Energy, Politics & Money - 21 November 2022
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive in these chaotic times.
In this roundup, we look at the global macro-economic situation in which the COVID situation in China plays a crucial role. EPM’s short-term forecast for crude oil prices has looked at the potential of supply disruptions coming primarily from the OPEC+ quota cut and the next round of sanctions on Russia and on demand by examining the impact of global monetary tightening and China’s response to COVID.
For us at EPM, it has become clear that the OPEC+ quota cut will not significantly change crude oil exports from these countries but that the Russian oil price cap will remove around a million barrels per day from the market. We have over recent weeks explained why. As for demand, the global recession is moving forward, as evidenced by slowing factory activity in manufacturing countries such as Vietnam, port traffic in western markets, and the slowdown in the tech sector.
That leaves China’s situation trying to handle COVID outbreaks and the news regarding its efforts is not good. In the short term you should expect a new wave of lock downs suppressing demand. Beyond the short term, fears are growing that many smaller and medium size companies will not come out of this prolonged period of suppressed economic activity in China.
Furthermore, we look at:
The panic in the crude oil market yesterday, where rumors of an OPEC+ production increase crashed prices, before an official Saudi declaration restored calm
The Russian threat that it will not ship oil or oil products to countries imposing a price cap on its oil exports, and may also cut crude production in response
Goldman Sachs’ price forecast cut for the 4th quarter of 2022, from $110 to $100
The mammoth LNG supply deal between Qatar and China – 27 years for 4 million tons per annum worth $60 billion – which we at EPM see as adding pressure to Europe’s energy equation
The meeting of US and Chinese defense ministers, which we at EPM do not see as a “thawing”, but rather as a recognition by both sides that because their economic war is escalating, closer communication at military level is required to prevent a military conflict
The potential for a nuclear renaissance in the US, and the challenges this potentiality faces
The Goldman Sachs advice to governments in the western hemisphere to counter China’s dominance in batteries, components and raw materials, through a pivot to protectionism and over $160 billion and investment
The recently appointed UN climate chief’s plans to “shake-up” of the annual COP summit
The new front in ESG, with Oxfam launching a shareholder resolution against the tax practices of US oil majors.
General Energy News
Panic in the crude oil market yesterday. Rumors that OPEC+ was considering a 500,000 barrels per day production increase on December caused both Brent and WTI to fall by over $5 per barrel. But prices rebounded quickly in full after Saudi Arabian energy minister Prince Abdulaziz bin Salman said the kingdom is sticking with output cuts and not discussing a potential oil output increase with other OPEC oil producers. In the end, Brent crude futures closed at $88 and WTI crude futures for January at $80. The EPM analysis is that this event explains the dominant sentiment on the crude oil markets, which is more focused toward the downside risks than toward upside potentials.
Goldman Sachs lowered its oil price forecast by $10 to $100 per barrel for the fourth quarter of 2022, citing rising Covid concerns in China, writes CNBC. According to Goldman, more lockdowns in China would affect demand equivalent to the OPEC+ 2 million barrels a day quota cut.
Russia on Monday re-iterated that it will not ship oil or oil products to countries imposing a price cap on its oil exports, and may also cut crude production in response, writes Reuters. The EPM view is that Russia should be expected to live up to its threat, as it did in the natural gas market. And that it should therefore be expected to reduce production, as it simply cannot redirect all affected crude flows.
As to natural gas, the big news is the mammoth deal between Qatar and China: a 27 year contract for 4 million tons of LNG per annum, worth $60 billion, reports Bloomberg. In analysis, there is a lot we at EPM can say. Europe’s energy transition plans make it impossible for the continent to sign fossil fuels deals for such long periods. But suppliers of course prefer such longer-term deals. (Bloomberg has an opinion piece on this.) This means Europe is in a weak position on the market for long-term supply deals, which will leave it more exposed to the spot market. In a volatile world, which is something EPM expect to worsen as the US-China geostrategic conflict progresses, prices will not only fluctuate more but they should also be expected to be significantly higher and more regularly.
Macro-Economics
Reuters reports Beijing shut parks and museums on Tuesday, while more Chinese cities resumed mass testing for COVID-19, as China fights a fresh nationwide spike in cases. China has reported 28,127 new local cases nationally for Monday, nearing its daily infection peak in April, with cases in the southern city of Guangzhou and the southwestern municipality of Chongqing account for about half of the total. In the capital Beijing, cases have hit a fresh record high, prompting calls for more residents to stay put. EPM’s view is that this provides forward guidance regarding the oil price. The chances the next round of sanctions on Russia will cause an oil price spike, due to the disruption of supply it is likely to cause, are now slim, since Chinese demand is unlikely to pick up anytime soon.
In related news, Reuters reports many smaller Chinese businesses, especially customer-facing ones, fear they may not survive until next year, by which time investors hope China will end its Zero Covid policy. China is still battling some of its biggest outbreaks so far, while shell-shocked consumers – whose lives were upended by the government's harsh anti-COVID measures – are holding on to their cash. A slate of economic data for October came in below already weak expectations: Exports fell. Inflation slowed. New bank lending tumbled. The downturn in the property market deepened. Retail sales fell for the first time since Shanghai's April-May lockdown. And with the COVID outbreaks getting worse, it is unlikely that China's economy can shift into a higher gear in the near term.
Container freight volumes at the largest US ports were down 3.8% in September compared with the same month a year earlier, confirming the slackening of merchandise trade and downturn in the business cycle, writes Reuters. The same slowdown was evident on the railroads, where the number of containers originated fell to 1.09 million in September 2022 from 1.14 million in September 2021 and 1.22 million in September 2020. Parcel delivery services have experienced an even steeper drop; FedEx reported U.S. deliveries were down by around 10% in the three months from June to August compared with a year earlier.
There is also a global downturn in clothes demand, as The Financial Times reports from Bangladesh, where factory inventories are shooting up and manufacturers are requested to shut down production. “Clothing is piling up at warehouses in Bangladesh as consumers tighten belts in the US, Europe and other big markets”, the report says.
Central banks bought a net 399.3 tonnes of gold in the July-September period, more than quadruple last year’s number, according to the November report by industry group the World Gold Council reported on by Nikkei Asia. It is unclear who bought roughly 300 tonnes out of this amount, and speculation is rife it could be China. The report says, China has been unloading US bonds since the start of the Ukraine war, selling $121.2 billion in US debt, the equivalent of roughly 2,200 tonnes of gold.
Geopolitics
The US and Chinese defence ministers, Defense Secretary Lloyd Austin met Defense Minister General Wei Fenghe, met for their second face-to-face talks this year on Tuesday, reports Reuters. EPM does not view these meeting as a signal of a “thawing”, but rather a recognition by both sides that because their economic war is escalating, closer communication at military level is required to prevent a military conflict.
Energy Transition & Technology News
Liam Denning at Bloomberg looks at the potential for nuclear to start growing again, as decarbonization policies ramp up globally. He highlights that as it is, the US hosts the world’s largest fleet, generating 18% of the country’s electricity overall and almost half of its zero-carbon electricity. The vast majority were built in two waves through the 1970s and 1980s, with an average age of 36 years. More than 10 reactors have closed over the past decade, largely because cheap shale gas depressed the price of electricity and burgeoning renewables muscled in. But, the Inflation Reduction Act tax credit for green hydrogen, which existing nuclear plants can potentially use, represents a windfall for the industry. But whether it will result in new plants coming online, or just and extension of the lifetime of existing nuclear reactors, is something to be seen. In this regard, Denning notes the last reactor came online in 2016. Not only was it the first in 20 years, its construction kicked off more than 40 years ago! The capabilities needed to grow nuclear have become scarce, as a result. This might well be the proverbial “straw that broke the camel’s back”, as the nuclear industry already has a long history of delivering projects massively over budget and delayed.
Climate Politics
Simon Stiell, the recently appointed UN Climate Chief, is planning a shake-up of the annual international summit to ensure it is transparent and produces results after a controversial conclusion to this year’s COP27 in Egypt, writes the Financial Times. While many vulnerable and developing countries praised the most recent COP in Egypt for an agreement for a fund to help poor countries cope with the effects of climate change, others hit out at the handling of the fortnight of talks and all-night wrangling that ended without any progress on global warming targets.
The Electrification of Transport
The Japanese carmakers are all late to the electrification of transport. Now they have to catch up too! Nikkei Asia reports Mazda will team up with Envision AESC Group, a major auto battery manufacturer owned by a Chinese company, to secure batteries and increase EV production at its plants in Japan. The plan is to cost $10.6 billion (1.5 trillion yen) by 2030, and should enable the company to electrify 30% to 40% of all production by 2030, compared with a previous target of 25%.
According to Goldman Sachs the US and Europe can cut their dependence on China for electric vehicle batteries but it would require more than $160 billion in new capital expenditure by 2030 reports the Financial Times. China produces three quarters of the world’s batteries and also dominates production of their materials and components. To obtain a self-sufficient supply chain, countries competing with China would need to spend $78.2bn for batteries, $60.4bn in components and $13.5bn in mining of lithium, nickel and cobalt, as well as $12.1bn in refining of those materials, the report calculated. And in addition introduce a stark pivot to protectionism.
ESG
Oxfam has opened a new front in ESG, filing shareholder resolutions against US oil giants Exxon Mobil, Chevron and ConocoPhillips for a lack of transparency over their global tax practices, which it argues poses a material risk for long-term investors. The charity said the companies’ tax practices undermine the public’s interest in a fair tax system — especially in Global South countries “with the greatest tax revenue needs”, reports CNBC. “Oil and gas companies frequently point to their contributions to the tax base in producer countries as a justification for their continued operations, particularly in poor countries, but secretive tax practices make it impossible to verify whether the companies actually contribute to shared prosperity,” Oxfam said. “If oil and gas projects are alleviating poverty, why hide the numbers?”