Energy, Politics, & Money - 2023.10.09
In this roundup, we take a closer look at the Hamas attack on Israel over the weekend, and what this is likely to mean for the energy markets. 50 years ago, the Yom Kippur War led to Middle Eastern countries sanctioning the US (and The Netherlands), which causing a massive spike in oil prices – and a risk of shortages. EPM explains why this time round, that is unlikely to happen. EPM also explains our contrarian view that the Hamas attack is more likely to accelerate the normalization deal between Israel and Saudi Arabia than delay it, as most analysts hold.
Furthermore, we look at:
ExxonMobil’s potential acquisition of major Permian shale producer Pioneer, and why investors are cheering the deal on
Russia lifting of its diesel export ban
OPEC’s update to its longer-term oil demand forecast, to 116 million barrels a day in 2045
The potential for a further rate hike in the US
The Huawei smartphone Mate 60 Pro, its ability to perform satellite calls, as well as the BeiDou Navigation Satellite System from which this capability draws; what this all says about China’s technological capabilities, and consequently its most likely medium- to longer-term economic outlook
A deepdive analysis on the issue of Nagorno-Karabakh
Geopolitics
Because 50 years ago, the Yom Kippur War led to Middle Eastern countries sanctioning the US (and The Netherlands), EPM reviews the Hamas attack on Israel over the weekend.
First, we agree with the analysts who say that this conflict is unlikely to have the effect on the oil markets of the Yom Kippur War in 1973. Javier Blas of Bloomberg explains why this is the case. For one, because this is not a country-on-country war as it was in 1973. For another, because the oil market is only artificially tight (due to OPEC+ production cuts) this time round, and thus there is room for the “fear factor” in oil prices to be offset by additional OPEC+ supplies. The only risk is escalation of the conflict. If Israel were to attack Iran in response to the Hamas attacks (Shi’ite Iran is typically accused of being the sponsor of firmly Sunni Hamas) a real disruption of oil flows could be triggered. But this scenario comes with a very low probability in the EPM view, as such an Israeli act would not be aligned with current US plans for the region (think, Abraham Accord and ongoing negotiations with Iran), and are therefore unlikely to be supported by the countries that Israel would need support from such as Jordan, Iraq and Saudi Arabia.
Second, we look at potential longer-term implications. Most analysts appear of the opinion that this war will delay the peace deal that is in the makes between Israel and Saudi Arabia (see here for an example of that view, by Andreas Kluth of Bloomberg; or here for a more balanced view by the Financial Times). EPM believes another outcome is more likely. The US eagerness for this peace deal is evident and well known. Just before Hamas launched its attack, retired US Navy admiral James Stavridis, former supreme allied commander of NATO, explained the rationale for this in a piece on Bloomberg. It would enable the US to establish formal defense treaties with both Israel and Saudi Arabia, with NATO-like security guarantees and it would increase the intelligence and technology sharing between Washington and Jerusalem. And third, it would enable broader collaboration between Washington, Jerusalem and Riyadh, which would give the US continued dominance in the broader Middle East while at the same time enabling it to focus its own military on the China threat in Asia.
In the EPM view, Israeli prime minister Netanyahu has been a significant obstacle for the US to achieve this aim. Much has been said about Saudi Arabia’ de-facto king Mohammed bin Salman “snubbing” of US president Biden, but as you know, EPM considers this mostly theater. MBS’ recent Fax interview communicated very clearly that Saudi is equally willing and eager to enter into the US proposed deal with Iran. It too wants to the US security guarantee, and has no issues with collaborating on the military front with Israel to make that happen (a Dutch journalist recently revealed that the Saudi’s have a deal with Israel about flyover rights for Israeli jets in case of an Israeli attack on Iran). But, the Saudi’s want American support for a nuclear industry, something Netanyahu has since long been vehemently against. And this brings us to the alternative outcome of the current crisis that we at EPM see as most likely. Netanyahu has formed a far-right government in order to make his stance against US-Saudi nuclear collaboration formal Israeli policy. In response to the Hamas attack, the more centrist opposition parties have approached Netanyahu and offered establishment of a “National Unity government” along the lines of the Levi Eshkol government that then-opposition leader Menachem Begin joined before the Six-Day War in 1967, writes the Times of Israel. The offer comes with an important caveat: Netanyahu must drop the far-right members of his coalition, namely the Religious Zionism and Otzma Yehudit parties. And this, EPM notes, would make it very unlikely Netayanhu can continue his stance regarding the deal with the US and Saudi Arabia, and thus make it more likely that this deal goes through as (US) planned, early to mid 2024.
As to what is likely to happen over coming days, in the EPM view is: In the first phase of the war, as is taking place already, Israel will hit back very hard on Gaza, where casualties will unavoidably number in the thousands as the “open air prison” leaves nowhere to hide for anyone. This first phase is likely to last up to two weeks – during which the fear factor on international markets will remain elevated – assuming Israel does not decide to enter Gaza with the objective to occupy it. EPM is aware of calls within Israel of doing just that, but we do not see that as likely to happen. For one, because the Israeli army would in this case suffer significant casualties. For another because occupying Gaza would not solve anything, just create more problems to manage for Israel.
Thereafter, in the second phase, there will be efforts from the international community to bring fighting to a halt and start negotiations over prisoners’ exchanges – that appears to be behind Hamas taking people from Israel into Gaza. The US in particular will weigh down on Israel to move into this direction, while countries such as Egypt, Saudi Arabia, Turkey and Qatar will do similarly with Hamas. This second phase will likely take months, but will calm fears among international investors and thus be accompanied by a return to normal on international markets. The third phase is as we described above, where the US proposed deal between Israel and Saudi is moved forward.
GIS has a deep dive analysis on the issue of Nagorno-Karabakh. The fallout of Azerbaijan’s victory over Armenia in the region is fundamental and profound, it says. Following the collapse of the Soviet Union, Russia created the issue in order to maintain its influence in the South Caucasus. The result was proclamation of the self-declared Republic of Artsakh in September 1991. Ever since, Azerbaijan has worked to win back the territory, with support of Turkey, which it now has succeeded in doing. The result of that Russia’s geopolitical influence is now by-and-large removed. Azerbaijan is firmly in the Turkish camp, while Armenia’s recent military drills with the US indicates that it too is turning its back on its long-term ally Russia. This permanently closes for Russia what was historically an important trade route between southern Russia, Iran and India. The east-west trade route, part of China’s Belt and Road Initiative, is now most likely to become dominant.
General Energy News
Hamas’ attack on Israel has increased the “fear factor” in the oil price. Brent crude prices rose as much as 5.2 per cent in early trading in Asia, before pulling back to be up 3.7 per cent at $87.69, writes the Financial Times. Driving it is fear that Hamas’s attack will increase tension across the Middle East and affect output from leading oil producers. As EPM explained above.
ExxonMobil is in advanced talks to acquire Pioneer Natural Resources in a deal that could value the Permian shale basin producer at about $60 billion, writes Reuters. The acquisition would be Exxon's biggest since its $81 billion deal for Mobil in 1998 and would expand its footprint in one of the most lucrative regions of the U.S. oil patch. Pioneer, which had a market value as of Thursday of $50 billion, is the third-largest producer of oil in the Permian basin after Chevron and ConocoPhillips. That basin, which stretches across parts of Texas and New Mexico, is the U.S. energy industry's most coveted because of its relatively low cost to extract oil and gas. It would be ExxonMobil’s second major acquisition in US shale following its $36 billion purchase of XTO in 2010, EPM adds.
Reuters also writes that investors have cheered the potential deal on, basef on the reserves that Pioneer would to ExxonMobil, the strength of Pioneer’s balance sheet, and ExxonMobil’s perceived ability to drive efficiencies at Pioneer to further improve its cash generating ability.
Javier Blas of Bloomberg is also firmly behind the potential deal. Shale production is notoriously short-cycle, compared to conventional oil where production is usually years in the making, and in the energy transition, that makes Pioneer an excellent oil and gas based addition to ExxonMobil, he says.
On September 21, Russia said it had temporarily banned gasoline and diesel exports to all but four ex-Soviet states, in response to domestic shortages, a move that disrupted global trade that had already had to adjust to Western sanctions on Russian fuel exports. Over the weekend it announced that the diesel export ban has been lifted, but that the gasoline ban is being kept in place, Reuters writes. Traders expect the lifting of the diesel ban likely means Asian diesel cargoes, which would have replaced Russian exports in Africa and Turkey, will now stay in the region. European diesel futures spreads collapsed on the news. The 6-month backwardation fell by nearly 30% to $80.50 a metric ton.
OPEC has raised forecasts for global oil demand through to the middle of the century, writes Bloomberg. It now sees oil consumption climbing 16% over the next two decades to reach 116 million barrels a day in 2045, about 6 million a day more than previously predicted. Road transportation, petrochemicals and aviation will drive the growth, it said. India represents the biggest expansion, more than doubling its consumption to almost 12 million barrels a day, followed by China, with a gain of 4 million a day, or 26%.
Macroeconomics
Federal Reserve Governor Michelle Bowman has repeated her view that inflation continues to be too high despite "considerable" progress in lowering it, and that the U.S. central bank will likely need to tighten monetary policy further, writes Reuters. "I expect it will likely be appropriate for the (Fed) to raise rates further and hold them at a restrictive level for some time to return inflation to our 2 percent goal in a timely way," Bowman said in prepared remarks to the Connecticut Bankers Association.
While China’s shorter-term economic outlook is dominated by its real estate sector, its longer-term outlook is dominated by technology and geopolitics. On the cut point of these latter two, Nikkei Asia writes about the Huawei smartphone Mate 60 Pro and its ability to perform satellite calls. The feature is powered by the BeiDou Navigation Satellite System, China's satellite navigation system. The BeiDou system allows devices to send low-capacity data to its satellites, share their locations and receive messages back from the satellites. That marks a key difference from rival satellite systems such as the American Global Positioning System (GPS), the Russian Glonass and the European Galileo, which cannot send messages back to devices. BeiDou's global coverage was completed in July 2020 after the final satellite in the third BeiDou constellation, known as BDS-3, was launched in mid-2020. Since then, China has accelerated expansion of applications for civil uses. It is also preparing to build a next-generation BDS-4 system by 2035 with greater precision and global reach. In the EPM view, this is an example of the pace at which China is developing the technologies which it believes will underpin the economy of the future. At EPM we do not believe that US sanctions will be able to halt China’s technological development – something else proven by Huawei’s Mate 60 Pro. As such, our base case outlook for the medium- to longer-term (2030 and beyond) has China as the dominant technological power of the world