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

Crude oil jumped on the unexpected decision by OPEC+ to cut production targets.

(Source: Barchart.com)

Crude oil inventories fell 3.7 mb compared to the forecast of a 1.8 mb build.  The SPR fell 0.4 mb.

In the details, U.S. crude oil production was unchanged at 12.2 mbpd.  Exports rose 0.7 mbpd, while imports increased 1.8 mbpd.  Refining activity declined 0.7% to 89.6% 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 the past two weeks, putting levels near seasonal norms.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $55.48.  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 $94.11.

Market News:

• The big news this week was the decision by OPEC+ to cut production targets. Consensus going into the meeting had been for no change, and the announced cut, between 1.0 to 1.5 mbpd, was a shock that sent oil prices higher.
  • This decision was a major disappointment for the Biden administration. As we have previously noted, presidential approval ratings are closely tied to gasoline prices and the rise in crude oil will likely lift these prices going into summer.  We believe there is a broad difference of opinion on the “proper” price of oil.  We suspect the West (obviously including Washington) would prefer a price around $60 per barrel, but with this action the oil-exporting countries are signaling a price above $80 per barrel.  That scenario raises the odds of gasoline prices at $4 per gallon.
  • Last week, we noted that the U.S. had delayed rebuilding the SPR (as regular readers know, we doubt the reserve will ever be refilled). According to reports, Riyadh did not take the lack of injections well.
  • The U.S. wasn’t the only target for Riyadh. The Kingdom of Saudi Arabia (KSA) also wanted to punish bearish speculators.
  • The modest rise in U.S. oil production has increased OPEC+ market power. This gives the cartel the ability to force prices higher.
• The Dallas FRB’s quarterly survey of the oil and gas industry in its district suggests production is stalling. The overall index of business activity has sharply declined from 30.3 to 2.1.  Both oil and gas production are reporting declines.
• China has opened a new refinery that specializes in heavy oil, and the heightened demand is lifting prices.
• The state of California is preparing to regulate profit margins on gasoline. Similar measures in the 1970s led to shortages and gas lines.  Although a similar outcome is possible in this instance as well, it does depend on how the price intervention is structured.  It should be noted that the California gasoline market is isolated, so this action will probably have little effect outside of the state.
• LNG projects are facing increasing financing costs as interest rates rise. This factor combined with growing input costs for labor and construction materials may potentially slow development.  The recent banking problems are creating financing problems as well.  Less LNG capacity is a risk for Europe.
• The Brent oil price is the global benchmark. However, due to falling production among the components of the benchmark, S&P/Platts (SPGI, $340.01) announced it will begin to include U.S. Midlands crude oil in the benchmark.  This decision could affect the Brent/WTI spread going forward.
• The Biden administration has approved a large Gulf of Mexico drilling auction. Although the administration initially was hostile to the oil and gas industry, its recent actions in Alaska and now in the Gulf suggest that the White House now realizes that oil and gas are necessary for economic growth and security.
• For the first time ever, China recently settled an LNG shipment in CNY instead of USD.
• It would stand to reason that the expansion of EVs should reduce oil consumption, but given the life of gasoline engines and the steady demand for petrochemicals, the “end of oil” will probably take longer than expected. However, EVs may play havoc on refining.
• Environmentalists have been using the courts to delay or kill pipeline projects, but it appears the Mountain Valley pipeline might finally be approved.
• Last week, we noted that oil flows from Kurdistan had been halted due to an arbitration decision that favored the Iraqi government. The halt has apparently also led to a delay in debt payments.  It does appear that we are close to a resumption in oil exports from northern Iraq.
• Nigeria is boosting investment with the goal of increasing its oil reserves.
• Freeport LNG is finally back to full output after the facility suffered a major fire last summer.
• Sanctions on Russia have clearly disrupted global oil flows. We note that Russian diesel is moving to the Middle East.  If this product gets reexported (as we expect), then the Middle East is essentially “laundering” this diesel for resale to Europe and other parts of the world.

 Geopolitical News:

• Russia and India have agreed to an export arrangement where the former will boost supplies to the latter. The two countries will use the Dubai price for the transactions.  Russia is steadily shifting its focus onto Asia.
  • Japan bought Russian oil at a price above the cap; Tokyo has claimed an exemption. As prices rise due to the OPEC+ production target cuts, other nations may be forced to violate the cap as well.
• There are growing concerns that Russia is using substandard oil tankers to skirt sanctions, which will increase the odds of an accident.
• Ukraine’s energy minister is arguing that oil companies should pay to rebuild the country’s infrastructure because the war has boosted these companies’ profits.
• The KSA is joining the Shanghai Cooperation Organization, a China-led Eurasian security bloc. As we have noted recently, the KSA is rapidly aligning with China.  The Saudis are also implementing a harder line on nations that receive their aid.
  • There are reports that diplomats from the KSA and Iran will meet in China.
• When Venezuela was under sanctions, it relied on rogue traders to move oil. It seems that these brokers were the primary beneficiaries of the arrangement.

Alternative Energy/Policy News:

• Ford (F, $12.30) announced a joint venture with two other companies (one Chinese) to process nickel in Indonesia. Automakers are rapidly trying to secure supply chains for EVs.
• The Biden administration has issued its guidance on the Inflation Reduction Act subsidies. As often occurs with White House policies, there was an attempt to find a middle ground by giving enough leeway to help allies while still being restrictive enough to support U.S. investment.  Such attempts tend to be unpopular, and we are already seeing opposition grow in Congress.  Given China’s dominance in EV batteries and minerals, the rules are rather fuzzy on Chinese content and subsidies.  We suspect the administration wants to support EV adoption, which means that China will be a part of that goal.
  • China’s dominance of these key industries made it into Jamie Dimon’s CEO letter to shareholders.
  • Western moves to reduce China’s dominance in rare earths have been noted in Beijing.
• European utilities are investigating whether they can use abandoned mines as “gravity batteries” to store energy from wind and solar and unwind the batteries when intermittent outages develop.
• One issue with EVs is what to do with the depleted batteries. We are seeing a growing effort to recycle batteries, not just from cars but from other sources as well.
• As we have noted recently, geothermal energy is also attracting attention.
• A recent study suggests that once the world engages in geoengineering, it may be trapped into maintaining it for a long period of time. Often, the process is seen as a short-term stopgap measure.
• Although EVs dominate the alternative fuel mandates, hydrogen is also a viable competitor.

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

Crude oil decisively broke its recent $72-$82 per barrel trading range.  Recent weakness was exacerbated by funds that sold out of long crude oil positions.  Prices have recovered to the lower end of the previous trading range.  We will see if this acts as resistance.

(Source: Barchart.com)

Crude oil inventories plunged 7.5 mb compared to the forecast of a 1.5 mb build.  The SPR was unchanged.

In the details, U.S. crude oil production fell 0.1 mbpd to 12.2 mbpd.  Exports fell 0.3 mbpd, while imports dropped 0.8 mbpd.  Refining activity jumped 1.7% to 90.3% 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 this week due to the rise in refinery activity.  Levels are nearing seasonal norms, which should relieve the bearish pressure on the market.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $54.26.  Although we think there is enough geopolitical risk in the world to prevent a decline to this level, it does suggest that the oil market is dealing with rather weak fundamentals.

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 $93.58.

Market News:

• We have held a generally bullish position on oil and gas because of persistent underinvestment. The ESG movement has raised concerns that long-term demand will fall, and since many projects have long lead times, investment has been discouraged.  When investors buy into a “sunset” industry, they don’t expect growth but instead demand high current returns in the form of high dividends and stock buybacks.  Investment, which reduces current returns, tends to be frowned upon.  The outcome is that oil and gas prices will likely remain elevated until energy alternatives grow enough to render oil and gas irrelevant.  That might take a long time.
  • Drillers have gone into this year with reduced hedges and are therefore vulnerable to price declines. This fact might make oil equities more sensitive to falling prices.
• The Ukraine war has led to a major restructuring of global oil and gas flows. As Russian oil is increasingly sold to China and India, the U.S. has become a key exporter to the EU.  Similar patterns are emerging for LNG.  As we noted last week, Russia has replaced the Saudis as the lead supplier to China.  China and India are taking advantage of this restructuring by purchasing Russian oil at lower prices.
• China’s recovery from its Zero-COVID policy is expected to lift oil demand. Forecasters expect that this recovery will account for 40% of this year’s growth in demand.
• The Chamber of Commerce is pressing to speed up permitting for energy projects. Interestingly enough, it’s not just oil and gas companies that are supporting the effort.
• Western sanctions have changed global oil flows. One result of this rerouting is a glut of diesel fuel in Asia.
• Despite promises, the Biden administration continues to delay the rebuilding of the SPR. Our position is that these delays will become permanent.

Geopolitical News:

• Last week, there was an attack on a U.S. military post in eastern Syria. Iranian-backed militants were involved, and the U.S. has retaliated with air strikes.  Although the U.S.’s commitment to the region is being questioned, it is important to remember that the American military footprint in the Middle East is still substantial.  The attacks have increased tensions between the U.S. and Iran.  It is arguable that Iran is using such attacks to encourage the continued withdrawal of the U.S. from the region.  Meanwhile, the administration is trying to avoid escalation while also maintaining a presence in Syria.
  • Internal tensions within Iran remain elevated. The leadership is trying to decide if its harsh response should be adjusted.
• Oil exports from the Kurdish region of Iraq have been halted as Iraq has won an arbitration ruling concerning the control of oil flows from the area. The news was offered as the reason for this week’s bounce in crude oil prices, although we suspect that technical selling had been exhausted.
• Russia has become a major investor in Iran. We are seeing a China/Russia/Iran bloc emerge fostered by Western sanctions.
  • The U.S. has added sanctions on firms involved in the Iranian drone supply chain.
  • Russia is supplying Iran with cyberweapons.
  • Russia is working to restore relations between the Assad regime in Syria and the Kingdom of Saudi Arabia (KSA).
  • Although Russia was unable to get the UN to investigate the Nord Stream pipeline explosions, Moscow says it will continue to call for international investigations.
• Russia has cobbled together an aging fleet of oil tankers to evade Western sanctions. There are growing concerns that the state of these vessels could trigger an environmental incident.
• Although Russia was initially able to evade sanctions and benefit from high oil prices, as the war grinds on, there is growing evidence that the Russian economy is starting to topple. There are increasing reports of labor shortages, caused by military recruitment and draft avoidance, and the lack of Western investment is beginning to take a toll.  If this continues, it could lead to less oil being available on world markets.
• We have been monitoring the rapidly evolving diplomatic situation in the Middle East. One element of that change was China’s involvement in fostering a détente between Iran and the KSA.  This change has somewhat isolated Israel, and we note that the Israelis, who view Iran’s nuclear program as an existential threat, are warning that uranium enrichment above 60% may trigger a military response.
  • The KSA announced it will invest and participate in the construction of a new refinery in China. The Saudis have agreed to store oil in China as well.
  • The KSA has formally joined the Shanghai Cooperation Organization, a China-led group of like-minded nations. This action is further confirmation of the KSA’s drift toward Beijing.
  • The biggest prize in the region, in terms of oil production, might be Iraq. The country produces about 4.5 mbpd, but some analysts believe it could lift production to rival the KSA.  With 20-year retrospectives being made on the U.S. invasion of Iraq, one unfortunate consequence is that Iraq has never developed a working government.  For the most part, governments have been riven by religious and ethnic strife, and corruption is endemic.  As we noted in a recent Bi-Weekly Geopolitical Report, China viewed the Iraq invasion as evidence that the U.S. was trying to secure oil supplies.  Although events tend to discount that take, as we note in the report, Beijing’s opinion on the matter hasn’t changed.  As a result, China has been encroaching on the region to secure oil flows.  We could see Beijing try to bring order and investment to Iraq; however, as the U.S.’s experience has shown, it can be hard to manage the divisions in the region.
• Mexican President AMLO has generally pined for a return to the 1930s when the Institutional Revolutionary Party (PRI) created its political monopoly. One of its tools was the nationalization of the Mexican oil industry.  In recent years, Mexico has gradually opened its oil industry to foreign investors in a bid to lift production.  AMLO has aimed to reverse that opening but has generally found it impossible to do so without declines in production.  Thus, we are seeing a reopening of Mexico’s oil industry to foreign companies.
• Venezuela has arrested 21 people connected to a corruption scandal tied to PDVSA, the state oil company. Oil exports have been curtailed due to various investigations.

Alternative Energy/Policy News:

• This week, the Biden administration is expected to issue rules on what exactly will qualify for the green subsidies associated with EVs. Trade negotiators are actively trying to shape the outcome.
• Change creates winners and losers. Although there is the rare circumstance of a win/win scenario, we find that such an outcome is exceedingly rare in real life.  Geothermal energy may be about as close as we can get to clean, low-cost power with seemingly few “losers.”  Japan has great geothermal potential as it rests on the ring of fire, a region of the world where volcanic activity is near the surface, meaning that tapping the planet’s inner heat is easy.  Yet, Japan has been slow to exploit this power source, which is a bit shocking given that the island nation is notoriously energy deficient.  Why?  Japan is famous for its hot springs and the owners of these springs fear that tapping this resource will harm the springs and end their livelihood.
  • As cities implement regulations to curb greenhouse gases from buildings, direct geothermal power is one alternative that might help buildings meet the new rules.
• Europe continues to expand its solar power but is increasingly beholden to China for raw materials and technology. This is a vulnerability the EU feels it must address (see below).
• The U.S. and Japan have entered a narrow trade agreement on critical minerals. The U.S. is moving away from large, multilateral trade arrangements, but narrowly focused ones are getting done.  We note that it looks increasingly likely that the EU will join the U.S. and Japan in this effort.
• As we noted last week, carbon capture technology will likely be critical in curbing the effects of greenhouse gases, and the field is rapidly evolving. This database from the IEA shows all the global projects underway.
• Researchers have successfully created “green” hydrogen from seawater.  If this process is scalable and economical, it could provide an alternative to electrification for transportation.

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