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 – 30 June 2022

Uniper appeals for state support as gas crisis worsens

India/Russia/China trilateral trade of cement for yuan

Energy conservation as response to Ukraine war ($FP)

Tokyo scrapes through heatwave and power shortage

Vietnam to cut gasoline import tariffs to limit inflation

U.S. central bank refocuses on inflation control ($WSJ)

U.S. refinery capacity fell in both 2020 and 2021

CHINA’s manufacturers reported a slight increase in business activity this month after lockdowns drove a contraction in April and May but it was not very widespread. The purchasing managers’ index rose to 50.2 in June (31st percentile for all months since 2011) up from 49.6 in May (10th percentile) but it was still down from 50.9 in June 2021 (59th percentile):

U.S. PETROLEUM INVENTORIES including the strategic petroleum reserve fell -1 million bbl to 1,679 million bbl last week. Inventories have declined in 77 of the last 102 weeks by a total of -439 million bbl since the start of July 2020. Stocks are now at the lowest level since October 2008:

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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 – 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 – 21 June 2022

China power generators relying on lower-quality coal

White House considers suspension of U.S. gasoline tax

Russia becomes top crude oil supplier to China in May

U.S./Germany sign firm LNG export agreement ($WSJ)

Australia’s power shortage will spur more rooftop solar

Iron ore prices fall on China’s building downturn ($FT)

United Kingdom addicted to currency devaluation ($FT)

China scrutinises Musk’s dual-use technologies ($FT)

SOUTHEAST ASIA’s gross refining margin for making gas oil from Dubai crude has climbed to a record $70 per barrel, up from $7 a year ago, as fuel supplies for freight and manufacturing remain at 14-year lows:

EAST CHINA’s temperatures have been 2-5°C higher than the long-term seasonal average since the middle of June, straining power supplies in the Lower Yangtze region and the provinces just to its north, including Jiangsu, Henan and up to Shandong:

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Best in Energy – 20 June 2022

Germany to boost gas storage, restart coal generation (trans.)

Italy reports persistent shortfall in gas supplies

East China reports record power consumption

China restricts Tesla cars for national security

China iron ore prices tumble on weaker demand

China’s refineries idled amid lockdowns ($BBG)

EU/Russia gas flows cut as dispute worsens (FT)

Germany appeals for energy conservation ($FT)

EUROPE’s summer-winter gas futures calendar spread from July 2022 to January 2023 has surged into a backwardation of more than €5/MWh from a contango of €14 earlier this month as the dispute between Russia and the European Union has worsened and Russia has cut pipeline exports. Traders expect Europe will struggle to fill gas storage following the reduction of pipeline flows and will need even higher prices to enforce greater gas conservation. The backwardation is the most severe since early April:

CHINA’s most actively traded iron ore futures contract has slumped to $116/tonne from $146 a little over two months ago, as persistent lockdowns to control the coronavirus epidemic disrupt consumption:

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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 – 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 – 10 June 2022

United States asks India to restrain Russia oil buying ($FT)

U.S/EU explore options to limit Russia’s oil revenues ($WSJ)

EU/UK ban on insuring Russian oil threatens to raise prices

U.S. gas prices to remain high in 2022 before easing in 2023

China freight volumes and logistics return to normal (trans.)

China sends inspectors to coal regions after prices rise ($BBG)

China threatens to punish “price gouging” (trans.) *

* The warning from China’s State Administration for Market Regulation against price gouging echoes ideas and language employed by the Biden administration and U.S. Congress and the UK Department for Business, Energy and Industrial Strategy. Policymakers in whatever type of government or historical era always try to deflect blame for rising food and fuel prices on to middlemen and traders.

In medieval England, middlemen could be prosecuted under the common law for the offences of forestalling (buying up supplies before they could be delivered to the market), regrating (buying and reselling at a higher price) and engrossing (buying a large proportion of the available supplies to resell them at a higher price). Present-day governments of the United States, the United Kingdom and China would approve.

FREEPORT LNG’s explosion and shutdown is only expected to have a limited impact on the availability of gas in either the United States or the European Union. The premium for gas deliveries in July 2022 to Northwest Europe compared with Louisiana’s Henry Hub has increased to €56/MWh compared with €50 before the incident. But the spread had already shrunk from €100-180 in March in the immediate aftermath of Russia’s invasion of Ukraine.

The market is relatively well situated at the moment to absorb the loss of Freeport LNG exports. Europe has been overbuying LNG and overfilling storage at an unsustainable rate that would have to slow in any event over the next 1-2 months. At the same time, the United States has been overselling LNG, leaving inventories below average for the time of year, implying exports would have had to slow soon.

Even before the Freeport incident, futures prices were starting to enforce an adjustment, with EU prices softening while U.S. prices were climbing to the highest for more than a decade. The stoppage in exports from the facility is accelerating the correction already underway, tempering the need for a larger price adjustment. As a result, the previous weakening of EU prices has been arrested for now, while the prior rise in U.S. prices has been capped for the time being.

The Freeport incident is not expected to have a major impact on gas availability in the European Union. Europe’s gas futures summer-winter calendar spread from July 2022 to January 2023 is still in a near-record contango of more than €11 per MWh, down only slightly from €14 before the explosion, implying the market remains heavily oversupplied in the short term:

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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: