Energy, Geopolitics & Money - 2023.12.28
Non-partisan, objective & neutral analysis of global developments curated from sources covering the world of energy, geopolitics & investment.
In this roundup, we continue our close look at the Israeli War on Gaza, this time looking at how it is likely to develop from here over the first quarter of 2024.
We note that in the Israeli mindset, their country is already in a broader regional conflict. Its defence minister Yoav Gallant says the country is being attacked from seven areas, namely Gaza, the West Bank, Lebanon, Syria, Iraq, Yemen and Iran. In the EPM view, this does not make rational sense, as the statement is not aligned with facts on the ground. But it could explain why Israel is behaving in what we would describe as “reckless behaviour”, that in our view creates the greatest risk for escalation.
Our overall assessment of the situation is that the narrative surrounding the War in Gaza indicates a worsening of tensions and stress. The country that can place the region on a different path, away from regional war, is the United States. It has the “leverage” over the different actors, in particular Israel, needed to change the discourse and the actions on the ground. For the sake of humanity, we hope it will use this leverage sooner rather than later. But because it has over the past 2 months not used this leverage, we do not expect it will. And that leaves us bearish in our outlook.
Furthermore, we look at:
The rise in oil prices, as traders see the same trajectory towards escalation of the conflict in the Middle East as EPM does
The agreement between India and Russia to further collaborate on nuclear energy, which indicates the energy relationship between the two countries is not only growing closer in the fossil fuel area
The assessment that contrary to expectation, “the economy” avoided recession in 2923; where EPM highlights this applies to the US, and why, but certainly not to the EU
What semiconductor companies are doing to maintain Moore’s law, as the race is on to mass-produce 2-nanometer nodes, and what this means for the future structure of the industry
Xi Jinping’s speech on the occasion of Mao Zedong’s 130th birthday, which focused on continuing Chinese development and reunification with Taiwan
Moody’s analysis into the European natural gas situation, where it says it is not worried about supply interruptions, but does see prices, currently double than what they averaged previously, remaining above historical averages until at least 2031
France’s decision to ban European funds claiming to invest on an ESG basis from investing in companies that launch new hydrocarbon exploration, exploitation or refining projects, exploit coal or “unconventional” hydrocarbons
General Energy News
Concerns about shipping in the Red Sea have eased, which led to oil prices drop by nearly 2% on Wednesday, writes Reuters. Key in this sentiment change was Maersk’s announcement, which EPM covered earlier this week, that it will resume Red Sea shipping. During early trading on Thursday prices started on the up again, due to the fears over escalating tensions in the Middle East. This sentiment, which EPM shares, we have covered and explained yesterday and today. Brent crude futures were at $79.85 a barrel by 0133 GMT, while WTI crude futures were at $74.35 a barrel.
India and Russia have signed agreements for future units at the Kudankulam Nuclear Power Project in the southern Indian state of Tamil Nadu, writes Reuters. Foreign Minister Subrahmanyam Jaishankar said at a gathering with the Indian community in Moscow
Today, in the presence of Deputy Prime Minister Denis Manturov, we signed some important agreements pertaining to future units of the Kudankulam Nuclear Project
Construction of the first two units began nearly two decades ago as part of a project signed by both countries. EPM notes that while Europe has disconnected its energy relation with Russia, India is using the opportunity to strengthen its relationship in all energy areas.
Macroeconomics
Last year at this time, 85% of economists in one poll predicted a recession this year, writes Bloomberg. That was an optimistic take compared to the 100% probability of a recession forecast two months earlier. EPM, as you know, was among those who shared the bleak outlook, for the simple reason that monetary tightening policy has in history always caused recessions. So far, however, Bloomberg notes, this hasn’t happened. As both inflation and unemployment are headed in the right direction, most economists now expect the US to avoid a recession in 2024.
Unfortunately, EPM notes, Bloomberg does not provide an analysis of why “this time it’s different”. We would argue that, as far as the US is concerned, government policy has something to do with it. For while the Fed slowed down aggregate demand through raising interest rates, the US federal government massively increased deficit spending, at least partially offsetting this.
The Brookings Institute writes, from 5.4% of GDP in 2022 to 6.3% in 2023. Obviously, with interest rates on US treasury bonds now significantly higher than economic growth, with a total US national debt of $34 trillion, 2023 should be considered another year where the US has delayed an avoidable painful reckoning (for more on this we refer to Ray Dalio’s analysis on the US debt). EPM notes that over in Europe, where governments did not go on as much of a spending spree, the economic situation is different. The EU’s third quarter GDP shrank, writes Reuters, and since then things have markedly worsened in Germany, as EPM discussed extensively over recent days and weeks.
New materials and more advanced chemicals will play an increasingly important role in the chipmaking industry as companies like TSMC and Intel push current production technologies to their limits, writes Nikkei. It is no longer the chipmaking machines, but advanced materials and cleaning solutions that are taking center stage in making advanced production processes possible, it says. But, constant innovation is not cheap. A single 2-nm wafer costs up to $30,000, which is 50% more than the previous generation, namely the 3-nm advanced processors used in the iPhone 15 Pro. The enormous cost is one reason chip material makers predict that the big semiconductor players will continue to get bigger as governments in the U.S., China, Europe, Japan and India push to onshore semiconductor production. It is not easy for newcomers or latecomers to break into the race, and none of the today's front runners are expected to drop out.
Geopolitics
As to Israel’s War on Gaza, yesterday EPM discussed how the country is doing everything it should not be doing, if it wanted to avoid a horizontal escalation of the conflict. Today, the Financial Times writes that according to Israel’s defence minister Yoav Gallant, this escalation has already occurred, as he told a parliamentary committee that the country was being attacked in a “multi-arena war” from seven areas, which he identified as Gaza, the West Bank, Lebanon, Syria, Iraq, Yemen and Iran. In the EPM view, this does not make rational sense, as the statement is not aligned with facts on the ground. But it could explain why Israel is behaving in what we would describe as “reckless behaviour”, such as its devastation of Gaza, its bombings of and assassinations on Syrian territory and its shelling of and threats towards Lebanon and Hezbollah, that, in our view, create the greatest risk for escalation. In summary, therefore, we say the narrative surrounding the War in Gaza at present indicates a worsening of tensions and stress. Our assessment is that the only country that can place the region on a different path, away from regional war, is the United States. It has the “leverage” over the different actors, in particular Israel, needed to change the discourse and the actions on the ground. For the sake of humanity, we hope it will use this leverage sooner rather than later. But because it has over the past 2 months not used this leverage, we do not expect it will. And that leaves us bearish in our outlook.
The unification of Taiwan with mainland China "will surely be realized," Chinese President Xi Jinping declared at a speech in Beijing on Tuesday to commemorate the 130th anniversary of Mao Zedong's birth, writes Nikkei. According to state broadcaster CCTV, Xi said
[We] will resolutely prevent anyone from splitting Taiwan from China in any way
Bloomberg writes that at the same celebration Xi also touted China’s alternative to the western capitalist economic model. Xi said the “central task” of the nation and its ruling Communist Party is “to build China into a stronger country and rejuvenate the Chinese nation on all fronts by pursuing Chinese modernization”. In China, “Chinese modernization” has been described as containing unique features, including benefiting a large population, achieving “common prosperity” and developing peacefully.
Connected to China and its ambitions to develop and reunite with Taiwan, Nikkei writes that the government of Japan will give approval for the relocation of the US military stationed at Futenma airbase in Okinawa prefecture to another site in the same prefecture, Henoko, despite strong local objections. The project was first approved in December 2013 by then-Okinawa governor Hirokazu Nakaima, but the pro-relocation governor was defeated in a 2014 election by Takeshi Onaga, who ran on his opposition to the plan. Tamaki, who succeeded Onaga in 2018, has also opposed the relocation. The Japanese government will nevertheless force acceptance of the transfer as its southwestern islands have grown even more strategically important since the US entered its strategic competition with China.
The Global Energy Crisis
A feared European winter gas shortage has yet to materialize for the second year in a row — but consumers are set to stay stuck paying significantly higher rates than they used to, writes CNBC. According to research published by Moody’s this month, the EU had record high gas stocks of around 97.5% at the end November 2023, meaning both very low risk of energy shortages this winter and a strong position for the next cold season. Yet, “European gas prices will remain high and volatile,” the report finds. Moody’s found that European gas prices are well above their 2015-2019 average. Wholesale prices are still more than double what they were historically. Moody’s sees them remaining above historical averages until at least 2031.
Other
Pan-European funds claiming to invest on an environmental, social and governance basis may need to sell all their fossil fuel holdings following a ruling by the French government, writes the Financial Times. It says that France has ruled that funds operating under its “socially responsible” ISR label will, from the start of 2025, be barred from investing in any companies that launch new hydrocarbon exploration, exploitation or refining projects. Companies that exploit coal or “unconventional” hydrocarbons will also be off limits.
The stricter rules, unveiled by French finance minister Bruno Le Maire, will reverberate outside of France because many asset managers market the same ESG funds across Europe in order to minimise duplication and costs and maximise liquidity.