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Welcome to another power source.

The big story on the energy markets remains oil, whose prices fell sharply again yesterday. In our first note, I speak with Ed Morse, Citigroup’s Global Head of Commodity Research and Nestor of Oil Market Analysts. He shares his thoughts on why the price of oil is still defying Saudi Arabia, which announced new cuts more than a week ago – but has watched prices continue to fall.

In our second point, Aime reports on a proposal to avert more competition in carbon trading. In Data Drill, Amanda takes on a report on fossil fuel producers’ volatile net zero commitments.

Thank you for reading. Derek

PS Join us on 15 June for the FT’s Hydrogen Summit, where energy CEOs, leading politicians and financiers will discuss the opportunities and obstacles to harnessing the full power of hydrogen. FT Premium subscribers can register for free here.

The view from the bears’ point of view

Saudi Arabia is cutting oil production, and analysts from the International Energy Agency to Wall Street believe China’s roaring economy will send demand soaring this year while supply growth remains tepid.

So why do oil prices continue to fall? We asked Ed Morse, Citi’s veteran head of commodity research and a bearish voice in the bull market.

Morse’s argument: there is still plenty of supply; and the bullish faith of market cheerleaders is misplaced. “Our basic judgment is that supply will exceed demand in the second half of the year,” ES said.

Prices won’t average much more than $82 a barrel this year, he predicts — a good 20 percent below some forecasts. Next year they will be “well below” that level. This is his case:

1. China will not come to the rescue

The long-held belief was that China’s energy-hungry economy would finally kick into high gear later this year to boost global oil demand and push up prices.

Not so, says Morse.

“They [oil bulls] they have a sense – which is reinforced by both the IEA and the OPEC secretariat – that demand will really emerge in the second half of the year,” ES said. “They are very optimistic that China will find a way to stimulate the economy in ways that the government has so far chosen not to do.”

But in reality, China’s demand for diesel has long since peaked, he says. And its demand for gasoline will be close to peaking in the middle of the decade.

“We believe the market consensus that China has had several years of high demand growth is really a misunderstanding of where the demand drivers have been in the country. . . “

2. GDP growth is decoupled from oil demand

Economic growth no longer has the same impact on the oil market.

Before the pandemic, gross domestic product growth of 1 percent a year implied roughly half a percent growth in oil demand, Morse said. But that elasticity has fallen – and the fall will be sharper.

“We think people underestimate the structural phenomena that are at work,” he said. “They certainly reduce the relationship between GDP growth and oil demand.”

By mid-decade, peak motor vehicle demand in the US and Europe, coupled with peak diesel consumption in China and a near peak in gasoline consumption, will mean that even a fast-growing economy will not be enough to set the fire under oil demand.

This is a deeply bearish fundamental for the oil market.

“If you get 4 percent GDP growth globally, what’s the demand growth likely to be? You can have hope if you’re on the side of environmentalists and think it will be zero. Or I think you can be more realistic and say it will be less than 1%. And it could be half a percent,” Morse said.

And if demand is to grow by just 0.5 percent, that’s only 500,000 barrels a day. Can the world find that much extra oil? “It’s not hard,” Morse said.

The US itself is likely to be responsible for such extra supply.

3. ‘There’s plenty of oil around’

In fact, when we look at the growth of oil producing centers around the world, securing this growth looks pretty easy.

“Unless world demand is growing by 2 million barrels a day and you add up what is happening in the US and Brazil and Guyana and Australia and Argentina and Norway and Canada and even Venezuela. . . there’s a lot of oil around.”

Oil production is rising again in each of these countries. Yes, even Venezuela, which Platts believes is now producing nearly 800,000 b/d.

Arguments that a lack of investment — in and out of the U.S. shale region — will limit supply in the coming years are overstated, he says. “As far as we can tell, the argument that costs are rising and spending is falling is incorrect because it lacks greater efficiency in the use of capital.”

The big shale drillers, including ExxonMobil and Chevron, are capable of producing roughly double that in 2019 for the same price, Morse said.

“We’ve seen it time and time again, we certainly saw it between 2014 and 2016, when capital spending went down but productivity went up — way up because companies found ways to do more with less.”

5. What will Opec do?

The big wild card is Opec. Is the cartel willing to make more cuts to prop up the market?

There doesn’t seem to be much of an appetite outside of Saudi Arabia. And the group’s repeated efforts to intervene in the market have recently supported prices too much.

“I’m skeptical of an organization that has changed its production outlook three times since October and said, ‘Hey, this is permanent,'” Morse said.

It seems unlikely that Opec will keep its latest production plans intact until the end of 2024. “I certainly don’t think this is permanent for Iraq and their plans.” And it is definitely not for the UAE.”

With Brent down more than $4 a barrel since Saudi Arabia announced another temporary cut of 1m b/d last week, the group’s ability to support the oil price against the tide of macro dynamics looks increasingly limited. (Derek Brower and Myles McCormick)

New proposal to dampen green trade tensions

Joe Biden has largely halted the festering trade wars of the Donald Trump era, placating allies by suspending tariffs and offering new talks on a long-running dispute over aircraft subsidies.

But the president has ushered in a new era of green trade friction, angering US allies with a generous subsidy package available to companies that make cars, batteries and other clean technologies in the US.

Disagreements between the US and the EU over how to account for carbon in traded goods are about to intensify. This year, the EU introduced the world’s first carbon border tax. The levy, which is applied to imports in certain sectors, is linked to a carbon price set by the EU and paid by its domestic producers.

IN new paperformer White House climate adviser Paul Bledsoe and former trade official Edward Gresser propose a neat solution: Europe could be limited to some of the Inflation Reduction Act’s subsidies in exchange for reconsidering its carbon border tax.

The agreement could apply more broadly than just Europe, the authors say. Within the G7, countries could agree to measure the emissions intensity of products in sectors including steel, aluminium, fertilisers, hydrogen, cement and electricity. Any traded goods with embedded emissions above an agreed threshold could be taxed.

In exchange for traded goods from G7 countries that agree to the terms, it could be eligible for some subsidies under the IRA, including but not limited to tax credits on minerals, batteries and auto parts.

The G7 has been considering the details of a “climate club” on trade since late last year, but has so far released few details. In addition, the US and the EU are engaged in slow-moving talks on a climate agreement for steel and aluminum. But very little was achieved.

Bledsoe said it was still unclear how a proposal to scrap the carbon border tax in exchange for some green credits would pass in Brussels. But he added: “There is no reason to restrict our trade – we have every reason to trust our allies to ensure a secure supply of vital energy resources. (Aimee Williams)

Data drill

The net zero liabilities of fossil fuel producers are “largely pointless,” says a new report from the Net Zero Tracker, a research consortium that includes the University of Oxford and the University of North Carolina at Chapel Hill.

Two-thirds of the world’s largest fossil fuel companies have made net zero commitments, up from 45 percent last year, according to the report. However, most do not include or clarify coverage of Scope 3 emissions – emissions generated from end products – which make up the bulk of the industry’s carbon footprint. No company has pledged to phase out oil and gas production by mid-century, violating UN guidelines that credible net zero commitments must have “specific targets to phase out and/or support fossil fuels”. (Amanda Chu)

A bar chart of the share of the world's 2,000 largest companies by sector and commitment shows Two-thirds of the world's largest fossil fuel companies have net zero targets, but credibility is lacking

Power Points

Source of Power was written and edited by Derek Brower, Myles McCormick, Amanda Chu and Emily Goldberg. Contact us at and follow us on Twitter at @FTEenergy. Follow past issues of the newsletter here.

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