BRENT’s six-month calendar spread has firmed slightly into a backwardation of around $2 per barrel from just over $1 on March 20, as immediate fears about a contagion of bank failures triggering a global recession have eased, and traders react to the loss of crude supplies from northern Iraq:
Yemen’s decaying oil storage tanker to be unloaded
U.S. TREAURY YIELD curve between two-year and ten-year maturities has inverted to around 100 basis points, the most extreme since August 1981, when the economy was entering the second part of the double-dip recession of the early 1980s. The inversion is signalling a sharp fall in interest rates, resulting from a rapid deceleration of inflation, a downturn in the business cycle, or a combination of both:
U.S. GAS INVENTORIES are moving into an increasing surplus, keeping downward pressure on prices. Stocks were +240 billion cubic feet (+13% or +0.58 standard deviations) above the prior ten-year seasonal average on March 3, up from a deficit of -263 billion cubic feet (-8% or -0.98 standard deviations) on January 1, 2023, and a deficit of -427 billion cubic feet (-13% or -1.52 standard deviations) on September 9, 2022:
U.S./China struggle to stabilise relationship ($WSJ)
U.S. CENTRAL BANK chief Jerome Powell toughened his rhetoric on core inflation during congressional testimony, sending forecasts for interest rates surging higher on March 7. Rate traders expected interest rates to end 2023 at around 5.55% up from a forecast of 5.38% on March 6:
SINGAPORE distillate inventories remain at their lowest level for the time of year since 2008. Stocks are -4 million barrels (-36% or -1.91 standard deviations) below the prior ten-year seasonal average. The deficit has only narrowed slightly from six months ago when it was -4 million barrels (-34% or -2.21 standard deviations):
U.S. OIL AND GAS drilling rigs fell by -7 last week to 753. The number of active rigs has fallen in five of the last eight weeks and is at the lowest since the start of July 2022. The upturn that started in August 2020 after the first wave of the pandemic has at least paused and possibly ended as drilling rates slide in response to lower oil and gas prices:
¹ China’s high-altitude balloon overflight across North America and the U.S. decision to shoot it down is being almost totally ignored by the country’s main state-controlled media, suggesting the government is still deciding its response and/or is keen not to allow the episode to worsen relations further.
U.S. OIL DRILLING is slowing in response to the slide in prices since the middle of 2022 (when WTI was trading around $120 per barrel) especially since the start of November (when it was still $90-95). Typically there is a 15-20 week lag between a change in futures prices and a change in number of active rigs. The number of rigs drilling for oil has fallen in 7 of the last 9 weeks by a total of -28 rigs (-4%). The drilling reduction is the largest since July and August 2020 when the industry was still in shock after the first wave of the pandemic and the volume war between Russia and Saudi Arabia:
EUROPE’s gas futures summer-winter calendar spread for July 2023 to January 2024 has slumped into an increasingly wide contango as traders anticipate a record carryover over inventories from winter 2022/23 which will leave the storage system short on space. Lower gas prices in summer 2023 will encourage more consumption by power generators and major industrial users. Higher prices may still be needed to restrain consumption during the peak of next winter:
U.S. OIL DRILLING has started to slow in response to the fall in prices since the middle of 2022. The number of rigs drilling for oil was just 609 on January 27 down from a cyclical high of 627 on December 2:
¹ Distillate fuel oil is an important fuel source for electricity generators designed to serve peak loads and provide emergency reserves. New England is particularly reliant on distillate to provide reserve generation and distillate units were heavily used during cold weather around Christmas. In the rest of the country, distillate is also used as lighting-up fuel for coal-fired units, which were heavily used during the extreme cold. Coal will not ignite on its own and distillate is sprayed into the furnace to provide initial combustion, heat up the furnace, establish air circulation, and support the combustion process until the flame is stabilised. As the coal combustion becomes self-sustaining, the distillate burners are gradually shut off.
² Failure of generators to start when instructed by the grid contributed to the shortfall in capacity in New England ISO region on December 24, as in other areas. Scheduled generation of 2,150 MW became unavailable. Failure to start remains one of the biggest problems for electric reliability during extreme cold events.
EUROPE’s gas futures prices no longer command a premium over futures for deliveries into Northeast Asia. Europe’s prices have fallen much more rapidly than Asia’s as fears of a winter emergency have faded. Europe’s futures are now trading at a slight discount for the first time since Russia invaded Ukraine in February 2022. European importers are no longer paying a premium to attract cargoes which should leave more LNG cargoes available for consumers in Northeast and South Asia:
U.S. DISTILLATE STOCKS fell -1.4 million bbl over the seven days to December 30 (including drawdown of -0.7 million bbl in New England). Inventories were probably pulled forward along the supply chain to homes, offices and power generators as a result of extreme cold around Christmas:
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United States prepares to ease Venezuela oil sanctions ($WSJ)
U.S. GASOLINE inventories have remained much closer to normal, in contrast to distillates, with gasoline stocks just -9 million barrels (-4%) below the pre-pandemic five-year seasonal average on November 18:
U.S. PETROLEUM INVENTORIES including the strategic reserve fell by -6 million bbl last week. Petroleum inventories have depleted in 88 of the last 120 weeks by a total of -486 million bbl since the start of July 2020:
U.S. DISTILLATE FUEL OIL inventories have fallen in 70 of the last 120 weeks by a total of -71 million bbl since July 2020. Stocks are at the lowest seasonal level since the U.S. Energy Information Administration began publishing weekly data in 1982:
China plans big increase in wind and solar (trans.)
BRENT spot prices and calendar spreads have surged as traders anticipate EU sanctions on Russia’s exports will increase the shortage of oil. Both have returned to levels last seen in March in the immediate aftermath of Russia’s invasion of Ukraine. The six-month calendar spread is at a near-record backwardation of $16 per barrel, signalling inventories are expected to fall further in the rest of the year, leaving the market critically tight:
BRENT’s inter-month spreads for the rest of 2022 and 2023 have moved into an increasingly large backwardation over the last two months as the prospect of EU sanctions is expected to tighten the market and leave it short of both crude and fuels:
CHINA’s manufacturers reported a continued contraction in business activity in May but the downturn was less widespread than in April. The official purchasing managers’ index increased to 49.6 (10th percentile) up from 47.4 (1st percentile) the previous month:
CHINA’shydro-electric generation increased to a record 313 TWh in the first four months of the year, surpassing the previous peak of 299 TWh in 2019, and sharply reducing coal consumption:
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