Best in Energy – 27 July 2022

[MUST READ] Germany cuts ammonia production to save gas

[MUST READ] Critical minerals recovery from waste streams

Japan strikes benchmark coal deal at $375/tonne ($BBG)

Germany to subsidise energy efficiency renovations

IMF downgrades global economy forecasts

Pakistan raises electricity prices

U.S./Russia oil price cap ($FT)

U.S. uranium import reliance

CYCLICAL INDICATORS: three of the top five stories featured on the front page of the Wall Street Journal on Wednesday are about slower sales, slower corporate earnings and slower hiring:

CATERPILLAR’s share price in the three months from May to July was down by -13% compared with the same period a year ago. The heavy equipment manufacturer’s share price has been closely correlated with the OECD’s leading economic indicator. The slump is consistent with the onset of a business cycle slowdown:

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Best in Energy – 8 July 2022

[MUST READ] EU still vulnerable to Russian gas cuts this winter

German landlord cuts heating to limit bills and gas consumption

U.S. manufacturers start to idle on higher energy costs ($BBG)

U.K. transmission operator’s investment pathway to 2030

Africa’s governments face fuel price protests ($BBG)*

South Asia hit by Europe’s rush for LNG ($WSJ)

Big nickel short position broke the LME ($BBG)

U.S. gasoline consumption fell in second quarter

* Sharp increases in the cost of food and fuel have often acted as the trigger for unrest. In eighteenth century England, increases in grain prices as a result of bad harvests or war frequently led to local disturbances, usually targeting bakers, grain merchants and government storehouses, with magistrates often calling in soldiers to restore order. Fuel riots were less common but a sharp rise in the price of coal would normally trigger a parliamentary inquiry to investigate monopolistic practices and hoarding. Food and fuel price rises were always seen as politically sensitive and a potential threat to public order (“The Coal Industry of the Eighteenth Century”, Ashton and Sykes, 1929).

U.S. PETROLEUM INVENTORIES including the strategic petroleum reserve fell -1 million bbl to 1,678 million bbl last week. Stocks have fallen in 78 out of the last 105 weeks by a total of -440 million bbl since the start of July 2020. The most recent week saw an increase in crude inventories (+2 million bbl) but depletion of gasoline (-2 million), distillate fuel oil (-1 million) and jet fuel (-1 million).

The drawdown in fuel stocks in the week ending July 1 is likely associated with the impending public holiday on July 4, which will have seen inventories pulled forward from the primary distribution system of refineries, pipelines and bulk terminals (where they are recorded) into the secondary system of retailers and local fuel suppliers as well as end-users’ own storage tanks (where they are not recorded). It largely reversed a big build in gasoline, distillate and jet fuel the week before as stocks were pre-positioned ahead of the holiday demand:

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Best in Energy – 24 June 2022

RWE calls for EU standardised gas rationing plan ($FT)

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

EU/Russia de-escalate dispute over Kaliningrad ($FT)

Russia cancels Kaliningrad grid separation exercise

U.S. energy secretary holds summit with refiners

Freeport LNG’s extended outage and the impact

Pakistan cancels expensive LNG tender ($BBG)

Recession indicators, depth and duration ($BBG)

Investors prepare for imminent recession ($BBG)

U.S. FINANCIAL CONDITIONS are tightening rapidly, nearing levels consistent with the onset of a recession or at least a pronounced mid-cycle slowdown. The Federal Reserve Bank of Chicago’s adjusted financial conditions index, which measures financial pressure, has risen to the highest since the first wave of the pandemic in 2020 and before that 2011. In contrast to those episodes, however, this time the central bank plans to tighten conditions even further to squeeze inflation out of the economy rather than easing them to support growth and employment:

SOUTH CHINA continues to experience torrential rainfall, with cumulative precipitation this year at Xiangjiaba on the Sichuan/Yunnan border almost +60% higher than the seasonal average for 2014-2021, and even heavier rains expected in July and August:

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Best in Energy – 15 June 2022

ECB holds crisis meeting as bond yields surge and diverge

Australia’s electricity market suspended to avert blackouts

Europe has imported record volume of LNG so far in 2022

Europe boosts coal from South Africa to offset Russia

U.S. API calls for deregulation to boost energy production

Pakistan’s economy caught in balance of payments crisis*

Europe races to fill gas storage but will still be vulnerable

Macro-economic tools and micro-economic goals ($FT)

* The IMF’s usual response to a balance of payments crisis is to recommend a “structural adjustment programme” with higher taxes/charges and lower government spending/subsidies to reduce internal demand and shore up the budget combined with a devaluation of the exchange rate to boost exports and reduce imports. Some external lending can be provided to smooth the adjustment. Because IMF loans are “conditional” they are also designed to encourage the adoption of unpopular policies and perseverance with them.

FREEPORT LNG’s statement on incident at its export terminal and likely resumption of operations – key items:

* incident … resulted in the release of LNG, leading to the formation and ignition of a natural gas vapor cloud, and subsequent fire at the facility

*  LNG vapor cloud dispersion and ignition thereof were at all times contained within the fence line of the liquefaction facility, lasting approximately 10 seconds

* fire and associated smoke visible thereafter were from the burning of materials in and around the location where the incident occurred, such as piping insulation and cabling

* incident occurred in pipe racks that support the transfer of LNG from the facility’s LNG storage tank area to the terminal’s dock facilities

* none of the liquefaction trains, LNG storage tanks, dock facilities, or LNG process areas were impacted

* preliminary observations suggest that the incident resulted from the overpressure and rupture of a segment of an LNG transfer line, leading to the rapid flashing of LNG and the release and ignition of the vapor cloud

* completion of all necessary repairs and a return to full plant operations is not expected until late 2022.  Given the relatively contained area of the … incident, a resumption of partial operations is targeted to be achieved in approximately 90 days

FREEPORT’s updated timeline for the resumption of exports is more delayed than traders initially anticipated. The premium for gas delivered in Northwest Europe compared with Louisiana’s Henry Hub has widened to €77/MWh up from €50 before the incident, with the adjustment coming via upward pressure on European prices and downward pressure on prices in the United States:

TEXAS temperatures and therefore air-conditioning and refrigeration demand remain much higher than normal. Temperatures have been at or above average on 56 of the 74 days since the start of April. Cumulative cooling demand since the start of the year has been almost 36% higher than the long-term average:

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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 – 7 June 2022

Global output growth set to decelerate sharply

Pakistan cuts work-week to reduce energy use

Russia’s long-term oil and gas challenge ($FT)

U.S. LNG exports rerouted to Europe from Asia

Hubris/nemesis in international relations*

* This RAND study for the CIA was produced in 1994 but has some interesting implications for the current conflict between Russia and the U.S./NATO over Ukraine.

EUROPEAN gas futures prices for deliveries in January 2023 have converged with those for deliveries in Northeast Asia. Europe’s gas prices are no longer trading at a premium as the region’s storage fills up at record rates alleviating some concerns about a supply shortfall this winter: