Energy, Politics & Money - 2 June 2023
In this roundup, we take a closer look at the upcoming OPEC+ meeting. The dilemma facing OPEC+ is that on the one hand, there is the Goldman Sachs / Andurand / IEA thesis, which says that global oil inventories are shrinking as the alliance’s latest production cuts take effect, and in combination with a global economic recovery during the second of this year this will raise oil prices significantly. On the other hand is the EPM view, which says that disappointing Chinese economic indicators confirm the global economy is more likely to disappoint than to surprise, and thus that oil demand will not develop in the way needed to significantly raise oil prices. In addition, OPEC needs to maintain harmony within the cartel, which is being challenged by Russia and the UAE. Russia has not yet delivered on its promise to reduce production by 500,000 barrels per day, which is one of the main reasons for the crude oil price decline so far this year. The UAE wants a higher production quota, one that reflects the increases in its production capacity over recent years.
As to what OPEC+ might decide, what would make sense in the EPM view is for OPEC+ to maintain the current production quota for now, until things become clearer regarding the global economy. This could be achieved in harmony, by pressuring Russia to (finally) deliver on its promise to cut production, thereby making room for an increase in the UAE production quota. A Saudi promise to “voluntarily” cut production by, say, 250,000 barrels per day could get such a proposal agreed to by all members of the cartel, as this would prevent a further decline in the oil price until the next OPEC+ meeting.
Furthermore, we look at:
- ExxonMobil’s ambition to double the amount of oil produced from the company's U.S. shale holdings over a five-year period using new technologies
- The continued growth in renewable energy, which is now set to achieve a generation capacity equal to that of fossil energy in 2024
- ExxonMobil’s continued development to becoming a supplier of “carbon management” services, through a carbon capture deal with steel maker Nucor
- The overwhelming rejection by shareholders of ExxonMobil and Chevron of a resolution demanding strict medium-term Scope 3 (end-use) emissions targets for the US majors
- The companies taking the lead in India’s early-stage EV industry
General Energy News
After another significant spell of decline, oil finally found the way up again during early trading on Friday, writes Reuters. Driving the increase was the passage of the bill raising the debt ceiling in the US which removes the risk of a US default in June. Brent crude futures rose 34 cents, or 0.46% to $74.62 a barrel by 0302 GMT, while WTI rose 30 cents, or 0.43%, to $70.40.
With the US debt ceiling subject closed, all attention now shifts to the OPEC+ meeting scheduled for this Sunday. The decision by the OPEC Secretariat, which oversees media accreditation, to withhold invitations to cover the meeting to journalists from Bloomberg, Reuters and the Wall Street Journal has caused some stir, writes CNBC. No reason was given for the decision, for which there is little precedent in OPEC’s history, writes Bloomberg. The Financial Times writes that according to people familiar with the decision had been instigated by Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, the half-brother of Crown Prince Mohammed bin Salman. The EPM read of the event is that it is either wisdom, in which case the objective is the shift the focus away from the pressure on OPEC to reduce production in support of prices; or foolishness, in which case arrogance combined with shortsightedness to result in a decision that lowers the status of the organization in general and the person driving the decision in particular.
Beyond the above saga, the dilemma facing OPEC+ is that on the one hand, there is the Goldman Sachs / Andurand / IEA thesis, which says that global oil inventories are shrinking as the alliance’s latest production cuts take effect, and in combination with a global economic recovery during the second of this year this will raise oil prices significantly. On the other hand is the EPM view, which says that disappointing Chinese economic indicators confirm the global economy is more likely to disappoint than to surprise, and thus that oil demand will not develop in the way needed to significantly raise oil prices. S&P Global discusses this latter economic outlook through a review of what stagflation (low growth – high inflation) scenario would mean for oil demand.
Bloomberg discusses the various considerations OPEC+ will have to manage, which in addition to the above mentioned difference of opinion on the outlook for demand, also includes the relationship with Russia – which so far does not seem to have delivered on its promise to lower production by 500,000 barrels per day, which is an important element in the explanation for oil’s price decline in 2023.
Javier Blas of Bloomberg further raises a lingering disagreement between Saudi and the UAE about production quotas. For several years, the UAE has fought an unsuccessful campaign for a higher quota, commensurate with its rising production capacity, he says. The Emirati push erupted into public in July 2021, when Riyadh and Abu Dhabi clashed at an OPEC+ meeting, forcing the group to adjourn the gathering. The meeting didn’t re-start until after the UAE several days later backed off from its demands under Saudi pressure. Almost two years later, the feud hasn’t gone away, and it could become central in the next few months as OPEC+ starts to plot its 2024 production policy. The difference from 2021 is that Riyadh appears to be ready to oblige its neighbor, Blas believes. The UAE has a “voluntary” production level of 2.875 million barrels a day. But the country says its can produce more than 4 million. The midpoint, around 3.5 million barrels a day, seems a reasonable compromise. If supply and demand behave in the second half of the year as OPEC currently expects, tightening the market in late 2023 and early 2024, allowing the UAE to boost its production could be easy. The increase would be soaked up by demand for extra oil. But if the market remains loose, any increase could put pressure on prices.
Based on sources within OPEC, Reuters says OPEC and its allies are unlikely to deepen their supply cuts, despite a fall in oil prices toward $70 per barrel.
As to what OPEC+ might decide, what would make sense in the EPM view is for OPEC+ to maintain the current production quota for now, until things become clearer regarding the global economy. This could be achieved in harmony, by pressuring Russia to (finally) deliver on its promise to cut production, thereby making room for an increase in the UAE production quota. A Saudi promise to “voluntarily” cut production by, say, 250,000 barrels per day could get such a proposal agreed to by all members of the cartel, as this would prevent a further decline in the oil price until the next OPEC+ meeting.
Looking more broadly at the oil markets, ExxonMobil’s Chief Executive Darren Woods has said he aims to double the amount of oil produced from the company's U.S. shale holdings over a five-year period using new technologies, writes Reuters. A first wave of new shale technology could come by fracking along much longer lateral well segments, and better keeping the fracks open so more resources flow, he said.
Macroeconomics
The U.S. Senate on Thursday passed the legislation that lifts the government's $31.4 trillion debt ceiling, writes Reuters. The Senate voted 63-36 to approve the bill that had been passed on Wednesday by the House of Representatives. This removes the risk of the US defaulting on debt. With this legislation, the statutory limit on federal borrowing will be suspended until Jan. 1, 2025.
Geopolitics
Japan, the U.S. and the Philippines are reinforcing their collaboration in marine security in the South China Sea, writes Nikkei Asia, as part of the coalition’s efforts to confront China. The Philippine Coast Guard, Japan Coast Guard and U.S. Coast Guard launched joint drills on Thursday, the first exercise of its kind between the three countries.
Energy Transition & Technology News
Renewable energy capacity worldwide will exceed 4,500 gigawatts in 2024, roughly on a par with fossil fuels, Nikkei Asia writes based on an International Energy Agency analysis. Global renewable capacity grew about 330 GW in 2022 and is expected to rise by an annual record of more than 440 GW in 2023, thanks to energy security concerns sparked by Russia's invasion of Ukraine on top of efforts to meet decarbonization goals. But renewables' share of actual generation will be lower because they cannot run as consistently around the clock as fossil-fuel or nuclear power.
ExxonMobil continues its development to becoming a supplier of “carbon management” services through a deal with steel-maker Nucor, under which ExxonMobil will capture carbon emissions from Nucor’s direct reduced iron (DRI) plant in Convent, Louisiana and permanently store it in underground reservoirs, according to Forbes.
An opinion piece over at Forbes looks at the question if hydrogen is being oversold. The outlook for H2 was recently reduced by energy forecaster DNV, which now believes its share in the future energy market will be 5% rather than the 7 – 10% previous (and commonly) assumed.
Climate Politics
Shareholders of Exxon Mobil and Chevron on Wednesday voted overwhelmingly against a resolution demanding strict medium-term Scope 3 (end-use) emissions targets for the US majors, writes Energy Intelligence. The measure, introduced at the majors’ annual general meetings (AGMs) by activist investor Follow This, garnered just 11% of the vote at Exxon and 10% at Chevron, according to preliminary results. A similar proposal last year that demanded both medium- and long-term Scope 3 targets consistent with 1.5°C scenarios under the Paris climate agreement took 28% of the vote at Exxon and 33% at Chevron.
The Electrification of Transport
Tata Motors' dominance in the EV segment of India’s autoindustry is being challenged, writes Nikkei Asia. Tesla has yet to arrive and Chinese automakers face hurdles to investment. But, Hyundai plans to invest 200 billion rupees ($2.42 billion) over 10 years to develop an electric vehicle supply chain and charging network in the country. The Chinese-owned British auto brand MG Motor would like to join the charge against Tata. Preorders began in May for its new Comet EV, which has stolen a bit of Tata's thunder with a limited-time starting price of 798,000 rupees. But geopolitical risks hang over its growth prospects. The company is a subsidiary of China's SAIC Motor, and its new electrics are based on Chinese models. Official approval is required for direct investments from countries that share a land border with India -- a barrier pointed mainly at China, which has clashed with its neighbor over their disputed boundary line in the Himalayas.
The Global Energy Crisis
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