U.S. DIESEL crack spreads for December 2023 have firmed to $191 per tonne on May 15 up from a recent low of $172 on April 28. Inventories have tightened despite the weakness in the industrial business cycle:
BRENT futures have drifted lower since mid-April as the impact of OPEC⁺’s unexpected production cuts has been more than offset by concerns about a slowing global economy and the strength of consumption. Prices for the remainder of 2023/24 are close to their lowest levels since the start of 2022:
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:
BANK FAILURES – In March 2008, I was working as an analyst on the trading floor at a commodity firm. The Reuters terminal flashed an alert that the Federal Reserve Bank of New York (FRBNY) had extended a multi-billion dollar credit facility to the troubled investment bank Bear Stearns. As part of my market-monitoring role, I sent a brief one-paragraph email to the treasury and credit teams highlighting the news and warning it probably meant the end for Bear as an independent institution; emergency borrowing from the central bank normally marks effective failure.
Less than five minutes later, the finance director sent an email to all staff instructing no new positions were to be initiated with Bear; only risk-reducing trades that reduced our exposure were permitted. For the next week, our firm would not initiate any new trades unless we could verify Bear was NOT the counterparty. Presumably similar emails and trading prohibitions were being implemented at all the other firms in the market. Bear was isolated, unable to attract cash inflows, and collapsed a week later.
Watching the demise of a major investment bank taught me a valuable lesson: financial institutions live or die by confidence, and once it has been damaged, the end can come extraordinarily fast. Financial institutions die slowly at first, but very quickly towards the end. They do not get the benefit of the doubt. Our firm started to cut our exposure to Bear immediately at the hint of trouble, we couldn’t afford to wait for more information to see if the bank might survive. No one wants to be one of the last counterparties.
Friday is a particularly dangerous day for a bank in trouble. Regulators like to close a bank on Friday so they have the weekend to put in place a resolution and attempt to stabilise confidence in the rest of the financial system by Monday.
¹ Running a “test” of the cold-start process at Drax on December 16 just four days after the coal-fired power plant received instructions (subsequently cancelled) to light up and prepare to generate for “real” on December 12 to help with insufficient reserve margins is interesting timing.
U.S. DISTILLATE inventories increased by +1 million barrels to 120 million barrels over the seven days ending on December 9. Stocks are still -16 million barrels (-12%, -0.79 standard deviations) below the pre-pandemic five-year average, but the deficit has halved from -34 million barrels (-24%, -2.05 standard deviations) on October 7. The biggest seasonal inventory accumulation for at least two decades has erased a large part of the previous shortage:
U.S. SERVICE SECTOR prices rose at an annualised rate of 6.4% over the three months ending in November. Service sector output is more labour-intensive than manufacturing and prices tend to be more sticky. Services inflation has decelerated from 9.9% in the three months ending in June, but it is still three times faster than the central bank’s target of a little over 2%:
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:
IF YOU would like to receive best in energy and my research notes every day you can add your email to the circulation list here: https://eepurl.com/dxTcl1
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:
SIGN UP to receive best in energy and my research notes every day by adding your email to the circulation list here: https://eepurl.com/dxTcl1