Best in Energy – 4 August 2022

OPEC+ raises output  by de minimis amount¹

Electricity transmission links undervalued

Freeport LNG to restart partially in October

Autos/semiconductors relationship

Automakers see weakening demand

¹ Higher oil production by Saudi Arabia and the other Gulf monarchies was briefed as one of the benefits from U.S. President Joe Biden’s visit to the region and “reset” of the relationship with Saudi Arabia last month. The tiny output increase of +100,000 b/d was the smallest that could be announced without appearing to snub the president completely. But it raises the question of what diplomatic benefits the president achieved from the trip – if not higher oil output did he secure some other objectives? Who advised the president to make this trip, within the administration and outside? Does the president ultimately see it as a success or a disappointment?

BRENT spot prices and calendar spreads have weakened consistently in recent weeks, a sign the recent upward price cycle has begun to break down. Prices and spreads are softening in response to the increased probability of a recession dampening oil consumption:

BRENT’s calendar spread from December 2022 to December 2023 has softened to a backwardation of $7.20 per barrel, down from $16.50 in early June, and close to its lowest levels since Russia invaded Ukraine in February. Traders are anticipating an imminent business cycle slowdown will relieve under-production in the oil market and stabilise inventory levels:

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Best in Energy – 28 July 2022

EU/Russia gas pipeline flows fall sharply

U.S. frackers warn of supply chain limits

China’s plan to centralise iron ore purchasing

U.S. leaders embrace subsidies, tariffs ($WSJ)

Grid-scale batteries used for price response

U.K. households face winter bill crisis ($FT)

West London’s local power constraint ($FT)

U.S. PETROLEUM inventories depleted by -9 million bbl in the week to July 22, with declines in commercial crude (-5 million), gasoline (-3 million), and distillate fuel oil (-1 million) as well as a drawdown in the SPR (-6 million), partially offset by increases in propane (+3 million) and other oils (+3 million). Petroleum inventories have depleted in 80 of the last 108 weeks by a total of -438 million bbl since the start of July 2020. Total stocks are at the lowest seasonal level since 2008 and show no signs of rebuilding:

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Best in Energy – 25 July 2022

EU softens oil-trading related sanctions on Russia

China’s biggest coal miner boosts output (trans.)

U.K. transmission grid hits capacity limit ($BBG)

Dark tanker market grows competitive

Urban centres and heatwaves ($FT)

Oil exploration accelerates ($BBG)

China’s lessons from Russia’s war

U.S. INITIAL CLAIMS for unemployment insurance benefits have been trending upwards since the start of April, albeit from an exceptionally low base, indicating the labour market may be starting to cool:

BRENT futures for September delivery are showing characteristics of a squeeze, trading in a backwardation of almost $5 per barrel compared with October. But further forward, spreads have softened significantly in recent weeks, as traders anticipate an increased probability a recession will dampen oil consumption:

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Best in Energy – 22 July 2022

Germany to cut energy use to resist blackmail

EU divided on compulsory gas demand cuts

Europe’s electricity generation under stress

Europe turns to Africa for more oil and gas

China’s semiconductor manufacturing ($BBG)

Texas power grid and bitcoin miners ($BBG)

RHINE RIVER water levels measured at Kaub are the lowest for the time of year for more than a quarter of a century and indicative of drought conditions across northwest Europe. Low rainfall is restricting river borne freight and is an indicator of the stress for thermal and nuclear power plants that rely on river water for their cooling systems. For coal and gas combustion plants, efficiency and maximum output is reduced. For nuclear plants, insufficient cooling capacity can force output limits or a precautionary safety shutdown:

EUROZONE manufacturers reported a decline in activity this month for the first time since the first wave of the pandemic in 2020. Preliminary data show the manufacturing sector purchasing managers index fell to 49.6 in July (28th percentile) down from 52.1 in June (47th percentile) and 54.6 in May (65th percentile). Russia’s invasion of Ukraine and the sanctions the EU has imposed in response have pushed the region’s economy into recession:

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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 – 18 July 2022

[MUST READ] Europe must reduce gas consumption now, warns IEA

Russia/Europe locked in economic war of attrition ($WSJ)

Texas deploys power grid emergency measures ($BBG)¹

U.S./GCC summit ends with more oil output uncertain

Hebei’s efforts to reverse groundwater depletion (trans.)

¹ Power grid managers in Texas and elsewhere have a variety of tools to cope with an imminent emergency caused by insufficient generation, including orders to generators for “maximum generation” (mandating output from individual units above their normal recommended operating levels); “no touch” (prohibiting all but critical maintenance and repairs to enable maximum generation and transmission); “reliability must-run” (requiring and paying units to run regardless of their normal economics); and “system-to-system” mutual aid (requesting maximum imports from neighbouring networks). The isolated nature of the Texas grid restricts STS opportunities for ERCOT but it is frequently used in other networks. On the demand side, grid managers can invoke voluntary demand reduction contracts, issue public appeals for conservation, order voltage reductions (usually in two stages), and in the final resort use forcible disconnection, loading shedding and rotating blackouts.

LONDON temperatures have started to ramp towards a likely record on Monday and Tuesday, as the heat builds over southeast England, with each day’s temperature profile hotter the last:

U.S. CRUDE oil inventories around the NYMEX WTI delivery point at Cushing in Oklahoma stand at just 21.6 million bbl, the lowest seasonal level since 2014 and before that 2008, when front-month WTI prices were at $122 and $170 respectively adjusted for inflation:

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Best in Energy – 15 July 2022

White House downplays hopes for more oil

Middle East imports more Russian fuel oil

Japan plans reactor restarts before the winter

United Kingdom heads for winter crisis ($BBG)

Germany is moving into a recession ($BBG)

ERCOT confident will avoid blackout ($BBG)

U.S. household finances and inflation ($WSJ)

Russia/NATO conflict is test of resolve ($BBG)

Central banks turn hawkish on inflation

U.S. CENTRAL BANK is expected to raise short-term interest rates to 3.50-3.75% by February 2023 up from 1.50-1.75% at present to curb inflation. From the second quarter of 2023, however, policymakers are expected to start reducing interest rates as the economy slows and inflation decelerates:

U.S INTEREST RATE traders anticipate a recession has become virtually certain following the continued acceleration of inflation. The yield curve spread between 2-year and 10-year maturities is now in the 98th percentile for all months since 1990:

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Best in Energy – 13 July 2022

Baltic grids prepare to synchronise to EU rapidly

OPEC predicts oil consumption to rise in 2023

Russia’s fuel exports to Middle East surge ($BBG)

China hydropower generation hits record high

U.S. homes with electric-only energy systems

China hesitates to mandate vaccination ($BBG)

Rapid inflation and its many discontents ($FT)

BRENT’s calendar spread from December 2022 to December 2023 has softened to a backwardation of $8 per barrel from $16 in early June as traders anticipate a cyclical economic slowdown will relieve some of the shortage in oil supply next year:

TEXAS electricity consumption increased at a compound annual rate of +1.5% over the last 20 years, reaching 427 billion kWh in 2021, up from 318 billion kWh in 2001:

U.K. REAL GDP rose by +0.51% in May from April, the fastest increase for four months, with particularly large increases in manufacturing (+0.87%) and construction (+1.54%):

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Best in Energy – 1 July 2022

Shipping lines cancel more ocean sailings as demand falls

Friendshoring starts to reshape minerals supply chains

OPEC+ tries to maintain unity despite U.S. pressure

Baltic grid operators ready for rapid re-synchronisation

Russia plans for nationalisation of Sakhalin-2 gas project

U.S. Supreme Court curbs authority of regulatory agencies

Japan faces power shortages throughout summer ($WSJ)

China starts west-east electricity transmission line (trans.)

Coal’s resurgence sends prices soaring ($FT)

U.S. DISTILLATE FUEL OIL supplied to the domestic market averaged 3.68 million b/d in the four weeks ending on June 24 down from 3.88 million b/d in the same period last year. The volume supplied is an estimate subject to considerable short-term errors and volatility so it should be interpreted with extreme caution. But the reduction of -0.2 million b/d is relatively large and would be consistent with the onset of an economic slowdown:

EUROZONE MANUFACTURERS reported a much narrower increase in business activity this month as inflation and sanctions push the region’s economy towards recession. The purchasing managers’ index slid to 52.1 in June (47th percentile for all months since 2006) down from 54.6 in May (65th percentile) and 63.4 in June 2021 (a record):

U.S. REAL PERSONAL INCOMES less transfer payments (PILT) were up by just +1.8% in May compared with the same month a year earlier. PILT is one of the indicators monitored by the National Bureau of Economic Research’s Business Cycle Dating Committee to determine peaks and troughs in the cycle. PILT growth has been slowing since the start of the year and is now in only the 30th percentile for all months since 1980, implying the economy is losing momentum as inflation outstrips earnings:

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Best in Energy – 24 June 2022

RWE calls for EU standardised gas rationing plan ($FT)

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

EU/Russia de-escalate dispute over Kaliningrad ($FT)

Russia cancels Kaliningrad grid separation exercise

U.S. energy secretary holds summit with refiners

Freeport LNG’s extended outage and the impact

Pakistan cancels expensive LNG tender ($BBG)

Recession indicators, depth and duration ($BBG)

Investors prepare for imminent recession ($BBG)

U.S. FINANCIAL CONDITIONS are tightening rapidly, nearing levels consistent with the onset of a recession or at least a pronounced mid-cycle slowdown. The Federal Reserve Bank of Chicago’s adjusted financial conditions index, which measures financial pressure, has risen to the highest since the first wave of the pandemic in 2020 and before that 2011. In contrast to those episodes, however, this time the central bank plans to tighten conditions even further to squeeze inflation out of the economy rather than easing them to support growth and employment:

SOUTH CHINA continues to experience torrential rainfall, with cumulative precipitation this year at Xiangjiaba on the Sichuan/Yunnan border almost +60% higher than the seasonal average for 2014-2021, and even heavier rains expected in July and August:

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