Presenting What Next TBD: Why Everyone is Freaking out About Private Credit

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1:46Tracy Alloway:Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, it's April 9th, 9.05 a.m. There's a ceasefire-ish. It's sort of, there has been something announced that's called a ceasefire. There does not seem to actually have been much of a cessation of fire per se. Maybe it's slowed down a little bit. Some of the headlines this morning are about Israel continuing to strike hard in Lebanon. Iran saying that, well, if there's no ceasefire in Lebanon, there's no ceasefire at all. But, you know, overall, at least as of right now, you know, the market, et cetera, we saw that huge drop in oil Tuesday night.

2:31Tracy Alloway:You know, the market's still sort of still sort of buoyant. Right. Still sort of resilient. Well, I think the important thing for the purposes of this particular discussion is if you take a look at what's going on in the Strait of Hormuz, it still seems to be shut more or less. and shout out to the Bloomberg function, ECAN, Hormuz, Go. You can see the number of ships that are going through that particular choke point. And I have two as of today, which is basically not like two today. There were some headlines about how maybe even in the good case, they would let through 10 to 15, which is still sort of nothing compared to normal ship traffic.

3:11Tracy Alloway:So like nothing's back to normal. I was going to say to your point, I think the thing that's confusing everyone is we keep seeing these headlines about like a billion barrels lost of world supply or 20 percent of the world's oil supply now choked out because of the Hormuz situation. And yet, if you look at the oil price, you know, WTI, Brent are definitely up, but they're not up as much as you might think given the scale of disruption. I think many people feel intuitively the price should be higher. And then, of course, there's the whole refined products situation, which is more extreme. And a lot of the prices that feel really extreme in general have happened where we see it in East Asia, whether it's like Singapore jet fuel, et cetera.

3:57Tracy Alloway:Or a lot of the headlines that you see about extreme rationing come from East Asia. I forget which country was. They were like, you know, they're doing that classic thing of only drive to work if your license plate ends in an odd number on this day. Very 1970s. Yeah, and we're seeing a lot of these types of headlines, some in Korea, some Thailand, etc. So it also then raises the question, you know, the Strait of Hormuz is closed. Maybe it'll be open. But does this change future energy trajectory in some way? Does this mean there's going to be more comfort with coal mining over the long term? Does this mean that economies are going to try to accelerate decarbonization efforts more intensely?

4:39Tracy Alloway:Could this be a huge boon for the American LNG industry where we know we're building a lot of export terminals, et cetera? And if, you know, there's some sort of impairment to Qatari LNG, then I don't know. Huge questions about even just setting aside market pricing right this second or this week, the future of energy. One thing about our current market moment is we are getting like a crash course in real time about the flow of energy throughout the world. And as we will see in this conversation, like it is still very much geographically constrained East versus West. And so, as you say, the big question is whether or not the East kind of, I don't know, scrambles even harder to adapt to this.

5:21Tracy Alloway:Well, I'm very excited to say we do, in fact, have the perfect guest, someone who knows about all this stuff, someone who's been on the podcast before, but we haven't talked to him in years. which is really sad because we really like the guy. And so very excited to welcome back onto the show, Alex Turnbull. He's an investor based in Singapore, but he's also a researcher with the Australian National University focused on energy security, really knows the energy scene, very well spends his time thinking about the present and future of energy. So Alex, thank you so much for coming back on Outlaws.

5:53Thank you very much. It's great to be back on.

5:55Tracy Alloway:Yeah, really, really appreciate it. Talk about like, hey, Fidelity, what's it cost to invest with the Fidelity app? Start with as little as$1 with no account fees or trade commissions on US stocks and ETFs. Hmm, that's music to my ears. I can only talk.

6:27NYSE SIPC.

6:57Tracy Alloway:global tech markets. We do this all every weekday, then bring you the most important conversations and analysis in our podcast. Search for Bloomberg Tech on YouTube, Apple, Spotify, or anywhere else you listen. Join us every afternoon on your commute home and stay ahead of the tech news cycle. That's the Bloomberg Tech Podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today, wherever you get your podcasts. right now you know this phenomenon that we talk about where yeah prices are up but you know by some measures still within some sort of historical range whereas the headlines that you see about rationing etc like oh this is extremely dire etc give us your lay of the land from the account from the from the asian perspective from the perspective of east asian countries like how dire are things just like right now without that without that flow terrible frankly the challenge right now for asia is that most of their crude supply does come from the middle east uh or there are some countries which do have some domestic production um malaysia china of course but broadly speaking asia is a massive crude important principally from the middle east because it's the most proximate supply and generally it's the cheapest shipping distances and costs.

8:17So Asia is very heavily exposed right now and more acutely thinking about what the impacts might be, how they might want to pre-answer than the United States, of course, which produces a lot of oil, but still needs Middle Eastern grades for blending and refining. Also Europe, which has access to it quite readily.

8:37Tracy Alloway:How much do the spot prices actually matter at this moment in time? Because, you know, you can look up something like Dubai, Oman or some type of oil that you would assume would be maybe flowing into East Asia. And you can look at the spot price. But like if it's not actually moving, does that like moving out of the Strait of Hormuz into Asia, does that mean anything? It does certainly for some grades. So for Omani, crude can still be loaded and is being loaded. Those are real prices. Prompt Brent. Those sorts of trades are real. So you're often seeing, even for loadings from Yanbu and Saudi Arabia, OSPs, which are indications of price, are anywhere from$20 to$25 above whatever the prevailing bread contract is.

9:25Tracy Alloway:So in terms of the knock-on effects on the economy, you mentioned some of the rationing thing. Okay, yes, they're highly exposed to it. Is it hitting now? Is the economic destruction already taking place? Talk to us about just sort of like, I guess, on the ground figuratively and literally, what are some of the ripple effects that we're seeing? You're certainly seeing serious constraints on consumption where they don't really have a lot of refining capacity and where they just don't have large amounts of crude storage. So places like the Philippines and Vietnam are already under some significant stress.

10:08A lot of it is also driven by the fact it's just kind of a question of whether you can get credit lines to be able to pay these prices. And ultimately, the decision of the refineries is if they don't have inputs, they have to shut the refinery down, which incurs a large amount of fixed costs and downtime and so forth. So a lot of these players are kind of living hand to mouth and trying to get whatever they can to stay open as long as they can. So that's how you have this extreme willingness to pay for prompt cargoes in order to keep these assets operating and running. But then, you know, the futures curve is out 30, 60 days.

10:45And that's a long time in the current February context where you could get resolution or not. And so that disconnect is going to remain, I think, so long as there is no sense of a clear path here.

11:00Tracy Alloway:Who's not getting energy? Because, all right, if there are some entities that are almost going to be completely price insensitive, they have to keep the lights on. They're going to just pay whatever. And so you get these huge short-term spot prices. But volume is volume. And so who is actually being forced to turn off the lights or not run a refinery or whatever because they're getting outbid? If there are fewer molecules, there are fewer molecules. Yeah, I mean, certainly less high-income countries in Asia. You're starting to see quite an acute crunch in the Philippines. So they've recently secured some cargoes from China on a one-off basis.

11:39Some in Vietnam, the same. Places like the Pacific Islands, they're in a not very good place. So it's already starting to begin the demand destruction starting mostly by income.

11:55Tracy Alloway:So you mentioned refineries there. And one of the headlines that's come up recently is Asian refining margins slip into negative territory, which would seem like a bad thing if you're a refiner. And I take the point that you need to keep these assets going because it's hard to shut them down and then restart them again. But if you're not making any money, how long are these refiners actually going to keep going for? Well, for some Chinese teapot refineries, just smaller private ones, they live in a different political slash economic context. And if they are told to stay on, they will. You know, it depends on which.

12:34In many of these countries, you don't have purely market price fuels. So whether that's Vietnam or China, places where you have market pricing pass through, like Australia, the price of fuel is getting very expensive indeed.

12:48Tracy Alloway:So in those situations, basically, where Tracy mentioned a refiner might be actually operating at negative margin, that's an environment in which the retail price of fuel is not liberalized. The government sets the price of fuel or sets them banned or something like that, and the refiners just have to keep operating until the next time that band is changed. Okay, got it. So what are you seeing? Let's talk about, you know, right now. Is this, is there, what's happening with US LNG? Is it all being taken up by Europe? Is Asia trying to get in on the action or bidding for cargoes? Like what's happening with American flows?

13:30American flows are going to move into Asia quite sharply right now. So Asian prices and spot, even the JKM futures above European TTF or title transfer facility futures for the next period, that could change quickly. But at the moment, Asia has a much higher urgency and willingness to pay as they go into summer, higher power demand from cooling, air conditioning, and also just a much more acute dependence upon LNG in certain countries. So in Europe, you've also, so you're going into summer, you have this solar and wind, and it's not quite panic stations just yet. So I think Europe will be a little bit more slow to fill its storage.

14:15But then if this goes on until, say, June or July, then that's when the real panic will set in.

14:37Tracy Alloway:For Asia, how much of a role does Russian oil play right now in terms of replacing lost Middle Eastern supply? I mean, most of the Russian crude has already been sold anyway, and it has been sold very heavily into Chinese refineries and teapots. So it's not like some of it was sitting offshore when it was going through a period of more robust US sanctions. The offshore barrels of oil and water has been dropping very sharply as all that crude has been absorbed into various places, India, China, like I said. So, yeah. So I think that has provided something of a buffer to this shock because there was this backup of Russian crude that couldn't.

15:20No one was quite sure whether they could pay for it without being sanctioned by the US. But of course, that's melted away in the current context.

15:28Tracy Alloway:You mentioned that the Philippines has imported some gas from China. And I'm curious, like, what has China, we know they've been a big accumulator over the years, generally, of natural resources. And they have strategic stockpiles and so forth. But right now, what are they doing and are they trying to play some role in stabilizing or easing the crunch for the region overall? I think they've been very strategic. Certainly, there's more or less control on exports of oil products right now, which is not very helpful for the region because they have over time been large exporters. They are clearly doing this in a very targeted fashion.

16:10fashion and i would assume there's uh other considerations behind that oh wait say more uh well for example china has territorial disputes with the philippines and vietnam and the south china sea and they've now got something so interesting okay that makes sense

16:29Tracy Alloway:yeah oil as geopolitical tool is a tale as old as as all the time i was gonna say time but i guess as old as, what, 200 years or something like that. Okay. So we were talking about the potential for an energy crisis to actually hasten decarbonization efforts in Asia. And this is something that came up before on an episode we did on China's teapot refineries. Are you seeing rumblings of that at the moment or are people still in sort of wait and see mode? No, there's definitely been a notable pick up in certain areas where there was already a bit of momentum. So in Japan, they have been undertaking a number of nuclear restarts.

17:10They've been moving very tentatively as the public got behind nuclear and the politics became less challenging. That is all apparently accelerating now. So Japan will push very hard on nuclear restarts. And more importantly, the public polling is really strong for it. So there's not a lot of political risk. And of course, Takeichi had a massive election win. So she's in favor of it, the public's behind it, and there's a matter of necessity now. So I think that's something one could assume is only going to move faster. And then in Korea, there's also more of a push for nuclear restarts. So that's moving quickly.

17:50China is doing some very pointed stuff to try to reduce LNG burns and use in chemicals. It's tricky to, if you've got a plastics plant, that's kind of hard to do, but they're having a red hot go at it. And similarly, you're also starting to see a staggering acceleration in EV adoption. If you do calls to auto dealers around Asia and ask them how much time electric vehicles stay on the lots down to single days, and many of them are back audited now. So there probably was an EV go.

18:23Tracy Alloway:Is that something you're doing? Are you calling up the car lots and asking them this? Yeah, of course. Wait, say more about this and what would they have said? This is actually, this is not, this is new, this is new, it's on the ground information. But talk about this, like what would they have said a month ago? What are the type of dealers you're talking to? What would they have said a month ago and what are they saying now? I mean, you know, January when there was, you would see BYD cars, for example, a couple of dealers in Australia, Singapore, other parts of Asia, they would be on the lot for 25 plus days.

19:00You know, the inventory turns were kind of a bit slow and the market did look kind of glutted. We're down to single digit days in most places now. So anything China can produce out of the EV sector, I think will get solved this year. That's just really the constraint is on the supply side, not on the demand side now.

19:19Tracy Alloway:I don't know the degree of granularity that you pay attention to American politics. Are you familiar with, do you know who Thomas Massey is? Does this name ring a bell? Yeah, yeah. He's a Kentucky from, a congressman from Kentucky who drives a Tesla with a bumper sticker that said this Tesla is powered by Kentucky coal. So he's like, you know, he's a politician from Kentucky Republic. is very pro coal, but he's also pro Tesla. So he has his coal powered Tesla. Is that basically the sort of near or medium term future of Asia, which is like, okay, LNG is impaired. BYDs are flying off the lot. And so essentially we have a lot of like de facto coal powered Teslas driving around, or sorry, coal powered BYDs flying around.

20:04To a certain extent, yeah. I mean, it's also, There's also very hard analytic math behind this in the sense that there are the Straits of Hormuz do not, aside from the east-west pipeline, which looks like it got pretty badly hit today over the last 24, 48 hours. There is no way for that oil to make its way out otherwise. So this is very different to 2022 where you have sanctions, you have this and that, but the spice will flow if it can physically move or be moved by pipelines, by rail or what have you. And so in 2022, I was pretty sanguine about the impacts on the oil market because Russia's got a lot of pipeline capacity to China, through Kazakhstan, and there was clearly not really the appetite to do full -on shadow fleet sanctions that would be required to slow down.

20:55In this case, you actually just can't get it out. That's all there is to it. And so if you look at that vulnerability with oil, where 20 plus percent of the market comes from the Middle East, and LNG, which is about the same numbers, and then you look at, say, a big network flow graph model of global coal market, which I've done, the coal is not really dependent upon choke points. The biggest producers are places like, you know, first of all, China produces an enormous amount domestically. It's the world's largest producer. India does too. Australia, South Africa, these are all places with access to open ocean, no quirky straits.

21:33And so you don't really have to worry too much about whether some geopolitical event takes out coal. The most reliable option, of course, is just producing stuff in country, whether that's solar, wind, you know, batteries, nuclear. But in a pinch, and currently, I think coal is going to have a bit of a comeback for that reason a lot.

21:53Tracy Alloway:Yeah. Setting coal aside for a second, when you look at alternate sources of energy, do you have like, I don't want to say a personal favorite, but which one of them do you think comes out on top in the sort of medium to longer term from this particular situation? It's like asking someone, well, you know, what wine should I grow? What should I plant? I'm like, well, okay, where are you? So if you're anywhere close to the equator or have a good solar resource, solar is crazy cheap. And if you've got it year-round, batteries are also pretty cheap. That's hard to beat. If you're somewhere in the Baltic or something, then it's weird, right?