#2. Energy Markets are Realigning as Oil/Energy Trade Flows are Re-Ordered

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#2. Energy Markets are Realigning as Oil/Energy Trade Flows are Re-Ordered

Since the peak of the last secular bull market in commodities in early 2011, chronic underinvestment driven by cyclical factors and attention to ESG concerns (environmental, social and governance) have created structural supply shortages and tighter supply-demand balances than prior investment cycles. And now, spillover from sanctions has taken a bigger bite from the supply. For example, the U.S. has sanctioned countries accounting for 40% of the world's oil reserves (Russia, Iran and Venezuela), resulting in much of this oil trade flow going to China at steep discounts. Furthermore, China continues to make inroads with the GCC (Gulf Cooperation Council, an economic union of six oil producers, notably Saudi Arabia, UAE, Kuwait, etc.) for long-term oil purchases and investment in its upstream sectors (refining, storage, transportation, etc.). The GCC accounts for another 40% of the world's oil reserves. Facilities for settlement systems have been created (or nearly) for renminbi (RMB) settlement,10 currency swaps and foreign exchange transaction systems. In short, we appear to be in the early days of an emerging "petroyuan" and another step in long-term de-dollarization.

As the economic war with China deepens and energy trade flows are re-ordered, it becomes apparent the transition to alternative (and cleaner) energy sources is quickly becoming essential for the West from a national security, industrial sovereignty and competitive economics point of view. Although the U.S. is oil-independent, the European Union (EU) and other U.S. allies are not, and energy prices are set globally. Moreover, China receives price discounts, and security of supply, while securing downstream investments in GCC countries, a considerable advantage in an economic war.

If some see the future planetary threat from global warming as distant, then the danger of re-ordering the energy market is immediate (with other commodities to follow). The world order of the last several decades is at risk (Western perspective), and energy supply shocks and resultant inflation are significant risks. The 1970s was a tumultuous macro environment riddled with nonlinear left-tail risks11 and today's similarities are uncomfortably familiar.


Migration of the dominance of the USD in all commodities is slowly eroding and will affect the dollar dramatically.

We should see an expensive price for all due to supply issues, demand where countries can't pivot soon enough and the tax on non-green products.

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