure. Many African governments are concerned about these organizations’ performance, particularly their track record of providing and facilitating major African infrastructure and industrialization projects.
Energy Transition & Technology News
An opinion piece in the New York Times argues that a failure to adequately upgrade the electricity grid is holding back the energy transition. Huge backlogs of renewable energy projects have built up around the world as developers are refused permission to pump their power into the grid, it says. The projects go on waiting lists that can now stretch for years, and many ultimately drop off when the delays become intolerable. In the United States, enough renewable energy projects are backlogged right now to achieve a largely clean electric grid by 2030. The problem is relatively easy to fix, it says, but does require investment. And that, apparently, is the nub of the issue. Electrical utilities have been caught flat-footed by the falling costs and rapid growth of renewable energy. They simply failed to get ahead of the wave and upgrade their wires, and the state governments that oversee the power business neglected to hold them accountable. At EPM we see this opinion piece as a great contribution to the conversation about the energy transition, and we wonder why governments around the world stand ready to subsidize hydrogen projects – including pipelines – with billions of dollars, but are largely neglecting upgrading their existing electricity system, although the latter would be significantly faster and more cost-effective way to decarbonize the economy.
Wired has a review of the electrification of aviation, asking the question “How Far Can You Fly a Battery-Powered Jumbo Jet?”. Wired calculated that an electric-powered 747 could fly for 22.7 minutes with a range of 304 kilometers. Forget about that trip to Hawaii.
Climate Politics
following two weeks of negotiations at the COP15 United Nations Biodiversity Conference in Montreal, Canada, rich nations committed to pay an estimated $30 billion a year by 2030 to poorer nations through a new biodiversity fund that will be created under the Global Environment Facility, a 30-year-old organization that supports environmental work, writes Bloomberg. The word “mandatory” was erased from the final document on reporting on biodiversity impact, it also mentions. If anyone were to ask us at EPM our perspective on the matter, we would say, more promises to provide funding, to avoid any kind of legally binding restrictions.
Meanwhile, EU energy ministers gathering in Brussels on Monday are likely to agree to a limit on gas prices at €188 a megawatt hour, according to the latest proposal for the bloc, writes the Financial Times.
In totally predictable fashion, the EU’s trading partners, including the US, South Africa, and Brazil, are criticizing the bloc’s plan to introduce the world’s first carbon border tax, CBAM, saying it is protectionist and puts export industries at risk, writes the Financial Times.
S&P Global writes the International Maritime Organization, UN’s global regulatory body for shipping, will soon introduce its first set of emission regulations. From January 2023, companies operating ships of 5,000 gross tons or more will need to collect voyage and fuel consumption data to calculate the carbon intensity of their vessel operations.
The Global Energy Crisis
Last week at EPM we discussed the news that Germany has already spent around US$500 billion on energy, to deal with the outcomes of its sanctions policy regarding Russia. Bloomberg reports the bill for all of Europe is US$1 trillion by now, i.e. double the bill of Germany. It concludes that with interest rates rising, and economies likely already in recession, the support that cushioned the blow for millions of households and businesses is looking increasingly unaffordable – which, indeed, has also been the EPM analysis from the very beginning of Europe’s market interventions.