Anyone pondering how effortlessly Russia finances its war against Ukraine via the sales of its petroleum products should look no further than yesterday’s announcement by the country’s deputy prime minister. Russia has decided or been forced to ban gasoline exports effective March 1 for the next six months as domestic supply and prices are now on the forefront of thinking three weeks before the presidential elections. Needless to say, that the developing shortage provided invaluable support for gasoline, and also helped crude oil strengthen. Its impact could have been neutralized by talks that a ceasefire throughout the Holy month of Ramadan in the Middle East is within reach, but Hamas was quick to pour cold water on any hopes of an imminent truce saying that gaps remain to be bridged. No doubt, an eventual temporary respite would shave off a few dollars of risk premium although the cessation of hostility in the Red Sea by the Iran-backed militant Houthi group is dubious, to say the least.

The plausible OPEC+ decision to leave production cuts untouched also brightened the sentiment albeit what it will do is probably prevent prices from falling off the cliff as opposed to pushing them to $90/bbl and beyond. Healthy backwardation in WTI and Brent implies genuine tightness in the physical market, so the stage, it appeared after last night’s close, was set for a tenacious test of recent peaks. The bigger-than-expected build in US crude oil stocks reported by the API post-settlement, however, cooled enthusiasm. The power of inflationary expectations must not be underestimated either and in case tomorrow’s US PCE reading comes in above expectations a temporary top might have been found, notwithstanding the evident tightening of the underlying oil balance.

Between the Devil and the Deep Blue Sea

It would be bold and maybe even reckless to conclude that the widely accepted view on the trajectory of the transition from fossil fuel to renewable energy is palpably shifting, nonetheless, it is undeniable that those who are responsible to make this interim period as smooth as possibly, governments and oil companies alike, are coming under fire from more than one side. To put it in a different way, the need of scaling back on exploration and production of oil and gas in order to reduce carbon-dioxide and methane emission by cutting investment is not as unambiguous as it was a year or two ago. The antagonists and proponents of fossil fuel supply are equally adamant that their view is the only possible way forward. Environmentalists refute anything that might advocate the protracted use of fossil fuel, yet the definition of activist investors is being re-written, and those with vested interest in oil production and supply insist that whilst the world, unequivocally, needs to reduce the emission of harmful greenhouse gases, abruptly halting investment in oil and gas production causes visibly more damage than the benefit it brings.

The latest example of this stand-off has been the simultaneous legal actions taken against the Biden administration. Last September, the interior department, in its attempt to reduce reliance on fossil fuel, announced only three offshore lease sales in the Gulf of Mexico between 2025 and 2029, much to the outcry of US oil producers. Consequently, the industry’s lobby group, the American Petroleum Institute, has taken the government to court accusing it of using ‘every tool at its disposal’ to limit access in federal waters. It would, the argument goes, jeopardize the US’s energy security as it leads to growing reliance on foreign oil. Not so fast, said the other side. Earthjustice, an environmental group, contends that the health aspects of the lease sales on local communities have not been considered and calls for a halt in awarding permits of offshore drilling in its entirety.

Oil companies, given their roles in fossil fuel production, have always been obvious targets of climate groups and activist investors. In May 2021, a Dutch court ruled in a landmark case instigated by Friends of the Earth that by 2030, Shell must cut it carbon-dioxide emission by 45% compared to the 2019 level, claiming that the company is responsible for its own, as well as its suppliers’ emission. The same day, a small hedge fund called Engine No 1 achieved the unlikely feat of unseating three board members of ExxonMobil and replacing them with its own candidates with the effective help of BlackRock, one of the major shareholders of the US giant.

The general mood of hastening the transition after the health crisis of 2020 unprecedently destroyed oil demand seems to be changing. ExxonMobil filed a lawsuit against a Dutch green activist group, Follow This, to stop investors voting on a motion put forward by the group that called for accelerating the reduction of greenhouse gas emission. Bluebell Capital Partners, a tiny investor in BP, is urging the oil major to re-consider its approach towards net-zero as the company’s investment strategy had been based on a ‘drastic decline in oil and gas demand, which we consider utterly unrealistic’. BP welcomed the constructive engagement. Investment bank JPMorgan and asset manager State Street announced this month that they would quit a global coalition of investors, CA100+ tasked with aligning the action Wall Street takes in tackling global warming. BlackRock said that it had transferred its membership to its international arm. It is estimated that the total assets under management by the coalition have plunged from nearly $70 trillion to $54 trillion.

Clearly, the way towards the era of renewable energy is being re-evaluated. There is no divergence of opinions of the undeniable need in reducing the amount of emission released into the atmosphere to stop the warming of the planet. The debate is about the most effective modus operandi to achieve it. In case global consumption of oil and natural gas proves resilient in coming decades a moratorium in investment in exploration and production of oil and gas will result in considerable economic harm. Pressure on publicly traded producers will not lead to falling output under this scenario, it would simply incentivize independent and state producers to satisfy existing and very real demand. Marked changes are already under way as solar and wind power have become cost competitive with fossil fuel without financial support. This trend is expected to remain intact, and the balance of energy demand will gradually keep shifting towards renewables. In the meantime, oil and gas will be an inevitable and necessary part of the energy mix.

Overnight Pricing

tamas.varga@pvm.co.uk

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