It appears that neither the death of the Iranian President nor the International Criminal Court’s application for arrest warrants against the Israeli Prime Minister and senior Hamas leaders rattled investors’ sentiment. In the absence of any major development oil drifted lower as the view on the fundamental outlook remains grim. It is manifested in the weakening of the backwardation in crude oil where the front spread on the European benchmark settled at 18 cents/bbl yesterday and is softening further this morning. The M1/M7 backwardation has narrowed from over $5.70/bbl mid-April to $2.44/bbl with physical Brent pricing well under the forward contracts. Crack spreads remain under pressure. RBOB could not weather the fiercest attack precipitated by the US Department of Energy closing the Northeast Gasoline Supply Reserve preceded by getting rid of 1 million bbls of the motor fuel. The API report released post-settlement ran counter to forecast and showed sizeable builds in crude and gasoline stocks. Distillate inventories depleted a tad. In search for guidance attention will shift to the FOMC minutes due out just before the close tonight, which could swing the pendulum of mood, the dollar, the bond market and therefore oil either direction as the timing of a Fed rate cut is ambivalent at best.
 

Beggar-thy-Neighbour

A 19th century writer, Robert Mackenzie, categorized human history as a record of progress – a record of accumulating knowledge and increasing wisdom, of continual advancement from a lower to a higher platform of intelligence and well-being. Open any newspaper or news channel in 2024 and it will be hurtfully evident that humanity started to go backwards this century. The gradual erosion of liberal democracy and effective market capitalism probably started in the 1990s when Italy’s Silvio Berlusconi captured the media and manipulated public opinion. The illegal second Gulf war, which was partly based on unfounded claims about non-existent Iraqi weapons of mass destruction further corroded trust in the western political establishment. The 2007-2008 global recession made it painfully obvious that reckless financial risk-taking is rewarded with impunity.

The disillusionment triggered the rise of the far right in many developed nations whilst adversaries of liberal democracies have also considerably grown in relevance on the global stage. The unipolar world order experienced towards the end of the last and the beginning of the current centuries is turning into a multipolar world where competition for political and economic hegemony intensifies. The west, for the advocates of democracy and free market, justifiably accuses autocracies of espionage, human rights violation, free speech constraints and government subsidies that, the reasoning goes, make the playing field uneven. In the process, it conveniently keeps schtum about its own modus operandi that is akin to the accusations it holds against rising powers. Just think of the Inflation Reduction or CHIPS Acts, protectionist moves, or the dysfunctional global arbiter of trade disputes, the WTO because of the US persistence spanning over 5 years now of blocking appointments to the Appellate Body. The ineffective UN Security Council and the underwhelming presence of developing nations in global institutions smoothly fit into this trend.

Whether we like it or not there is a war out there as a new multipolar order is taking shape. Even amidst rising tension there should be red lines that must not be crossed but they are, adding to the current precariousness. Anyone with a functioning moral compass would condemn Russia’s military invasion of Ukraine, at least tacitly, or the assassination attempt of Slovakia’s far right prime minister last week, which is nothing less than the definite embodiment of a fragmented society. Perhaps the two most obvious examples of global friction and palpable polarization are the China-Russia rapprochement and the China-West trade war.

It is hard to view Russia’s full-scale assault on Ukraine anything else than Vladimir Putin’s personal ambition of re-constructing the Great Russia with no regard of the short and long-term harmful impacts it has domestically as well as worldwide. After the invasion started China was quick and successful to turn the nefarious act to its full advantage. China has been continuously providing lifelines to Russia to finance its ongoing war. This ‘no-limit friendship’, whilst partly ideological (the mutual dislike of the US was on full display during Putin’s latest visit to Beijing), is chiefly transactional. As published by Chinese customs, the value of bilateral trade reached $240 billion in 2023, a year-on-year increase of 26%. The flow from China to Russia includes cars, machinery, and smartphones whilst its purchases of energy products increased significantly. Its export to Russia doubled between 2020 and 2023 whilst it plunged 55% to one of its biggest markets, the EU and retreated from $4.9 billion to 0.6 billion to the US in these 3 years.

As co-operation between these two neighbours goes from strength to strength for the time being, the trade war between China and the US and the EU intensifies and, in fact, is now bordering with the extreme. Despite the vast differences between the former and the incumbent US presidents, they share unequivocal fear of Chinese green products, solar panels, electric vehicles (EVs), etc, flooding the US market and in the run-up to the presidential elections they are outbidding each other on Chinese import tariffs. Not only did Joe Biden keep punitive measures worth $300 billion on Chinese imports from the previous administration in place but last week slapped fresh tariffs on Chinese goods – 100% on EVs, 50% on solar panels and 25% on lithium-ion EV batteries – labeled as inadequate by Donald Trump. The EU is widely expected to follow in the footsteps of the US and is reportedly planning to impose a 30% tariff of Chinese EVs after an investigation on subsidies was launched last October.

No doubt, the economies of China and US/EU are decoupling. The trade deficit of the US with China rose to $382 billion in 2022 from $308 billion in 2020 (and declined to $279 billion last year due to tariffs). The EU’s trade deficit also ballooned to unprecedented levels in 2022 before narrowing in 2023. Trade deficit, economists would argue, is not necessarily evil, it can simply be viewed as the cost of giving up the opportunity to produce a certain good, which can be produced cheaper somewhere else and in return to strengthen the comparative advantage of other goods produced locally.

Technological advances and the spectacular rise of artificial intelligence, however, are raising severe national security concerns on both sides. It leads to onshoring, nearshoring and ultimately to protectionist policies. Globalization on steroids, which lifted 800 million Chinese and hundreds of millions more in the developing world out of extreme poverty is well and truly done with. Inequality, which between and within countries declined will rise again. National interests are being prioritized amidst elevated levels of acrimony. Confrontation replaced conversation. The good news, however, is that globalization will not be eradicated but a lighter version of it will become prevalent. It must be remembered that China, from the economic perspective, relies as much on the West as the other way round. It is not lost on the Chinese leadership that the county’s economy is failing to return to its former glory as the multipolar world order is being constructed. Further escalation of geopolitical tension will serve neither the Chinese nor the West interest. China has made it abundantly clear that its red line in the Ukrainian conflict is the deployment of nuclear weapon. With light globalization taking hold it becomes ever more conspicuous that global growth will inevitably suffer as world trade is increasingly repudiated. Medium-term global energy demand estimates might well have to be scaled down. Growing anxiety about geopolitical/geoeconomic upheavals and national security, on the other hand, will delay the transition from fossil fuel to renewables (one of the numerous inexcusable consequences of the Ukrainian war), therefore oil demand will likely hold up much better than believed pre-2022 while the global political and economic order is being re-written.

© 2024 PVM Oil Associates Ltd