Best in Energy – 17 March 2022

China temperatures to tumble in eastern areas (trans)*

U.S/U.K. ask Gulf monarchs for more oil ($WSJ)

Saudi Arabia’s strained relations with the West

U.S. gas and power bill arrears are rising ($FT)

U.S. oil importers race to beat Russian embargo           

Commodity traders and systemic risks ($BBG)

Ukraine/Russia peace negotiations ($FT)

* Temperatures are predicted to fall by -20°C or more in the most densely populated areas of eastern China, which are also the ones which rely most heavily on gas to meet heating demand

U.S. PRESIDENT Joe Biden has complained that the retail price of gasoline has remained high even as crude prices have fallen in recent days. “Oil and gas companies shouldn’t pad their profits at the expense of hardworking Americans,” he posted on Twitter on March 16, hinting at the possibility of anticompetitive behaviour in the fuel market.

Gasoline prices have broadly tracked the rise and fall in crude prices since at least 2010. Variations in the price of crude explain nearly all the variation in prices paid at the pump. Gasoline prices were indeed anomalously high at the start of the week. But this was likely the result of timing differences in the supply chain.

While crude is priced on a second-by-second basis in futures markets, wholesale and retail prices are adjusted must less frequently. Differences in pricing frequency create the possibility of temporary divergences along the supply chain especially when crude prices are moving very fast.

Last week saw an unprecedentedly rapid decline in crude oil prices. In dollar terms, the decline in Brent futures prices over the week to March 14 was the second-largest weekly fall since 1993. In percentage terms, the fall in crude prices was the 12th largest (n = 1510).

It will take a few days for gasoline prices to catch up. But the White House presented no convincing evidence of anticompetitive behaviour in the retail gasoline market. The administration’s primary purpose seems to be political – to deflect voter concerns about the rising price of fuel and the rising cost of living more generally:

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Best in Energy – 16 March 2022

China’s urban road traffic plunges ($BBG)

EU plan for minimum gas storage requirement

U.S. shale producers in further consolidation

Italy would need 3 years to replace Russia gas

U.S./Russia deal on Iran nuclear accord ($WSJ)

China/Saudi discuss oil pricing in yuan ($WSJ)

China struggles with slowing economy ($WSJ)

China struggles to control coronavirus (trans.)*

* Like most public communications from policymakers, business chiefs and organisation leaders, reassuring statements can be reverse-engineered to identify the issues they are most concerned about – in this case the very rapid, often asymptomatic, spread of omicron infections and the challenge it presents to effectiveness and sustainability of the country’s dynamic clearance zero-covid strategy.

BRENT spot prices and calendar spreads have eased significantly over the last week, signalling a market expected to be very tight, compared with the extreme shortage indicated on March 8. Brent’s six-month calendar spread is now “only” 3.1 standard deviations away from the 1990-2022 average down from a record 7.1 standard deviations on March 8:

Best in Energy – 15 March 2022

China struggles with massive coronavirus outbreak

Europe is key destination for Russia energy exports

Europe oil deliveries via pipeline from Russia ($FT)

U.S./China talks about Ukraine (China view) (trans.)

U.S./China talks about Ukraine (U.S. perspective)

LME’s nickel contract failed under pressure

Nickel trading to resume under standstill agreement

Russia oil likely to be sold on shadow market ($BBG)

China’s traders sold LNG into Europe market ($BBG)*

* Europe’s summer gas futures prices moved to a huge premium of €72 per MWh compared with winter 2023, encouraging opportunistic sales by China’s traders into what was a very hot market.

HEDGE FUNDS and other money managers held short positions in NYMEX WTI equivalent to just 25 million barrels on March 8, one of the smallest short positions in recent years, as the persistent surge in prices and the threatened interruption of Russian oil exports forced most holders to close them out. Short-covering likely amplified upward pressure on prices, especially for near-dated futures contracts, where most hedge fund positions are concentrated, which would also have intensified the backwardation. But with short positions reduced close to historic lows, the conditions are in place for a new short-selling cycle when the extreme upside risk to prices is reduced:

NORTHWEST EUROPE’s temperatures have moved above the long-term seasonal average again over the last week, reducing heating demand and gas consumption, and helping make the post-winter inventory level look more comfortable. So far this winter, cumulative heating demand at Frankfurt in Germany has been -10% below the seasonal average, significantly easing the pressure on gas inventories:

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Best in Energy – 14 March 2022

China to cut reliance on coal imports ($BBG)

Diesel shortage pushes up prices ($BBG)

India plans to take more Russian crude

Steel sector decarbonisation trajectories

China’s government priorities for 2022

(see also the premier’s press conference)

China’s nickel hedger explores delivery

New Zealand cuts fuel taxes temporarily

France to rebate fuel charges temporarily

China/Russia gas and transition pathways

Recession indicators are increasing ($BBG)

Inflation is top issue for U.S. voters ($WSJ)

Europe/Asia prepare to battle for gas ($BBG)

U.S./Venezuela talks run into opposition ($FT)

Russia corporate exits, uncertain return ($BBG)

Digital currency and banking systems ($BBG)

Shipbuilders benefit from LNG boom ($FT)

EUROPE’s gas futures prices have fallen sharply in recent days amid an improving supply situation and expectations for an early de-escalation of the conflict between Russia and Ukraine. Front-month futures prices have almost halved to €118/MWh from €227/MWh a week ago. The six-month calendar spread from midsummer July 2022 to midwinter January 2023 has shrunk to less than €18 from almost €72 a week ago, implying less anxiety about rebuilding inventories before next winter:

EUROPE’s gas inventories are becoming slightly more comfortable as ultra-high prices and mild weather curb consumption. EU and UK inventories are on course for a post-winter low of 265 TWh up from a projection of 257 TWh two weeks ago and 238 TWh a month ago:

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Best in Energy – 11 March 2022

LME’s persistently problematic nickel contract

Nickel’s big short doesn’t want to close ($BBG)

Europe braces for intensifying diesel shortage

OPEC/U.S. shale find objectives align at dinner

China’s energy strategy still relies heavily on coal

U.S./Iran nuclear talks need top political decisions

EU considers emergency power price limit ($WSJ)

White House hunts for more sources of oil ($WSJ)

China reports 1,100 new coronavirus cases ($BBG)

U.S. distillate prices rise on low inventories

U.S. CONSUMER price inflation accelerated in February even before the main impact was felt of rising energy prices and other supply chain disruptions stemming from Russia’s invasion of Ukraine. Inflation has run at more than double the Federal Reserve’s flexible average target of +2.0% per year over the last two years. In the last three months, prices have been rising four times faster than the target, a sign the economy is overheating, with too much consumption and investment spending overwhelming limited production capacity and struggling supply chains. The chartbook contains a full set of long-term and short-term inflation indicators:

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Best in Energy – 10 March 2022

OPEC+ attempts to maintain unified position

Biden tries to deflect blame for rising fuel prices

BP’s rapid decision to exit from stake in Rosneft

ENI stops buying Russian oil

Russia oil tanker struggles to find discharge port

China’s independent refiners to cut processing

U.S./Russia oil embargo is a balancing act ($FT)

Asia’s manufacturers hit by rising costs ($BBG)

Europe’s fertiliser makers cut production ($BBG)

U.S. DISTILLATE fuel oil inventories fell by -5 million bbl to 114 million bbl last week- the lowest seasonal level for more than 15 years. Distillate stocks were already looking tight and are now on track to become exceptionally tight before mid-year. Distillate inventories are on course for an expected first-half low of 103 million barrels (with a range of 92-114 million). Stocks are on track to hit their lowest seasonal level since 2008, when distillate shortages helped propel crude oil prices to a record high at the middle of the year:

