Best in Energy – 17 March 2023

U.S. energy-related emissions projection

Bank rout as easy money era ends ($BBG)

OPEC⁺ calm despite oil price drop ($BBG)

OPEC⁺ sees oil price fall financially driven

Russia/India oil price above $60 on freight

China is diversifying away from U.S. trade

U.S. retailers press for price cuts ($WSJ)

Russia oil exports and rising storage ($BBG)

Shippers balk at costly green freight ($WSJ)

U.S. INTEREST RATE markets steadied on March 16 as the Federal Reserve organised major national banks to help boost confidence in their smaller regional counterparts by placing large-scale deposits with First Republic bank. Rate forecasts firmed slightly. But the rate trajectory implied by futures prices still shows rates declining from August onwards as the central bank responds to tightening credit conditions and a slowing economy:

NORTHWEST EUROPE is roughly 85% of the way through the heating season. Temperatures at Frankfurt in Germany have been close to the long-term seasonal average since the start of March. But very warm temperatures in October and from mid-December to mid-January have left a significant deficit in heating demand that has not been erased. The total number of degree days so far this winter (1540) is -16% below the long-term average (1842):

Best in Energy – 14 March 2023

U.S./EU economies boosted by lower energy prices ($WSJ)

Global LNG market balance becomes less clear after 2027

European steelmakers restart selected blast furnaces

Russia/India crude oil flows and market price reporting

Philippines set for big rise in wind and solar generation

U.S. ethane consumption by petrochemicals makers

Silicon Valley recriminations over bank failure ($FT)

U.S. central bank’s favourable collateral loans ($WSJ)

U.S. INTEREST RATE traders no longer expect the central bank to lift rates further following the failure of Silicon Valley Bank, with overnight rates expected to start falling from July onwards, as credit conditions tighten and force a slowdown in the economy. The path for interest rates over the rest of 2023/24 is now forecast to be much lower.

But the outcome of a financial failure is notoriously difficult to predict since it depends largely on confidence. Some failures are resolved quickly with little or no impact on the rest of the financial system and the real economy. In other cases, contagion occurs and the economic impact is significant:

EUROPE’s gas storage sites are 56.5% full, the second-highest on record for the time of year, well above the prior ten-year seasonal average of 36.3%. The end of the winter heating and inventory depletion season is now very near (with stocks usually hitting a minimum on March 30 ± 14 days):

Best in Energy – 13 March 2023

U.S. regulators take over failed Silicon Valley Bank

U.S. central bank acts to shore up liquidity

China/Iran/Saudi diplomatic talks ($WSJ)

Aramco sees oil market “tightly balanced”

Cobalt prices slump on output surge ($FT)

U.S. central bank and a hard landing ($FT)

U.S. INTEREST RATE traders have slashed exectations for future rate rises as the banking system comes under strain. Banks are heavily engaged in maturity and liquidity transformation, funding longer-term loans with shorter-term deposits and other borrowing. The progressive inversion of the yield curve is putting that function under increasing strain. Silicon Valley Bank (SVB), which failed on March 10 after a run by depositors, may have been an outlier. But the intensifying inversion poses challenges for all banks. Following the run on SVB, traders increasingly think concerns about financial stability will constrain future interest rate increases. Futures prices imply benchmark overnight interbank rates will end the year at around 4.50% (the same level as now) rather than 5.50-5.75% (which was expected as recently as March 8):

U.S. DRILLING activity continues to slow. The combined oil and gas rig count fell by -3 in the seven days to March 10. The total number of active rigs has fallen in 9 of the last 14 weeks by a total of -38 rigs (-5%) since early December:

HEDGE FUND and other money manager positions in the six major petroleum futures and options contracts on February 21, 2023:

Best in Energy – 8 March 2023

Russia/India switch trade settlement out of dollars

India’s heightened risk of evening power shortages

Nord Stream sabotage linked to Ukraine ($NYT)

Ukraine denies involvement in pipeline sabotage

U.S. shale chiefs recognise end of revolution ($FT)

Tesla shifts focus to cutting manufacturing costs

Nuclear generation deployment is shifting to Asia  

China’s military researchers study Ukraine conflict

Europe boosts diesel from Middle East and Asia

Tech sanctions to spur industrial espionage ($FT)

U.S./China struggle to stabilise relationship ($WSJ)

U.S. CENTRAL BANK chief Jerome Powell toughened his rhetoric on core inflation during congressional testimony, sending forecasts for interest rates surging higher on March 7. Rate traders expected interest rates to end 2023 at around 5.55% up from a forecast of 5.38% on March 6:

SINGAPORE distillate inventories remain at their lowest level for the time of year since 2008. Stocks are -4 million barrels (-36% or -1.91 standard deviations) below the prior ten-year seasonal average. The deficit has only narrowed slightly from six months ago when it was -4 million barrels (-34% or -2.21 standard deviations):

Best in Energy – 7 March 2023

OPEC/U.S. shale firms discuss tight capacity

EU to launch joint gas buying system ($BBG)

China’s next premier will be Li Qiang

BP resets renewable energy strategy

South Korea boosts coal-fired power

Russia’s crude shipped to Middle East

U.S. Customs clears China solar panels

U.S. solar generation and wind farms

U.S. oil firms to get CCS subsidies (FT)

India trade pivots to U.S. allies ($WSJ)

U.S. recession postponed again ($WSJ)

U.S./China relations deteriorate ($FT)

U.S./China escalation strategies ($FT)

U.S. INTEREST RATE traders continue to boost their expectations for benchmark short rates at the end of the year as the central bank signals rates may have to go higher and stay there for longer to bring inflation back to target. Rates are now expected to be around 5.25-5.50% in December 2023 up from an expectation of 4.25-4.50% at the start of February:

COMMITMENT OF TRADERS reports – the U.S. Commodity Futures Trading Commission (CFTC) and ICE Futures Europe suspended publication of their commitments of traders reports in late January following a ransomware attack on a major market participant and infrastructure provider which resulted in incomplete submissions. Both are now starting to catch up with the backlog of missed weekly reports. ICE has caught up; the CFTC is still some weeks behind. I am not going to publish a weekly analysis again until they have both caught up fully since the reports now contain very out of date information. For reference, however, the hedge fund and money manager positions on February 7, the most recent currently available, are shown below:

Best in Energy – 3 March 2023

China’s abandonment of coronavirus suppression

China predicts rise in gas consumption

Debt relief in return for climate policies

U.S. interstate gas pipeline construction

U.K. auto sector’s future in doubt ($FT)

Bangladesh tenders for more LNG

Interest rate traders probe Fed reactions

NORTH INDIA has experienced above-normal seasonal temperatures since early February, driving an increase in air-conditioning and refrigeration demand and boosting electricity consumption to a record level. Temperatures in New Delhi’s Palam suburb have been above the long-term seasonal average for 18 out of 22 days since February 9:

U.S. GAS INVENTORIES are depleting much more slowly than normal for the time of year. As a result, inventories were +209 billion cubic feet (+11% or +0.55 standard deviations) above the prior ten-year seasonal average on February 24 up from a deficit of -427 billion cubic feet (-13% or -1.52 standard deviations) on September 9, 2022:

Best in Energy – 15 February 2023

Global central banks inject $1 trillion of liquidity

South Asia’s price-sensitive LNG consumption

U.S. services sector inflation remains high ($BBG)

U.S. automakers have more pricing power ($BBG)

Ocean freight rates slump as volumes fall ($WSJ)

China’s major refiners resume Russia oil buying

U.S. pilot shortage drives up airfares ($FT)

Near-space and sovereignty issues ($WSJ)

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:

Best in Energy – 10 February 2023

Russia plans to cut oil production by 0.5 million b/d in March

Indonesia’s coal-fired generation and “just energy transition”

U.S. gas production growth set to slow as futures prices slump

Germany’s storage firms to “refine” gas purchasing strategy

U.K. energy inefficient homes and heritage preservation ($FT)

U.S. heating oil prices ease from record high in early November

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:

Best in Energy – 8 February 2023

Power sector emissions near tipping point

(see full IEA report on electricity markets)

Russia oil sanctions enrich intermediaries

Cobalt prices fall on emerging oversupply

Container trade left with massive surplus

U.S. gasoline consumption falls ($FT)

U.S. coal-fired generator retirements

U.S. INTEREST RATE traders expect the central bank to increase its target fed funds rate by two more quarter-points before July 2023 reaching 5.00-5.25% up from 4.50-4.75% at present. The forecast has increased by a quarter-point following stronger than expected employment data for January. The interest rate path has been repeatedly revised upward over the last year as inflationary pressures have proved more persistent than expected:

Best in Energy – 31 January 2023

Europe’s ammonia plants idle – for now

IMF upgrades economic forecast slightly

Germany plans to keep gas stocks high

Germany explores strategic gas reserve

EU boosts imports of Russian LNG ($BBG)

Pakistan’s foreign exchange shortage

Journalism – impartiality and framing ¹

Commodity trading  (McKinsey report)

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: