WESTERN EUROPE’s temperatures are expected to be above average for the time of year through December, according to the European Centre for Medium-Range Weather Forecasting, which would reduce heating demand and ease pressure on gas and electricity supplies:
U.S. EMPLOYMENT has been growing faster than would have been expected based on output growth alone. The discrepancy between rapid job gains and slower growth in real gross domestic product is evident whether jobs are measured from the employer side (payrolls) or employee side (household surveys). If historical relationships reassert themselves, job gains are likely to slow or output growth will accelerate:
U.S. EMPLOYMENT in the transportation and warehousing super-sector has been flat since June after growing rapidly for two years following the first wave of the pandemic. The number of jobs in the sector has levelled off around 6.5 million up from 5.8 million before the arrival of the pandemic in the first quarter of 2020:
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:
U.S. INTEREST RATE TRADERS expect the Federal Reserve to raise its federal funds target for longer to peak at a higher level and sustain them at a higher rate than before, following a warning by the central bank’s chief. Policy-controlled interest rates are expected to continue rising until they peak at 5.00-5.25% in May 2023, up from 3.75-4.00% at present, and still be at 4.00-4.25% at the end of 2024:
U.S. PETROLEUM INVENTORIES including the strategic reserve fell by -3 million barrels in the week to October 28. Stocks have depleted in 90 of the last 122 weeks by a total of -494 million barrels since the start of July 2020:
¹ This article seems to be merging the related but separate concepts of rotating power cuts to cope with possible electricity shortages caused by insufficient gas-fired and renewable generation this winter with restarting the grid after a total failure such as might be caused by an accident or sabotage.
“Yarrow” sounds like a plan for a “black start” of generation, transmission and distribution systems following complete failure. Electricity network managers in the United Kingdom and other countries have planned for a black start for decades. It is one of those remote “high impact low probability” risks commonly used in scenario planning.
The United Kingdom has never had to undertake a nationwide black start though a regional one was necessary in parts of the southeast following damage caused by the Great Storm of October 1987.
Black starts involve a complicated series of steps and would take several days to complete. Designated generating units would have to be started up autonomously, following by limited energisation of the transmission grid, first regionally and then nationally.
Black start sites often have auxiliary diesel-fired generators maintained at a high state of readiness that can restart without external power. The auxiliary generator is then used to start one or more main generators (usually oil, coal or gas-fired) on the same site which are then reconnected to the grid.
Progressively more generators would be started up and synchronised to the network, which would start to provide limited power to the local distribution systems. Protected sites would start to receive power and then more customers as sufficient power becomes available.
The process could take up to 5-7 days in the event of total failure. In the meantime most customers would receive no power or be subject to rotating power cuts to limit demand while generation is restored gradually.
The complexity and time needed for a full black start explains why grid managers attempt to avoid them at all costs. Temporary but controlled load-shedding directed by grid managers is preferable to uncontrolled cascading failure of the power grid leading to collapse and forcing a black start.
Black start should be a very remote risk in a well-run grid. But the sabotage of the Nord Stream pipelines has focused attention on the risks of deliberate attacks on energy infrastructure and will make black start a higher priority for emergency planners.
EUROZONE manufacturers reported an accelerating decline in activity last month as the region’s economy was hit by inflation, soaring energy prices, supply chain problems, Russia’s invasion of Ukraine and the EU sanctions imposed in response. The composite purchasing managers’ index slipped to 46.2 in October (12th percentile for all months since 2006) from 48.4 in September (24th percentile) and 58.3 in October 2021 (92nd percentile). The composite index has been below the 50-point threshold dividing expanding activity from a contraction for four months running, confirming the zone’s economy is entering a recession:
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:
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:
NORTHWEST EUROPE’s gas futures prices for deliveries in December, the first part of winter, are still above those for Northeast Asia, continuing to divert cargoes. But the premium has narrowed to around €30/MWh from €60-75 two months ago as Europe’s gas supply has improved and storage has neared maximum capacity. Europe’s lower gas prices are steadily filtering through to lower prices in East and South Asia for spot cargoes, though prices remain exceptionally high compared with before 2022:
¹ Floating storage is more expensive than storing on land. Storing LNG is especially expensive because it needs to be kept super-chilled. But the extreme contango in European futures for nearby delivery months has made relatively long duration floating storage commercially viable. As a result, Europe’s available inventories are even higher than shown in the daily storage reports from Gas Infrastructure Europe.
U.S. PETROLEUM INVENTORIES including the strategic reserve fell by -5 million bbl in the week to October 21. Stocks have depleted by a total of -491 million bbl since the start of July 2020 and are at the lowest seasonal level since 2004. Oil inventories are on an unsustainable trajectory. “If something cannot go on forever, it will stop,” according to the aphorism popularised by Herbert Stein, chief economic adviser to U.S. President Richard Nixon. Global production must grow faster. Consumption must grow more slowly. Or both:
U.S. FINANCIAL CONDITIONS have tightened as lenders adopt more conservative policies and higher prices for credit, risk and leverage. The Federal Reserve Bank of Chicago’s national financial conditions index has is in the 87th percentile for all months since 1990 up from the 24th percentile a year ago:
EUROPE’s gas futures prices have slumped for nearby delivery months as storage facilities near their maximum capacity but inventories continue to build rapidly. Calendar spreads from November through January have slumped into contango as storage is maxed out:
EUROPE’s maturing benchmark gas futures contract for November is falling rapidly as storage becomes full and the weather is forecast to remain mild. Prices for November delivery slipped to €99 per megawatt-hour (MWh) on October 24 down from €200 a month earlier. Mid-winter prices for January have remained higher at €143 compared with €200 a month ago. The extreme contango is symptomatic of storage becoming nearly full and the need to encourage more consumption by power generators and consumers in the short term, while concerns persist about availability in the middle and later stages of winter: