EUROPE’s summer-winter gas futures calendar spread between July 2023 and January 2024 has slumped into a contango of more than €17 per megawatt-hour down from €4 on December 30 and a backwardation of €3 at the start of last winter on October 3. Storage is expected to become full well before the end of the traditional refill season in late October or early November. Nearby futures prices are falling to encourage more consumption this summer and divert cargoes to price-sensitive buyers in Asia. But prices in the middle of next winter are still expected to be high given limits on the total amount of gas that can be stored and released and the consequent need for demand restraint in December 2023 and January 2024:
NORTHWEST EUROPE has experienced a slightly colder-than-normal start to the gas refill season, limiting the volume added to storage and forestalling a sharper fall in futures prices and deeper contango. Average daily temperatures at Frankfurt in Germany have been -0.6°C below the long-term seasonal average so far in April:
EUROPE’s front-month gas futures price has fallen below €40 per megawatt-hour, down from €189 at the start of winter 2022/23, to encourage more consumption from energy-intensive industries and power generators while redirecting LNG flows to customers in South and East Asia:
CHINA’s southwest received far less precipitation than average in the second half of 2022 and low rainfall has persisted into 2023, threatening hydroelectric power generation and industrial output:
CHINA’s manufacturers reported a severe contraction in business activity in December as coronavirus infections surged following the end of the government’s suppression policy. “The epidemic has had a great impact on the production and demand of enterprises, the arrival of personnel, and logistics and distribution,” according to the National Bureau of Statistics. The purchasing managers index fell to 47.0 (1st percentile for all months since 2011) in December down from 48.0 in November (2nd percentile) and 50.1 (26th percentile) in September:
NORTHWEST EUROPE’s temperatures ended 2022 much higher than normal, sharply reducing gas consumption and pulling down prices. On December 31, the average temperature at Frankfurt in Germany was almost +14°C higher than the long-term seasonal average. Frankfurt has experienced 764 cumulative heating degree days so far in winter 2022/23 compared with a seasonal average of 901, a deficit of -15%:
FEDEX’s share price has slumped by more than -30% over the last year (more than -40% in real terms) as merchandise shipments have slowed after the pandemic. In the past, a retrenchment of this magnitude has been consistent with a mid-cycle slowdown or a cycle-ending recession:
U.S. S&P 500 equity index is down by almost -20% compared with the same point in 2021. In the past, falls of this magnitude have been consistent with the onset of a recession. The index closed at a new high only once in 2022 and that was on the first trading day of the year. The absence of new highs is reminiscent of the 2001-2012 period when equity prices stagnated in the aftermath of the dotcom bubble:
LVMH to turn off store lighting overnight to save power
Eiffel Tower to turn off lights earlier to save power ($WSJ)
U.K. GAS AND ELECTRICITY consumption has not shown a significant decline so far in response to higher prices. I spent a large part of yesterday trying to find a price response in the available official consumption statistics without success. The charts are below. But there are some important limitations:
Electricity consumption data is only available through June and gas data is only available through March owing to publication delays.
Most of the rise in prices has occurred since April with another big increase scheduled to take effect from October.
Heating demand and bills are lower in the summer months reducing consumers’ sensitivity to prices.
Domestic and commercial consumption patterns have been distorted by the lockdowns in 2020/21 and then re-opening in 2022.
Electricity and gas consumption has been on a long-term downtrend as a result of improvements in insulation and efficiency.
Electricity and gas consumption shows significant annual variation depending on winter temperatures.
Once these factors are taken into account, there is no evidence of a significant reduction in gas and electricity use by households, offices and commercial premises so far. If reductions are going to occur, it will be later this year and into 2023:
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