BRENT calendar spreads had already tightened significantly between March 20 and March 31, then tightened further after Saudi Arabia and its allies in OPEC⁺ announced production cuts on April 2. The six-month spread tightened from a backwardation of $1.13 (59th percentile since 1990) on March 20 to $1.46 (64th percentile) on March 31 and then $3.43 (88th percentile) on April 3. The spreads imply traders were not anticipating a significant oversupply or a large increase in inventories prior to the OPEC⁺ cut. Following the cut, however, traders expect the market to become very tight later in 2023:
CHINA’s manufacturers reported the most widespread rise in business activity for over a decade as the economy rebounded after the end of coronavirus lockdowns and the passing of the epidemic’s exit wave. The official purchasing managers’ index surged to 52.6 in February, the highest since April 2012, and up from just 50.1 in January 2023 and 47.0 in December 2022. The index was in the 96th percentile for all months since 2011 pointing to a very broad upturn in activity:
NORTHWEST EUROPE is more than three-quarters of the way through the heating season. Frankfurt in Germany has experienced 1,377 heating degree days so far this winter compared with a long-term seasonal average of 1,673, a deficit of almost 18%, reducing heating demand and easing the pressure on gas inventories and prices:
U.S. GAS PRICES have fallen less than $2.60 per million British thermal units from more than $9 six months ago. In real terms, prices have fallen to just the 3rd percentile for all months since 1990 down from the 86th percentile in August 2022:
FRANKFURT, a proxy for northwest Europe, reached roughly 60% of the way through the winter heating season on February 1. So far the accumulated heating demand has been -17% below the long-term average and is the lowest since 2015/16 and before that 2006/07. But after an exceptionally long period of mild temperatures between December 19 and January 15, temperatures have turned significantly colder, causing the heating deficit to narrow slightly:
FRANKFURT and the rest of Northwest Europe are roughly half-way through the 2022/23 heating season. In the three decades between 1981 and 2010, on average 50% of heating degree days and heating demand at Frankfurt occurred before January 15. For London and southeast England, the half-way point arrives a few days later on January 23. So far this winter has been much milder than average. Frankfurt had accumulated 860 degree days up to January 15 compared with a long-term average of 1,078:
EUROPE’s gas inventories are rapidly nearing a record high for the time of year following warmer than normal temperatures and reductions in industrial consumption. EU28 inventories were 937 TWh on January 9 closing in on the seasonal record of 944 TWh set in winter 2019/20.
Stocks were +247 TWh (+36% or +2.37 standard deviations) above the prior ten-year seasonal average up from a surplus of +92 TWh (+10% or +0.86 standard deviations) at the start of the winter season on October 1. The storage surplus is still increasing.
Inventories are projected to reach a post-winter low of 591 TWh with a probable range of 460 TWh to 749 TWh. If that proves correct, storage facilities would end the winter 52% full, with a likely range from 41% to as much as 66%:
CHINA’s manufacturers reported a severe contraction in business activity in December as coronavirus infections surged following the end of the government’s suppression policy. “The epidemic has had a great impact on the production and demand of enterprises, the arrival of personnel, and logistics and distribution,” according to the National Bureau of Statistics. The purchasing managers index fell to 47.0 (1st percentile for all months since 2011) in December down from 48.0 in November (2nd percentile) and 50.1 (26th percentile) in September:
NORTHWEST EUROPE’s temperatures ended 2022 much higher than normal, sharply reducing gas consumption and pulling down prices. On December 31, the average temperature at Frankfurt in Germany was almost +14°C higher than the long-term seasonal average. Frankfurt has experienced 764 cumulative heating degree days so far in winter 2022/23 compared with a seasonal average of 901, a deficit of -15%:
EUROPE’s seven-largest gas consuming countries (excluding the United Kingdom) reported consumption was down -21% in October compared with the same month a year earlier, and down by a similar percentage compared with the ten-year average, as a result of high prices, conservation, and milder-than-normal temperatures in the second half of the month:
U.S. MANUFACTURING output shows signs of peaking. Production was up by just +1.4% in November compared with the same month a year earlier, the smallest increase for almost two years, and the growth rate has been decelerating progressively since February:
U.S. CONTAINERISED rail freight in October was running at the slowest seasonally adjusted rate since 2013, reflecting weakness in the manufacturing economy and cutting consumption of diesel:
LONDON temperatures were -6°C below the long-term seasonal average on December 8, stretching the transmission system to the limit, as solar generation faded and demand ramped up in an unusually frosty early evening. There were repeated periods of under-frequency on the transmission system in the run up to the evening peak, with load exceeding generation and reserves running low. National demand approached the maximum triad levels set in winter 2021/22, despite extremely high electricity prices, triad avoidance behaviour by major electricity users, and calls for household and commercial conservation:
CHINA’s official Xinhua news agency and other government-run sites are running multiple stories and commentaries emphasising epidemic controls must be applied with “softness”, “greater precision”, ensuring daily life and healthcare continues. There has been a marked change of tone from the previous military-themed rhetoric and analogies to battling the epidemic, with greater focus on resuming as much normality as possible. Like other governments facing widespread social unrest, China appears to be pursuing a mixed strategy of rolling up protestors, intensifying street policing, while trying to make selective concessions to keep the majority of the population in line by relaxing epidemic controls to reduce their social and economic costs.
BRENT’s calendar spreads for the first part of 2023 have slumped from a steep backwardation at the start of November close to contango as the end of the month nears. The nearest to deliver January-February spread is no longer a useful indicator as the January contract nears expiry and there is insufficient liquidity to make the price representative. But the more active February-March and March-April spreads are now trading close to flat from backwardations of around $1.50 per barrel at the start of the month.
Refiners and traders seem to have accelerated purchases ahead of the introduction of the planned G7 price cap on Russia’s crude exports from early next month to protect themselves against any possible disruption. Concern about the impact likely drove up prices and spreads in September and October.
But the cap itself now appears likely to be set at a relatively high level with relaxed enforcement, at least initially. The result is a marked softening in the market. At the same time, the business cycle continues to weaken across most of Europe and Asia, dampening crude demand. All of this is weighing on prices and spreads for nearby futures contracts with deliveries in early 2023: