Best in Energy – 22 July 2022

Germany to cut energy use to resist blackmail

EU divided on compulsory gas demand cuts

Europe’s electricity generation under stress

Europe turns to Africa for more oil and gas

China’s semiconductor manufacturing ($BBG)

Texas power grid and bitcoin miners ($BBG)

RHINE RIVER water levels measured at Kaub are the lowest for the time of year for more than a quarter of a century and indicative of drought conditions across northwest Europe. Low rainfall is restricting river borne freight and is an indicator of the stress for thermal and nuclear power plants that rely on river water for their cooling systems. For coal and gas combustion plants, efficiency and maximum output is reduced. For nuclear plants, insufficient cooling capacity can force output limits or a precautionary safety shutdown:

EUROZONE manufacturers reported a decline in activity this month for the first time since the first wave of the pandemic in 2020. Preliminary data show the manufacturing sector purchasing managers index fell to 49.6 in July (28th percentile) down from 52.1 in June (47th percentile) and 54.6 in May (65th percentile). Russia’s invasion of Ukraine and the sanctions the EU has imposed in response have pushed the region’s economy into recession:

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Best in Energy – 18 July 2022

[MUST READ] Europe must reduce gas consumption now, warns IEA

Russia/Europe locked in economic war of attrition ($WSJ)

Texas deploys power grid emergency measures ($BBG)¹

U.S./GCC summit ends with more oil output uncertain

Hebei’s efforts to reverse groundwater depletion (trans.)

¹ Power grid managers in Texas and elsewhere have a variety of tools to cope with an imminent emergency caused by insufficient generation, including orders to generators for “maximum generation” (mandating output from individual units above their normal recommended operating levels); “no touch” (prohibiting all but critical maintenance and repairs to enable maximum generation and transmission); “reliability must-run” (requiring and paying units to run regardless of their normal economics); and “system-to-system” mutual aid (requesting maximum imports from neighbouring networks). The isolated nature of the Texas grid restricts STS opportunities for ERCOT but it is frequently used in other networks. On the demand side, grid managers can invoke voluntary demand reduction contracts, issue public appeals for conservation, order voltage reductions (usually in two stages), and in the final resort use forcible disconnection, loading shedding and rotating blackouts.

LONDON temperatures have started to ramp towards a likely record on Monday and Tuesday, as the heat builds over southeast England, with each day’s temperature profile hotter the last:

U.S. CRUDE oil inventories around the NYMEX WTI delivery point at Cushing in Oklahoma stand at just 21.6 million bbl, the lowest seasonal level since 2014 and before that 2008, when front-month WTI prices were at $122 and $170 respectively adjusted for inflation:

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Best in Energy – 15 July 2022

White House downplays hopes for more oil

Middle East imports more Russian fuel oil

Japan plans reactor restarts before the winter

United Kingdom heads for winter crisis ($BBG)

Germany is moving into a recession ($BBG)

ERCOT confident will avoid blackout ($BBG)

U.S. household finances and inflation ($WSJ)

Russia/NATO conflict is test of resolve ($BBG)

Central banks turn hawkish on inflation

U.S. CENTRAL BANK is expected to raise short-term interest rates to 3.50-3.75% by February 2023 up from 1.50-1.75% at present to curb inflation. From the second quarter of 2023, however, policymakers are expected to start reducing interest rates as the economy slows and inflation decelerates:

U.S INTEREST RATE traders anticipate a recession has become virtually certain following the continued acceleration of inflation. The yield curve spread between 2-year and 10-year maturities is now in the 98th percentile for all months since 1990:

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Best in Energy – 14 July 2022

Smart sanctions on Russia’s petroleum exports¹

EU prepares for gas shortages in winter 2022/23

Biden wants sanctions and lower oil price ($FT)

Berkshire Hathaway boosts Occidental ownership

China studies ending Australia coal ban ($BBG)²

ERCOT again appeals for electricity conservation

(see also ERCOT’s alert notice

Bolton boasts about helping plan coup attempts⁴

Urban heat islands and summer electricity ($BBG)

¹ This paper by Harvard’s Craig Kennedy published in April appears to be an early version of the price-cap plan the U.S. Treasury Department is advocating to the European Union, Japan, India and China.

² Bloomberg reports Chinese officials are preparing to recommend the lifting of the country’s ban on coal imports from Australia. The proposal is framed as a policy response to concerns about coal shortages stemming from sanctions on Russia. But China does not need Australian coal at the moment given the slowdown in the domestic economy, rapidly rising domestic coal production, and the huge increase in hydropower generation. The proposal therefore appears to be primarily diplomatic – part of détente between China and the new government in Canberra. The question is what China would hope to receive in return: de-escalation of the conflict, generalised goodwill and a reset in the relationship, or something more concrete?

³ Visible only to IP addresses in the United States or via a VPN

⁴ U.S. government involvement in the overthrow of foreign governments is widely known, including Iran (1953) and Chile (1973). But it is rare for a recently serving senior official to acknowledge the fact. There is always a large gap between what we “know” in the sense of being overwhelmingly probable and what we “know” in the sense of being able to prove to the satisfaction of audiences, editors and lawyers. Indiscretions by former officials are useful because they move topics from the known-suspected to the known-proven category which makes it much easier to analyse and write about them.

U.S. SERVICE SECTOR prices climbed at an annualised rate of almost +10% in the three months from April to June, a clear sign the economy is overheating. Services inflation is running at some of the fastest rates for 60 years. The three-month rate is in the 93rd percentile for all similar periods since 1960:

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Best in Energy – 13 July 2022

Baltic grids prepare to synchronise to EU rapidly

OPEC predicts oil consumption to rise in 2023

Russia’s fuel exports to Middle East surge ($BBG)

China hydropower generation hits record high

U.S. homes with electric-only energy systems

China hesitates to mandate vaccination ($BBG)

Rapid inflation and its many discontents ($FT)

BRENT’s calendar spread from December 2022 to December 2023 has softened to a backwardation of $8 per barrel from $16 in early June as traders anticipate a cyclical economic slowdown will relieve some of the shortage in oil supply next year:

TEXAS electricity consumption increased at a compound annual rate of +1.5% over the last 20 years, reaching 427 billion kWh in 2021, up from 318 billion kWh in 2001:

U.K. REAL GDP rose by +0.51% in May from April, the fastest increase for four months, with particularly large increases in manufacturing (+0.87%) and construction (+1.54%):

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Best in Energy – 12 July 2022

Computer shipments tumble on inflation (WSJ)

Iran/Israel war is emerging from the shadows

Texas averts blackouts with voluntary conservation

U.K. utility bills on course for winter crisis

U.K. retail sales fall rapidly as inflation surges

U.S. Treasury lobbies for oil price cap

Chartbook – what causes an energy crisis?*

* I will update this chartbook from September 2021 to illustrate the gas, electricity and oil crisis in 2022 triggered by Russia’s invasion of Ukraine but which was building long before as spare capacity eroded. The current energy crisis has all the four classic elements; (1) pre-crisis erosion of spare production capacity and inventories; (2) failure to appreciate increasing risk and take timely preventive action; (3) a short-term trigger that turns a potential shortage into an actual shortage; and (4) panicked reaction.  

U.S. TREASURY yield curve has continued to invert and is now trading at a premium of 9 basis points between the two-year and ten-year maturities. The yield spread is in 96th percentile for all months since 1980 and implies traders believe a significant economic slowdown is inevitable. The last occasions on which the spread had tightened this much were in January 2007, February 2006, November 2000 and September 1989:

LONDON’s temperatures have climbed sharply since the start of July and are currently +5°C above the long-term average. In contrast to the United States, peak electric load occurs in midwinter rather than midsummer. Solar and wind output is currently favourable. But distribution transformers are vulnerable to the heat:

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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 – 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 – 6 June 2022

Texas grid anticipates record electric load this week

OPEC⁺ and the growing gap between rhetoric and reality

U.S./Saudi rapprochement forced by rising oil prices ($FT)

Argentina struggles to boost Vaca Muerta shale play ($FT)

Germany’s policy conflicts over LNG expansion ($FT)

Africa’s shortage of local crude oil refining capacity ($FT)

MISO’s generation reserve could fall very low this summer

MISO prepares for power shortages and demand reductions

Russia/Ukraine war will reshape global energy flows ($WSJ)

TEXAS ELECTRICITY CONSUMPTION has increased at a compound rate of +1.70% per year over the last five years, notwithstanding the pandemic and recession in 2020. Electricity sales to end-users in the state totalled 433 TWh between April 2021 and March 2022 (the latest data available) up from 398 TWh between April 2016 and March 2017:

U.S. PETROLEUM INVENTORIES including the strategic petroleum reserve depleted by another -5 million bbl to 1,681 million bbl in the week to May 27. Stocks have fallen in 74 of the last 100 weeks by a total of -436 million bbl since the start of July 2020:

U.S. EAST COAST DISTILLATE stocks fell by another -0.6 million bbl to just 21.0 million bbl in the week to May 27. Regional distillate inventories are now -23 million bbl (-52%) below the pre-pandemic five-year average and the supply position shows no sign of improving:

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Best in Energy – 18 May 2022

EU cannot be a green island in a dirty world ($FT)

Oil consumption and moderate recessions ($BBG)

U.S./EU examine Russia oil embargo + tariff plan

U.K. inflation accelerates to 9% fastest since 1982

China’s LNG imports set to rise from August ($BBG)

U.K. explores extensions for coal and nuclear ($BBG)

Texas electricity supply hit by congestion on grid

German refinery at risk from Russian oil ban ($BBG)

Austria tries to encourage industry to store gas

U.K. orders competition probe into fuel retailing

U.S. MANUFACTURING output in the three months Feb-Apr was almost 6% higher than in the same period a year earlier, showing momentum in the business cycle but also why supply chains are struggling to cope and prices are escalating rapidly. Rapid growth in manufacturing explains why diesel is short supply and prices are escalating:

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