Best in Energy – 15 July 2022

White House downplays hopes for more oil

Middle East imports more Russian fuel oil

Japan plans reactor restarts before the winter

United Kingdom heads for winter crisis ($BBG)

Germany is moving into a recession ($BBG)

ERCOT confident will avoid blackout ($BBG)

U.S. household finances and inflation ($WSJ)

Russia/NATO conflict is test of resolve ($BBG)

Central banks turn hawkish on inflation

U.S. CENTRAL BANK is expected to raise short-term interest rates to 3.50-3.75% by February 2023 up from 1.50-1.75% at present to curb inflation. From the second quarter of 2023, however, policymakers are expected to start reducing interest rates as the economy slows and inflation decelerates:

U.S INTEREST RATE traders anticipate a recession has become virtually certain following the continued acceleration of inflation. The yield curve spread between 2-year and 10-year maturities is now in the 98th percentile for all months since 1990:

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Best in Energy – 4 July 2022

Australia’s export earnings rise on energy prices

South Africa’s electricity shortages are worsening

U.K. electricity pricing – space and time (parts 1-3)

Biden/Bezos disagree on causes of inflation ($FT)

U.S. government split on lifting China tariffs ($FT)

NATO’s resolve tested by economic downturn ($FT)

U.S. refineries push crude processing to limit ($BBG)

U.S. CENTRAL BANK is now expected to raise rates earlier and more aggressively to bring inflation under control, with traders anticipating rates will peak around the end of the first quarter or the start of the second quarter of 2023. By implication, the business cycle is expected to slow significantly by the end of this year, creating conditions for inflation to moderate and the central bank to begin easing interest rates a few months later by the second quarter of 2023:

U.S. MANUFACTURERS reported much slower growth last month. The Institute for Supply Management (ISM)’s purchasing managers’ index slid to 53.0 in June (45th percentile since 1980) from 56.1 in May (76th percentile) and 60.9 a year ago (97th percentile):

U.S. MANUFACTURERS reported a decline in new orders for the first time since the first wave of the pandemic in 2020. The ISM new orders index slumped to 49.2 in June (18th percentile) from 55.1 in May (45th percentile):

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Best in Energy – 16 June 2022

U.S. central bank raises interest rate by +0.75%

US/EU concern about insurance sanctions ($FT)

White House complains about refining margins

U.S. refiners respond to president’s letter

EU/Russia gas flows fall sharply

Australia’s electricity market suspension

Australia appeals for power conservation

China to centralise iron ore buying ($FT)

Biden team divided over economy ($WSJ)

U.S. FEDERAL RESERVE increased its target range for the federal funds rate by +75 basis points to 1.50-1.75%, the largest increase since 1994. In real terms, monetary policy has become increasingly stimulative because inflation has risen faster than rates. The real interest rate had fallen to -5.25% in May 2022 compared with -3.75% in May 2021 and +0.38% in May 2019. The large rise was designed to signal the central bank’s determination to bring inflation under control as well as to start making real interest rates less stimulative:

U.S. PETROLEUM INVENTORIES including the strategic reserve depleted by -3 million bbl to 1,682 million bbl last week. Inventories have fallen in 75 of the last 102 weeks by a total of -435 million bbl since the start of July 2020. Stocks are at the lowest seasonal level since 2008:

U.S. DISTILLATE INVENTORIES rose by +0.7 million bbl to 110 million bbl last week. East Coast stocks increased by +1.2 million bbl to 27 million bbl. But total stocks remain -27 million bbl (-19%) below the pre-pandemic five-year seasonal average. Although inventories have started to accumulate seasonally the deficit is not narrowing because refineries cannot make enough fuel to rebuild stocks:

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Best in Energy – 14 June 2022

Pakistan hit by long blackouts as EU diverts LNG ($BBG)

Northeast Asia’s tepid LNG imports offset Freeport blast

U.S. shale producers opt not to accelerate drilling

U.S. finances construction of rare earths plant

Yang/Sullivan hold another round of talks (trans.)

(see also far briefer statement from White House)

U.S. INTEREST RATE traders expect the federal funds rate to reach 3.50-3.75% by January 2023 up from 0.75-1.00% at present as the central bank attempts to bring inflation under control. If they prove necessary, increases on this scale would result in a significant slowdown in the business cycle:

DATED BRENT calendar spreads are signalling exceptional tightness over the next two months. The extreme backwardation is consistent with the disruption of Russia’s exports and the maintenance season for platforms, pipelines and fields in the North Sea. But it could also be a sign the market is being squeezed. Strong fundamentals create ideal conditions for a squeeze. “Always squeeze with the grain of the market not against it,” as a veteran trader told me over lunch many years ago:

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Best in Energy – 20 May 2022

China accelerates purchases of Russian crude*

China increases crude inventories*

China boosts energy imports from Russia ($BBG) *

U.S./China talks on Russia strategic oil purchases*

U.S./China top diplomats hold telephone talks*

United States open to Russia oil secondary sanctions*

China cuts mortgage rates sharply to boost economy

Italy boosts Russian oil imports ($FT)

Germany prepares for rationing industrial gas supply

China completes Daqing coal rail maintenance (trans.)

U.K. postal service to raise prices again as costs surge

U.K. consumer confidence lowest since at least 1974

Finland prepares for end of Russian gas flows ($BBG)

U.K. grid practises black start with renewables ($BBG)

* An interesting cluster of stories has emerged over the last 24 hours about China increasing crude oil purchases from Russia, but using the extra volumes to replenish strategic reserves, which the White House says would not violate any sanctions. The first six items should all be read in this context.

China does not report commercial or strategic reserves and there is less distinction between them than for IEA countries, so there is no way of ascertaining whether extra crude is really going into strategic inventories or being added to commercial stocks to be refined or depleted later. The concept of “replenishment” of strategic stocks is also curious because China did not join the U.S.-led emergency oil releases in late 2021 and early 2022.

An outside observer might conclude China is boosting its purchases of deeply discounted Russian crude, but the White House has decided to ignore it, at least for the time being, because it does not want to risk triggering a further rise in prices, especially before congressional elections in November, where inflation is emerging as the dominant political issue.

U.S. FINANCIAL CONDITIONS were tightening rapidly even before this week’s tumble in equity prices, as access to credit and risk capital becomes more restricted and expensive:

EUROPE’s GAS FUTURES summer-winter calendar spread from July 2022 to January 2023 has moved into a small contango of €2/MWh, down from a record backwardation of more than €70 in early March, as storage fills at record rates and inventories become more comfortable:

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Best in Energy – 10 May 2022

U.S. gasoline and diesel prices hit record nominal highs

Germany/Qatar gas negotiations hit by disagreements

China’s gas consumption and imports decline ($WSJ)

Germany fears economic hit from gas disruption ($FT)

EU drops planned ban on shipping Russian crude ($FT)

China avoids surge in consumer price inflation ($WSJ)

U.S. INTEREST RATE traders have started to anticipate a slowdown in the business cycle that will bring inflation under control and then encourage the central bank to start trimming interest rates slightly to support growth later in 2023. Policy-controlled short-term rates are expected to peak at 3.00-3.25% by August 2023, up from 0.75-1.00% currently, before dipping slightly at the end of 2023 and into 2024.

The implied trajectory is consistent with inflation under better control by mid-2023 and a slowdown in the business cycle that will cause the central bank to shift its focus to supporting growth. A similar pattern occurred during previous interest rate tightening and “soft-landing” cycles in 1966/67 and 1994/95.

As a result, the U.S. Treasury yield curve between two-year and ten-year notes has started to steepen slightly, usually a sign of an impending business cycle slowdown that will eventually cause the central bank to reverse some of its expected interest rate rises:

Best in Energy – 6 April 2022

EU/Russia coal ban would strain supply ($BBG)

U.S. central bank signals rapid move to neutral

U.S. Treasury warns of economic shock ($BBG)

Europe’s economy faces energy shock ($BBG)

India’s coal imports to rise in 2022/23

Argentina’s gasoil consumption rises

Crude physical benchmarks weaken

LME sees sharp reduction in positions

California’s emissions price increases

Reuters has created new web pages where you can find all the columns by our commodities experts in one place:

* Industrial metals www.reuters.com/authors/andy-home

* Asian markets www.reuters.com/authors/clyde-russell

* Agriculture www.reuters.com/authors/karen-braun

* Energy markets www.reuters.com/authors/john-kemp

EUROPE’s midsummer-midwinter gas futures calendar spread from July 2022 to January 2023 has narrowed sharply to a backwardation of less than €4/MWh down from a record €72 in early March. To ensure inventories can be accumulated over the next six months for use next winter, without incurring large losses, the spread needs to move into contango to cover storage costs. The July 2022 futures price must fall, the January 2023 price must rise, or both. So far, both prices appear to be adjusting in the expected direction:

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Best in Energy – 25 March 2022

Brent futures margin requirements raised further

Europe’s diesel shortage threatens output growth

U.S. refiners source more fuel oil from Middle East

EU diesel supply vulnerable to Russia ban ($BBG)

EU faces high costs for filling gas storage ($BBG)

China economy disrupted by new epidemic ($BBG)

Russia/Ukraine war cuts fertiliser supply ($WSJ)

Mexico follows Fed in raising interest rates

UAE/Saudi seek to reset U.S. relationship ($FT)

EUROPEAN gas oil and Brent twelve-month calendar spreads are both trading in the 99.9th percentile for all trading days since 2000 as traders anticipate possible severe shortages of both crude and products stemming from Russia’s invasion of Ukraine and U.S./EU sanctions imposed in response:

EUROZONE manufacturers reported a less widespread expansion this month as war in Ukraine and inflation pushes the region’s economy towards a cyclical slowdown. Preliminary readings put the purchasing managers’ index at 57.0, down from 58.2 in February, and the lowest since January 2021, when economy was still gripped by pandemic:

GERMANY’s IFO business expectations index fell to 85.1 in March from 98.4 in February, a level only normally seen during a recession, as employers prepare for the impact of the war and sanctions to be felt on the domestic economy:

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[CHARTBOOK] Global financial conditions – 23 March 2022

Most global financial indicators are characterised by a lack of obvious stress at the moment

Markets are sanguine about the economic and financial impact of Russia’s invasion of Ukraine and the Fed’s planned cycle of interest rate increases

U.S. central bank is expected to engineer a soft-landing rather than hard one, leading to a mild mid-cycle slowdown rather than a deep recession

Markets expect businesses, households and borrowers to absorb more than 200 basis points of U.S. interest rate increases without difficulty

If there is a cyclical slowdown, it is expected to be conventional downturn in growth, jobs and inflation rather than accompanied by a financial crisis

Russia’s invasion of Ukraine and sanctions imposed in response have not so far resulted in a significant change to the outlook embodied in asset markets