Best in Energy – 24 November 2022

China’s coronavirus cases hit record high

Russia tanker fleet too small to avoid price cap

China/India slow purchases of Russian crude

United States to relax Venezuela oil sanctions

Europe hit by high gas prices for years ($FT)

BRENT’s six-month calendar spread fell to a backwardation of just over $2 per barrel on November 23, down from almost $9 a month earlier, and a high of almost $22 in early March, shortly after Russia invaded Ukraine. The spread has been easing consistently for a month and has fallen to its lowest level since December 2021. The business cycle downturn is expected to offset production restraint by OPEC⁺ and U.S. shale firms while traders anticipate Russia’s oil exports will continue flowing despite sanctions and the planned price cap:

Best in Energy – 23 November 2022

[MUST READ] U.S. Treasury publishes regulations for Russia price cap

Vitol chief says price cap will divert flow to small traders

Iran’s leaders struggle to reach out to moderates ($WSJ)

South California vessel queue dissipates  ($WSJ)

China’s coronavirus controls are multiplying

China’s renewable generation hits record high

U.S./Canada gas flows support winter reliability

Europe’s business confidence slumps ($FT)

Selective self-deception is an important leadership skill, especially in politics and diplomacy, but sometimes leaders say things they must know to be untrue, and I’m reminded of the exchange between Alice and the White Queen in Lewis Carroll’s “Through the Looking-Glass”:

“I can’t believe that!” said Alice.

“Can’t you?” the Queen said in a pitying tone. “Try again: draw a long breath, and shut your eyes.”

Alice laughed. “There’s no use trying,” she said: “one can’t believe impossible things.”

“I daresay you haven’t had much practice,” said the Queen. “When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”

BRENT’s front-month futures price is trading close to the average since the start of the century once adjusted for inflation. The current price of around $87 per barrel is in the 54th percentile for all months since 2010 and the 47th percentile for all months since 2000:

Best in Energy – 22 November 2022

China hit by worst coronavirus outbreaks since April ¹

European Union proposes gas price cap, without figures

Australia’s gas consumers try to avoid high export price

Saudi Arabia boosts renewable power to export oil ($FT)

U.S./India diplomatic and economic relationship

¹ China has reported severe coronavirus outbreaks in megacities across the entire country, including Beijing and Tianjin in the northeast, Guangzhou in the southeast, and Chongqing in the southwest. Xinjiang in the northwest has been under semi-permanent lockdown for months. The central government’s lockdown and suppression strategy is failing to control transmission and disrupting the entire economy. But there is still no sign of an exit strategy that would enable the country to live with the virus, worsening the economic and oil consumption outlook for 2023.

BRENT calendar spreads for the first half of 2023 have softened significantly as traders anticipate a business cycle slowdown and China’s postponed re-opening from coronavirus will relieve some pressure on crude supplies and inventories:

Best in Energy – 21 November 2022

European refiners find themselves with plentiful crude

Europe boosts Russian diesel imports ahead of sanctions

India’s refiners seek extra Russian crude before deadline

U.S. gas inventories erase deficit with late season refills

U.S. consumer spending from pandemic savings ($WSJ)

China promotes science and technology experts ($WSJ)

Central banks go back to basics ($BBG)

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:

Best in Energy – 16 November 2022

India’s refiners prepare for price cap from early December

China’s refiners request state aid on Russian crude ($BBG)

Europe’s energy crisis and supply security lessons ($BBG)

U.K. households and the increase in energy debts ($BBG) ¹

California ports report drop in container volumes ($WSJ)

Freeport LNG – root cause report on explosion

¹ Food and energy shortages have always been about prices and affordability rather than physical supplies and availability. Higher-income and wealthier households will always find ways to put food on the table and heat their homes, it is lower-income and poorer households that lack financial resources that are unable to cope and hit hardest (“Corn supply of ancient Rome”, Rickman, 1980).

SOUTHERN CALIFORNIA’s ports are experiencing a sharp drop in container traffic reflecting contentious labour negotiations and the threat of a strike as well as the slowdown in global merchandise trade and efforts by U.S. manufacturers and distributors to cut excess inventories. Combined container traffic through the neighbouring ports of Los Angeles and Long Beach was just 0.84 million twenty-foot equivalent units (TEUs) in October, down from 1.07 million TEUs in the same month in 2021, and the lowest for the time of year since the recession of 2009:

Best in Energy – 9 November 2022

G7 sanctions will raise tanker ton-miles ($BBG)

U.S. coal mining firms plan for gradual phase out

U.S. coal mining regional productivity variations

New Zealand to increase strategic oil inventories

EU agrees distribution of emissions targets

LONDON’s temperatures have been higher than the long-term seasonal average consistently since the middle of October, reducing heating demand and gas consumption. The number of heating degree days so far this winter has reached just 117 compared with a long-term average of 153. But the city-region is only 10% of the way through the expected heating season. The half-way point doesn’t normally arrive until January 23 as a result of seasonal lag:

Best in Energy – 8 November 2022

Europe squeezes LNG supply for emerging markets ($BBG)

Russia sends tanker to China via northern sea route ($BBG)

China to boost diesel exports as new refineries start up

China’s oil imports rise as new refineries build stocks

Nvidia downgrades semiconductors for China ($WSJ)

U.S. coal-fired generators scheduled to retire by 2029

Renewable diesel output grows rapidly from low base

Fusion firms target commercial models by 2030s ($FT)

China explores gradual retreat from lockdowns ($WSJ)

ATMOSPHERIC concentrations of carbon dioxide (CO2) at the Mauna Loa observatory on Hawaii rose to 415 parts per million (ppm) in October 2022 up from 404 ppm in October 2017 and 391 ppm in October 2012. CO2 concentrations have increased at a compound annual rate of +0.57% per year between 2017 and 2022. On the current trajectory, concentrations are likely to reach 430 ppm, the maximum scientists say is consistent with +1.5°C of average global warming, in 2027:

Best in Energy – 4 November 2022

G7⁺ agree to set fixed price cap for Russia oil exports ¹

Netherlands regulator supports TTF gas benchmark

Global coal consumption set for new record ($BBG)

U.S. tech firms enter downturn with layoffs ($WSJ)

Europe’s floating LNG storage queue ($FT)

¹ A fixed price cap that will be reviewed regularly in the light of market conditions sounds a lot like creating an “Organization of Petroleum Importing Countries” (OPIC) with all the resulting problems of information collection, analysis, forecasting and decision-making. OPEC has struggled to be an effective market manager; there is no reason to think OPIC will be any more successful.

Some operational and policy questions for OPIC:

  • How will the organisation estimate current production and consumption?
  • How will the organisation forecast future production, consumption, inventories and prices?
  • Will OPIC seek input from oil traders and refiners?
  • Will OPIC hold regular meetings to decide policy?
  • How often will the organisation review and revise the price cap?
  • Will OPIC coordinate with OPEC and OPEC⁺ ?
  • What is the relationship between OPIC and the IEA?
  • How will OPIC respond if Russia cuts production and exports?
  • Will the U.S./IEA release more crude and product stocks to counter any interruption of Russia’s oil exports?
  • Will G7⁺ set policy unilaterally or will it take into account the interests of third-country importers (e.g. China and India)?

U.S. GAS INVENTORIES rose by +107 billion cubic feet (bcf) in the week to October 28. Inventories have increased by a total of +2,119 bcf since the start of April, the fastest seasonal rise since 2019 and before that 2015. Stocks are still -203 bcf (-5%) below the pre-pandemic average for 2015-2019 but the deficit has narrowed from -401 bcf (-14%) since mid-August:

Best in Energy – 1 November 2022

U.S. distillate shortages – a useful market primer

U.S. workforce and the impact from faster inflation

(more information about the distribution of losses)

United States narrows semiconductor embargo ($BBG)

Japan appeals for winter electricity conservation ($BBG)

U.S. EAST COAST distillate fuel oil inventories were just 24 million barrels on October 21, compared with a pre-pandemic five-year seasonal average of 50 million barrels. The East Coast deficit (-26 million bbl) accounted for nearly all the nationwide deficit (-29 million bbl): 

WESTERN EUROPE’s gas consumptionwas down in August and September by 14-15% compared with the pre-pandemic seasonal average for 2015-2019, as a result of high prices, industrial closures, a slowing economy, and energy conservation measures:

Best in Energy – 31 October 2022

EU LNG offshore queue is depressing gas prices

EU diesel prices at record relative to jet and crude

U.S. road freight faces ‘muted’ peak season ($WSJ)

U.S. gas prices fall as inventories swell ($WSJ)

Copper production is falling short of consumption

Copper shortage threatens energy transition ($FT)

EU/Russia gas conflict, inventory and prices ($FT)

Europe’s consumers cut discretionary spend ($FT)

China builds coal-fired back to renewables ($BBG)

China’s internal news reporting system

China’s ever-normal granaries ($JSTOR)

CHINA’s manufacturers reported a decline in activity last month as the economy struggled with repeated lockdowns. The official purchasing managers’ index slipped to 49.2 in October (4th percentile for all months since 2011) from 50.1 in September (24th percentile). Manufacturing activity has contracted in seven of ten months so far in 2022:

SOUTHERN CALIFORNIA’s ports handled the lowest volume of containers in the month of September since 2009, as spending on merchandise slowed and retailers struggled to reduce excess inventories: