¹ The two most important observations in this article are about gas demand reductions by energy-intensive businesses:
“Lower prices are not only saving energy-intensive companies a fortune. They have also put the colour back in the elaborate creations of the Italian glass blowers at New Murano Gallery. Each of the firm’s 11 1,000 degree furnaces produces glass with a different hue and, after the company had to turn half of them off last year, almost all are back on. ‘We have nearly the full palette,’ Francesco Scarpa, one of the gallery’s co-founders.”
“Fernández-Valladares described the mood of the tile making sector that dominates his small town in Castellón province as ‘generally quite pessimistic’. Sales have plunged. Since December, demand from clients — which are mostly wholesale buyers — has dropped 30 per cent. In January, the factory resorted to the radical option of turning off the kiln for an extended period, shutting it down for 22 days to save on gas. Fernández-Valladares said he could not rule out more shutdowns. ‘We normally work through the Easter holidays and I don’t know if we’re going to have to stop.’”
Multiply these examples across the entire European Union, and it helps explain much of the reduction in temperature-adjusted gas consumption during winter 2022/23.
BRENT’s six-month calendar spread has collapsed to a backwardation of just 47 cents per barrel down from $3 per barrel at the start of March as traders anticipate a much higher probability of a hard-landing or recession following enforced takeover of the crisis-stricken Credit Suisse by rival bank UBS:
U.S. PETROLEUM INVENTORIES including the strategic reserve rose by +3 million barrels over the seven days ending on February 17. Increased inventories of commercial crude (+8 million), distillate fuel oil (+3 million) and jet fuel (+1 million) were partly offset by reductions in gasoline (-2 million), propane (-3 million) and other oils (-3 million).
Petroleum inventories have risen for seven consecutive weeks by a total of +55 million barrels, the largest increase over any similar period since June 2020, when the market was absorbing the impact of the first wave of the pandemic and lockdowns.
Total inventories are still at the lowest seasonal level since 2005 and -235 million barrels (-13% or -2.22 standard deviations) below the prior ten-year average, but the deficit has narrowed from -291 million barrels (-16% or -3.06 standard deviations) on December 30:
EUROPE’s gas futures prices for deliveries in March 2023 have fallen below €50 per megawatt-hour for the first time since December 2021, before Russia’s invasion of Ukraine. Prices have fallen from €177 at the beginning of the winter heating season at the start of October and a record €338 in late August. Energy-intensive industrial closures, conservation measures, the impact of previous high prices, reduced LNG purchasing from China and South Asia, and a mild winter in northwest Europe all combined to avert feared shortages or a price spike during winter 2022/23:
CFTC/ICE commitment of traders suspended for second week
NORTHWEST EUROPE is now roughly two-thirds of the way through the winter heating season. In an average year, two-thirds of all heating degree days at Frankfurt in Germany occur on or before February 10. Cumulative heating demand has been the lowest since the winter of 2015/16 and before that 2006/07. With the 2022/23 heating season now winding down, traders’ attention has already turned to the summer refill season and winter 2023/24:
U.S. INTEREST RATE traders anticipate a major reduction in inflationary pressure – with or without a significant slowdown in the business cycle – which has been reflected in a sharp reduction in forward interest rate forecasts. Market forecasts for interest rates at the end of 2024 fell by more than a full percentage point between the start of November and the start of February:
FRANKFURT, a proxy for northwest Europe, reached roughly 60% of the way through the winter heating season on February 1. So far the accumulated heating demand has been -17% below the long-term average and is the lowest since 2015/16 and before that 2006/07. But after an exceptionally long period of mild temperatures between December 19 and January 15, temperatures have turned significantly colder, causing the heating deficit to narrow slightly:
¹ This report on impartiality and bias in journalism focuses on the British Broadcasting Corporation and its coverage of government finance issues (spending, taxation, borrowing and debt) in the United Kingdom. But the same issues are relevant for other media organisations and other topics, including energy. Factual accuracy is a necessary but not sufficient condition for impartiality. Selection of sources, choice of language, exploration of alternative viewpoints and narrative framing are just as important.
U.S. INTEREST RATE traders expect the federal funds target rate to peak at 4.75-5.00% by July 2023 up from 4.25-4.50% at present. Thereafter the rate is expected to start declining before the end of the year as the central bank responds to decelerating inflation and/or recession:
CHINA’s manufacturers reported an increase in business activity in January 2023. The official purchasing managers’ index climbed to 50.1 (26th percentile for all months since 2011) from 47.0 (1st percentile) in December 2022:
FRANKFURT and the rest of Northwest Europe are roughly half-way through the 2022/23 heating season. In the three decades between 1981 and 2010, on average 50% of heating degree days and heating demand at Frankfurt occurred before January 15. For London and southeast England, the half-way point arrives a few days later on January 23. So far this winter has been much milder than average. Frankfurt had accumulated 860 degree days up to January 15 compared with a long-term average of 1,078:
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:
¹ Running a “test” of the cold-start process at Drax on December 16 just four days after the coal-fired power plant received instructions (subsequently cancelled) to light up and prepare to generate for “real” on December 12 to help with insufficient reserve margins is interesting timing.
U.S. DISTILLATE inventories increased by +1 million barrels to 120 million barrels over the seven days ending on December 9. Stocks are still -16 million barrels (-12%, -0.79 standard deviations) below the pre-pandemic five-year average, but the deficit has halved from -34 million barrels (-24%, -2.05 standard deviations) on October 7. The biggest seasonal inventory accumulation for at least two decades has erased a large part of the previous shortage:
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: