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Fed and European Central Bank could cut interest rates in September, Morgan Stanley strategist says

The U.S. Federal Reserve and European Central Bank could move to cut interest rates in September as key data provides further signs that inflation is cooling in the U.S. and the euro zone, a Morgan Stanley strategist said Friday.
Andrew Sheets, managing director and head of cross-asset strategy, told CNBC that the bank had grown bullish about the prospect of dual cuts, amid recent consumer price index and labor market data in the U.S. and Europe.
“We’re more optimistic that both the Fed and ECB will cut rates in September,” he told “Squawk Box Europe.”
The two central banks showed signs of monetary policy divergence earlier this month, as the ECB implemented its first interest rate cut in almost five years, while the Fed insisted that U.S. inflation remains too high to take a similar step.
“It’s understandable that these central banks don’t want to pre-commit. They don’t want to sound overly complacent about the risks of inflation,” Sheets said.
“But we think the data that the ECB will see by September is inflation [is] continuing to moderate. And I think, for the Fed, inflation is continuing to fall,” he added.
Euro zone inflation surprised to the upside in May, rising by 0.2 percentage point on a month-on-month basis to hit 2.6%. Fluctuations had been expected, due to base effects from the energy market and the unwinding of government support across the bloc.
U.S. inflation, meanwhile, held steady in May but was up 3.3% from a year ago, the latest CPI data showed earlier this month. That was an improvement on the 0.1% monthly gain economists had expected.
Markets are now watching out for May’s core personal consumption expenditures price index, the Fed’s preferred inflation gauge, due Friday morning.
Analysts expect the headline PCE to be flat from April and 2.6% higher on the year. Excluding volatile food and energy prices, the core PCE is forecast to come in 0.1% higher month on month, which Sheets said was also in line with his expectations.
A majority of economists polled by Reuters now anticipate the Fed will cut interest rates from its current range of 5.25% to 5.50% this September, with a further trim projected later in the year. The ECB is also expected to cut rates in September and December.

$200B In Carbon Capture Investment Needed Over Next 10 Years
By 2034, the world will have developed carbon capture capacity of 440 millions tonnes per annum (Mtpa) while storage capacity will reach 664 Mtpa, requiring $196 billion in total investment, global energy data and analytics provider Wood Mackenzie has predicted.
In a report titled  “CCUS: 10-year market forecast”, WoodMac projects that nearly half of CCUS (Carbon Capture, Utilization & Storage) investment globally over the next decade will go into CO2 capture, with the remaining $53 billion going into transport and $43 billion to storage. The energy experts estimate that government support in key countries is currently at $80B, with the U.S. accounting for half of that, followed by the United Kingdom at 33% and Canada at 10%.
“This is a huge ramp-up from where the industry is today. Government funding plays a critical role in driving the first wave of CCUS investments. We see governments offering capex grants, opex subsidies, tax incentives and contracts for differences for CCUS. While no single mechanism has been used predominantly and each country devises novel methods to incentivize investments, nearly $80 billion is directly committed to CCUS across five key countries,” Hetal Gandhi, the APAC CCUS lead with Wood Mackenzie, has said.
According to WoodMac, CCUS is receiving strong support by governments in the U.S. and Europe while APAC (Asia–Pacific) lags behind. Despite the large, forecasted increase in projects, WoodMac sees a carbon capture capacity of 440 Mtpa by 2034, failing to meet industrial demand at 640 Mtpa. However, on a brighter note, analysts have predicted that almost 80% of the planned pipeline storage capacity of 664 Mtpa will be available by 2030.
On a more sobering note, governments everywhere and the private sector will have to do a lot more if CCUS is to save the planet from its unfolding climate woes.
In a report released in 2023, McKinsey & Company estimates that the world needs to capture at least 4.2 gigatons of CO2 per annum (GTPA) to achieve net-zero commitments by 2050. That’s 120x higher than the current total annual capacity of ~45?Mt?CO2 by the 35 commercial CCUS facilities available globally.
Carbon Capture In Oil Production
The Biden administration has been a strong supporter of CCUS. Last year, the U.S. Department of Energy (DOE) announced up to $1.2 billion to advance the development of two commercial-scale direct air capture facilities in Texas and Louisiana. According to the DoE, together, these projects are expected to remove more than 2 million metric tons of carbon dioxide (CO2) emissions each year from the atmosphere--an amount equivalent to the annual emissions from roughly 445,000 gasoline-powered cars.
Canadian and Alberta governments are lining up more than $15.3 billion in tax credits to the country’s largest oil sands producers for CCS projects. Canada is not alone.
The U.K. government is promising £20 billion in CCS subsidies while U.S. oil and gas producers can obtain a tax credit of $85 for every tonne of carbon dioxide they bury in underground geological formations (the credit is lowered to $60 per tonne if the CO2 is used for EOR).
Thankfully, the private sector is beginning to pull its weight, too. Over the past few years, Big Oil has been heavily investing in carbon capture and storage technology, ostensibly to offset CO2 emissions from the energy commodities they produce.
Exxon Mobil (NYSE:XOM) has created a Low Carbon Solutions business segment focused on the innovation of next-generation low-emission fuels supported by its carbon capture segment. Last year, Exxon acquired  Denbury Inc. in an all-stock transaction valued at $4.9B. Denbury recycles CO2 through its Enhanced Oil Recovery (EOR) operations, and uses it to produce environmentally-friendly, carbon-negative Blue Oil. The company owns the largest CO2 pipeline network in the U.S. at 1,300 miles, including nearly 925 miles of CO2 pipelines in Louisiana, Texas and Mississippi, as well as 10 onshore sequestration sites.
In the same year, Exxon signed a long-term contract with industrial gas company Linde Plc. (NYSE:LIN) that involves the offtake of carbon dioxide associated with Linde’s planned clean hydrogen project in Beaumont, Texas.  Exxon will transport and permanently store as much as 2.2M metric tons/year of carbon dioxide each year from Linde’s plant.
Two years ago,  oil field services peer Schlumberger Ltd (NYSE:SLB) unveiled its  SLB New Energy unit that encompasses carbon solutions including CCUS; hydrogen, geothermal and geoenergy, energy storage and critical minerals. The company says each of these niches has a minimum addressable market of $10 billion.
Meanwhile, Occidental Petroleum Corp. (NYSE:OXY) has created Oxy Low Carbon Ventures (OLCV). Through a development license with Carbon Engineering, Oxy’s 1PointFive is advancing large-scale Direct Air Capture (DAC). Its first facility, STRATOS, is under construction in the Permian basin. STRATOS is designed to extract 500,000 metric tons of atmospheric CO2 annually--laying the foundation for commercial-scale DAC deployment.
Thankfully, Big Oil will be able to put some of that captured CO2 into good use--in their own oilfields. Calgary-based senior geological advisor Menhwei Zhao has conducted an AAPG Bulletin study regarding the use of CCS in Enhanced Oil Recovery (EOR). He analyzed more than 22 years of production data from the Weyburn Midale oil pool in Saskatchewan, which since 2000 has been receiving carbon dioxide injections thus making it the world’s longest-running EOR project. Zhao concluded that the pool would have stopped producing oil by 2016 without CO2 injection, but that “enhanced oil recovery could extend the pool’s lifespan to 39 or even 84 more years.” Although Zhao acknowledges that he focused on a specific project in Canada, he says he would expect to see “similar results” for large-scale CCS projects around the world.
Zhao’s claims might not be exaggerated: The Wasson Field’s Denver Unit CO2 EOR project resulted in a nearly seven-fold increase in crude production after injecting CO2.
By Alex Kimani for Oilprice.com

Jun 30, 2024 00:54
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