Best in Energy – 24 November 2022

China’s coronavirus cases hit record high

Russia tanker fleet too small to avoid price cap

China/India slow purchases of Russian crude

United States to relax Venezuela oil sanctions

Europe hit by high gas prices for years ($FT)

BRENT’s six-month calendar spread fell to a backwardation of just over $2 per barrel on November 23, down from almost $9 a month earlier, and a high of almost $22 in early March, shortly after Russia invaded Ukraine. The spread has been easing consistently for a month and has fallen to its lowest level since December 2021. The business cycle downturn is expected to offset production restraint by OPEC⁺ and U.S. shale firms while traders anticipate Russia’s oil exports will continue flowing despite sanctions and the planned price cap:

Best in Energy – 23 November 2022

[MUST READ] U.S. Treasury publishes regulations for Russia price cap

Vitol chief says price cap will divert flow to small traders

Iran’s leaders struggle to reach out to moderates ($WSJ)

South California vessel queue dissipates  ($WSJ)

China’s coronavirus controls are multiplying

China’s renewable generation hits record high

U.S./Canada gas flows support winter reliability

Europe’s business confidence slumps ($FT)

Selective self-deception is an important leadership skill, especially in politics and diplomacy, but sometimes leaders say things they must know to be untrue, and I’m reminded of the exchange between Alice and the White Queen in Lewis Carroll’s “Through the Looking-Glass”:

“I can’t believe that!” said Alice.

“Can’t you?” the Queen said in a pitying tone. “Try again: draw a long breath, and shut your eyes.”

Alice laughed. “There’s no use trying,” she said: “one can’t believe impossible things.”

“I daresay you haven’t had much practice,” said the Queen. “When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”

BRENT’s front-month futures price is trading close to the average since the start of the century once adjusted for inflation. The current price of around $87 per barrel is in the 54th percentile for all months since 2010 and the 47th percentile for all months since 2000:

Best in Energy – 22 November 2022

China hit by worst coronavirus outbreaks since April ¹

European Union proposes gas price cap, without figures

Australia’s gas consumers try to avoid high export price

Saudi Arabia boosts renewable power to export oil ($FT)

U.S./India diplomatic and economic relationship

¹ China has reported severe coronavirus outbreaks in megacities across the entire country, including Beijing and Tianjin in the northeast, Guangzhou in the southeast, and Chongqing in the southwest. Xinjiang in the northwest has been under semi-permanent lockdown for months. The central government’s lockdown and suppression strategy is failing to control transmission and disrupting the entire economy. But there is still no sign of an exit strategy that would enable the country to live with the virus, worsening the economic and oil consumption outlook for 2023.

BRENT calendar spreads for the first half of 2023 have softened significantly as traders anticipate a business cycle slowdown and China’s postponed re-opening from coronavirus will relieve some pressure on crude supplies and inventories:

Best in Energy – 18 November 2022

India’s coal-fired generation rises over 10%

China solar installers hit by lockdowns ($BBG)

China food and energy security focus (trans.)

Hess chief marks the end of shale revolution

U.S. heating oil prices up 65% from year ago

Australia’s changing defence strategy ($FT)

Qatar Energy – company profile and ($FT)

BRENT’s six-month calendar spread has fallen to a backwardation of $4.90 per barrel (95th percentile for all trading days since 1990) down from $7.60 (98th percentile) a month ago and a record over $15-20 in the first months after Russia’s invasion of Ukraine. The softening spread is consistent with a recession in Europe and China, possibly spreading across the rest of the world, easing pressure on oil supplies in 2023:

U.S. TREASURY yield curve is now more inverted between two-year and ten-year maturities than at any time since September 1981 at the start of the second instalment of the double-dip recession. U.S. interest rate traders anticipate an exceptionally rapid turn around in monetary policy. Such a rapid pivot is consistent with a soft-landing allowing the central bank to unwind rate rises quickly, or because a hard-landing eliminates inflation and requires it to support growth and employment instead:

Best in Energy – 16 November 2022

India’s refiners prepare for price cap from early December

China’s refiners request state aid on Russian crude ($BBG)

Europe’s energy crisis and supply security lessons ($BBG)

U.K. households and the increase in energy debts ($BBG) ¹

California ports report drop in container volumes ($WSJ)

Freeport LNG – root cause report on explosion

¹ Food and energy shortages have always been about prices and affordability rather than physical supplies and availability. Higher-income and wealthier households will always find ways to put food on the table and heat their homes, it is lower-income and poorer households that lack financial resources that are unable to cope and hit hardest (“Corn supply of ancient Rome”, Rickman, 1980).

SOUTHERN CALIFORNIA’s ports are experiencing a sharp drop in container traffic reflecting contentious labour negotiations and the threat of a strike as well as the slowdown in global merchandise trade and efforts by U.S. manufacturers and distributors to cut excess inventories. Combined container traffic through the neighbouring ports of Los Angeles and Long Beach was just 0.84 million twenty-foot equivalent units (TEUs) in October, down from 1.07 million TEUs in the same month in 2021, and the lowest for the time of year since the recession of 2009:

Best in Energy – 15 November 2022

OPEC trims oil consumption forecast for 2023

Northeast Asia LNG prices fall on high stocks

Indonesia to get loans to cut coal generation

U.S./China summit – U.S. version

U.S./China summit – China’s version

U.S. electric service reliability in 2021

FedEx furloughs workers as freight falls ($BBG)

EUROPE’s gas inventories have continued to accumulate later into the start of the traditional winter heating season than any other year in records dating back to 2011. Gas inventories in the European Union and the United Kingdom (EU28) were still rising on November 13, later than the previous record of November 12 in 2011 and far past the median peak occurring on October 26. The late fill is attributable to a combination of warmer-than-normal temperatures and high prices rationing consumption. Late fill is lifting inventories close to a record high and reducing the probability stocks will fall critically low before the end of winter:

GREAT BRITAIN’s maximum winter loads on the transmission system since 1990/91 are illustrated in the chart below (loads exclude Northern Ireland which has its own electricity network). Loads shown are “triads” – the three highest half-hourly loads separated by at least 10 days occurring each winter between November and February. Triads are used to set transmission network use of system (TNUoS) charges for large electricity consumers who are metered on a half-hourly basis. Triads are declared retrospectively after the end of each winter in March (“What are electricity triads?” National Grid, 2018).

Half-hourly (HH) customers are billed for TNUoS based on the amount of electricity they use during the three triad half-hours. Triads set charges for the entire year. In the limit, if a HH consumer uses no electricity from the grid during those three half hour periods, their TNUoS is set at zero for the entire year. The possibility a triad might be declared gives HH customers a strong incentive to minimise electricity use and/or generate their own power during periods when the total load on the network is expected to be very high.

Triad charging helps reduce strain on the grid during the winter peak, usually between 1630 GMT and 1800 GMT, when street lighting comes on, families start preparing the evening meal, but many shops and offices are still open and occupied. Several consultancies offer triad forecasting services – alerting HH consumers when there is an elevated risk that a triad could occur so they can reduce their net load temporarily.

In winter 2021/22, triads occurred on Thursday December 2 (43.7 GW at 1630-1700 GMT); Wednesday January 5 (42.8 GW at 1700-1730 GMT); and Thursday January 20 (43.5 GW at 1700-1730 GMT) (“Triads 2021/22”, National Grid, March 29, 2022).

Triad loads have been declining since 2007/08, and especially since 2010/11, as a result of improvements in energy efficiency, sluggish economic growth, changes in the industrial mix, and an increase in self-generation by HH consumers as well as embedded generation from solar panels added to homes, offices and local distribution networks:

Best in Energy – 10 November 2022

City leaders plan for 24/7 carbon-free energy

Aramco to ship full crude volumes to Asia in Dec

Coal prices tumble as winter supply fears ease

Corporate-level emissions receive more focus

U.S. PETROLEUM INVENTORIES including the strategic reserve fell by -4 million barrels in the week to November 4. There were only minor changes in stocks of distillate fuel oil (-1 million barrels), jet fuel (+1 million barrels) and gasoline (-1 million barrels). Total inventories have depleted by -498 million barrels since the start of July 2020 and are at the lowest seasonal level since 2004:

Best in Energy – 8 November 2022

Europe squeezes LNG supply for emerging markets ($BBG)

Russia sends tanker to China via northern sea route ($BBG)

China to boost diesel exports as new refineries start up

China’s oil imports rise as new refineries build stocks

Nvidia downgrades semiconductors for China ($WSJ)

U.S. coal-fired generators scheduled to retire by 2029

Renewable diesel output grows rapidly from low base

Fusion firms target commercial models by 2030s ($FT)

China explores gradual retreat from lockdowns ($WSJ)

ATMOSPHERIC concentrations of carbon dioxide (CO2) at the Mauna Loa observatory on Hawaii rose to 415 parts per million (ppm) in October 2022 up from 404 ppm in October 2017 and 391 ppm in October 2012. CO2 concentrations have increased at a compound annual rate of +0.57% per year between 2017 and 2022. On the current trajectory, concentrations are likely to reach 430 ppm, the maximum scientists say is consistent with +1.5°C of average global warming, in 2027:

Best in Energy – 7 November 2022

U.S./Russia communicate to cut escalation risk ($WSJ)

Global LNG prices slide as storage fills ahead of winter

U.S. electricity generators add more gas-fired capacity

G7⁺ price cap for Russian oil to have low impact ($BBG)

German economist sues OPEC for illegal cartel ($BBG)

U.S. shale gas promotes itself as cleaner than coal ($FT)

China’s exports fall as global trade slows ($BBG)

WESTERN EUROPE’s temperatures are expected to be above average for the time of year through December, according to the European Centre for Medium-Range Weather Forecasting, which would reduce heating demand and ease pressure on gas and electricity supplies:

U.S. EMPLOYMENT has been growing faster than would have been expected based on output growth alone. The discrepancy between rapid job gains and slower growth in real gross domestic product is evident whether jobs are measured from the employer side (payrolls) or employee side (household surveys). If historical relationships reassert themselves, job gains are likely to slow or output growth will accelerate:  

U.S. EMPLOYMENT in the transportation and warehousing super-sector has been flat since June  after growing rapidly for two years following the first wave of the pandemic. The number of jobs in the sector has levelled off around 6.5 million up from 5.8 million before the arrival of the pandemic in the first quarter of 2020:

Best in Energy – 4 November 2022

G7⁺ agree to set fixed price cap for Russia oil exports ¹

Netherlands regulator supports TTF gas benchmark

Global coal consumption set for new record ($BBG)

U.S. tech firms enter downturn with layoffs ($WSJ)

Europe’s floating LNG storage queue ($FT)

¹ A fixed price cap that will be reviewed regularly in the light of market conditions sounds a lot like creating an “Organization of Petroleum Importing Countries” (OPIC) with all the resulting problems of information collection, analysis, forecasting and decision-making. OPEC has struggled to be an effective market manager; there is no reason to think OPIC will be any more successful.

Some operational and policy questions for OPIC:

  • How will the organisation estimate current production and consumption?
  • How will the organisation forecast future production, consumption, inventories and prices?
  • Will OPIC seek input from oil traders and refiners?
  • Will OPIC hold regular meetings to decide policy?
  • How often will the organisation review and revise the price cap?
  • Will OPIC coordinate with OPEC and OPEC⁺ ?
  • What is the relationship between OPIC and the IEA?
  • How will OPIC respond if Russia cuts production and exports?
  • Will the U.S./IEA release more crude and product stocks to counter any interruption of Russia’s oil exports?
  • Will G7⁺ set policy unilaterally or will it take into account the interests of third-country importers (e.g. China and India)?

U.S. GAS INVENTORIES rose by +107 billion cubic feet (bcf) in the week to October 28. Inventories have increased by a total of +2,119 bcf since the start of April, the fastest seasonal rise since 2019 and before that 2015. Stocks are still -203 bcf (-5%) below the pre-pandemic average for 2015-2019 but the deficit has narrowed from -401 bcf (-14%) since mid-August: