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

Oil prices may be establishing a new trading range between $67 and $75 per barrel.

(Source: Barchart.com)

Commercial crude oil inventories rose 7.9 mb when compared to the forecast draw of 1.5 mb.  The SPR fell 1.9 mb, putting the total build at 6.0 mb.

In the details, U.S. crude oil production was steady at 12.4 mbpd.  Exports rose 0.8 mbpd, while imports were flat.  Refining activity declined 2.1% to 93.7% 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 then declined.  This week’s outsized build puts inventories back at seasonal norms.  The seasonal pattern would suggest that stocks should fall in the coming weeks, but the seasonal pattern has become less reliable due to export flows.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $57.11.  Commercial inventory levels are a bearish factor for oil prices, but with the unprecedented withdrawal of SPR oil, we think that the total-stocks number is more relevant.

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 $92.53.

Market News:

• The IEA released its forecast for oil demand over the next five years. The group estimates that expanding EV usage will dampen gasoline demand and thus lead to a peak in global oil demand after an almost continuous rise for 80 years.

• As the above chart shows, oil demand is forecast to fall dramatically mostly due to negative growth for road transportation.  We have serious doubts that this will actually occur, but oil producers, especially those beholden to shareholders, have to be aware of this forecast since it suggests that investment in new production is at risk of being stranded.  Therefore, shareholders are likely to demand a shareholder return instead of investment into new production, and it appears this trend is already beginning to happen.  This forecast is likely to add to bullish pressure for prices, especially if demand exceeds expectations.
• Oil prices continue to mark time in the wake of the OPEC+ announcement. Our take is that the U.S. wants prices around $60 per barrel and the Saudis have a target of at least $80 per barrel.  Because of this, we are sitting in a netherworld between these two price points.  Worries about Chinese demand are acting as a bearish factor on prices and offsetting the supply cuts coming from OPEC+.
  • We note that it’s hot in China, but so far, coal and LNG demand have been remarkably modest. This situation would suggest weak industrial activity.
  • OPEC+ production fell last month, with some sources suggesting a 67 mbpd cut while others report a lesser one. In any case, we are seeing a decline in supplies.
  • There are reports that the Saudis were targeting bearish oil speculators. Given the market’s reaction, that idea makes some sense.  We note that each OPEC+ announcement seems to be having less of a bullish impact.
• U.S. crude oil exports have been increasing, but we are starting to get close to capacity at some export facilities.
• Natural gas production in the Permian Basin has hit a new record high.
• There is always tension between commodity project development and environmental concerns. Oil drilling in the Amazon Delta is pitting oil drillers against environmentalists.
• Much to our surprise, it looks like the U.S. will add 3.0 mb to the SPR. Of course, this injection pales in comparison to the sales over the past year.  We note the Biden administration wants to purchase another 12.0 mb over this coming year.
• Venezuela has suffered falling oil production for years. However, we are starting to see a slow recovery in this area.  As Russian sanctions change global oil flows, the U.S. has begun easing sanctions on Caracas.

 Geopolitical News:

• Although Putin and Xi seem to have a close personal relationship, the geopolitics of China and Russia are often contentious. One reason is that both nations have interests in the same regions, with one area of potential conflict being Central Asia.  Russia views this region as part of its “near abroad” as some of these states were part of the Soviet Union.  China wants the natural resources of these nations and is making investments in a bid to improve ties.  As nuclear power demand rises, China is trying to encourage the Central Asian nations to supply it with uranium.  The region is rich with this material.  This development is raising tensions between China and Russia.
• There are reports that U.S. and Iranian negotiators have made progress in restarting the nuclear deal. We remain highly skeptical of such reports.  Although corralling Iran’s nuclear program would be potentially positive, the political costs of helping Iran would be high.  Also, we doubt that the incumbent administration could promise any agreement would be binding for future administrations barring an actual treaty agreement, which seems unlikely.
  • The U.S. has denied having these reported talks, though that doesn’t necessarily mean they didn’t happen. Israel reported that the U.S. and Iran held talks on what might be a narrowing set of goals.  At the same time, the lead Iranian negotiator has been invited to Norway for talks.  Overall, we think the Europeans really want access to Iranian oil and may be trying to foster talks.  As we noted above, we think the political hurdles are too high for success.
  • Furthermore, the U.S. has begun to offload the Iranian oil it seized due to sanctions. If there were serious efforts being made to restart nuclear negotiations, we doubt this would be happening.
  • It has been reported that Iran is sending drone parts for assembly in Russia; again, if Iran were really trying to restart talks, the U.S. wouldn’t be issuing this intelligence.
• The recent dam rupture in Ukraine has been in the news but the damage done to the Tolyatti-Odesa ammonia pipeline is also important. Ammonia is one of the key building blocks in fertilizer production.  This pipeline is the world’s largest but has not operated since the Russian invasion.  The attack on this pipeline may make Moscow less likely to extend the grain deal.  Natural gas is important to ammonia production, and the loss of this pipeline could have a minor bearish impact on European natural gas.
• In the wake of SoS Blinken’s trip to the Kingdom of Saudi Arabia (KSA), Riyadh made it clear that it wants support for a civilian nuclear program. The Saudi foreign minister warned that the U.S. faces competition from other nations.  The KSA is pressing for a civilian nuclear program in return for recognizing Israel.
  • There are reports that the U.S. and the KSA both threatened each other after the kingdom cut oil production. It appears that recent visits were designed to repair relations.
• We continue to monitor the steady flow of leaks concerning the Nord Stream Pipeline sabotage. Reports now suggest the CIA warned Ukraine not to attack the pipeline.  It remains unclear who did attack the pipeline as both the U.S. and Ukraine had an incentive to destroy the structure because it more closely tied Germany to Russia.  These leaks do suggest the U.S. is trying to distance itself from the attack and pin the event on Ukraine.
  • In related news, Dutch intelligence also reportedly warned the U.S. that Ukraine was planning an attack on the pipeline.
• Azerbaijan is making diplomatic engagements with regional powers likely in an effort to reduce the risks to oil flows.
• As relations between the KSA and China improve, Chinese businesses are “streaming” to the kingdom in search of investment opportunities.
• China is rapidly expanding its refining capacity and, according to the IEA, is poised to become the holder of excess refining capacity. Since there is little direct consumption of crude oil, this excess capacity will tend to narrow profit margins for refiners.
• Russia has resumed oil exports to North Korea. Given that North Korea has limited capacity to pay for such oil, we suspect that Moscow is swapping oil for military equipment.
• The EU is looking to ban all Russian pipeline gas imports by the end of the year. This move would most harm Hungary.

 Alternative Energy/Policy News:

• EV growth is projected to rise steadily in coming years, but there are serious doubts about the availability of battery metals. The dependence on China for batteries remains a major issue as well.
  • It’s arguable that short-sighted U.S. policies for the battery industry helped create China’s dominance.
  • Battery metals are critical to the EV transition; the lack of mining talent could boost costs in the future.
  • There is a significant price war going on in China’s EV market. A major producer has cut prices, suggesting the price war is spreading.
  • BYD (BYDDY, $66.39), the Chinese auto company, is poised to become the world’s largest EV producer. It specializes in low-cost vehicles and makes one for the world market that costs just over $11k.  We note BYD is also building the infrastructure to manufacture sodium-ion batteries, which are much cheaper than lithium-ion batteries.
• As more investment funds flow into alternatives, we continue to monitor new technological developments. Work being done on plasma drills could expand geothermal power which is nearly emissions-free.
• Although nuclear power is often heralded as a solution to climate change and carbon emissions, in reality, the U.S. has allowed its uranium industry to unwind, preferring to acquire the metal from other places. When the world was considered safe for trade and investment, this policy may have made sense; it doesn’t now.
• In our 2023 Geopolitical Outlook, we discussed the race for space. Part of the allure of space is the possibility of beaming electricity from orbiting solar panels that would be exposed around the clock.  Although seemingly farfetched, a team at CalTech is testing such a program.  Obviously, if this works it becomes a game changer for energy.
• Back on Earth, the expansion of wind and solar energy is being hamstrung by the lack of grid expansion. This is why there was an interest in Congress to address permitting in the debt ceiling negotiations.  Smoke is a problem, too.
• Summers are becoming increasingly unpleasant for both coasts but especially for the West Coast. There have been several news items suggesting a rapid warming trend; however, this trend may be due more to non-recurring factors and may not actually signal permanent changes.

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

Oil prices continue to trade in the lower part of the trading range despite the Saudis’ announcement of a unilateral production cut.

(Source: Barchart.com)

Commercial crude oil inventories fell 0.5 mb when compared to the forecast build of 1.5 mb.  The SPR fell 1.9 mb, putting the total draw at 2.3 mb.

In the details, U.S. crude oil production rose 0.2 mbpd to 12.4 mbpd.  Exports fell 2.4 mbpd, while imports declined 0.8 mbpd.  Refining activity jumped 2.7% to 95.8% 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.  As the average line shows, we are nearing the seasonal draw period, although that pattern has become less reliable with the U.S. exporting crude oil.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $59.61.  Commercial inventory levels are a bearish factor for oil prices, but with the unprecedented withdrawal of SPR oil, we think that the total-stocks number is more relevant.

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 $93.27.

Market News:

• The outcome of the OPEC+ meeting was that the Kingdom of Saudi Arabia (KSA) announced a large production cut independent of the rest of the cartel. The KSA will lower its output to 9.0 mbpd, and oil prices initially rose on the announcement.  Below the surface, there are growing tensions within the cartel.  OPEC traditionally sets output quotas based on production capacity.  However, transparency on capacity is lacking, meaning that members have an incentive to overstate their capacity, which would then lead to a higher quota.  In recent years, the cartel has struggled to meet its production quotas; in fact, their new term is “target,” which is telling.  Saudi Arabia was pressing African members to reduce their stated capacity which would mean lower quotas, but naturally they resisted.
  • What’s the motive for the KSA to go it alone? We presume there are three reasons behind the decision.  First, the IMF estimates that the kingdom needs an oil price of $80 to meet its fiscal requirements.  Now, obviously, the IMF is calculating a total revenue number, so lowering production does reduce that calculation unless the price exceeds the lost revenue from the production cut.  We suspect the crown prince has a price in mind and the oil minister had to hit it, although it might be the case that the leadership has not thought through the full ramifications.  Second, we suspect MBS continues to harbor animosity toward the Biden administration.  It’s rather evident that there is a disparity between Washington and Riyadh on oil pricing.  The U.S. wants a price below $70 per barrel, while the KSA wants a price north of $80.  Higher gasoline prices are politically unpopular and this action has the potential to cause just that.  SoS Blinken is in the KSA, so the decision to cut production will surely make talks contentious.  We do note Blinken’s trip is centered on the KSA normalizing relations with Israel.  Saudi Arabia has indicated that in exchange for recognizing Israel, Riyadh wants Israel to transfer its civilian nuclear technology.  Third, the KSA may view the voluntary cut as a way to gain further control over the oil market.  If the kingdom is holding onto the bulk of the excess reserves, it will take over the role of swing producer.  It’s notable that the Saudis gave up this role in 1985, triggering a near collapse in prices.  It may be that the new generation of leadership is simply unaware of this history.  The role only works if no other nations expand capacity.  It’s interesting that the Saudis didn’t ask Russia or the UAE for cuts, which further isolates the KSA in the cartel.
  • Either the Saudis really need higher oil prices, or they are assuming that other suppliers won’t fill the gap created by the KSA cut.
  • The cartel did agree to consider lower production targets for 2024.
• China is starting a deep well project in Xinjiang which is projected to drill down 36k feet; ostensibly, this is a science project, but there is also talk about trying to engage in deep earth oil exploration. Recent comments from President Xi about oil independence are driving these sorts of projects.
• Various dredging projects off the coast of Texas are allowing larger tankers to load up Texas oil for export.
• The U.S. rig count has dropped, raising fears about future U.S. oil production. We also note that operating conditions appear to be deteriorating.  At the same time, Exxon (XOM, $105.73) claims that refracking existing U.S. wells could double output.
• Saudi Arabia is looking to invest in Iraq’s natural gas industry.
• Environmentalists are targeting LNG exports by forcing insurance companies to stop providing coverage.

 Geopolitical News:

• We have written on the de-dollarization in oil markets. We are now hearing about the downsides since Russia is apparently sitting on billions of INR and is struggling to do something with them.  India has capital controls that restrict Russia’s access to India’s capital markets, and it isn’t obvious whether the forex markets can absorb Russia’s sale of its holdings.
• There are reports that Ukraine planned the attack on the Nord Stream pipelines and the U.S. was aware of the plans. This news adds to the likelihood that Ukraine was responsible for the attack.  If so, this would likely strain relations with Germany.
• European nations and the U.S. are restarting talks on how to deal with Iran’s nuclear program. Recent reports about Iran’s enrichment program and the hardening of its research sites are leading to an attempt to return to diplomacy.
  • The U.S. and U.K. navies responded to a merchant vessel in the Strait of Hormuz that was being harassed by IRGC speedboats. Iran, meanwhile, announced a new regional maritime alliance that would exclude the U.S.  We struggle to see why nations like the UAE or Saudi Arabia would join with Iran on such a pact (given that Iran is the instigator of maritime problems in the Gulf), but the announcement is a development that we will be tracking going forward.
  • Iran appears to be backing away from the purchase of Su-35s from Russia.
  • The UAE is engaging with Iran while at the same time trying to obtain security guarantees from the U.S. The UAE may be trying to determine how far the U.S. will go in providing security to the region, and if the guarantees are seen as lacking, the emirate may decide it needs to have better relations with Tehran.
  • Iran has unveiled a missile it claims to be hypersonic. Such missiles can generally evade existing defense systems; thus, the announcement is raising concerns, especially for Israel.  In response, the U.S. has added even more sanctions on Iranian and Chinese entities involved in Iran’s missile program.
• Venezuelan President Maduro is visiting the KSA this week to discuss various investment ideas. Venezuela was under sanction, but the Biden administration has eased restrictions to reduce oil prices.  The visit, occurring just before SoS Blinken arrives in the KSA, is an interesting juxtaposition.

 Alternative Energy/Policy News:

• We have been noting the rise in resource nationalism. Mexico is becoming more aggressive in restricting foreign company access to its mining resources, which could boost prices on key metals.
• Texas is an energy powerhouse. Not only does the state produce the most crude oil but it  is also a leading producer in wind, solar, and nuclear power.  State lawmakers were considering bills to curb wind and solar projects, but those bills appear to have mostly died.  In many respects, Texas is a prime example of the “all of the above” solution to energy issues.
• Climate change concerns are causing some parts of the U.S. to become uninsurable.
• As we have noted over the past few weeks, China dominates the solar energy industry. It has been the low-cost producer of panels and other components.  However, the U.S. is now subsidizing this industry and there are signs that firms that have previously struggled to survive against China are now seeing a way forward.
• China’s BYD (BYDDY, $64.40) has moved up in the rankings of suppliers of EV batteries. It is now second only to Contemporary Amperex Technology Co. (300750.SZ, CNY, 207.30) after overtaking LG Electronics (066570.KS, KRW, 125,700).  The fact that two Chinese companies dominate the EV battery market highlights the difficulty that the auto industry will have in isolating China.  As we have noted in recent reports, China’s EV industry has rapidly become world class, putting the West in a difficult spot.  If the goal is rapid adoption of EVs for energy transition purposes, it makes more sense to import Chinese EVs; however, such a policy will likely devastate the auto sector in the West and undermine the re-industrialization process.  On the other hand, restricting imports will drive up costs and slow the energy transition.  We note that China’s export data for May was disappointing, but one bright spot has been EV exports.

(Source: Capital Economics)

• Hydrogen remains a potential replacement for hydrocarbons. However, the production of hydrogen can come from both “dirty” and “clean” production methods, which has led to a color coding of hydrogen.  The Biden administration is trying to create a regulatory path for fostering the development of the fuel that will go along with a subsidy program to boost production.  The subsidy program still requires decisions about what will be covered.  The industry wants loose standards, while environmentalists are pressing for only the “greenest” of sources.  Although we don’t know the outcome yet, this administration tends to try to split the middle on these issues, which will tend to please no specific group.

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

Oil prices have been volatile in front of the OPEC+ meeting.

(Source: Barchart.com)

Commercial crude oil inventories fell a whopping 12.5 mb when compared to the forecast build of 1.5 mb.  The SPR fell 1.6 mb, putting the total draw at 14.1 mb.

In the details, U.S. crude oil production fell 0.1 mbpd to 12.2 mbpd.  Exports rose 0.4 mbpd, while imports rose 1.4 mbpd.  Refining activity rose 1.4% to 93.1% 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.  As the average line shows, we are nearing the seasonal draw period, although that pattern has become less reliable with the U.S. exporting crude oil.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $59.17.  We will wait to see if OPEC+ (see Market News below) moves to push prices higher by cutting output.

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 $94.63.

Market News:

• The IEA notes that investment in fossil fuels has stalled, while investment in clean energy is rising steadily. If this trend continues, it means oil and natural gas prices will likely rise in the future.
• As we noted earlier this month, WTI Midland will now be part of the Brent basket. As U.S. oil becomes increasingly used globally, quality issues are cropping up which may affect export capacity.
• The debt ceiling situation does appear to be resolved. The proposed arrangement hammered out by the White House and the Speaker will still need to pass Congress, but we suspect it will.  As the details emerge, it does look like some easing of permitting did make it in the final bill.  Both the fossil-fuel and clean-energy industries are plagued by permitting  Of course, both sides want to gain permitting approval while restricting the other, but such outcomes are rare in democracies.  It is worth noting that the debt deal didn’t actually address transmission lines and pipelines, which will help its passage but neglects the key problems with streamlining permitting.
  • Last year, coal was the largest net contributor to power generation.
• Methane is considered one of the most potent greenhouse gases, and it is also the key component of natural gas. There are increasing regulations designed to reduce methane leaks which tend to lift production costs.  There are now efforts to use new technology to measure and cap unwanted methane emissions.
• OPEC+ meets this week. Last week, the Saudi oil minister warned oil speculators not to be short going into the meeting.  Initially, the market rallied, but as reality set in, it’s becoming clear that the cartel is facing internal divisions as Russia is taking market share from the other oil producers, especially in the Far East.  We will be watching to see how the cartel handles Russian output.
  • One interesting sidelight is that OPEC+ has banned the media from their meetings. It isn’t clear why, although one possibility is that the cartel expects an acrimonious meeting due to falling prices.
  • Lloyd’s of London has stopped underwriting tanker insurance on an Indian shipper that has transacted in Russian oil. Indian underwriters have stepped in to insure these fleets, but it is uncertain if the major canals will accept the new insurance as legitimate. At the same time, European insurers are growing nervous about the loss of market share to other insurers.
  • Russian oil continues to flow due to a growing network of tankers that help Moscow evade sanctions.
  • There are worries that this “fleet” of tankers is substandard. We note that Singapore has seen more tankers fail safety inspections.
• Production in Guyana is reported to be ramping up. It is projected to be a 1.2 mbpd oil producer by 2027, which would make it the largest oil producer in South America.  Managing the windfall of revenue will be a challenge for the government (although one they probably would prefer over not having the revenue).
  • Another area of potential growth is Argentina.
• Canadian tar-sand production is showing signs of increasing. Although production levels remain below pre-pandemic trajectories, the increase is notable.
• As drought spreads in China, we could see hydropower reduced, which could then lead to the use of other fuels to replace the lost power. Warm temperatures are already lifting demand.  If this continues, we expect coal and LNG demand to rise.
• To a great extent, insurance is where climate change will be enforced. Firms are already leaving the California market due to persistent wildfires.  At the same time, the insurance industry is shunning net-zero groups that have come under fire from the GOP.  Essentially, the industry will likely be driven by the assessment of risk, which could lead to changes in underwriting that would restrict development in vulnerable areas.
• Weak natural gas demand in Europe could lead to much lower prices in some markets. We view this issue as temporary, but low prices could discourage production and raise the odds of a spike in prices this winter.
• Colombia is considering a ban on fracking, and if implemented, it may create shortages of natural gas.
• Nigeria is ending petrol subsidies, which has led to mass hoarding.

