Energy, Politics & Money - 30 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:
The Brent and WTI benchmarks, which are on track to climb more than 2.5% for June, Brent's first monthly gain for 2023 and WTI’s second after its gain in April; and why the outlook for crude oil is “balanced”
The current state of Russia’s gas industry
The CNBC summary of the sentiment at the Energy Asia conference in Malaysia this week: “Energy transition is going to take a lot longer, it’s going to cost a lot more money and need new technologies that don’t even exist today”.
China's manufacturing activity contraction in June, a third straight month
The sectors of the economy left most exposed by the central banks’ interest rate hikes to fight inflation
The US and the Netherlands’ plan to further restrict sales of chipmaking equipment to China
The view that regulators urgently need to fast-track approvals for new mines and the renewable energy projects to power them, to ensure the supply of minerals essential for delivery of energy transition targets
The problems facing wind turbine manufacturer Siemens Energy, which in the EPM view represents an opportunity for Chinese manufacturers to take a larger share of the market
The growing interest in bioenergy with carbon capture and storage, or BECCS
The Chinese EV manufacturers that are most eager to take the European market: BYD, Nio and Chery
Larry Fink (of BlackRock)’s decision to no longer use the term ESG
Nestle’s decision to walk away from offsetting to get to net zero, and instead focus on delivery of real reductions of GHG emissions in its supply chain
General Energy News
Brent and WTI are poised for a monthly gain in June, writes Reuters. Brent crude futures for September delivery stand at $74.67 as of 0405 GMT. WTI stands at $69.95. Both benchmarks are on track to climb more than 2.5% for June. While it would be Brent's first monthly gain for 2023, it would mark a second for WTI after a gain in April. While there is broad concern about the outlook for the economy, markets have been more worried about tightening supply, due to the most recent OPEC+ decision and US crude inventories dropping by 9.6 million barrels in the week ended June 23, far exceeding the 1.8-million-barrel draw analysts had forecast.
Global producers might like prices to go even higher, but at current levels they appear reasonable considering global inventories, writes John Kemp for Reuters. Commercial inventories of crude oil and refined products in the OECD advanced economies were around 2,842 million barrels at the end of May, just 35 million barrels (-1% or -0.19 standard deviations) below the prior 10-year seasonal average. Looking ahead, production cuts by Saudi Arabia and its allies in OPEC, as well as the declining oil and gas rig counts in the United States, are likely to deplete inventories later in 2023 and into 2024, he says. Working in the other direction, however, are high exports from Russia, Venezuela and Iran; rising interest rates and slowing economies in North America and Europe; and a sluggish post-pandemic recovery in China.
Bloomberg looks at where Russian gas has been heading, now that it is largely locked out of Europe. In 2021, Russia pumped about 150 billion cubic meters of pipeline gas to Europe — more than enough to satisfy the combined annual consumption of Germany, France and Austria, it notes. Much of Russia’s existing gas export infrastructure therefore points West, but most of its current gas customers are to its East. A lot of the infrastructure Russia needs to supply them is yet to be built. As a result, Russia has no customers for about 90 billion cubic meters of pipeline gas, forcing down gas production by 13% so far, and gas revenues for the state 45%. Because China seems in no rush to finalize the Power of Siberia 2 pipeline, it is unlikely this situation will change anytime soon.
CNBC has summarized the sentiment at the Energy Asia conference in Malaysia this week: “Energy transition is going to take a lot longer, it’s going to cost a lot more money and need new technologies that don’t even exist today”.
Macroeconomics
In June, China's manufacturing activity contracted for a third straight month, writes Nikkei Asia. The official purchasing managers' index (PMI) was at 49.0, from 48.8 in May, staying below the 50-point mark that separates expansion from contraction.
Reuters looks at the sectors of the economy left most affected by the central banks’ interest rate hikes to fight inflation. Residential real estate and commercial real estate, obviously, as the rate hikes have significantly increased the cost of mortgages. The banking sector also, as the higher rates have lowered the value of most banking assets, while the worsening economic climate is likely to lead to an increase in defaults among private and corporate borrowers. Especially on the corporate side the outlook is grim, in the EPM view, as in the new monetary realities the free money that “zombie companies” have been surviving on the past 5 years is gone – consequently, so will they shortly. In addition, EPM adds that in our view, we are still only at the beginning of the effects the interest rate hikes, and we expect things to worsen as time progresses, well into 2024. Also, we do not expect the same impact everywhere. Especially countries with a historical preference for shorter duration debt, such as the UK and its short-term mortgages, are exposed. Lastly, we believe that one thing that might blindside investors is the likely shorter-term rises in real estate prices. As happened in the US, the prospect of having to sign new mortgage contracts when selling-then-buying properties is holding a lot of people back from putting their house on the market, pushing up prices in some areas / circumstances. The medium-term drop in real estate prices that we believe is the most likely scenario at this stage, will occur once the economic environment starts to force people to sell their properties.
Geopolitics
The United States and the Netherlands are set to further restrict sales of chip making equipment to China, writes Reuters. The Dutch government plans to announce new regulations on Friday with a licensing requirement for the top tier of ASML'S second-best product line, deep ultra violet (DUV) semiconductor equipment. ASML's most sophisticated machines -- extreme ultraviolent "EUV" lithography machines -- are already restricted, and have never been shipped to China. The US is targeting the same technology exports through its own, new regulations as well. Six Chinese facilities are expected to be identified in a new U.S. rule that will allow the U.S. to restrict foreign equipment with even a small percentage of U.S. parts.
Reuters also has a timeline of U.S. actions against China's chip industry. EPM notes that while these policies officially are about preventing the Chinese defense industry from using state-of-the-art semiconductors in weapons manufacturing, according to ASML at least this is not the truth of the matter as it says such semiconductors are not typically used in weapons. Generally speaking less advanced semiconductors in the weapons industry, it said, while noting that in this segment of the semiconductor industry it is US companies that lead, and have not been affected by export restrictions. In the EPM view the US policy is about preventing or slowing down Chinese development in the cutting-edge technologies that will provide a broad competitive advantage to any economy that can establish a lead in them, such as AI and quantum computing. As such, the US semiconductor policy is akin to the country’s decision to sanction crude oil sales to Japan pre-WWII.
Energy Transition & Technology News
The head of gold miner Newcrest, Sherry Duhe, believes regulators urgently need to fast-track approvals for new mines and the renewable energy projects to power them, to ensure the supply of minerals essential for delivery of energy transition targets, writes Reuters. The mining industry needs to bring online the equivalent of 17 more Escondidas, the world's biggest copper mine, by 2050, to meet demand projections. Other metals, such as nickel, cobalt and lithium, used in batteries and wind turbines, are also urgently needed for the energy transition. Miners therefore need to step up development by an order of magnitude, she said, but governments need to slash regulatory timelines and beef up regulatory staffing to enable this.
Bloomberg has analysed the root cause of the earnings warning issues by Siemens Energy. It found that the issue is vibration on a main piece on the frame of its wind turbine, which could potentially lead to damage on other critical components. Fixing the problem may far exceed the company’s estimate of more than €1 billion ($1.1 billion), it says, as 15% to 30% of turbines were affected by the flaw. In the best case scenario, the recently disclosed faults will have caused only limited damage to critical components. Though even if that’s the case, scores of turbines that sit hundreds of feet in the air will need to be serviced, an endeavor that can only be done with specialized equipment and likely to cost $1.7 billion. The company will also need to change the design of its turbines to fix the issue, and deal with customers that now want to walk away from contracts. EPM notes this represents a great opportunity for Chinese wind turbine manufacturers, that have been eager to move into Europe.
Bioenergy with carbon capture and storage, BECCS, is gaining traction as a technological solution for reducing carbon emissions while adding to the global energy supply, writes S&P Global. Because the process uses organic waste materials before they are allowed to naturally decompose—a process that releases greenhouse gasses into the atmosphere—then adds CCS technology on the back end, BECCS’ main attraction is the fact that the process has the net effect of reducing CO2 emissions while producing clean fuels. The EPM perspective is that all bio-energy opportunities represent really good but niche business opportunities. Feedstock availability we do not believe will ever reach the level where it can replace conventional fossil energy in meaningful quantities.
The Electrification of Transport
The Financial Times looks at the Chinese EV manufacturers that are most eager to take the European market: BYD, Nio and Chery. “We want to be in the top three” brands in the region by the end of the decade and number one “if we can”, says BYD, for example. With their large domestic EV market, and decade-long sincere focus on EVs, EPM believes they stand a really good chance of delivering on their promise.
Other
Larry Fink, CEO of investing giant BlackRock, said he’ll no longer be using the buzzphrase “ESG,” writes Yahoo Finance. Fink has been a leading proponent of ESG investing, but now says the term and the concept of ESG have been “totally weaponized” and “misused by the far left and the far right.” The question is whether BlackRock will now also drop the ESG related performance indicators from its assessments of companies. Some might rightfully disappear, as they were primarily about “tick-the-box” exercises to enable moralistic messaging. But other such as such GHG emissions represent a real risk to business, and as such should be expected to survive Fink u-turn on ESG.
Nestle has decided to walk away from offsetting to get to net zero, and instead focus on delivery of real reductions of GHG emissions in its supply chain, writes Bloomberg. It is getting out of the offset market and putting the money it would have spent on those credits toward cutting emissions in its supply chain and operations. It’s also dropping “carbon neutral” pledges that have so far relied primarily on offsetting. The company made its move in response to popular criticisms of offsetting.