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 – 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 – 27 September 2022

Russia gas pipelines hit by suspected sabotage¹

Nord Stream says three lines damaged in one day¹

U.S./EU lobby for Russian oil exports price cap

LNG market consolidated by higher credit costs

Nigeria’s electricity collapses for fourth time in 2022

California tries to balance EVs with grid limits ($WSJ)

U.S. refined petroleum exports hit record high

U.K. energy agency distracted by restructure ($FT)

U.S./China academic exchanges diminish ($FT)

U.S./China cyber-espionage (trans.)

¹ Like damage to other subsea pipelines and cables, the leaks in the Nord Stream 1 and 2 pipelines could have been caused accidentally by a trawler, a ship’s anchor dragging, or a submarine. But pipelines are marked on nautical charts and such incidents are rare. The probability of two pipelines being accidentally breached at the same time, reportedly in three separate locations, when both lines are at the centre of a major international dispute, is very low, which makes it much more likely they were unintentionally damaged by a submarine or deliberately sabotaged.

BRENT’s front-month futures price is back to year-ago levels once adjusted for core inflation excluding food and energy prices. The real price of $85 per barrel (U.S.$2022) is close to long-term averages since 2010 (53rd percentile) and 2000 (46th percentile) though still somewhat above the average since 1990 (69th percentile):

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Best in Energy – 28 July 2022

EU/Russia gas pipeline flows fall sharply

U.S. frackers warn of supply chain limits

China’s plan to centralise iron ore purchasing

U.S. leaders embrace subsidies, tariffs ($WSJ)

Grid-scale batteries used for price response

U.K. households face winter bill crisis ($FT)

West London’s local power constraint ($FT)

U.S. PETROLEUM inventories depleted by -9 million bbl in the week to July 22, with declines in commercial crude (-5 million), gasoline (-3 million), and distillate fuel oil (-1 million) as well as a drawdown in the SPR (-6 million), partially offset by increases in propane (+3 million) and other oils (+3 million). Petroleum inventories have depleted in 80 of the last 108 weeks by a total of -438 million bbl since the start of July 2020. Total stocks are at the lowest seasonal level since 2008 and show no signs of rebuilding:

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Best in Energy – 20 July 2022

EU asks member countries to cut gas consumption

EU countries most vulnerable to Russian gas cut off

(see also IMF working paper on gas shut off impact)

EU/Russia sanctions eased on food-related exports

Electric-vehicle charger market is growing rapidly

Bangladesh to start rationing electricity and gasoline

China boosts oil imports from Russia at Saudi expense

LONDON’s brief but exceptional heatwave has already ended, but 24-hour temperatures on both July 18 (27.3°C) and July 19 (27.4°C) were more than +8°C above the long-term seasonal average, straining transportation infrastructure and the electrical network.

In a normal year, London temperatures peak between July 20 and August 5, the result of seasonal lag. But weather conditions this year coincided with and compounded the normal seasonal peak pushing daily temperatures far above normal. Temperatures on both days were 2.2-2.6 standard deviations above the 2013-2021 average:

U.S REAL AVERAGE WEEKLY EARNINGS were down by almost -4.5% in June 2022 compared with June 2021, as inflation outstripped wage increases, underscoring the intensity of the squeeze on incomes and spending power:

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Best in Energy – 11 July 2022

Saudi Arabia’s oil production capacity scrutinised

Canada to return Nord Stream impounded turbine

Ocean carriers likely to revert to slow steaming

India rejects US/EU calls to boycott Russian oil

France plans for complete loss of Russian gas

France prepares to switch from gas to fuel oil

Freight rates start to soften as volume falls ($WSJ)

U.S. central bank tries to avoid stop-go policy ($WSJ)

U.K. businesses prepare for onset of recession ($FT)

China boosts coal by rail deliveries by +9% (trans.)

Texas appeals for electricity conservation on July 11

U.S. BUSINESS inventory ratios have started to climb as sales slow and firms struggle to shift extra items ordered on a precautionary basis at the height of the supply-chain crisis. Manufacturers, wholesalers and retailers held inventories equivalent to 1.29 months worth of sales in April up from a cyclical low of 1.26 months in November. Excess stocks are concentrated at the retail level where the ratio has climbed to 1.18 months up from 1.09 months in October 2021.

U.S. inventory ratios remain low by pre-pandemic standards but will climb quickly if sales slow further in response to rapid inflation and a business cycle downturn. Inventory reduction is likely to weigh on economic growth over the next six months as businesses to limit or reverse overstocking:

TEXAS temperatures have climbed well above the long-term seasonal average since the start of July increasing the strain on the state’s isolated electric grid. Cumulative cooling degree days since the start of the year have been almost +30% higher than the 1981-2010 average:

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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 – 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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