Energy, Politics & Money - 30 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, EPM takes a close look at:
The OPEC+ meeting scheduled for Sunday, which is most likely to lead to a decision to maintain current quota levels, with a slight change of a further reduction in case oil continues its price decline until then
China’s response to domestic protests against its Zero COVID policy, which is, exactly as EPM predicted Monday, a combination of repression coupled with a push for vaccination of the elderly
NATO’s doubling down on a promise to make Ukraine a member of the military alliance
Huawei’s stealthy efforts to establish a semiconductor design and manufacturing industry inside China
Developments in India’s EV market
Efforts by Ford and GM to strengthen their position in the lithium supply chain
Rolls-Royce test of hydrogen instead of conventional jet fuel to power a modern aircraft engine
General Energy News
OPEC+ is scheduled to meet (virtually, according to Bloomberg) on Sunday, as demand faces headwinds from slowing economies and Chinese COVID-19 lockdowns, while a looming European Union ban on Russian crude imports and a G7 price cap on Russian oil places a question mark over supply. Reuters reports OPEC+ is likely to keep oil output policy unchanged, according to five OPEC+ sources, although two sources said an additional production cut was also likely to be considered to bolster prices that have slid due to fears of an economic slowdown.
The slight possibility OPEC+ will introduce an additional quota cut is supporting crude oil prices, writes Bloomberg. Brent is now back to $83 per barrel, and WTI has climbed toward $79 a barrel.
Goldman Sachs sees a “high probability” of an additional OPEC+ cut, writes CNBC. The bank also expects oil prices to hit $110 next year. At EPM we just wish to remind our readers that the bank’s forecast for the fourth quarter of 2022 was $110 per barrel – we are about $20 to $30 below that so far…
On Monday November 28, when we heard about the increase in COVID-cases in China, and the social unrest this was causing, analysts debated whether this would mean the end of Zero COVID, and consequently an uptick in economic activity and energy demand. At that time, we said “we at EPM expect another push by China in the area of vaccine development and mandatory vaccination, and more repression of dissent against coronavirus restrictions until the objectives of this push are achieved.” According to The Guardian our assessment was correct, and China is now indeed adding repressing AND stepping up vaccination of older people. Meaning, don’t expect an end to Zero COVID or an uptick in energy demand in the near term.
Geopolitics
NATO has doubled down on a promise to make Ukraine a member of the western military alliance, writes the Financial Times, while vowing to step up support to Kyiv and help rebuild its energy infrastructure destroyed by Russian attacks. EPM’s view is that this is an escalatory step, as the potential of NATO membership was one of the reasons for Russia’s invasion. Therefore, as long as this remains on the table it will be very hard to negotiate a settlement.
Nikkei Asia reports on what China is doing in response to the US ban on semiconductor (and associated technology) exports to the country. Apparently, Huawei is now – stealthily – leading the effort to design and manufacture chips inside China. With help of local governments across China, Huawei and its partners are working on a new chip production and assembly network in Beijing, Wuhan, Qingdao and Huawei's home base Shenzhen, with investments estimated at more than 400 billion yuan ($55.8 billion). The Chinese goal is simple: to replace foreign manufacturers and suppliers, and bring back Huawei's key chip production for telecom base stations, surveillance cameras and smartphones -- and venture into the automotive chip business.
Energy Transition & Technology News
Just as Chinese players dominate the Chinese market for EVs, and are using their home turf as a launching pad for entry into Europe’s large and growing EV market (as well as Latin America as Reuters reports today), India’s domestic car manufacturers want to capture their home market and use it to enable entry in other markets later on, writes Nikkei Asia. Tata Motors has introduced electrics that are 30% to 50% cheaper than conventional models, showing a willingness to sacrifice profitability for market share, and other manufacturers are increasing investments as the government offers financial incentives for production and purchases, it writes.
The western hemisphere’s legacy automakers are catching up to Tesla in the lithium supply chain, writes Bloomberg. Ford and GM are offering financing to prospective suppliers, something Tesla never had to do as its involvement with any players in the lithium supply chain automatically qualified that player for third party financing. Ford in June sealed a pact with Liontown Resources, which aims to build a mine in Australia, that included a A$300 million ($199 million) loan from the automaker at comparatively low terms. Livent Corp., the number 3 lithium producer, said in August that GM will pay $198 million in advance under a six-year agreement that starts in 2025.
Meanwhile, in aviation, Rolls-Royce has successfully tested hydrogen instead of conventional jet fuel to power a modern aircraft engine, a world first for the aviation industry, writes the Financial Times. EPM’s view is that it will be easier to find a way to run a jet engine on hydrogen, than it will be to find a way to store the hydrogen needed for a (transatlantic) flight on the plane and the latter will remain a major bottleneck (EPM notes it takes 4 times the weight of kerosene for a hydrogen powered aircraft, carrying the same weight, to fly the same distance).