Energy price woes due to geopolitical issues emerge

Oil prices continued to fluctuate at around 80 US dollars per barrel in recent trading sessions, subject to moves by oil producing countries to restrict output. On top of that, the EU’s ban on Russian crude imports—effective from 5 December—and the G7 price cap on Putin's oil, are all factors that increase concerns about tighter supplies, which puts further pressure on prices.

Prices were also pressured by reports that the US granted Chevron Corp a licence to resume production in Venezuela, thus pushing the US oil benchmark into its fourth straight week of declines. This happened at the same time as Covid-related uncertainties in top crude importer China and fears of a looming global recession weighed on energy markets despite a recent recovery in crude prices as seen in the past few days. 

The OPEC+ alliance—comprised of 13 oil-exporting countries and 11 non-member allied countries—announced a cut in oil production by 2 million barrels a day in early October. This move represented the largest cut in production since the start of the pandemic. Despite this, prices trended downward from July to mid-September, as the Biden administration officials also urged US oil producers to increase output and reinvest profits towards boosting production. The Biden administration also attempted to counter OPEC's moves by releasing stock from the US's strategic petroleum reserve but this move turned out to be largely inconsequential given the sheer volume that OPEC+ is able to produce. 

As a last resort, the so-called NOPEC bill can be deployed by the US as a reaction if prices go higher, causing more inflationary woes to consumers. The bill would effectively penalise other oil producing states by opening them up to antitrust scrutiny, which would effectively allow the US Justice Department to sue members of OPEC+ for anti-competitive behaviour. Alternatively, the US could also limit American energy companies’ exports if shortages ensue, or even loosen sanctions on other oil producers such as Venezuela and Iran. 

Both Venezuela and Iran are outcast oil producers subject to domestic policies, with Iran’s nuclear program being a dominant factor in its oil exportation capacity. The US’s sudden shift in its attitude towards Iran is an issue that has been leading up to a positive resolution since 2016, when the International Atomic Energy Agency verified that Iran had completed the necessary steps under the Iran deal that would ensure the peaceful nature of Iran's nuclear program. In practice, this means less harsh oil-exporting sanctions imposed on Iran. However, if Iran breaks this agreement, sanctions will snap back into place. 

Another political factor that has an effect on the situation is the recently passed Inflation Reduction Act, which includes measures that will aid the US in transitioning away from fossil fuels and would eventually reduce US exposure to global oil prices in the long term. The bill would also make credit form subsidies “direct pay”, meaning that companies will get payment for credits directly from the government rather than having to deal with a lot of red tape in between. 

On the corporate front, big clean energy groups have seen their shares rise on the renewal of the Inflation Reduction Act as analysts expected the trend upwards to persist with the bill moving forward. ExxonMobil and Chevron have put carbon capture and storage, hydrogen, and biofuels at the centre of their low-carbon businesses, and they get bigger tax credits and new incentives to do so. 

Disclaimer: This article is brought to you by Shaun Frendo, Research Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd, which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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