Energy, Politics, & Money - 2023.10.30
In this roundup of the weekend news, we take a closer look at the Gaza War, where EPM provides an update on the current status based on events over the weekend.
In our original forecast on Monday, October 9, we said the war was unlikely to cause the regional war which many analysts at the time were speaking about and traders were anticipating. In our contrarian view we said the US would likely use the event to pressure Israeli Prime Minister Netanyahu to finally accept US objectives for the Middle East: a formal US – Iran agreement, coupled with a formal Israel – Saudi agreement, for which Netanyahu would have to end his security-focused policy regarding the Palestinians. Based on this expectation, we said a major Israel ground invasion of Gaza, of the “re-occupation” kind, was unlikely, and that a minimal invasion to re-establish some of Israel’s lost military prestige would take place.
Israeli prime minister Netanyahu has so far not pulled back down from his more “extreme”, non-US aligned, policies regarding Iran, Saudi Arabia and the Palestinians – although he was offered a face-saving way out when Israel’s mainstream centrist parties in the opposition offered a unity government. Instead, political circles around Netanyahu developed proposals to use the October 7 event to forcefully expel the Gazans across the border into the Egyptian desert. As a result, Netanyahu now faces growing domestic calls to resign, while US president Biden has very clearly stated the people of Gaza will not be relocated. Instead, the US and its allies in the Middle East are calling for a lasting peace based on the original US proposed “two-state solution”.
Based on a deep analysis of these developments, EPM continues to believe we are looking at a controlled event, which is unlikely to create surprised to the market.
Furthermore, we look at:
Why Guyana is the “cherry on the cake” in Chevron’s deal to acquire Hess
Siemens Energy’s financial difficulties, which in the EPM view are an example of how the macroeconomic environment affects the energy industry
The echoes of 1997 in Asia, where currencies are under pressure, forcing central banks to raise rates at the expense of economic growth
Why the WTO is worried about the signs of fragmentation of the global economy
Why the US believes it needs approximately 5 years to de-couple/de-risk its supply chains from China
Russia willingness to talk to the West about a Ukraine settlement, and beyond that co-existence with the West
Why metals represent a major opportunity for investors in the energy transition
The focus of COP28 on the gaps in the implementation of the 2015 Paris Agreement that established the 1.5°C ceiling, which among other things means a tripling of global renewables capacity to more than 11,000 GW by 2030; but also a reduction in the production and use of “unabated” fossil fuels
The view that there are two kinds of car buyers out there, one who prefers ICEVs and another who prefers EVs; which EPM disagrees with – we think they are all primarily focused on price
General Energy News
The Financial Times notes that Chevron’s deal to buy Hess gives the US super major access to one of the hottest prospects in the global resources industry: Guyana’s 11bn barrels of offshore oil. Wall Street analysts have labelled the Exxon-led investment in Guyana “the best oil deal in modern history”. It has a low break-even price of $25-$35 per barrel at a time when global oil prices are above $90 a barrel. The slow creep to control Africa’s hydrocarbons continues.
An example of how the macroeconomic environment affects the energy industry has come from Germany, where Siemens Energy has requested the government to provide guarantees on its order book. Siemens Energy's order book has swollen to a record €109 billion, mostly associated with natural gas and wind power projects, writes Reuters. Around 20%-30% of that is in down payments from customers, which needs to be backstopped by guarantees. Normally banks provide these guarantees, but due to tighter monetary policy, Siemens Energy is struggling to get sufficient bank support – also because of the multi-billion dollar operational issues the company is facing in its wind turbine division (Siemens Gamesa), EPM adds. About €15 billion now needs to be covered by the government.
Macroeconomics
Following monetary tightening in Indonesia and the Philippines, key monetary policy meetings next week in Japan and Malaysia are likely to result in further rate hikes across Asia, writes Nikkei. The region continues to struggle with inflation, to which has been added a significant decline in the value of the local currencies versus the US dollar which translates into higher prices for imports.
Part of the problem originates in the US, Nikkei writes. US Fed tightening is translating into an exit of dollars in Asia towards the US. The article highlights this is eerily similar to 1997. Fortunately, banks in the region are today far more stable and transparent, markets are deeper, links between public and private sectors are less incestuous and foreign-exchange reserves are ample. Nevertheless, the year ahead looks like a buckle-your-seatbelt period for the region, as the raising of rates that is needed to protect the currencies will have a negative impact on investment and consumption.
World Trade Organization Director-General Ngozi Okonjo-Iweala says the WTO’s 2024 outlook for economic growth, at 3.3%, is relatively optimistic as the main risks are on the downside, writes Nikkei. Okonjo-Iweala says the WTO does not see "big signs of a broader de-globalization", but is showing signs of fragmentation. De-globalization would be "very costly" for all, she says. The WTO has estimated that if the world decouples into two trading blocs, global gross domestic product will fall 5% in the longer term.
Geopolitics
As to the situation in Gaza, EPM believes develops continue in line with our original forecast from Monday, October 9. At the time we said the event was unlikely to cause the regional war which many analysts at the time were speaking about and traders were anticipating. In our contrarian view we said the US would likely use the event to pressure Israeli prime minister Netanyahu to finally accept the US designs for the Middle East, that is a formal US – Iran agreement, coupled with a formal Israel – Saudi agreement, for which Netanyahu would have to end his security-focused policy regarding the Palestinians.
