Energy, Politics & Money - 31 May 2023
In this roundup, we take a closer look at current sentiment in the crude oil markets. And it is bearish, all signs flashing red. The main indicators for global economic growth are all in decline, and China’s economic activity is significantly underperforming the mainstream expectations (not EPM’s, as you know…). At the same time, Russia is supplying significantly more energy to the market than anticipated – there is no sigh as of yet it has indeed cut production by the 500,000 barrels per day it promised earlier in 2023. This leaves the current physical market oversupplied, and with a bearish outlook for the economy, that pushes crude oil.
Furthermore, we look at:
- The decline in three key indicators for global economic growth, namely copper prices, the U.S. yield curve and shipping rates, a warning of a recession being underway; which is further evidenced by large increases in semiconductor inventories in South Korea, and disappointing industrial activity levels in China
- The expectation of Nvidia founder and CEO Jensen Huang that China will catch up in semiconductors
- Saudi Arabia’s ambition to power buses by green hydrogen
- The TotalEnergies plan to build a $2bn plant in the US to produce synthetic natural gas
- The OpEd by Mark van Baal, founder of climate-focused activist investor Follow This, in the Financial Times
- The $1 billion lawsuit facing Delta Air Lines over its claims of “carbon neutrality”, because it relies on nature based offsets
- The valuation of Saudi Aramco on the Saudi stock exchange
General Energy News
Bloomberg reports that this week, oil experienced its biggest decline in four weeks. Brent for July settlement, which expires Wednesday, dipped 0.2% to $73.41 a barrel. WTI for July delivery fell 0.3% to $69.24 a barrel, 4.4% lower from Friday’s close.
The macroeconomic data EPM covers below are part of what is driving the bearish crude oil price expectations. Another part of the story is amply crude oil supplies in the physical market at the moment. This is largely a Russia story. Despite the country having previously pledged to reduce output, its crude oil flows to international markets show no substantive sign of the curbs. Meanwhile, it aims to boost its daily diesel exports from key western ports by nearly a third in June as some refineries resume full operations following seasonal maintenance, writes Bloomberg.
A Reuters poll of crude buyers in Asia concludes that the general expectation is a further cut to Arabian crude pricing. "Refining margins at Asian refineries remain weak and there are still pressures to cut operation rates," said one respondent. "The problem is not that there is too much oil in the market. The problem is that the prices are too high," said another respondent.
Macroeconomics
Three leading indicators, namely lower copper prices, the inverted U.S. yield curve and depressed shipping rates, have converged to warn of a slowdown in global economic growth, writes Nikkei Asia. Copper is used in a wide range of sectors, such as infrastructure, automobiles and consumer electronics, and its price has recently fallen around 20% from this year's peak. Asian container shipping rates, which reflect the strength of consumption in Western economies, have tumbled dramatically from last year. Spot rates for sea lanes between Shanghai and the U.S. West Coast came to $1,398 per forty-foot-equivalent unit for the fourth week in May, according to the Shanghai Shipping Exchange -- down 82% from a year earlier.
A further indicator to take note of is semiconductor inventories. South Korea’s semiconductor inventory surged by the most in seven years, underscoring ongoing weak demand for chips despite the global boom in AI development, writes Bloomberg. Stockpiles rose 83% in April from a year ago — the biggest increase since April 2016 — while factory shipments fell 33% from the year-ago period and production was cut 20%.
China is unlikely to come to the rescue of the global economy. The country's factory activity shrank faster than expected in May on weakening demand, writes Reuters. Chemical, ferrous metal smelting and rolling processing industries faced significant declines in production and demand. In the services sector, rail and air transport, accommodation and catering sectors remained in the expansion, on the back of strong May Labor Day travel, while real estate activity fell.
Geopolitics
Nvidia founder and CEO Jensen Huang has warned that China will cultivate its own chip companies in response to tensions with the U.S. and that existing chip players will have to work hard to stay competitive, writes Nikkei Asia. “I think China will use the opportunity to foster their local entrepreneurs, and that's why there's so many GPU startups in China”. GPU refers to graphic processing units, a type of chip that can handle large amounts of graphic data, making it critical component in artificial intelligence technologies as well as gaming.
Energy Transition & Technology News
Saudi Arabia’s Neom Green Hydrogen Company, part of a $500 billion industrial and tourist development on Saudi Arabia’s Red Sea coast, will begin producing hydrogen for transportation next year, writes Bloomberg. By mid-2024, the company will be making hydrogen for vehicles such as buses and trucks. Neom Green Hydrogen is a venture between local firm ACWA Power, state-backed Neom and US-based Air Products & Chemicals.
TotalEnergies and a Belgian energy start-up named Tree Energy Solutions plan to build a $2bn plant in the US to produce synthetic natural gas, writes the Financial Times. The plant, which will probably be in Texas, will use wind and solar power to make hydrogen that will be combined with carbon dioxide to create synthetic methane. The incentives provided by the IRA had accelerated the project by several years. “The US has the best renewable potential when it comes to solar and wind, it has great ease of doing business, and it has available CO₂, available pipes and liquefaction capacity — so it ticks a lot of boxes even before the IRA.” In the EPM view, thermodynamics related economics will keep synthetic fuels the “most expensive option”, always. Even more expensive than using fossil-based energy coupled with engineering offsets. It is incentive schemes such as the IRA that make it an interesting proposition for businesses. In addition we say, synthetic fuels will always remain a niche in the market.
Climate Politics
Mark van Baal, founder of climate-focused activist investor Follow This has an OpEd in the Financial Times. It represents 9,000 shareholders in oil and gas companies, and submits climate resolutions at shareholder meetings of the oil majors — Shell, BP, TotalEnergies, Chevron, and ExxonMobil — calling them to align their CO₂-emissions reduction targets with the Paris Agreement on climate change and invest accordingly. Van Baal says all his conversations with oil companies go in the same way. “One of the executives will ask my organisation, Follow This, to withdraw our shareholder resolution from their company’s AGM. My colleagues and I reply that we’re seeking a shareholder mandate that will support management to lead the energy transition. A short moment later, we shake hands — as if to confirm our disagreement. Then I make my way down the plush C-suite corridors back to the elevator.” Van Baal’s view is that oil companies have claimed — defying logic or responsibility — that increasing investment in hydrocarbons is an imperative made more urgent by the energy crisis. Which he sees as a short-term panic in commodity markets eclipsing the larger catastrophe of climate crisis. “My argument”, he says, “that the business case for oil will collapse, just as soon as fossil fuel producers are held liable for climate damage — falls on deaf ears”.
The Electrification of Transport
The Global Energy Crisis
Other
Over recent weeks we have been covering developments in the field of offsetting. Our EPM view is that the practice of buying carbon credits that result from “preventing deforestation” will soon become socially unacceptable. Our belief results from news such as that, according to The Guardian, Delta Air Lines in the US is facing a lawsuit over its $1 billion carbon neutrality claim which plaintiffs say is “false and misleading” as it relies on offsets that do little to mitigate global heating. The new legal action, filed in California on Tuesday, targets Delta’s statement that it is “the world’s first carbon-neutral airline”, a claim it has made in adverts, LinkedIn posts, in-flight napkins and comments by company executives, according to the lawsuit. The Delta Airlines approach to decarbonization includes the purchase of carbon credits generated from conserving rainforest, wetlands and grasslands, along with decreasing the use of jet fuel and increasing plane efficiency. The class-action lawsuit says Delta’s carbon neutrality claim is demonstrably false as it heavily relies on junk offsets that do nothing to counteract the climate crisis.
Javier Blas of Bloomberg says Aramco valuation on the Saudi stock exchange is mostly an illusion. A daily average of just $51 million worth of stock changed hands over the past year, he says, compared to nearly $2 billion for ExxonMobil, $11.2 billion for Apple and $7.5 billion for Microsoft. It isn’t just that liquidity in Aramco is low, it’s also troublesome that many buyers and sellers are involved in what looks like merry-go-rounds. Middle East investors, often controlled by regional governments or royals, trade with each other, back and forth. The big institutional investors are absent. And don’t waste your time looking for short sellers: they don't exist. Aramco trades at a price-to-earnings ratio of 13.5 times, nearly double that of Exxon. In mid-2021, the ratio peaked at nearly 40 times. An obvious conclusion of all this is that the share price is being managed by those with an interest in doing so.