Best in Energy – 22 June 2022

U.K. energy supplier failure has cost £2.7bn

India urges refiners to buy Russia oil ($WSJ)

China’s northern heatwave and southern floods

OPEC’s spare capacity decision ($BBG)

Thailand reduces LNG imports ($BBG)

Xilodu hydropower station (trans.)*

Xiangjiaba hydropower station (trans.)*

* The Xilodu (13.9 GW) and Xiangjiaba (7.8 GW) mega-dams on the Jinsha River between the provinces of Sichuan and Yunnan have almost as much combined generation capacity as the much more internationally famous Three Gorges hydropower station (22.5 GW). Hydro generation on the Jinsha plays a critical role in power supply for the southern export manufacturing hub around the Pearl River delta (including Guangzhou, Shenzhen and Hong Kong) as well long-distance power transmission to Shanghai. Southern rainfall and reservoir levels are therefore critical for electricity availability and the region’s demand for coal from the north.

EU28 GAS INVENTORIES increased by an average of +5.6 TWh per day over the seven days ending on June 20, decelerating from more than 7.4 TWh per day in the middle of May. But storage has filled at a record rate this year and the pace of injection was clearly unsustainable; some slowdown in the rate of injection was therefore anticipated. Inventories are +35 TWh (+6% or 0.25 standard deviations) above the ten-year seasonal average. The impact of Russia’s supply reductions to Europe cannot (yet) be identified in the data:

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Best in Energy – 21 June 2022

China power generators relying on lower-quality coal

White House considers suspension of U.S. gasoline tax

Russia becomes top crude oil supplier to China in May

U.S./Germany sign firm LNG export agreement ($WSJ)

Australia’s power shortage will spur more rooftop solar

Iron ore prices fall on China’s building downturn ($FT)

United Kingdom addicted to currency devaluation ($FT)

China scrutinises Musk’s dual-use technologies ($FT)

SOUTHEAST ASIA’s gross refining margin for making gas oil from Dubai crude has climbed to a record $70 per barrel, up from $7 a year ago, as fuel supplies for freight and manufacturing remain at 14-year lows:

EAST CHINA’s temperatures have been 2-5°C higher than the long-term seasonal average since the middle of June, straining power supplies in the Lower Yangtze region and the provinces just to its north, including Jiangsu, Henan and up to Shandong:

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Best in Energy – 13 June 2022

Reuters has launched a new twice-weekly newsletter called Power Up curated by my talented colleague David Gaffen. It covers all Reuters’ top energy stories. If you would like to receive it, you can add your email to the distribution list here: https://www.reuters.com/newsletters/reuters-power-up/

Oil price shock to persist into 2023 ($BBG)

Oil prices expected to rise further ($FT)

U.K. government orders fuel price inquiry

U.S. refinery processing likely to accelerate

U.S. Midwest at risk of blackouts for years

Food versus biofuel – land competition ($FT)

U.S. TREASURY yield curve between two-year and ten-year notes has flattened again in response to faster inflation. Traders anticipate the central bank will have to engineer a harder landing for the economy to bring price increases under control:

BRITAIN’s economy has started to contract as surging inflation hits household and business spending. Real output fell or was flat in four of the five months between December and April. The other major European economies, which publish data with longer delays and less frequency, are probably also on the leading edge of a recession:

Energy sanctions and the impact on prices for consumers

Four case studies from the coal and oil markets

John Kemp

10 June 2022

Conclusion: Energy embargoes increase prices paid by consumers significantly in the short and medium term unless there are alternative supplies readily available to make up the deficit.

Corollary: Boycotts are an attractive policy instrument when excess production capacity (actual or potential) allows energy from sanctioned sources to be replaced by non-sanctioned ones.

Case Study 1: Coal during the English Civil War (1643-1644)

By the mid-17th century, coal had replaced wood as the principal fuel for domestic heating and manufacturing in London and other towns near the east coast of England.

Production was concentrated in Newcastle and the northeast from where it was carried by ship down the coast to London and other major consumption centres in the south.

But in January 1643, Parliament, based in London, banned ships from fetching coal from Newcastle, under royalist control, to deprive King Charles I of revenues and shipping with which to wage war.

Parliament had been assured by Scotland’s coal owners sufficient alternative supplies would be forthcoming to make up the deficit, but this proved incorrect.

Wholesale prices in London doubled to 30-40 shillings per ton in 1643/44 from 15-16 shillings before the ban in 1640.

In response, Parliament and the Lord Mayor and Aldermen of the City of London attempted to fix maximum prices, but this was unsuccessful.

Parliament imposed a forced loan on ship owners and consumers of coal to raise funds for the capture of Newcastle, and the City imposed a levy to raise funds to provide coal for the poor.

“Profiteering continued, and there was seen to be no substitute for north of England coal,” according to historian John Nef.

In June 1644, the Venetian ambassador warned the loss of coal shipments “will be unbearable next winter, as they have felled most of the trees” around London to meet the shortage the previous winter.

In July 1644, the ambassador predicted “there will be riots this winter” unless coal shipments from Newcastle resumed.

The coal shortage was relieved when a Scottish army, encouraged by Parliament and promised income from future coal sales, captured Newcastle in October 1644 and shipments to London resumed.

Sources:

Rise of the British Coal Industry (Volume 2) (Nef, 1932)

Declaration of the Lords and Commons Concerning Coals and Salt (1642)

The English Coasting Trade 1600-1750 (Willan, 1967)

History of the British Coal Industry (Volume 1) (Hatcher, 1993)

Case Study 2: Oil during the Iranian embargo 1951-54

Following nationalisation of the Anglo-Iranian Oil Company in 1951, Britain boycotted crude and fuel sales from Iran, and was later joined by most other western-owned oil companies.

In 1950, Iran had produced 660,000 b/d of crude, amounting to 7% of total production in the Western World, of which 150,000 b/d were exported and 510,000 b/d processed at the Abadan refinery.

Abadan was the world’s largest refinery and supplied one-quarter of all the refined products outside the Western Hemisphere.

Nearly all output from Abadan was exported (489,000 b/d) with most of the rest accounted for by the refinery’s own consumption (20,000 b/d) and only small volumes used domestically (1,000 b/d).

The boycott’s impact on crude oil supplies and prices was limited because Iran’s crude oil exports were relatively small and easily replaced from other sources.

Crude production from other countries in the Middle East (Kuwait, Saudi Arabia and Iraq) had already  been increasing rapidly and accelerated further once the boycott was imposed.

Iran’s production declined by -31 million long tons between 1950 and 1952 but that was more than offset by increases from Kuwait (+20 million tons), Saudi Arabia (+15 million) and Iraq (+12 million).

There were also large increases in production in the rest of the world (+69 million tons) mostly from the Caribbean and the United States.

But the impact on refined fuel supplies especially aviation gasoline, kerosene and residual fuel oil east of Suez, was much more severe.

Lost output from Abadan had to be replaced by increased refinery processing in the United States and the Caribbean and to a smaller extent in Western Europe.

Much longer supply routes from western refineries to markets east of Suez strained available tanker capacity.

In response, tanker transport and foreign fuel marketing was coordinated by international oil companies with direction from the U.S. government.

“The Voluntary Agreement Relating to the Supply of Petroleum to Friendly Foreign Nations” was created by the U.S. government to permit the exchange of information and coordination of supplies.

Under the Voluntary Agreement, which conferred antitrust immunity, a Foreign Petroleum Supply Committee involving the international oil companies was organised to coordinate supplies.

During the boycott, the British-owned Anglo-Iranian Oil Company brought legal proceedings against oil buyers breaching the boycott for trafficking in stolen property.

Japanese companies were reported to have purchased Iranian oil at discounts of as much as 50% to the official price.

The boycott was eventually lifted in 1954 when the Anglo-Iranian Oil Company was replaced by an International Consortium, with the agreement of all parties.

Sources:

Oil in the Middle East: Discovery and Development (Longrigg, 1968)

Middle East Oil Crises and Western Europe’s Oil Supplies (Lubell, 1963)

Probable Developments in Iran through 1953 (NIE-75/1) (Central Intelligence Agency, 1953)

History of the British Petroleum Company (Volume 2) (Bamberg, 1994)

Case Study 3: Oil sanctions on Iraq 1990-1996

Following the invasion of Kuwait in 1990, the United Nations imposed a comprehensive economic embargo on Iraq (Security Council Resolution 661) including a prohibition on oil sales.

Iraq’s production declined by -90% from 2.8 million b/d prior to the invasion to 280,000 b/d in 1991 and remained stuck around 500,000 b/d until the oil-for-food program was launched in late 1996.

Initially, the loss of output from Iraq (-2.6 million b/d) and occupied Kuwait (-1.4 million b/d) caused real oil prices to more than double between June and September 1990.

But following the release of IEA strategic petroleum reserves and the successful expulsion of Iraqi forces from Kuwait, prices had roughly reverted to pre-invasion levels by March 1991.

Other Middle East producers proved willing and able to increase their production to offset the losses from Iraq and Kuwait and later from Iraq-only under sanctions.

Iraq’s output fell by -2.3 million b/d between 1989 and 1996 but that was more than offset by output from other producers in the Middle East which increased by +6.6 million b/d over the same period.

Total Middle East production increased by +4.3 million b/d between 1989 and 1996 and global output was up by +5.7 million b/d, despite sanctions on Iraq, minimising the impact on prices.

As a result, the period of most intense sanctions on Iraq during the early and mid-1990s was characterised by relatively low and stable prices for consumers.

Sources:

Statistical Review of World Energy (BP, 2021)

Case Study 4: Oil sanctions on Iran 2012-2015 and since 2018

The United States has imposed multiple rounds of  sanctions on Iran since the revolution of 1979 but the most intense restrictions on oil exports were in force between 2012 and 2015 (when sanctions were also imposed by the European Union) and since 2018 (when the United States terminated its participation in the Joint Comprehensive Plan of Action).

During the most intense period of sanctions, Iran’s oil exports were reduced by up to -1.4 million barrels per day, according to estimates compiled by the U.S. Congressional Research Service.

The sanctions-driven reduction in Iranian exports (actual and prospective) likely contributed to the period of very high prices between 2011 and 2014 and more moderately in 2018.

Real Brent prices averaged $120 between 2011 and 2014, the highest in the history of the oil industry, and were also comparatively high in 2018 compared with 2015-2017 and 2019.

But sanctions on Iran also coincided with the first and second shale drilling booms in the United States which resulted in very rapid growth in U.S. oil production.

U.S. oil production increased by an average of +1 million b/d each year between 2012 and 2014 and by an average of almost +1.5 million b/d each year in 2018 and 2019.

Rapid growth in U.S. production likely emboldened U.S. policymakers to impose stringent sanctions on Iran as well as blunting their impact on prices.

The entire period spanned by sanctions since 2011 also saw very large increases in output from other producers in the Middle East.

Between 2011 and 2019, production increased in Iraq (+2.0 million b/d), Saudi Arabia (+0.8 million b/d) and the United Arab Emirates (+0.7 million b/d) more than offsetting losses from Iran.

Knowing alternative supplies were available, including from domestic producers, likely encouraged the Obama and Trump administrations to pursue more stringent restrictions on Iran’s oil exports.

Stringent sanctions on Iran contributed to high prices for consumers but the impact was moderated over time by growing output from other Middle East producers and especially the U.S. shale industry.

Sanctions on Iran were an important spur for the shale revolution; conversely, the shale boom and reintegration of Iraq into global markets helps explains the severity of U.S. and international sanctions.

Sources:

Iran sanctions – Report for Congress (U.S. Congressional Research Service, 2022)

Statistical Review of World Energy (BP, 2021)

Best in Energy – 10 June 2022

United States asks India to restrain Russia oil buying ($FT)

U.S/EU explore options to limit Russia’s oil revenues ($WSJ)

EU/UK ban on insuring Russian oil threatens to raise prices

U.S. gas prices to remain high in 2022 before easing in 2023

China freight volumes and logistics return to normal (trans.)

China sends inspectors to coal regions after prices rise ($BBG)

China threatens to punish “price gouging” (trans.) *

* The warning from China’s State Administration for Market Regulation against price gouging echoes ideas and language employed by the Biden administration and U.S. Congress and the UK Department for Business, Energy and Industrial Strategy. Policymakers in whatever type of government or historical era always try to deflect blame for rising food and fuel prices on to middlemen and traders.

In medieval England, middlemen could be prosecuted under the common law for the offences of forestalling (buying up supplies before they could be delivered to the market), regrating (buying and reselling at a higher price) and engrossing (buying a large proportion of the available supplies to resell them at a higher price). Present-day governments of the United States, the United Kingdom and China would approve.

FREEPORT LNG’s explosion and shutdown is only expected to have a limited impact on the availability of gas in either the United States or the European Union. The premium for gas deliveries in July 2022 to Northwest Europe compared with Louisiana’s Henry Hub has increased to €56/MWh compared with €50 before the incident. But the spread had already shrunk from €100-180 in March in the immediate aftermath of Russia’s invasion of Ukraine.

