Best in Energy – 1 July 2022

Shipping lines cancel more ocean sailings as demand falls

Friendshoring starts to reshape minerals supply chains

OPEC+ tries to maintain unity despite U.S. pressure

Baltic grid operators ready for rapid re-synchronisation

Russia plans for nationalisation of Sakhalin-2 gas project

U.S. Supreme Court curbs authority of regulatory agencies

Japan faces power shortages throughout summer ($WSJ)

China starts west-east electricity transmission line (trans.)

Coal’s resurgence sends prices soaring ($FT)

U.S. DISTILLATE FUEL OIL supplied to the domestic market averaged 3.68 million b/d in the four weeks ending on June 24 down from 3.88 million b/d in the same period last year. The volume supplied is an estimate subject to considerable short-term errors and volatility so it should be interpreted with extreme caution. But the reduction of -0.2 million b/d is relatively large and would be consistent with the onset of an economic slowdown:

EUROZONE MANUFACTURERS reported a much narrower increase in business activity this month as inflation and sanctions push the region’s economy towards recession. The purchasing managers’ index slid to 52.1 in June (47th percentile for all months since 2006) down from 54.6 in May (65th percentile) and 63.4 in June 2021 (a record):

U.S. REAL PERSONAL INCOMES less transfer payments (PILT) were up by just +1.8% in May compared with the same month a year earlier. PILT is one of the indicators monitored by the National Bureau of Economic Research’s Business Cycle Dating Committee to determine peaks and troughs in the cycle. PILT growth has been slowing since the start of the year and is now in only the 30th percentile for all months since 1980, implying the economy is losing momentum as inflation outstrips earnings:

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Best in Energy – 30 June 2022

Uniper appeals for state support as gas crisis worsens

India/Russia/China trilateral trade of cement for yuan

Energy conservation as response to Ukraine war ($FP)

Tokyo scrapes through heatwave and power shortage

Vietnam to cut gasoline import tariffs to limit inflation

U.S. central bank refocuses on inflation control ($WSJ)

U.S. refinery capacity fell in both 2020 and 2021

CHINA’s manufacturers reported a slight increase in business activity this month after lockdowns drove a contraction in April and May but it was not very widespread. The purchasing managers’ index rose to 50.2 in June (31st percentile for all months since 2011) up from 49.6 in May (10th percentile) but it was still down from 50.9 in June 2021 (59th percentile):

U.S. PETROLEUM INVENTORIES including the strategic petroleum reserve fell -1 million bbl to 1,679 million bbl last week. Inventories have declined in 77 of the last 102 weeks by a total of -439 million bbl since the start of July 2020. Stocks are now at the lowest level since October 2008:

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Best in Energy – 29 June 2022

Aramco’s disputed maximum output capacity ($BBG)

Copper prices fall to 16-month low on recession fears

G7 leaders try to design a price cap for Russia oil ($FT)

G7 officials negotiate price cap with India and China

Murban front-month spread at record $9/bbl ($BBG)

U.K. plans to halt gas flows to Europe in a crisis ($FT)

China’s northern drought and southern floods (trans.)

U.S. energy and employment in 2021

U.S. FINANCIAL CONDITIONS are tightening at the fastest rate for more than 40 years, according to the Federal Reserve Bank of San Francisco (“Policy nimbleness through forward guidance”, FRBSF, June 28):

LONDON’s coal market in the late 1830s and early 1840s saw the last and most ambitious in a long line of attempts to restrict supply to keep up prices. The volume of coal sold each day on the city’s coal exchange was linked to prevailing prices on a sliding scale. If prices rose, more coal was sold. If prices fell, a smaller volume was offered for sale. An example of the sliding scale from February 1837 is reproduced below. The “limitation of the vend” was managed by the London coal factors acting on behalf of and in conjunction with the coal mine owners of the Northeast.

The system was possible because cargoes of coal carried by ship from the Northeast to the Port of London could only be sold and unloaded in strict order of arrival. Regulations enforced by the port authorities and the coal factors themselves required unsold and unloaded ships to wait their turn in the lower reaches of the river. Ships could only proceed to the “legal quays” or for lightering from midriver in the Pool of London once the factors had arranged a sale and the city’s metering office (which measured and later weighed the cargos) had assigned a metering officer.

The coal owners were organised in a series of coal trade committees which forecast demand and allocated output among the mines. The London factors had their own society which managed the rules of the turn system, the market, and the sliding scale as well as reporting on market conditions and cheating efforts to the coal trade committees (“Sea coal for London”, Smith, 1961).

The “limitation of the vend” and the “turn” system eventually broke down in the early 1840s in the face of increased supply from new sources in the Northeast and other parts of the country. At the same time, increasing numbers of vessels avoided the costly wait for sale and unloading because they were delivering cargoes for the government or the rapidly growing gas-manufacturing companies. Instead of waiting for sale after arrival in the port, more and more cargoes were sold prior to arrival and in some cases even before loading in the Northeast.

