Energy, Politics & Money (EPM) - 15 March 2023
Independent, objective, and politically neutral analysis of global developments curated from sources covering the world of energy, geopolitics, and money.
In this roundup, EPM examines:
The rebound in oil prices following OPEC’s upgrading of Chinese demand growth in 2023
The Goldman Sachs view on how the SVB crisis is likely to affect the global economy
The Trilateral Commission’s recent meeting in India, which called the year 2023 “Year One” of a new global order characterized by regionalization of the global economy driven by government policy
The wave of bankruptcies hitting Europe – as we at EPM predicted
Eon’s warning that the year ahead will remain a period of “crisis” for the energy sector
ING’s decision to cut lending to oil and gas commodity traders
General Energy News
OPEC on Tuesday raised its forecast for Chinese oil demand growth in 2023 due to the relaxation of the country's COVID-19 curbs, reports Reuters. It left the global total growth in demand steady at 2.32 million barrels per day (bpd), citing potential downside risks for world growth.
This updated outlook enabled crude oil price to rise from the 3-months lows established during the SVB crisis, writes Bloomberg. On Wednesday morning, Brent for May settlement rose 1.2% to $78.40 per barrel, while WTI for April delivery gained 1.3% to $72.26 per barrel. To determine the next step, the market will be looking at release of the International Energy Agency’s monthly market report (later on Wednesday), and the Fed decision on the interest rate.
Macroeconomics
In our continued look at how the SVB collapse could affect the global economy, in a recent Bloomberg article on the subject, Goldman Sachs Chief Economist Jan Hatzius says,
It will be hard to be completely confident in the near term that Sunday’s intervention will halt the pressure on smaller banks, who play a large macroeconomic role and could become considerably more conservative in their lending.
Bloomberg says that potentially will create a massive issue for companies as they might lose un-drawn credit lines, while at the same time struggle to get new ones. On the positive side, however, Hatzius believes the SVB induced crisis will make the Fed pause its interest rate hikes saying,
While we agree that more tightening will likely be needed to address the inflation problem if financial stability concerns abate, we think Fed officials are likely to prioritize financial stability for now, viewing it as the immediate problem and high inflation as a medium-term problem.
Geopolitics
Nikkei Asia reports on the Trilateral Commission’s recent meeting in India. In attendance were (retired) foreign ministers, ambassadors, CEOs, bankers and academics, as well as James Baker, director of the Pentagon’s Office of Net Assessment responsible for providing the Secretary of Defense with an assessment of US military capabilities relative to other actors 20 to 30 years down the road. Among the topics of discussion was the structural change to the global economy we have been covering extensively here at EPM, namely regionalization under the influence of government policy. One of the members of the Commission apparently posited:
Three decades of globalization -- defined as integrated, free-market based and deflationary -- has been replaced by what will be a multidecade period of globalization defined as fragmented, not-free-market-based but industrial-policy based and structurally inflationary. This year, 2023, is Year One of this new global order.
In such a world, middle powers like India, Saudi Arabia and Turkey will carve their own paths, weighing the economic, strategic and defense interests, the speaker said.
Nikkei Asia looks at China’s response to the blockade American is attempting to erect around it for semiconductors. The Chinese automotive industry has been tasked to place more domestically produced chips in its vehicles, it says. On November 8 of last year, top auto executives nationwide were summoned to a secret meeting in Shanghai, where they were told to switch completely to Chinese chips by Miao Wei, a former minister of industry and information technology and an influential former auto executive himself. The task is substantial, as China was less than 5% self-sufficient in auto-related semiconductors as of 2021. The idea is that this will create the demand that China needs to build out its domestic semiconductor manufacturing industry. Speculation has grown that China will launch a package topping 1 trillion yuan ($146 billion) to support this build out, while Shanghai and Beijing, as well as Guangdong and Zhejiang provinces, are also preparing large-scale local subsidies for chip making.
Energy Transition & Technology News
The energy transition will transform the mining industry, writes Wood Mackenzie in a Forbes post. By 2050 the energy transition could see nickel (Ni) demand triple, copper (Cu) demand more than double, and demand for Lithium chemicals grow 700%.
The Global Energy Crisis
As EPM forewarned, across large swathes of Europe’s economy, legions of businesses are going bankrupt, writes Naked Capitalism based on Eurostat data. In the EU as a whole the number of bankruptcy declarations initiated by businesses increased substantially (26.8%) quarter-on-quarter in the fourth quarter of 2022, reaching the highest levels on record since Eurostat began collecting EU-wide bankruptcy data in 2015. The number of bankruptcy declarations increased during all four quarters of 2022. As per Eurostat, at the current rate of business destruction it won’t be long before businesses are closing at a faster rate than they are opening. The explanation is that during COVID, businesses were kept afloat by generous government loans. Post-COVID, these loans are to be paid back. But, in an economic environment characterized by inflation, leading to reduced demand. This is pushing many small- and medium-size businesses over the edge.
German energy giant Eon has warned the year ahead will remain a period of “crisis” for the energy sector, writes the Financial Times. It cautioned against being “lulled into a false sense of security”. Leonhard Birnbaum, the chief executive of one of Europe’s largest energy suppliers, said
Prices are still at levels we would’ve considered unthinkable just a few years ago. Moreover, prices remain volatile. Nobody knows how prices will develop in the weeks and months ahead.
Other
ING, the world’s biggest lender to commodities trading, will starting cutting the volumes of oil and gas deals that it finances as it looks for ways to dramatically reduce its carbon footprint, writes Bloomberg. The Dutch bank plans to cut the volumes of traded oil and gas it finances by 19% by the end of the decade. Commodity traders are highly reliant on banks to fund their purchases and shipping of resources. Consequently, any restrictions on lending to traders have the potential to reshape the industry.