by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA | PDF

Recession fears are gripping the oil market, sending prices toward lows last seen in March.

(Source: Barchart.com)

Commercial crude oil inventories fell 1.3 mb compared to the forecast draw of 1.5 mb.  The SPR fell 2.0 mb, putting the total draw at 3.3 mb.

In the details, U.S. crude oil production rose 0.1 mbpd to 12.3 mbpd.  Exports fell 0.1 mbpd, while imports were unchanged.  Refining activity fell 0.6% to 90.7% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace into mid-February, injections first slowed and have since declined, putting storage levels below seasonal norms.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $58.88.  Although OPEC+ is trying to stabilize the market, recession worries are clearly pressuring crude oil prices.

Since the SPR is being used, to some extent, as a buffer stock, we have constructed oil inventory charts incorporating both the SPR and commercial inventories.  With another round of SPR sales set to happen, the combined storage data will again be important.

Total stockpiles peaked in 2017 and are now at levels last seen in 2002.  Using total stocks since 2015, fair value is $95.17.

Market News:

• OPEC+ is warning the IEA that it should be careful about discouraging oil investments as doing so could lead to higher prices and shortages. We are still seeing considerable pressure being put on banks to avoid oil and gas funding.
• China lost its crude oil self-sufficiency in the mid-1990s. Since then, it has become an increasingly important oil importer.  As we noted in a recent Bi-Weekly Geopolitical Report, China has been deeply worried about energy security for some time.  It has taken numerous steps to address this issue, including building alternative pipelines that avoid the Straits of Malacca, a key chokepoint in Asia, and increasing supplies from Russia and Central Asia.  China is also increasing domestic production.  Although it seems likely that China will again become self-sufficient, it is clearly taking aggressive steps to reduce supply risk.
• In the wake of the recent approval of the Willow oil project in Alaska, the Biden administration is revisiting a major LNG project also located in Alaska. The drive for energy security conflicts with the president’s coalition that wants to curtail fossil fuel use and production.  Most presidents, at some point, are forced to disappoint elements of their coalition.  This decision will help with the energy shortfall but could weaken his re-election chances.
• For years, Iraq has wasted associated natural gas from its oil production. The Halfaya oil field is about to begin processing this gas for use in firing the Iraqi electrical grid (and consequently import less electricity from Iran), and perhaps at some point, it can export the natural gas to other parts of the region.  French and Chinese oil firms are involved in the project.
• As part of China’s stimulus to recover from COVID-19 lockdowns, it may boost its coal consumption.
• The Biden administration is granting a waiver that will allow refiners to continue to blend ethanol at 15% even though it will violate clean air regulations. Because the evaporation of ethanol speeds up in warm weather, the EPA usually lowers the allowable amount of ethanol to be blended with gasoline in the summer.  Keeping the winter standard in place could please the farm belt.
  • Although the U.S. hasn’t built a greenfield oil refiner since 1977, the industry has increased capacity through expansions of existing facilities. Exxon (XOM, $108.52) announced that a 250 kbpd expansion of its Beaumont, TX, facility has become operational.

 Geopolitical News:

• China may be building military installations, or at least intelligence-gathering platforms, in the UAE. The emirate is home to the Al Dhafra Air Base which is used by the USAF.
• In the debate over the “petrodollar v. petroyuan,” the reserve asset is a key issue. There is an argument that the petroyuan can’t work because China won’t create a reserve asset.  If an oil exporter accepts CNY, what will they do with it if they can’t buy Chinese financial assets?  One solution is to use the funds for investment.  We note that China is building a steel factory in the Kingdom of Saudi Arabia (KSA).  The KSA has indicated that it will accept CNY for payment, so using the currency to fund Chinese investment in the country is one solution.
  • We also note that TotalEnergies (TTEF.PA, EUR, 54.57) and Sinopec (SNPMF, $0.65) have both bid on a KSA natural gas project.
• Iran seized two oil tankers this week that held crude oil destined for the U.S. One of the tankers is leased by a Chinese shipper but sailed under the flag of the Marshall Islands, and the second carried a Panamanian flag.  These actions may have been in retaliation for the U.S. redirecting an Iranian vessel bound for China, which was carrying crude oil.
  • A senior Iranian cleric was assassinated, and it is unclear who was behind the killing. Ayatollah Abbas Ali Soleimani was a former envoy to the troubled region of Baluchistan.  The assassination of religious figures is not common in Iran, but unrest has been elevated recently over hijab rules.
  • Iran has not released inflation data for two months, likely because it doesn’t want to reveal bad news.
  • Indian and Iranian officials met this week, and Tehran is encouraging India to use local currencies in the oil trade to reduce contact with the U.S. dollar system. India should welcome that development.
• Russia considers Armenia and Azerbaijan to be included in its sphere of influence. These two powers have been in some sort of conflict for decades, however, which complicates matters for Moscow.  In an interesting twist, the U.S. is holding talks between the two nations to moderate tensions, a move that will be seen by the Kremlin as meddling.  We note that the natural gas supply line from Russia to Armenia has been temporarily suspended for repairs just as the discussions appear to be getting underway.
• In a recent Bi-Weekly Geopolitical Report, we noted that the KSA has indicated what it would require in order to normalize relations with Israel. Reports suggest the U.S. is considering its options.
• Iranian officials fleeing the violence in Sudan were evacuated by the KSA military. These officials arrived in Jeddah this week.  The news adds to evidence of the thaw between the KSA and Iran.
• The impact of sanctions has mostly been to disrupt oil flows. Although Russia is still exporting significant levels of oil and natural gas, it is earning less due to the increased cost of transportation.  India, it appears, is a prime beneficiary since it is taking Russian crude oil and processing it into products to be sold to Europe.
• Resource nationalism is becoming increasingly common. Last week, we noted that Chile has moved to nationalize its lithium industry.  We discuss this in further detail in the Alternative Energy section below.
• We continue to monitor updates on the Nord Stream I and II attacks. Denmark reports that Russian vessels that carry small submarines were seen in the area just before the blast.
• Turkmenistan has started exporting natural gas to Pakistan for its eventual sale to Afghanistan. Turkmenistan wants to build pipelines to South Asia to boost its exports but is finding it hard to secure routes through Afghanistan.
• A German firm’s investment in Siberian natural gas fields may be supporting Russia’s war effort.
• Iran is looking to swap oil for Chinese cars.
• Cuba was unable to hold May Day parades due to a lack of fuel.

 Alternative Energy/Policy News:

• Every so often, we come across something that we didn’t expect. Oliver Stone, the movie director, has produced a documentary that makes the case that the only way to address decarbonization is through nuclear power. Although we agree with this position, it’s still a shock to see someone who generally leans “left” come out so strongly in support of nuclear power.  Here is the movie trailer.
  • China is expected to have the world’s largest installed nuclear power capacity by 2030. Currently, the U.S. has the world’s largest.
• California has unveiled new rules on trucking that will force the industry into zero-emissions vehicles, but there are numerous loopholes that will give the industry some leeway. We do note that the state can’t implement the rule without EPA approval, although it is expected to get it.  These new rules are coming at a time when the industry is struggling.
  • Apparently, other states are also looking to eliminate internal combustion engine (ICE) vehicles.
  • At the same time, the Supreme Court is looking at cases that may restrict the power of regulatory bodies. This concept has been a concern of conservatives who worry that regulators could become overly powerful.  Specifically, the court will hear litigation surrounding the “Chevron (CVX, $158.65) deference,” which gives regulators leeway when legislation isn’t clear.  We expect the court to impose limits on this deference.
• New York is looking to ban natural gas heating and stoves. Germany wants to ban all gas and oil home heating.
• One of the major hurdles to alternative energy is scalability. Vaclav Smil’s work on energy concentration raises strong objections to alternatives.  The history of modern society is one where energy sources become increasingly concentrated, e.g., coal had more embedded power than wood, petroleum more than coal, uranium more than petroleum, etc.  Although it is possible to get energy from sun, wind, and biofuels, the scale required to match current consumption isn’t yet possible.  This op-ed discusses the issue with great clarity.
• Pumped storage is making a comeback. This process pumps water uphill to a reservoir when electricity demand is low (and cheap) and allows it to run downhill through turbines when demand is higher (and prices are, too).  Although this “battery” is somewhat limited by geography, there are apparently enough sites to trigger an expansion of the method.
• Chile’s decision to nationalize its lithium industry is roiling the market and sending shares of Chilean companies lower while lifting shares of those that produce the metal outside of Chile. Still, Chile is the world’s largest producer, and state interference will almost certainly lift prices.
  • There is growing concern that other mining nations may take similar steps. Mexico has passed legislation that shortens mining concessions, tightens regulations on mining waste, and requires that local areas share in the profits.  The Obrador administration has not approved any new concessions since he took office.  It is unclear if (a) he will approve new projects with this new law, and (b) if mining firms will be interested in investing.
  • Although there will be environmental concerns, Germany is reopening mines to secure important minerals.
  • We note that EU “rewilding laws” are starting to conflict with wind and solar farms.
• Although the Biden administration continues to claim it doesn’t want to “decouple” from China, and instead wants to “de-risk,” it may be a distinction without a difference. However, if the U.S. tries to avoid China in the solar energy market, it may find it difficult to overcome China’s dominance.
  • India and China want to avoid “hard targets” for cutting carbon emissions.
• EVs are much heavier than ICE cars. The battery is the issue, and the overall vehicle weight is becoming a problem for traffic safety.
• Ford’s (F, $11.92) earnings this week highlighted the large investment costs needed to transition to EVs. The electric division reported losses of $722 million.
• Occidental Petroleum (OXY, $61.17) hopes to sell the CO₂ it captures for industrial use.
• Geothermal projects are being developed in Africa.
• Researchers are testing to see if aquifers can be used for long-term energy storage.
• The EPA will allow companies in Louisiana to begin storing CO₂ in injection wells. Notwithstanding the scaling issue, having a place for the gas is necessary if carbon capture has any hope of working.
  • Major banks are increasing their support for carbon capture projects.
  • There are a number of “clean ammonia” projects underway which will need a place to store the CO₂ generated during the process.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA | PDF

After gapping two weeks ago, oil prices have filled the gap on worries about the global economy.

(Source: Barchart.com)

Commercial crude oil inventories fell 5.1 mb compared to the forecast draw of 1.5 mb.  The SPR fell 1.0 mb, putting the total draw at 6.1 mb.

In the details, U.S. crude oil production fell 0.1 mbpd to 12.2 mbpd.  Exports rose 0.2 mbpd, while imports rose 0.1 mbpd.  Refining activity rose 0.5% to 91.3% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace into mid-February, injections first slowed and have since declined, putting storage levels below seasonal norms.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $58.47.  The recent actions of OPEC+ are clearly designed to prevent this sort of price from emerging.

Since the SPR is being used, to some extent, as a buffer stock, we have constructed oil inventory charts incorporating both the SPR and commercial inventories.  With another round of SPR sales set to happen, the combined storage data will again be important.

Total stockpiles peaked in 2017 and are now at levels last seen in 2002.  Using total stocks since 2015, fair value is $94.82.

Market News:

• As U.S. oil production rises, associated natural gas production is also rising steadily, leading to a glut. This supply situation is keeping U.S. prices low and is encouraging the expansion of American LNG capacity.  However, higher interest rates and permitting issues are acting to constrain projects, thus leading to persistently low prices of natural gas.
• China’s large SOE refiners are getting privileged access to cheap Russian crude oil.
• Natural gas finds in the eastern Mediterranean raised hopes that nations in that region could profit from these discoveries. In addition, there was optimism that this gas could pave the way for improving previously fraught relations between states.  However, on the latter front, only modest changes have emerged.

 Geopolitical News:

• Last summer, there was a great fear that high natural gas prices would lead to economic turmoil in Europe. Luckily, winter temperatures were unusually mild.  Lower demand coupled with ample LNG flows (partly helped by China’s COVID-19 lockdowns) led to a sharp drop in prices.  At the end of the winter heating season, Europe’s natural gas storage was at 56% of capacity compared to 34% in a typical winter.  Although these high levels do reduce the impact of the loss of Russian natural gas, a cold winter will put Europe at risk regardless of inventory levels.  As we discussed recently, the oncoming El Niño event increases the odds of a cold northern European winter.
• Russia is receiving increasing levels of oil payments in CNY and RUB. Avoiding the USD for settlement makes it easier for Russia to circumvent Western sanctions.
  • An Indian tanker company has lost insurance coverage by agreeing to ship Russian oil at a price above the G-7 cap.
  • Despite efforts to evade sanctions, there is evidence that the oil price cap has reduced Russian oil revenue.
• As Russia increases oil sales to China and Asia, West African producers are losing market share. This is allowing them to move oil to Europe.
• There are reports of additional, broader sanctions on Russia. However, we are doubtful these will be implemented.
• Due to insider bid-rigging, Venezuela has potentially lost billions in the oil trade.

 Alternative Energy/Policy News:

• EV sales are starting to accelerate, and the industry is increasingly showing its dependence on China for both sales of the vehicles and their key components. First, sales:

(Source: IEA)

• As the chart shows, sales are lifting, with the bulk of those occurring in China. The IEA reports that 20% of car sales this year will be EVs.  Second, China is beginning to export EVs which could roil global car markets.

• The expansion of EV sales will begin to destroy oil demand by the end of the decade.

(Source: IEA)

• Even under existing policies, 5.3 mbpd of demand will be lost to electrics. This sort of information will tend to dampen oil investment, and, paradoxically, could be bullish for crude oil.
  • Chile is planning on nationalizing its lithium industry. The country has the world’s largest lithium reserves, but nationalization raises fears that supplies will become constrained.
  • Abandoned oil wells could become a source of lithium. Often, brine exists in oil wells, and once evaporated, this product can be used for extracting lithium.
  • On the other hand, lithium may be replaced by sodium. Chinese EV manufacturers are planning on rolling out sodium-battery-powered cars this year.  As lithium prices rise, firms are looking for alternatives to the metal, and sodium is chemically similar.  As we have noted before, the current state of sodium batteries is that they lack the range of lithium.  However, they appear to have longer charge/discharge cycles (meaning they last longer) and perform better at low temperatures.
  • Another emerging battery technology is solid state batteries. These batteries would have a longer range and a faster rate of recharge than what is currently available.  If this technology becomes scalable for autos, it could lead to rapid electrification of transportation.  Even with current lithium technology, improvements are emerging.
• A battery is stored energy. We are used to thinking about batteries as a chemical process, but in reality any sort of energy storage that can be used later is technically a battery.  That energy can also be kinetic.  Renewable energy sources are notorious for creating excess electricity as particularly sunny or windy days can create more energy than is needed at any given time.  The startup Energy Vault is building facilities in Texas and Shanghai that will lift 24-ton blocks of dirt during periods of excess electricity, and then lower them to spin turbines to generate electricity when it is needed.
• We continue to note news reports on geoengineering. Although controversial, as climate problems emerge, the use of this technology to address them will become attractive.
• The EU is adjusting rules to encourage the use of sustainable fuels in aviation.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA | PDF

After gapping last week, prices are consolidating.

(Source: Barchart.com)

Commercial crude oil inventories fell 4.6 mb compared to the forecast draw of 0.9 mb.  The SPR fell 1.6 mb, putting the total draw at 6.2 mb.

In the details, U.S. crude oil production was unchanged at 12.3 mbpd.  Exports rose 1.8 mbpd, while imports rose 0.1 mbpd.  Refining activity rose 1.7% to 91.0% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace into mid-February, injections first slowed and have since declined, putting storage levels in line with seasonal norms.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $56.81.  The recent actions of OPEC+ are clearly designed to prevent this sort of price from emerging.

Since the SPR is being used, to some extent, as a buffer stock, we have constructed oil inventory charts incorporating both the SPR and commercial inventories.  With another round of SPR sales set to happen, the combined storage data will again be important.

Total stockpiles peaked in 2017 and are now at levels last seen in 2001.  Using total stocks since 2015, fair value is $94.11.

Market News:

• Climate activists are bewailing the continued investments from financial firms into the fossil fuel industry. Canadian banks were highlighted for their continued support of the oil and gas industry.  These reports suggest activists will continue to pressure the financial services industry in a bid to reduce lending and investment into fossil fuels.
• The bearish case for oil rests on demand concerns. There is evidence that global diesel demand is declining, adding to signs of a global recession, which is bearish for oil demand and prices.  However, we note that China’s refiners processed nearly 15.0 mbpd of crude oil in March, a new record.
• At the same time, the Biden administration’s recent moves to expand oil and gas production isn’t garnering much support from industry executives.
  • The administration has approved natural gas exports from Alaska. Although environmentalists are upset, the increased supplies will likely go to Asia and reduce Russia’s gas sales.
  • The G-7 finance minister’s meeting highlights the ambivalence of the group toward natural gas. Over the long term, the goal is to shift away from fossil fuels;  however, it is unclear just how long that “long term” will take.  To ensure ample supplies in the here and now, investment will be necessary.  For investors, though, the fear of stranded assets is a strong consideration, which means that longer-term projects probably don’t get funded.  This situation suggests higher prices are likely.  The IEA’s recount of the range of potential outcomes shows the dilemma for investors.

• The state of California cannot ban natural gas hookups in new buildings.
• We continue to monitor the supply chain shifts caused by the war in Ukraine as well as the consequent sanctions. We note that Russia is redirecting oil and product supplies away from Europe to other parts of the world.  The disruption has boosted U.S. exports of oil, natural gas, and associated products.
• DOE Secretary Granholm reiterated that the administration was prepared to rebuild the SPR if “it is advantageous to taxpayers.” Which means, most likely, that the injections are not expected.
• China is aggressively expanding its coal supplies.
• After the world dealt with an unusually long La Niña cycle, there is increasing evidence that we are rapidly shifting to a El Niño cycle. The latter increases the chances of Midwest drought (which would lift crop prices, including ethanol), reduces hurricane numbers (bearish for natural gas) and often leads to wet conditions across the South.
  • Although unrelated, Asia is dealing with an early season heat wave. India is experiencing temperatures in excess of 104°F.  Thailand recorded highs of 113.7°F with multiple locations within the country setting new highs.
• Although the investment took over two decades to bring to market, Guyana is poised to rapidly add to global oil supplies.
• Turkey has started natural gas deliveries from its offshore drilling in the Black Sea.
• Due to a strike in Nigeria, Exxon (XOM, $115.02) has declared force majeure on some of its oil contracts.

 Geopolitical News:

• Saudi Crown Prince Salman announced that 4% of Saudi Aramco (2222, SAR, 34.65), worth about $80 billion, will be moved to the nation’s sovereign wealth fund. The reason is to support the Kingdom of Saudi Arabia’s economic diversification.  Although the amount doesn’t necessarily suggest a rapid move away from fossil fuels, the “direction of travel” suggests less investment in oil and gas, and more in other parts of the economy.
• The IEA admits that the price cap on Russian oil has been violated. Russian oil exports are now exceeding prewar levels with nearly all of the oil flows going to China and India.  Russia is also apparently selling oil in the Far East that is being exported by tanker, but this voyage is short enough to avoid insurance, which means that buyers can violate the price cap.  The U.S. is warning that it will begin cracking down on this practice.
• Russia has surprisingly little domestic oil storage. Because of this lack of storage capacity, it must sell most of what it produces.  The country has announced that it will build new storage facilities which will give it more flexibility for timing sales.
• China is proposing new natural gas pipelines from Kazakhstan to diversify its sources of the product.
• Given China’s dominance in renewable energy and EV components, Chinese companies are often participants in foreign investment projects. However, due to deteriorating relations between China and the West, political resistance to these projects is growing.

 Alternative Energy/Policy News:

• Planting trees is often touted as a solution to elevated carbon dioxide levels. As it turns out, it’s much more complicated than just increasing the number of trees.
• Ember, a firm that tracks energy data, indicates that renewables are growing rapidly and now account for 40% of the world’s electricity supply. However, we doubt the data takes into account the reserve power required to ensure stable baseload when the climate or the clock fail to cooperate (when the wind doesn’t blow and/or the sun doesn’t shine).
• Last week, we discussed the Biden administration’s proposed emissions rules that would strongly tilt the market toward EVs. As one would expect, the auto industry is not wild about the recommended regulations.
• The government released its list of EVs and plug-in hybrids that qualify for a tax credit. The new list excludes most foreign models.  Here is a link to the website to see what does qualify.  Look for European auto makers to begin considering a shift in the production of EVs to the U.S.
• Volkswagen (VWAPY, $13.98) announced a joint venture to make EV batteries in Indonesia.
• Panasonic (PCRFY, $9.28) announced it is considering a plan to build an EV battery factory in Oklahoma.
• Germany has closed its last nuclear power facilities. The shutdown, originally scheduled for December, was delayed due to the war in Ukraine.  The decision to decommission the facilities means that Germany is even more vulnerable to supply disruptions.
• A developing economy alliance on geoengineering has been formed.
• China is building a hydrogen pipeline from Inner Mongolia to its eastern cities.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA | PDF

Crude oil gapped higher in early April on reports that OPEC+ was cutting production targets.  It has held those gains and is now moving above chart resistance at $82 per barrel.

(Source: Barchart.com)

Commercial crude oil inventories rose 0.6 mb compared to the forecast draw of 1.7 mb.  The SPR fell 1.6 mb, putting the total draw at 1.0 mb

In the details, U.S. crude oil production rose 0.1 mbpd to 12.3 mbpd.  Exports plunged 2.5 mbpd, while imports dropped 0.9 mbpd.  Refining activity declined 0.3% to 89.3% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace into mid-February, injections first slowed and then declined for two weeks.  The mostly steady report for last week puts stockpiles near seasonal norms.  Past history would suggest there will be mostly steady inventory levels into early June.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $55.36.  The actions of OPEC+ this week are clearly designed to prevent this sort of price from emerging.

Since the SPR is being used, to some extent, as a buffer stock, we have constructed oil inventory charts incorporating both the SPR and commercial inventories.  With another round of SPR sales set to happen, the combined storage data will again be important.

Total stockpiles peaked in 2017 and are now at levels last seen in 2001.  Using total stocks since 2015, fair value is $93.33.

Market News:

• The DOE released its Short-Term Energy Outlook this week. The government lifted its oil price forecast by around $2 per barrel in light of the recent OPEC+ supply cuts.
• The EPA announced massive changes to pollution targets for the auto industry which, if implemented, will almost certainly trigger a rapid shift to EVs. At this juncture, we view this news as more of a trial balloon, but we do think this announcement suggests the “direction of travel” for regulations.  Once implemented, these regulations would eventually depress oil demand.  In the near term, though, they could have just the opposite impact since discouraging investment will keep oil supplies tight.  Also, a rapid shift to EVs will almost certainly increase our dependence on China for key components of the vehicles.  And, the U.S. electrical grid isn’t ready for such a major adjustment.
  • Related to the investment issue is pressure brought by environmental groups and others against the financing of oil and gas projects. The problem with such movements is they run the risk of causing higher oil and gas prices.
  • Another tactic of the environmental groups has been to use the courts to delay pipeline projects. The Mountain Valley Pipeline faces another delay due to a court decision.  This outcome highlights the call from the industry to streamline the permitting process.
• As we noted last week, the OPEC+ decision to cut production is pushing Russia’s oil price above the cap. It is looking increasingly likely that the cap’s effectiveness will be reduced.
  • Although the cartel’s decision has been taken as bullish by the oil markets, it is important to note that there are other oil producers increasing output which will partially offset the cut in production by OPEC+. In fact, the higher prices caused by the cartel’s decision could bolster the case for higher output.
  • Russia announced its oil product fell 0.7 mbpd in March, a greater decline than projected as earlier estimates suggested a 0.5 mbpd drop. Revenues are also falling.  Russia’s Urals oil price benchmark has been weak, although, as we note above, the recent decisions to cut production may improve Russia’s revenue in the coming months.
• Evidence is mounting that a key consequence of the war in Ukraine and added sanctions is a massive restructuring of oil trade flows. This change is leading to longer lead times for shipments and will likely cause greater stockpiling.
• Exxon (XOM, $115.05) announced it is abandoning a drilling project deep offshore of Brazil due to the inability to find commercially viable oil fields.
• Initially after the war in Ukraine began the RUB fell sharply; however, it recovered rapidly as higher oil prices boosted Russian revenue. Reports that Shell (SHEL, $60.58) will repatriate $1.2 billion from asset sales has triggered depreciation in the RUB.

 Geopolitical News:

• The U.S. has sent the USS Florida, a guided missile submarine, to the Persian Gulf region. The U.S. often has a naval presence in this region, but this sub could be viewed as a show of force against Iran.
• The U.S has been restricting China’s ability to import semiconductor chips and the equipment for fabricating them. China is considering retaliation in the form of restricting rare earth exports.  Rare earths are critical in technology and alternative energy.
• Last week, we noted that China hosted a meeting between diplomats from the Kingdom of Saudi Arabia (KSA) and Iran. Both sides agreed to resume flights between the two Middle Eastern nations.
• Officials from the KSA are meeting in Yemen for talks with rebel groups. One potential outcome from the recent détente between Iran and the KSA could be a ceasefire in the long-running civil war in Yemen.
  • Graham (R-SC) had a “productive meeting” with Crown Prince Salman this week. Graham has been critical of the crown prince in the past, so the meeting might signal something of a thaw in U.S./KSA relations.
• Although the U.S. political class is moving decidedly against China, the business class is clearly loath to break ties. We think that eventually businesses will be forced to choose.
• Recently, we reported that schoolgirls in Iran were being poisoned in their schools. Apparently, the poisonings have continued.  It isn’t clear if Iran is facing a dissident movement within Shia Islam, or if the acts are being perpetrated by radical Sunni groups.  We note that the Islamic State and Taliban groups oppose education for women and so these acts may be being perpetrated by groups outside of Iran.
• Iran is apparently in talks with China and Russia to provide components for missile fuel. Russia is attempting to acquire ammonium perchlorate which is used in solid fuel propellants in missiles.  If Iran supplies the component, it will surely face additional sanctions, but at the same time, Tehran may be reluctant to sell the fuel to Russia because it has its own needs for missile fuel.
• Recent leaks of classified materials indicate that Russian hackers were targeting Canadian pipelines. Although the hackers claimed success in penetrating the networks, there were no reports of disruptions from cyberattacks.

 Alternative Energy/Policy News:

• As the energy transition gains momentum, countries are increasingly applying export controls on key materials. If this policy continues, it will slow the progress of the transition and drive up costs.
  • We are also seeing automakers vertically integrate their supply chains, a characteristic observed in the 1920s when auto production reached a mass market. The latest example is General Motors’ (GM, $35.37) investment in a lithium technology startup EnergyX.
• Although lithium continues to dominate the auto battery market, Chinese researchers are working on sodium batteries. Lithium batteries remain superior, but reports suggest that progress is being made in replacing lithium with sodium.  Sodium is far cheaper than lithium and batteries made from sodium hold a charge better in colder temperatures.  The U.S. does have one great advantage in this race— about 90% of soda ash, the input product for sodium, is mined in America.
• A sizable community solar power project is underway in Georgia. The project has received some funding from the Inflation Reduction Act.
• As the market share of EVs rise, the issue of charging stations remains a problem. However, we note that Walmart (WMT, $150.47) announced it will begin expanding the number of charging stations in its parking lots.  Due to the ubiquitous nature of Walmart stores, this decision could expand the availability of stations.  At the same time, given the time required to charge an EV, it could give Walmart a “captured audience” of shoppers.
• The Inflation Reduction Act restricts the tax credit that comes from buying an EV or a plug-in hybrid. However, one way to get around the restrictions is to lease such a vehicle.  Commercial buyers have fewer restrictions, meaning that although the lessor gets the tax credit, there is an incentive to at least share the credit with the lessee to “do the deal.”
• In China, Tesla (TLSA, $187.99) is facing increasing competition from local EV brands.
• Although geothermal energy holds great promise, there is concern that it won’t be possible to scale the energy source in a widespread manner.
• The U.S. is opening two new nuclear power stations in Georgia.
• Europe is expanding its hydrogen pipeline network.

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