China’s gas consumption and imports decline ($WSJ)
Germany fears economic hit from gas disruption ($FT)
EU drops planned ban on shipping Russian crude ($FT)
China avoids surge in consumer price inflation ($WSJ)
U.S. INTEREST RATE traders have started to anticipate a slowdown in the business cycle that will bring inflation under control and then encourage the central bank to start trimming interest rates slightly to support growth later in 2023. Policy-controlled short-term rates are expected to peak at 3.00-3.25% by August 2023, up from 0.75-1.00% currently, before dipping slightly at the end of 2023 and into 2024.
The implied trajectory is consistent with inflation under better control by mid-2023 and a slowdown in the business cycle that will cause the central bank to shift its focus to supporting growth. A similar pattern occurred during previous interest rate tightening and “soft-landing” cycles in 1966/67 and 1994/95.
As a result, the U.S. Treasury yield curve between two-year and ten-year notes has started to steepen slightly, usually a sign of an impending business cycle slowdown that will eventually cause the central bank to reverse some of its expected interest rate rises:
DISTILLATESHORTAGES are pulling up crude spot prices and calendar spreads as refiners maximise crude processing to meet demand for freight and manufacturing fuel:
U.S. FINANCIAL CONDITIONS are tightening rapidly as investors and intermediaries anticipate higher interest rates and a slowing economy. The Federal Reserve Bank of Chicago’s national financial conditions index – derived from 105 indicators covering risk, credit and leverage – shows conditions are the tightest since the first wave of the pandemic in 2020, and before that 2016 and 2012. The adjusted index, which attempts to isolate purely financial rather than real-economy factors, is the tightest since 2020 and before that 2011:
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U.S. GAS PRICES have climbed to $8 per million British thermal units, based on the front-month futures contract for deliveries at Henry Hub. In real terms, prices are the highest since November 2008, when the financial crisis had started to intensify and the economy was heading deeper into recession. The inflation-adjusted price is in the 82nd percentile for all months since 1990, creating an incentive for more gas drilling as well as maximum fuel-switching away from gas in power generation:
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.
INDIA’s electricity consumption climbed to a record of more than 201,000 megawatts at the peak on April 26. But grid stability is deteriorating with average frequency trending lower and prolonged under-frequency excursions pointing to insufficient generation. Frequency is now so low for so much of the day controllers no longer appear to be trying to maintain it close to 50.0 Hz and have instead accepted a lower frequency as normal. States have begun to restrict supplies to industrial users during peak hours to maintain stability and reduce the risk of a cascading failure:
U.S. PETROLEUM inventories fell by -2 million bbl to 1,697 million bbl last week and are now down by -421 million bbl since the start of July 2020:
U.S. DISTILLATE inventories fell -1 million bbl to just 107 million bbl last week, the lowest seasonal level since 2008:
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Narratives about inflation and recession as epidemic
World Bank warns over energy and food prices shock
Indonesia needs Russian oil to keep prices down ($FT)
* The announcement was anodyne but significant the policy meeting was chaired by the president himself and the write up is the top item across all state-controlled media and government websites (Xinhua, NDRC and State Council) emphasising importance of the investment message and signal.
BRITAIN plans to extend coal-fired power generation at Drax to cope with gas and electricity shortages, according to the operator:
EUROPE’s gas traders were sanguine about the ability to replenish storage over the next few months ahead of next winter’s heating season, at least before Gazprom announced it would cut deliveries to Poland and Bulgaria. Benchmark futures for summer 2022 and winter 2022/23 gas have been high but stable for more than a month and the backwardation has remained narrow and also stable, indicating that most traders expected a regular storage fill:
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U.S. PETROLEUM inventories including the strategic petroleum reserve rose +3 million bbl to 1,712 million bbl last week. Inventories have risen by a total of almost +5 million bbl in the two most recent weeks after declining by -81 million bbl over the previous twelve weeks:
U.S. DISTILLATE stocks fell by almost -3 million bbl to just 111 million bbl, the lowest for the time of year since 2008:
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Global distillate inventories remain low but have shown some signs of stabilising as the business cycle slows in response to inflation, coronavirus outbreaks and increased uncertainty following Russia’s invasion of Ukraine.
In the United States, distillate fuel oil inventories fell by 3 million barrels to 111 million in the week to April 8, according to high-frequency data from the Energy Information Administration.
Distillate stocks are 28 million barrels (20%) below the pre-pandemic five-year seasonal average and at the lowest level for the time of year since 2008 (“Weekly petroleum status report”, EIA, April 13).
Based on stock movements in previous years, inventories are expected to fall as low as 105 million barrels before the end of June, with the forecast minimum ranging from 97-111 million barrels.
Stocks have been tight since the start of the year but the situation has stabilised since early March with some of the more extreme downside inventory scenarios receding.
High prices for all petroleum products but especially middle distillates such as diesel, heating oil, jet fuel and gas oil are blunting consumption growth.
More importantly, there are signs consumer and business spending has started to decelerate under pressure from inflation, increased uncertainty and supply chain disruptions.
As the pandemic has receded, consumer pending has also begun to rotate from distillate-intensive manufactured products to less distillate-intensive services.
In Europe, too, distillate stocks are low but have stabilised since the start of March in response to high prices and slowing consumption.
Europe’s distillate inventories amounted to just 392 million barrels at the end of March, the lowest for the time of year since 2015, according to estimates compiled by Euroilstock.
But inventories had risen by more than 12 million barrels compared with the end of February, the largest seasonal increase for more than two decades.
The last time stocks rose this rapidly between February and March was in 2008, when surging crude and diesel prices and diminishing economic activity also caused stocks to start rising from a very low level.
In Singapore, stocks have fallen to just 7.6 million barrels, the lowest seasonal level since 2008, and the storage hub is the tightest of all the regions.
Distillates are the most cyclically sensitive of the major petroleum products and a slowdown in consumption growth is normally associated with a mid-cycle slowdown or an end-of-cycle recession.
There are some early signs inventory depletion has slowed or even stopped altogether, with stocks broadly stable since the middle of March, but it will take a few more weeks before any turning point is confirmed.
* Xinhua’s lead article on the coronavirus outbreak in Shanghai illustrates the scale of the challenge, with more than 100,000 cases in the latest outbreak in the megacity, as well as the government’s decision to stick with the “dynamic clearing” zero-coronavirus suppression strategy.
BRENT’s six-month calendar spread has fallen to a backwardation of less than $5 per barrel from a record high of more than $21 a month ago, as the pledge by IEA members to offer 240 million barrels of oil from government-controlled strategic reserves over the next six months has eased traders’ concerns about short-term availability:
U.S. MANUFACTURERS reported new orders for nondefense capital equipment excluding aircraft were up +11% in cash terms in the three months from December to February compared with the same period a year earlier. But growth has decelerated significantly with nominal orders advancing at an annualised rate of only +6.48% in the latest three months, the slowest increase since July 2020, when the economy was emerging from the first wave of the pandemic and lockdowns:
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U.S. MANUFACTURERS reported a less-widespread increase in business activity last month. The ISM composite index fell to 57.1 in March from 58.6 in February and the lowest reading since Sep 2020 as the expansion decelerates. There was also a sharp deceleration in new orders growth in March. The ISM new orders index slipped to 53.8 from 61.7 the month before, consistent with a slowdown in the business cycle ahead:
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