EUROPE’s gas futures summer-winter calendar spread for July 2023 to January 2024 has slumped into an increasingly wide contango as traders anticipate a record carryover over inventories from winter 2022/23 which will leave the storage system short on space. Lower gas prices in summer 2023 will encourage more consumption by power generators and major industrial users. Higher prices may still be needed to restrain consumption during the peak of next winter:
U.S. OIL DRILLING has started to slow in response to the fall in prices since the middle of 2022. The number of rigs drilling for oil was just 609 on January 27 down from a cyclical high of 627 on December 2:
* 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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