Before the system collapsed, the queue of unsold and unloaded ships in the river, which could amount to hundreds of vessels at a time, stuck for days or even weeks at a time, rafted along both banks from London Bridge down to Greenwich, with more queued downriver in sections managed by the harbour master all the way to Gravesend, attracted adverse attention from consumers, the city government and parliament, especially at times of high and rising prices, triggering multiple enquiries into anticompetitive practices.

Half-hearted efforts to resurrect the system in the later 1840s and early 1850s were unsuccessful because the system of supplying coal by ship faced rapidly growing competition from the delivery of coal by the new railways to the metropolis. Rail deliveries were not covered by the ship-based system of waiting turn or the sliding scale. The rail network also opened up new inland sources of coal supply in Yorkshire, Durham and the Southwest to compete with the traditional producers in the Northeast, overwhelming efforts at market management.

Development and deployment of steam-powered coal ships rapidly displacing the traditional sailing ships from the early 1850s onwards also made a return to the turn system impossible. Steam-powered ships were faster, larger and needed fewer crew members so they were cheaper to operate. But they were also more capital intensive so their profitability depended on maximising time spent voyaging and minimising delays loading and unloading. Steam-driven ships could not afford to wait their turn for sale and unloading. Many were contracted to gas companies, which had always been exempt from the turn system, and often bought direct from the mine owners in the Northeast, bypassing the factors and the coal exchange. The rest usually voyaged with orders to sell immediately on reaching the port – or the cargo had already been sold before they were even loaded.

The limitation of the vend and the turn system is a fascinating case study in the how to make a cartel work and the problems that can cause it to break down, anticipating many of the practices and challenges faced by the Organization of the Petroleum Exporting Countries (OPEC) and the wider group of exporters (OPEC+).

Rough procedure for sale of coal in London during the late 1830s and early 1840s under the limitation of the vend and turn system:

  • Coal Trade Committee of major mine owners in the Northeast of England forecasts coal demand;
  • Total coal production apportioned between mines according to quotas;
  • Coal mine owner sells coal to ship owner at the quayside in Northeast of England;
  • Ship owner conveys cargo down east coast to Thames Estuary;
  • Ship reports to Coal Factors’ Office at Gravesend;
  • Ship given turn number based on strict order of arrival;
  • Ship’s papers and cargo details expressed by steamer or horse to London;
  • Ship also reports to Harbour Master at Gravesend for section order;
  • Ship directed to one of seven sections in the Lower Thames between Northfleet and Blackwall to wait turn;
  • Cargoes for the government or for gas-manufacturing companies sent direct to unloading wharves, thereby avoiding turn keeping;
  • Cargo registered with both the Coal Exchange and with Metering/Weighing Office ;
  • Cargo entered into both the Sales Turn and the Metering Turn lists;
  • Ships can appeal to magistrate for immediate unloading on safety grounds;
  • Ships caught cheating sent to bottom of sales and/or metering lists;
  • Coal Factor appointed by coal mine owner files paperwork with Customs and Lord Mayor’s office and pays bond;
  • Cargo waits turn for sale with the number of cargoes sold each limited according to prevailing prices on a sliding scale;
  • Cargo sold on Coal Exchange by Factor to a professional First Buyer;
  • Coal Meter/Weigher appointed to measure the volume of cargo as unloaded;
  • Ship given permission to proceed upriver to the Lower Pool for unloading;
  • Unloading gang appointed by the owner of one of the local pubs*;
  • Metering officer and unloading gang actually unload cargo at specified minimum rate per day;
  • Payment terms: one-third cash, one-third in note payable in sixty days, one-third in four days after sale;
  • Coal Factor notifies coal mine owner of completion of sale in accordance with obligations;
  • Ships caught deviating from the system refused future cargoes by sellers in the Northeast;
  • Ship returns to the Northeast to collect next cargo;
  • Coal Factors Society sends regular report on market conditions to coal owners in the Coal Trade Committee.

* Not a joke. Gangs got hired on the understanding they would spend a large part of their earnings in the pub. There were 70 public houses between the Tower of London and Limehouse where men who wanted to work would assemble. “He who spent most at the public house had the greatest chance of work” (“London labour and the London poor”, Mayhew, 1851).

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Best in Energy – 27 June 2022

Russia/EU clash over routine gas pipeline maintenance

EdF/Engie/Total call for immediate energy conservation

U.S. shale producers turn to refracturing existing oil wells

Germany’s chemicals firms contemplate shutdown ($WSJ)

Bank for International Settlements annual economy review

Southwest Airlines’ fuel hedging ($FT)

U.S. OIL AND GAS rig count rose +13 to 753 last week as higher prices spur exploration and production companies to contract more drilling teams. The number of active rigs has climbed by +509 from the cyclical low in August 2020 and is only -40 below the pre-pandemic level in March 2020. The number of active oil rigs is still -88 below the pre-pandemic level but gas rigs are already +48 above the March 2020 level.

Oil and gas drilling is exhibiting a fairly normal cyclical recovery, though it is unfolding slower than other recent recoveries because some of the larger exploration and production companies have been constraining drilling and production programmes to keep prices high and boost returns to shareholders:

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Best in Energy – 24 June 2022

RWE calls for EU standardised gas rationing plan ($FT)

China’s southern floods and northern heatwave (trans.)

EU/Russia de-escalate dispute over Kaliningrad ($FT)

Russia cancels Kaliningrad grid separation exercise

U.S. energy secretary holds summit with refiners

Freeport LNG’s extended outage and the impact

Pakistan cancels expensive LNG tender ($BBG)

Recession indicators, depth and duration ($BBG)

Investors prepare for imminent recession ($BBG)

U.S. FINANCIAL CONDITIONS are tightening rapidly, nearing levels consistent with the onset of a recession or at least a pronounced mid-cycle slowdown. The Federal Reserve Bank of Chicago’s adjusted financial conditions index, which measures financial pressure, has risen to the highest since the first wave of the pandemic in 2020 and before that 2011. In contrast to those episodes, however, this time the central bank plans to tighten conditions even further to squeeze inflation out of the economy rather than easing them to support growth and employment:

SOUTH CHINA continues to experience torrential rainfall, with cumulative precipitation this year at Xiangjiaba on the Sichuan/Yunnan border almost +60% higher than the seasonal average for 2014-2021, and even heavier rains expected in July and August:

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Best in Energy – 23 June 2022

Germany declares stage two gas emergency

(see official statement in translation)

U.S. presses EU to relax oil sanctions ($WSJ)

Biden requests three-month fuel tax holiday

Biden’s broken relations with oil and gas firms

Supply constraints trip up policymakers ($FT)

Batteries for grid storage – beyond lithium ion

EUROPEAN manufacturers are on the leading edge of a recession. Preliminary readings show the eurozone purchasing managers’ index has slipped to 52.0 (47th percentile) down from 54.6 (65th percentile) in May and a record 63.4 in the same month a year ago:

U.S. GASOLINE SUPPLIED averaged 8.86 million b/d in March 2022 compared with 9.18 million b/d in March 2019 (-328,000 b/d, -3.6%).

U.S DISTILLATE SUPPLIED averaged 4.16 million b/d in March compared with 4.18 million b/d in March 2019 (-23,000 b/d, -0.5%).

The differential recovery in distillate and gasoline consumption after the pandemic helps explain the relative shortage of diesel, as well as jet fuel, and why mid-distillate crack spreads and prices have been pulling the whole petroleum complex higher:

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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 – 17 June 2022

White House mulls export gasoline and diesel controls ($BBG)

Australia threatens export controls on coal ($FT)

U.S. energy secretary to talk with oil refiners

Australia’s power generation shortage eases

Qatar/China negotiate joint ventures in LNG

U.S. power prices forecast to rise

U.S. GASOLINE prices at retail level and adjusted for wages are now at the highest since 2013. Wage-adjusted gasoline prices are in the 94th percentile for all months since 1994, up from the 60th percentile at the end of 2021. At this level, demand destruction should be evident within the next few months:

FREEPORT LNG’s prolonged disruption is expected to reduce exports from the United States to Europe significantly and tighten the European gas market. Reduced pipeline flows from Russia are likely to worsen the shortfall.

The premium for gas delivered in Northwest Europe rather than at Louisiana’s Henry Hub next month has more than doubled to €109/MWh up from €50 on June 7.

Europe’s summer-winter calendar spread from July 2022 to January 2023 has reverted to a backwardation of almost €3/MWh from a contango of more than €14 on June 8 as traders anticipate the market will be tighter:

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Best in Energy – 16 June 2022

U.S. central bank raises interest rate by +0.75%

US/EU concern about insurance sanctions ($FT)

White House complains about refining margins

U.S. refiners respond to president’s letter

EU/Russia gas flows fall sharply

Australia’s electricity market suspension

Australia appeals for power conservation

China to centralise iron ore buying ($FT)

Biden team divided over economy ($WSJ)

U.S. FEDERAL RESERVE increased its target range for the federal funds rate by +75 basis points to 1.50-1.75%, the largest increase since 1994. In real terms, monetary policy has become increasingly stimulative because inflation has risen faster than rates. The real interest rate had fallen to -5.25% in May 2022 compared with -3.75% in May 2021 and +0.38% in May 2019. The large rise was designed to signal the central bank’s determination to bring inflation under control as well as to start making real interest rates less stimulative:

U.S. PETROLEUM INVENTORIES including the strategic reserve depleted by -3 million bbl to 1,682 million bbl last week. Inventories have fallen in 75 of the last 102 weeks by a total of -435 million bbl since the start of July 2020. Stocks are at the lowest seasonal level since 2008:

U.S. DISTILLATE INVENTORIES rose by +0.7 million bbl to 110 million bbl last week. East Coast stocks increased by +1.2 million bbl to 27 million bbl. But total stocks remain -27 million bbl (-19%) below the pre-pandemic five-year seasonal average. Although inventories have started to accumulate seasonally the deficit is not narrowing because refineries cannot make enough fuel to rebuild stocks:

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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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