Best in Energy – 16 January 2023

[MUST READ] U.S. shale revolution has ended ($FT)

EU boosts diesel imports from Russia ahead of ban

Iran oil exports rise as sanctions enforcement eased

India oil imports from Russia at record high ($BBG)

Iran hit by cold weather-related gas shortage ($BBG)

U.S. gas output growth set to decelerate as prices fall

U.S. oil refinery distillation unit to start up in Q1 2023

Russia’s crude oil exports able to avoid G7 sanctions

Germany boosted non-Russian coal imports in 2022

U.S. heating oil stocks are more comfortable ($WSJ)

U.S./Taiwan relations and next election cycle ($FT)

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:

Best in Energy – 11 January 2023

U.S. energy transition hits workforce shortage

FedEx cuts parcel deliveries on falling demand

India considers temporarily lifting solar tariffs

Europe’s mild winter increases drought threat

EU regulator launches LNG price assessment

Plastics boost petroleum consumption ($BBG)

Chesapeake’s recovery after insolvency ($WSJ)

U.S. electricity price volatility

Quantum computing ($FT)

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%:

Best in Energy – 3 January 2023

Europe’s energy crisis eased by mild weather ($BBG)

U.S./Venezuela crude oil trade set to resume

Russia/China struggle to bridge gaps on Ukraine

France energy security improves on mild weather

U.S. shale oil production growth slows in 2022/23

U.S. winter storm reveals energy fragility ($BBG)

U.S. regional indicators point to future recession

Semiconductor market moves into surplus ($WSJ)

Global supply chains starting to normalise ($WSJ)

Tesla discounts to clear excess inventories ($WSJ)

United Kingdom explores more steel subsidies ($FT)

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%:

Best in Energy – 16 December 2022

Lithium prices double on output deficit

Global coal consumption hits record high

China braces for impact of rural epidemic

ICE warns it could relocate TTF gas futures

Russia crude sold to India under $60 ($FT)

China experiences intense cold snap (trans.)

Texas oil production hit by seismicity limits

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:

Best in Energy – 9 December 2022

China’s hesitant exit from coronavirus lockdowns

Germany accelerated floating LNG rollout ($WSJ)

Oil prices fall despite G7 Russia price cap ($FT)

U.S. grid-scale battery storage to triple by 2025

U.S. shale output has delinked from prices

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:

Best in Energy – 30 November 2022

Guangzhou and other cities see more protests, arrests

France says most energy use reduction due to weather

Europe accelerates deployment of domestic heat pumps

(see also IEA report on future of heat pumps)

Europe increases LNG imports from Russia ($BBG)

EU struggles to agree caps on oil and gas prices ($FT)

Europe’s energy price controls cost €700 billion ($BBG)

Los Angeles port loses cargo share ($BBG)

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:

Best in Energy – 7 November 2022

U.S./Russia communicate to cut escalation risk ($WSJ)

Global LNG prices slide as storage fills ahead of winter

U.S. electricity generators add more gas-fired capacity

G7⁺ price cap for Russian oil to have low impact ($BBG)

German economist sues OPEC for illegal cartel ($BBG)

U.S. shale gas promotes itself as cleaner than coal ($FT)

China’s exports fall as global trade slows ($BBG)

WESTERN EUROPE’s temperatures are expected to be above average for the time of year through December, according to the European Centre for Medium-Range Weather Forecasting, which would reduce heating demand and ease pressure on gas and electricity supplies:

U.S. EMPLOYMENT has been growing faster than would have been expected based on output growth alone. The discrepancy between rapid job gains and slower growth in real gross domestic product is evident whether jobs are measured from the employer side (payrolls) or employee side (household surveys). If historical relationships reassert themselves, job gains are likely to slow or output growth will accelerate:  

U.S. EMPLOYMENT in the transportation and warehousing super-sector has been flat since June  after growing rapidly for two years following the first wave of the pandemic. The number of jobs in the sector has levelled off around 6.5 million up from 5.8 million before the arrival of the pandemic in the first quarter of 2020:

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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