Energy, Politics & Money - 19 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 look at:
China’s buildup of crude oil inventories in May, and the flexibility this provides its refiners to respond to crude oil price moves
The trend among multinational corporations to consider breaking up into two parts, one to serve the Chinese market and another to serve western markets
The trip of U.S. Secretary of State Antony Blinken to China for meetings with his counterpart, Qin Gang
The meeting of the foreign ministers of Saudi Arabia and Iran in Tehran over the weekend, which EPM thinks is important because it is happening while Iran is also having secret meetings with the US
The two structural realities that will define the relationship between Russia and the Ukraine, and by extension the West, for years if not decades to come
Perceptions of “the West” in the Global South, which provide an indications as to where geopolitics are heading over the medium- to longer-term
The lack of trust and aligned within the West, as Europe is not fully convinced the US is leading it down a path that serves the European interests
UN secretary-general António Guterres scathing attack on the oil and gas industry, calling attempts to justify fossil fuel expansion with carbon capture technology as “proposals to become more efficient planet wreckers” and arguing “The problem is not simply fossil fuel emissions. It’s fossil fuels — period”
India’s anger regarding what it sees as “new energy protectionism” by the US and EU
The 58% support for Switzerland’s Climate Law in a referendum on Sunday
General Energy News
Oil closed on Friday with a weekly gain, as higher Chinese demand and the OPEC+ supply cuts slightly outweighed expected weakness in the global economy and the prospect for further interest rate hikes, writes Reuters. Brent posted a weekly gain of 2.4% to settle at $76.61 a barrel, while WTI rose 2.3% to close at $71.78.
China added to crude oil stockpiles at the fastest rate in nearly three years in May, writes Reuters. China doesn't disclose the volumes of crude flowing into or out of strategic and commercial stockpiles, but an estimate can be made by deducting the amount of crude processed from the total of crude available from imports and domestic output. China's refiners processed 62.0 million metric tons in May, equivalent to 14.6 million bpd. The volume of crude available to refiners was 16.37 million bpd, consisting of imports of 12.11 million bpd and domestic output of 4.26 million bpd. As a result, a total of 1.77 million barrels per day (bpd) was added to inventories in May, the most since July 2020 and reversing the small, and rare, draw of 340,000 bpd in April. The question for the market is what Chinese refiners choose to do in coming months, and the answer will likely depend on what happens to crude prices, with movements in the physical market more important that those in paper trade. If OPEC+ is successful in boosting prices by restricting output, it's likely that Chinese refiners will trim back some of their crude imports and turn to inventories in order to meet any rise in domestic demand. But if prices remain anchored around the $75 a barrel level, it's likely that China will continue to import at fairly robust levels.
The Financial Times looks in a bit more detail at Shell’s strategy pivot last – at EPM we continue to see it that way, although Shell says there is no pivot and its energy transition ambitions remain intact.
Macroeconomics
After venture capital firm Sequoia, drug maker AstraZeneca is also looking at breaking up into two parts, one to serve the Chinese market and another to serve western markets, writes the Financial Times. The objective of these moves is to respond to the geopolitical situation and the trend towards regionalization of the global economy, as we have discussed extensively here at EPM. Under the plans AstraZeneca, which is the UK’s biggest listed company by market value at £183bn, would carve off its operations in China into a separate legal entity but would retain control of the business. “Every multinational with a strong China business” seems to have considered a similar move, one senior Asia-based banker said. “Even if it’s just the option to give you flexibility in the future, it’s worth thinking about.”
Geopolitics
The big news in geopolitics is the trip of U.S. Secretary of State Antony Blinken to China for meetings with his counterpart, Qin Gang. He arrived in Beijing on Sunday, writes Nikkei Asia, which says that his office describes the visit as "intense diplomacy" aimed at countering “Chinese provocations”. That kind of language leads us at EPM to have little faith in real breakthrough in relations that de-escalates tensions. At best we can hope for is agreement on a process to manage tensions, such that miscommunications and misunderstandings don’t result in armed conflict.
During his stay through Monday, Biden is expected to meet with not only Foreign Minister Qin Gang, but also China's top diplomat Wang Yi and possibly President Xi Jinping, writes Reuters, seeking to establish open and durable communication channels to ensure the strategic rivalry between the two countries does not spiral into conflict.
At EPM we are a little surprised (not really…) the major news sources all follow the American narrative that it wants to establish “guardrails” to safeguard against accidental clashes between the US and Chinese forces, but that China is resisting this. See for example Bloomberg. We agree there is a need for guardrails, but the simple reality is: if the US wants talks with China it should not sanction the Chinese officials it needs to talk to. China can not accept formal talks on the subject as long as the head of its military is sanctioned by the US. If it were to accept this, it would be a humiliation for the country. And the talks would then start from an unequal position, leaving China on the defensive and in catch-up.
Also on the weekend the foreign ministers of Saudi Arabia and Iran met in Tehran, writes Bloomberg. In remarks broadcast on state TV, Iran’s Hossein Amirabdollahian said his talks with Faisal Bin Farhan Al Saud ranged from offshore security in the Middle East to “sustainable trade, economic cooperation and joint investment.” EPM sees the improvement of relations between the two as part of the behind-the-scenes negotiations taking place currently between the US and Iran in Oman. We expect, therefore, a new agreement between the US and Iran that will open the way for a broader improvement of relations between Iran and the world. This will, of course, result in additional energy exports by Iran, as well as renewed investment in the Iranian energy industry, with especially the European eager to re-enter the country.
As to the Ukrainian War, Bloomberg interviewed Samuel Charap, a senior political scientist at the RAND Corporation, co-author of “Everyone Loses: The Ukraine Crisis and the Ruinous Contest for Post-Soviet Eurasia”, and former State Department policy planning staff member during the Obama administration. He says two structural realities will define the conflict for years if not decades to come. First, neither Russia nor Ukraine is in a position to take the other’s capital, overthrow the other’s regime, or destroy the other’s military. So both sides at the end of this war will have significant military capabilities with which they could pose a threat to the other in the future. Second, neither side is likely to achieve its territorial objectives. In all probability, the line of contact when the guns fall silent will not be recognized by either side as a legitimate border. Therefore, the two countries will remain locked in a confrontation long after the hot phase is over. Those two factors will be more important in determining the nature of the war than the precise location of the front line.
An opinion piece in Nikkei Asia looks at perceptions of “the West” in the Global South, i.e. the developing world. The West is seen as judgmental for constantly finding fault with other countries, it says, expressing a false righteousness, devoid of genuine partnership. Western critiques are seen to be driven by aggressive media, political demagoguery and vested interest groups that seek to please domestic constituencies and advance their own political and economic agendas. The West is perceived to perpetuate double standards on issues ranging from climate action and responsibility to trade and accountability for human rights violations. On climate, western nations have made the largest contributions to carbon emissions over the years, yet they have failed to meet pledges to provide $100 billion in climate financing for developing nations. On trade, western nations preach free trade but increasingly engage in protectionism. They promote competition but resent those who outcompete them. The EPM perspective is that perceptions matter, and provide an indications as to where geopolitics are heading over the medium- to longer-term. The authors of the opinion piece argue that it is resulting in a growing tendency toward a fragmented internationalism.
But even within the West there is not complete alignment, writes Niall Ferguson for Bloomberg. Many Europeans have the unpleasant feeling of being caught between two superpowers in a new cold war, he says. They know China is partly to blame for this. But they see the US as equally culpable. Officially, the US and the European Union are on the same page when it comes to “de-risking” their economic relationship with China. But privately, Europeans have their doubts. First, they see the Inflation Reduction Act as “America First — Biden edition.” Second, they know that (National Security Adviser Jake) Sullivan’s foreign policy objectives keep them out of the artificial intelligence race (except maybe as regulators). Third, they worry about the unintended consequences of what amounts to a US policy of technological containment of China.
Climate Politics
UN secretary-general António Guterres has attacked oil and gas industry attempts to justify fossil fuel expansion with carbon capture technology as “proposals to become more efficient planet wreckers”, writes the Financial Times. Guterres said:
Let’s face facts. The problem is not simply fossil fuel emissions. It’s fossil fuels — period.
US and European efforts to subsidise domestic renewable energy industries are tantamount to western “protectionism” and will hold back developing countries’ climate ambitions, India’s power minister has warned according to the Financial Times. Raj Kumar Singh, India’s minister for power and renewable energy, said measures such as the US Inflation Reduction Act and Europe’s green hydrogen auctions, which both offer heavy subsidies to renewable industries, would undermine budding clean energy production in emerging economies such as India. Singh told the Financial Times:
This protectionism — I saw that in the Inflation Reduction Act in the United States. I see that in this green hydrogen auction in Europe. We’ve had the developed world lecturing the rest of the world on how important free trade is . . . And here they themselves are erecting barriers.
Switzerland’s commitment to reducing its carbon emissions was put to the test this weekend in a fractious national vote, but the country’s proposed Climate Law passed in a referendum on Sunday with a majority of 58%, writes the Financial Times.