Best in Energy – 21 March 2023

Maritime emissions and pathway to net zero

Africa/Southeast Asia set for emissions growth

Oil majors and trading operations ($BBG)

EU plan to extend gas conservation target

U.S. fuel exports reach record high in 2022

U.K. explores small modular reactors ($FT)

EUROPE’s gas storage sites reported small net inflows on March 18 and March 19, a tentative sign the winter inventory depletion season is coming to an end early. The data is provisional and contains a mix of confirmed reports and estimates. But storage across the European Union and the United Kingdom was 55.8% full on March 19, the second-highest for the time of year after winter 2019/20 (56.2%) and well above the prior ten-year average (34.8%):

Best in Energy – 20 March 2023

EU energy-intensive business ($FT) ¹

Russia oil trade and sanctions ($FT)

Iraq’s mismanaged reconstruction

Supercore prices and policymaking

Russia/China border trade ($WSJ)

Germany urges more gas conservation

India plan to extend fuel export controls

¹ The two most important observations in this article are about gas demand reductions by energy-intensive businesses:

“Lower prices are not only saving energy-intensive companies a fortune. They have also put the colour back in the elaborate creations of the Italian glass blowers at New Murano Gallery.  Each of the firm’s 11 1,000 degree furnaces produces glass with a different hue and, after the company had to turn half of them off last year, almost all are back on. ‘We have nearly the full palette,’ Francesco Scarpa, one of the gallery’s co-founders.”

“Fernández-Valladares described the mood of the tile making sector that dominates his small town in Castellón province as ‘generally quite pessimistic’. Sales have plunged. Since December, demand from clients — which are mostly wholesale buyers — has dropped 30 per cent. In January, the factory resorted to the radical option of turning off the kiln for an extended period, shutting it down for 22 days to save on gas. Fernández-Valladares said he could not rule out more shutdowns. ‘We normally work through the Easter holidays and I don’t know if we’re going to have to stop.’”

Multiply these examples across the entire European Union, and it helps explain much of the reduction in temperature-adjusted gas consumption during winter 2022/23.

BRENT’s six-month calendar spread has collapsed to a backwardation of just 47 cents per barrel down from $3 per barrel at the start of March as traders anticipate a much higher probability of a hard-landing or recession following enforced takeover of the crisis-stricken Credit Suisse by rival bank UBS:

Best in Energy – 17 March 2023

U.S. energy-related emissions projection

Bank rout as easy money era ends ($BBG)

OPEC⁺ calm despite oil price drop ($BBG)

OPEC⁺ sees oil price fall financially driven

Russia/India oil price above $60 on freight

China is diversifying away from U.S. trade

U.S. retailers press for price cuts ($WSJ)

Russia oil exports and rising storage ($BBG)

Shippers balk at costly green freight ($WSJ)

U.S. INTEREST RATE markets steadied on March 16 as the Federal Reserve organised major national banks to help boost confidence in their smaller regional counterparts by placing large-scale deposits with First Republic bank. Rate forecasts firmed slightly. But the rate trajectory implied by futures prices still shows rates declining from August onwards as the central bank responds to tightening credit conditions and a slowing economy:

NORTHWEST EUROPE is roughly 85% of the way through the heating season. Temperatures at Frankfurt in Germany have been close to the long-term seasonal average since the start of March. But very warm temperatures in October and from mid-December to mid-January have left a significant deficit in heating demand that has not been erased. The total number of degree days so far this winter (1540) is -16% below the long-term average (1842):

Best in Energy – 16 March 2023

Climate target of 1.5°C called in doubt ($FT)

Credit Suisse gets lifeline from central bank

Banks as privately-owned state agents ($FT)

Exxon ramps up new crude distillation unit

Iran/Saudi deal to end arming Yemen ($WSJ)

If you are interested in banking supervision and financial failures, I can strongly recommend “Integrity, Fairness and Resolve”, a short monograph published by the Federal Reserve Bank of Kansas City about the savings and loan crisis of the 1980s. “Belly Up: The Collapse of the Penn Square Bank” also comes with my highest recommendation for a combination of insight and dark humour.

OIL PRICES fell sharply on March 15 in response to growing fears about a banking crisis and its impact on the economy. Brent futures were pushed bellow the bottom of the recent trading range:

U.S. DISTILLATE fuel oil inventories amounted to 120 million barrels on March 10. Inventories were -13 million barrels (-10% or -0.81 standard deviations) below the prior ten-year average. But the deficit has narrowed from -21 million barrels (-16% or -1.62 standard deviations) at the start of 2023 and -31 million barrels (-22% or -2.05 standard deviations) on October 7, 2022:

Best in Energy – 15 March 2023

China to import more LNG after prices fall

China boosted coal production in January and February

East Asia plans massive deployment of wind generation

U.S. gas consumption hit multiple record highs in 2022

Central banks balance inflation and financial stability

Philippines/Vietnam set to start importing LNG ($FT)

BANK FAILURES – In March 2008, I was working as an analyst on the trading floor at a commodity firm. The Reuters terminal flashed an alert that the Federal Reserve Bank of New York (FRBNY) had extended a multi-billion dollar credit facility to the troubled investment bank Bear Stearns. As part of my market-monitoring role, I sent a brief one-paragraph email to the treasury and credit teams highlighting the news and warning it probably meant the end for Bear as an independent institution; emergency borrowing from the central bank normally marks effective failure.

Less than five minutes later, the finance director sent an email to all staff instructing no new positions were to be initiated with Bear; only risk-reducing trades that reduced our exposure were permitted. For the next week, our firm would not initiate any new trades unless we could verify Bear was NOT the counterparty. Presumably similar emails and trading prohibitions were being implemented at all the other firms in the market. Bear was isolated, unable to attract cash inflows, and collapsed a week later.

Watching the demise of a major investment bank taught me a valuable lesson:  financial institutions live or die by confidence, and once it has been damaged, the end can come extraordinarily fast. Financial institutions die slowly at first, but very quickly towards the end. They do not get the benefit of the doubt. Our firm started to cut our exposure to Bear immediately at the hint of trouble, we couldn’t afford to wait for more information to see if the bank might survive. No one wants to be one of the last counterparties.

Friday is a particularly dangerous day for a bank in trouble. Regulators like to close a bank on Friday so they have the weekend to put in place a resolution and attempt to stabilise confidence in the rest of the financial system by Monday.

Best in Energy – 14 March 2023

U.S./EU economies boosted by lower energy prices ($WSJ)

Global LNG market balance becomes less clear after 2027

European steelmakers restart selected blast furnaces

Russia/India crude oil flows and market price reporting

Philippines set for big rise in wind and solar generation

U.S. ethane consumption by petrochemicals makers

Silicon Valley recriminations over bank failure ($FT)

U.S. central bank’s favourable collateral loans ($WSJ)

U.S. INTEREST RATE traders no longer expect the central bank to lift rates further following the failure of Silicon Valley Bank, with overnight rates expected to start falling from July onwards, as credit conditions tighten and force a slowdown in the economy. The path for interest rates over the rest of 2023/24 is now forecast to be much lower.

But the outcome of a financial failure is notoriously difficult to predict since it depends largely on confidence. Some failures are resolved quickly with little or no impact on the rest of the financial system and the real economy. In other cases, contagion occurs and the economic impact is significant:

EUROPE’s gas storage sites are 56.5% full, the second-highest on record for the time of year, well above the prior ten-year seasonal average of 36.3%. The end of the winter heating and inventory depletion season is now very near (with stocks usually hitting a minimum on March 30 ± 14 days):

Best in Energy – 13 March 2023

U.S. regulators take over failed Silicon Valley Bank

U.S. central bank acts to shore up liquidity

China/Iran/Saudi diplomatic talks ($WSJ)

Aramco sees oil market “tightly balanced”

Cobalt prices slump on output surge ($FT)

U.S. central bank and a hard landing ($FT)

U.S. INTEREST RATE traders have slashed exectations for future rate rises as the banking system comes under strain. Banks are heavily engaged in maturity and liquidity transformation, funding longer-term loans with shorter-term deposits and other borrowing. The progressive inversion of the yield curve is putting that function under increasing strain. Silicon Valley Bank (SVB), which failed on March 10 after a run by depositors, may have been an outlier. But the intensifying inversion poses challenges for all banks. Following the run on SVB, traders increasingly think concerns about financial stability will constrain future interest rate increases. Futures prices imply benchmark overnight interbank rates will end the year at around 4.50% (the same level as now) rather than 5.50-5.75% (which was expected as recently as March 8):

U.S. DRILLING activity continues to slow. The combined oil and gas rig count fell by -3 in the seven days to March 10. The total number of active rigs has fallen in 9 of the last 14 weeks by a total of -38 rigs (-5%) since early December:

HEDGE FUND and other money manager positions in the six major petroleum futures and options contracts on February 21, 2023:

Fusion energy will come too late to solve climate change

Fusion reactors will generate lots of radioactive waste, be very expensive initially, and come too late to be part of the solution to climate change, argues Ross McCracken

It’s clean, cheap and part of the solution to climate change. Not only that, but agile, private-sector innovators will accelerate hugely its technical and commercial development. What are we taking about? Nuclear fusion apparently.
 
In the last 18 months, private sector fusion development companies have seen a step change in funding levels. From typically attracting sums in the low millions, Helion Energy, for example, raised $2.2 billion in venture capital in November 2021. MIT spin-off Commonwealth Fusion Systems secured $1.8 billion last year, while U.K. company Tokamak Energy had, by May 2022, raised about $150 million in equity ahead of a planned new fund-raising initiative.
 
With enough money, the narrative runs, the private sector will achieve within years what slow-moving, cumbersome publicly-funded research facilities have failed to do in decades.
 
Is fusion clean? A fusion reaction, unlike fission, does not produce radioactive products. However, 80% of the energy released comes in the form of fast neutrons which hit the wall of the containment chamber. These neutrons – necessary to breed tritium fuel to sustain the reaction – cause nuclear reactions in the containment wall, which becomes radioactive.
 
Ideal materials have yet to be invented, and the containment walls will weigh thousands of tons and need periodic replacement. Fusion reactors, particularly early-stage ones, are therefore likely to produce more long-lived radioactive waste than fission reactors.
 
Fusion will need strict regulatory oversight. It will also need, on an industrial scale, huge quantities of novel materials. Neither look good for costs.
 
Will fusion be cheap? The idea that fusion will produce cheap energy arises from two features of the science. First, the fuel used in fusion reactions is hydrogen and there is a lot of hydrogen in water, so fuel is abundant. Second, the energy generated from a fusion reaction is so huge that the unit cost of production will be low.
 
Hydrogen might be abundant, but producing it sustainably is not cheap. Moreover, fusion reactions do not use simple hydrogen, but the heavy hydrogen isotope tritium, which has to be bred from lithium via neutron bombardment. Tritium’s short half-life makes it highly radioactive.
 
Estimates of fusion costs are hugely speculative because of the technology’s immaturity, but a fusion power plant will have a very high capital cost, most likely far beyond the risk profile of power utilities. There is no reason to think such complex machines will follow the cost trajectory of technologies like wind, solar or battery storage, which have essentially become mass manufactured items. Fusion costs and construction timescales are far more likely to have a trajectory similar to fission costs.
 
Will fusion combat climate change? Not on a 2050 horizon and most likely not until the next century, when it will be too late. Even fusion advocates, private and public sector, admit this when pushed.
 
In an idealistic, accelerated scenario, which assumes the massive physics and engineering challenges are overcome, only one or two prototype fusion machines are likely to be operating in the 2040s. It will then take decades more to develop commercial reactors and decades more for their deployment to spread throughout the world – assuming commercial viability.
 
Publicly-funded fusion research is valuable and, unlike the private sector, largely collaborative. However, as yet, there has been no proof of concept. There has been no experimentation at reactor-relevant levels of energy gain – the core focus of the pathfinding $20 billion ITER project in France, delivery time circa 2035 – when more scientific challenges are likely to become evident.
 
Fusion remains early stage because it is very complex. For society at large, it will continue to push the boundaries of science, but, today, for the individual investor, it is a high-risk, no-reward offering.

 
Ross McCracken is a senior energy journalist who edited Platts Energy Economist and is now the founder of Commodity Publishing. ross.mccracken@commoditypublishing.com

Best in Energy – 10 March 2023

U.S. Treasury reassures traders on sanctions ($FT)

Russia’s missiles target Ukraine’s energy networks

India to boost LNG imports for generators ($BBG)

U.S. central bank discovers r* is unreliable indicator

U.S. yield curve inversion and equity values ($WSJ)

U.S. economy and supply-driven inflation ($WSJ)

U.S. inflation fuelled by margin expansion ($BBG)

U.S./EU downplay race on energy subsidies ($FT)

EU eases state aid rules to match U.S. subsidies

(see also European Commission press release)

U.S. railroad safety and trackside sensors ($WSJ)

Yemen’s decaying oil storage tanker to be unloaded

U.S. TREAURY YIELD curve between two-year and ten-year maturities has inverted to around 100 basis points, the most extreme since August 1981, when the economy was entering the second part of the double-dip recession of the early 1980s. The inversion is signalling a sharp fall in interest rates, resulting from a rapid deceleration of inflation, a downturn  in the business cycle, or a combination of both:

U.S. GAS INVENTORIES are moving into an increasing surplus, keeping downward pressure on prices. Stocks were +240 billion cubic feet (+13% or +0.58 standard deviations) above the prior ten-year seasonal average on March 3, up from a deficit of -263 billion cubic feet (-8% or -0.98 standard deviations) on January 1, 2023, and a deficit of -427 billion cubic feet (-13% or -1.52 standard deviations) on September 9, 2022:

Best in Energy – 9 March 2023

Tesla plans to eliminate dependence on rare earths

U.S. energy secretary address to Houston CERAWeek

U.S. oil well initial productivity is declining ($WSJ)

Keystone ordered to trim pipeline pressure ($BBG)

U.S./EU embark on race for energy subsidies ($BBG)

U.S. LNG exports projected to grow in 2023 and 2024

Nord Stream sabotaged by pro-Ukraine team ($WSJ)

Russia/NATO energy war enters attrition phase ($FT)

U.K. workforce remains smaller than before pandemic

India tries to improve electric reliability in April/May

(see also formal press release by the power ministry)

China’s refined petroleum exports set to slow

U.S. solar installers forecast to rebound in 2023

U.S. oil firms embrace hydrogen production idea

U.S./Australia submarine sales agreement ($WSJ)

U.S. PETROLEUM INVENTORIES including the strategic reserve increased by +2 million barrels over the seven days ending on March 3. Stocks have increased in 10 of the last 14 weeks by a total of +31 million barrels from their recent low on November 25, 2022, arresting the previous downward trend. Inventories are still -231 million barrels (-12% or -2.15 standard deviations) below the prior ten-year seasonal average. But the deficit has narrowed from -278 million barrels (-15% or -3.05 standard deviations) in November: