Prigozhin’s ‘coup’ failed to wake oil market bears

Good day from New York.

The big story in energy over recent days is of course the turmoil in Russia, the world’s largest petroleum exporter. For oil and gas markets, the brief possibility of a coup in Moscow and the threat to Vladimir Putin’s regime was a dog that didn’t bite. That is the topic of note one.

In our second note, Amanda hears from AlixPartners about the future of the world’s car sector. Data Drill reveals that the rich will lose the most from any effects of the energy transition on their retirement portfolios.

Thanks for reading — Derek

Why the ‘coup’ attempt in Russia hasn’t lifted oil prices

It’s probably good that the oil market takes the weekend off. Between the closing of the Brent contract on Friday and the reopening on Monday morning in Asia, Yevgeny Prigozhin and his band of mercenaries launched a “coup” in Russia, seized control of a city, destroyed Russian aircraft, marched towards Moscow, and were then dissuaded from the whole idea. Oil traders who slept through the weekend would have seen little impact: Brent prices opened barely higher after a wild 24 hours in which the world’s third-biggest oil producer faced the prospect of a civil war.

This is strange. After previous big geopolitical events in oil producing countries, crude prices have risen by 8 per cent, according to Rystad Energy. Why has the market been so sanguine this time?

For one thing, it’s a sign of just how bearish the mood is. 2008 and 2011 this ain’t. Back then, news of a pipeline attack in the Niger Delta or even violence in non-oil-producing Israel could push up crude prices. The sudden loss of Libyan oil during the Arab Spring compelled the US and other countries to release emergency supplies on to the market — and even so, crude soared above $110 a barrel.

Over the weekend, US officials including Biden energy adviser Amos Hochstein were concerned enough to ask domestic and foreign producers for contingency plans should there be a loss of Russian crude, wrote Helima Croft, head of global commodity strategy at RBC Capital Markets. A spokesman for Hochstein did not comment.

Any panic was shortlived. Bullish analysts still expect the oil market to tighten significantly later this year. But for now three bearish forces continue to be front of mind for many traders.

The Opec cuts announced in recent months may have done little to raise oil prices, but they do leave a lot of spare oil in reserve. Opec’s spare capacity has risen from 2.5mn barrels a day in August to 4.3mn b/d now.

China’s sputtering economic recovery is still hurting oil demand and weighing on prices. Goldman Sachs believes Chinese oil demand dropped by 500,000 b/d last week — a huge number.

Rising interest rates in big western economies, coupled with the persistent inversion of the yield curve in the US — when the yield on short-term bonds is higher than those on longer-term bonds — leaves analysts still expecting a recession.

Analysts were also quick to downplay the impact on Russian oil supply from the weekend’s events. Matthew Holland, geopolitical analyst at Energy Aspects, said an imminent regime collapse, end to the war in Ukraine or end to sanctions were all unlikely. Prigozhin had “seriously undermined” the stability of Vladimir Putin’s regime, he said, but “we see no impact on Russian oil or gas flows”.

Can this calm last? Goldman said the events underline Russia’s “political fragility” — a new reality that will trouble China and India, which have deepened their dependence on Russian oil since Putin ordered the full-scale invasion of Ukraine. Goldman also notes that Prigozhin’s Wagner mercenaries operate in Libya and could disrupt its oil output.

My own observation, having reported from conflict zones from Libya to Iraq and lived in Russia during the era when Putin dismantled Mikhail Khodorkovsky’s Yukos, prompting dire warnings of impending energy supply losses, is that oil-producing countries tend to be better than expected at getting their commodity to market — even in the face of political turmoil. For too many vested interests — among consumers but especially producers — oil is usually too valuable to leave in the ground for long.

There are plenty of counter examples. Iran’s oil output never regained the highs it hit before the 1979 revolution. Venezuela’s is a fraction of its level from before the late Hugo Chávez took power. But the oil market has already panicked once about Russian supply, just over a year ago. The lesson since its brutal invasion began last February is that the oil will keep flowing. (Derek Brower)

Rise of Chinese carmakers presents a global challenge

The global car market has reached a geopolitical turning point.

China topped Japan as the largest car exporter in the first quarter, with 1mn vehicles sent abroad, according to an outlook from AlixPartners, an industry consultancy. Europe remains the largest buyer of Chinese-made models, importing more than 600,000 vehicles last year.

Domestically, China’s car industry has achieved other notable milestones. Electric vehicles made up a quarter of new vehicle sales in the country last year, three years ahead of the government’s target. Chinese consumers also increasingly prefer domestic carmakers, with Chinese brands predicted to outsell their foreign counterparts for the first time in decades.

The shifts in China’s car industry are a harbinger of the disruption expected to come to the global market, warns the consultancy.

Here are other notable takeaways from the report.

Massive subsidies

When US president Joe Biden approved historic subsidies for clean energy in the Inflation Reduction Act last year, he set off a race among western nations to incentivise their own domestic industries.

But China was long ahead of the curve. Last year, Beijing invested $52bn in domestic EV development, nearly five times the amount of capital deployed in the US, estimates AlixPartners. Its carmakers also lead the way in engineering special technology features for EVs and are faster to come to market.

“If we look at [it] historically over the last 10 years . . . the industry has been focused on the disruption of Tesla,” said Stephen Dyer, co-head of the consultancy’s Greater China business. “Now what we see going forward is this might be the time and age where we need to look at future disruptive competition from Chinese brands.”

‘Wave’ of Chinese EVs abroad

Unless traditional carmakers find a way to regain their competitive edge, AlixPartners expects Chinese brands to become strong challengers in foreign markets, particularly in Europe, which has been more receptive to imports from China.

But the consultancy isn’t ruling out Chinese penetration of the US market. Beijing’s participation in the US EV rollout has become a thorny issue amid worsening tensions between the two largest economies. Ford’s $3.5bn plant with Chinese battery maker CATL in Michigan came under fire from Republican politicians earlier this year, with Virginia governor Glenn Youngkin accusing the project of being a “front” for the Chinese Communist party.

“The mood can change politically over several years . . . It wouldn’t be a good idea to simply bet on protectionism and bet on a cold relationship between China and the US if your horizon is five to 15 years out,” said Mark Wakefield, head of the consultancy’s auto practice in the Americas.

ICE is melting

While it will be tough for traditional carmakers to catch up with China’s acceleration, they are trying. EV investments doubled in the past two years, with global commitments totalling $616bn, according to AlixPartners. The consultancy found that EV investments now make up one-third of investments among original equipment manufacturers.

The declining share of investment for gas-guzzling cars reflects broader market trends. While the consultancy sees a 6 per cent increase in US internal combustion engine sales this year, it attributes the growth to pent-up demand and expects sales to plateau before declining in 2026. (Amanda Chu)

Data Drill

Opponents of the energy transition have harnessed the fear that a rapid move from fossil fuels to renewable energy sources will dent the general public’s savings. But a new study in the science journal Joule found that the losses from stranded assets will mainly effect the rich.

The study estimated the potential in lost profits from more than 40,000 oil and gas fields and found that in the US and Europe, the top 10 per cent of wealth holders will bear more than two-thirds of the losses from stranded assets. The bottom 50 per cent, meanwhile, will bear less than 5 per cent.

Because the portfolios of the wealthy are often large and diversified, the study estimates these losses will make up less than 1 per cent of their net wealth.

“If you’re looking at this from the perspective of a policymaker who wishes to avoid pain for ordinary people, one way this could manifest is the loss in the value of your savings. [But] it’s just not a big deal,” said Gregor Semieniuk, an economist at University of Massachusetts Amherst and the co-author of the study. “People that stand to lose on the stranded asset side, they can stomach this loss.” (Amanda Chu)

Power Points

Energy Source is written and edited by Derek Brower, Myles McCormick, Amanda Chu and Emily Goldberg. Reach us at [email protected] and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.