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Best in Energy – 9 March 2022

Saving oil in a hurry – an IEA guide

Shell halts spot Russian oil buying

Russia’s oil exports stuck at sea

Biden warns gasoline prices to rise

U.S. shale firms can’t boost output

U.S./Russia oil trade and sanctions

Europe must cut energy use ($BBG)

U.S. urges more shale output ($FT)

Qatar mediates U.S./Iran talks ($FT)

U.S./Venezuela talks to relax sanctions

U.S./Venezuela prisoner release ($FT)

LNG growth shifts from Asia to Europe

LME nickel contract fails and halted

Nickel hit by settlement fail ($BBG)

Russia to keep leased aircraft ($BBG)

U.S. IMPORTS of petroleum from Russia averaged 0.67 million b/d in 2021, mostly in the form of semi-processed oils from Russian refineries imported for further processing (0.35 million b/d) and crude petroleum (0.20 million b/d), with a small volume of finished products (0.12 million b/d). Replacing these items with oil sourced from other countries should be relatively straightforward given the small volumes involved. These items account for a modest share of Russia’s total exports and a small share of U.S. total imports. Banning U.S. oil imports from Russia is therefore primarily symbolic:

Best in Energy – 8 March 2022

Russia threatens to cut gas flows as conflict intensifies

Germany repeats will not sanction energy flows (trans.)

United States could ban Russian oil imports

Russia warns of spike in oil and gas prices

EU plan to end Russian gas reliance eventually

LME suspends nickel contract as prices double

Oil consumption falls as prices climb ($BBG)

Europe’s energy users hit by high prices ($FT)

Global food security threatened by Ukraine war

EUROPEAN gas futures prices have moved into an extreme backwardation – as market signals urgent need to conserve inventories and rebuild them as much as possible ahead of winter 2022/23. The calendar spread from midsummer Jul 2022 to midwinter Jan 2023 has climbed to €72/MWh from less than €1 at the end of February as the market tries to shut down all non-essential consumption and attract maximum LNG inflows away from Asia:

EU+UK GAS inventories are becoming slightly more comfortable as ultra-high prices attract gas to the region and suppress consumption from industrial users and power producers, despite colder weather in recent days, showing price signals are having an impact:

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Best in Energy – 7 March 2022

U.S./EU discuss ban on Russian oil imports

White House wary about higher oil prices

U.S dilemma: sanctions and inflation ($WSJ)

U.S./Iran nuclear talks focus on final items

U.S./Venezuela officials hold negotiations

U.S./Venezuela sanctions could be relaxed

Iran’s timetable for boosting oil exports

U.S. shale firms unable to raise output ($FT)

Freight flows badly disrupted by war ($WSJ)

BRENT’s front-month futures contract is trading at $126 per barrel, the highest in real terms since July 2014 and in the 87th percentile for all months since 1990. Traders are anticipating U.S. and EU sanctions on Russia’s oil exports will remove millions of barrels per day from the market in the next few months. Policymakers have been careful to exempt Russia’s energy exports from sanctions so far. But traders have proved reluctant to handle cargoes given the legal and reputational risks involved so the exemption is proving ineffective – illustrated by the outcry over Shell’s purchase of a cargo on Friday. Traders anticipate even the legal exemption could be removed in the next few days as policymakers come under intense public pressure to toughen sanctions further:

EUROPE‘s benchmark gas futures price is at a record €260/MWh – signalling urgent need to conserve as much gas as possible to start rebuilding depleted inventories ahead of winter 2022/23:

GLOBAL FOOD PRICES hit a record high in February and were up +20% compared with the same month a year earlier – even before the conflict between Russia and Ukraine intensified and threatened to disrupt shipments from two of the world’s largest grain exporters. Food price inflation is set to accelerate further if the conflict is prolonged. The combination of rapidly escalating prices for food, energy and other industrial commodities would be severely recessionary:

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