Best in Energy – 7 October 2022

U.K. electricity winter reliability forecast

U.S./Saudi standoff over oil policy ($FT)

White House fury with oil output cut ($BBG)

France outlines plan for “energy sobriety”

Nord Stream inquiry confirms sabotage

Texas electricity market and volatility

Houston and energy system transition

Luck more important than talent ($WSJ)¹

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:

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Best in Energy – 6 October 2022

OPEC+ cuts output allocations by -2 million b/d¹

White House criticises OPEC+ cut as shortsighted

Global trade expansion set to decelerate in 2023

Germany plans tax forbearance in energy crisis

Germany warns gas consumption still too high

China’s crude processing slipped in April-June

United States to ease Venezuela sanctions ($WSJ)

U.S. interest rates and financial crises ($WSJ)

¹ Like any cartel, OPEC+ uses a set of production baselines so total group supply can be adjusted in response to changes in market demand while ensuring each member retains a fair pro rata share. Like other cartels, the baselines used by OPEC+ do not necessarily correspond to shares in actual production or capacity in the real world. Cartels often find it very difficult to reach unanimous agreement to change baselines and shares. So in most cases they end up using baselines that have some historical basis but have become out of date.

Between the 1600s and 1800s, England’s Newcastle coal cartel (known as “the limitation of the vend”) allocated larger shares to some mines than they could actually supply. Some of the older, smaller or higher-cost mines had not been able to grow output fast enough to maintain their traditional market shares. But it was easier to keep the baselines and adjust allocations up and down in line with changing market demand than to renegotiate them. OPEC+ has often faced the same problem.

For both the Newcastle coal cartel and OPEC+, total allocations were often above total supply, ensuring changes in notional allocations were normally greater than changes in actual production.

OPEC+ frames its decisions in terms of adjustments to total and individual allocations, not production. The actual change in production is often different. In this case, many OPEC+ countries have been unable to utilise their allocations fully because they have insufficient capacity. These members will not be required to reduce their actual production since it was already well under quota. The actual fall in production is therefore likely to be much smaller than the reduction in the notional allocations.

The difference between production and notional allocations has been a persistent problem in the oil market. OPEC+ decisions are usually reported as “changes in production” when they should be reported as “changes in allocations”. It may seem a harmless simplification but it is deeply misleading.

Sometimes, however, the misdirection is intentional. It allows OPEC+ to announce a large headline increase or decrease, and use it to generate a desired market or diplomatic reaction, even though the actual change in production is much smaller.

But it is more technically accurate and analytically useful to report OPEC+ decisions in terms of production allocations and then report changes in actual production separately.

U.S. PETROLEUM INVENTORIES fell by -16 million bbl in the week to September 30. There were reductions in crude (-8 million), gasoline (-5 million), distillate fuel oil (-3 million) and jet fuel (-1 million). Total inventories have depleted by -480 million bbl since the start of July 2020 and are now at the lowest seasonal level since 2004:

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Best in Energy – 5 October 2022

I want to feature a wider range of high-quality sources in Best in Energy. If you publish an academic research paper related to energy, in its broadest sense, and there is an open-access version, I would love to hear about it so I can consider highlighting it and helping it reach a broader audience. Please send a link to john@jkempenergy.com. For the avoidance of doubt, I do not want to receive press releases, public relations pitches or offers of interviews to this email address.

[MUST READ] Critical infrastructure protection ($BBG)

Germany plans more financial help for gas importers

Nord Stream sites off limits as authorities investigate

U.S. trade oil groups warn against banning exports

Europe accelerates deployment of electric vehicles

Bangladesh hit by widespread electricity blackout

U.S./Saudi relations strained by oil policy ($FT)

Iran’s social unrest is broadening ($WSJ)

EU28 GAS STOCKS were +158 TWh (+19%) higher on October 3 than on the same date in 2021, after one of the largest inventory accumulations on record this summer:

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Best in Energy – 29 September 2022

Germany says gas consumption too high

German economists predict recession in 2023

Rotating blackouts could hit cell service¹

California’s demand response in heatwave

China says yuan stable and healthy (trans.)²

Lebanon forced to devalue currency ($FT)

Nord Stream: too early to conclude sabotage

Nord Stream fourth leak discovered ($BBG)

Nord Stream who sabotaged the lines? ($FT)

Hydrocarbon investment in energy transition

Global spending on advertising is falling

¹ Fixed line telephone systems carried their own electricity supply so the network would remain operational during power cuts. From this story it appears cell towers rely on the public distribution system and have not (yet) been prioritised in the same way as hospitals and other essential customers to ensure they remain operational during rotating power cuts. It is a classic example of how complexity and the unplanned evolutionary growth of networks can lead to the fusion or “coupling” of formerly separate systems, unintentionally creating a single point of failure (“Normal accidents”, Perrow, 1999). It is also an example of how the failure of the petroleum, gas or electricity networks can result in the failure of other systems critical to the functioning of a modern economy and society (“Brittle power”, Lovins and Lovins, 1982).

² If a government or a business or any other organisation has to say publicly everything is okay, or some variant, that’s an important sign of problems and stresses. If it really was okay, there would be no need to say it. Do don’t say. So statements such as this are important markers thought not in the way policymakers intend.

U.S. PETROLEUM inventories depleted by -13 million barrels last week, the largest decline this year. Drawdowns included crude (-5 million barrels), gasoline (-2 million), jet fuel (-2 million) and distillate fuel oil (-3 million). Petroleum inventories have depleted in 86 out of the last 117 weeks by a total of -464 million barrels since the start of July 2020. Distillate inventories are just 114 million barrels, the lowest for the time of year since 1996:

Best in Energy – 26 September 2022

U.S. Treasury promotes plan for Russia oil price cap

Germany business confidence at post-pandemic low

Germany struggles to agree deals for LNG ($BBG)

Transport shares stumble on recession risk ($WSJ)

China metal trader to restructure ($BBG)

Oil futures markets are not broken ($BBG)

U.S. INTEREST RATE traders expected the central bank to increase its target for the fed funds rate to 4.50-4.75% or even 4.75-5.00% by April 2023, up from 3.00-3.25% at present, as policymakers battle to reduce inflation quickly before it becomes entrenched in wage and price-setting behaviour. Rising expected rates are pushing up the dollar’s exchange value, suppressing inflation at home, but intensifying inflation and financial pressure in other advanced economies in Europe and Asia as well as emerging markets:

U.S. DOLLAR has appreciated by almost +9% over the last twelve months against a trade-weighted basket of other major currencies, as the central bank increases interest rates rapidly. The stronger exchange rate will help reduce domestic inflation but will also worsen the trade deficit:

BRITAIN’S CURRENCY has fallen to a record low against the U.S. dollar and is not far above its record lows against the euro, which will increase competitiveness but put upward pressure on the price of road fuel, gas, electricity and other imported items:

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Best in Energy – 21 September 2022

European energy trading hit by falling liquidity

Small modular reactors – deployment challenges

U.K. government caps energy prices for businesses

Coal miners seek ways to stay in future energy mix

Germany nationalises gas importer Uniper

Hertz orders 175,000 more electric vehicles ($WSJ)

CHINA’s railway hauled a record volume of freight in the first seven months of the year. Freight tonne-kilometres were up +9% compared with the same period in 2021 and +22% compared with before the pandemic in 2019. Coal is by far the largest item on the network. The system is moving record quantities of coal from the northern mining areas in Shanxi, Shaanxi and Inner Mongolia to the major consuming centres in the eastern, central and southern provinces:

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Best in Energy – 20 September 2022

Germany’s auto sector emissions remain high

China boosts imports of coal from Russia

EU/Africa tensions over gas investment ($FT)

La Niña to boost winter heating in Japan ($BBG)

U.S. shale producers hit drilling limits ($WSJ)

U.S. central bank refocuses on inflation ($WSJ)

Stranded asset story and the energy crisis ($FT)

Renewables and domestic energy security ($FT)

California relies on nuclear for 10% of electricity

United States is shifting policy on Taiwan ($BBG)

Coal boom leads to expansion of marginal mines

U.S. TREASURY securities with ten year maturity are yielding 3.53%, the highest since 2010, as traders anticipate the central bank will have to keep interest rates higher for longer to bring down inflation. Yields are rising at the fastest year-over-year rate since 1999. The increase is testing the downward trend in place since the mid-1980s. If the increase is sustained it will force a widespread re-pricing of most other assets:

HEDGE FUNDS and other money managers made few changes to their positions in the six most important petroleum futures and options contracts in the week to September 13. There were total net purchases of +4 million barrels with buying in NYMEX and ICE WTI (+10 million) and Brent (+3 million) but sales of U.S. gasoline (-5 million), U.S. diesel (-3 million) and European gas oil (-1 million):

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Best in Energy – 16 September 2022

Germany takes control of Russian-owned refinery

EU explores alternative benchmarks for gas prices

U.K. government set to lift moratorium on fracking

La Niña disrupts global economy ($BBG)

Europe’s gas prices have retreated ($FT)

EU28 GAS STOCKS stood at 953 TWh on September 14 and are on course to reach 1,019 TWh with a likely range of 981-1,080 TWh by the time the summer refill season ends in late October or early November. Inventories will begin the winter drawdown season at the third-highest level on record.

In the last ten years, inventories have drawn down by an average of 588 TWh with a range of 352-782 TWh between the peak in October-November and the trough in March-April.  But this has been with strong pipeline inflows from Russia and other countries as well as LNG deliveries.

If Russian pipeline flows are severely disrupted the winter draw is likely to be much higher. High prices and exceptional demand restraint will be needed to ensure stocks do not run out before the winter ends. Even so, they are likely to fall to very low levels by next March, implying another herculean effort to refill them next summer:

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Best in Energy – 15 September 2022

[MUST READ] China focuses on self-reliance ($FT)

Remote work likely to persist after pandemic ($WSJ)

U.S. shale firms won’t boost oil and gas output ($FT)

U.S. SPR’s role in the oil market is changing ($BBG)

U.S. gas consumption forecast to hit record in 2022

Germany warns about energy risk from cold winter

China planner warns against yin-yang coal prices

China’s continued drought in Yangtze basin (trans.)

U.S. Northeast fears fuel shortages in event of rail strike

LVMH to turn off store lighting overnight to save power

Eiffel Tower to turn off lights earlier to save power ($WSJ)

U.K. GAS AND ELECTRICITY consumption has not shown a significant decline so far in response to higher prices. I spent a large part of yesterday trying to find a price response in the available official consumption statistics without success. The charts are below. But there are some important limitations:  

  • Electricity consumption data is only available through June and gas data is only available through March owing to publication delays.
  • Most of the rise in prices has occurred since April with another big increase scheduled to take effect from October.
  • Heating demand and bills are lower in the summer months reducing consumers’ sensitivity to prices.
  • Domestic and commercial consumption patterns have been distorted by the lockdowns in 2020/21 and then re-opening in 2022.
  • Electricity and gas consumption has been on a long-term downtrend as a result of improvements in insulation and efficiency.
  • Electricity and gas consumption shows significant annual variation depending on winter temperatures.

Once these factors are taken into account, there is no evidence of a significant reduction in gas and electricity use by households, offices and commercial premises so far. If reductions are going to occur, it will be later this year and into 2023:

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Best in Energy – 13 September 2022

EU frames energy windfall tax as “solidarity contribution”

EU explores electricity demand reduction at peak hours

Diesel additives are in short supply in Germany ($BBG)

Europe needs more diesel fuel exports from China

Renewable energy jobs set to increase rapidly

U.S. railroads prepare for imminent strike ($WSJ)

China reports cyberattack by United States (trans.)

U.S. Northeast distillate inventories very low

NORTHWEST EUROPE’s benchmark gas futures contract for deliveries in January 2023, the heart of next winter, has fallen to less than €200 per megawatt-hour from a peak of €345 in late August. Higher inventories in seasonal storage have reduced the probability about stocks running out. Plans for significant voluntary and mandatory reductions in gas and electricity consumption and the increasing probability of a region-wide recession will also lessen the pressure on stocks in the event gas supplies from Russia are disrupted:

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