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Crude Oil: Pushed by Houthis, Pulled by Evergrande

By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia

Crude Oil: Pushed by Houthis, Pulled by Evergrande 
 
Harry Altham
Energy Analyst, EMEA & Asia

Oil prices have started the week flat ($83.60 Brent March 2024 contract at 11AM GMT) despite the first successful Houthi strike on an oil tanker in the Gulf of Aden over the weekend. In futures and options, we saw the managed money net long increase by 25k contracts across ICE Brent and NYM WTI combined (in the week to 23rd January) amid that heightened instability in the Middle East; there was a further escalation last night after three U.S. troops were killed in an attack on a military base in Jordan – the U.S. has blamed Iran-backed proxies and has vowed revenge. 

EVERGRANDE ORDERED TO LIQUIDATE. bUT WILL IT?
A court in Hong Kong has ordered the Chinese property major Evergrande to liquidate after ‘repeatedly failing’ to restructure its debt, sending a demand-side shudder to oil markets. The ruling will initially apply in Hong Kong, but Chief Executive Shawn Zhu stated that projects would continue in mainland China where it operates as a separate entity.
International investors are closely monitoring the situation to assess how the liquidators will be able to seize Chinese assets on behalf of creditors; Beijing has been supporting Evergrande since its default two years ago and may well resist Hong Kong’s authority on the matter. Initial independent legal analysis suggests that the reciprocal enforcement ordinance does not cover judgments from insolvency proceedings. The risk of capital flight and consequential damage to the Chinese economy is a major concern, as would be the halting of all live Evergrande construction projects in the Chinese housing market – in itself a major demand-side risk for oil. The MSCI China Index is down 2% as of 11AM GMT, which is indicative of the negative sentiment surrounding the issue but the relatively small drop is also a sign that investors don’t believe Beijing will allow the firm’s collapse in current circumstances. The week ahead will require close monitoring of Beijing’s response to the Hong Kong Court order. 
image 88657
Source: MSCI, StoneX
houthi attack heightens concerns of maritime safety in red sea
The 109,991DWT Marlin Luanda, a British-operated Aframax vessel sailing under the flag of the Marshall Islands, was damaged by a rocket attack on Friday night, according to its charterer Trafigura. The ship, a clean petroleum product (CPP) tanker, was carrying 90Kt of middle distillates from a ship-to-ship (STS) transfer in the Laconian Gulf (Greek Mediterranean, cargo likely of Russian origin) to Singapore. It was hit around 110km to the Southeast of Aden, having exited the Red Sea a few hours before, and has caused Trafigura to reassess navigation through the region; the company has stated it currently has no ships in the Gulf of Aden but has not declared whether further vessels are in the Red Sea (our research showed no displayed vessels chartered by Trafigura, but most vessels are not declaring charterer information). 
image 88658
Source: Refinitiv, StoneX
The attack is a sign that the Houthis are not deterred by U.S. and U.K. preventative strikes and will continue to attempt attacks on allied vessels in the region for as long as Israel continues its campaign in Gaza. Given the attack on the U.S. base in Jordan, we expect the United States to increase its presence in the region; there are likely to be further attacks on Houthi positions in the coming days, while it is expected that some form of response for last night’s attack will also take place (the U.S. has said it will happen ‘at a time and manner of their choosing’). As well as the Government response to the Evergrande Crisis, this is likely to be a week in which the oil markets will take cue from a fragile geopolitical landscape, and this is likely to spur spot price volatility in the coming days. 
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