SINGAPORE distillate inventories have started to rise from multi-decade lows set in the final months of 2022:
U.S. PETROLEUM INVENTORIES depleted by -10 million barrels over the week ending on March 17, the largest drawdown since the end of 2022. Draws in gasoline (-6 million barrels), distillate fuel oil (-3 million) and propane/propylene (-2 million) more than offset a small build in crude (+1 million):
U.S. BUSINESS INVENTORIES remained elevated in January as manufacturers and distributors struggled to work down excess stocks despite an acceleration in retail sales. Reducing unplanned inventories is likely to take at least another six months, even if the economy avoids a recession, which will keep freight volumes under pressure until the third quarter of 2023:
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:
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):
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.
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:
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:
U.S./China struggle to stabilise relationship ($WSJ)
U.S. CENTRAL BANK chief Jerome Powell toughened his rhetoric on core inflation during congressional testimony, sending forecasts for interest rates surging higher on March 7. Rate traders expected interest rates to end 2023 at around 5.55% up from a forecast of 5.38% on March 6:
SINGAPORE distillate inventories remain at their lowest level for the time of year since 2008. Stocks are -4 million barrels (-36% or -1.91 standard deviations) below the prior ten-year seasonal average. The deficit has only narrowed slightly from six months ago when it was -4 million barrels (-34% or -2.21 standard deviations):
U.S. INTEREST RATE traders continue to boost their expectations for benchmark short rates at the end of the year as the central bank signals rates may have to go higher and stay there for longer to bring inflation back to target. Rates are now expected to be around 5.25-5.50% in December 2023 up from an expectation of 4.25-4.50% at the start of February:
COMMITMENT OF TRADERS reports – the U.S. Commodity Futures Trading Commission (CFTC) and ICE Futures Europe suspended publication of their commitments of traders reports in late January following a ransomware attack on a major market participant and infrastructure provider which resulted in incomplete submissions. Both are now starting to catch up with the backlog of missed weekly reports. ICE has caught up; the CFTC is still some weeks behind. I am not going to publish a weekly analysis again until they have both caught up fully since the reports now contain very out of date information. For reference, however, the hedge fund and money manager positions on February 7, the most recent currently available, are shown below:
EUROPE’s gas futures prices continue to slide despite a blast of colder weather across the northwest this week reflecting the high level of inventories. Front-month futures prices closed below €45 per megawatt-hour on March 3 for the first time since August 2021:
U.S. NON-MANUFACTURING firms reported a solid increase in activity in February. The ISM non-manufacturing index stood at 55.1 (40th percentile for all months since 1997) in February, little changed from January, but up from 49.2 (7th percentile) in December. The low December reading is starting to look like an anomaly. Service providers and other non-manufacturing businesses are reporting healthier conditions than their counterparts in manufacturing and freight:
U.S. OIL DRILLING activity continued to decelerate with the number of active rigs down -8 to 592 over the week ending on March 3. The oil-directed rig count has fallen in 10 of the last 13 weeks by a total of 35 rigs (-6%):