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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* 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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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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* 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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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)
TEXASELECTRICITY 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. PETROLEUMINVENTORIES 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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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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“The price of grain is linked essentially with the concept of ‘famine’. As in the modern world, so in the ancient, ‘famine’ is a concept with class and financial connotations. The lowly and the poor in society had no reserves either of food or money and therefore suffered immediately as a result of a rise in the cost of basic essentials. The rich and upper classes on the contrary rarely experienced actual hunger during a famine because of their financial resources and even private grain reserves. If the shortage of grain persisted, the rich might suffer economically by having to use more of their wealth, or their own grain, but they did not starve. The poor did, not necessarily because there was a total lack of grain available, but rather because the current price of grain had risen beyond what they could normally afford to pay, whether because of crop failure, hoarding or speculation by dealers.” ― The Corn Supply of Ancient Rome, Rickman, 1980
U.S. GASOLINE and diesel prices are much higher than would be expected based on the price of crude alone, reflecting the shortage of refining capacity. Once increases in wages are taken into account, however, the average gasoline pump price of $4.44 per gallon this month is well below the peak of $6.17 per gallon in June 2008. In real terms, prices are only in the 81st percentile for all months since 1994:
CHINA’s coal production climbed by almost +12% in the first four months of the year compared with the same period in 2021, as the government ordered miners to maximise output to reduce the risk of electricity shortages and cut dependence on imports from Australia:
U.S. TRANSPORTATION SERVICES (freight, post and passengers) prices increased at an annualised rate of almost +47% in the three months from January to April – as the supply chain remained under pressure and fuel costs surged after Russia’s invasion of Ukraine and sanctions imposed in response:
U.S. CONSUMER SENTIMENT has weakened sharply this month and has fallen to levels consistent with a recession in the past:
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China calls for elderly to get vaccinated (trans.)
U.K. REAL GDP declined in both February and March, a sign growth was stalling even before the rise in utility prices and payroll taxes took effect in April:
TEXAS power consumption has surged to a near-record as the state is hit by a sustained period of much higher than normal temperatures for the time of year:
U.S. PETROLEUM inventories increased by +3 million bbl to 1,699 million bbl last week (SPR crude -7 million; commercial crude +8 million; gasoline -4 million; distillate -1 million; and jet +2 million):
U.S. DISTILLATE inventories fell -1 million bbl to 104 million bbl. Distillate availability shows no improvement but it is not deteriorating either at present:
U.S. GASOLINE inventories depleted by -4 million bbl to 225 million bbl last week, the lowest for the time of year since 2014, as distillate shortages bleed across into gasoline:
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