Based on this expectation, we said a major Israel ground invasion of Gaza, of the “re-occupation” kind, was unlikely, and that a minimal invasion to re-establish some of Israel’s lost military prestige would take place. As to developments since then, Netanyahu was invited to a unity government with the centrist opposition parties, on the condition he drops the far-right parties in his government.
That hasn’t happened.
It doesn’t surprise us, therefore, that according to Bloomberg, he now finds himself under significant pressure to resign. He has faced criticism over his unwillingness to accept any responsibility for the October 7 attack, and worsened matters for himself through a social media post over the weekend in which he blamed security chiefs for Israel’s biggest security lapse in decades, only to then delete it and apologize.
Meanwhile, another Bloomberg report says the US is firmly against the plans formed by Israeli far-right forces to use the October 7 event to resettle the inhabitants of Gaza across the border in the desert of Egypt. Biden said he spoke with President Abdel-Fattah El-Sisi and the two reaffirmed their “commitment to work together and discussed the importance of protecting civilian lives, respect for international humanitarian law, and ensuring that Palestinians in Gaza are not displaced to Egypt or any other nation,” according to a post on the American president’s X account writes Bloomberg. Instead of this “Netanyahu solution”, the US together with the Arab countries and international organizations are emphasizing achievement of a lasting peace built around a two-state solution.
According to the Financial Times, Israel is trying to escalate the conflict. In addition to its ground operations in the Gaza Strip, it has been bombing targets in Syria and carried out a raid in the occupied West Bank. EPM notes that in addition, Israel has also been shelling Southern Lebanon, where Hezbollah is based. We also note the political leaders in the Palestinian Authority, Syria and Lebanon have shown noteworthy restraint in response to what are, in essence, unprovoked cross-border attacks. The only way we can explain this restraint is through the possibility of US diplomacy behind the scenes.
Meanwhile in Ukraine, Russia appears to be doing what a military strategist would expect them to do at the moment the US is heavily engaged in the Middle East – go on the offensive. The Financial Times writes Russia is stepping up its attacks on Avdiivka (dubbed “the gateway to Donetsk”), on areas surrounding Bakhmut, and along the 600-mile frontline more generally.
The US is taking a longer-term view on decoupling supply chains from China, and that is why it is indefinitely extending export waivers allowing South Korean and Taiwanese chipmakers to supply Chinese facilities with American technology, writes Nikkei. The waiver was initially supposed to expire this October, a year after the US restricted exports of advanced semiconductor technology and equipment to China. But concerns that the curbs could significantly disrupt the industry are leading Washington to consider a slower phaseout of around five years.
Russian Defense Minister Sergei Shoigu has said the country is ready for talks on the post-conflict settlement of the Ukraine crisis, Nikkei writes. Speaking at the Beijing Xiangshan Forum, China's largest annual military diplomacy event, Shoigu also said that Russia is ready for talks on further "co-existence" with the West. Nikkei also says that according to former president Dmitry Medvedev, Russia does not expect its energy relation with Europe to improve again anytime soon. "This cooperation is either spoiled or frozen for some time", he said.
Energy Transition & Technology News
BlackRock believes metals represent a major opportunity for investors in the energy transition – something EPM firmly agrees with. According to Bloomberg Evy Hambro, global head of thematic and sector investing at BlackRock, said:
Our view from speaking to our clients and investors at large is that the opportunity within this space has been massively overlooked. If you’re focused on sustainability, if you’re focused on the energy transition, don’t overlook this area. There’s a huge value opportunity.
Climate Politics
COP28 president Sultan Al Jaber Jas urged governments to triple renewable energy capacity by 2030, writes Reuters. COP28 will focus on the gaps in the implementation of the 2015 Paris Agreement that established the 1.5°C ceiling. This means renewable energy capacity needs "to reach more than 11,000 GW" by 2030. It is not a controversial target, apparently, as most major economies are already on board with the goal. Group of 20 nations, among them China, the United States and India, agreed in September to pursue efforts to triple global renewable energy capacity by 2030.
The US and Europe, meanwhile, are likely to call for a cut in the production and use of “unabated” fossil fuels, writes Bloomberg. “Unabated fossil fuels”, the IPCC notes, “refers to fossil fuels produced and used without interventions that substantially reduce the amount of [greenhouse gas] emitted throughout the life-cycle; for example, capturing 90% or more from power plants, or 50-80% of fugitive methane emissions from energy supply.” In short, it is about a buildout of CCS next to continuing (and possibly expanding) existing fossil fuel operations. Bloomberg notes this is easier said than done, highlighting the high cost and (so far) limited effectiveness of CCS plants (including DAC).
The Electrification of Transport
Bloomberg sees the different shares of EV in car sales across markets as evidence of a “two tier” global market developing. In China and Europe, the transition to electric vehicles is gathering pace. Battery-powered autos made up nearly a quarter of sales in both markets in August, with plug-in hybrids lifting the total share to 38% and 28%, respectively. Things look very different in the US and India, where penetration is struggling to break north of 10%, and in Japan, where it’s on life support at 3%.
EPM notes that could look at this as a tale of two customers, with different preferences. Or, as a tale of two speeds of market penetration. We at EPM think it is the latter, and that is why we believe in the not too distant future we will see an acceleration of the EV share in car sales in all countries. Key in this is price, in which battery technology is key. EVs are competing on price with conventional cars in China right now, while margins at EV-maker BYD are already in line with those at comparable gasoline-powered vehicles. As the Chinese EV focused car companies go global, they will take their prices with them, accelerating EV adoption everywhere, we believe.