The market is relatively well situated at the moment to absorb the loss of Freeport LNG exports. Europe has been overbuying LNG and overfilling storage at an unsustainable rate that would have to slow in any event over the next 1-2 months. At the same time, the United States has been overselling LNG, leaving inventories below average for the time of year, implying exports would have had to slow soon.

Even before the Freeport incident, futures prices were starting to enforce an adjustment, with EU prices softening while U.S. prices were climbing to the highest for more than a decade. The stoppage in exports from the facility is accelerating the correction already underway, tempering the need for a larger price adjustment. As a result, the previous weakening of EU prices has been arrested for now, while the prior rise in U.S. prices has been capped for the time being.

The Freeport incident is not expected to have a major impact on gas availability in the European Union. Europe’s gas futures summer-winter calendar spread from July 2022 to January 2023 is still in a near-record contango of more than €11 per MWh, down only slightly from €14 before the explosion, implying the market remains heavily oversupplied in the short term:

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Best in Energy – 27 May 2022

White House articulates strategy towards China

U.K. announces windfall tax on oil and gas firms

Europe protects households from energy prices

EU runs into problems negotiating Russia oil ban

Offshore drilling experiences cyclical recovery

U.S. hot economy has unwanted side effects ($FT)

Thailand/Vietnam explore rice cartel ($BBG)

Space-based solar power – how realistic is it?

BRENT’s six-month calendar spread is moving into an increasingly steep backwardation again as traders anticipate a growing shortage of crude. High margins for diesel and gasoline are encouraging refineries to maximise crude processing which is intensifying the downward pressure on already-depleted crude inventories:

U.K. DIESEL and gasoline inventories depleted further in March as late-cycle tightness was intensified by the impact of Russia’s invasion of Ukraine and some panic-buying by consumers and road haulage firms. Diesel/gas oil stocks were at the lowest seasonal level since 2014 and before that 2006:

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Best in Energy – 20 May 2022

China accelerates purchases of Russian crude*

China increases crude inventories*

China boosts energy imports from Russia ($BBG) *

U.S./China talks on Russia strategic oil purchases*

U.S./China top diplomats hold telephone talks*

United States open to Russia oil secondary sanctions*

China cuts mortgage rates sharply to boost economy

Italy boosts Russian oil imports ($FT)

Germany prepares for rationing industrial gas supply

China completes Daqing coal rail maintenance (trans.)

U.K. postal service to raise prices again as costs surge

U.K. consumer confidence lowest since at least 1974

Finland prepares for end of Russian gas flows ($BBG)

U.K. grid practises black start with renewables ($BBG)

* An interesting cluster of stories has emerged over the last 24 hours about China increasing crude oil purchases from Russia, but using the extra volumes to replenish strategic reserves, which the White House says would not violate any sanctions. The first six items should all be read in this context.

China does not report commercial or strategic reserves and there is less distinction between them than for IEA countries, so there is no way of ascertaining whether extra crude is really going into strategic inventories or being added to commercial stocks to be refined or depleted later. The concept of “replenishment” of strategic stocks is also curious because China did not join the U.S.-led emergency oil releases in late 2021 and early 2022.

An outside observer might conclude China is boosting its purchases of deeply discounted Russian crude, but the White House has decided to ignore it, at least for the time being, because it does not want to risk triggering a further rise in prices, especially before congressional elections in November, where inflation is emerging as the dominant political issue.

U.S. FINANCIAL CONDITIONS were tightening rapidly even before this week’s tumble in equity prices, as access to credit and risk capital becomes more restricted and expensive:

EUROPE’s GAS FUTURES summer-winter calendar spread from July 2022 to January 2023 has moved into a small contango of €2/MWh, down from a record backwardation of more than €70 in early March, as storage fills at record rates and inventories become more comfortable:

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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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Best in Energy – 16 May 2022

China’s coal output rises sharply in Jan-Apr

China utilities to rebuild coal stocks ($BBG)

U.K. gasoline and diesel sales start to fall

EU hurries to rebuild depleted gas inventories

EU explores emergency price cap on gas ($BBG)

Climate pressure tempered by energy security

EU/Ukraine steel trade disrupted by war ($FT)

Texas grid appeals for electricity conservation

South Africa increases load-shedding blackouts

EU backs down on rouble gas payments ($BBG)

Remote workers balk at return to office ($WSJ)

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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Best in Energy – 12 May 2022

South Africa’s coal and a just energy transition

U.K. economy on the cusp of a recession

U.S. East Coast hit by local jet fuel shortage

U.S. West Coast ports start pay talks ($WSJ)

China’s top leaders jockey for position ($WSJ)

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: