Best in Energy – 1 July 2022

Shipping lines cancel more ocean sailings as demand falls

Friendshoring starts to reshape minerals supply chains

OPEC+ tries to maintain unity despite U.S. pressure

Baltic grid operators ready for rapid re-synchronisation

Russia plans for nationalisation of Sakhalin-2 gas project

U.S. Supreme Court curbs authority of regulatory agencies

Japan faces power shortages throughout summer ($WSJ)

China starts west-east electricity transmission line (trans.)

Coal’s resurgence sends prices soaring ($FT)

U.S. DISTILLATE FUEL OIL supplied to the domestic market averaged 3.68 million b/d in the four weeks ending on June 24 down from 3.88 million b/d in the same period last year. The volume supplied is an estimate subject to considerable short-term errors and volatility so it should be interpreted with extreme caution. But the reduction of -0.2 million b/d is relatively large and would be consistent with the onset of an economic slowdown:

EUROZONE MANUFACTURERS reported a much narrower increase in business activity this month as inflation and sanctions push the region’s economy towards recession. The purchasing managers’ index slid to 52.1 in June (47th percentile for all months since 2006) down from 54.6 in May (65th percentile) and 63.4 in June 2021 (a record):

U.S. REAL PERSONAL INCOMES less transfer payments (PILT) were up by just +1.8% in May compared with the same month a year earlier. PILT is one of the indicators monitored by the National Bureau of Economic Research’s Business Cycle Dating Committee to determine peaks and troughs in the cycle. PILT growth has been slowing since the start of the year and is now in only the 30th percentile for all months since 1980, implying the economy is losing momentum as inflation outstrips earnings:

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Best in Energy – 29 June 2022

Aramco’s disputed maximum output capacity ($BBG)

Copper prices fall to 16-month low on recession fears

G7 leaders try to design a price cap for Russia oil ($FT)

G7 officials negotiate price cap with India and China

Murban front-month spread at record $9/bbl ($BBG)

U.K. plans to halt gas flows to Europe in a crisis ($FT)

China’s northern drought and southern floods (trans.)

U.S. energy and employment in 2021

U.S. FINANCIAL CONDITIONS are tightening at the fastest rate for more than 40 years, according to the Federal Reserve Bank of San Francisco (“Policy nimbleness through forward guidance”, FRBSF, June 28):

LONDON’s coal market in the late 1830s and early 1840s saw the last and most ambitious in a long line of attempts to restrict supply to keep up prices. The volume of coal sold each day on the city’s coal exchange was linked to prevailing prices on a sliding scale. If prices rose, more coal was sold. If prices fell, a smaller volume was offered for sale. An example of the sliding scale from February 1837 is reproduced below. The “limitation of the vend” was managed by the London coal factors acting on behalf of and in conjunction with the coal mine owners of the Northeast.

The system was possible because cargoes of coal carried by ship from the Northeast to the Port of London could only be sold and unloaded in strict order of arrival. Regulations enforced by the port authorities and the coal factors themselves required unsold and unloaded ships to wait their turn in the lower reaches of the river. Ships could only proceed to the “legal quays” or for lightering from midriver in the Pool of London once the factors had arranged a sale and the city’s metering office (which measured and later weighed the cargos) had assigned a metering officer.

The coal owners were organised in a series of coal trade committees which forecast demand and allocated output among the mines. The London factors had their own society which managed the rules of the turn system, the market, and the sliding scale as well as reporting on market conditions and cheating efforts to the coal trade committees (“Sea coal for London”, Smith, 1961).

The “limitation of the vend” and the “turn” system eventually broke down in the early 1840s in the face of increased supply from new sources in the Northeast and other parts of the country. At the same time, increasing numbers of vessels avoided the costly wait for sale and unloading because they were delivering cargoes for the government or the rapidly growing gas-manufacturing companies. Instead of waiting for sale after arrival in the port, more and more cargoes were sold prior to arrival and in some cases even before loading in the Northeast.

Before the system collapsed, the queue of unsold and unloaded ships in the river, which could amount to hundreds of vessels at a time, stuck for days or even weeks at a time, rafted along both banks from London Bridge down to Greenwich, with more queued downriver in sections managed by the harbour master all the way to Gravesend, attracted adverse attention from consumers, the city government and parliament, especially at times of high and rising prices, triggering multiple enquiries into anticompetitive practices.

Half-hearted efforts to resurrect the system in the later 1840s and early 1850s were unsuccessful because the system of supplying coal by ship faced rapidly growing competition from the delivery of coal by the new railways to the metropolis. Rail deliveries were not covered by the ship-based system of waiting turn or the sliding scale. The rail network also opened up new inland sources of coal supply in Yorkshire, Durham and the Southwest to compete with the traditional producers in the Northeast, overwhelming efforts at market management.

Development and deployment of steam-powered coal ships rapidly displacing the traditional sailing ships from the early 1850s onwards also made a return to the turn system impossible. Steam-powered ships were faster, larger and needed fewer crew members so they were cheaper to operate. But they were also more capital intensive so their profitability depended on maximising time spent voyaging and minimising delays loading and unloading. Steam-driven ships could not afford to wait their turn for sale and unloading. Many were contracted to gas companies, which had always been exempt from the turn system, and often bought direct from the mine owners in the Northeast, bypassing the factors and the coal exchange. The rest usually voyaged with orders to sell immediately on reaching the port – or the cargo had already been sold before they were even loaded.

The limitation of the vend and the turn system is a fascinating case study in the how to make a cartel work and the problems that can cause it to break down, anticipating many of the practices and challenges faced by the Organization of the Petroleum Exporting Countries (OPEC) and the wider group of exporters (OPEC+).

Rough procedure for sale of coal in London during the late 1830s and early 1840s under the limitation of the vend and turn system:

  • Coal Trade Committee of major mine owners in the Northeast of England forecasts coal demand;
  • Total coal production apportioned between mines according to quotas;
  • Coal mine owner sells coal to ship owner at the quayside in Northeast of England;
  • Ship owner conveys cargo down east coast to Thames Estuary;
  • Ship reports to Coal Factors’ Office at Gravesend;
  • Ship given turn number based on strict order of arrival;
  • Ship’s papers and cargo details expressed by steamer or horse to London;
  • Ship also reports to Harbour Master at Gravesend for section order;
  • Ship directed to one of seven sections in the Lower Thames between Northfleet and Blackwall to wait turn;
  • Cargoes for the government or for gas-manufacturing companies sent direct to unloading wharves, thereby avoiding turn keeping;
  • Cargo registered with both the Coal Exchange and with Metering/Weighing Office ;
  • Cargo entered into both the Sales Turn and the Metering Turn lists;
  • Ships can appeal to magistrate for immediate unloading on safety grounds;
  • Ships caught cheating sent to bottom of sales and/or metering lists;
  • Coal Factor appointed by coal mine owner files paperwork with Customs and Lord Mayor’s office and pays bond;
  • Cargo waits turn for sale with the number of cargoes sold each limited according to prevailing prices on a sliding scale;
  • Cargo sold on Coal Exchange by Factor to a professional First Buyer;
  • Coal Meter/Weigher appointed to measure the volume of cargo as unloaded;
  • Ship given permission to proceed upriver to the Lower Pool for unloading;
  • Unloading gang appointed by the owner of one of the local pubs*;
  • Metering officer and unloading gang actually unload cargo at specified minimum rate per day;
  • Payment terms: one-third cash, one-third in note payable in sixty days, one-third in four days after sale;
  • Coal Factor notifies coal mine owner of completion of sale in accordance with obligations;
  • Ships caught deviating from the system refused future cargoes by sellers in the Northeast;
  • Ship returns to the Northeast to collect next cargo;
  • Coal Factors Society sends regular report on market conditions to coal owners in the Coal Trade Committee.

* Not a joke. Gangs got hired on the understanding they would spend a large part of their earnings in the pub. There were 70 public houses between the Tower of London and Limehouse where men who wanted to work would assemble. “He who spent most at the public house had the greatest chance of work” (“London labour and the London poor”, Mayhew, 1851).

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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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Best in Energy – 27 June 2022

Russia/EU clash over routine gas pipeline maintenance

EdF/Engie/Total call for immediate energy conservation

U.S. shale producers turn to refracturing existing oil wells

Germany’s chemicals firms contemplate shutdown ($WSJ)

Bank for International Settlements annual economy review

Southwest Airlines’ fuel hedging ($FT)

U.S. OIL AND GAS rig count rose +13 to 753 last week as higher prices spur exploration and production companies to contract more drilling teams. The number of active rigs has climbed by +509 from the cyclical low in August 2020 and is only -40 below the pre-pandemic level in March 2020. The number of active oil rigs is still -88 below the pre-pandemic level but gas rigs are already +48 above the March 2020 level.

Oil and gas drilling is exhibiting a fairly normal cyclical recovery, though it is unfolding slower than other recent recoveries because some of the larger exploration and production companies have been constraining drilling and production programmes to keep prices high and boost returns to shareholders:

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Best in Energy – 23 June 2022

Germany declares stage two gas emergency

(see official statement in translation)

U.S. presses EU to relax oil sanctions ($WSJ)

Biden requests three-month fuel tax holiday

Biden’s broken relations with oil and gas firms

Supply constraints trip up policymakers ($FT)

Batteries for grid storage – beyond lithium ion

EUROPEAN manufacturers are on the leading edge of a recession. Preliminary readings show the eurozone purchasing managers’ index has slipped to 52.0 (47th percentile) down from 54.6 (65th percentile) in May and a record 63.4 in the same month a year ago:

U.S. GASOLINE SUPPLIED averaged 8.86 million b/d in March 2022 compared with 9.18 million b/d in March 2019 (-328,000 b/d, -3.6%).

U.S DISTILLATE SUPPLIED averaged 4.16 million b/d in March compared with 4.18 million b/d in March 2019 (-23,000 b/d, -0.5%).

The differential recovery in distillate and gasoline consumption after the pandemic helps explain the relative shortage of diesel, as well as jet fuel, and why mid-distillate crack spreads and prices have been pulling the whole petroleum complex higher:

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Best in Energy – 22 June 2022

U.K. energy supplier failure has cost £2.7bn

India urges refiners to buy Russia oil ($WSJ)

China’s northern heatwave and southern floods

OPEC’s spare capacity decision ($BBG)

Thailand reduces LNG imports ($BBG)

Xilodu hydropower station (trans.)*

Xiangjiaba hydropower station (trans.)*

* The Xilodu (13.9 GW) and Xiangjiaba (7.8 GW) mega-dams on the Jinsha River between the provinces of Sichuan and Yunnan have almost as much combined generation capacity as the much more internationally famous Three Gorges hydropower station (22.5 GW). Hydro generation on the Jinsha plays a critical role in power supply for the southern export manufacturing hub around the Pearl River delta (including Guangzhou, Shenzhen and Hong Kong) as well long-distance power transmission to Shanghai. Southern rainfall and reservoir levels are therefore critical for electricity availability and the region’s demand for coal from the north.

EU28 GAS INVENTORIES increased by an average of +5.6 TWh per day over the seven days ending on June 20, decelerating from more than 7.4 TWh per day in the middle of May. But storage has filled at a record rate this year and the pace of injection was clearly unsustainable; some slowdown in the rate of injection was therefore anticipated. Inventories are +35 TWh (+6% or 0.25 standard deviations) above the ten-year seasonal average. The impact of Russia’s supply reductions to Europe cannot (yet) be identified in the data:

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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 – 14 June 2022

Pakistan hit by long blackouts as EU diverts LNG ($BBG)

Northeast Asia’s tepid LNG imports offset Freeport blast

U.S. shale producers opt not to accelerate drilling

U.S. finances construction of rare earths plant

Yang/Sullivan hold another round of talks (trans.)

(see also far briefer statement from White House)

U.S. INTEREST RATE traders expect the federal funds rate to reach 3.50-3.75% by January 2023 up from 0.75-1.00% at present as the central bank attempts to bring inflation under control. If they prove necessary, increases on this scale would result in a significant slowdown in the business cycle:

DATED BRENT calendar spreads are signalling exceptional tightness over the next two months. The extreme backwardation is consistent with the disruption of Russia’s exports and the maintenance season for platforms, pipelines and fields in the North Sea. But it could also be a sign the market is being squeezed. Strong fundamentals create ideal conditions for a squeeze. “Always squeeze with the grain of the market not against it,” as a veteran trader told me over lunch many years ago:

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Best in Energy – 13 June 2022

Reuters has launched a new twice-weekly newsletter called Power Up curated by my talented colleague David Gaffen. It covers all Reuters’ top energy stories. If you would like to receive it, you can add your email to the distribution list here: https://www.reuters.com/newsletters/reuters-power-up/

Oil price shock to persist into 2023 ($BBG)

Oil prices expected to rise further ($FT)

U.K. government orders fuel price inquiry

U.S. refinery processing likely to accelerate

U.S. Midwest at risk of blackouts for years

Food versus biofuel – land competition ($FT)

U.S. TREASURY yield curve between two-year and ten-year notes has flattened again in response to faster inflation. Traders anticipate the central bank will have to engineer a harder landing for the economy to bring price increases under control:

BRITAIN’s economy has started to contract as surging inflation hits household and business spending. Real output fell or was flat in four of the five months between December and April. The other major European economies, which publish data with longer delays and less frequency, are probably also on the leading edge of a recession:

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)