GLOBAL INDUSTRIAL PRODUCTION was essentially flat in December 2022 compared with December 2021, as output deteriorated through the latter part of 2022 in response to rising inflation, faltering consumer and business purchases of merchandise, and efforts to reduce excess inventories. Output growth has slowed to rates consistent with the onset of recessions in 2001, 2008 and 2020, though also with mid-cycle slowdowns in 2012 and 2015 from which the economy re-accelerated:
FRANKFURT, a proxy for northwest Europe, reached roughly 60% of the way through the winter heating season on February 1. So far the accumulated heating demand has been -17% below the long-term average and is the lowest since 2015/16 and before that 2006/07. But after an exceptionally long period of mild temperatures between December 19 and January 15, temperatures have turned significantly colder, causing the heating deficit to narrow slightly:
¹ Failure of coal and gas-fired generators to start up when instructed by the grid because of instrument and equipment freezes has been a recurrent problem and major cause of power failures during extreme cold weather episodes in the last several decades. Failure to start has meant actual generation available has been much lower than forecast, reducing reserve margins and forcing rotating blackouts to restore margins to safe levels.
THE FUNDAMENTALS of commodity trading have not changed in 2500 years, illustrated by this quote about China’s commodity merchants taken from the Guan Zi, which purports to be a dialogue between Lord Huan of Qi and his powerful chief minister Guan Zhong in the Spring and Autumnperiod (771-481 BCE) but probably a compilation of traditional knowledge written during the Warring States period (481-221 BCE):
“Merchants observe outbreaks of dearth and starvation, scrutinize changes in the fortunes of states, study the patterns of the four seasons, and take notice of what goods are produced in each place. With this knowledge of prices in the marketplace, they gather up their stock of goods, load them on oxcarts and horses, and circulate throughout the four directions. Having reckoned what is abundant and what is scarce and calculated what is precious and what is worthless, they exchange what they possess for what they lack, buying cheap and selling dear … Marvellous and fantastic things arrive in timely fashion; rare and unusual goods readily gather. Day and night thus engaged, merchants tutor their sons and brothers, speaking the language of profit, teaching them the virtue of timeliness, and training them how to recognise the value of goods.”
Guan Zi: Political, Economic and Philosophical Essays from Early China (Rickett, 1985) cited in The Economic History of China: From Antiquity to the Nineteenth Century (von Glahn, 2016)
EUROPE’s gas prices are falling and the futures curve has shifted into contango as inventories remain very high for the time of year and traders no longer anticipate any risk of a shortage before the end of winter 2022/23. The end-of-winter March-April 2023 calendar spread is trading in a contango of more than €1.20/MWh down from a backwardation of €9.70 at the end of September:
NORTHERN EUROPE is forecast to experience colder-than normal temperatures through the first half of December, which will boost gas and electricity consumption. The European Centre for Medium-Range Weather Forecasting is predicting colder-than-average seasonal temperatures for the weeks from December 5 to 12 (first chart) and December 12 to 19 (second chart):
U.S. MANFACTURERS reported business activity started to decline last month, for the first time since the first wave of the pandemic. The ISM composite index slipped to 49.0 in November (22nd percentile for all months since 1980) from 50.2 in October (31st percentile) and 60.6 a year ago (96th percentile).
Manufacturing growth has decelerated progressively this year and activity now shows the first sign of falling in absolute terms. Firms signalled a further decline in new business last month. The new orders component slipped to just 47.2 in November from 49.2 in October and 61.4 a year ago. It is well-below the threshold dividing expanding activity from a contraction – implying activity is likely to slow further over the next few months:
Japan appeals for winter electricity conservation ($BBG)
U.S. EAST COAST distillate fuel oil inventories were just 24 million barrels on October 21, compared with a pre-pandemic five-year seasonal average of 50 million barrels. The East Coast deficit (-26 million bbl) accounted for nearly all the nationwide deficit (-29 million bbl):
WESTERN EUROPE’s gas consumptionwas down in August and September by 14-15% compared with the pre-pandemic seasonal average for 2015-2019, as a result of high prices, industrial closures, a slowing economy, and energy conservation measures:
U.S./China navy competition and Northern Sea Route
EUROPEAN GAS OIL calendar spreads between December 2022 and December 2023 have fallen into a backwardation of less than $11 per barrel from almost $33 in mid-June, as traders anticipate the onset of a recession depressing consumption:
JAPAN LNG STOCKS at the end of May had risen to 2.36 million tonnes, the highest for the time of year for at least seven years, as the country’s utilities accumulate inventories to protect against possible supply disruptions in winter 2022/23:
IF YOU would like to receive best in energy plus my research notes every day, you can add your email to the circulation list here: https://eepurl.com/dxTcl1
U.S. REAL FINAL SALES to private domestic purchasers were unchanged in the second quarter after advancing at an annualised rate of +3.0% in the first, confirming the economic slowdown that has been evident for some time. Real final sales to private domestic purchasers (RFSPDP) strips out the impact of inventory changes, government spending and trade to focus on the underlying behaviour of households and businesses and is therefore the best indicator of underlying economic momentum. RFSPDP was growing at the slowest rate since the first wave of the pandemic in 2020 and before that the recession of 2008/09:
IF YOU would like to receive best in energy plus my research notes every day, you can add your email to the circulation list here: https://eepurl.com/dxTcl1
CYCLICAL INDICATORS: three of the top five stories featured on the front page of the Wall Street Journal on Wednesday are about slower sales, slower corporate earnings and slower hiring:
CATERPILLAR’s share price in the three months from May to July was down by -13% compared with the same period a year ago. The heavy equipment manufacturer’s share price has been closely correlated with the OECD’s leading economic indicator. The slump is consistent with the onset of a business cycle slowdown:
IF YOU would like to receive best in energy plus my research notes every day, you can add your email to the circulation list here: https://eepurl.com/dxTcl1
¹ Physical crude markets are prompt cash markets and reflect the balance of production, consumption and inventories now. Financial markets reflect expectations about how production, consumption and inventories will evolve over the next 6-12 months or so and are anticipating a recession in future. There is only one price of oil. But near-term shortages are consistent with anticipating future surpluses as a result of an economic slowdown. The current strongly backwardated market structure implies oil is in very short supply right now (which has been evident from large and persistent inventory draw downs) but is expected to be more plentiful in 6-12 months time (as a result of an economic slowdown dampening oil consumption). The price structure embodies the cyclical behaviour of production, consumption, inventories and price levels:
LONDON temperatures continue to rise with the temperature at Heathrow reaching 36.3°C on July 18 up from a high of 30.6°C on July 17, with a further build in heat expected today:
U.K. POWER GRID is relying heavily on gas-fired generation to meet demand during the heatwave. Combined-cycle gas turbines (CCGTs) have been supplying around 50% of total domestic generation in recent days:
IF YOU would like to receive best in energy plus my research notes every day, you can add your email to the circulation list here: https://eepurl.com/dxTcl1
JKempEnergy.com 