Can The U.S. Afford A Conflict With Saudi Arabia?

1. Gasoline Prices Drop Back After Brief Surge

- After several weeks of increasing gasoline prices, the trend is declining again with the national average dropping back to $3.84 per USG.

- Refinery outages in the US west coast and Midwest were the main drivers of fuel price growth, resulting in California prices edging higher by more than $1/USG whilst Texas saw further decreases.

- The gap between wholesale and retail prices as their spread remains above $1 per barrel, has prompted White House calls against price-gouging by oil companies.

- With US refineries running at 89% of capacity, up 5% compared to this time around last year, it will not be gasoline but diesel that would be under serious upward pressure over the upcoming weeks.

2. Europe is Mopping Up Brazilian Ethanol

- The inexorably high costs of natural gas and electricity in Europe have hurt the continent's ethanol industry, forcing many producers to halt or curb production, however, gasoline blenders have found a new savior - Brazil.

- Ethanol prices have been in a freefall in Brazil after President Bolsonaro scrapped federal taxes on energy and since they were heavier on fossil fuels, ethanol lost its competitive edge over gasoline (the country's flexible-fuel vehicles can run on either).

- As a consequence, the European pull on Brazil's ethanol has been so high that local producers of it can no longer keep up with demand - in September alone, shipments were three times as high as a year ago.

- It is not just Europe that has seen surging flows of Brazilian ethanol as exports to the US went up by 10% year-on-year, though they still lag behind peak 2018 numbers.

3. Can India Trigger Another Grains Price Spike?

- Ever since harvesting season has started in India, the incessant heavy rainfall in the north-western and eastern parts of the country ensured 2022 will go down as one of the weakest years in some time.

- The crop losses are becoming the main upside factor for India's inflation, coming in at 7.4% in September, impacting poorer regions much more as wages have not kept pace with inflation.

- Limited wheat stocks, halving year-on-year to 22.7 million tons, will most probably curb India's grain exports just as global wheat trade remains curtailed by the Russia-Ukraine war.

- India's food inflation continues to trend higher than the overall CPI, however so far it has been vegetable inflation (at 18% as of September) that rose the quickest.

4. Can the US Afford a Conflict with Saudi Arabia?

- One of the most historic axes of cooperation in the oil markets, between the United States and Saudi Arabia, is increasingly under strain after OPEC+ production cuts pushed the White House to threaten its erstwhile partner with "consequences".

- Relations have soured despite a blossoming in the Trump era when the 45th President chose Saudi Arabia as his first foreign visit and vetoed three congressional bills that would have blocked arms sales to Riyadh.

- US President Biden indicated he has no plans to meet Crown Prince Mohammed bin Salman at the upcoming G20 summit in Indonesia, whilst Saudi authorities decided not to invite any US officials to their FII summit later this month.

- Saudi exports to the United States have been at their lowest level in decades, tallying a little below 400,000 b/d, as US refiners increasingly rely on domestic grades and short-haul imports.

5. High Power Prices Lift Renewables' Payback Time

- Even though Germany's 2023 calendar year power futures price slid down below 400 per MWh, the unprecedentedly elevated levels of electricity are cutting the payback periods of new renewables projects.

- According to Rystad Energy, the current elevated power prices and easing feedstock costs would make solar PV and wind projects see paybacks in 12 months or less, an unprecedented feat for an industry that is so used to subsidies.

- Even the EU's proposed €180/MWh power price cap would bring the payback period to 5-6 years, half of what it was a year ago.

- This being said, most renewable energy projects that are already operational do not benefit from the current streak of high prices as selling price would be fixed by a power purchase agreement (PPA).

6. India Doubles Down on Coal Despite Room for Intensive Growth

- Despite India's commitment to cut carbon emissions by a billion tons by 2030, the South Asian country's government is pushing forward with the development of 99 new coal mines.

- India's electricity demand is expected to grow at an annualized rate of 7.2% over the upcoming five years and with gas being as expensive as it is, coal was deemed the most suitable fossil fuel source.

- Analysts suggest that India need not open new mines because its current ones are already massively underutilized - miners are using merely two-thirds of existing production capacity.

- According to Kpler data, India's coal imports are already nearing the 2021 totals of 200 million tons, with the year-on-year growth in thermal coal standing at some 12%.

7. IRA Puts Wind into Sails of US Renewable Rollout

- BloombergNEF research indicates that the recently signed Inflation Reduction Act (IRA) will boost the development of solar and wind installations in the US by at least 20% through 2030.

- Installed solar power capacity is expected to more than triple by 2030, reaching a capacity of 364 GW, with annual new installations doubling from their current level of 24-25 GW.

- Wind power will see the addition of 147 GW new capacity, but most of the increases would come in the second half of the 2020s as new installations in 2023-2024 are set to drop.

- Renewables provided more than 25% of power generation in the US during the first half of 2022, on par with the global average and an almost 5 percentage point increase compared to 2021 levels.