U.S. GAS front-month futures prices have slumped to less than $3.80 per million British thermal units (34th percentile for all months since 1990) from more than $9.10 (86th percentile) at the end of August. Figures have been adjusted for inflation using the core consumer price index for all items excluding food and energy:
¹ Gas has been transported and stored in bags or balloons by poorer, often rural, customers without connection to grid supplies across Asia for some time. Specialised gas containers are relatively expensive. Photo agency Alamy has a photograph of a cyclist trailing a gas-filled “balloon” in China’s Shandong province in 2014. Don’t try this at home!
EUROZONE MANUFACTURERS reported business activity declined for the sixth month running in December but the deterioration was less widespread than in November and October. The eurozone manufacturing purchasing managers’ index was at 47.8 (21st percentile for all months since 2006). The index remained well below the 50-point threshold dividing expanding activity from a contraction. But declines were less widespread than November when the index was at 47.1 (17th percentile) and October at 46.4 (13th percentile):
U.S. CRUDE PRODUCTION including field condensates rose by +69,000 b/d to 12.381 million b/d in October 2022. The increase came entirely from onshore production in the Lower 48 states, most of which is from shale. Production has been up year-on-year by an average of around +630,000 b/d (+5.7%) in the last 12 months:
¹ Failure of coal and gas-fired generators to start up when instructed by the grid because of instrument and equipment freezes has been a recurrent problem and major cause of power failures during extreme cold weather episodes in the last several decades. Failure to start has meant actual generation available has been much lower than forecast, reducing reserve margins and forcing rotating blackouts to restore margins to safe levels.
THE FUNDAMENTALS of commodity trading have not changed in 2500 years, illustrated by this quote about China’s commodity merchants taken from the Guan Zi, which purports to be a dialogue between Lord Huan of Qi and his powerful chief minister Guan Zhong in the Spring and Autumnperiod (771-481 BCE) but probably a compilation of traditional knowledge written during the Warring States period (481-221 BCE):
“Merchants observe outbreaks of dearth and starvation, scrutinize changes in the fortunes of states, study the patterns of the four seasons, and take notice of what goods are produced in each place. With this knowledge of prices in the marketplace, they gather up their stock of goods, load them on oxcarts and horses, and circulate throughout the four directions. Having reckoned what is abundant and what is scarce and calculated what is precious and what is worthless, they exchange what they possess for what they lack, buying cheap and selling dear … Marvellous and fantastic things arrive in timely fashion; rare and unusual goods readily gather. Day and night thus engaged, merchants tutor their sons and brothers, speaking the language of profit, teaching them the virtue of timeliness, and training them how to recognise the value of goods.”
Guan Zi: Political, Economic and Philosophical Essays from Early China (Rickett, 1985) cited in The Economic History of China: From Antiquity to the Nineteenth Century (von Glahn, 2016)
EUROPE’s gas prices are falling and the futures curve has shifted into contango as inventories remain very high for the time of year and traders no longer anticipate any risk of a shortage before the end of winter 2022/23. The end-of-winter March-April 2023 calendar spread is trading in a contango of more than €1.20/MWh down from a backwardation of €9.70 at the end of September:
FEDEX’s share price has slumped by more than -30% over the last year (more than -40% in real terms) as merchandise shipments have slowed after the pandemic. In the past, a retrenchment of this magnitude has been consistent with a mid-cycle slowdown or a cycle-ending recession:
U.S. S&P 500 equity index is down by almost -20% compared with the same point in 2021. In the past, falls of this magnitude have been consistent with the onset of a recession. The index closed at a new high only once in 2022 and that was on the first trading day of the year. The absence of new highs is reminiscent of the 2001-2012 period when equity prices stagnated in the aftermath of the dotcom bubble:
U.S. SERVICE SECTOR prices rose at an annualised rate of 6.4% over the three months ending in November. Service sector output is more labour-intensive than manufacturing and prices tend to be more sticky. Services inflation has decelerated from 9.9% in the three months ending in June, but it is still three times faster than the central bank’s target of a little over 2%:
¹ When policymakers appeal to “patriotism,” or decry its absence, it usually means they have run out of good arguments. When I hear arguments based on patriotism and its variants, I am instinctively suspicious about the speaker’s motivations, and try to work out how someone is trying to mislead or distract attention from their own failures.
² Coal-fired units need roughly four hours to reach full generation from a warm start and 10-12 hours from a cold start. The grid’s instruction to start warming up ensures the two massive coal-fired units at Drax will be available to help meet electricity consumption during the evening peak on December 12. Before privatisation of the U.K. electricity industry, the state-owned Central Electricity Generating Board (CEGB) would often keep at least one coal-fired power station warmed up but not generating so it could be brought into service at relatively short notice. Long ramping times for coal-fired units, and the enormous quantity of fuel burned before commercial generation starts, are one reason gas-fired units are more efficient and have largely supplanted them.
CHINA’s semiconductor (integrated circuits) trade – export earnings have grown rapidly, but the cost of imports has risen even faster, so the country’s trade balance has become increasingly adverse:
BRENT calendar spreads slipped into contango yesterday through May 2023. The combined six-month spread moved into contango for the first time (outside the month-end expiry process when prices and spreads are unrepresentative) for the first time since November 2020, before the first successful coronavirus vaccines were announced:
LONDON is experiencing a period of unusually low temperatures this week, exactly 70 years after similar conditions between December 5 and December 9, 1952, caused the “Great Smog” resulting in 4,000 excess deaths. As temperatures dropped to freezing, domestic and commercial coal combustion surged, sending thousands of tonnes of particulates into the air over the city. A temperature inversion trapped smoke in low-lying areas along the Thames, between the hills surrounding the metropolitan area. For four days and nights, the metropolitan area was blanketed with a suffocating mixture of fog and smoke. The map below shows areas with the worst pollution, which were also the areas with the highest excess mortality:
U.S. GAS inventories fell faster than the seasonal average in the second half of November. Working gas stocks in underground storage were -178 billion cubic feet (-4.9%) below the pre-pandemic five-year seasonal average on November 25 compared with a deficit of -97 bcf (-2.5%) on November 11:
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:
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: