Oils not well

Election campaigning has highlighted the differing political views on the North Sea oil and gas industry. With Sir Kier Starmer heading for no.10, the Labour party has said it would not issue new oil and gas licences and would extend the windfall tax on energy companies.

While the UK shifts towards renewables, elsewhere new oil production continues to come on stream. For example, Senegal has started producing oil for the first time, aiming at 100,000 barrels a day from Woodside Energy’s Sangomar offshore oil & gas field.

With the world shifting to renewables, the International Energy Agency (IEA), has updated its longer-term global oil demand forecasts. These show that global demand could peak before 2030 due to three main factors. Firstly, the switch from petrol to electric vehicles; second,  Saudi Arabia’s shift to renewables for electricity generation; and third, the slower pace of economic growth in China. The most important of these is China, which over the last decade accounted for 60% of global oil demand growth.

While demand is forecast to peak before 2030, the IEA estimates continued investment by oil producers could result in more than 8 million barrels a day of surplus capacity. If correct, this would usher in an era of lower oil prices. However, OPEC+ has challenged the IEA’s projections and warned of ‘energy chaos on a potentially unprecedented scale’ if producers stop investing in new oil capacity. Interestingly, New Zealand’s government recently announced it would introduce legislation to remove a ban on offshore petroleum exploration that was put in place in 2018.

Meanwhile, OPEC+ has been trying to support the oil price through voluntary production cuts, but not all members of the organisation appear to have adhered to this plan. To further complicate matters, Russia is pumping oil to finance its war in Ukraine, with China and India buying its oil at a discounted price. The war in Ukraine and the cost-of-living crisis is a timely reminder of the need for energy security. While we all support the shift to renewables, there is the matter of keeping the lights on during the transition.

In the meantime, China has ramped up production of electric vehicles (EVs), to dominate the global market with more than 50% of worldwide EV sales last year. This has prompted the US and EU to introduce tariffs. However, it is not just oil with a potential over capacity risk, as a report suggested China’s lithium-ion battery production could exceed demand significantly for the rest of the decade!

Whether it’s oil or renewables, the world needs stable energy markets and lower interest rates.

What have we been watching?

Despite uncertainty over interest rates, US equities hit their thirtieth fresh all-time high last week, driven by large tech companies but particularly semiconductor chip manufacturers. AI chipmaker Nvidia is now up 163% year-to-date and 15% so far this month, briefly overtaking Microsoft to become the world’s most valuable company. The enthusiasm for AI has more than offset deferred interest rate cut hopes, with just one likely compared to up to six at the start of 2024. The chance of a US interest rate cut in September is currently 65%. Elsewhere, the chance of a second cut by the European Central Bank (ECB) in September is 58%. In the UK,’sticky’ service inflation and election build-up have seen interest rate cut expectations drift, with the chance of an August cut now down to 44%. The chance of two UK interest rate cuts this year have dropped from 95% to 75%.

Australia and China appear to be re-building trade bridges after the latter imposed various trade tariffs on the former a few years ago following its accusation that China had covered up the Covid-19 outbreak. Unfortunately, the EU and China are now involved in a tit-for-tat trade war. Following last week’s news about EU tariffs on Chinese EVs, China has announced an anti-dumping investigation into imported pork from the EU that is most likely to impact Spain, the Netherlands, France, and Denmark. Chinese car makers are calling on Beijing to impose tariffs of 25% on EU EVs and large petrol-driven engines.

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UK headline CPI inflation for May fell from 2.3% to 2%, while core inflation came down from 3.9% to 3.5%. While headline inflation dropped to the Bank of England’s (BoE) target of 2%, service sector inflation remained strong in May, albeit slowing to 5.7%. The Bank of England kept interest rates on hold at 5.25% by 7-2 votes, as expected, but did leave the door open to consider the first cut at its next meeting in August. UK retail sales came in stronger than expected, at 1.3%, rebounding from -2.3%, its biggest gain since March 2022.

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US retail sales were a tad weaker than expected in May at 0.1%, but the April data was revised lower to a 0.2% contraction. However, US industrial production picked up faster than expected in May increasing by 0.9% compared with no growth or contraction in April from March.

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Inflation in Japan has accelerated to 2.8% from 2.5% in May, with the BOJ minutes revealing that a rate hike is being considered, with one member advocating for an increase “without too much delay”.

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Brent oil edged up to $85 as tension in the Middle East grows with the risk of war across Lebanon’s southern border.

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Finally, another bit of supportive news for the UK stock market? French equities have been under pressure since Emanuel Macron called a snap election. Last week, France lost its crown as Europe’s largest stock market, with London leapfrogging it after spending two years in second place. Sadly, both the UK and French stock markets have been leapfrogged by Nvidia with a value of over $3.1 trillion! AI is obviously more exciting than the prospect of Sir Kier Starmer/Rachel Reeves or Emanuel Marcon/Marine Le Pen!

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.