CHINA’s official Xinhua news agency and other government-run sites are running multiple stories and commentaries emphasising epidemic controls must be applied with “softness”, “greater precision”, ensuring daily life and healthcare continues. There has been a marked change of tone from the previous military-themed rhetoric and analogies to battling the epidemic, with greater focus on resuming as much normality as possible. Like other governments facing widespread social unrest, China appears to be pursuing a mixed strategy of rolling up protestors, intensifying street policing, while trying to make selective concessions to keep the majority of the population in line by relaxing epidemic controls to reduce their social and economic costs.
BRENT’s calendar spreads for the first part of 2023 have slumped from a steep backwardation at the start of November close to contango as the end of the month nears. The nearest to deliver January-February spread is no longer a useful indicator as the January contract nears expiry and there is insufficient liquidity to make the price representative. But the more active February-March and March-April spreads are now trading close to flat from backwardations of around $1.50 per barrel at the start of the month.
Refiners and traders seem to have accelerated purchases ahead of the introduction of the planned G7 price cap on Russia’s crude exports from early next month to protect themselves against any possible disruption. Concern about the impact likely drove up prices and spreads in September and October.
But the cap itself now appears likely to be set at a relatively high level with relaxed enforcement, at least initially. The result is a marked softening in the market. At the same time, the business cycle continues to weaken across most of Europe and Asia, dampening crude demand. All of this is weighing on prices and spreads for nearby futures contracts with deliveries in early 2023:
BRENT’s six-month calendar spread has softened to a backwardation of less than $1 per barrel compared with more than $9 at the end of September and a peak of almost $22 in early March shortly after Russia’s invasion of Ukraine. The spread between January and February 2023 has moved from backwardation into a small contango. Refiners and traders increased buying ahead of the planned introduction of the price cap in case it disrupts Russia’s crude exports, creating at least a temporary pause in new buying and putting pressure on the calendar spreads for nearby months:
THE NETHERLANDS was the fourth-largest gas consumer in the European Union in 2021 accounting for 11% of the total. The country’s gas consumption was down almost -33% in October 2022 compared with the prior ten-year seasonal average as a result of above-average temperatures, high prices, and energy conservation measures to reduce reliance on imported gas from Russia following the invasion of Ukraine:
CONTAINER shipping costs were down by more than -50% in November 2022 compared with the same month in 2021, as freight volumes fell and supply chain delays eased:
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:
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