Easwaran Kanason

Co - founder of NrgEdge
Last Updated: February, 25 2022 10:51:43 PM
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It has happened. After months of warnings and (failed) diplomatic attempts, Russia has invaded Ukraine. Less than 48 hours after officially recognising two Russian-majority separatist territories in Eastern Ukraine, Vladimir Putin ordered Russian troops to enter its western neighbour.

The sanctions on Russia stop short of crippling, but still triggered a collapse in the rouble. In response, Brent crude prices reached US$100/b, and looks set to continue trading in triple digits indefinitely, given that there is not endgame in sight. Russia’s stated objective is to ‘demilitarise’ and ‘denazify’ Ukraine, characterising it as a defensive manoeuvre. Most of the rest of the world is calling a spade a spade, labelling it a premediated invasion. In the 24 hours since the invasion began, Russia since stated that it is willing to negotiate terms of surrender. Given that Ukraine had cut off diplomatic relations with Russia, any deal would have to be brokered. The alternative is total occupation, which will prove difficult in the long-run, given that Ukrainians have been preparing for insurgency or a regime change. The latter would be Russia’s preference, having already installed a puppet government in Belarus, but it seems that it will also be content with a treaty that will forbid Ukraine from building a closer relationship with the West. Because that is, ultimately, Russia’s endgame. Or rather, Vladimir Putin’s ambitions of Russian hegemony: to prevent the NATO line moving eastwards to its largest land border and to rekindle the expanse and influence of the former Soviet Union.

How long the conflict in Ukraine will last is anyone’s guess. But world powers are calling it the largest threat to global peace since World War II, with some NATO states already triggering articles in the NATO charter to start defensive manoeuvres. Ukraine is not a NATO state, though it wants to be. But Poland, Estonia, Latvia and Romania are. An attack on one NATO state is an attack on all of NATO. Russian provocation in Ukraine is contained for the moment, but if its spreads, then the threat of Mutual Assured Destruction (MAD) rears its head as nuclear-powered powers go to war. Let’s hope it doesn’t come to that.

Meanwhile, the world will have to deal with the consequences of Russia’s move. That crude oil prices hit US$100/b is no surprise. Brent has been trading with a war risk ever since December when intelligence agencies began sounding the alarm over Ukraine. Given Russia’s major oil and gas production, as well as OPEC+ shrugging off the conflict and sticking with its ‘slowly, surely’ strategy of increasing crude supply, the ceiling for crude prices is unknown. Oil supply/demand dynamics are already tight, and the conflict (and sanctions) are also going to have major implications on super-tight supply chains elsewhere, from semiconductors (Ukraine is a major producer of neon gas for global semiconductor production) to sunflower oil (Ukraine and Russia being the largest producers).

Western sanctions on Russia are tough, but not the toughest that it could be. The EU, UK and US have not cut off Russia from the international banking SWIFT system, while sanctions have excluded energy so far. In fact, in the immediate aftermath of the invasion, over US$700 million in Russian oil and gas was purchased by the US and its allies. It could be strategic pickings but also driven by necessity; Europe is still dependent on Russian gas to power its economies, which was driven home since September when European gas prices surged to eye-watering all-time highs as Russian supply was held back with supply elsewhere tighter.

So, expect crude and natural gas prices to remain high until at least mid-2022, which could make things unbearable inflation-wise. But Russia’s move is also going to have long-term implications on the energy complex. Germany has suspended certification of the Nord Stream 2 gas pipeline, which was designed to provide a new direct route for Russian gas to Germany that bypasses Ukraine. Having resisted this against US and EU pressure, Germany’s decision to pull the plug will be existential: as long as Putin is in power, Germany will be reluctant to be reliant on Nord Stream 2 and Russian gas. That should drive an increasing acceleration to renewables in Germany and elsewhere in Western Europe, as the continent’s dependence on Russia for its energy needs is now a political minefield. Expansion and diversification of cleaner and domestic energy sources will now be the goal, with self-sufficiency a stretch.

But Russia is also treading on broken glass here. Full-time occupation of Ukraine will draining on resources that Russia does not have, and if Ukrainian insurgency prevents a regime-change, then Russia will have its back to the wall in the face of global sanctions aimed at crippling its economy. The West has also targeted influential individuals and institutions within Russia in a regime-change effort of its own. Ukraine may be facing physical pain, but Russian citizens will be feeling economic pain. The world will also feel plenty of its own pain, as the conflict further disrupts the global economy and pushes inflation even higher. China has offered Russia a bit of a lifeline from the sanctions, but that has been limited with Beijing trying to play both sides while also considering its own ambitions towards Taiwan, regarded as a breakaway province.

It didn’t have to come to this. Most analysts and a majority of the Russian population believed that Putin’s provocations were a bluff, aimed at bolstering Putin’s bargaining position in regards to existing sanctions and military defence. One Moscow-based analyst called potentially occupying Ukraine a ‘debatable short-term physical gain for a whole lot of long-term economic pain’. But Putin has been laying the ground for possibly annexing the whole of Ukraine for a while now. Past speeches that now seem sinister called Ukrainians and Russians ‘one people’ and labelled Ukraine as ‘historical Russian lands’. The situation is volatile and so will energy prices. Markets trade on logic and, in the absence of that, behave irrationally.

Other notes:

  • There is some hope that efforts to re-engage Iran on a nuclear deal could provide some additional supply, but that has been fogged over by the uncertainty of war
  • On the natural gas front, Dutch TTF Gas Futures jumped 60% as Russia threatened to cut off even more gas supply following a halt in the certification of Nord Stream 2

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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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An online shop is a type of e-commerce website where the products are typically marketed over the internet. The online sale of goods and services is a type of electronic commerce, or "e-commerce". The construction supply online shop makes it all the more convenient for customers to get what they need when they want it. The construction supply industry is on the rise, but finding the right supplier can be difficult. This is where an online store comes in handy.

Nowadays, everyone is shopping online - from groceries to clothes. And it's no different for construction supplies. With an online store, you can find all your supplies in one place and have them delivered to your doorstep. Construction supply online shops are a great way to find all the construction supplies you need. They also offer a wide variety of products from different suppliers, making it easier for customers to find what they're looking for. A construction supply online shop is essential for any construction company. They are the primary point of contact for the customers and they provide them with all the goods they need.

Most construction supply companies have an online shop where customers can purchase everything they need for their project, but some still prefer to use brick-and-mortar stores instead, so it’s important to sell both in your store.

Construction supply is an essential part of any construction site too. Construction supply shops are usually limited to the geographic area where they are located. This is because, in order for construction supplies to be delivered on time, they must be close to the construction site that ordered them. But with modern technology and internet connectivity, it has become possible for people to purchase their construction supplies online and have them shipped right to their doorstep. Online stores such as Supply House offer a wide variety of products that can help you find what you need without having to drive around town looking for it.

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