Energy, Politics, & Money - 2023.10.05
In this roundup, we look at:
The $5 per barrel drop in crude oil prices, brought about by rising gasoline stocks in the US, which is causing traders to focus on fears for an economic recession
Why OPEC+ is taking a gamble with its decision not to increase crude supplies in the current environment
Why the Ukraine War is over; why Ukraine lost a lot, Russia is likely to “win some and lose some”, while America won a lot; and what the implication of a settlement in the conflict would be for the markets
Shell’s priorities under new CEO Wael Sawan, which are about maintaining oil, growing gas, and shrinking renewables
The future of transportation is settled, and EVs won
Germany’s firing up of its aged coal plants, in order to keep the lights on this coming winter (begging the question of why it is not restarting its nuclear plants?)
General Energy News
Oil settled down more than $5 on Wednesday, writes Reuters. Brent crude oil futures settled down $5.11, or 5.6%, to $85.81 a barrel while WTI fell $5.01, or 5.6%, to $84.22. Driving the event was information regarding gasoline stocks in the US, which unexpectedly rose by 6.5 million barrels in the week to 227 million barrels, the most since January 2022. Seasonally, US gasoline consumption is now at the lowest level in 22 years. This brought demand concerns front and center in the minds of traders.
There was support for oil on the supply side, as an OPEC+ ministerial panel that met on Wednesday made no changes to the group's oil output policy, after Saudi Arabia and Russia said they would keep voluntary supply cuts in place to support the market, writes Reuters.
Clyde Russel of Reuters says OPEC+ is taking a gamble with this decision. A key question is, namely, whether the global economy can withstand an oil price closer to $100 a barrel than the $70 level that prevailed in the middle of 2023. It might be, in other words, that the reduced oil supplies bring about the economy that traders fear so much, and that pushes down prices through lowering overall demand.
Geopolitics
George Friedman of Geopolitical Futures says the war in Ukraine is now effectively over. Interestingly, he refers to the conflict as the “American-Russian war”. Underlying the conflict in Ukraine, namely he says was Russia’s fear that an American force on the Ukrainian border could attack Moscow, some 300 miles (480 kilometers) away; while the Americans feared that with Ukraine part of the Russian sphere of influence would bring Russian forces to the eastern line of NATO nations, restarting the Cold War. Looked at this way, he says, the Russian invasion of Ukraine was a move against the Americans. After 18 months of fighting, US reached its goal, while Russia and Ukraine have not, Friedman says. Russia has kept the US away from its border, but little else. Ukraine has retained sovereignty over a good deal of the country, but little else. While the US has made a Russian penetration beyond Ukraine highly unlikely. The war should now be brought to an end, says Friedman, but that requires political will, he notes.
In the EPM view, that political will IS developing. We say this because of the narrative shift in western media, which over recent days has focused on the inability of the West to continue to support Ukraine. For example, CNN writes that NATO and British officials have publicly warned that western militaries are running out of ammunition to give to Ukraine. “The bottom of the barrel is now visible,” Admiral Rob Bauer of the Netherlands - Chair of the NATO Military Committee and NATO’s most senior military official - said of the West’s ammunition stockpile during a discussion at the Warsaw Security Forum. Bauer said “We gave away weapons systems to Ukraine, which is great, and ammunition, but not from full warehouses. We started to give away from half-full or lower warehouses in Europe” and those stores are now running low” This news of possible ammunition shortfalls comes after money to buy weapons for Ukraine was not included in a stopgap spending bill the US Congress passed at the weekend to avoid a federal government shutdown. We get the impression from this, that in the hallways of power in Washington DC and London, conversations have started on ending the fighting in Ukraine.
Bloomberg says that an end to western support for Ukraine will bring nothing good. Given how reliant Ukraine is on arms and ammunition delivered by the Pentagon, its military situation would get ugly and it would have to stretch to the limit just to hold what it has. At best, then, a US pullback will leave Ukraine in a brutal stalemate on its own territory. At worst, it will cause a gradual erosion that would force Kyiv to seek peace on unfavorable terms. This, Bloomberg argues would be bad for US global standing, it says, as Russia – and by extension China – could claim victory.
The EPM view on all this is as follows:
From a moral perspective the US “standing” should be irrelevant. It should not matter if the pride of US politicians becomes hurt, because hundreds of people are dying on a battlefield. The focus should be on ending this slaughter.
From a military perspective we remember that John Mearsheimer warned over the summer that Russia would win the war in Ukraine because the West cannot keep up with Russia in the “war of attrition” that is Ukraine’s artillery-focused conflict. It appears he now stands vindicated. EPM foresees a very rapid deterioration in Ukraine’s military situation if indeed ammunition supplies becomes limited. It is then likely that it will lose significantly more territory, and will thus be incentivized to settle for peace on sub-optimal terms. That is, the way things are looking now, the most likely outcome.
From an economic perspective, the implication of such an outcome in the military and diplomatic arenas is that it will open the door to normalization of Russia’s economic relations with the rest of the world, and as such could be a great relief for the European economy in particular. Beyond Europe, oil and natural gas markets would obviously be affected if and when Russian commodities become more freely traded again. But, we hasten to add, it is not a given that following a negotiated settlement, however fair that might turn out to be, Russia will be “brought back into the fold” by the West. Another scenario you should consider is that the sanctions will remain in place for the foreseeable future.
Energy Transition & Technology News
The Financial Times shares a few takeaways following Shell’s recent investor day. Under new CEO Wael Sawan, the company now plans to hold oil output steady rather than allowing it to decline. The company further told investors that boosting output from LNG assets was a “top priority”. This focus comes at the expense of ambitions in Renewables. “Fundamentally, Sawan believes that LNG produces better returns than renewables,” FT quotes one former Shell executive who worked with Sawan for more than two decades. The new CEO, who rose to prominence at the company through his work on gas projects in Qatar, grew up “through the gas business”, the former executive added. “He is a big believer in the business and also a big believer in the trading model.” Also, this focus clearly conflicts with the Net Zero by 2050 ambition articulated by the company under previous CEO Ben van Beurden.
The Electrification of Transport
“It's Done. The Future Is Battery-Powered Electric Cars”, writes Bloomberg. Globally, this year will see more than 14 million electric cars sold, it notes, compared with just 700,000 in 2016. And some 23 countries have now passed a crucial EV tipping point — 5% of new-car sales — after which adoption picks up dramatically. In China, the biggest EV market, 38% of new-car sales were electric in August.
The Global Energy Crisis
Germany's cabinet has approved putting on-reserve lignite-fired power plants back online from October until the end of March 2024, as a step to replace scarce natural gas this winter and avoid shortages, writes Reuters. The government will make proposals by summer next year on how to offset increased carbon dioxide these plants will generate this winter.