Energy, Politics & Money - 23 August 2022
Curated news from the ever evolving worlds of energy, geopolitics, and money view just for you!
Welcome to the Energy, Politics & Money newsfeed of Tuesday 23 August 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
In this roundup, we note:
Saudi statements that the oil future pricing does not correspond to reality
OPEC+ is under producing oil
Chinese local governments are working on solving the real estate crisis
Europe and the U.S. are inching toward a new deal with Iran
German power surged to above 700 euros ($698.21) a megawatt-hour
This coming winter (and the next ten) will be tough (if not ‘hell’) for Europe and threatens chaos
And much more!
General Energy News
Saudi Arabian oil minister Prince Abdulaziz bin Salman says the recent decline in oil futures prices, which we’ve been covering here at EPM, does not correspond to what is happening in the physical world. Benchmark crude oil futures have fallen more than 20% since early June, on concern about the outlook for the global economy and the possibility of more Iranian oil coming onto the market. In comments to Bloomberg, the Prince said, “The paper and physical markets have become increasingly more disconnected. In a way, the market is in a state of schizophrenia, and this is creating a type of a yo-yo market and sending erroneous signals”. The prince also indicated this disconnect may force OPEC+ to act, which traders interpreted as a threat to cut production in support of prices, and this immediately translated into an increase in oil prices. Reuters reports that Brent crude futures for October settled at $96.48 per barrel, down 24 cents, or 0.25%, after having fallen as much as 4.5% earlier in the day (Tuesday).
Our take here at EPM is that:
1) The disconnect between futures and physical oil markets is essentially perpetual, with futures prices trending towards what is prescribed by the physical reality but perpetually overshooting, both up and down. This means that anyone active in the oil industry needs to analyse both the futures and the physical market, and should not rely in decision-making on just one of the two.
2) In light of the above observed reality, we question the so-called “price discovery” function of the financial markets, but that’s a topic for another day.
3) Based on the above again, one could argue it does not make much sense to alter realities in the physical market to influence what’s happening in the futures market.
But perhaps what the prince is doing is here is managing the futures market through the discussing the physical markets, and clearly that worked.
As to the physical oil market, Reuters reports that OPEC+ produced 2.892 million barrels per day (bpd) below their targets in July, as sanctions on some members and low investment by others stymied its ability to raise output as per the agreed quota. So in a way, the conversation about OPEC+ quota is theoretical anyway…
In particular in Asia the physical market might not to be developing in line with Prince Abdulaziz’s assessment. Bloomberg reports the physical crude market in Asia is softening as oil from as far away as the US and Brazil flows into the world’s top consuming region, boosting competition for Middle East producers.
The Macro Environment (economics & geopolitics)
An interesting opinion piece about China’s real estate problems in Nikkei Asia. It explains the situation, which most people already know and understand: real estate is 30% of the Chinese economy and 70% of middle-class wealth, so any downturn in real estate will severely affect aggregate demand and thereby economic growth, while a collapse in real estate could cause a collapse of the financial sector. But here’s the interesting, new insight provided by the article: “(Beijing’s) response to the property downturn has been to rely on the financial resources of local governments who … are being asked to step in to help both mortgage holders and defaulting property companies. The growing responsibility of local governments in the face of tightening economic conditions will alter the balance of power between Beijing and the provinces. This change of financial responsibility, if not actual political power, is likely to continue with the downward economic spiral.”
Energy Transition & Technology News
China already dominates the market for solar cell manufacturers, and according to Nikkei Asia, its solar panel manufacturers are building or planning new production facilities that will add combined annual output capacity equivalent to 340 nuclear reactors, or 340 GW.
We remember, almost a decade ago, asking an expert in the tire industry if the electrification of transport would have implications for tires and tire manufacturers. This analyst did not at the time, see how it could. Ever since, however, it has become quite clear there will be a revolution in the tire industry. Sustainability is forcing a rethink of the materials used to manufacture tires. And as highlighted by this Bloomberg article, the unique demands of electric cars are forcing a rethink of their design.
Climate Politics
As to geopolitics, the US has formally responded to Iran’s response to Europe’s proposals for the Iran nuclear deal. The US is encouraged that Iran “appears to have dropped some of its non-starter demands”, Bloomberg quoted the US State Department as saying. But conversations continue to continue…
The Electrification of Transport
The Financial Times reports on market share in the EV segment. Hyundai Motor and affiliate Kia have taken over the number two spot, behind Tesla, in the US electric car market by sales volume this year. The duo’s market share in Europe has reached 12 per cent after making the biggest market share gains among its peers last year. Globally, excluding China, Hyundai and Kia are the second-biggest electric carmakers by shipments, with a combined 14 per cent market share. Tesla holds the top spot at 27 per cent. What this really indicates is the strong demand globally for mid-tier electric vehicles.
ESG
The Economist has a special report on ESG. Title, “A broken idea: ESG investing”.
The Global Energy Crisis
European natural gas prices have surged to about 15 times the average summer time price, causing electricity to spike as well -- German power surged to above 700 euros ($698.21) a megawatt-hour. As if that wasn’t enough reason to worry, according to Bloomberg, Belgian Prime Minister Alexander De Croo said the next “5 to 10 winters” in Europe will be “difficult”. As you know, we at EPM are forecasting Armageddon for Europe this winter, if Europe and Russia don’t agree on a deal to get gas flowing again. If things remain the way they are today, it won’t be just “difficult”. Current energy prices are making European industry uncompetitive, and are forcing European households into poverty. Energy rationing would make things worse for both, including through physically damaging industrial facilities that are not designed to be shut down. So, if indeed as the Belgian prime minister warns, Europe will have to deal with an energy crisis for the next few years, we fear it will be game over for its industry – and its current political order.
Judging by the development of the Euro on international financial markets, to some extent at least, our pessimism is being shared broadly. The Financial Times reports the Euro yesterday broke parity with the US dollar, at one stage stumping as low as $0.9934. The fall came as the benchmark TTF gas price in Europe rallied more than 10 per cent to a high of €292.50 per megawatt hour ($85 per million British thermal units).
Energy Intelligence has an opinion piece by Philip Verleger, that in our view summarizes Europe’s predicament correctly. “The winter of 2022-23 truly promises to be one from hell” is its title, and Verleger explains why he feels this way. In line with what we have been arguing, energy supply is likely to remain constrained, if Europe does not change its change vis-à-vis Russia, and voluntary demand reductions will not be nearly enough to compensate. This will keep energy prices at elevated levels, possibly even higher than today, making heating and electricity unaffordable for many households and businesses. Governments will try to intervene, but cannot make the economic problems caused by record energy prices go away. We add based on the above, companies operating in an area of energy with regulated prices are therefore likely to enter serious financial distress, as will critical industrial players with high energy usage (steel, cement, aluminum, petrochemicals, refining), and many households will struggle to pay their mortgages (especially if an ECB anti-inflation monetary policy raises interest rates further). In conclusion: energy poverty, economic recession, real-estate trouble, all of which will impact the financial sector, and of course Europe’s political situation, both nationally and regionally.