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:
Yemen’s decaying oil storage tanker to be unloaded
U.S. TREAURY YIELD curve between two-year and ten-year maturities has inverted to around 100 basis points, the most extreme since August 1981, when the economy was entering the second part of the double-dip recession of the early 1980s. The inversion is signalling a sharp fall in interest rates, resulting from a rapid deceleration of inflation, a downturn in the business cycle, or a combination of both:
U.S. GAS INVENTORIES are moving into an increasing surplus, keeping downward pressure on prices. Stocks were +240 billion cubic feet (+13% or +0.58 standard deviations) above the prior ten-year seasonal average on March 3, up from a deficit of -263 billion cubic feet (-8% or -0.98 standard deviations) on January 1, 2023, and a deficit of -427 billion cubic feet (-13% or -1.52 standard deviations) on September 9, 2022:
CHINA’s manufacturers reported the most widespread rise in business activity for over a decade as the economy rebounded after the end of coronavirus lockdowns and the passing of the epidemic’s exit wave. The official purchasing managers’ index surged to 52.6 in February, the highest since April 2012, and up from just 50.1 in January 2023 and 47.0 in December 2022. The index was in the 96th percentile for all months since 2011 pointing to a very broad upturn in activity:
NORTHWEST EUROPE is more than three-quarters of the way through the heating season. Frankfurt in Germany has experienced 1,377 heating degree days so far this winter compared with a long-term seasonal average of 1,673, a deficit of almost 18%, reducing heating demand and easing the pressure on gas inventories and prices:
U.S. SERVICE SECTOR prices excluding rent (a measure economists have taken to calling “supercore” inflation) rose at an annualised rate of +5.2% over the three months ending in January, more than twice as fast as the central bank’s target of a little over 2% per year. Supercore prices rose at an annualised rate of +7% in January alone and were up by a similar amount over the previous 12 months, implying there is still a lot of momentum behind inflation:
U.S. INTEREST RATE traders expect the central bank will have to adopt a more restrictive policy to squeeze persistent inflation out of the economy. The central bank is expected to raise its fed funds target rate to 5.00-5.25% or even 5.25-5.50% by August 2023 up from 4.50-4.75% at present. Forecasts for interest rates at the end of 2024 have risen by almost +75 basis points since the start of the month:
NORTHEAST ASIA has experienced an unusually cold winter, in contrast to milder than normal temperatures at the other end of the Eurasian continent. Heating demand in Beijing, the heart of the Beijing-Tianjin-Hebei (Jīng-Jīn-Jì) mega-region, with a combined population of 113 million, has been +8% higher than the long-term average so far this winter. Beijing’s daily temperatures were below the seasonal average on 43 of 62 days in December and January:
CHINA imported 508 million tonnes of crude oil in 2022, down from 513 million in 2021 and 542 million in 2020, according to preliminary data from the General Administration of Customs. Slower imports as the country grappled with intermittent lockdowns eased pressure on global petroleum supplies. But the economy’s re-opening is likely to boost crude imports and tighten the market in 2023:
U.S. MANUFACTURERS are raising prices more slowly as input costs for raw materials and energy ease and demand for goods falls. Producer selling prices for finished products other than energy and food increased at an annualised rate of +4.2% in the three months to December 2022 down from an annualised +11.5% increase in the three months to April 2022. But selling prices are still rising twice as fast as the central bank’s target of a little over 2% per year for overall inflation, keeping upward pressure on interest rates:
INDIA’s coal stocks at power plants remain low for the time of year at just 12 days of consumption, up from 9 at the same point in 2022, but down from 18 in 2021 and 19 in 2020. There is a risk inventories could deplete to critical levels in the event of a pre- or post-monsoon heatwave or other pressure on the electricity system, which explains why the government has instructed power producers to increase coal imports:
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:
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: