Best in Energy – 11 November 2022

China’s leaders reiterate and adapt covid strategy (trans.) ¹

China trims coronavirus quarantine and contact tracing

China’s commentators question covid strategy ($BBG)

Pakistan to ration gas supplies as EU absorbs more LNG

U.S. diesel prices climb as inventories dwindle ($NYT)

U.S. diesel prices rise with stocks low ahead of winter

Global insurers press for more details on oil price cap

¹ The Politburo Standing Committee special study session on epidemic control is top news across all government-controlled media. Reverse engineering the official commentary, top leaders seem anxious to counter political and social fatigue with repeated lockdowns, reinforcing the current zero-covid strategy in the short term despite its rising costs, while also searching for a way out via improved vaccination rates and the development of new vaccines and therapeutic drugs.

U.S. SERVICE SECTOR prices increased at an annualised rate of +7.8% in the three months to October, more than three times faster than the central bank’s target, ensuring that interest rates are likely to continue rising:

BRITAIN’s economy entered a recession during the third quarter with real gross domestic product declining in three out of four months between June and September. So far the downturn has been led by manufacturing but is likely to spread to construction and services:

Best in Energy – 25 October 2022

Freight season on course to be very weak

U.S./Saudi strains between leaders ($WSJ)

Nord Stream blasts and insurance claims

U.S. fertilizer exports surge

U.K. plan for warming centres ($BBG)

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:

Best in Energy – 10 June 2022

United States asks India to restrain Russia oil buying ($FT)

U.S/EU explore options to limit Russia’s oil revenues ($WSJ)

EU/UK ban on insuring Russian oil threatens to raise prices

U.S. gas prices to remain high in 2022 before easing in 2023

China freight volumes and logistics return to normal (trans.)

China sends inspectors to coal regions after prices rise ($BBG)

China threatens to punish “price gouging” (trans.) *

* The warning from China’s State Administration for Market Regulation against price gouging echoes ideas and language employed by the Biden administration and U.S. Congress and the UK Department for Business, Energy and Industrial Strategy. Policymakers in whatever type of government or historical era always try to deflect blame for rising food and fuel prices on to middlemen and traders.

In medieval England, middlemen could be prosecuted under the common law for the offences of forestalling (buying up supplies before they could be delivered to the market), regrating (buying and reselling at a higher price) and engrossing (buying a large proportion of the available supplies to resell them at a higher price). Present-day governments of the United States, the United Kingdom and China would approve.

FREEPORT LNG’s explosion and shutdown is only expected to have a limited impact on the availability of gas in either the United States or the European Union. The premium for gas deliveries in July 2022 to Northwest Europe compared with Louisiana’s Henry Hub has increased to €56/MWh compared with €50 before the incident. But the spread had already shrunk from €100-180 in March in the immediate aftermath of Russia’s invasion of Ukraine.

The market is relatively well situated at the moment to absorb the loss of Freeport LNG exports. Europe has been overbuying LNG and overfilling storage at an unsustainable rate that would have to slow in any event over the next 1-2 months. At the same time, the United States has been overselling LNG, leaving inventories below average for the time of year, implying exports would have had to slow soon.

Even before the Freeport incident, futures prices were starting to enforce an adjustment, with EU prices softening while U.S. prices were climbing to the highest for more than a decade. The stoppage in exports from the facility is accelerating the correction already underway, tempering the need for a larger price adjustment. As a result, the previous weakening of EU prices has been arrested for now, while the prior rise in U.S. prices has been capped for the time being.

The Freeport incident is not expected to have a major impact on gas availability in the European Union. Europe’s gas futures summer-winter calendar spread from July 2022 to January 2023 is still in a near-record contango of more than €11 per MWh, down only slightly from €14 before the explosion, implying the market remains heavily oversupplied in the short term:

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