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 – 20 May 2022

China accelerates purchases of Russian crude*

China increases crude inventories*

China boosts energy imports from Russia ($BBG) *

U.S./China talks on Russia strategic oil purchases*

U.S./China top diplomats hold telephone talks*

United States open to Russia oil secondary sanctions*

China cuts mortgage rates sharply to boost economy

Italy boosts Russian oil imports ($FT)

Germany prepares for rationing industrial gas supply

China completes Daqing coal rail maintenance (trans.)

U.K. postal service to raise prices again as costs surge

U.K. consumer confidence lowest since at least 1974

Finland prepares for end of Russian gas flows ($BBG)

U.K. grid practises black start with renewables ($BBG)

* An interesting cluster of stories has emerged over the last 24 hours about China increasing crude oil purchases from Russia, but using the extra volumes to replenish strategic reserves, which the White House says would not violate any sanctions. The first six items should all be read in this context.

China does not report commercial or strategic reserves and there is less distinction between them than for IEA countries, so there is no way of ascertaining whether extra crude is really going into strategic inventories or being added to commercial stocks to be refined or depleted later. The concept of “replenishment” of strategic stocks is also curious because China did not join the U.S.-led emergency oil releases in late 2021 and early 2022.

An outside observer might conclude China is boosting its purchases of deeply discounted Russian crude, but the White House has decided to ignore it, at least for the time being, because it does not want to risk triggering a further rise in prices, especially before congressional elections in November, where inflation is emerging as the dominant political issue.

U.S. FINANCIAL CONDITIONS were tightening rapidly even before this week’s tumble in equity prices, as access to credit and risk capital becomes more restricted and expensive:

EUROPE’s GAS FUTURES summer-winter calendar spread from July 2022 to January 2023 has moved into a small contango of €2/MWh, down from a record backwardation of more than €70 in early March, as storage fills at record rates and inventories become more comfortable:

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Hedge funds sidelined by cross-cutting uncertainties on oil

2 May 2022

Portfolio investors made few changes to petroleum positions last week as the outlook remained finely poised between offsetting uncertainties about a slowing economy, coronavirus lockdowns and Russia sanctions.

Hedge funds and other money managers trimmed their combined position in the six most important futures and options contracts by the equivalent of 2 million barrels over the week ending on April 26.

There were small reductions in both bullish long positions (-17 million barrels) and bearish short ones (-15 million) as funds reduced their risk exposure .

Purchases of NYMEX and ICE WTI (+13 million barrels) and U.S. diesel (+1 million barrels) were offset by sales of Brent (-14 million) and U.S. gasoline (-2 million) with no change in European gas oil.

As a result, the combined net position across all six contracts fell to just 550 million barrels (38th percentile since 2013) from a recent high of 761 million (70th percentile) in the middle of January.

Cross-cutting impacts from sanctions on Russia’s oil exports, China’s coronavirus lockdowns and a slowing global economy have made the future direction of prices less clear.

At the same time, elevated volatility has made it more expensive to maintain existing positions or initiate new ones.

Reflecting increased uncertainty and cost of positions, the total number of open futures contracts held by money managers and all other categories of traders fell for the ninth time in the last ten weeks.

Last week’s reduction of open interest by 13 million barrels takes the total reduction since the middle of February to 1,141 million barrels.

Best in Energy – 25 March 2022

Brent futures margin requirements raised further

Europe’s diesel shortage threatens output growth

U.S. refiners source more fuel oil from Middle East

EU diesel supply vulnerable to Russia ban ($BBG)

EU faces high costs for filling gas storage ($BBG)

China economy disrupted by new epidemic ($BBG)

Russia/Ukraine war cuts fertiliser supply ($WSJ)

Mexico follows Fed in raising interest rates

UAE/Saudi seek to reset U.S. relationship ($FT)

EUROPEAN gas oil and Brent twelve-month calendar spreads are both trading in the 99.9th percentile for all trading days since 2000 as traders anticipate possible severe shortages of both crude and products stemming from Russia’s invasion of Ukraine and U.S./EU sanctions imposed in response:

EUROZONE manufacturers reported a less widespread expansion this month as war in Ukraine and inflation pushes the region’s economy towards a cyclical slowdown. Preliminary readings put the purchasing managers’ index at 57.0, down from 58.2 in February, and the lowest since January 2021, when economy was still gripped by pandemic:

GERMANY’s IFO business expectations index fell to 85.1 in March from 98.4 in February, a level only normally seen during a recession, as employers prepare for the impact of the war and sanctions to be felt on the domestic economy:

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