Best in Energy – 28 March 2023

China’s coal imports rebound as economy restarts

France hit by fuel shortage due to industrial unrest

Kurdish regional oil output falls after pipeline halt

Sustainable aviation fuel adoption in United States

U.S. renewable generation surpasses coal or nuclear

Freight forecasts downgraded on stock glut ($WSJ)

U.S. retailers negotiate cuts in freight rates ($WSJ)

U.S. shale producers avoid forward oil selling ($FT)

Aramco’s downstream integration into China ($FT)

Aramco downstream integration into China ($BBG)

Central banks constrained by inflation targets ($FT)

U.S. CONTAINER PORTS handled loaded boxes amounting to 2.24 million twenty-foot equivalent units (TEUs) in February 2023, down from 2.77 million TEUs in February 2022, and the lowest for the time of year since 2015. Businesses are still trying to reduce excess inventories as a result of the pivot from spending on merchandise to services following the lifting of epidemic controls, as well as the general slowdown in the business cycle:

Best in Energy – 16 March 2023

Climate target of 1.5°C called in doubt ($FT)

Credit Suisse gets lifeline from central bank

Banks as privately-owned state agents ($FT)

Exxon ramps up new crude distillation unit

Iran/Saudi deal to end arming Yemen ($WSJ)

If you are interested in banking supervision and financial failures, I can strongly recommend “Integrity, Fairness and Resolve”, a short monograph published by the Federal Reserve Bank of Kansas City about the savings and loan crisis of the 1980s. “Belly Up: The Collapse of the Penn Square Bank” also comes with my highest recommendation for a combination of insight and dark humour.

OIL PRICES fell sharply on March 15 in response to growing fears about a banking crisis and its impact on the economy. Brent futures were pushed bellow the bottom of the recent trading range:

U.S. DISTILLATE fuel oil inventories amounted to 120 million barrels on March 10. Inventories were -13 million barrels (-10% or -0.81 standard deviations) below the prior ten-year average. But the deficit has narrowed from -21 million barrels (-16% or -1.62 standard deviations) at the start of 2023 and -31 million barrels (-22% or -2.05 standard deviations) on October 7, 2022:

Best in Energy – 13 March 2023

U.S. regulators take over failed Silicon Valley Bank

U.S. central bank acts to shore up liquidity

China/Iran/Saudi diplomatic talks ($WSJ)

Aramco sees oil market “tightly balanced”

Cobalt prices slump on output surge ($FT)

U.S. central bank and a hard landing ($FT)

U.S. INTEREST RATE traders have slashed exectations for future rate rises as the banking system comes under strain. Banks are heavily engaged in maturity and liquidity transformation, funding longer-term loans with shorter-term deposits and other borrowing. The progressive inversion of the yield curve is putting that function under increasing strain. Silicon Valley Bank (SVB), which failed on March 10 after a run by depositors, may have been an outlier. But the intensifying inversion poses challenges for all banks. Following the run on SVB, traders increasingly think concerns about financial stability will constrain future interest rate increases. Futures prices imply benchmark overnight interbank rates will end the year at around 4.50% (the same level as now) rather than 5.50-5.75% (which was expected as recently as March 8):

U.S. DRILLING activity continues to slow. The combined oil and gas rig count fell by -3 in the seven days to March 10. The total number of active rigs has fallen in 9 of the last 14 weeks by a total of -38 rigs (-5%) since early December:

HEDGE FUND and other money manager positions in the six major petroleum futures and options contracts on February 21, 2023:

Best in Energy – 12 January 2023

PJM says 46 GW of generators failed to respond ¹

U.S. says price cap is cutting Russia’s oil earnings

Global LNG import volumes hit record high

Freeport LNG outage extended to February

French aluminium smelter begins restart

South Africa hit by worst ever power cuts

Freight forwarder cuts employment ($WSJ)

Australia/China coal trade restarts ($WSJ)

Saudi Arabia plans full nuclear fuel cycle

LME’s nickel-market breakdown inquiry

¹ PJM’s post-event study for winter storm Elliot on December 24 is worth reading in full and confirms the major problem was the failure of many generators to respond to instructions from the grid because of a failure to start up or secure enough fuel (principally gas). Generators were unavailable even though they had been given repeated warnings of an extreme weather event for several days beforehand and told to prepare for a plunge in temperatures. In many cases, generators provided less than 1 hour of notice they would not be available. If generators cannot be depended upon to respond to instructions they cannot be considered firm dispatchable power for reliability purposes.

In response, PJM was forced to initiate a series of relatively extreme emergency measures to protect the transmission system, including voltage reductions and an order for flat-out maximum generation from units that were available.

U.S. PETROLEUM INVENTORIES including the strategic reserve totalled 1,599 million barrels on January 6, the lowest seasonal level since 2004. Stocks have fallen by -185 million barrels over the last 12 months and are down by -518 million barrels from their peak in mid-2020 as production has persistently fallen below consumption:

Best in Energy – 4 January 2023

Duke’s insufficient generation during storm ($BBG)¹

China issues more export quotas for fuels

Japan gas suppliers seek overseas resources

India to compensate coal-fired generators

Saudi Arabia’s sovereign wealth fund ($WSJ)

U.K. steel makers seek another bailout ($FT)

China/Australia discuss end of coal boycott ($BBG)

¹ Failure of coal and gas-fired generators to start up when instructed by the grid because of instrument and equipment freezes has been a recurrent problem and major cause of power failures during extreme cold weather episodes in the last several decades. Failure to start has meant actual generation available has been much lower than forecast, reducing reserve margins and forcing rotating blackouts to restore margins to safe levels.

THE FUNDAMENTALS of commodity trading have not changed in 2500 years, illustrated by this quote about China’s commodity merchants taken from the Guan Zi, which purports to be a dialogue between Lord Huan of Qi and his powerful chief minister Guan Zhong in the Spring and Autumnperiod (771-481 BCE) but probably a compilation of traditional knowledge written during the Warring States period (481-221 BCE):

“Merchants observe outbreaks of dearth and starvation, scrutinize changes in the fortunes of states, study the patterns of the four seasons, and take notice of what goods are produced in each place. With this knowledge of prices in the marketplace, they gather up their stock of goods, load them on oxcarts and horses, and circulate throughout the four directions. Having reckoned what is abundant and what is scarce and calculated what is precious and what is worthless, they exchange what they possess for what they lack, buying cheap and selling dear … Marvellous and fantastic things arrive in timely fashion; rare and unusual goods readily gather. Day and night thus engaged, merchants tutor their sons and brothers, speaking the language of profit, teaching them the virtue of timeliness, and training them how to recognise the value of goods.”

Guan Zi: Political, Economic and Philosophical Essays from Early China (Rickett, 1985) cited in The Economic History of China: From Antiquity to the Nineteenth Century (von Glahn, 2016)

EUROPE’s gas prices are falling and the futures curve has shifted into contango as inventories remain very high for the time of year and traders no longer anticipate any risk of a shortage before the end of winter 2022/23. The end-of-winter March-April 2023 calendar spread is trading in a contango of more than €1.20/MWh down from a backwardation of €9.70 at the end of September:

Best in Energy – 8 December 2022

Semiconductors as fulcrum of U.S./China conflict ($FT)

U.S./EU explore deal on technology and subsidies ($WSJ)

Saudi/China summit showcases U.S. triangulation ($FT)

China’s relationship with the Arabian peninsula (trans.)

Western allies try to unblock oil queue at Turkish Straits

Renewables growth sharpens focus on need for dispatch

United Kingdom approves first new coal mine for decades

U.K. temperatures fall well below seasonal average

U.S. coal-fired generation in slow retreat

Abadan oil crisis – U.K. official history

BRITAIN’s electricity transmission system is heading towards what is likely to be the first triad event of winter 2022/23 on the early evening of December 8. Freezing temperatures with little wind and an early end to solar generation will maximise demand on the island-wide transmission system from 1630-1800 GMT. Net demand has been climbing steadily towards likely-triad levels in recent days. Major customers with discretionary loads have a strong incentive to reduce demand in these critical periods to benefit from lower transmission charges through throughout the entire year ahead. Deliberate “triad avoidance” behaviour helps curb peak loads and reduce stress on the system:

Best in Energy – 5 December 2022

EU sets price cap for Russia crude at $60

(see legal text of EU price cap regulation)

Russia’s “shadow fleet” of oil tankers ($FT)

EU sets oil price cap above market ($BBG)

EU cuts gas consumption by 25% ($FT)

U.S. shale production runs into constraints

Saudi/China summit and policy priorities

India’s capital hit by severe winter smog

North Carolina substations attacked ($WSJ)

Japan plans strategic LNG purchasing ($WSJ)

U.S./EU compete to offer green subsidies ($FT)

BP plans big expansion of hydrogen production

U.S. GAS inventories fell faster than the seasonal average in the second half of November. Working gas stocks in underground storage were -178 billion cubic feet (-4.9%) below the pre-pandemic five-year seasonal average on November 25 compared with a deficit of -97 bcf (-2.5%) on November 11:

Best in Energy – 17 November 2022

U.S. hydrogen – funding and technology deployment

Aramco plans downstream investment in South Korea

U.S. diesel inventories at 70-year seasonal low ($FT)

Texas tries to prepare better for extreme winter cold

U.K. inflation accelerates to 11.1% in October

France’s nuclear generation starts to recover

China/Taiwan bilateral communications cease

U.S. PETROLEUM INVENTORIES depleted by -11 million barrels in the week to November 11. Large drawdowns in commercial crude (-5 million bbl), crude in the strategic petroleum reserve (-4 million) and other oils (-3 million) were partially offset by increased stocks of gasoline (+2 million), distillate fuel oil (+1 million) and jet fuel (+0.3 million). Total inventories have depleted by -509 million barrels since early July 2020, the largest drawdown on record and a symptom of persistent under-supply:

Best in Energy – 14 November 2022

Saudi Arabia widens diplomatic relationships ($BBG)

U.S. retailers push back against price increases ($BBG)

China says pre-winter coal stocks comfortable (trans.)

China underground gas storage for Jīng-Jīn-Jì (trans.)

Indonesia explores early retirement of coal-fired plant

China’s iron ore prices bounce on non-residential use

Western Interconnection’s rising reliability challenge

U.S/China presidents try to stabilise poor relationship

U.S./China leaders to meet at G20 ($FT)

OPEC⁺  and the stabilisation of oil prices

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:

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: