“Geoeconomic Fragmentation Creating Dynamic Shifts in Global Logistics!”

H.E. ???? ?????? Khamis Juma Buamim, Chairman, Dubai Council for Marine & Maritime Industries, Chairman & Group CEO, KBI-uae

The geopolitical tensions we are witnessing in the Middle East are not a new phenomenon, and we don’t see that the derailment of shipping routes will be long lasting. In some cases, the impact on global trade and mobility has been overestimated. We’ve also seen many countries impacted positively in that it has opened the opportunity to have new bilateral economic agreements. This is a phenomenon that has been happening for quite a while due to the geoeconomic fragmentation that’s happening around the globe. As we speak, countries and regions are implementing more modifications and mitigating these new dynamics in transportation, whether by sea or by land. The UAE has always been at the forefront of reducing trade restrictions and has placed a lot of importance on infrastructure investment in this regard. This is part of the evolution of trade and economy, and of creating added value for the future.

How critical is the maritime sector in shaping the future of the UAE economy?

A notable new dynamic, particularly within the maritime and energy industries, is a growing emphasis on building clusters to foster integration and synergies. This trend spans both regional and international levels. The UAE stands out as a dynamic player in this arena, consistently leading change, to bolster economic and sustainable growth. One unique aspect of the UAE is its geographical advantage, straddling the Red Sea and the Arabian Gulf, with access to the Gulf of Oman and the Indian Ocean. This strategic positioning facilitates faster and more efficient global trade. The development of clusters around the UAE is poised to generate added value. Globally, there’s a concerted effort to enhance such strategic thinking, transitioning from traditional modes of operation to a more clustered approach.

What new technologies do you envisage will disrupt logistics next?

The presence of technology, whether it’s AI, software, or systems, has always been pervasive. This holds true not only in the UAE but across the Middle East. These capabilities have been steadily integrated into various sectors. A key focus has been on streamlining supply chain processes, with a significant shift from paper-based to digital exchanges. The advent of AI further enhances this connectivity, enabling remote access and benefiting areas such as data management and blockchain applications. These advancements have the potential to greatly optimize our ports, cities, supply chain, and overall logistics and shipping operations, adding substantial value to our industry. Embracing technology in this manner is pivotal for ensuring the sustainability of our future endeavors. It’s a concept we’re actively implementing and refining.

How are trends like ‘near-shoring’ impacting the maritime industry?

Regulatory changes in various countries and regions, often occur in response to economic, geopolitical, or environmental triggers. Interestingly, such changes can inadvertently create opportunities for other nations to explore mitigation strategies. The most pressing issue we face today is the fragmentation of the global landscape that has unfolded over the past few years. This affects trade, supply chains, logistics, and overall economic structures, with associated costs. We’re experiencing a shift from the traditional West to East trade dynamic, to a new paradigm where the focus is transitioning from North to South. This shift is particularly significant in the energy sector and the sourcing of raw materials such as minerals, and regions like the GCC, MENA, and Africa are poised for substantial growth. Ensuring the smooth flow of trade and economic activity in our region is paramount, both for our own prosperity and for the global economy.

What’s your view on sharing best practice with countries the UAE invests in?

This is perhaps the most crucial aspect. We firmly believe in the power of knowledge sharing, embracing best practices, and fostering transformation processes. Our approach is distinct in that we advocate for a holistic perspective, striving to create value for all stakeholders involved. For example, the success of Africa’s transformation journey is intertwined with our own, and we are committed to supporting and enhancing this process from within. Rather than imposing external solutions, we prioritize empowering in-country processes. The UAE has long-standing ties with regions such as the subcontinent, East Africa, and the Arabian Gulf. This historical interconnectedness underscores the potential for further enhancement. The question today is how we can amplify it and add more value.

Are maritime services for the region becoming overcrowded?

Competition will continue to be a driving force within the industry, spurring innovation and enhancing value creation. However, it’s essential that competition remains fair and equitable and leads to better services and ensures the sustainability of the industry. Ultimately, it’s the end user who bears the costs, so fair competition is imperative. Collaboration is equally vital, and this is why we advocate for the formation of maritime clusters, particularly among neighbouring regions. The UAE serves as a prime example, with numerous agreements facilitating interaction with countries, while circumventing unnecessary restrictions from global trade regulations. The ongoing transformation within the industry, encompassing port operations, logistical advancements, technological innovations, and enhanced mobility, is substantial and is set to continue.

What progress do you envisage for sustainable fuels this decade?

Excessive regulation tends to stifle innovation rather than foster it. Ideally, it should support processes rather than constrain them with overly specific targets. Thankfully, the UAE has been proactive and flexible in its approach to regulation, particularly in the realm of fuels. We’re witnessing a shift towards cleaner, more sustainable fuels, aimed at minimizing carbon emissions. In Fujairah, for instance, initiatives are underway to explore alternative fuel sources and technologies, such as slow-speed processes that reduce shipping emissions. While the fuels of the future are still not all there, there’s a collective effort towards innovation and adaptation. But despite this progress, oil will likely remain a primary energy source for years to come, so it’s crucial to embrace technological advancements that can create value, enhance efficiency in fuel consumption and reduce environmental impact.

Watch full Interview here!

Over the last week, Gulf Intelligence has held high-level interviews with energy experts in the Middle East, Asia, Europe, and the US. This intel is harvested from the exclusive briefings.

ENERGY MARKETS VIEWS YOU CAN USE

Maleeha Bengali
Founder, MB Commodity Corner         

The oil market is stuck in a range primarily because demand has been muted.

Prices should have been lower, but since OPEC+, have kept 3 to 5 million barrels off the market, they’ve stayed stable. Most sell-side equity and commodity analysts predict a massive recovery, including OPEC, but those demand expectations are just not coming to fruition. If you take a step back and look at other sectors like copper, nickel, or uranium, there’s a lot of activity in those commodities because they are primarily very supply-driven markets. The oil market, on the other hand, doesn’t have a shortage. Oil products demand has been quite weak, demonstrated by the gasoline and middle distillate inventories levels.

What’s next for Fed rate cuts?

Having started this year with 6 or 7 rate cuts projected, today we’re oscillating between 1 and 2, which probably will start between September to December. We think the Fed prematurely flip-flopped in December and went very dovish when there was no reason to do so. Now the data is looking weak on the GDP side. The employment market is holding up well, but the actual PMI and ISM services are rolling over. Inflation is ticking up, stabilizing around 2.8% to 2.9%, and by some metrics 3.9%. The rate of change is lower from last year, but we’re not going lower, and services inflation is high. Add to that copper, nickel, and other commodities prices, and we’re going to see inflation pick up. The question is, what can the Fed do? The data indicates stagflation. Banks and consumers need a cut, and the US interest expense on debt is $1.2 trillion. But who bears the burden, the consumer or inflation?

What about central banks elsewhere?

We think others, like the ECB, are probably going to start cutting rates, as their economies are weaker. That’s what’s driving the dollar right now. And look at the Bank of Japan and the Yen, and bond yields going above 1%. There’s a lot happening also with the Yuan and the PBoC. There’s a currency crisis of sorts. The entire world is waiting for the Fed to cut

Is it a soft landing for the US economy?

The Fed may need to cut eventually, but under the wrong circumstances. The labour market is showing signs of stabilizing and slightly weakening, with a lag effect that the Fed might not fully comprehend. So, we think there could be a downgrade if we go into a recession at the end of this year or early next year, which is not being priced in. People are very bullish across the board. And on equities, the technology sector has a lot of cash, but SMEs are suffering; they can’t afford these high rates and we’re seeing bankruptcies even higher than 2008 levels.

Michal Meidan
Head of China Research Programme
The Oxford Institute for Energy Studies        

What should we conclude from the IMF’s raised growth forecasts for China?

The IMF is fundamentally aligning with the Chinese government, forecasting around 5% GDP growth for the year. However, it is becoming harder to read because the traditional drivers of growth, like the real estate sector, are no longer driving economic activity and sentiment in China. The reality is that the recovery remains relatively weak and very complex. The government is looking to stabilize the real estate sector, but that’s very difficult. There’s a problem with employment and consumption. The ‘new productive forces’—this big industrial push for EVs, batteries, and solar panels—are maintaining growth but probably not enough to keep a very bullish outlook for the Chinese economy.

Has China made any progress on resolving its real estate sector issues?

It’s a very fine balance between trying to stabilize the sector, without inflating a bubble. Also, although real estate is one of the elements because people’s wealth and the economy are so tied in, the government is equally or more worried about local government debt. This debt fuels the economy, employment, job creation, and social security, which they need to establish for sustainable long-term growth. They’re also concerned about the securitization of the economy amid a very negative external environment, both geopolitically and economically. So, what the IMF might suggest as economic goals is not necessarily what the Chinese government is prioritizing.

How big a deal are the most recent tariffs from the US on Chinese EVs?

It could be seen as a symbolic signal, but it’s going to make decarbonization and the US energy transition harder, as Chinese goods and components are lower cost and abundant. Chinese capacity now is likely enough to supply the world in various goods two times over, depending on which part of the new energy supply chains you’re looking at. China will probably retaliate symbolically, targeting something like agricultural products from electorally important states, to send a message without hurting the Chinese economy too much. But this tit-for-tat will likely escalate, adding costs and logistical constraints, feeding into inflationary pressures, and slowing down the energy transition. Another impact is that third countries could possibly benefit, as Chinese companies relocate supply chains into FTA countries or other locations, where their goods can then enter the US.

Brian Pieri
Founding Member, Energy Rogue        

US production today is about 13.1mn b/d, the same level as in October.

We’ve essentially plateaued at this rate, with declines offsetting new production. To significantly increase oil output, we’d need to expand rigs. However, the economics are challenging due to current pricing. One notable observation is that ten years ago, both Brent and WTI prices were similar. Drilling costs have surged by about 300% since then, while oil prices remain stagnant. Consequently, operators are facing difficulties in bringing new production online, contributing to rig discipline and limited expansion compared to last year, which was still recovering from the effects of Covid. I anticipate US production to either remain flat or decrease, possibly reaching 12mn b/d by year-end.

Outlook for increased Venezuelan production?

Despite the reimplementation of US sanctions, Chevron and Repsol continue their operations in Venezuela. I don’t foresee a near-term slowdown or rapid growth in Venezuelan oil production. It may take up to 24 months for significant additional barrels to enter the market.

Will there be a significant difference in energy policy between Biden or Trump?

The Democrats and Biden’s policies lean towards renewables, some of which could prematurely shut down up to 40-50% of US oil and gas production if strictly enforced. Conversely, Republicans, likely led by Trump, may offer more favourable policies. Yet, any significant changes would entail a lengthy process of unwinding previous policies, meaning immediate impacts are unlikely in 2025. What’s disheartening is the polarization between fossil fuels and renewables, neglecting the potential synergy between them.

What are gasoline and diesel consumption indicating about the US economy?

In various regions, gasoline and diesel prices have converged, a stark departure from the past 24 months. This convergence suggests two possibilities for the driving season: either increased gasoline demand or weakened diesel demand, each signalling different economic scenarios. While strong gasoline demand indicates robust consumer activity, soft diesel demand could hint at underlying economic fragility, with broader implications. So, while I’m not offering a clear bullish or bearish outlook, these conflicting indicators warrant close observation in the weeks ahead.

Ilia Bouchouev, Ph.D. 
Managing Partner, Pentathlon Investments        

The consensus suggests OPEC+ will extend the output cuts.

They are doing an excellent job of keeping prices stable and defending against aggressive short speculators. Surprisingly, the price has held up well against that. In my opinion, OPEC wants to exit the cuts into a position of price strength, which hasn’t yet materialized for several reasons. One is the transition from weak seasonal demand to strong demand in the second half of the year. Financial speculators are more likely to reduce their significant short positions during this period, which is what OPEC wants. OPEC aims to sell into strength to demonstrate their market control. Although that strength hasn’t arrived yet, there is a higher probability it will in Q3.

When could they start loosening supply tightness?

It has more to do with price than with the calendar. Whenever we see oil prices sustain above $90 for any period of time, they could start unwinding voluntary cuts. But the assumption is that the voluntary cuts would need to be extended at least until the end of the year for this strength to happen. If so, we could see a price spike of $10 between now and then due to a seasonal demand upswing, which is what OPEC is betting on. We’re moving into the summer, where demand is picking up. In the next three months, we could see a $10-$15 rally, and that’s when they might announce the start of unwinding the voluntary cuts. That’s my base case scenario.

Are oil prices having an impact on interest rate policy?

Inflation remains a significant risk, and high oil prices can materially contribute to inflation, along with other commodities like copper. If hedge funds start allocating more money to commodities, including oil—which is currently very cheap—that’s going to be inflationary. High inflation is very difficult to bring down, and we might see interest rates stay at 5% for much longer.

Janiv Shah
Vice President, Oil Markets; Refinery and Crude Balances Lead
Rystad Energy        

We are looking at extreme tightness coming into Q3 in terms of the crude balance.

The market consensus is looking at a complete rollover of OPEC+ cuts, or at least for most of the 2.2mn b/d. OPEC+ is looking at deeper backwardation, such that no stock builds occur. We’re already seeing some tipping points of stock builds here and there. We’re looking at crude exports being high, and crude on the water extremely high as well. Light sweet availability within Europe is extremely high, making tradable volumes low. OPEC+ and its member countries are seeing a reduction in their market share and revenue by continuing cuts, but they are increasing revenue from products exports. Q3 is the real demand period for gasoline in the US and diesel in Europe, which are at opposite ends of the scale. This is where OPEC+ can create revenue growth, and I think that’s where their targets lie.

Are Russian oil exports into Asia consistent?

China is taking a significant amount of Russian and Iranian barrels. Recently, Russia inked a deal with Reliance Industries in India to supply up to 3mn barrels monthly, with a guaranteed one million and an option for an additional 2 million at a discount of around $3.00. Russia is entering the market in different phases and will likely continue to do so due to the types of barrels needed and significant OPEC+ cuts.

A strong seasonal outlook for products in Q3?

We are seeing some weakness in US gasoline on a real-time basis, with limited growth expected for the rest of 2024 compared to 2023. This is influenced by macroeconomic factors, political considerations, and pricing. Potential SPR releases from the US could ease prices and spur consumption. While refinery run ramp-ups in the US might slightly reduce gasoline yields, supply will remain relatively stable. And in the wider Atlantic basin, new refinery projects like Dangote in Nigeria and Pemex in Mexico are set to start up, though on varying timelines. Jet fuel demand growth this year is significantly skewed, with Asia as the main driver, at about 600,000 b/d. In the Atlantic basin, including Europe and the US, year-on-year growth is muted, following seasonal patterns. All eyes are on China, its forecasted run rates, continued outages, and the oversupply of diesel and its effect on crack spreads compared to last year.

SOUNDINGS WEEK IN REVIEW