Best in Energy – 8 August 2022

Russia oil discounts narrow on China/India demand

Germany’s river freight restricted by low water level

Bangladesh explores rotating factory closure ($BBG)

Asia’s emissions market prices are still low ($BBG)

China’s navy and air force practices Taiwan blockade

China forecasts flooding in major coal areas (trans.)

U.S. shale producers focus on higher oil prices ($FT)

U.S./China navy competition and Northern Sea Route

EUROPEAN GAS OIL calendar spreads between December 2022 and December 2023 have fallen into a backwardation of less than $11 per barrel from almost $33 in mid-June, as traders anticipate the onset of a recession depressing consumption:

JAPAN LNG STOCKS at the end of May had risen to 2.36 million tonnes, the highest for the time of year for at least seven years, as the country’s utilities accumulate inventories to protect against possible supply disruptions in winter 2022/23:

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Best in Energy – 27 May 2022

White House articulates strategy towards China

U.K. announces windfall tax on oil and gas firms

Europe protects households from energy prices

EU runs into problems negotiating Russia oil ban

Offshore drilling experiences cyclical recovery

U.S. hot economy has unwanted side effects ($FT)

Thailand/Vietnam explore rice cartel ($BBG)

Space-based solar power – how realistic is it?

BRENT’s six-month calendar spread is moving into an increasingly steep backwardation again as traders anticipate a growing shortage of crude. High margins for diesel and gasoline are encouraging refineries to maximise crude processing which is intensifying the downward pressure on already-depleted crude inventories:

U.K. DIESEL and gasoline inventories depleted further in March as late-cycle tightness was intensified by the impact of Russia’s invasion of Ukraine and some panic-buying by consumers and road haulage firms. Diesel/gas oil stocks were at the lowest seasonal level since 2014 and before that 2006:

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Best in Energy – 13 May 2022

China’s industrial metals exports are rising

India tries to accelerate coal imports ($BBG)

U.S. truckers hit by rising diesel prices ($WSJ)

Office return stalls in tight job market ($BBG)

U.S. FINANCIAL CONDITIONS for households and businesses wanting to  borrow or raise capital tightened again last week and are the most restrictive since the first wave of the pandemic in 2020 and before that 2012:  

U.S. INFLATION is becoming more deeply embedded in the economy with service sector prices climbing at an annualised rate of almost 8% over the last three months, the fastest increase since 1990 and before that 1982.

Some commentators have dismissed the increase inflationary pressure as a problem of supply bottlenecks rather than too much demand. Separating the supply side and demand side this way is an analytical error. Insufficient supply is the same as excess demand and vice versa.

But the data also shows inflationary pressures have spread from the energy- and raw materials-intensive merchandise sector to the labour-heavy services sector. Rapid service sector price increases usually signal the imminent arrival of a recession:

BUSINESS CYCLE turning points and phase transitions are hard to spot in advance or in real time in the official statistics because most data is published with a lag of 1-3 months. Latency in the statistical system conceals the much more rapid change in business conditions. But it may be possible to detect mid-cycle slowdowns and end-of-cycle recessions much closer to real time by focusing on the behaviour of key companies.

In presidential address to the American Economic Association in 2017, economist Robert Shiller characterised a recession as “a time when many people have decided to spend less, to make do for now with that old furniture instead of buying new, or to postpone starting a new business, to postpone hiring new help in an existing business.”

Decisions to reduce spending, postpone expensive purchases, defer or freeze hiring are all indicators of a potential slowdown. Sometimes the reasons will be company or household specific. But if there are enough companies and households behaving in the way the likelihood of an imminent slowdown is much higher.

In that context, these recent news headlines are all indications economic momentum is slowing:

  • “Uber to cut back on spending, treat hiring as a privilege” (Wall Street Journal, May 9)
  • “Twitter freezes hiring as two senior executives leave the company” (Wall Street Journal, May 12)
  • “Amazon’s net loss prompts query: has it built too many warehouses?” (Reuters, April 29)

This is not conclusive proof the major economies are entering a slowdown, and it cannot show whether it will be a mid-cycle soft patch or something deeper that qualifies as a recession, but the headlines are strongly suggestive pattern.

