Energy, Geopolitics & Money - 2024.01.02
Non-partisan, objective & neutral analysis of global developments curated from sources covering the world of energy, geopolitics & investment.
In this first roundup of 2024, we look at:
The support for crude oil prices from the tensions in the Red Sea, where there was an escalation over the weekend as the US engaged the Houthi’s, sinking 3 ships and killing 10 people; which in the view of EPM is a “controlled” escalation
China’s first refined fuel export quotas for 2024
Growing real estate stress across Asia; and the commercial real estate problems coming to the United States
The appointment of a new defense minister in China, and the resulting resumption in the formal military dialogue between China and the US; where EPM sets out our view on the impact this is likely to have
Israeli prime minister Netanyahu’s explanation of what he means when in his Wall Street Journal OpEd from last week he demanded “demilitarization of Gaza”, namely renewed Israeli control over Gaza; which, EPM notes, is another example of Netanyahu taking a policy position that conflicts with the stated policy positions of the United States
China’s decision to target global leadership in the low carbon segment of shipbuilding; as well as in fusion nuclear technology
Toyota’s and Honda’s continued efforts to make hydrogen a mainstream transportation solution
The SEC failure, so far, to finish a mandate for public companies to disclose their environmental footprints
General Energy News
Brent crude climbed above $78 a barrel and West Texas Intermediate neared $73, on the news of the escalation in the Red Sea, writes Bloomberg. EPM analysis this escalation in more detail under Geopolitics.
China has issued its first refined fuel export quotas for 2024, writes Reuters. Totalling 19 million metric tons, the volume is unchanged from 2023’s and largely in line with market expectations, it says. State oil companies Sinopec and CNPC, the top recipients of the quotas that cover diesel, gasoline and aviation fuel, together were granted 13.22 million tons or nearly 70% of total. Zhejiang Petrochemical Corp remains the only private refiner allotted with the refined fuel export quota totalling 1.73 million tons.
India’s crude oil imports from its largest supplier Russia plunged in December to their lowest since January 2023, as six tankers carrying Sokol grade oil could not deliver due to payment issues amid tightening sanctions, writes Bloomberg. After rising to a record 2.15 million barrels a day in May, oil imports from Russia fluctuated downwards, experiencing a sharp decline between November and December to 1.48 million barrels a day last month. The seller, Sakhalin-1 LLC, which extracts crude from Russia’s Far East, has not been able to open a bank account in the United Arab Emirates to enable buyers to pay in dirham as agreed.
Macroeconomics
Real estate stress is growing across Asia, writes Bloomberg. Surging interest rates and regulatory scrutiny are causing distress for builders and creditors not only in China, but also in South Korea, Indonesia, Vietnam, Hong Kong and Australia, it says.
Over in US real estate, billions of dollars of debt will fall due this year on hundreds of big US office buildings that their owners are likely to struggle to refinance at current interest rates, writes the Financial Times. There are $117bn of commercial mortgages tied to offices which either need to be repaid or refinanced in 2024. Many of those were taken out a decade ago in an era when interest rates were far lower. Since then, commercial mortgage rates have nearly doubled, while the performance of many buildings has sunk, raising the prospect of billions of dollars of losses for investors. About two-thirds of the soon-to-be due mortgages are held by banks. Delinquencies on those loans — which tend to be backed by higher-quality or lower-leveraged buildings — are rising, but are still very low.
Geopolitics
China's top legislative body has named Admiral Dong Jun, a top navy commander, as the country's defense minister, writes Nikkei. He will fill the post left vacant after the removal of General Li Shangfu in October; as EPM readers might remember, General Li Shangfu was a US sanctioned individual which made it practically impossible for formal military dialogue to take place between China and the US. Nevertheless, the US refused to remove him for its sanctions list (while at the same saying it wanted the dialogue to resume). Military dialogue was canceled by China in August 2022, in protest over the visit of then House Speaker Nancy Pelosi to Taiwan. During Xi’s visit to US in November of 2023, and his meeting with Biden, both sides agreed the dialogue should be resumed.
The appointment of Admiral Dong Jun makes this possible, and further according to Nikkei the Defense Policy Coordination Talks (DPCT) will start again in January 2024. The DPCT is typically led by a deputy assistant secretary of defense from the US side and a major general on the Chinese military side. The DPCT will be followed by Military Maritime Consultative Agreement (MMCA) talks during early 2024. The MMCA talks are an operational safety dialogue between the U.S. Indo-Pacific Command and PLA naval and air forces.
EPM examines developments in the following manner. The change is is de-escalationary and reduces the risk of hot war in the region. The talks establish personal relations, which reduces the risk of misunderstandings on either side. However, we do not believe this means China now sees US policy in the Asia Pacific in a different light. We believe it continues to see US actions in the diplomatic and economic realm as “encirclement”, and we therefore believe China will enter the resumed talks with a heightened level of caution and awareness. In short, therefore, EPM does not see renewed military talks leading to a resolution between the countries and any of the current problems going away. We do believe more open communications will reduce the risk of misunderstandings that lead to localized hostilities and a hot war.
We note that retired US Navy admiral and former supreme allied commander of NATO James Stavridis, in an OpEd for Bloomberg, is aligned with EPM’s analysis.
As to the War on Gaza, Reuters writes that Israeli prime minister Netanyahu has set out what he meant with the “demilitarization of Gaza” in his Wall Street Journal OpEd last week. Speaking at a press conference, Netanyahu said:
The Philadelphi Corridor - or to put it more correctly, the southern closing point (of Gaza) - must be in our hands. It must be shut. It is clear that any other arrangement would not ensure the demilitarisation that we seek.
Achieving this objective would take many more months of fighting, he also said. EPM notes this is another example of Netanyahu taking an explicit stance against the United States’ position. According to the New York Times, on October 15 of 2023 US president Biden warned Israel not to reoccupy Gaza.
Beyond the war in Gaza in the Red Sea, US helicopters repelled an attack by Iran-backed Houthi militants on a Maersk container vessel, sinking three ships and killing 10 militants, writes Reuters. Afterwards, a Houthi delegation met with Iranian officials in Tehran, writes Bloomberg. The meeting resulted in Iran’s decision to send a warship to the Red Sea area. Iranian state media said on Monday, the Alborz destroyer traversed the Bab El-Mandeb strait - a narrow choke point between the Red Sea and the Gulf of Aden - without providing information on the vessel’s intended mission. EPM remains of the opinion that Iranian actions are designed not to attack the US, but to create leverage for the negotiations on normalization of US – Iranian relations. As such, while events over the weekend represent an escalation, we do not see them as an uncontrolled escalation.
The news that the USS Gerald R. Ford aircraft carrier strike group will leave the eastern Mediterranean Sea, more than two months after being sent to the region, as reported by Bloomberg, supports the EPM perspective, we believe. If developments in the broader Middle eastern region had been uncontrolled in any way, the US would not have withdrawn at this moment.
Energy Transition & Technology News
China wants to extend its lead in global shipbuilding to a new generation of vessels that burn cleaner fuels, writes Bloomberg. It is targeting building more than half of global vessels powered by lower-carbon fuels, including liquefied natural gas and green methanol by 2025. In addition to the target for building such vessels, China also plans to speed up research and design of new types of ships powered by liquefied ammonia, hydrogen and even carbon dioxide. The goal is in line with Beijing’s plans to future-proof its massive industrial complex by focusing on sectors that will gain prominence as the world tries to reduce emissions over the next few decades. China already dominates global production of solar panels, batteries and electric vehicles.
Furthermore, China has unveiled a new national company and formed a broad coalition of industrial giants to advance research in nuclear fusion technology, writes Bloomberg. The group comprises 25 central government-owned enterprises and research institutes, including some of the country’s largest energy and steel firms such as State Grid Corporation, China Three Gorges Corporation and China Baowu Steel Group Corporation. To lead the group China will establish the China Fusion Corporation.
The Electrification of Transport
EPM is of the view that Toyota and Honda are being foolish in not giving up on hydrogen. The Japanese automakers continue betting that trucks will pave the way for hydrogen-powered cars, writes Nikkei. In May, a jointly developed fuel cell truck by Toyota Motor and its subsidiary Hino became the first such experimental vehicle to start demo-running. Later in December, a truck powered by fuel cells - jointly developed by Honda Motor and Isuzu Motors - that combine hydrogen with oxygen in the air to make electricity for turning the wheels hit the road for tests. But, Nikkei notes, FCVs are already stuck in a bottleneck, one created by a lack of hydrogen refueling stations. Government subsidies helped convince operators to build the stations, but the lack of demand meant not much use. As you know, in the EPM view, the economics of hydrogen are such that it will not become a mainstream transportation solution. Ever.
Other
The SEC has yet to finish a mandate for public companies to disclose their environmental footprints, writes Bloomberg. The most controversial part of the SEC’s agenda is a March 2022 proposal that would force businesses to detail risks that a warming planet poses to their operations. Under the plan, some large companies would also have to disclose emissions that come from other firms in their supply chain. Some of their sharpest criticism has been aimed at a requirement to disclose so-called Scope 3 emissions -- pollution from other businesses in a company’s supply chain and from consumption of the firm’s products by customers.