Best in Energy – 29 June 2022

Aramco’s disputed maximum output capacity ($BBG)

Copper prices fall to 16-month low on recession fears

G7 leaders try to design a price cap for Russia oil ($FT)

G7 officials negotiate price cap with India and China

Murban front-month spread at record $9/bbl ($BBG)

U.K. plans to halt gas flows to Europe in a crisis ($FT)

China’s northern drought and southern floods (trans.)

U.S. energy and employment in 2021

U.S. FINANCIAL CONDITIONS are tightening at the fastest rate for more than 40 years, according to the Federal Reserve Bank of San Francisco (“Policy nimbleness through forward guidance”, FRBSF, June 28):

LONDON’s coal market in the late 1830s and early 1840s saw the last and most ambitious in a long line of attempts to restrict supply to keep up prices. The volume of coal sold each day on the city’s coal exchange was linked to prevailing prices on a sliding scale. If prices rose, more coal was sold. If prices fell, a smaller volume was offered for sale. An example of the sliding scale from February 1837 is reproduced below. The “limitation of the vend” was managed by the London coal factors acting on behalf of and in conjunction with the coal mine owners of the Northeast.

The system was possible because cargoes of coal carried by ship from the Northeast to the Port of London could only be sold and unloaded in strict order of arrival. Regulations enforced by the port authorities and the coal factors themselves required unsold and unloaded ships to wait their turn in the lower reaches of the river. Ships could only proceed to the “legal quays” or for lightering from midriver in the Pool of London once the factors had arranged a sale and the city’s metering office (which measured and later weighed the cargos) had assigned a metering officer.

The coal owners were organised in a series of coal trade committees which forecast demand and allocated output among the mines. The London factors had their own society which managed the rules of the turn system, the market, and the sliding scale as well as reporting on market conditions and cheating efforts to the coal trade committees (“Sea coal for London”, Smith, 1961).

The “limitation of the vend” and the “turn” system eventually broke down in the early 1840s in the face of increased supply from new sources in the Northeast and other parts of the country. At the same time, increasing numbers of vessels avoided the costly wait for sale and unloading because they were delivering cargoes for the government or the rapidly growing gas-manufacturing companies. Instead of waiting for sale after arrival in the port, more and more cargoes were sold prior to arrival and in some cases even before loading in the Northeast.

Before the system collapsed, the queue of unsold and unloaded ships in the river, which could amount to hundreds of vessels at a time, stuck for days or even weeks at a time, rafted along both banks from London Bridge down to Greenwich, with more queued downriver in sections managed by the harbour master all the way to Gravesend, attracted adverse attention from consumers, the city government and parliament, especially at times of high and rising prices, triggering multiple enquiries into anticompetitive practices.

Half-hearted efforts to resurrect the system in the later 1840s and early 1850s were unsuccessful because the system of supplying coal by ship faced rapidly growing competition from the delivery of coal by the new railways to the metropolis. Rail deliveries were not covered by the ship-based system of waiting turn or the sliding scale. The rail network also opened up new inland sources of coal supply in Yorkshire, Durham and the Southwest to compete with the traditional producers in the Northeast, overwhelming efforts at market management.

Development and deployment of steam-powered coal ships rapidly displacing the traditional sailing ships from the early 1850s onwards also made a return to the turn system impossible. Steam-powered ships were faster, larger and needed fewer crew members so they were cheaper to operate. But they were also more capital intensive so their profitability depended on maximising time spent voyaging and minimising delays loading and unloading. Steam-driven ships could not afford to wait their turn for sale and unloading. Many were contracted to gas companies, which had always been exempt from the turn system, and often bought direct from the mine owners in the Northeast, bypassing the factors and the coal exchange. The rest usually voyaged with orders to sell immediately on reaching the port – or the cargo had already been sold before they were even loaded.

The limitation of the vend and the turn system is a fascinating case study in the how to make a cartel work and the problems that can cause it to break down, anticipating many of the practices and challenges faced by the Organization of the Petroleum Exporting Countries (OPEC) and the wider group of exporters (OPEC+).

Rough procedure for sale of coal in London during the late 1830s and early 1840s under the limitation of the vend and turn system:

  • Coal Trade Committee of major mine owners in the Northeast of England forecasts coal demand;
  • Total coal production apportioned between mines according to quotas;
  • Coal mine owner sells coal to ship owner at the quayside in Northeast of England;
  • Ship owner conveys cargo down east coast to Thames Estuary;
  • Ship reports to Coal Factors’ Office at Gravesend;
  • Ship given turn number based on strict order of arrival;
  • Ship’s papers and cargo details expressed by steamer or horse to London;
  • Ship also reports to Harbour Master at Gravesend for section order;
  • Ship directed to one of seven sections in the Lower Thames between Northfleet and Blackwall to wait turn;
  • Cargoes for the government or for gas-manufacturing companies sent direct to unloading wharves, thereby avoiding turn keeping;
  • Cargo registered with both the Coal Exchange and with Metering/Weighing Office ;
  • Cargo entered into both the Sales Turn and the Metering Turn lists;
  • Ships can appeal to magistrate for immediate unloading on safety grounds;
  • Ships caught cheating sent to bottom of sales and/or metering lists;
  • Coal Factor appointed by coal mine owner files paperwork with Customs and Lord Mayor’s office and pays bond;
  • Cargo waits turn for sale with the number of cargoes sold each limited according to prevailing prices on a sliding scale;
  • Cargo sold on Coal Exchange by Factor to a professional First Buyer;
  • Coal Meter/Weigher appointed to measure the volume of cargo as unloaded;
  • Ship given permission to proceed upriver to the Lower Pool for unloading;
  • Unloading gang appointed by the owner of one of the local pubs*;
  • Metering officer and unloading gang actually unload cargo at specified minimum rate per day;
  • Payment terms: one-third cash, one-third in note payable in sixty days, one-third in four days after sale;
  • Coal Factor notifies coal mine owner of completion of sale in accordance with obligations;
  • Ships caught deviating from the system refused future cargoes by sellers in the Northeast;
  • Ship returns to the Northeast to collect next cargo;
  • Coal Factors Society sends regular report on market conditions to coal owners in the Coal Trade Committee.

* Not a joke. Gangs got hired on the understanding they would spend a large part of their earnings in the pub. There were 70 public houses between the Tower of London and Limehouse where men who wanted to work would assemble. “He who spent most at the public house had the greatest chance of work” (“London labour and the London poor”, Mayhew, 1851).

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Best in Energy – 5 April 2022

Germany takes control of local Gazprom unit

Aramco raises crude prices to refiners in Asia

India faces coal crisis for a second year ($BBG)

U.S. intelligence sharing sets precedent ($WSJ)

China’s rail freight rose +2.8% yoy in Q1 (trans.)

U.S. TREASURY yield curve is now flat between two-year and ten-year maturities, which puts it in the 94th percentile for all months since 1990, and is a strong signal the business cycle is on course for a mid-cycle slowdown or end-of-cycle recession inside the next 12-18 months as the central bank is forced to lift interest rates to bring inflation back under control. Interest rate traders expect the Federal Reserve to boost its target overnight rate to 2.50% by the end of the year up from 0.25-0.50% currently:

BRENT’s calendar spread from Jun 2022 to Dec 2023 has narrowed sharply as the announced crude oil sales from the U.S. strategic petroleum reserve depress nearby prices while the more vague promise to buy back the barrels later helps boost prices in 2023:

U.S. PETROLEUM inventories including the strategic petroleum reserve have depleted by -411 million bbl since the start of July 2020 after increasing by +225 million bbl during the first wave of pandemic and lockdowns. Inventories have fallen in 68 of the last 91 weeks. The drawdown confirms the global market has been persistently under-supplied for almost two years. Historically, market analysis has treated U.S. government-controlled stocks as purely strategic and passive and has therefore focused on inventory changes excluding the SPR. But as the SPR comes to be used more actively to manage prices, the focus will switch to inventories including the SPR as providing the best indicator of the balance between production and consumption:

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