Energy, Politics & Money - 24 November 2022
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive in these chaotic times.
In this roundup, we take a closer look at the price caps for (Russian) oil and gas that the EU has put forward. While the policy proposals make for great headlines, the actual content of the proposals gives the impression the EU is actually trying to avoid real price caps and the disruptions of markets they cause.
In regard to Russian crude oil, the range of $65 to $70 per barrel is significantly higher than some countries had been pushing for, which was $40 to $60. This range is in line with the historical average price for Russian crude oil from before the invasion. It is also well above Russia’s cost of production, leaving significant a profit margin for Russian crude oil producers. And, Russia is today selling its crudes within this price range, when factoring in the discounts it is offering customers, which means the cap would have minimal impact on trading.
With respect to natural gas, this cap too is set very high, at €275 per megawatt hour. In addition, it comes with a wide range “but’s” and “if’s”, such as that the market price must be higher than €275 for two weeks consistently, and if it does, the EU will still seek advice from bodies like the European Central Bank, the European Securities and Markets Authority, and the network of transmission system operators for gas (ENTSO-G), which monitor security of supply and market stability, before taking any decision – meaning the cap might still not be implemented even if the gas price breaks through the cap.
In short, the EU is clearly trying to “do the right thing politically”, while preventing this from really affecting normal functioning of the market.
Furthermore, we look at:
The answers by the US Treasury Department's Office of Foreign Assets Control (OFAC) finally released on key questions regarding the price cap plan
The outlook for US Fed monetary policy
An analysis of China’s progress on the technology value chain, which concludes that over 2021, the country’s companies captured more global market share in 13 high-technology products and services, from electric vehicles to smartphones
The plan by the California Air Resources Board to force all diesel truck fleets off of California’s roads
General Energy News
The European Union is discussing a price cap on Russian oil between $65 and $70 a barrel, writes Bloomberg. The range is significantly higher than some countries had been pushing for, which was $40 to $60. The range is in line with the historical average price for Russian crude oil from before the invasion. It is also well above Russia’s cost of production, leaving significant a profit margin for Russian crude oil producers.
And, Russia is today selling crude within this price range, when factoring in the discounts it is offering customers, which means the cap would have minimal impact on trading. (Reuters says Indian customers of Russian crude oil are getting a $25 to $35 a barrel FOB basis, meaning they are presently paying a price of $50-$60 per barrel of Urals. On a delivered basis, the discount for India is $15 to $20 per barrel, which also translate in prices below the cap). In EPM’s view, the plan gives the distinct impression the EU is trying to secure its interests by appeasing both the US and Russia at the same time. Go along with the US proposed price cap plan, but then put the cap price so high that it won’t prevent many deals from happening.
Global crude prices fell sharply in response to the above news, as traders realized that such a high price cap would make almost certainly prevent major disruptions of Russian crude oil production and exports, as those involved in the trade (sellers, buyers, traders, shippers and insurers) could easily find arrangement to keep the actual price below the cap. Brent lost 4% to close Wednesday at $84.86 per barrel, while WTI fell 4.2% to $77.55 per barrel, writes Business Insider.
Meanwhile, the US Treasury Department's Office of Foreign Assets Control (OFAC) finally released answers on a few key questions regarding the price cap plan, including when the restrictions will take effect and what types of scenarios and companies will be bound by them. Reuters has summarized the key points. Oil cargoes loaded before 12:01 a.m. EST (0501 GMT) on Dec. 5, and docking before Jan. 12, will not be covered by the price cap policy. The price cap only applies to the first “landed” sale outside of Russia, meaning the first point at which the cargo comes ashore. If the oil is resold on land after that point, it can be sold above the cap. But if the cargo goes back out to sea without having been substantially transformed ashore outside of Russia – like having been refined into fuel – it falls back under the price cap. US trading firms can be involved in sales to other destinations as long as they conform to the price cap rules.
Further analysis of the EU’s natural gas price cap plan by Euractive gives the impression the real objective is avoiding an actual price cap, while political pressures call for it. The cap for gas is set very high, at €275 per megawatt hour, and with a wide range “but’s” and “if’s”. The market price must be higher than €275 for two weeks consistently (it closed at 124.5 euros per megawatt hour on the day of announcement, Tuesday). Within these two weeks, prices must be €58 higher than the LNG reference price for 10 consecutive trading days. If these conditions are met, the EU will seek advice from bodies like the European Central Bank, the European Securities and Markets Authority, and the network of transmission system operators for gas (ENTSO-G), which monitor security of supply and market stability, before taking any decision. All this means the EU has reserved for itself the possibility to not trigger the price cap even when the gas price goes over €275.
Still, according to the Financial Times, energy traders would still have to pay an additional $33bn in margin payments if the gas price cap plan by Brussels goes ahead. This is the amount traders that rely on the Dutch TTF futures market have to pay as insurance to secure their deals, Intercontinental Exchange has told the European Commission – an 80 per cent increase. Such a large increase in margin requirements could “destabilise the market”, ICE, the Atlanta-based group that runs the TTF market, said in the memo.
Macro-Economics
A “substantial majority” of Federal Reserve officials support slowing down the pace of interest rate rises soon, even as some warned that monetary policy would need to be tightened more than expected next year, according to an account of their most recent meeting, writes the Financial Times.
Chinese companies have captured more global market share in 13 high-technology products and services, from electric vehicles to smartphones, research by Nikkei Asia shows. Out of 28 high-tech categories reviewed, China widened its share in 13 over 2021, lost market share in six, and did not make the top five in the remaining nine.
In the EV supply chain, Chinese battery leader Contemporary Amperex Technology, known as CATL, is the world's top battery supplier, holding a 38.6% share last year. Its position has grown by more than 12 points since 2020. When combined with peer BYD, the two companies held a combined share of 46%. When it comes to battery materials, Shanghai Energy New Materials Technology held a 28.7% share in separators. The company has used government subsidies to invest in expanding output. Asahi Kasei of Japan was a distant second at 10.7%.
BYD rose to become the fourth-largest EV manufacturer last year, climbing past the Renault, Nissan Motor and Mitsubishi Motors alliance. In the first half of this year, BYD became the second-largest EV maker by vehicle sales after Tesla.
In liquid crystal displays, a sector where Japanese and South Korean companies were engaged in cutthroat competition, China's BOE Technology Group took the top share in both large panels for televisions and small and medium panels for phones and tablets.
In organic light-emitting diode (OLED) displays, Apple picked BOE as a supplier for iPhones, putting the company on the path to catch up with Samsung Electronics.
Chinese telecommunication company Huawei Technologies kept the top spot in wireless network base stations, but its share slipped to 34% from 38% under pressure from U.S. sanctions
The Electrification of Transport
The California Air Resources Board has laid out an ambitious plan to eventually force all diesel truck fleets off the road, with varying timelines, writes SF Gate. The plan includes mandating that all new trucks operating around busy railways and ports be zero-emission vehicles by 2024; phasing out all diesel trucks from those areas by 2035; and eventually taking every diesel truck and bus fleet off California roads by 2045.