Hedge funds sidelined by cross-cutting uncertainties on oil

2 May 2022

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.

Global distillate stocks stabilise as consumption falters

14 April 2022

Chartbook: https://tmsnrt.rs/3M1dK96

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.

Related columns:

Global diesel shortage pushes oil prices higher (Reuters, March 24)

Global diesel shortage raises risk of oil price spike (Reuters, March 11)

U.S. diesel stocks set to fall critically low (Reuters, Feb. 17)

Diesel is the U.S. economy’s inflation canary (Reuters, Feb. 9)

Depleted U.S. distillate stocks show supply chain pressure (Reuters, Feb. 4)

Best in Energy – 6 April 2022

EU/Russia coal ban would strain supply ($BBG)

U.S. central bank signals rapid move to neutral

U.S. Treasury warns of economic shock ($BBG)

Europe’s economy faces energy shock ($BBG)

India’s coal imports to rise in 2022/23

Argentina’s gasoil consumption rises

Crude physical benchmarks weaken

LME sees sharp reduction in positions

California’s emissions price increases

Reuters has created new web pages where you can find all the columns by our commodities experts in one place:

* Industrial metals www.reuters.com/authors/andy-home

* Asian markets www.reuters.com/authors/clyde-russell

* Agriculture www.reuters.com/authors/karen-braun

* Energy markets www.reuters.com/authors/john-kemp

EUROPE’s midsummer-midwinter gas futures calendar spread from July 2022 to January 2023 has narrowed sharply to a backwardation of less than €4/MWh down from a record €72 in early March. To ensure inventories can be accumulated over the next six months for use next winter, without incurring large losses, the spread needs to move into contango to cover storage costs. The July 2022 futures price must fall, the January 2023 price must rise, or both. So far, both prices appear to be adjusting in the expected direction:

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Best in Energy – 30 March 2022

Germany issues early warning of possible gas rationing

Russia tells Europe to find roubles for export payments

Russia’s oil export system handles third-country crude

EU gas oil storage rates fall to record low as stocks drop

U.S. recession inevitable says former Fed official ($BBG)

Russia’s alternative domestic payments system ($WSJ)

U.S. consumers switch brands to offset inflation ($WSJ)

Spain’s inflation rate nears 10% ($BBG)

India’s coal inventories under pressure

CHINA’s Lower Yangtze mega-region, home to more than 225 million people, has experienced an exceptionally mild winter, especially since late February. Cumulative heating demand at Nanjing has been 14.5% below normal so far, implying large savings in gas, coal and electricity consumption, and limiting upward pressure on international LNG and coal prices:

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Best in Energy – 21 March 2022

EU divided on whether to embargo Russian oil

India experiences run on retail diesel outlets

EU’s plan to refill gas storage risks price surge

EU’s short-term reliance on Russian gas ($FT)

Saudi Aramco says global oil market is very tight

U.K./Saudi summit and wider political relations

China civilian aircraft crashes with 132 on board

Economic sanctions – measuring effectiveness

Russia/Ukraine war enters attrition phase ($FT)

Russia/Ukraine war enters attrition phase ($WSJ)

China’s epidemic control in rural areas (trans.)

Sri Lanka’s rising energy bill risks default ($BBG)

BRENT futures open interest fell by a record 352 million barrels over the three weeks spanning Russia’s invasion of Ukraine from February 22 to March 15, tumbling to the lowest level since August 2015, as prices spiked higher, volatility increased, margins rose and liquidity dried up:

COAL went from a marginal fuel used in a handful of local areas to become an essential part of England’s pre-industrial economy between 1500 and 1700 – well before the commonly accepted start of the industrial revolution in the later 18th century. By 1700, coal had replaced wood as the dominant fuel for domestic heating in London and most urban centres, and was the main fuel for all manufacturing, including glass-making, salt production, brewing, dyeing, and nonferrous smelting, with the notable exception of iron making:

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