Energy, Politics & Money - 27 June 2023
Providing independent, objective, & always politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, & investment.
In this roundup, we look at:
A likely reduction in Saudi crude oil exports to the US and Europe
The continued buying of Russian liquids fuels by Gunvor and Vitol
The OPEC view that oil demand will continue to grow, hitting 110 million barrels per day in 2045, up almost 30% from today
The push by US companies into India, as an alternative to China
The IMF view that inflation is likely to remain higher for longer, and that the fight against inflation is to be prioritized over economic growth
The Financial Times’ and Semafor’s summaries of analysts’ views on the Wagner saga
The US’s doubling down on naming Chinese president Xi a “dictator”, which signals a US intent to keep relations between the two countries “hot” rather than on a de-escalatory pathway
China’s belief that just as “decoupling”, “de-risking” too is likely to move the world closer to confrontation
China’s military outreach to Vietnam
The EU’s decision to join an international effort to assess whether large-scale interventions such as deflecting the sun’s rays or changing the Earth’s weather patterns are viable options for fighting climate change
General Energy News
Javier Blas of Bloomberg believes Saudi Arabia’s unilateral crude oil production cut is likely to lead to lower exports to the US and Europe. Going after the US and European markets has an advantage for Riyadh: Neither can switch to Russian or Iranian supplies, something that refiners in Asia do every day, and is thus more likely to push up prices, he says.
Vitol and Gunvor, two of the world’s largest independent energy traders, remain significant buyers of refined oil from Russia, writes the Financial Times. Analysis of export records filed with Russian customs in the first four months of 2023 show that both companies were among the top-10 buyers of refined products, such as petrol and diesel. Switzerland-headquartered Gunvor was the eighth-largest buyer by value, shipping 1mn tonnes of petroleum products worth about $540mn, according to the data reviewed by the Financial Times. Vitol, whose top executives largely sit in London and Geneva, was the 10th-largest buyer, shipping about 600,000 tonnes worth about $400mn, according to the data.
Looking further out, OPEC says oil demand will hit 110 million barrels per day in 2045, writes CNBC. ″Oil is irreplaceable for the foreseeable future,” Secretary General Haitham Al Ghais of the Organisation of the Petroleum Exporting Countries said while addressing the inaugural Energy Asia conference held in the Malaysian capital of Kuala Lumpur. “In our worldwide outlook, we see global oil demand rising to 110 million barrels a day by 2045,” he said, adding that oil will still comprise about 29% of the energy mix by then. OPEC’s secretary general added that underinvestment in the oil industry will only challenge the viability of current energy systems and lead to an “energy chaos.” Al Ghais acknowledged that renewables will play a greater role in the world’s energy mix going forward, and affirmed that some OPEC member countries are “already investing significantly” in the area.
Macroeconomics
Central banks must accept the “uncomfortable truth” that they may have to tolerate a longer period of inflation above their 2 per cent target in order to avert a financial crisis, the deputy head of the IMF Gita Gopinath has warned, according to the Financial Times. “We are getting into a period where we have to recognise that inflation is taking too long to get down to target — that is my first uncomfortable truth — and that means that we risk inflation getting entrenched,” Gopinath said. “When governments lack fiscal space or political support to respond to the problem, central banks may need to adjust their monetary policy reaction function to account for financial stress,” she said in her speech. Which, EPM notes, practically means higher rates for longer. The IMF view is also that the fight against inflation is to be prioritized over economic growth. Gopinath said in her speech that the ECB and other central banks “should be prepared to react forcefully” to signs of persistent inflation even if it leads to “much more cooling” in labour markets.
Leading U.S. corporations are accelerating their push into India as an alternative production hub to China amid protracted tensions between Washington and Beijing, writes Nikkei Asia. Tesla is reportedly in talks with New Delhi to set up a factory in India, expanding a production network that spans the U.S., China, Germany and Mexico. Apple opened its first stores in India in April, and wants to shift more output there from China with the help of suppliers like Hon Hai Precision Industry, known as Foxconn. The U.S. tech company reportedly aims to produce around 25% of its products in India, up from 5%-7% currently. Micron Technology said it will invest $825 million to build a semiconductor assembly and testing facility in the Indian state of Gujarat. Amazon Web Services, Amazon.com's cloud unit, said in May that it will invest 1.06 trillion rupees ($12.9 billion) in India by 2030, including to build new data centers. These moves come amid heightened tensions between the U.S. and China.
Geopolitics
The Financial Times has summarized analysts’ views on the Wagner saga we at EPM discussed yesterday. Semafor has a similar summary. EPM notes that most coverage in western media looks at the issue from the western perspective, focusing mostly on outcomes that would support achievement of western objectives. As such, these summaries are useful, but they don’t provide you the 360 degrees view you need to outperform the market.
Last week EPM reviewed US president Biden’s use of the word “dictator” when referring to Chinese president Xi. We said at the time that this choice of words, intentional or not, would undermine relations between the two countries further. And, we expressed doubt that it was a mistake, as there was no formal apology or correction from anyone in the US government. Politico writes that indeed the event was not a mistake, as US secretary of state Antony Blinken had explicitly supported his president on the issue. “The President always speaks candidly, he speaks directly. He speaks clearly, and he speaks for all of us,” Blinken said Sunday during an interview on CBS’ “Face the Nation.” All this indicated in the EPM view that the US wants to keep relations with China “hot”, and is not looking for a de-escalation.
China is aware of where this is taking the world. The US and Europe efforts to “de-risk” supply chains from the country, the “invisible barriers” that are being erected will push “the world into fragmentation and even confrontation”, China’s Premier Li Qiang warned according to Bloomberg. “We should oppose the politicization of economic issues and work together to keep global industrial and supply chains stable, smooth and secure,” he added.
As the USS Ronald Reagan made a stop in the Vietnamese port of Danang on Sunday – the third by a U.S. aircraft carrier since the end of the Vietnam War – China offered closed military collaboration to Vietnam, writes Nikkei Asia. Chinese Defence Minister Li Shangfu met his Vietnamese counterpart this week in Beijing. Li said, "China and Vietnam should continue to work hand in hand and closely unite in the new journey of socialism, safeguard the common strategic interests of the two countries, and make positive contributions to regional peace and stability". Li told Vietnam's defence minister, Phan Van Giang, that relations between their militaries had developed well, adding that China's military was willing to push relations to a new level.
Climate Politics
The European Union will join an international effort to assess whether large-scale interventions such as deflecting the sun’s rays or changing the Earth’s weather patterns are viable options for fighting climate change, writes Bloomberg. Embarking on this research pushes the EU into the debate over whether so-called climate geoengineering is good science or just a science-fiction distraction with potentially dangerous implications for the planet and its atmosphere, it says.