Best in Energy – 12 July 2022

Computer shipments tumble on inflation (WSJ)

Iran/Israel war is emerging from the shadows

Texas averts blackouts with voluntary conservation

U.K. utility bills on course for winter crisis

U.K. retail sales fall rapidly as inflation surges

U.S. Treasury lobbies for oil price cap

Chartbook – what causes an energy crisis?*

* I will update this chartbook from September 2021 to illustrate the gas, electricity and oil crisis in 2022 triggered by Russia’s invasion of Ukraine but which was building long before as spare capacity eroded. The current energy crisis has all the four classic elements; (1) pre-crisis erosion of spare production capacity and inventories; (2) failure to appreciate increasing risk and take timely preventive action; (3) a short-term trigger that turns a potential shortage into an actual shortage; and (4) panicked reaction.  

U.S. TREASURY yield curve has continued to invert and is now trading at a premium of 9 basis points between the two-year and ten-year maturities. The yield spread is in 96th percentile for all months since 1980 and implies traders believe a significant economic slowdown is inevitable. The last occasions on which the spread had tightened this much were in January 2007, February 2006, November 2000 and September 1989:

LONDON’s temperatures have climbed sharply since the start of July and are currently +5°C above the long-term average. In contrast to the United States, peak electric load occurs in midwinter rather than midsummer. Solar and wind output is currently favourable. But distribution transformers are vulnerable to the heat:

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Best in Energy – 7 July 2022

EU parliament adds gas and nuclear to green energy list

France to renationalise nuclear power generator EdF

Aramco raises official selling prices as oil futures fall

Oil price falls not yet justified by recession risk ($BBG)

China tax reductions hit $385 billion in Jan-June (trans.)

China plans to boost car sales after lockdown hit ($BBG)

United States intensifies sanctions enforcement on Iran

PRIOR to this week’s sharp drop in oil prices, hedge fund positioning was not showing the congestion that often signals an imminent reversal in the price trend:

HEDGE FUND positions in crude were below average in both Brent and WTI (36-37th percentile). The ratio of long to short positions showed a bullish bias but not excessively so (65-66th percentile):

HEDGE FUND managers showed no sign of preparing for a sharp fall in oil prices – with the number of short positions close to multi-year lows:

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Best in Energy – 28 June 2022

France calls for easing sanctions on Iran, Venezuela

Australia’s coal miners seek higher contract prices

G7 summit defers price capping of Russia oil

OPEC production close to maximum capacity

China’s northern grid regions hit record load

China probes coal price manipulation (trans.)

Triple La Niña event possible in 2022 (trans.)

EU28 GAS INVENTORIES are accumulating at a relatively rapid rate of +5.2 TWh per day, notwithstanding the recent interruptions of pipeline supplies from Russia, compared with an average rate of +4.8 TWh per day over the previous ten years: 

CHINA’s central-northern region stretching from Ningxia and Gansu in the west to Henan and Shandong in the east, but not including Beijing and the wider Jīng-Jīn-Jì metropolitan region, has been experiencing temperatures well above normal, leading to record electricity consumption in recent weeks. The map also shows below normal temperatures in the south where the monsoon rains have been unusually heavy:

JAPAN has called for electricity conservation especially in Tokyo as temperatures have risen more than +6°C above the long-term seasonal average in recent days and the strong air-conditioning and refrigeration demand has strained the availability of power supplies:

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Energy sanctions and the impact on prices for consumers

Four case studies from the coal and oil markets

John Kemp

10 June 2022

Conclusion: Energy embargoes increase prices paid by consumers significantly in the short and medium term unless there are alternative supplies readily available to make up the deficit.

Corollary: Boycotts are an attractive policy instrument when excess production capacity (actual or potential) allows energy from sanctioned sources to be replaced by non-sanctioned ones.

Case Study 1: Coal during the English Civil War (1643-1644)

By the mid-17th century, coal had replaced wood as the principal fuel for domestic heating and manufacturing in London and other towns near the east coast of England.

Production was concentrated in Newcastle and the northeast from where it was carried by ship down the coast to London and other major consumption centres in the south.

But in January 1643, Parliament, based in London, banned ships from fetching coal from Newcastle, under royalist control, to deprive King Charles I of revenues and shipping with which to wage war.

Parliament had been assured by Scotland’s coal owners sufficient alternative supplies would be forthcoming to make up the deficit, but this proved incorrect.

Wholesale prices in London doubled to 30-40 shillings per ton in 1643/44 from 15-16 shillings before the ban in 1640.

In response, Parliament and the Lord Mayor and Aldermen of the City of London attempted to fix maximum prices, but this was unsuccessful.

Parliament imposed a forced loan on ship owners and consumers of coal to raise funds for the capture of Newcastle, and the City imposed a levy to raise funds to provide coal for the poor.

“Profiteering continued, and there was seen to be no substitute for north of England coal,” according to historian John Nef.

In June 1644, the Venetian ambassador warned the loss of coal shipments “will be unbearable next winter, as they have felled most of the trees” around London to meet the shortage the previous winter.

In July 1644, the ambassador predicted “there will be riots this winter” unless coal shipments from Newcastle resumed.

The coal shortage was relieved when a Scottish army, encouraged by Parliament and promised income from future coal sales, captured Newcastle in October 1644 and shipments to London resumed.

Sources:

Rise of the British Coal Industry (Volume 2) (Nef, 1932)

Declaration of the Lords and Commons Concerning Coals and Salt (1642)

The English Coasting Trade 1600-1750 (Willan, 1967)

History of the British Coal Industry (Volume 1) (Hatcher, 1993)

Case Study 2: Oil during the Iranian embargo 1951-54

Following nationalisation of the Anglo-Iranian Oil Company in 1951, Britain boycotted crude and fuel sales from Iran, and was later joined by most other western-owned oil companies.

In 1950, Iran had produced 660,000 b/d of crude, amounting to 7% of total production in the Western World, of which 150,000 b/d were exported and 510,000 b/d processed at the Abadan refinery.

Abadan was the world’s largest refinery and supplied one-quarter of all the refined products outside the Western Hemisphere.

Nearly all output from Abadan was exported (489,000 b/d) with most of the rest accounted for by the refinery’s own consumption (20,000 b/d) and only small volumes used domestically (1,000 b/d).

The boycott’s impact on crude oil supplies and prices was limited because Iran’s crude oil exports were relatively small and easily replaced from other sources.

Crude production from other countries in the Middle East (Kuwait, Saudi Arabia and Iraq) had already  been increasing rapidly and accelerated further once the boycott was imposed.

Iran’s production declined by -31 million long tons between 1950 and 1952 but that was more than offset by increases from Kuwait (+20 million tons), Saudi Arabia (+15 million) and Iraq (+12 million).

There were also large increases in production in the rest of the world (+69 million tons) mostly from the Caribbean and the United States.

But the impact on refined fuel supplies especially aviation gasoline, kerosene and residual fuel oil east of Suez, was much more severe.

Lost output from Abadan had to be replaced by increased refinery processing in the United States and the Caribbean and to a smaller extent in Western Europe.

Much longer supply routes from western refineries to markets east of Suez strained available tanker capacity.

In response, tanker transport and foreign fuel marketing was coordinated by international oil companies with direction from the U.S. government.

“The Voluntary Agreement Relating to the Supply of Petroleum to Friendly Foreign Nations” was created by the U.S. government to permit the exchange of information and coordination of supplies.

Under the Voluntary Agreement, which conferred antitrust immunity, a Foreign Petroleum Supply Committee involving the international oil companies was organised to coordinate supplies.

During the boycott, the British-owned Anglo-Iranian Oil Company brought legal proceedings against oil buyers breaching the boycott for trafficking in stolen property.

Japanese companies were reported to have purchased Iranian oil at discounts of as much as 50% to the official price.

The boycott was eventually lifted in 1954 when the Anglo-Iranian Oil Company was replaced by an International Consortium, with the agreement of all parties.

Sources:

Oil in the Middle East: Discovery and Development (Longrigg, 1968)

Middle East Oil Crises and Western Europe’s Oil Supplies (Lubell, 1963)

Probable Developments in Iran through 1953 (NIE-75/1) (Central Intelligence Agency, 1953)

History of the British Petroleum Company (Volume 2) (Bamberg, 1994)

Case Study 3: Oil sanctions on Iraq 1990-1996

Following the invasion of Kuwait in 1990, the United Nations imposed a comprehensive economic embargo on Iraq (Security Council Resolution 661) including a prohibition on oil sales.

Iraq’s production declined by -90% from 2.8 million b/d prior to the invasion to 280,000 b/d in 1991 and remained stuck around 500,000 b/d until the oil-for-food program was launched in late 1996.

Initially, the loss of output from Iraq (-2.6 million b/d) and occupied Kuwait (-1.4 million b/d) caused real oil prices to more than double between June and September 1990.

But following the release of IEA strategic petroleum reserves and the successful expulsion of Iraqi forces from Kuwait, prices had roughly reverted to pre-invasion levels by March 1991.

Other Middle East producers proved willing and able to increase their production to offset the losses from Iraq and Kuwait and later from Iraq-only under sanctions.

Iraq’s output fell by -2.3 million b/d between 1989 and 1996 but that was more than offset by output from other producers in the Middle East which increased by +6.6 million b/d over the same period.

Total Middle East production increased by +4.3 million b/d between 1989 and 1996 and global output was up by +5.7 million b/d, despite sanctions on Iraq, minimising the impact on prices.

As a result, the period of most intense sanctions on Iraq during the early and mid-1990s was characterised by relatively low and stable prices for consumers.

Sources:

Statistical Review of World Energy (BP, 2021)

Case Study 4: Oil sanctions on Iran 2012-2015 and since 2018

The United States has imposed multiple rounds of  sanctions on Iran since the revolution of 1979 but the most intense restrictions on oil exports were in force between 2012 and 2015 (when sanctions were also imposed by the European Union) and since 2018 (when the United States terminated its participation in the Joint Comprehensive Plan of Action).

During the most intense period of sanctions, Iran’s oil exports were reduced by up to -1.4 million barrels per day, according to estimates compiled by the U.S. Congressional Research Service.

The sanctions-driven reduction in Iranian exports (actual and prospective) likely contributed to the period of very high prices between 2011 and 2014 and more moderately in 2018.

Real Brent prices averaged $120 between 2011 and 2014, the highest in the history of the oil industry, and were also comparatively high in 2018 compared with 2015-2017 and 2019.

But sanctions on Iran also coincided with the first and second shale drilling booms in the United States which resulted in very rapid growth in U.S. oil production.

U.S. oil production increased by an average of +1 million b/d each year between 2012 and 2014 and by an average of almost +1.5 million b/d each year in 2018 and 2019.

Rapid growth in U.S. production likely emboldened U.S. policymakers to impose stringent sanctions on Iran as well as blunting their impact on prices.

The entire period spanned by sanctions since 2011 also saw very large increases in output from other producers in the Middle East.

Between 2011 and 2019, production increased in Iraq (+2.0 million b/d), Saudi Arabia (+0.8 million b/d) and the United Arab Emirates (+0.7 million b/d) more than offsetting losses from Iran.

Knowing alternative supplies were available, including from domestic producers, likely encouraged the Obama and Trump administrations to pursue more stringent restrictions on Iran’s oil exports.

Stringent sanctions on Iran contributed to high prices for consumers but the impact was moderated over time by growing output from other Middle East producers and especially the U.S. shale industry.

Sanctions on Iran were an important spur for the shale revolution; conversely, the shale boom and reintegration of Iraq into global markets helps explains the severity of U.S. and international sanctions.

Sources:

Iran sanctions – Report for Congress (U.S. Congressional Research Service, 2022)

Statistical Review of World Energy (BP, 2021)

Best in Energy – 30 May 2022

Russia threat to respond to sanctions with output cuts

Global oil flows re-route around Russia sanctions

U.S. seasonal gasoline prices highest since 2012

EU struggles to agree Russia oil sanctions

India’s coal shortage to worsen

Iran seizes two oil tankers ($FT)

EUROPE’s gas storage is filling at the fastest rate on record, and now holds above-average volumes, as utilities try to accumulate inventories ahead of a possible shut off of imports from Russia next winter, and high prices attract heavy LNG inflows away from Asia while discouraging industrial consumption:

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Best in Energy – 24 May 2022

U.S. president’s statements on Taiwan

Biden insists no change in Taiwan policy

U.S. Northeast distillate fuel oil shortage

U.S. Northeast home heating oil reserve

White House examines diesel release

Russia’s crude oil increasingly stuck at sea

LNG flows set to shift from Europe to Asia

Russia’s oil production declines ($BBG)

Amazon to sublet excess storage ($WSJ)

Sri Lanka raises fuel prices sharply

Iran/Venezuela increase oil cooperation

U.S. household finances strong at end 2021

U.S. EAST COAST distillate fuel oil inventories have fallen to just 22 million bbl compared with a pre-pandemic five-year seasonal average of 43 million bbl. Regional inventories have depleted to the lowest level since records began in 1990, leading to intense upward pressure on regional fuel prices:

U.S. DISTILLATE prices have been at a record premium to crude but the shortage is increasingly bleeding into gasoline inventories and prices as well as refiners try to boost output of diesel and jet fuel:

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Best in Energy – 3 May 2022

India plans to accelerate coal imports

EU lacks effective minerals strategy

Germany warns of recession risk ($FT)

EU sanctions threaten recession ($BBG)

NATO’s war aims become bolder ($WSJ)

Carbon capture – where is it working?

India’s heatwave in third month ($BBG)

China’s epidemic and economy (trans.)

China becomes world’s top gas importer

U.S./Iran nuclear talks hit impasse

India’s cooking oil imports at risk

Arsenal of democracy’ (Roosevelt 1940)

INDIA’s temperatures have been consistently above the long-term seasonal average in the north and west of the country since March 13, driving record demand for refrigeration and air-conditioning. In New Delhi’s Palam suburb, cooling demand has been 43% higher than normal since the start of the year:

INDIA’s daily peak electricity consumption hit a new record of 207,000 megawatts last week as the heatwave boosted demand:

INDIA’s power generators held coal stocks equivalent to just 8 days worth of consumption at the end of April, compared with 12 days at the same point in 2021 and 18 days in 2019, as record power generation has made it hard to rebuild inventories after they were severely depleted in 2021:

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