Energy, Politics & Money - 31 January 2023
Independent, objective, and politically neutral analysis of interconnected global developments in the world of energy, geopolitics, and money curated to help you thrive or survive these chaotic times.
In this roundup, EPM examines:
The call between Russian President Vladimir Putin held a phone call with Saudi Crown Prince Mohammed Bin Salman, which in our EPM view indicates OPEC+ collaboration will continue in 2023
ExxonMobil’s record earnings
The IMF’s hope for 2023, which the Fund itself presents as a forecast, but does not convince us at EPM
More saber-rattling in Asia, as Japan pledged to strengthen ties with NATO, and South Korea agrees to increase military drills with the US
Shell’s latest restructuring – its second in three years
General Motors’ $650 million investment in a US lithium mine
The shift in the automotive industry, where as a result of electrification, the main competitive differentiator is no longer the powertrain, but rather software
A review of Glasgow Financial Alliance for Net Zero (GFANZ)’s performance
General Energy News
Ministers from the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, known collectively as OPEC+, are due to hold a virtual meeting on Wednesday. In preparation, Russian President Vladimir Putin held a phone call with Saudi Crown Prince Mohammed Bin Salman to discuss cooperation to maintain oil price stability, reports Reuters. In EPM’s view this indicates the OPEC+ collaboration is likely to last throughout 2023. And this, in turn, establishes a firm foundation for the oil price as the cartel has the ability to effectively intervene when oil goes too low (to their liking). Coupled with the US ambition to restock the Strategic Petroleum Reserve once crude drops below $60 per barrel, the $60 to $70 per barrel range is what EPM believes will be the bottom price range this year.
As for refined products the wildcard continues to be China’s export policy. With the West soon to ban Russian refined products, China’s higher than typical exports have helped to keep the market supplied. But, as S&P Global notes, Beijing could do another U-run and put a lid on exports if domestic demand picks up post-COVID .
ExxonMobil smashes Western oil majors' earnings record with $56 billion profit for 2022, reports Reuters. The company’s results far exceeded its 2008 record of $45.2 billion net profit, when oil hit $142 per barrel, 30% above last year's average price. Deep cost cuts during the pandemic helped supercharge last year’s earnings. The other western IOCs are similarly expected to report record earnings over coming days.
Macroeconomics
Bloomberg writes the International Monetary Fund sees a “turning point” for the global economy. It raised its growth outlook for the first time in a year with resilient US spending and China’s post-COVID reopening. The fund now expects gross domestic product to expand 2.9% in 2023, 0.2 percentage point more than forecast in October. EPM’s view is that, fundamentally, the IMF has a terrible track record in forecasting especially in a downturn. This time round, the upgrade is mostly wishful thinking, which Pierre-Olivier Gourinchas, the IMF’s Chief economist, as much as confirmed when he said, “The outlook is not worsened this time around, which in itself is good news. But it’s not enough. There are still some challenges to get on our way to a sustainable recovery that is broad and long-lasting.” The reality is that there is still a way to go before China’s recovery is complete – and as we saw during COVID in the West, a number of surprises could very well be in store. Beyond that, the fight against inflation is not (and should not be) considered over, meaning monetary policy will remain contractionary, and some countries will even need to tighten further; the war in Ukraine will continue throughout 2023; and more emerging and developing economies are entering debt distress.
Mohammed El Erian over at Bloomberg argues that the US should continue on its monetary tightening path with another 0.50% rate increase – which is probably not what the IMF backed into its forecast.
Geopolitics
More saber-rattling in Asia, with Japan pledging to strengthen its ties with NATO and South Korea agreeing to increase military drills with the US. The justification for the North Atlantic Treaty Organization’s entry into the Asia Pacific is that Russia is allied with China, and that the groups 30 countries in Europe and North America “are affected by global threats”, writes Nikkei Asia. South Korea and the US, meanwhile, in an official statement, focused on the North Korean threat but the Nikkei Asia notes South Korea is facing growing pressure from the US to join its efforts to counter the rising influence of China and help Ukraine battle Russia. The EPM view on these developments is given away in our introduction to the news. This is saber-rattling, that will be understood in only a single way by Beijing and Moscow: the US and its allies are preparing for hot war. This obviously creates a vicious circle that brings the possibility of World War III closer each day.
Energy Transition & Technology News
Shell plans to restructure the way it runs its hydrocarbons and renewables businesses as part of changes being made under new chief executive Wael Sawan, writes the Financial Times. The gas business, which includes the world’s largest liquefied natural gas trading operation, will be combined with the company’s oilfields in a new Integrated Gas and Upstream division, headed by Zoe Yujnovich the current upstream director. The renewables and energy solutions business, which includes Shell’s wind and solar projects, will be combined with the oil refining and marketing units to create a new downstream and renewables division led by Huibert Vigeveno the current downstream director. Additionally, Sinead Gorman, the current chief financial officer, will oversee strategy and sustainability, while the corporate relations team will report to Sawan. The role of director of strategy, sustainability and corporate relations will be discontinued.
General Motors will invest $650 million in a US lithium mine, Thacker Pass in the US state of Nevada, a record investment by a carmaker to secure the raw materials used in electric vehicle batteries, writes the Financial Times.
The Electrification of Transport
Bloomberg recognizes that electrification is disruptive for transportation on a variety of fronts. In the ICEV era, the power train—essentially the engine and transmission – was where manufacturers differentiated themselves. In the EV era, the point of differentiation is software. Automakers are therefore bringing more of their software development in-house.
ESG
A new report published by 13 NGOs looks at how well the Glasgow Financial Alliance for Net Zero (GFANZ) is living up to its promises. It is quite negative, as the alliance continues to pour hundreds of billions of dollars into the biggest corporations that are developing new fossil fuel projects. But at EPM we’d recommend you take a look at the report yourself to make up your own mind.