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April 2022 | Issue 244
Opinion Credit
Faltering oil supply is lamentable at a time of strategic and moral shortfall
Faltering oil supply is lamentable at a time of strategic and moral shortfall
Welshcake
welshcake@acuris.com
We need to accept the pain and cut dependence on Russian oil today
Financial market desensitisation is worryingly apparent as the war in Ukraine continues, but any bubbles of comfort are sure to burst in April. Governments face decisions on energy and central banks on policy that they know will be unpopular, but make these calls they must — and credit is in the crossfire.
It is customary for Wales to take the lead on all matters of global importance. Nevertheless, I have been gratified to learn this is the case on energy independence, at a time when Europe desperately needs to show more resolve.
There are plans afoot to build a $7 billion tidal lagoon between our coastal towns of Prestatyn and Llandudno. This, so it’s claimed, would generate 22,000 jobs and enough electricity for every home in Wales. Take that Vladimir Putin!
The only problem: right in the middle of said salubrious geographical range is North Rhyl. This was recently reported as the place in all of Wales where you are most likely to be attacked — especially if you use words like ‘bidirectional turbines’.
Welsh passions aside, the real obstacle will be getting the UK government to approve funding — given it quashed a proposed Swansea Bay plant in 2018 on ‘value-for-money’ grounds. For history to be repeated would be galling, especially since thousands of Russian oil barrels continue to find their way regularly onto our nation’s shores.
Governments need to act decisively
Pressure is mounting on European governments to do more. Sanctions continue to tighten, but in what must seem a horrendously piecemeal manner to the people of Ukraine. With Putin calling the shots on receiving payment for oil in roubles and the currency having rebounded sharply against the US dollar, pledges like the UK’s to end dependence by the end of 2022 are not enough.
Of course I get it — so many people are already suffering from higher energy prices. But taking a sharp shock up front is preferable to anything that allows this Europe-wide economic trauma to persist throughout the year. And wildly more preferable than allowing the suffering of Ukrainians to persist.
Horrors like those discovered in the town of Bucha surely put the onus on world governments to act in lockstep to mount an effective response. One policy that would be devastating for Russia, but that would also ease European consumer pain, would be for the US and Opec members to boost oil production at the same time as importing countries cease their Russian orders.
That is a tall order both practically and politically — and certainly not something I would normally dream of advocating given the environmental implications. But the US already upped supply by one million barrels per day — and history teaches that similar supply shocks brought the Soviet Union to its knees back in the late 80s.
Whether the US can pressure Opec members is debatable. In a recent television interview, Saudi energy minister Abdulaziz bin Salman Al Saud said the existence of Opec-plus (which includes Russia) depends on separating its mission to stabilise oil prices from geopolitical factors. But this appeared to be in response to suggestions Opec-plus could kick Russia out of the group, rather than to the idea of increasing production — which surely would sit well with that mission.
Opec already voted to increase production but members have failed to meet their own quotas. Iraq for one, the biggest contributor to Opec after Saudi Arabia, slumped 220,000 barrels per day behind target in March, while the organisation increased total production only by 90,000bpd — against an allowed increase of 253,000bpd. As much as faltering oil supply might be music to ESG-enthusiasts, this is lamentable at a time of strategic and moral shortfall in the world’s attempts to deal with the Ukraine crisis.
Stability may not last much longer
Credit investors should be mindful that supply shocks could soon hit in either direction. That, in tandem with the central bank policy monster rearing its head again after a month seemingly dormant, could lay waste to any semblance of stability in the coming weeks.
Hold onto your hats — as I do on the Rhyl miniature railway while eating an ice cream and giving a friendly shove to the tourists.
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Global credit funds & CLO's
April 2022 | Issue 244
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