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 – 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 – 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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Best in Energy – 23 March 2022

Fed’s narrow path to a soft-landing*

Russia sanctions risk diesel shortage

U.S. imports of petroleum from Russia

Russia’s oil exports and global economy

China’s plan for hydrogen development

White House options to cut fuel prices

Russia cuts pipeline oil flows after storm

U.K. inflation rate accelerates to 6.2%

* The Fed’s aggressive rate rises in 1994 helped create a government debt funding crisis in Mexico forcing a devaluation of the peso at the end of the year (the “tequila crisis”). The U.S. central bank was caught unaware (see Fed minutes from an emergency conference call held on Dec. 30, 1994). Rapid interest rate rises in the United States tend to induce extreme stress in the more peripheral and obscure parts of the international system. In 1994, it was the Mexican government’s increasingly heavy reliance on funding its operations with short-duration dollar-linked bills known as “tesobonos” that had to be constantly rolled forward. The causes of the peso crisis was my first semi-serious piece of research when I had to write a 15,000-word thesis on it for my university finals in 1996.

BRENT spot prices and calendar spreads are ratcheting higher again as traders anticipate a prolonged conflict in Ukraine and therefore a prolonged disruption of Russia’s petroleum exports, coupled with the lack of spare capacity in the global oil supply system, leaving it increasingly vulnerable to any more shocks:

U.S. GASOLINE prices have started to converge with Brent after the supply chain was shocked by Russia’s invasion of Ukraine. But retail prices are still rising at one of the fastest rates for 30 years, increasing by around 20% over the last four weeks, which is in the 99th percentile for all four-week periods since 1993:

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