Energy, Politics & Money - 30 August 2022
Curated news from the ever evolving worlds of energy, geopolitics, and money view just for you!
Welcome to the Energy, Politics & Money news summary for Tuesday 30 August 2022, with your daily dose of cutting-edge insight into everything of importance in the connected worlds of energy, geopolitics and the economy.
General Energy News
CRUDE OIL
According to Reuters, trader sentiment is shifting again to a focus on demand, pushing crude futures lower, as the Jackson Hole meeting of the world’s central bankers made clear that monetary tightening will be the policy for the foreseeable future.
Clyde Russell writing for Reuters is of the opinion the physical crude market at present is less tight than the Saudi Arabian energy minister made it out to be in his comments last week. Demand in Asia, the top-importing region, is presently flat at best, as China's imports maintain their recent soft trajectory.
The EMP View
The news reported by Reuters that Saudi Aramco is considering lowering its Official Selling Price (OSP) in Asia, as there is significant competition between Saudi, Russian and American crude grades for demand in the region, seems to indicate Russell might well be right.
Our position here at EPM has for longer been bearish, as we see a severe economic downturn globally as essentially certain. At the same time, we also see a possibly of significant support for crude demand coming out of Europe – if the regions ends up experiencing a cold winter, and it does not cut a deal with Russia, we will see a big effort to switch from gas to liquids for heating and power.
Macro-Economics
BEARISH ON THE WORLD ECONOMY
Ren Zhengfei, founder of Huawei, apparently shares our bearish outlook for the global economy. According to the South China Morning Post, in an internal memo to company employees, Ren said the company should focus on profits and cash flows instead of revenue to ensure its survival over the next three years. Ren also said Huawei would scale back or divest noncore businesses, signalling that more job cuts could follow after the company’s headcount shrank by 2,000 in 2021, the first drop since 2008. The reasons for Ren’s concern we have discussed extensively here at EPM. The US – China conflict is breaking apart the global economy, and Huawei has found itself at the heart of it: US sanctions have blocked it from entering important markets and buying important inputs for its products, primarily semiconductors. In addition, Ren expects a painful economic recession globally. “The next 10 years will come down as a painful period in history”, he said.
GROWING INFLATIONARY CONCERNS
Reuters summarized the messages coming out of the global meeting of Central Bankers in Jackson Hole past week. The message from the world’s top finance chiefs is loud and clear, it says. And, we add, paints a picture of the shorter-term future that is exactly as we have been warning about for throughout July and August: Rampant inflation is here to stay and taming it will take an extraordinary monetary policy effort, causing a recession with job losses and sending shockwaves through emerging markets.
It is important to understand that what the Fed is doing is not just raising interest rates. It is also shrinking it balance sheet, i.e. removing money from circulation. According to Bloomberg, the Fed’s “unwinding of position” will this week increase to $95 billion per month. This process should be expected to support the USD exchange rate internationally, and domestically push up lending rates further.
RE-ESTABLISH BRETTON WOODS?
Bloomberg also reports on comments made by Swiss Re Chief Economist Jerome Haegeli, who sees the current environment as one that incentivizes a re-invention of the global economic order. Bretton Woods was significantly adjusted in 1971 when the US left the gold standard. The current food, energy, and supply-chain crises could create a similar change, he says.
Geopolitics
DEAL WITH IRAN UNLIKELY
The odds of a Iran nuclear deal anytime soon have significantly decreased. According to a confidential report to member states seen by Reuters, the IAEA says Iran is secretly pressing ahead with its rollout of an upgrade to its advanced uranium enrichment program.
US RESPONSIBLE FOR TENSIONS WITH CHINA
As you know, we see de-globalization as one of the macro-trends that will define the future global economy. The US – China conflict will break the global economy up into two blocks, and both blocks are likely to put pressure on companies to pick a block to operate in, threatening sanctions for companies that try to operate in both. According to The Financial Times, Malaysia’s former prime minister Mahathir Mohamad sees the future similarly. He blames the US for worsening the tensions with China, calling the Pelosi visit to Taiwan a “provocation”, and urges south-east Asian countries to move closer to China, as he expect that economically this will be more beneficial.
Electrification of Transport
HONDA & LG – PLAN US BATTERY PRODUCTION
Nikkei Asia reports Honda and South Korean battery maker LG Energy Solution will build a battery plant for electric vehicles in the US, the two companies announced on Monday. The companies will invest $4.4 billion in the effort. The plan is to have an annual production capacity of up to 40 gigawatt-hours, enough to equip 700,000-800,000 typical EVs. Construction will begin in 2023 with a goal of starting mass production in 2025. No doubt, the US Climate Bill strongly incentivize such investments in the US, as it is making its significant EV subsidies contingent on a localized supply chain for both the vehicle and its battery.
CHINESE EV – NEW MARKETING APPROACHES
Over in China, Bloomberg reports on the extraordinary – and creative – ways in which the country’s local EV company are trying to win the competitive battle. Among those, Nio developed a business model that relies on creating a sense of allegiance among customers, who then persuade family and friends to spread the word about its cars. Nio has also spent significant amounts of money building Nio Houses, resembling private clubs for Nio car owners. Bloomberg also highlights that automakers who succeed to win the hearts and minds of customers stand to reap immense gains in China. Deliveries of “new-energy vehicles”, as EVs and hybrids are referred to in China, more than doubled in July to around 486,000 units, accounting for more than one quarter of total new car sales. Full year sales are forecasted at 6 million.
CHINESE EV – NEW BATTERY TECH
Also on Bloomberg an excellent report on the battery side of BYD. According to Bloomberg, BYD batteries have lots going for it. Compared to the world’s largest maker of batteries, CATL, BYD’s Blade powerpack technology allows heat to be dispersed more evenly, which is a big advantage given the risk of fire. Because it’s so long but narrow, it’s more efficient in terms of space and that ends up giving it a higher energy density. The materials of the battery parts are about 5% cheaper than CATL’s. But… The price of the battery’s packaging or housing is almost 30% above CATL’s. In addition, the manufacturing cost is 21% higher. This means that while BYD might have technology on its side, it is lagging in terms of manufacturing at scale the products that use the technology.
Global Energy Crisis
EUROPEAN ELECTRICITY PRICES
The Financial Times reports the EU is preparing emergency measures to curb the price of electricity by separating it from the soaring cost of gas. EPM agrees that this is a good idea, and we eagerly await news as to how the EU intends to do this? It will be a challenge to do so without massively disrupting market forces, and without government subsidies that will also have to be paid by households and industry just in the form of taxes. We wish the EU success!
SHELL PREDICTS TOUGH WINTER(S)
The Financial Times also has an interview with Shell CEO Ben van Beurden, and quotes him as saying that “it may well be that we have a number of winters where we have to somehow find solutions through efficiency savings, through rationing and a very, very quick buildout of alternatives” and “that this is going to be somehow easy, or over, I think is a fantasy that we should put aside.” Europe’s record gas prices, more than 30 times higher than prices two years ago, and more than 10 times their current level in the US, which are clearly devastating society at large and industry, should be expected to stay around longer, in other words.