U.S. INTEREST RATE traders continue to boost their expectations for benchmark short rates at the end of the year as the central bank signals rates may have to go higher and stay there for longer to bring inflation back to target. Rates are now expected to be around 5.25-5.50% in December 2023 up from an expectation of 4.25-4.50% at the start of February:
COMMITMENT OF TRADERS reports – the U.S. Commodity Futures Trading Commission (CFTC) and ICE Futures Europe suspended publication of their commitments of traders reports in late January following a ransomware attack on a major market participant and infrastructure provider which resulted in incomplete submissions. Both are now starting to catch up with the backlog of missed weekly reports. ICE has caught up; the CFTC is still some weeks behind. I am not going to publish a weekly analysis again until they have both caught up fully since the reports now contain very out of date information. For reference, however, the hedge fund and money manager positions on February 7, the most recent currently available, are shown below:
U.S. GAS front-month futures prices have slumped to less than $3.80 per million British thermal units (34th percentile for all months since 1990) from more than $9.10 (86th percentile) at the end of August. Figures have been adjusted for inflation using the core consumer price index for all items excluding food and energy:
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:
U.S. OIL PRODUCERS increased the number of rigs drilling for oil to 622 on November 10 up from 610 two weeks earlier. Drilling increased significantly for the first time since July. The number of active rigs has rebounded from a pandemic low of just 172 in August 2020 and is nearing the pre-pandemic level of 683 in early March 2020.
But the resumption has been much slower than after the two previous downturns. The rig count has risen by a total of +450 (+3.8 per week) over the 117 weeks since August 2020 compared with an increase of +544 (+4.6 per week) at the same point after the last cyclical low in 2016 and +885 (+7.6 per week) after the cyclical low in 2009:
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:
¹ This article seems to be merging the related but separate concepts of rotating power cuts to cope with possible electricity shortages caused by insufficient gas-fired and renewable generation this winter with restarting the grid after a total failure such as might be caused by an accident or sabotage.
“Yarrow” sounds like a plan for a “black start” of generation, transmission and distribution systems following complete failure. Electricity network managers in the United Kingdom and other countries have planned for a black start for decades. It is one of those remote “high impact low probability” risks commonly used in scenario planning.
The United Kingdom has never had to undertake a nationwide black start though a regional one was necessary in parts of the southeast following damage caused by the Great Storm of October 1987.
Black starts involve a complicated series of steps and would take several days to complete. Designated generating units would have to be started up autonomously, following by limited energisation of the transmission grid, first regionally and then nationally.
Black start sites often have auxiliary diesel-fired generators maintained at a high state of readiness that can restart without external power. The auxiliary generator is then used to start one or more main generators (usually oil, coal or gas-fired) on the same site which are then reconnected to the grid.
Progressively more generators would be started up and synchronised to the network, which would start to provide limited power to the local distribution systems. Protected sites would start to receive power and then more customers as sufficient power becomes available.
The process could take up to 5-7 days in the event of total failure. In the meantime most customers would receive no power or be subject to rotating power cuts to limit demand while generation is restored gradually.
The complexity and time needed for a full black start explains why grid managers attempt to avoid them at all costs. Temporary but controlled load-shedding directed by grid managers is preferable to uncontrolled cascading failure of the power grid leading to collapse and forcing a black start.
Black start should be a very remote risk in a well-run grid. But the sabotage of the Nord Stream pipelines has focused attention on the risks of deliberate attacks on energy infrastructure and will make black start a higher priority for emergency planners.
EUROZONE manufacturers reported an accelerating decline in activity last month as the region’s economy was hit by inflation, soaring energy prices, supply chain problems, Russia’s invasion of Ukraine and the EU sanctions imposed in response. The composite purchasing managers’ index slipped to 46.2 in October (12th percentile for all months since 2006) from 48.4 in September (24th percentile) and 58.3 in October 2021 (92nd percentile). The composite index has been below the 50-point threshold dividing expanding activity from a contraction for four months running, confirming the zone’s economy is entering a recession:
U.S. PETROLEUM INVENTORIES including the strategic reserve fell by -6 million bbl last week. Petroleum inventories have depleted in 88 of the last 120 weeks by a total of -486 million bbl since the start of July 2020:
U.S. DISTILLATE FUEL OIL inventories have fallen in 70 of the last 120 weeks by a total of -71 million bbl since July 2020. Stocks are at the lowest seasonal level since the U.S. Energy Information Administration began publishing weekly data in 1982:
NORTHWEST EUROPE has had an unusually early start to the winter heating season. Temperatures at Frankfurt-am-Main were consistently below the long-term average from the middle of September until early October, boosting gas and electricity consumption:
IF YOU would like to receive best in energy and my research notes every day, you can add your email to the circulation list here: https://eepurl.com/dxTcl1
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:
IF YOU would like to receive best in energy and my research notes every day, you can add your email to the circulation list here: https://eepurl.com/dxTcl1
¹ Like any cartel, OPEC+ uses a set of production baselines so total group supply can be adjusted in response to changes in market demand while ensuring each member retains a fair pro rata share. Like other cartels, the baselines used by OPEC+ do not necessarily correspond to shares in actual production or capacity in the real world. Cartels often find it very difficult to reach unanimous agreement to change baselines and shares. So in most cases they end up using baselines that have some historical basis but have become out of date.
Between the 1600s and 1800s, England’s Newcastle coal cartel (known as “the limitation of the vend”) allocated larger shares to some mines than they could actually supply. Some of the older, smaller or higher-cost mines had not been able to grow output fast enough to maintain their traditional market shares. But it was easier to keep the baselines and adjust allocations up and down in line with changing market demand than to renegotiate them. OPEC+ has often faced the same problem.
For both the Newcastle coal cartel and OPEC+, total allocations were often above total supply, ensuring changes in notional allocations were normally greater than changes in actual production.
OPEC+ frames its decisions in terms of adjustments to total and individual allocations, not production. The actual change in production is often different. In this case, many OPEC+ countries have been unable to utilise their allocations fully because they have insufficient capacity. These members will not be required to reduce their actual production since it was already well under quota. The actual fall in production is therefore likely to be much smaller than the reduction in the notional allocations.
The difference between production and notional allocations has been a persistent problem in the oil market. OPEC+ decisions are usually reported as “changes in production” when they should be reported as “changes in allocations”. It may seem a harmless simplification but it is deeply misleading.
Sometimes, however, the misdirection is intentional. It allows OPEC+ to announce a large headline increase or decrease, and use it to generate a desired market or diplomatic reaction, even though the actual change in production is much smaller.
But it is more technically accurate and analytically useful to report OPEC+ decisions in terms of production allocations and then report changes in actual production separately.
U.S. PETROLEUM INVENTORIES fell by -16 million bbl in the week to September 30. There were reductions in crude (-8 million), gasoline (-5 million), distillate fuel oil (-3 million) and jet fuel (-1 million). Total inventories have depleted by -480 million bbl since the start of July 2020 and are now at the lowest seasonal level since 2004:
IF YOU would like to receive best in energy and my research notes every day, you can add your email to the circulation list here: https://eepurl.com/dxTcl1
JKempEnergy.com 