Best in Energy – 25 October 2022

Freight season on course to be very weak

U.S./Saudi strains between leaders ($WSJ)

Nord Stream blasts and insurance claims

U.S. fertilizer exports surge

U.K. plan for warming centres ($BBG)

EUROPE’s maturing benchmark gas futures contract for November is falling rapidly as storage becomes full and the weather is forecast to remain mild. Prices for November delivery slipped to €99 per megawatt-hour (MWh) on October 24 down from €200 a month earlier. Mid-winter prices for January have remained higher at €143 compared with €200 a month ago. The extreme contango is symptomatic of storage becoming nearly full and the need to encourage more consumption by power generators and consumers in the short term, while concerns persist about availability in the middle and later stages of winter:

Best in Energy – 7 October 2022

U.K. electricity winter reliability forecast

U.S./Saudi standoff over oil policy ($FT)

White House fury with oil output cut ($BBG)

France outlines plan for “energy sobriety”

Nord Stream inquiry confirms sabotage

Texas electricity market and volatility

Houston and energy system transition

Luck more important than talent ($WSJ)¹

¹ Luck plays a more important role in determining individual success than talent, according to the study authors. But individuals have to be ready and open to grasp opportunities. The best strategy to maximise the probability of success is therefore “expose, explore, exploit,” which seems sound advice.

GERMANY’s industrial production was down -4.5% in the three months from June to August compared with the same period in 2019 before the coronavirus epidemic. The economy is struggling with multiple shocks stemming from Russia’s invasion of Ukraine, sanctions, gas shortages, higher energy and raw materials prices, and persistently sluggish growth in China:

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Best in Energy – 30 September 2022

EU divided on capping price of imported gas

U.S. commercial real estate’s energy efficiency

Netherlands’ inflation hits 17% in September

U.S. hiring strong despite sluggish GDP ($WSJ)

Nord Stream was sabotaged says NATO ($WSJ)

U.K. currency and debt market in crisis ($WSJ)

U.K. pension funds received margin call ($BBG)

Oil traders hunt for price floor

Low Earth Orbit satellites are proliferating

CHINA’s currency is trading close to its lowest level against the dollar since 2008 as U.S. interest rates rise while China’s economy struggles to end the cycle of coronavirus lockdowns:

CHINA’s manufacturers reported a slight increase in business activity this month after declines in the two prior months. The purchasing managers’ index rose to 50.1 (24th percentile for all months since 2011) in September from 49.4 (7th percentile) in August and 49.0 (2nd percentile) in July. The economy appears to have stabilised but is not growing significantly as a result of repeated city-level lockdowns and travel restrictions:

U.S INITIAL UNEMPLOYMENT claims fell to 193,000 last week, implying the labour market remains very tight, which will likely keep upward pressure on interest rates:

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Best in Energy – 29 September 2022

Germany says gas consumption too high

German economists predict recession in 2023

Rotating blackouts could hit cell service¹

California’s demand response in heatwave

China says yuan stable and healthy (trans.)²

Lebanon forced to devalue currency ($FT)

Nord Stream: too early to conclude sabotage

Nord Stream fourth leak discovered ($BBG)

Nord Stream who sabotaged the lines? ($FT)

Hydrocarbon investment in energy transition

Global spending on advertising is falling

¹ Fixed line telephone systems carried their own electricity supply so the network would remain operational during power cuts. From this story it appears cell towers rely on the public distribution system and have not (yet) been prioritised in the same way as hospitals and other essential customers to ensure they remain operational during rotating power cuts. It is a classic example of how complexity and the unplanned evolutionary growth of networks can lead to the fusion or “coupling” of formerly separate systems, unintentionally creating a single point of failure (“Normal accidents”, Perrow, 1999). It is also an example of how the failure of the petroleum, gas or electricity networks can result in the failure of other systems critical to the functioning of a modern economy and society (“Brittle power”, Lovins and Lovins, 1982).

² If a government or a business or any other organisation has to say publicly everything is okay, or some variant, that’s an important sign of problems and stresses. If it really was okay, there would be no need to say it. Do don’t say. So statements such as this are important markers thought not in the way policymakers intend.

U.S. PETROLEUM inventories depleted by -13 million barrels last week, the largest decline this year. Drawdowns included crude (-5 million barrels), gasoline (-2 million), jet fuel (-2 million) and distillate fuel oil (-3 million). Petroleum inventories have depleted in 86 out of the last 117 weeks by a total of -464 million barrels since the start of July 2020. Distillate inventories are just 114 million barrels, the lowest for the time of year since 1996:

Best in Energy – 28 September 2022

U.S. Treasury 10-yr yields surge to 4% (%WSJ)

Russia/NATO nuclear escalation calculations¹

Nord Stream pipelines sabotaged says EU

Nord Stream pipelines sabotaged ($BBG)

Nord Stream pipelines sabotaged ($FT)

Nord Stream pipelines sabotaged (trans.)

Solar generation – global deployment

Iran morality police pulled off streets ($FT)

¹ “On Escalation: Metaphors and Scenarios” (Kahn, 1965 and 2010) remains the best guide to escalation strategies (escalation ladders, escalate-to-negotiate, escalation pauses and escalation dominance) including the role of tactical and strategic nuclear weapons in conflict. I can highly recommend it as a guide to the current Russia/NATO conflict over Ukraine but also the U.S./Iran conflict in the Persian Gulf and the U.S./China conflict centred on Taiwan.

The taboo on the use of nuclear weapons is strong but has never been as absolute as opinion-formers have implied in public. Both the USSR and USA/NATO actively planned for the use of nuclear weapons in scenarios short of mutually assured destruction. Tactical and strategic nuclear weapons have always been a central part of NATO nuclear doctrine, including ambiguity on “first use”.

Nuclear weapons are also playing an increasingly central role in U.S./China strategic competition. China historically assigned a minor role to nuclear weapons but it is massively increasing its arsenal and delivery systems to give it more leverage and room for manoeuvre in any future conflict with the United States.

Some of the basic outlines of Kahn’s work on escalation can be seen in the table below (taken from page 39). The current Russia/NATO conflict has already escalated beyond the “nuclear war is unthinkable threshold” and reached the 14th or 16th rung on the ladder, with open speculation about breaching the “no nuclear use threshold” and climbing to the 21st-24th rungs or even the 26th-28th rungs:

U.S. TREASURY YIELDS on notes with 10-year maturity have climbed to 4.00% up from just 1.50% a year ago, the fastest increase since 1984. The rapid increase reflects expectations inflation will remain persistent and interest rates will remain higher for longer. The escalation in “risk-free” benchmark yields will force a re-pricing of all other assets and borrowing costs:

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