Best in Energy – 27 July 2022

[MUST READ] Germany cuts ammonia production to save gas

[MUST READ] Critical minerals recovery from waste streams

Japan strikes benchmark coal deal at $375/tonne ($BBG)

Germany to subsidise energy efficiency renovations

IMF downgrades global economy forecasts

Pakistan raises electricity prices

U.S./Russia oil price cap ($FT)

U.S. uranium import reliance

CYCLICAL INDICATORS: three of the top five stories featured on the front page of the Wall Street Journal on Wednesday are about slower sales, slower corporate earnings and slower hiring:

CATERPILLAR’s share price in the three months from May to July was down by -13% compared with the same period a year ago. The heavy equipment manufacturer’s share price has been closely correlated with the OECD’s leading economic indicator. The slump is consistent with the onset of a business cycle slowdown:

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Best in Energy – 26 July 2022

Germany struggles with Russia gas reductions

Germany’s coal-fired generators face challenges

EU motorists hit by relatively high diesel prices

EU poised to approve softened gas cuts plan

United States becomes largest LNG exporter

EU28 GAS STOCKS are still accumulating rapidly and have risen above the pre-pandemic seasonal average, despite recent concerns about a potential disruption of pipeline supplies from Russia. EU28 gas inventories are currently at 751 TWh compared with a pre-pandemic five-year average of 719 TWh. Stocks have been accumulating at +5 TWh per day, in line with the seasonal norm. Inventories are on course to reach 985 TWh by end of September, slightly above the pre-pandemic average of 983 TWh:

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Best in Energy – 25 July 2022

EU softens oil-trading related sanctions on Russia

China’s biggest coal miner boosts output (trans.)

U.K. transmission grid hits capacity limit ($BBG)

Dark tanker market grows competitive

Urban centres and heatwaves ($FT)

Oil exploration accelerates ($BBG)

China’s lessons from Russia’s war

U.S. INITIAL CLAIMS for unemployment insurance benefits have been trending upwards since the start of April, albeit from an exceptionally low base, indicating the labour market may be starting to cool:

BRENT futures for September delivery are showing characteristics of a squeeze, trading in a backwardation of almost $5 per barrel compared with October. But further forward, spreads have softened significantly in recent weeks, as traders anticipate an increased probability a recession will dampen oil consumption:

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Best in Energy – 22 July 2022

Germany to cut energy use to resist blackmail

EU divided on compulsory gas demand cuts

Europe’s electricity generation under stress

Europe turns to Africa for more oil and gas

China’s semiconductor manufacturing ($BBG)

Texas power grid and bitcoin miners ($BBG)

RHINE RIVER water levels measured at Kaub are the lowest for the time of year for more than a quarter of a century and indicative of drought conditions across northwest Europe. Low rainfall is restricting river borne freight and is an indicator of the stress for thermal and nuclear power plants that rely on river water for their cooling systems. For coal and gas combustion plants, efficiency and maximum output is reduced. For nuclear plants, insufficient cooling capacity can force output limits or a precautionary safety shutdown:

EUROZONE manufacturers reported a decline in activity this month for the first time since the first wave of the pandemic in 2020. Preliminary data show the manufacturing sector purchasing managers index fell to 49.6 in July (28th percentile) down from 52.1 in June (47th percentile) and 54.6 in May (65th percentile). Russia’s invasion of Ukraine and the sanctions the EU has imposed in response have pushed the region’s economy into recession:

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Best in Energy – 21 July 2022

Russia restarts Nord Stream 1 gas pipeline

China doubles new solar power installations

EU urges member states to cut gas use by 15%

Shell chief discusses transition strategy ($FT)

EU energy system strained by heatwave ($FT)

China enters main flood season (trans.)

U.K. homes are worst in western Europe

What does an energy crisis look like in real-time to contemporary observers? The following secret diplomatic cable sent from the U.S. embassy in London to Washington on 7 February 1947 and reproduced in the Foreign Relations of the United States (FRUS, 1947, Volume 3, pages 487-489) illustrates how Britain’s coal and electricity crisis in the winter of 1946/47 appeared to observers at the time, without the colour of hindsight:

Telegram to the U.S. Secretary of State from the U.S. Chargé d’Affaires in the United Kingdom

7 February 1947

SECRET

Shinwell, Minister Fuel, announced in Parliament today that beginning Monday no power would be furnished industrial consumers in London, southeastern, midland and northwestern areas, that power to all domestic consumers these areas would be cut off between 9 and 12 a.m. and 2 and 4 p.m. Drastic step taken in order to assure maintenance of power such essential services as sewage, water, lighting, hospitals, bakeries, etc.

Immediate cause emergency is snow and cold weather of past weeks which has nearly paralyzed road, rail and coastwise traffic and disrupted coal movement. Basic cause is shortage of coal stocks which country entered winter on November 1 and which has resulted in steadily worsening crisis ever since cold snap mid-December. Duration of emergency measures will depend on weather improvements but even after that it will take several weeks to build up coal stocks in order to provide general power requirements.

Meanwhile, industrial concerns throughout country whose deliveries had already been cut in mid-January to 75% in case of iron and steel and 50% all other industries, are rapidly exhausting their stocks, and press each day carries accounts of new factory close downs and production curtailment. Although government has not given out figures, in our opinion number unemployed already numbers over 100,000 with considerably larger number on short-time work, and effect of paragraph 1 will be to put several million out of work next week in affected areas. To make matters worse many households have already exhausted their yearly coal allocation which should have lasted until May 1.

Although coal traffic has been given priority on all rail lines traffic disruption has caused shortage of coal cars at the pits and forced serious curtailment coal production. Output in Yorkshire, largest producing area in Britain, is down 50% this week, other areas somewhat less.

In our opinion coal stock exhaustion throughout country is now such, that even with improved weather, the country can only limp through until mid-April. For until then country must live on current coal output which is not sufficient to meet winter needs, even if substantial increase in output, which occurred after January 1 when the mines formally passed into public ownership, is maintained when transport becomes normal.

Also in our opinion, government is now facing its first real loss of public support. Failure of production and export drive to forge ahead during past two months has already caused widespread misgivings, and with production and export declines inevitable during next three months in view coal position, we do not see how government can continue maintain popularity at same high levels during past 19 months. We do not, however, anticipate any government crisis or any attempt to form a coalition and discount all rumours to this effect. Only bright spot for the government is that Labor MPs who led the rebellion against Bevin’s foreign policy last fall and meant to renew their attack when Parliament resumed on January 21, have decided hold their fire in view of serious domestic situation in order not to embarrass government further.

Best in Energy – 20 July 2022

EU asks member countries to cut gas consumption

EU countries most vulnerable to Russian gas cut off

(see also IMF working paper on gas shut off impact)

EU/Russia sanctions eased on food-related exports

Electric-vehicle charger market is growing rapidly

Bangladesh to start rationing electricity and gasoline

China boosts oil imports from Russia at Saudi expense

LONDON’s brief but exceptional heatwave has already ended, but 24-hour temperatures on both July 18 (27.3°C) and July 19 (27.4°C) were more than +8°C above the long-term seasonal average, straining transportation infrastructure and the electrical network.

In a normal year, London temperatures peak between July 20 and August 5, the result of seasonal lag. But weather conditions this year coincided with and compounded the normal seasonal peak pushing daily temperatures far above normal. Temperatures on both days were 2.2-2.6 standard deviations above the 2013-2021 average:

U.S REAL AVERAGE WEEKLY EARNINGS were down by almost -4.5% in June 2022 compared with June 2021, as inflation outstripped wage increases, underscoring the intensity of the squeeze on incomes and spending power:

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Best in Energy – 19 July 2022

Crude’s physical tightness contrasts with recession fears¹

Germany’s chemical makers cannot cut gas further

Japan buys its most expensive ever LNG ($BBG)

China’s LNG imports set to drop in 2022 ($BBG)

China’s power generation at record high ($BBG)

U.S. labour market indicators are diverging ($WSJ)

EU calls for immediate gas consumption cut ($FT)

U.S. gasoline consumption fell in second quarter

¹ Physical crude markets are prompt cash markets and reflect the balance of production, consumption and inventories now. Financial markets reflect expectations about how production, consumption and inventories will evolve over the next 6-12 months or so and are anticipating a recession in future. There is only one price of oil. But near-term shortages are consistent with anticipating future surpluses as a result of an economic slowdown. The current strongly backwardated market structure implies oil is in very short supply right now (which has been evident from large and persistent inventory draw downs) but is expected to be more plentiful in 6-12 months time (as a result of an economic slowdown dampening oil consumption). The price structure embodies the cyclical behaviour of production, consumption, inventories and price levels:

LONDON temperatures continue to rise with the temperature at Heathrow reaching 36.3°C on July 18 up from a high of 30.6°C on July 17, with a further build in heat expected today:

U.K. POWER GRID is relying heavily on gas-fired generation to meet demand during the heatwave. Combined-cycle gas turbines (CCGTs) have been supplying around 50% of total domestic generation in recent days:

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Best in Energy – 18 July 2022

[MUST READ] Europe must reduce gas consumption now, warns IEA

Russia/Europe locked in economic war of attrition ($WSJ)

Texas deploys power grid emergency measures ($BBG)¹

U.S./GCC summit ends with more oil output uncertain

Hebei’s efforts to reverse groundwater depletion (trans.)

¹ Power grid managers in Texas and elsewhere have a variety of tools to cope with an imminent emergency caused by insufficient generation, including orders to generators for “maximum generation” (mandating output from individual units above their normal recommended operating levels); “no touch” (prohibiting all but critical maintenance and repairs to enable maximum generation and transmission); “reliability must-run” (requiring and paying units to run regardless of their normal economics); and “system-to-system” mutual aid (requesting maximum imports from neighbouring networks). The isolated nature of the Texas grid restricts STS opportunities for ERCOT but it is frequently used in other networks. On the demand side, grid managers can invoke voluntary demand reduction contracts, issue public appeals for conservation, order voltage reductions (usually in two stages), and in the final resort use forcible disconnection, loading shedding and rotating blackouts.

LONDON temperatures have started to ramp towards a likely record on Monday and Tuesday, as the heat builds over southeast England, with each day’s temperature profile hotter the last:

U.S. CRUDE oil inventories around the NYMEX WTI delivery point at Cushing in Oklahoma stand at just 21.6 million bbl, the lowest seasonal level since 2014 and before that 2008, when front-month WTI prices were at $122 and $170 respectively adjusted for inflation:

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Best in Energy – 15 July 2022

White House downplays hopes for more oil

Middle East imports more Russian fuel oil

Japan plans reactor restarts before the winter

United Kingdom heads for winter crisis ($BBG)

Germany is moving into a recession ($BBG)

ERCOT confident will avoid blackout ($BBG)

U.S. household finances and inflation ($WSJ)

Russia/NATO conflict is test of resolve ($BBG)

Central banks turn hawkish on inflation

U.S. CENTRAL BANK is expected to raise short-term interest rates to 3.50-3.75% by February 2023 up from 1.50-1.75% at present to curb inflation. From the second quarter of 2023, however, policymakers are expected to start reducing interest rates as the economy slows and inflation decelerates:

U.S INTEREST RATE traders anticipate a recession has become virtually certain following the continued acceleration of inflation. The yield curve spread between 2-year and 10-year maturities is now in the 98th percentile for all months since 1990:

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Best in Energy – 14 July 2022

Smart sanctions on Russia’s petroleum exports¹

EU prepares for gas shortages in winter 2022/23

Biden wants sanctions and lower oil price ($FT)

Berkshire Hathaway boosts Occidental ownership

China studies ending Australia coal ban ($BBG)²

ERCOT again appeals for electricity conservation

(see also ERCOT’s alert notice

Bolton boasts about helping plan coup attempts⁴

Urban heat islands and summer electricity ($BBG)

¹ This paper by Harvard’s Craig Kennedy published in April appears to be an early version of the price-cap plan the U.S. Treasury Department is advocating to the European Union, Japan, India and China.

² Bloomberg reports Chinese officials are preparing to recommend the lifting of the country’s ban on coal imports from Australia. The proposal is framed as a policy response to concerns about coal shortages stemming from sanctions on Russia. But China does not need Australian coal at the moment given the slowdown in the domestic economy, rapidly rising domestic coal production, and the huge increase in hydropower generation. The proposal therefore appears to be primarily diplomatic – part of détente between China and the new government in Canberra. The question is what China would hope to receive in return: de-escalation of the conflict, generalised goodwill and a reset in the relationship, or something more concrete?

³ Visible only to IP addresses in the United States or via a VPN

⁴ U.S. government involvement in the overthrow of foreign governments is widely known, including Iran (1953) and Chile (1973). But it is rare for a recently serving senior official to acknowledge the fact. There is always a large gap between what we “know” in the sense of being overwhelmingly probable and what we “know” in the sense of being able to prove to the satisfaction of audiences, editors and lawyers. Indiscretions by former officials are useful because they move topics from the known-suspected to the known-proven category which makes it much easier to analyse and write about them.

U.S. SERVICE SECTOR prices climbed at an annualised rate of almost +10% in the three months from April to June, a clear sign the economy is overheating. Services inflation is running at some of the fastest rates for 60 years. The three-month rate is in the 93rd percentile for all similar periods since 1960:

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