Energy, Politics & Money - 21 April 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and investment.
In this roundup, we take a closer look at the shorter-term outlook for crude oil. Just weeks after the OPEC+ “million barrels plus” quota cut, prices are on the decline again, due to fear for a global economic recession. At EPM we examine the demand side, particularly China, and find significant evidence to say its outlook is indeed not rosy.
China’s crude oil purchases have been unsustainably high so far this year, due to its higher-than-normal export quotas and inventory building. Now, the country is likely to reduce its export quotas back to normal levels again, while crude oil inventory building cannot go on forever. As such, Asian crude oil demand is likely to decline, while we expect the economic effects of monetary tightening of the past months become clearer and more pronounced on the ground (for example through the demand-driven decline in refining margins that we discussed earlier this week).
Furthermore, we look at:
The largest two-year increase in net global refining capacity in 45 years: 1.5 million barrels a day this year and another 2.4 million next year
US regional banks – which have stopped the large outflow of funds that got them into trouble over March – but are now dealing with the new challenge of significantly reduced profitability
The Ray Dalio view that the world is in for disruptive change over the coming decades
The latest developments in the Ukraine War, where China’s Hong Kong is enabling supplies of semiconductors to China while Poland is a hub for the transfer of South Korean made ammunition to Ukraine
Cracks that are becoming clear in the US lead alliance against China, with countries not only trying to break free (recent examples of France and Brazil) but also parties and movements within countries whose governments have chosen a determined stance behind the US (Germany, Australia)
The (un)likelihood the US semiconductor embargo in China will succeed and the limits to what the US can do further to hold back China’s growth and development
A summary of the most important Sustainable Aviation Fuels processes
The IEA’s view that “the window to a credible pathway towards limiting warming to 1.5C in 2100 is rapidly closing” which we at EPM believe clearly explains why the goals of the Paris Climate Accord will not be met
Tesla’s continued push toward autonomous driving
Bloomberg’s view on what needs to be done to clean up the “murky world” of carbon offsets
General Energy News
Oil prices eased on Friday, extending losses from the two previous days and headed for a weekly decline, as softening U.S. economic data and a rise in U.S. gasoline inventories raised concerns about a recession and slower global oil demand, writes Reuters. Brent futures for June delivery were down by 14 cents, or 0.2%, at $80.96 a barrel at 0101 GMT. WTI for June delivery slid 12 cents, or 0.2%, to $77.25 a barrel. Both benchmarks slid by more than 2% to their lowest level since late March on Thursday amid fears of a possible recession, and are now on track for a weekly drop of about 6%. And to put that into context, at EPM we just want to remind our audience that this comes just a few weeks after the OPEC+ “million barrels plus” quota cut. This aligns with the view we expressed then, that OPEC+ was probably most worried about “contagion”, with the banking crisis of March trickling over into the real economy during the coming months.
We at EPM believe the shorter-term outlook for oil is not very positive in Asia either. This is based on another Reuters report, which says China boosted its crude oil inventories over recent weeks, while at the same time processing more crude than ever before in March. In our view this means China’s crude oil demand has been unsustainably high so far this year, and is likely to easy over coming weeks and month, adding additional downward pressure on crude oil prices.
Supporting EPM’s view is news – again from Reuters – that China may cut quotas for refined oil products exports as domestic demand improves while the need to boost its economy through oil products abates. If you recall, for the past 6 months the export quotas have been significantly higher than usual, which in EPM’s view was done in part to support Europe to deal with the implications of its sanctions on Russian energy, in part to support Russia to sell its oil, and in part to support China’s own domestic refining sector and therefore overall Chinese economic activity. Once exports quotas are reduced – which is likely because China’s policy is not to become an exported of liquid fuels - that will affect run rates in China’s refining sector and thereby crude oil demand.
In the medium term, refined product prices should ease, Javier Blas of Bloomberg writes, because the world is building new refineries and expanding older ones at a speed unseen in nearly two generations. Net global refinery capacity will increase by 1.5 million barrels a day this year, and by another 2.4 million next year, he says.
Macroeconomics
Regional banks across the US have largely stopped the massive outflow of deposits after the collapse of Silicon Valley Bank that threatened their stability. As a result, profit margins are shrinking unexpectedly quickly writes the Financial Times. We at EPM note that this is one of the root causes for SVB’s trouble as profitability pressures can cause forced divestments of holdings, which at the significantly higher interest rates today means incurring losses.
In a LinkedIn post, Ray Dalio explains again why he believes the world in the midst of transformational change. A point we at EPM share. In Dalio’s view, the world is at the end of the most recent Big Cycle which started around 1945 with the end of WW2 and coincided with US organizing international affairs in the western hemisphere in accordance to its vision. Following the collapse communism during the 1990s the whole world came under this system, but has now reached its limits. Why? The limit has been reached because of the massive debt burden created in the post-communist era. This period led to extreme political and economic inequality. And, as a result of the US losing its status as the hegemonic superpower as a result of the rise of China. Disruptive change will therefore happen over the coming decades, and that is exactly why we started EPM, to provide you with the foresight that enables you preserve and grow wealth (if not simply to survive).
Geopolitics
Lots of ground to cover in geopolitics today.
Firstly, regarding the current Ukraine War, Nikkei Asia reports China’s Hong Kong is at the center of a web of trading companies funneling millions of dollars' worth of American-made semiconductors into Russia thereby evading U.S. sanctions imposed following the invasion of Ukraine. Nikkei Asia also reports that as the recent leaks of classified US information suggested, South Korea will send ammunition to Poland – which EPM notes of course enables Poland to send more of its ammunitions to Ukraine. Poland will receive 4.3 million machine gun rounds and 50,000 tank shells. A high-ranking South Korean government official also suggested direct military assistance to Ukraine may occur in the future.
Secondly, we look at the broader US – China conflict. At EPM we have noted that the western hemisphere is in fact not the “united front under the leadership of the US” that it is often made out to be. Macron’s visit to China provided ample evidence that some countries at least would love to break free from what the recent leaks of US classified information clearly explains is at times a US chokehold. A Nikkei Asia report makes it clear that even within countries there can be less than complete agreement on how to position in this major geostrategic conflict – one that will form and characterize relations of our world for the coming decade – and determine the system under which it operates for the decades thereafter.
In Germany, together with India probably the second most important moving part in the equation, it says government's increasingly strong line on China is coming under fire from smaller parties on both the extreme right and left. The far-right Alternative for Germany (AfD) has in recent months become an outright opponent of the government's efforts to distance Europe's largest economy from China. It also endorsed French President Emmanuel Macron's position on China. A recent poll shows the AfD sitting at approximately 16% support, meaning that it has surpassed the Greens as Germany's third most popular party – which we at EPM believe should not be seen as disconnected from its stance in the US – China conflict. On the left, the democratic socialist Left Party continues to describe the U.S. as a "global hegemon" and paints China as the sole trustworthy peace broker.
Similarly, in Australia too there are voices against the AUKUS deal under which the country commits to spending a massive amount of money on nuclear submarines – to be exported from the US and the UK – and to operate them in alignment with US strategic plans against China. An opinion piece in Nikkei Asia sets out why this is a good for the US and the UK:
The U.S. sees AUKUS as part of its plan to counter China's economic and geopolitical rise. For the U.K., the project is part of its "special relationship" with the U.S. and relevance as a global power. Both countries stand to earn substantial export income.
The benefits for Australia, it argues, are a whole lot less clear. The project faces a high risk of failure, it says, and the touted economic benefits for Australia are negligible, while it will leave Australia with a defense “outsourced” to the US, it says.
Then, as to the success of one of the pillars of the US’ tactics against China, the semiconductor embargo, an opinion piece in Nikkei Asia argues that it will not succeed in halting the rise of China's chip industry. China's semiconductor capabilities in no way compare to those of Taiwan, the Netherlands or the U.S. at present, but it says China is hardly starting from ground zero.
Since 2015, Chinese companies have made varying degrees of headway across the semiconductor ecosystem. Chinese companies today represent 20% of the world's fabless chip design houses and 10% of the overall global chipmaking capacity, according to the Brookings Institution. China's 9% share of 2020 global chip sales, according to Semiconductor Industry Association data, placed it ahead of Taiwan and just behind the 10% captured by both the EU and Japan. Huawei Technologies, which has been subject to the most intense U.S. restrictions, late last year filed for a patent for lithographic technology, which is critical for producing advanced chips. And there are signs that China could already be well on its way to producing sub-14 nm chips. Semiconductor Manufacturing International Corp. (SMIC), China's largest contract chip producer, last year appeared to successfully produce 7 nm chips. (Although a lack of detail regarding the breakthrough has led to questions about whether the production is commercially sustainable.)
Furthermore, China has a 30-year head start in nurturing its stockpile of the rare earth metals, skilled chip designers and engineers, and thousands of indigenous suppliers that are an important part of the overall semiconductor supply chain. And if budgets were the key measure of future success, then China would probably be in first place. Under the CHIPS and Science Act, passed last year, the U.S. is funneling $52.7 billion into building, modernizing and expanding domestic chip production. The EU is mulling a plan to invest $46 billion. But even combined, these amounts pale in comparison to the 1 trillion-yuan ($146 billion) package that China is said to be preparing.
The conclusion of the author is, therefore, that the current embargo is too little, too late to stop China's momentum, and more likely to give China’s national semiconductor effort the push it needed to truly succeed.
And lastly, the US also recognizes there are limits to what it can do to hold back China. Any effort to truly decouple from China would be “disastrous” for the US economy, US Treasury secretary Janet Yellen has warned according to the Financial Times. “The US will assert ourselves when our vital interests are at stake,” the Treasury secretary said. “But we do not seek to ‘decouple’ our economy from China’s. A full separation of our economies would be disastrous for both countries. It would be destabilising for the rest of the world.”
Energy Transition & Technology News
Chile will adopt the “oil model” to develop its national lithium resources, writes Bloomberg. Initially, state copper giant Codelco will sign up partners for new contracts. Later, this role will be undertaken by a dedicated national lithium company.
An excellent summary of the most important Sustainable Aviation Fuels processes is here at LinkedIn: Alcohol to Jet, Hydrotreated Esters and Fatty Acids, Catalytic Hydro thermolysis, and good old Fischer-Tropsch.
Climate Politics
In a research note published Thursday, the IEA said that “the window to a credible pathway towards limiting warming to 1.5C in 2100 is therefore rapidly closing”, writes Bloomberg. The IEA also outlined four necessary thrusts of immediate policy and investment that are needed to remain on track.
2030 renewable energy installations need to triple from the record 275 terawatt-hours deployed in 2022. Electric cars, which made up 14% of sales last year, need to win 60% of market share by the end of the decade.
Countries must eliminate deforestation by 2030.
Non-CO₂ greenhouse gases from industry and agriculture must fall at least as fast as planned in the 2016 UN pact reached in Kigali, Rwanda.
The 300 million metric tons of CO₂ that’s projected to be captured in 2030 must rise fourfold by 2100.
If all this is done ON TOP OF countries completely meeting all their existing climate pledges on time — for which there are “limited policies are to date in place to deliver on them,” a United Nations science panel recently wrote – the goals of the Paris Climate Accord can still be met. EPM’s conclusion from the excellent IEA work is, therefore, that these goals will not be met. Simple (and this does not fill us with joy). So build your oil and gas outlooks on the basis of this assumption.
The Electrification of Transport
Despite many analysts now saying autonomous driving is just too difficult to achieve over the foreseeable future, it remains the focus at Tesla, writes Reuters. Elon Musk is counting on full-self driving and other new technologies and vehicles at Tesla to provide the "wow factor" that will continue to drive the electric carmaker's value far beyond its automotive rivals, it says.
Other
Packed with misleading pledges and outright greenwashing, the offsets market need revamping, writes Bloomberg.