NORTH INDIA has experienced above-normal seasonal temperatures since early February, driving an increase in air-conditioning and refrigeration demand and boosting electricity consumption to a record level. Temperatures in New Delhi’s Palam suburb have been above the long-term seasonal average for 18 out of 22 days since February 9:
U.S. GAS INVENTORIES are depleting much more slowly than normal for the time of year. As a result, inventories were +209 billion cubic feet (+11% or +0.55 standard deviations) above the prior ten-year seasonal average on February 24 up from a deficit of -427 billion cubic feet (-13% or -1.52 standard deviations) on September 9, 2022:
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:
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:
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%:
COAL-FIRED generators typically require 2-3 hours from initial notification to reach full power from a hot start, 6-7 hours from a warm start, and 10 or more hours from a cold start. Assuming the two massive coal units at Drax are typical, if the U.K. transmission operator wants them to be available during the evening peak from 1600 to 1900 GMT, notice to light up and begin warming must be given by 0600 GMT. If the forecast reserve margin improves during the day, however, the stand-by notices can be cancelled later, as happened on December 12.
The table below shows typical timelines for coal-fired and gas-fired generators showing how it takes (1) from initial notification from the grid controller to synchronisation with the grid – at which point the generator can start providing power to the network; and (2) from synchronisation to reaching maximum power output (“Technical Assessment of the Operation of Coal & Gas Fired Plants,” Parsons-Brinckerhoff for the U.K. Department of Energy, 2014):
LONDON and southeast United Kingdom are now a quarter of the way through the typical heating season. After an exceptionally warm period from mid-October to late November, which depressed heating demand, temperatures have plunged far below normal, erasing the earlier deficit in degree days, and putting winter heating demand on an entirely different trajectory:
U.S. CONTAINERISED rail freight in October was running at the slowest seasonally adjusted rate since 2013, reflecting weakness in the manufacturing economy and cutting consumption of diesel:
LONDON temperatures were -6°C below the long-term seasonal average on December 8, stretching the transmission system to the limit, as solar generation faded and demand ramped up in an unusually frosty early evening. There were repeated periods of under-frequency on the transmission system in the run up to the evening peak, with load exceeding generation and reserves running low. National demand approached the maximum triad levels set in winter 2021/22, despite extremely high electricity prices, triad avoidance behaviour by major electricity users, and calls for household and commercial conservation:
BRENT calendar spreads slipped into contango yesterday through May 2023. The combined six-month spread moved into contango for the first time (outside the month-end expiry process when prices and spreads are unrepresentative) for the first time since November 2020, before the first successful coronavirus vaccines were announced:
LONDON is experiencing a period of unusually low temperatures this week, exactly 70 years after similar conditions between December 5 and December 9, 1952, caused the “Great Smog” resulting in 4,000 excess deaths. As temperatures dropped to freezing, domestic and commercial coal combustion surged, sending thousands of tonnes of particulates into the air over the city. A temperature inversion trapped smoke in low-lying areas along the Thames, between the hills surrounding the metropolitan area. For four days and nights, the metropolitan area was blanketed with a suffocating mixture of fog and smoke. The map below shows areas with the worst pollution, which were also the areas with the highest excess mortality:
CHINA’s manufacturers reported a steep decline in activity last month as the economy buckled under pressure from city-level lockdowns. The official purchasing managers’ index slipped to 48.0 in November (1st percentile for all months since 2011), the lowest since April 2022, and before that the first wave of the pandemic in February 2020:
U.S. DISTILLATE inventories rose +4 million bbl to 113 million bbl last week. Stocks are still -20 million bbl (-15%, -1.04 standard deviations) below the pre-pandemic five-year average but the deficit has narrowed from -34 million bbl (-24%, -2.05 standard deviations) on October 7:
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: