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):
¹ Freeport LNG suffered a catastrophic failure after multiple safety systems failed and personnel ignored warning signs and lost situational awareness about the state of the plant. The resulting explosion is a classic example of what James Reason called an “organisational accident” – multiple systems should have prevented an incident but they were allowed to erode because of a poor internal safety culture leading to a rapid increase in risk (“Managing the risks of organisational accidents”, Reason, 1997).
Reason’s book is one of the best I have read on any topic, offering powerful insights in an engaging and accessible way. He provides a general framework for understanding why many catastrophic industrial and transportation failures happen. Everyone operating critical systems and machinery should be required to read it as part of their training. I can strongly recommend it to everyone else who is interested in safety, reliability and resilience systems.
U.S. OIL AND GAS drilling rates have stalled in response to the slump in prices since the third quarter of 2022. There has been no net increase in the number of active rigs (760) for the last 31 weeks:
EUROPE’s gas prices continue to slide as traders anticipate a record carry over of inventories at the end of winter 2022/23. Futures prices for deliveries in March 2023 fell to just €55 per megawatt-hour on January 26 from €110 on December 19 and €177 at the start of the winter season on October 3. Prices are falling to encourage more consumption, principally from energy-intensive industrial users and power generators, to ensure there is more storage space left to absorb excess production in summer 2023:
U.S. GROWTH stalled in the fourth quarter of 2022. Real final sales to private domestic purchasers (FSPDP), a measure excluding volatile changes in inventories, trade and government spending, increased at an annualised rate of just +0.2% in the fourth quarter, slowing from +1.1% growth in the third quarter, and +2.6% a year earlier. Real FSPDP advanced at the slowest rate since the first wave of the pandemic in 2020 and before that the recession in 2009.
Business inventories increased rapidly between October and December contributing +1.46 percentage points to reported output growth in the fourth quarter of 2022. Inventory accumulation was probably unplanned as sales were lower than expected. Large inventory changes are normally reversed within one or two quarters. The accumulation during the fourth quarter of 2022 is likely to be followed by efforts at depletion which will make a negative contribution to reported output growth in the first and second quarters of 2023:
U.S./Taiwan relations and next election cycle ($FT)
FRANKFURT and the rest of Northwest Europe are roughly half-way through the 2022/23 heating season. In the three decades between 1981 and 2010, on average 50% of heating degree days and heating demand at Frankfurt occurred before January 15. For London and southeast England, the half-way point arrives a few days later on January 23. So far this winter has been much milder than average. Frankfurt had accumulated 860 degree days up to January 15 compared with a long-term average of 1,078:
¹ Germany’s government-directed gas buying in the spot market likely contributed to the spike in prices in summer 2022 and subsequent slump in winter 2022/23. Price spikes normally occur when a price-insensitive buyer is forced into the market to buy no matter the cost and no matter how much it moves prices higher against themselves.
Spikes are often characteristic of a short-seller forced to buy back their position (“short and caught” or “he who sells what isn’t his’n, must pay the price or go to prison”).
In this case Germany purchased gas for storage regardless of cost to increase inventories and improve energy security ahead of the winter, anticipating a disruption of Russian pipeline flows. Playing the role of “forced buyer”, Germany’s buying likely caused or at least accelerated the rise in prices to record levels in August 2022. Once the forced buying was completed, however, prices corrected lower.
Some EU policymakers have suggested the spike shows the futures market “failed” in the summer of 2022 and needs to be reformed or replaced with an alternative and more representative and liquid benchmark. But arguably the market was simply responding to the presence of a very large and completely price insensitive buyer.
U.S. SERVICE SECTOR inflation appears to have peaked. But prices are still rising at an annualised rate of 5.5-7.5%, two or three times faster than the central bank target of 2.0-2.5% per year. Inflation in the labour-intensive services sector tends to be stickier than for commodities and merchandise, which is why it tends to be a focus for policymakers:
¹ Failure of coal and gas-fired generators to start up when instructed by the grid because of instrument and equipment freezes has been a recurrent problem and major cause of power failures during extreme cold weather episodes in the last several decades. Failure to start has meant actual generation available has been much lower than forecast, reducing reserve margins and forcing rotating blackouts to restore margins to safe levels.
THE FUNDAMENTALS of commodity trading have not changed in 2500 years, illustrated by this quote about China’s commodity merchants taken from the Guan Zi, which purports to be a dialogue between Lord Huan of Qi and his powerful chief minister Guan Zhong in the Spring and Autumnperiod (771-481 BCE) but probably a compilation of traditional knowledge written during the Warring States period (481-221 BCE):
“Merchants observe outbreaks of dearth and starvation, scrutinize changes in the fortunes of states, study the patterns of the four seasons, and take notice of what goods are produced in each place. With this knowledge of prices in the marketplace, they gather up their stock of goods, load them on oxcarts and horses, and circulate throughout the four directions. Having reckoned what is abundant and what is scarce and calculated what is precious and what is worthless, they exchange what they possess for what they lack, buying cheap and selling dear … Marvellous and fantastic things arrive in timely fashion; rare and unusual goods readily gather. Day and night thus engaged, merchants tutor their sons and brothers, speaking the language of profit, teaching them the virtue of timeliness, and training them how to recognise the value of goods.”
Guan Zi: Political, Economic and Philosophical Essays from Early China (Rickett, 1985) cited in The Economic History of China: From Antiquity to the Nineteenth Century (von Glahn, 2016)
EUROPE’s gas prices are falling and the futures curve has shifted into contango as inventories remain very high for the time of year and traders no longer anticipate any risk of a shortage before the end of winter 2022/23. The end-of-winter March-April 2023 calendar spread is trading in a contango of more than €1.20/MWh down from a backwardation of €9.70 at the end of September:
U.S. SERVICE SECTOR prices rose at an annualised rate of 6.4% over the three months ending in November. Service sector output is more labour-intensive than manufacturing and prices tend to be more sticky. Services inflation has decelerated from 9.9% in the three months ending in June, but it is still three times faster than the central bank’s target of a little over 2%:
BRENT spot prices and calendar spreads are retreating as traders anticipate the market will be balanced or over-supplied in 2023, after having been under-supplied continuously since the middle of 202o. Business cycle downturns across Europe, Asia and North America are expected to reduce oil consumption absolutely or relative to trend, helping rebuild depleted inventories:
U.S. PETROLEUM INVENTORIES depleted by -11 million barrels in the week to November 11. Large drawdowns in commercial crude (-5 million bbl), crude in the strategic petroleum reserve (-4 million) and other oils (-3 million) were partially offset by increased stocks of gasoline (+2 million), distillate fuel oil (+1 million) and jet fuel (+0.3 million). Total inventories have depleted by -509 million barrels since early July 2020, the largest drawdown on record and a symptom of persistent under-supply:
¹ The Politburo Standing Committee special study session on epidemic control is top news across all government-controlled media. Reverse engineering the official commentary, top leaders seem anxious to counter political and social fatigue with repeated lockdowns, reinforcing the current zero-covid strategy in the short term despite its rising costs, while also searching for a way out via improved vaccination rates and the development of new vaccines and therapeutic drugs.
U.S. SERVICE SECTOR prices increased at an annualised rate of +7.8% in the three months to October, more than three times faster than the central bank’s target, ensuring that interest rates are likely to continue rising:
BRITAIN’s economy entered a recession during the third quarter with real gross domestic product declining in three out of four months between June and September. So far the downturn has been led by manufacturing but is likely to spread to construction and services:
JKempEnergy.com 