Best in Energy – 16 November 2022

India’s refiners prepare for price cap from early December

China’s refiners request state aid on Russian crude ($BBG)

Europe’s energy crisis and supply security lessons ($BBG)

U.K. households and the increase in energy debts ($BBG) ¹

California ports report drop in container volumes ($WSJ)

Freeport LNG – root cause report on explosion

¹ Food and energy shortages have always been about prices and affordability rather than physical supplies and availability. Higher-income and wealthier households will always find ways to put food on the table and heat their homes, it is lower-income and poorer households that lack financial resources that are unable to cope and hit hardest (“Corn supply of ancient Rome”, Rickman, 1980).

SOUTHERN CALIFORNIA’s ports are experiencing a sharp drop in container traffic reflecting contentious labour negotiations and the threat of a strike as well as the slowdown in global merchandise trade and efforts by U.S. manufacturers and distributors to cut excess inventories. Combined container traffic through the neighbouring ports of Los Angeles and Long Beach was just 0.84 million twenty-foot equivalent units (TEUs) in October, down from 1.07 million TEUs in the same month in 2021, and the lowest for the time of year since the recession of 2009:

Best in Energy –  24 October 2022

Russia oil exports will be able to evade price cap

Russia’s nuclear forces – command and control

China boosts diesel and jet exports in September

U.S. shale producers disregard SPR refill offer

U.S. oil firms reluctant to increase output ($WSJ)

Southern California’s port backlog clears ($WSJ)

Schlumberger rebrands itself as SLB

U.S. SPR used more actively ($FT)

U.S. gas flows in 2021 (Sankey diagram)

Venezuela’s opposition seeks deal ($FT)

UN climate talks lose momentum ($BBG)

EUROZONE manufacturers report the sector has entered recession, based on preliminary results from the monthly purchasing managers survey. Partial results show the manufacturing activity index slipped to just 46.6 in October (14th percentile for all months since 2006) from 48.4 in September (24th percentile):

EUROPE’s temperatures are expected to be at or above the long-term seasonal average during the three months from November to January, according to the European Centre for Medium-Range Weather Forecasting. Mild temperatures through October and the relatively warm outlook for the first part of the winter have contributed to downward pressure on the region’s gas futures prices:

Best in Energy – 6 October 2022

OPEC+ cuts output allocations by -2 million b/d¹

White House criticises OPEC+ cut as shortsighted

Global trade expansion set to decelerate in 2023

Germany plans tax forbearance in energy crisis

Germany warns gas consumption still too high

China’s crude processing slipped in April-June

United States to ease Venezuela sanctions ($WSJ)

U.S. interest rates and financial crises ($WSJ)

¹ Like any cartel, OPEC+ uses a set of production baselines so total group supply can be adjusted in response to changes in market demand while ensuring each member retains a fair pro rata share. Like other cartels, the baselines used by OPEC+ do not necessarily correspond to shares in actual production or capacity in the real world. Cartels often find it very difficult to reach unanimous agreement to change baselines and shares. So in most cases they end up using baselines that have some historical basis but have become out of date.

Between the 1600s and 1800s, England’s Newcastle coal cartel (known as “the limitation of the vend”) allocated larger shares to some mines than they could actually supply. Some of the older, smaller or higher-cost mines had not been able to grow output fast enough to maintain their traditional market shares. But it was easier to keep the baselines and adjust allocations up and down in line with changing market demand than to renegotiate them. OPEC+ has often faced the same problem.

For both the Newcastle coal cartel and OPEC+, total allocations were often above total supply, ensuring changes in notional allocations were normally greater than changes in actual production.

OPEC+ frames its decisions in terms of adjustments to total and individual allocations, not production. The actual change in production is often different. In this case, many OPEC+ countries have been unable to utilise their allocations fully because they have insufficient capacity. These members will not be required to reduce their actual production since it was already well under quota. The actual fall in production is therefore likely to be much smaller than the reduction in the notional allocations.

The difference between production and notional allocations has been a persistent problem in the oil market. OPEC+ decisions are usually reported as “changes in production” when they should be reported as “changes in allocations”. It may seem a harmless simplification but it is deeply misleading.

Sometimes, however, the misdirection is intentional. It allows OPEC+ to announce a large headline increase or decrease, and use it to generate a desired market or diplomatic reaction, even though the actual change in production is much smaller.

But it is more technically accurate and analytically useful to report OPEC+ decisions in terms of production allocations and then report changes in actual production separately.

U.S. PETROLEUM INVENTORIES fell by -16 million bbl in the week to September 30. There were reductions in crude (-8 million), gasoline (-5 million), distillate fuel oil (-3 million) and jet fuel (-1 million). Total inventories have depleted by -480 million bbl since the start of July 2020 and are now at the lowest seasonal level since 2004:

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Best in Energy – 3 October 2022

[MUST READ] Shipping lines cancel dozens of sailings ($WSJ)

United States cannot avert dollar’s rise ($WSJ)

Central banks and “fiscal dominance” ($WSJ)

OPEC+ discusses output cuts to support prices

Europe’s refiners plan extensive maintenance

Permian Basin oil well productivity still rising

Europe gas use still unsustainably high ($BBG)

Emerging markets hit by capital outflow ($FT)

NORTHWEST EUROPE faces the first test of whether it can lower energy consumption this winter. After warmer than normal temperatures in the first half of September, temperatures were below average in the second half, creating the first significant heating demand earlier than normal:

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Best in Energy – 28 July 2022

EU/Russia gas pipeline flows fall sharply

U.S. frackers warn of supply chain limits

China’s plan to centralise iron ore purchasing

U.S. leaders embrace subsidies, tariffs ($WSJ)

Grid-scale batteries used for price response

U.K. households face winter bill crisis ($FT)

West London’s local power constraint ($FT)

U.S. PETROLEUM inventories depleted by -9 million bbl in the week to July 22, with declines in commercial crude (-5 million), gasoline (-3 million), and distillate fuel oil (-1 million) as well as a drawdown in the SPR (-6 million), partially offset by increases in propane (+3 million) and other oils (+3 million). Petroleum inventories have depleted in 80 of the last 108 weeks by a total of -438 million bbl since the start of July 2020. Total stocks are at the lowest seasonal level since 2008 and show no signs of rebuilding:

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Best in Energy – 20 July 2022

EU asks member countries to cut gas consumption

EU countries most vulnerable to Russian gas cut off

(see also IMF working paper on gas shut off impact)

EU/Russia sanctions eased on food-related exports

Electric-vehicle charger market is growing rapidly

Bangladesh to start rationing electricity and gasoline

China boosts oil imports from Russia at Saudi expense

LONDON’s brief but exceptional heatwave has already ended, but 24-hour temperatures on both July 18 (27.3°C) and July 19 (27.4°C) were more than +8°C above the long-term seasonal average, straining transportation infrastructure and the electrical network.

In a normal year, London temperatures peak between July 20 and August 5, the result of seasonal lag. But weather conditions this year coincided with and compounded the normal seasonal peak pushing daily temperatures far above normal. Temperatures on both days were 2.2-2.6 standard deviations above the 2013-2021 average:

U.S REAL AVERAGE WEEKLY EARNINGS were down by almost -4.5% in June 2022 compared with June 2021, as inflation outstripped wage increases, underscoring the intensity of the squeeze on incomes and spending power:

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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 – 6 July 2022

India limits gasoline and diesel exports

China issues new fuel export quotas

EU relaxes oil sanctions on Venezuela

Global LNG: trade report and statistics

U.S. recession indicators mixed ($WSJ)

Qatar is big winner from gas war ($FT)

BRENT’s front-month futures price fell -$10.73 (-9.5%) on July 5. The decline came on a day with little new information about production or consumption but traders seemed to anticipate a higher probability of an economic slowdown. In percentage terms, the decline was the third-largest since July 2020 and 4.1 standard deviations away from average since 1990:

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