 Geopolitical News:

• China continues to delay approval for another pipeline from Siberia. As we discussed last week, China appears to be getting remarkably cheap natural gas from the current Power of Siberia pipeline and is seemingly driving a hard bargain on funding a second pipeline.  Russia is in a tough spot on natural gas as its pipeline network is designed to send gas to Europe, but that market has been mostly lost due to sanctions (although not completely as Ukraine is still allowing Russian gas and oil to go through its territory).  Moscow needs to reroute pipelines away from Europe and toward Asia.  Beijing knows this, but despite promises of friendship, it isn’t willing to invest much to support Russia’s goal of moving its gas east.
• The Kingdom of Saudi Arabia (KSA) is participating in the evasion of Western sanctions on Russia by importing Russian diesel and then re-exporting it.
• One of the key benefits of a globalized world is that countries can specialize in what they most efficiently produce, which tends to lower inflation. As geopolitical tensions lead to a breakdown of globalization, nations may be forced to manufacture items that they might not be best at but still need to produce due to insecurity of supply.  China is especially vulnerable to food and energy deficiencies.  Due to its high population, limited arable land, and water constraints, China has tended to be a net importer of food.  With energy, China became a net importer in 1994.  As relations between the U.S. and China deteriorate, Beijing is vulnerable to the U.S. Navy’s ability to close off shipping lanes.  In response, China is considering new ways of securing food and energy.
• Russia has always considered Central Asia to be in its sphere of influence. In fact, during the Soviet era, the “stans” were part of the union.  These areas are rich in natural resources.  China is openly competing with Russia for dominance in this area, in part to secure key resources, and in part to exercise dominance over Russia.
  • We also note a Russian scientist working on hypersonic missiles has been detained on charges that he was selling secrets to China.
• German regulators are promoting heat pumps and looking to ban gas-fired boilers. The Greens support this idea, but other members of the ruling coalition oppose the measure.  This issue is fracturing the coalition, and although we doubt the government will fall over this measure, tensions within the coalition have been rising for some time.
• Iran has launched an alternative to the S.W.I.F.T. network in a bid to circumvent U.S. financial sanctions.
  • There are reports the IAEA has resolved some of the issues surrounding Iran’s nuclear program. However, the traces of highly enriched uranium have not been resolved.  As we noted last week, Iran may have built underground facilities so deep that U.S. conventional “bunker busters” can’t destroy them.  Iran may be close to the nuclear weapons threshold.
  • Iran has stated that it is near to unveiling an indigenous hypersonic missile.
  • Security forces in Iran claim to have uncovered a large “terrorist cell” allied with Israel.
  • Iran’s persistent interdiction of Persian Gulf shipping has prompted the UAE to ask for greater U.S. involvement. Although the Persian Gulf Arab states continue to woo China, when security concerns arise, these nations are not calling Beijing.  At the same time, China is looking to increase its economic partnership with the KSA; it is unclear if Beijing is willing to undertake the security arrangements.
  • Iran is facing a geopolitical threat from Azerbaijan. As Azerbaijan’s power rises relative to Armenia, the former could stir up ethnic unrest among the Azeri population.  Azeris are the largest minority in Iran comprising around 20% of the population.  Israel has good relations with Azerbaijan which further complicates matters.
  • Reports indicate that Iran plans to increase attacks on U.S. troops in Syria, and if true, it will raise tensions further.
  • There are reports suggesting that Egypt and Iran are mending relations.

 Alternative Energy/Policy News:

• During the first decade of this century, ethanol was thought to be a way to reduce America’s dependency on foreign oil. Regulations at the time envisioned a steady rise in the ethanol fuel mix.  However, the shale revolution reduced U.S. dependence on foreign oil, undercutting the national security argument for corn-based fuels.  Complicating matters further was that geopolitical disruption boosted grain prices significantly; using corn for fuel is seen as boosting food prices.  The Bush-era ethanol mandate has expired and it looks like the industry is being forced to defend current sales rather than boosting future use.
  • There are increasing doubts about ethanol’s green credentials.
  • Ethanol blending complicates the refining process which drives up gasoline costs. High gasoline prices are politically problematic.
• From the outset of the environmental movement, there have been tensions between the “Buckminster Fuller” wing and the “Thomas Malthus” wing. The former leans on technological fixes to environmental problems, while the latter believes reliance on technology creates an endless “treadmill” of solutions that leads to new problems where the only real solution is a decline in living standards.  This division often emerges, and the most recent instance appears to be tied to the carbon-removal industry.  The UN released a report critical of carbon renewal, because it is fearful that relying on it will curtail the drive to deploy alternative energy.  However, industry experts indicate that without direct carbon capture, meeting temperature targets will be impossible.
  • German police raided the homes of climate activists on suspicions that they were planning attacks on oil pipelines.
  • One interesting sidenote with captured CO₂ is what exactly to do with it. Although the gas has some industrial uses (in beer, for example), the amount of gas that is needed to be captured to make a difference far exceeds industrial demand.  However, one way the gas could be used, paradoxically, is to make synthetic natural gas.  By combining hydrogen with captured CO₂, you can create a clean methane that would seemingly be carbon neutral.
  • Exxon (XOM, $102.61) has made a deal with steelmaker Nucor (NUE, $132.72) to build a carbon-capture program.
• Resource nationalism is on the rise. Recently, we noted that South American commodity producers are considering nationalizing production of key metals, such as lithium and copper.  The Congo wants to change its royalty arrangements with foreign firms (mostly Chinese) on copper projects, in another example of resource nationalism.  This factor increases the attractiveness of key minerals in geopolitically safe places.  A new lithium development in Portugal has been especially welcomed.
• Clean energy proponents are pressing to streamline projects, a complaint heard from fossil-fuel companies as well.
• The president’s moratorium on solar panel tariffs survived a potential override of his veto.
• As we noted last week, China continues to dominate in EV components. Chinese battery companies are beginning to invest in productive capacity outside of China, perhaps to avoid a deteriorating geopolitical environment between the U.S. and China.  Europe is a primary target for this investment.
  • The Dutch trade minister, Liesje Schreinemacher, remarked that the energy transition is probably impossible without Chinese products. We suspect that nations will be forced to either use Chinese products, build them at home at higher costs, or forego them altogether.
  • Research is increasing on sodium batteries, although at this juncture, it doesn’t appear that sodium will displace lithium in EV batteries. Another possible alternative is lithium-phosphate batteries, which are safer and have a longer life span.
  • Toyota (TM, $139.88) announced it will build a large electric SUV in Kentucky.
  • EU leaders worry they won’t be able to match the U.S. on EV battery subsidies…which was probably Washington’s goal.
• When a new technology is developed, it takes a while for the industry to establish standards. Initially, there is a temptation for each firm to create its own standards with the hopes that they become dominant, as this adoption can create market power.  At the same time, widespread adoption usually requires a few standards so it’s easier for consumers to use the new technology.  The classic example is the VCR versus Betamax standard for videocassettes.  Although the latter was thought to be superior, the former dominated and eventually eclipsed Betamax.  Consumers would have otherwise needed two machines to handle the format.  This week, Ford (F, $12.13) announced that it would adopt the Tesla (TSLA, $197.40) NACS standard, which will allow Ford vehicles to use the 12k Tesla charging stations.  Other EV makers use the CCS standard.  By making this decision, Ford is increasing the odds that the Tesla standard will prevail.
• A German startup has won funding for a new fusion energy machine.

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