EUROPE’s gas storage sites reported small net inflows on March 18 and March 19, a tentative sign the winter inventory depletion season is coming to an end early. The data is provisional and contains a mix of confirmed reports and estimates. But storage across the European Union and the United Kingdom was 55.8% full on March 19, the second-highest for the time of year after winter 2019/20 (56.2%) and well above the prior ten-year average (34.8%):
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:
FRANKFURT, a proxy for northwest Europe, reached roughly 60% of the way through the winter heating season on February 1. So far the accumulated heating demand has been -17% below the long-term average and is the lowest since 2015/16 and before that 2006/07. But after an exceptionally long period of mild temperatures between December 19 and January 15, temperatures have turned significantly colder, causing the heating deficit to narrow slightly:
U.S. MANUFACTURERS are raising prices more slowly as input costs for raw materials and energy ease and demand for goods falls. Producer selling prices for finished products other than energy and food increased at an annualised rate of +4.2% in the three months to December 2022 down from an annualised +11.5% increase in the three months to April 2022. But selling prices are still rising twice as fast as the central bank’s target of a little over 2% per year for overall inflation, keeping upward pressure on interest rates:
U.S. WELL DRILLING shows signs of having hit a peak and starting to fall as the sector responds to lower prices. The number of active rigs targeting oil or gas has fallen in the most recent two weeks and is no higher than at the end of October. As a result, the rig count has increased by an average of just +1.0 per week in the last 13 weeks:
EUROPE’s seven-largest gas consuming countries (excluding the United Kingdom) reported consumption was down -21% in October compared with the same month a year earlier, and down by a similar percentage compared with the ten-year average, as a result of high prices, conservation, and milder-than-normal temperatures in the second half of the month:
U.S. MANUFACTURING output shows signs of peaking. Production was up by just +1.4% in November compared with the same month a year earlier, the smallest increase for almost two years, and the growth rate has been decelerating progressively since February:
CHINA’s official Xinhua news agency and other government-run sites are running multiple stories and commentaries emphasising epidemic controls must be applied with “softness”, “greater precision”, ensuring daily life and healthcare continues. There has been a marked change of tone from the previous military-themed rhetoric and analogies to battling the epidemic, with greater focus on resuming as much normality as possible. Like other governments facing widespread social unrest, China appears to be pursuing a mixed strategy of rolling up protestors, intensifying street policing, while trying to make selective concessions to keep the majority of the population in line by relaxing epidemic controls to reduce their social and economic costs.
BRENT’s calendar spreads for the first part of 2023 have slumped from a steep backwardation at the start of November close to contango as the end of the month nears. The nearest to deliver January-February spread is no longer a useful indicator as the January contract nears expiry and there is insufficient liquidity to make the price representative. But the more active February-March and March-April spreads are now trading close to flat from backwardations of around $1.50 per barrel at the start of the month.
Refiners and traders seem to have accelerated purchases ahead of the introduction of the planned G7 price cap on Russia’s crude exports from early next month to protect themselves against any possible disruption. Concern about the impact likely drove up prices and spreads in September and October.
But the cap itself now appears likely to be set at a relatively high level with relaxed enforcement, at least initially. The result is a marked softening in the market. At the same time, the business cycle continues to weaken across most of Europe and Asia, dampening crude demand. All of this is weighing on prices and spreads for nearby futures contracts with deliveries in early 2023:
BRENT’s six-month calendar spread has softened to a backwardation of less than $1 per barrel compared with more than $9 at the end of September and a peak of almost $22 in early March shortly after Russia’s invasion of Ukraine. The spread between January and February 2023 has moved from backwardation into a small contango. Refiners and traders increased buying ahead of the planned introduction of the price cap in case it disrupts Russia’s crude exports, creating at least a temporary pause in new buying and putting pressure on the calendar spreads for nearby months:
THE NETHERLANDS was the fourth-largest gas consumer in the European Union in 2021 accounting for 11% of the total. The country’s gas consumption was down almost -33% in October 2022 compared with the prior ten-year seasonal average as a result of above-average temperatures, high prices, and energy conservation measures to reduce reliance on imported gas from Russia following the invasion of Ukraine:
CONTAINER shipping costs were down by more than -50% in November 2022 compared with the same month in 2021, as freight volumes fell and supply chain delays eased:
INDIA’s electricity transmission system is in a much healthier condition than this time last year. Power grid frequency has been kept much closer to its target of 50.0 Hertz indicating a much closer and more stable balance between generation and load. Frequency has only fallen below the acceptable threshold of 49.9 Hertz 3.9% of the time in the first ten days of October compared with 14.4% of the time in the same period last year.
Cooler temperatures have helped by reducing air-conditioning and refrigeration demand. Temperatures were -2.5°C below the long-term seasonal average in the first ten days of October compared with +1.0°C above average in the same period last year.
Coal inventories are also more plentiful ensuring generators can remain online. Stocks at power plants are currently 24.7 million tonnes compared with just 7.3 million tonnes at the same point last year:
IF YOU would like to receive best in energy and my research notes every day, you can add your email to the circulation list here: https://eepurl.com/dxTcl1
¹ Luck plays a more important role in determining individual success than talent, according to the study authors. But individuals have to be ready and open to grasp opportunities. The best strategy to maximise the probability of success is therefore “expose, explore, exploit,” which seems sound advice.
GERMANY’s industrial production was down -4.5% in the three months from June to August compared with the same period in 2019 before the coronavirus epidemic. The economy is struggling with multiple shocks stemming from Russia’s invasion of Ukraine, sanctions, gas shortages, higher energy and raw materials prices, and persistently sluggish growth in China:
IF YOU would like to receive best in energy and my research notes every day, you can add your email to the circulation list here: https://eepurl.com/dxTcl1
JKempEnergy.com 