Energy, Politics & Money - 26 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 Friday 26 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:
OPEC+ efforts to spook crude traders and its working
Diesel prices are slated to increase significantly as we move into fall
The US Fed raised interest rates signaling inflation has not been beaten
The West does a 180 and encourages Africa to develop its vast energy resources
EV battery improvements and harnessing the wind
The impact of limited energy supplies and prices globally
And, so much more…
General Energy News
The United Arab Emirates is aligned to Saudi Arabia’s thinking on crude oil markets and supportive of its recent comments Reuters reports. This refers back to the comments by Saudi Energy Minister Prince Abdulaziz bin Salman Al Saud that we reported earlier this week. Discussing the decline of the crude oil futures prices he raised the potentiality of cutting the OPEC+ quota in order to bring the physical and financial oil markets closer together – a remark we said that doesn’t make rational sense (cut physical output to raise futures prices?) but as long as it spooks speculators will have the impact the Prince was looking for.
According to The Financial Times the objective of the Saudi prince’s comments were designed to push up futures prices for oil – which Javier Blas of Bloomberg says has clearly worked with Brent now back at $98 – and providing a signal to the US that a new Iran nuclear deal will aggravate oil markets and that this does not align with Saudi interests.
Bloomberg discusses the support diesel is likely to receive from the current record prices for LNG around the world (see below for further discussion under The Global Energy Crisis) as the high price of LNG is incentivizing consumers and businesses alike to switch to liquids for heating and power. This leaves Diesel stocks at record low levels and at a time when they are usually built up in preparation for peak demand during winter.
The Macro Environment (economics & geopolitics)
The Fed today raised interest rates by 0.5 or 0.75 indicating the US’ inflation beast has not yet been tamed . This is forcing the Fed to bring the US economy to "hard landing" in order to wrestle inflation under control. At the same time, this supports US dollar versus the Euro and thus will worsen Europe's economic problems (and increase support deal with Iran favouring the US).
Energy Transition & Technology News
In what can only be called a real case of Back to the Future, Bloomberg discusses the latest technology touted to support decarbonization of international shipping: sails. Some of the biggest names in the maritime trade have or are investing in retrofitting or building new vessels featuring sails to harness wind energy in order to meet pollution-busting goals and emissions standards. From giant kites that pull cargo ships to inflatable sails to spinning rotors that create lift
Just as the battery industry leaders in this Bloomberg report, we at EPM are confident that battery technology will go beyond today’s lithium-ion as new materials are implemented such as silicon or lithium-metal anodes, and solid electrolytes. The history of battery technology has followed step change improvements based on materials, material composition and followed by optimization that leads to a new step change improvement based on materials composition. With all the money pouring into R&D, we believe a step change improvement is close. But, Bloomberg highlights, you need to pay close attention, as “the biggest problem with the battery industry is there’s a lot of fake news”.
Energy Voice reports research broadcast by Channel 4 News (UK) noted that while pre-tax profits of £74 billion plus were reported by BP, Shell, Equinor and TotalEnergies in the first half of 2022despite while, only around 5% of that windfall is slated for investment in renewables or low-carbon project. Instead, they provided returns to shareholders.
Climate Politics
The Financial Times says a consensus is developing in Africa that the continent should not put “green” ahead of “development” and should focus on developing its significant supply of fossil fuel resources. We believe that it was highly hypocritical of Europe to suddenly offer support for development of gas resources in Africa, once Russia reduced supplies to Europe, only months after COP26 (Glasgow, Scotland) where everyone from the Western world was piling pressure on Africa not to develop these same resources. In other words, “it’s okay for you to develop your resources if we are the ones who need them, but not okay if you are the ones who need them”. That said, we argue that it makes economic sense for the continent to push forward on renewables – a large segment of Arica’s population live in scattered, rural communities – as these technologies are better suited for electrifying remote communities than a fossil fuel based macro-grid.
The Electrification of Transport
Audi is joining Formula 1 from 2026, with cars running on synthetic fuel, reports Bloomberg. EPM thinks this is a foolish move showing the German carmaker has its head up its exhaust pipe. The auto industry is very clearly electrifying and a move by Audi into Formula E would make more sense. At the same time, we think research funds spent on improving synthetic fuels will be largely wasted, as it seems like there will never be a large global market large enough to sustain this product. Basic physics illustrates that they synthetic fuels will always be significantly more expensive than competing alternatives, be it electricity or biofuels.
The Global Energy Crisis
British energy regulator Ofgem announced that British energy bills will rise 80% from October, to an average of 3,549 pounds ($4,188) a year. According to Reuters, Jonathan Brearley, Ofgem’s CEO said the rise would have a “massive impact” on households across Britain by worsening poverty among the lower and middle classes. And, that another increase was likely in January. The reason he didn’t discuss industry is that the prices paid by British industry are not regulated, i.e. they have already been paying for the increase in energy.
In his latest piece for Bloomberg, Javier Blas says that listening to European electricity traders has become very, very scary. Which, according to Blas, suggests that keeping the lights on this winter will be a lot more challenging than European governments are currently admitting. The problem is broader than just costs, Blas says. Increasingly traders are recognizing the real potential of shortages and rationing of energy, as evidenced by the increasing use of the words “emergency” and “shortages” in their conversations. All this we have said repeatedly over the past few weeks here at EPM. So, while we are not happy with the situation Europe faces, we are pleased that our analyses left our readers well ahead of the curve.
In Asia things are similar. As we also discussed before, Europe’s gas crisis has a significant impact on Asia, as Europe has been buying volumes of LNG that would otherwise have gone there -- pushing up prices along the way. So today, not only Europe is having to deal with record LNG prices, so is Asia, where the average LNG price for spot cargo being delivered in the month of October to north-east Asia is estimated at US$57 to US$60 per MMBTU. The Star from Singapore is now reporting on the fact that Japan and South Korea, two of the region’s largest buyers, have started their procurement programme for the coming winter, leading industry sources to speculate the Asian LNG price will only go up further over coming weeks and months.
Nikkei Asia examines the power crunch that China is presently experiencing, brought on by drought. The record heat wave in Sichuan has dried up reservoirs and is crippling hydropower stations and forcing electricity cuts to businesses and households across the southwestern province of 84 million people. Neighboring provinces and cities as far away as Shanghai that rely on electricity from Sichuan are also feeling the pain. This added strain on the global supply chain is likely to push inflation around the world.