It seems that world’s slight sigh of relief yesterday will once again turn into a deep intake of breath as in defiance of global opinion, and not to say the small matter of relations with the US, Israel’s Premier, Benjamin Netanyahu spoke on an ‘unspecified date’ on which Israel forces will invade Rafah, Gaza. Risk in oil just dialled up again and so have the shout outs for $100 crude which is represented by the increased buying of bullish call options not seen for over 4 years.

Not even warnings of a market showing too much length is enough to keep a bullish tinge from colouring investor thinking. Bloomberg Intelligence opine that with 14% of open interest made up of net longs, crude markets are at risk of exhaustion and correction and one that we have sympathy. Yet the bull stories keep coming and are strapped on as armour afresh it seems every day. Positive influence comes from the Americas as Pemex is about to cut at least 330kbpd of crude exports in May, according to Reuters, as production fell to a 45-year low in February and the new domestic refineries are about to claim more oil. In the US, the sick state of the Natural Gas market is stopping drillers from adding any more production, as exploration companies continue to concentrate on shareholder returns and profits, meaning that there will be little chance of production relief from the sands of America to quell current ‘tightness’ rumblings.

Oil-centric thinking at present has disqualified what is occurring in the grander macro arena, but at some stage our market will have to take notice. There are weighty issues this week including US CPI data tomorrow and the ECB rate decision on Thursday as the pick of many. The fate of interest rates and if there can be a reduction in 2024 is at stake and the rally in oil is making it harder for anyone believing that inflation is under control. Pricing of a FED rate cut continues to diminish and if one remembers, at the start of 2024 there was an expectation of 150-basis points of reduction, which at best now stands at 60%. A 25-basis point cut in June is now being priced in at under 50% whereas a week ago it was closer to 60%. Higher for longer interest rates and sticky inflation will have many and varied influences for commodities and one that should not be ignored in the current, understandable myopia of oil watching.

The world is still not ready

It has become increasingly difficult for the likes of the IEA to carry on in championing the call to end investment into fossil fuels. Back in 2021, Fatih Birol, the IEA’s executive director told the Guardian, “If governments are serious about the climate crisis, there can be no new investments in oil, gas and coal, from now – from this year.” The clamour and somewhat arrogance of a move into renewables and other forms of power have been given a right of passage and acceptance equivalent to modern day political correctness that to oppose, or even question the timing and costs of alternative power might be greeted with a doubter being ‘cancelled’. Recently, disgruntled persons linked with Oxford University were rending clothes, when they discovered that the endowment fund of the university still had £1 in every £200 invested in fossil fuels despite the promise of extrication back in 2020, and despite that the investments were through third-party fund managers. Even up to last year, the idea of investment in traditional fossil fuel company names was pilloried by the Institute of Energy Economics and Financial Analysis (IEEFA) as good money after bad for blue-chip fossil fuel returns would disappear. “Disruption and destabilisation in fossil fuel commodity markets, competition from renewable energy, the electrification of transport, and growing investor consciousness of climate change’s financial risks are driving investors to re-evaluate fossil fuels’ place in portfolios,” the IEEFA went on to say.

Yet, regardless of such warnings and for all the words mustered and bloviated at COP27 or is it COP28 they are numbered like the Fast and Furious movie saga, governments still pour trillions of dollars into production and even consumption of fossil fuels. The International Institute for Sustainable Development (IISD) complained at the end of last year that due to the energy crisis, fossil fuel subsidies increased substantially in 2022 as investments in fossil fuel infrastructure by state-owned energy companies in G20 countries hit an 8-year high. And although the international public financing for fossil fuel projects has decreased in recent years, it is still nearly four times greater than financing for clean energy. The horizon does not paint much change in terms of attitude. Platitudes and action seem unlikely to converge particularly in the world’s largest producer of oil. The US can only maintain that mantle if it continues to drill and explore at the same pace as it has done in the past few years. Americans have enjoyed autonomous oil freedom for only a short period of time, it has been hard won and the idea of being held to some sort of energy security ransom remains more unpalatable than what might be the effects of global warming. One need only look at the plight of Europe, particularly that of Germany, which has suffered at the hands of Russian weaponization of commodities and the painful process of weening itself from the cheap supply it had handcuffed itself to and probably the reason why Europe is the standout advocate of green energies and decarbonisation.

Energy security will continue to plague ideas of transition. Even the IEA in a recent analysis admits to such, “an enduring focus on oil security is a consequence of the continued need for oil to fuel cars, trucks, ships and aircraft, as well as to produce the petrochemicals necessary to manufacture countless everyday items.” Dependence is ingrained, forcibly accelerating away from fossil fuels can only lead to economic hardship, which is really the inconvenient truth, to steal from Al Gore. There is not a citizen of this planet that is beyond dreams of a healthier Earth, but the cost is too high and much of that cost is made up of security. This is why there is major dose of duplicity from politicians who must be seen to virtue signal in public but be pragmatic in private. Global Energy Monitor reports that last year, at least 20 oil and gas fields were readied and approved for extraction following discovery, sanctioning the removal of 8bn barrels of oil equivalent. By the end of this decade, the report found, the fossil-fuel industry aims to sanction nearly four times this amount, 31bn barrels of oil equivalent across 64 additional new oil and gas fields. The fossil fuel industry needs the green lobby to keep it innovative and proactive in emission control and pollution, but to say that oil and its like will have run its course by 2030 remains, in our view, premature indeed.

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