U.S. REAL PERSONAL INCOMES less current transfer payments (PILT) were down marginally in the three months from September to November 2022 compared with the same period in 2021. Real PILT captures the combined impact of changes in employment, wages and other compensation, and inflation. Turning points are one of the main indicators the National Bureau of Economic Research (NBER)’s Business Cycle Dating Committee uses to identify the onset of recessions and expansions. The deceleration in PILT to zero is a sign the economy is close to stalling:
U.S. PETROLEUMINVENTORIES including the strategic reserve increased by +2 million barrels in the seven days ending on January 13 after rising by +22 million barrels the week before. The combined two-week increase was the largest since the first wave of the coronavirus pandemic in the second quarter of 2020. But similarly large increases occurred in the first weeks of 2020 and 2019 so the rise was probably attributable in part to seasonal factors. Inventories are still -94 million barrels (-5% or -2.76 standard deviations) below the prior ten-year seasonal average:
¹ Running a “test” of the cold-start process at Drax on December 16 just four days after the coal-fired power plant received instructions (subsequently cancelled) to light up and prepare to generate for “real” on December 12 to help with insufficient reserve margins is interesting timing.
U.S. DISTILLATE inventories increased by +1 million barrels to 120 million barrels over the seven days ending on December 9. Stocks are still -16 million barrels (-12%, -0.79 standard deviations) below the pre-pandemic five-year average, but the deficit has halved from -34 million barrels (-24%, -2.05 standard deviations) on October 7. The biggest seasonal inventory accumulation for at least two decades has erased a large part of the previous shortage:
¹ Floating storage is more expensive than storing on land. Storing LNG is especially expensive because it needs to be kept super-chilled. But the extreme contango in European futures for nearby delivery months has made relatively long duration floating storage commercially viable. As a result, Europe’s available inventories are even higher than shown in the daily storage reports from Gas Infrastructure Europe.
U.S. PETROLEUM INVENTORIES including the strategic reserve fell by -5 million bbl in the week to October 21. Stocks have depleted by a total of -491 million bbl since the start of July 2020 and are at the lowest seasonal level since 2004. Oil inventories are on an unsustainable trajectory. “If something cannot go on forever, it will stop,” according to the aphorism popularised by Herbert Stein, chief economic adviser to U.S. President Richard Nixon. Global production must grow faster. Consumption must grow more slowly. Or both:
U.S. FINANCIAL CONDITIONS have tightened as lenders adopt more conservative policies and higher prices for credit, risk and leverage. The Federal Reserve Bank of Chicago’s national financial conditions index has is in the 87th percentile for all months since 1990 up from the 24th percentile a year ago:
EUROPE’s gas futures prices have slumped for nearby delivery months as storage facilities near their maximum capacity but inventories continue to build rapidly. Calendar spreads from November through January have slumped into contango as storage is maxed out:
U.S. PETROLEUM INVENTORIES including the strategic reserve fell by -6 million bbl last week. Petroleum inventories have depleted in 88 of the last 120 weeks by a total of -486 million bbl since the start of July 2020:
U.S. DISTILLATE FUEL OIL inventories have fallen in 70 of the last 120 weeks by a total of -71 million bbl since July 2020. Stocks are at the lowest seasonal level since the U.S. Energy Information Administration began publishing weekly data in 1982:
U.S. SERVICESPRICES were rising at an annualised rate of +10.1% between August and September and were +7.4% higher than a year earlier, a sign inflation is proving persistent even as some energy and commodity prices have eased:
U.S. INTEREST RATE traders expect the central bank to increase its target federal funds rate to 4.75-5.00% by April 2023 up from just 3.00-3.25% at present as they try to bring inflation back under control:
U.S. DISTILLATE fuel oil shortages are worsening. Inventories fell -5 million bbl to just 106 million bbl last week and are now at the lowest level for the time of year for more than 40 years:
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EU28 GAS STOCKS stood at 953 TWh on September 14 and are on course to reach 1,019 TWh with a likely range of 981-1,080 TWh by the time the summer refill season ends in late October or early November. Inventories will begin the winter drawdown season at the third-highest level on record.
In the last ten years, inventories have drawn down by an average of 588 TWh with a range of 352-782 TWh between the peak in October-November and the trough in March-April. But this has been with strong pipeline inflows from Russia and other countries as well as LNG deliveries.
If Russian pipeline flows are severely disrupted the winter draw is likely to be much higher. High prices and exceptional demand restraint will be needed to ensure stocks do not run out before the winter ends. Even so, they are likely to fall to very low levels by next March, implying another herculean effort to refill them next summer:
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China boosts coal by rail deliveries by +9% (trans.)
Texas appeals for electricity conservation on July 11
U.S. BUSINESS inventory ratios have started to climb as sales slow and firms struggle to shift extra items ordered on a precautionary basis at the height of the supply-chain crisis. Manufacturers, wholesalers and retailers held inventories equivalent to 1.29 months worth of sales in April up from a cyclical low of 1.26 months in November. Excess stocks are concentrated at the retail level where the ratio has climbed to 1.18 months up from 1.09 months in October 2021.
U.S. inventory ratios remain low by pre-pandemic standards but will climb quickly if sales slow further in response to rapid inflation and a business cycle downturn. Inventory reduction is likely to weigh on economic growth over the next six months as businesses to limit or reverse overstocking:
TEXAS temperatures have climbed well above the long-term seasonal average since the start of July increasing the strain on the state’s isolated electric grid. Cumulative cooling degree days since the start of the year have been almost +30% higher than the 1981-2010 average:
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Global distillate inventories remain low but have shown some signs of stabilising as the business cycle slows in response to inflation, coronavirus outbreaks and increased uncertainty following Russia’s invasion of Ukraine.
In the United States, distillate fuel oil inventories fell by 3 million barrels to 111 million in the week to April 8, according to high-frequency data from the Energy Information Administration.
Distillate stocks are 28 million barrels (20%) below the pre-pandemic five-year seasonal average and at the lowest level for the time of year since 2008 (“Weekly petroleum status report”, EIA, April 13).
Based on stock movements in previous years, inventories are expected to fall as low as 105 million barrels before the end of June, with the forecast minimum ranging from 97-111 million barrels.
Stocks have been tight since the start of the year but the situation has stabilised since early March with some of the more extreme downside inventory scenarios receding.
High prices for all petroleum products but especially middle distillates such as diesel, heating oil, jet fuel and gas oil are blunting consumption growth.
More importantly, there are signs consumer and business spending has started to decelerate under pressure from inflation, increased uncertainty and supply chain disruptions.
As the pandemic has receded, consumer pending has also begun to rotate from distillate-intensive manufactured products to less distillate-intensive services.
In Europe, too, distillate stocks are low but have stabilised since the start of March in response to high prices and slowing consumption.
Europe’s distillate inventories amounted to just 392 million barrels at the end of March, the lowest for the time of year since 2015, according to estimates compiled by Euroilstock.
But inventories had risen by more than 12 million barrels compared with the end of February, the largest seasonal increase for more than two decades.
The last time stocks rose this rapidly between February and March was in 2008, when surging crude and diesel prices and diminishing economic activity also caused stocks to start rising from a very low level.
In Singapore, stocks have fallen to just 7.6 million barrels, the lowest seasonal level since 2008, and the storage hub is the tightest of all the regions.
Distillates are the most cyclically sensitive of the major petroleum products and a slowdown in consumption growth is normally associated with a mid-cycle slowdown or an end-of-cycle recession.
There are some early signs inventory depletion has slowed or even stopped altogether, with stocks broadly stable since the middle of March, but it will take a few more weeks before any turning point is confirmed.
JKempEnergy.com 