Energy, Geopolitics & Money - 2024.01.08
In this roundup, we look at:
Saudi Arabia’s decision to lower its Official Selling Price (OSP) to Asia by more than expected, which is seen as an indication that demand in the physical market is weakening
The pressure on BP to target the appointment of an external candidate as its CEO
The bankruptcy of Zhongzhi Enterprise Group (ZEG), one of China’s major “shadow banks”
Hizbollah’s response to Israel’s assassination of the Hamas official in Beirut, and the risk of escalation surrounding this event, including the US and EU diplomatic efforts to contain it; where EPM re-iterates our view that this risk is relatively low (and as such that the risk premium in the oil price is exaggerated and will over coming weeks and months gradually disappear)
Denmark’s announcement that its donation of F-16 fighter jets will be delayed by most likely 6 months; which EPM feels exemplifies the current situation on the battlefield, which is characterized by an inability of Ukraine’s western backers to keep up with the Russian defense industry, just as John Mearsheimer predicted would happen back in June 2023 (when he also predicted Russia would ultimately win)
The analysis which says Germany’s hydrogen plans are grossly overestimating future demand
Azerbaijan’s selection of an oil and gas insider as the head for COP29, the be held in Baku later this year
John Mearsheimer’s analysis of South Africa’s accusation against Israel that it is committing genocide against the Palestinians in Gaza, which he believes will not have a meaningful impact on the current war, but will have longer term geopolitical implications as it damages the global standing of both Israel and the United States; which echoes EPM’s earlier assessment that the US is wasting valuable “soft power” through this conflict, which we believe it will come to regret
China’s commanding lead in the EV space, which western car companies are very well aware of, and explains US EV subsidy policy and the EU’s anti-dumping investigation; as well the country’s developing lead in Lidar technology which is crucial for autonomous driving
General Energy News
A bigger-than-expected cut in official oil pricing to Asia by OPEC+ leader Saudi Arabia has reinforced signs of softer physical crude market in the largest consuming region, writes Bloomberg. Saudi Aramco cut the official selling price for its flagship Arab Light crude to a $1.50-a-barrel premium to the regional benchmark for February, the lowest since November 2021, and a $2-a-barrel reduction.
A number BP's major and largest shareholders have urged the company to approach BAE Systems Chief Executive Charles Woodburn about becoming the British oil giant's next boss, writes Reuters. They believe that BP should target the appointment of an external candidate as its CEO, according to the report
Macroeconomics
A Beijing court has accepted the bankruptcy application from Zhongzhi Enterprise Group (ZEG), a major Chinese “shadow bank”, writes BBC. The struggling group reportedly told investors in a letter in November that its liabilities - up to $64bn (£50.6bn) - had outstripped its assets, now estimated at about $38bn. A significant portion of ZEG’s portfolio is real estate loans. ZEG’s bankruptcy has therefore raised concerns of further turmoil in the world's second-largest economy, after the collapse of property developer Evergrande and financial woes at Country Garden.
Geopolitics
As to the War on Gaza, Hizbollah has fired rockets at Israel in what it says is an “initial response” to Israel’s earlier assassination of a Hamas leader in Beirut, Saleh al-Arouri, writes the Financial Times. It says it has fired 62 rockets and hit the Meron observation post on the border between Lebanon and Israel. There were no immediate reports of casualties. Despite this news, EPM still stands behind our earlier analysis, that the war will not escalate horizontally. We have use a number of ‘reasons’ to come to this conclusion.
First, Hezbollah was established in response to Israel’s invasion of Lebanon, in order to protect Lebanon. Other than an emotional connection among its members, it has nothing to do with Palestine, in order words. For this reason EPM does not believe Hezbollah will choose to enter into an all-out war with Israel over Gaza or a Hamas official, because of the consequences such a war would have for Hezbollah’s military capabilities and its public standing in Lebanon.
Second, Hezbollah’s missile barrage does not necessarily indicate escalation. Just recall Iran’s response to the United States’ assassination of general Qasim Sulaimani in 2020, which according to BBC "deliberately chose targets that would not result in loss of life".
Third, there is active diplomacy underway to prevent an escalation. Both US secretary of state Antony Blinken and the European Union's top diplomat Josep Borrell and on (separate) trips to the region to prevent responses by any of Israel’s wider neighbours (and their proxy forces), writes Reuters. Blinken already met the leaders of Turkey and Greece on Saturday at the start of a week-long trip that will also take him to Israel, the Israeli-occupied West Bank, Jordan, Qatar, the United Arab Emirates, Saudi Arabia and Egypt. Borrell was busy in Lebanon.
The situation in Ukraine is exemplified by Denmark’s announcement that its donation of F-16 fighter jets will be delayed by most likely 6 months. Bloomberg writes that Denmark was the first to offer F-16 support. Delivery will now be some time during the second quarter of 2024. Among the reasons for the delay are, first, that not sufficient Ukrainian pilots have been trained; second, that the infrastructure in Ukraine needed for the logistical process surrounding the F-16 are not yet developed; and third, that delivery of F-35s to Denmark has been delayed. The news reminds us at EPM of John Mearsheimer’s analysis of the War in Ukraine back in June 2023. He said Russia would eventually win this war, as the defense industries of Ukraine’s western backers are not capable of keeping up with Russia in the production of the key equipment for this war, artillery and artillery shells. The West is trying to overcome this structural issue by providing more technologically advanced weapons, such as longer-range rocket system and tanks, and next the F-16. But neither the longer-range rocket system or the tanks fundamentally changed the situation on the battlefield. There is no reason to think it will be any different with the introduction of F-16s.
Speaking of John Mearsheimer, he has analysed South Africa’s 29 December 2023 application to the International Court of Justice (ICJ) accusing Israel of committing genocide against the Palestinians in Gaza.
Mearsheimer says the application is a superb description of what Israel is doing to Palestinians in Gaza. He describes it as comprehensive, well-written, well-argued, and thoroughly documented. While he can not see how Israel could be able to defend itself in a rational-legal way when the proceedings begin, he also notes that practically speaking, the power of international courts to coerce countries like Israel and the United States is extremely limited – to which Mearsheimer adds, “I am fully aware of the maneuvers that the United States and Israel will employ to avoid a fair trial”.
Mearsheimer therefore does not believe the case will have an impact on the War on Gaza. However, it will have important repercussions beyond the current and the immediate, he says: Israel’s reputation will forever be tainted by the just the accusation, which fundamentally weakens its position as it has eroded public support globally for the country; by extension, the US position in geopolitics is fundamentally weakened because of its position of almost “unconditional support for Israel” Biden’s administration has taken in the conflict; and, the hypocrisy of the western world’s “human rights mavens” have clearly demonstrated Israel is committing serious war crimes will further weaken trust in them and their platforms.
EPM very much agrees with this assessment. As we wrote previously, before, the United States is wasting serious "soft power” through this conflict. The global audience perceives the US administration is complicit in war crimes, its media as biased (at best) and/or sources of lies, and (many of) its elites as opponents of free thought and free speech. All this undermines the effectiveness of the “US narrative”, which creates space and opportunity for alternative narratives to influence how people see, think and feel about events. As such, EPM believes the US will eventually come to regret its actions in the conflict (but that was also said for its actions in Iraq).
Energy Transition & Technology News
Germany's future hydrogen demand could fall well short of the baseline the country is assuming in its plans to extend its gas network to carry the fuel, a study commissioned by a gas storage operators' group showed, according to Reuters. The research comes as Europe's biggest economy is about to decide how to place billions of euros to develop green hydrogen for decarbonisation in the coming decades. A cornerstone of Berlin's hydrogen strategy is a 20 billion euro, 9,700 km (6,000 mile) core hydrogen network, which envisaged hydrogen use of 279 terawatt hours (TWh) a year by 2032. But the new study saw hydrogen demand ranging only between 73 and 123 TWh up to 2030.
Climate Politics
COP29 is to be held later this year in Baku, Azerbaijan. Bloomberg writes the country has chosen its ecology minister Mukhtar Babayev to head the next round of global climate talks. Previously, Babayev worked for over two decades at Azerbaijan’s state oil and gas company. Although his role as ecology minister makes him a mainstream choice to preside over the talks, this background in oil may reignite the debate over the role of fossil fuel interests in the COP process.
The Electrification of Transport
China’s is in a commanding lead in the EV space, writes the Financial Times. Car company boardrooms in America, Europe, Korea and Japan are in a state of shock, it says. It quotes Takero Kato, the head of the Toyota division tasked with building electric vehicles, who travelled through China in 2018 and was shocked by what he found then,
For the first time, I came face to face with the competitiveness of Chinese components. Laying eyes on equipment that I had never seen in Japan and their state of the art manufacturing, I was struck by a sense of crisis. We’re in trouble!”
Now, the prospect of millions of low-cost, high-tech cars made by Chinese companies hitting American and European shores poses a dilemma for lawmakers there. One the one hand, electrification supports decarbonization. On the other hand, it is likely to bankrupt domestic automobile industries. Late to the game of electrification, most can not compete on neither quality nor price. The US government has responded with numerous subsidies to encourage domestic manufacturing and the EU is considering import tariffs to limit the damage. EPM has been of the opinion, formed as a result of VW's Diesel Gate, that Western auto producers were not interested in EVs, and, if they were, their efforts consisted of (mostly) putting hybrid or battery powered drive trains in existing designs.
Looking beyond the current toward the next big thing in transportation, autonomous driving, Chinese companies are also leading technology development crucial to self-driving technology such as light detection and ranging sensors. They are exceeding Japanese and American counterparts in related patents and control more than half of the global market, writes Nikkei. Lidar systems emit a laser beam to measure the distance to surrounding objects with high precision. Chinese companies have filed 25,957 related patent applications since 2000, compared with 18,821 by American companies and 13,939 by Japanese companies. Germany's Bosch holds the most patent applications, followed by Japanese auto parts supplier Denso. China's RoboSense and Hesai Technology come in fourth and fifth. The two Chinese companies have increased their numbers significantly since 2015.
The Global Energy Crisis
Javier Blas of Bloomberg is not concerned about Europe’s gas situation amidst a sever cold spell across the region. Because of the region’s mild weather until now, even if the chill holds for rest of the season, Europe would still consume far less natural gas for heating than in a normal winter, leaving current inventories more than plenty, he says. European natural gas reserves could carry over to the summer, when higher temperatures and need for air conditioning will increase demand.