Best in Energy –4 April 2022

[MUST READ] Sanctions and a long conflict

[MUST READ] Wars and settlements ($BBG)

SPR sale – formal announcement and details

France’s electricity grid calls for conservation

China to buy Russia LNG via middlemen ($BBG)

Australia’s export earnings boosted by conflict

EU/Russia standoff over gas payments

U.S. jet fuel prices surge on East Coast

Aviation recovery at risk from fuel prices ($FT)

Sri Lanka leader imposes state of emergency

United Kingdom takes Russian diesel delivery

U.S. MANUFACTURERS reported a less-widespread increase in business activity last month. The ISM composite index fell to 57.1 in March from 58.6 in February and the lowest reading since Sep 2020 as the expansion decelerates. There was also a sharp deceleration in new orders growth in March. The ISM new orders index slipped to 53.8 from 61.7 the month before, consistent with a slowdown in the business cycle ahead:

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Best in Energy – 1 April 2022

White House statement on oil release

IEA holds emergency meeting on oil

EU/Russia stand off over gas payments

U.S. homes transition to LED lighting

BRENT spot prices and calendar spreads have softened significantly since the White House announced the release of up to 180 million barrels from the U.S. strategic petroleum reserve. The six-month spread has narrowed to a backwardation of $9 per barrel, the lowest since before Russia’s invasion of Ukraine, down from $18 a week ago and a record $21 earlier in March:

U.S. SPR crude inventories will fall to less than 400 million barrels, the lowest since 1984, if 180 million are released over the next six months as briefed by the White House:

EUROZONE manufacturers reported a less widespread expansion in business activity this month. The purchasing managers’ index fell to 56.5 in March from 58.2 in February. The composite index is still well above the 50-point threshold dividing expanding activity from a contraction. But the index is at the lowest level for 14 months and in the 79th percentile since 2006 down from the 92nd percentile in December:

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Best in Energy – 31 March 2022

White House briefs on 180 million bbl oil release

U.S./IEA oil releases have had limited impact

Sri Lanka runs out of currency to buy fuel

U.K. horticulture hit by surging gas prices

Germany’s industrial base hit by energy crisis

India’s power generation shortages worsen

Euronav tanker firm suspends Russian business

U.S. hydro output hit by western drought

White House struggles to balance goals ($WSJ)

U.S. PETROLEUM stocks outside the strategic petroleum reserve rose by +2 million bbl to 1,139 million bbl last week. But inventories are -107 million bbl (-9%) below the pre-pandemic five-year seasonal average. Stocks have declined in 65 of the last 91 weeks by a total of -323 million bbl since the start of July 2020:

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Best in Energy – 30 March 2022

Germany issues early warning of possible gas rationing

Russia tells Europe to find roubles for export payments

Russia’s oil export system handles third-country crude

EU gas oil storage rates fall to record low as stocks drop

U.S. recession inevitable says former Fed official ($BBG)

Russia’s alternative domestic payments system ($WSJ)

U.S. consumers switch brands to offset inflation ($WSJ)

Spain’s inflation rate nears 10% ($BBG)

India’s coal inventories under pressure

CHINA’s Lower Yangtze mega-region, home to more than 225 million people, has experienced an exceptionally mild winter, especially since late February. Cumulative heating demand at Nanjing has been 14.5% below normal so far, implying large savings in gas, coal and electricity consumption, and limiting upward pressure on international LNG and coal prices:

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Best in Energy – 29 March 2022

EU reviews link between electricity and gas prices

U.S./EU and the idea of a new Marshall Plan for energy

Rhine’s low water levels threaten diesel flows ($BBG)

Fertiliser prices surge as a result of war ($BBG)

Austin airport issues jet fuel alert ($BBG)*

* During the Second World War, Britain ordered inbound shipping to bunker overseas to conserve oil and coal for the war effort and reduce the number of tankers that needed to run the gauntlet of German submarine attacks in the Atlantic.

EU+UK GAS inventories hit a post-winter low of 291 TWh on March 19 according to preliminary estimates from Gas Infrastructure Europe. Stocks have since risen by around 8 TWh. The provisional post-winter low occurred on the earliest date since 2012 and fell 11-12 days earlier than the median for the last decade as a result of mild temperatures and exceptionally high prices discouraging consumption and attracting maximum imports:

EU+UK GAS inventories have depleted by 578 TWh over winter 2021/22. The drawdown compares with averages of 651 TWh over the previous five years and 561 TWh over the previous ten years. The post-winter minimum is the lowest since the winter of 2017/18. But it is only 81 TWh below the five-year average and 57 TWh below the ten-year average. Stocks have ended this winter low but not exceptionally so owing to mild weather and exceptionally high prices:

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Best in Energy – 28 March 2022

Commodity traders keep Russian exports flowing

OPEC+ officials call for increased understanding

EU carbon market operations – regulator review

IEA defers decision on energy data subscriptions

Germany’s dependence on Russian oil ($BBG)

Japan nuclear restarts win more support ($BBG)

Russia sanctions threaten LNG ship orders ($FT)

U.S. shale output limited by supply chain ($FT)

Freight costs rise in response to diesel ($WSJ)

Middle East diplomatic negotiations ($WSJ)

Shanghai financial district in lockdown (trans.)

Shenzhen relaxes coronavirus controls (trans.)

Battery storage: grid-service and load-shifting

Hedge funds position for yield curve inversion

RECESSION signals are intensifying with the two-to-ten year segment of the U.S. Treasury yield curve within 12 basis points of inverting and in the 88th percentile for all months since 1990. The U.S. economy has been in a formal end-of-cycle recession as defined by the National Bureau for Economic Research for just over 9% of the time since 1990:

U.S. OIL producers have added drilling rigs at a rate of just over 4 per week since the start of the year, essentially the same rate since August 2020, but slower than during the previous recoveries after price slumps in 2015/16 and 2008/09:

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Best in Energy –  24 March 2022

[MUST READ] U.S. shale firms and production limits

Germany warns against immediate oil embargo ($FT)

Russia’s oil flows redirected to China and India ($BBG)

Oil shocks and impact on equity valuations

Australia’s domestic gas industry and higher prices

China port congestion worsens amid lockdowns ($BBG)

U.S. PETROLEUM inventories outside the strategic petroleum reserve fell last week by another -7 million bbl to 1,137 million bbl. Commercial stocks have declined in 65 of the last 90 weeks by a total of 325 million bbl since the start of July 2020. Inventories are at the lowest level for the time of year since 2014:

U.S. SHALE firms cite pressure from investors to return cash to shareholders as the main reason for not increasing output, with almost 30% of respondents to the Dallas Fed survey saying they would not increase output faster at any price:

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[CHARTBOOK] Global financial conditions – 23 March 2022

Most global financial indicators are characterised by a lack of obvious stress at the moment

Markets are sanguine about the economic and financial impact of Russia’s invasion of Ukraine and the Fed’s planned cycle of interest rate increases

U.S. central bank is expected to engineer a soft-landing rather than hard one, leading to a mild mid-cycle slowdown rather than a deep recession

Markets expect businesses, households and borrowers to absorb more than 200 basis points of U.S. interest rate increases without difficulty

If there is a cyclical slowdown, it is expected to be conventional downturn in growth, jobs and inflation rather than accompanied by a financial crisis

Russia’s invasion of Ukraine and sanctions imposed in response have not so far resulted in a significant change to the outlook embodied in asset markets

Best in Energy – 23 March 2022

Fed’s narrow path to a soft-landing*

Russia sanctions risk diesel shortage

U.S. imports of petroleum from Russia

Russia’s oil exports and global economy

China’s plan for hydrogen development

White House options to cut fuel prices

Russia cuts pipeline oil flows after storm

U.K. inflation rate accelerates to 6.2%

* The Fed’s aggressive rate rises in 1994 helped create a government debt funding crisis in Mexico forcing a devaluation of the peso at the end of the year (the “tequila crisis”). The U.S. central bank was caught unaware (see Fed minutes from an emergency conference call held on Dec. 30, 1994). Rapid interest rate rises in the United States tend to induce extreme stress in the more peripheral and obscure parts of the international system. In 1994, it was the Mexican government’s increasingly heavy reliance on funding its operations with short-duration dollar-linked bills known as “tesobonos” that had to be constantly rolled forward. The causes of the peso crisis was my first semi-serious piece of research when I had to write a 15,000-word thesis on it for my university finals in 1996.

BRENT spot prices and calendar spreads are ratcheting higher again as traders anticipate a prolonged conflict in Ukraine and therefore a prolonged disruption of Russia’s petroleum exports, coupled with the lack of spare capacity in the global oil supply system, leaving it increasingly vulnerable to any more shocks:

U.S. GASOLINE prices have started to converge with Brent after the supply chain was shocked by Russia’s invasion of Ukraine. But retail prices are still rising at one of the fastest rates for 30 years, increasing by around 20% over the last four weeks, which is in the 99th percentile for all four-week periods since 1993:

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Best in Energy – 22 March 2022

EU divided over response to high gas and power prices

Japan calls for electricity saving after earlier earthquake

Japan’s power supplies stretched after earthquake ($BBG)

Australia/Russia alumina embargo boosts end metal prices

China orders coal stocks replenished immediately ($BBG)

Vitol warns of volatility and margining challenges ($FT)

Jilin hit by widespread coronavirus outbreak (trans.)

Russia’s role as a uranium fuel exporter ($WSJ)

Global uranium supply dominated by Russia

U.S. energy-related CO2  projections through 2050

JAPAN called for electricity conservation as temperatures plunged and stretched power supplies after an earthquake damaged generation last week:

EU+UK GAS inventories are on course to an expected post-winter low of 272 TWh with a likely range of 238-292 TWh. Mild temperatures and ultra-high prices have reduced gas consumption while the region has continued to attract imports. As a result, the post-winter projection has improved significantly from just 215 TWh on Dec. 26. The region still needs to accumulate much higher-than-normal inventories over the next six months but every TWh saved now is one TWh of inventory that will not be needed later:

EU GAS prices have fallen as the inventory outlook has become more comfortable and the likelihood of an immediate cessation of pipeline imports from Russia has appeared to recede. Front-month futures prices have fallen to €96/MWh from a record €227 on March 7. The summer July 2022 to winter January 2023 calendar spread has shrunk to a backwardation of less than €9 from almost €72 on March 7. The market is still signalling the need for a large and urgent refill of inventories but is no longer trading at the crisis levels of two weeks ago:

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