Energy, Politics & Money - 6 June 2023
In this roundup, we look at:
- The impact of Sunday’s surprise crude oil production cut by Saudi Arabia – almost nothing after 36 hours of trading; including the Energy Intelligence and Bloomberg analyses of why the Saudi’s made their move
- The future of Saudi - US relations, in light of the Blinken visit to the Kingdom this week, which in the EPM view looks bright
- The effect slowing U.S. manufacturing and freight activity has had on consumption of diesel and other distillate fuel oils as well as industrial electricity sales, which shows how the economic recession underway is affecting demand for energy
- The Asian view on the “western” call to drop Sultan Al Jaber as president of this year's U.N. Climate Change Conference
- Germany’s new 50 billion euros ($53.45 billion) programme to help companies in energy intense industries switch from conventional to renewable energy
- The looming transformation of market for carbon offsets, as a growing number of sovereign governments announce their intention to tax, regulate or restrict trade in credits generated within their borders
General Energy News
Sunday’s surprise production cut by Saudi Arabia supported the crude oil price, but only temporarily writes Reuters. Brent gained as much as $2.6 on Monday and U.S. crude had risen as much as $3.3 in the hours after Saudi Arabia said its output would drop by 1 million barrels per day (bpd) to 9 million bpd in July. From that point, however, it has been all down as traders shifted focus to the deteriorating economic outlook, and connected to that central bank policy. During early morning trading on Tuesday oil had given up most of the prior gains. Brent crude futures were down 23 cents, or 0.3%, at $76.48 a barrel at 0020 GMT. The U.S. West Texas Intermediate crude eased 25 cents, or 0.4%, to $71.90 a barrel.
Energy intelligence has released its analysis of the OPEC+ meeting. Saudi Arabia’s additional 1 million barrel per day production cut for July — and potentially beyond that — is intended as a precautionary measure amid negative market sentiment, it says. But it notes the drawback, the move might put Riyadh in the uncomfortable position of ceding market share in the near term to other producers, a risk the Kingdom is willing to take as it feels that regaining control of a market that it sees as largely detached from underlying supply-demand fundamentals is more important. Saudi Arabia is still betting on a strong resurgence in Chinese oil demand during the second of this year, EI also says, so it sees its move as a “short term pain for a long term gain”.
Javier Blas of Bloomberg calls the Saudi move a risky strategy. Because Riyadh is forfeiting so much production, unless prices rally over the next few days it would end giving up an enormous amount of petroleum revenue. Everyone else inside the OPEC+ alliance would reap the benefits. To keep earnings unchanged, Riyadh needs oil to surge by more than $10 a barrel to offset the drop in production from April to July. For now, it doesn’t look like the strategy is paying off. He raises the possibility that instead of strategy, the move was forced upon the Saudi’s by a Russian refusal to cut production more, and doubts among other OPEC+ partners that Russia was actually living up to its promised 500,000 barrels per day cut. In other words, perhaps, the only way the Saudi’s cut achieve an OPEC+ impact on the market was to go it alone.
Macroeconomics
U.S. manufacturing and freight activity has now declined for seven months running, writes John Kemp for Reuters, and he notes this has been reflected in (falling) consumption of diesel and other distillate fuel oils as well as industrial electricity sales. Distillate use was down by more than 3% in the first three months of 2023 compared with the same period in 2022. Between December 2022 and February 2023, industrial power sales were down more 2.4% compared with a year earlier.
Geopolitics
US Secretary of State Antony Blinken’s is to visit to Saudi Arabia this week, which in the view of Bloomberg is the latest sign of improving relations. Not in the view of EPM, however, as we have always believed there was too much hype around the US – Saudi disagreements, such as on OPEC+ policy. Relationships that are built over decades do not disappear overnight, is what we fundamentally believe. But this does not make for exciting headlines in the media, which explains its bias towards hyperbole. Anyway, Bloomberg notes the close collaborations underway between the countries on Sudan, Ukraine and space exploration. EPM would add that around the Saudi – Iran meetings in China, Saudi and the US declared they had been in close communications. What helps the continued collaboration is that Saudi is preparing orders worth at least $265 billion from America’s defense and aviation industry giants. And yesterday EPM noted the Saudi’s ambition to collaborate with the US on development of a Saudi based nuclear industry. In summary, therefore, EPM believes the future of Saudi - US relations looks bright.
Energy Transition & Technology News
Singaporean renewable energy company Bluenergy Solutions will conduct tests of tidal turbines, to see if it can power the Raffles Lighthouse which runs on diesel fuel, writes Nikkei Asia. Four tide turbines will be attached to a 10-meter-by-30-meter floating structure. The turbines, each weighing 500 kilograms, will be suspended 3 meters deep in the water. Each turbine will be capable of an output of 7 kilowatts.
Climate Politics
The recent drive by Western lawmakers to oust Abu Dhabi's Sultan Al Jaber as president of this year's U.N. Climate Change Conference should concern Asian nations which are engaged in a tooth-and-nail fight to protect their energy security and economic growth, writes Vandana Hari for Nikkei Asia. The petition may have come to naught, but it ought to be taken seriously, particularly in emerging Asia, given the region's need for access to stable and affordable fossil fuels for the coming years, she says, as in her view it was “was emblematic of a dangerous escalation in radical views and misguided perceptions, especially in the developed West, about the need to eliminate oil and gas as indispensable for achieving net-zero emission targets across the globe”. She highlights the divide between the developed and developing world on this issue. The “Global South” supports the consensus view on the importance of ensuring a just, pragmatic and balanced energy transition, but it also sees oil and gas companies as having an important role to play in the U.N. climate talks. Producers are not seen as an enemy, but as essential partners to help ensure the availability and affordability of fossil fuels until greener alternatives are commercially viable.
Germany is launching a programme that will make available tens of billions of euros for firms facing substantial energy costs, writes Reuters. The programme could have a volume of around 50 billion euros ($53.45 billion) over the next 15 years, and will target helping companies in energy intense industries switch from conventional to renewable energy. The money is to come from a so-called climate and transformations fund, being fed by proceeds from emissions trading and other sources. It aims to provide a counterweight to programmes in other regions, most notably the United States, that could lure companies away from the continent by offering lavish subsidies and more favourable legislation.
The Electrification of Transport
The Global Energy Crisis
Other
The $2 billion market for carbon offsets is heading for a massive reset, as a growing number of sovereign governments announce their intention to tax, regulate or restrict trade in credits generated within their borders, writes Bloomberg. From Indonesia to Kenya to Honduras, the goals are the same: Governments want to retain more of the benefits of emissions-reduction projects, whether as revenue or as credit toward their own national climate goals.