Easwaran Kanason

Co - founder of NrgEdge
Last Updated: November 11, 2016
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Business Trends
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The US elections were not rigged after all. Defying several polls that showed Hillary Clinton had a distinct lead, Donald Trump won a majority of the electoral college to become the 45th President of the United States. It is a scenario that very few prepared for, and it is now the reality for the next four years. What does this mean for the energy sector?  

In his first 100 days, Donald Trump promises to:
….lift the restrictions on the production of $50 trillion dollars' worth of job-producing American energy reserves, including shale, oil, natural gas and clean coal.

….lift the Obama-Clinton roadblocks and allow vital energy infrastructure projects, like the Keystone Pipeline, to move forward

….cancel billions in payments to U.N. climate change programs and use the money to fix America's water and environmental infrastructure

In the immediate aftermath of the news, oil prices fell sharply, part of a broader plunge in financial and commodity prices as markets reacted nervously to the unexpected outcome. But less than a day after the news sunk in, numbers were up again, and crude oil prices were back were they were before November 8 – in the mid US$40s/b. This suggests that the market seems to think that Donald Trump being in the White House is no preclusion to business as usual. However, it is in the longer term that these ramifications will manifest.

First, domestically. If Hillary won, she would have pushed the energy industry down the renewables trend it has been on since Barack Obama took power. Trump has campaigned to reverse it, and most Republicans would be behind that, focusing instead of exploiting the US’s vast amounts of shale, as well as possibly reviving the Keystone XL rejected by Obama in 2015, that will ship oil sands crude from Canada to Nebraska, then onward to the US Gulf. As Sarah Palin once said – the mantra is, drill baby drill – and a Trump presidency would scale back regulation to allow more drilling. Proponents say it will pump money into neglected states and spur job creations, while opponents fear the environmental damage and usage of eminent domain. There’s also another thing – the pipeline and more drilling will pump supply into a market already suffering from a glut. 

Secondly, internationally. Trump’s rhetorical hostility to trade is well documented –slapping taxes on Chinese imports and bringing manufacturing jobs back. The Trans-Pacific Partnership with Asia and the Transatlantic Economic Partnership with the EU is likely to be killed. But putting up barriers to trade is counter-productive and this is one promise Trump may not be able to keep, if he ever had any serious thought of it. But if you can’t keep trade from coming in, you can boost it going out – so LNG export projects along the Gulf will pop up more. Trump has also criticised the Iranian nuclear deal, which removed international sanctions to allow Iran to significantly ramp up its crude exports this year. This could be reversed with unilateral sanction, creating an upside  for Oil prices here but this may overshadowed by increased US production or even OPEC. 

It is in geopolitics that the greatest worry is. The Paris International Climate Accord is going to be stalled, and Trump has threatened to de-fund everything from the United Nations to NATO. An America under Trump – if you believe the rhetoric – is going to become significantly more isolationist and significantly less “international policeman”. There are tremendous ramifications resulting from this. Trump’s pal Putin could move unchecked towards Eastern Europe and into the Middle East and retain hold of Syria. While China will take full advantage of the power vacuum in East Asia, which depends on the US to act as a counterbalance. This could stoke tensions; between Japan and China, between Southeast Asia and China over the South China Sea’s large oil reserves in Spartly Islands. 

Chicken Littles may be running around crying that the world is ending because Trump is President. They are probably overstating it. The world is not and will not be coming to an end. There is too little that we know about what Trump will accomplish in office come this January onwards.  This is a man who has no history in public governance. Will he really “walk the talk”, and grab Congress and the Senate by the b***s! 

For now what is certain is uncertainty itself. And this traditionally makes Oil markets volatile and keeps investments at bay in a market that is already reeling. 

The sun will still shine tomorrow. You can bet on that for now.  

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May, 20 2022
High Oil Prices and Indonesia’s Ban on Oil Palm Exports

Supply chains are currently in crisis. They have been for a long time now, ever since the start of the Covid-19 pandemic reshaped the way the world works. Stressed shipping networks and operational blockages – coupled with China’s insistence on a Covid-zero policy – means that cargo tanker rates are at an all-time high and that there just aren’t enough of them. McDonalds and KFCs in Asia are running out of French fries to sell, not because there aren’t enough potatoes in Idaho, but because there aren’t enough ships to deliver them to Japan or to Singapore from Los Angeles. The war in Ukraine has placed a particular emphasis on food supply chains by disrupting global wheat and sunflower oil supply chains and kicking off distressingly high levels of food price inflation across North Africa, the Middle East and Asia. It was against this backdrop that Indonesia announced a complete ban on palm oil exports. That nuclear option shocked the markets, set off a potential new supply chain crisis and has particular implications on future of crude oil pricing and biofuels in Asia.  

A brief recap. Like most of Asia, Indonesia has been grappling with food price inflation as consequence of Covid-19. Like most of Asia, Indonesia has been attempting to control this through a combination of shielding its most vulnerable citizens through continued subsidies while attempting to optimise supply chains. Like most of Asia, Indonesia hasn’t been to control the market at all, because uncoordinated attempts across a wide spectrum of countries to achieve a similar level of individual protectionism is self-defeating.

Cooking oil is a major product of sensitive importance in Indonesia, and one that it is self-sufficient in as a result of its status as the world’s largest palm oil producer. So large is Indonesia in that regard that its excess palm oil production has been directed to increasingly higher biodiesel mandates, with a B40 mandate – diesel containing 40% of palm material – originally schedule for full implementation this year. But as palm oil prices started rising to all-time highs at the beginning of January, cooking oil started becoming scarcer in Indonesia. The government blamed hoarding and – wary of the Ramadan period and domestic unrest – implemented a Domestic Market Obligation on palm oil refineries, directing them to devote 20% of projected exports for domestic use. Increasingly stricter terms for the DMO continued over February and March, only for an abrupt U-turn in mid-March that removed the DMO completely. But as the war in Ukraine drove prices even further, Indonesia shocked the market by announcing an total ban on palm oil exports in late April. Chaotically, the ban was first clarified to be palm olein only (straight refining cooking oil), but then flip-flopped into a total ban of crude palm oil as well. Markets went haywire, prices jumped to historical highs and Indonesia’s trading partners reacted with alarm.

Joko Widodo has said that the ban will be indefinite until domestic cooking oil prices ‘moderate’. With the global situation as it is, ‘moderate’ is unlikely to be achieved until the end of 2022 at least, if ‘moderate’ is taken to be the previous level of palm oil prices – roughly half of current pricing. Logistically, Indonesia cannot hold out on the ban for more than two months. Only a third of Indonesia’s monthly palm oil production is consumed domestically; the rest is exported. An indefinite ban means that not only fill storage tanks up beyond capacity and estates forced to let fruit rot, but Indonesia will be missing out on crucial revenue from its crude palm oil export tax. Which is used to fund its biodiesel subsidies.

And that’s where the implications on oil come in. Indonesia’s ham-fisted attempt at protectionism has dire implications on biofuels policies in Asia. Palm oil prices within Indonesia might sink as long as surplus volumes can’t make it beyond the borders, but international palm oil prices will remain high as consuming countries pivot to producers like Malaysia, Thailand, Papua New Guinea, West Africa and Latin America. That in turn, threatens the biodiesel mandates in Thailand and Malaysia. The Thai government has already expressed concern over palm-led food price inflation and associated pressure on its (subsidised) biodiesel programme, launching efforts to mitigate the worst effects. Malaysia – which has a more direct approach to subsidised fuels – is also feeling the pinch. Thailand’s move to B10 and Malaysia’s move to B20 is now in jeopardy; in fact, Thailand has regressed its national mandate from B7 to B5. And the reason is that the differential between the bio- and the diesel portion of the biodiesel is now so disparate that subsidy regimes break down. It would be far cheaper – for the government, the tax-payers and consumers – to use straight diesel instead of biodiesel, as evidenced by Thailand’s reversal in mandates.

That, in turn, has implications on crude pricing. While OPEC+ is stubbornly sticking to its gentle approach to managing global crude supply, the stunning rebound in Asian demand has already kept the consumption side tight to match that supply. Crude prices above US$100/b are a recipe for demand destruction, and Asian economies have been preparing for this by looking at alternatives; biofuels for example. In the past four years, Indonesia has converted some of its oil refineries into biodiesel plants; in China, stricter crude import quotas are paving the way for China to clamp down on its status of a fuels exporter in favour of self-sustainability. But what happens when crude prices are high, but the prices of alternatives are higher? That is the case for palm oil now, where the gasoil-palm spread is now triple the previous average.

Part of this situation is due to market dynamics. Part of it is due to geopolitical effects. But part of it is also due to Indonesia’s knee-jerk reaction. Supply disruption at the level of a blanket ban is always seismic and kicks off a chain of unintended consequences; see the OPEC oil shocks of the 70s. Indonesia’s palm oil export ban is almost at that level. ‘Indefinite’ is a vague term and offers no consolation to markets looking for direction. Damage will be done, even if the ban lasts a month. But the longer it lasts – Indonesian general elections are due in February 2024 – the more serious the consequences could be. And the more the oil and refining industry in Asia will have to think about their preconceived notions of the future of oil in the region.

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Market Outlook:

  • Crude price trading range: Brent – US$110-1113/b, WTI – US$105-110/b
  • As the war in Ukraine becomes increasingly entrenched, the pressure on global crude prices as Russian energy exports remain curtailed; OPEC+ is offering little hope to consumers of displaced Russian crude, with no indication that it is ready to drastically increase supply beyond its current gentle approach
  • In the US, the so-called NOPEC bill is moving ahead, paving the way for the US to sue the OPEC+ group under antitrust rules for market manipulation, setting up a tense next few months as international geopolitics and trade relations are re-evaluated

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