John Kemp
@JKempEnergy
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Energy analyst, public policy specialist, amateur historian. Welcome constructive debate. Zero tolerance for trolling
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Joined February 2014
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ENERGY ANALYSIS - some thoughts. I regularly get critical emails from people who think I am too pro-oil or pro-renewables. So I thought I would put on record my own approach to energy systems and how to analyse them:
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UNITED STATES and NATO/EU seem remarkably relaxed about sabotage of a piece of critical infrastructure. NS 1 and 2 were not delivering gas. But there is an important precedent/principle. Lack of high-profile response from Washington, London and Brussels itself an important story
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IEA plans to drop paywall and make all its data publicly available:
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U.S. REFINERS respond to president’s criticism about margins and domestic capacity closures:
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EUROPE-WIDE gas and electricity prices are surging - signalling need for urgent factory closures to reduce gas consumption and rebuild depleted inventories ahead of winter:
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POWER GRID FAILURES never have a single cause. Grids should be managed conservatively with multiple layers of protection and reserves. Even if there is a single proximate cause, such as a single generator outage, the grid will only fail if those multiple layers have eroded
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Embarking on the next adventure
After almost 16 years at Reuters, a third of a working lifetime, it’s time to set out on the next stage of my journey.
Entering the building for the first time in 2008, with the financial crisis raging, I planned to stay no more than 2-3 years
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U.S. SHALE REVOLUTION (2010-2019) and its aftermath (2020-2022). U.S. production accounted for more than 80% of the increase in global output between 2010 and 2019:
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INDIA's power grid is struggling to meet surging demand especially from airconditioners as temperatures climb. The grid met record demand of 200.6 GW on July 7, 2021. But since mid-March, demand has been approaching that record most days, straining the system to the limit
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INDIA's coal-fired power producers have an average of just 4 days worth of fuel consumption on hand
* Stocks are rated critically low at 104 out of a total of 135 power plants (77%)
* Stocks are rated critically low at 127 GW out of total of 165 GW of capacity (77%)
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U.S. SENATOR MANCHIN's letter to the president criticising Saudi Arabia's decision to cut oil production is extraordinarily blunt:
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BRITAIN’s gas and electricity systems are headed for a period of maximum seasonal stress next week. The forecast is for intense cold by mid-week, which will boost heating demand. Wind speeds will be low, minimising wind farm output. Solar output will be low ...
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[MUST READ] Sri Lanka runs out of foreign currency to import fuel, orders blackouts for 10 hours a day:
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OIL PRICES in historical perspective. Whether real prices are only slightly above average or already fairly high depends on the time frame chosen for comparison:
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NO ONE will ever be able to say again that OPEC is not political and sticks to technical/economic issues
Oil production has been weaponised -- only this time the weapon is pointed at Iran and is being wielded by the United States and Saudi Arabia
Quite a turn around from 1973 ...
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[MUST READ] Germany cuts ammonia production to conserve gas:
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U.S. DIESEL STOCKS are critically low after failing to recover during the summer:
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I am practicing a moment of calm so as not to write a comment I might later regret about this letter ...
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PERSONAL VIEW - it was an error for President Trump to provide a regular commentary on equity indices, and it is a similar error for President Biden to provide a running commentary on U.S. gasoline prices. President does not have control over either and staff should know better
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Surely the way for employers to help employees cope with a higher cost of living is to pay them more?
Marks & Spencer will spend £15 million to support employees struggling with Britain’s spiraling cost of living
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RECOMMENDED READING on energy - the books and articles I have found most useful in my own research on everything to do with energy, broadly defined:
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BRENT futures for September delivery are exhibiting characteristics of a squeeze, trading in a back of almost $5 compared with October. But further forward, spreads have softened significantly, as traders anticipate an increased probability a recession will dampen oil consumption
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SAUDI ARABIA's decision to scrap plans to raise maximum sustainable capacity from 12 million b/d to 13 million b/d by 2027 is not surprising. The kingdom has repeatedly announced big rises only to abandon them. The extract below is from a U.S. government report published in 1978:
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CHINA and RUSSIA open talks with Venezuela’s opposition to safeguard loans in case Maduro falls:
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SAUDI ARABIA should call truce in oil price war because it's the responsible course of action:
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My partner and I have both come down with coronavirus. Fortunately, we’re both double-vaccinated, fit, healthy, and under 50, so risks are low. So far it’s been like a bad head cold with low fever. Hoping for a rapid and complete recovery. Lots of naps and anti-fever medicines
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EUROPE’s gas storage is filling at the fastest rate on record, and now holds above-average volumes for the time of year:
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BRENT's six-month calendar spread is signalling a severe shortage of oil as sanctions cut off exports from Russia. The spread is currently trading in a backwardation of more than $13 per barrel. Last time backwardation was this severe was in Sep-Oct 1990 after Iraq invaded Kuwait
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SAUDI ARABIA and RUSSIA make net revenue gain as oil price increases more than offset lost volume:
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"A refinery! a refinery! my presidency for a refinery!" cried U.S. President Biden (with apologies to William Shakespeare)
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BRENT’s combination of rapidly escalating front-month prices and calendar spreads in strong backwardation is one of the most bullish signals for three decades:
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EVERY ENERGY CRISIS has four elements:
1) Pre-crisis erosion of spare production capacity and/or inventories;
2) Failure to appreciate increasing risk and take timely preventive action;
3) Short-term trigger that turns potential shortage into actual shortage;
4) Panicked reaction
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RHINE water levels measured at Kaub are the lowest for time of year for more than a quarter of a century - which will restrict freight traffic and is an indicator of the stress for thermal and nuclear power plants which rely on river water for cooling:
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CALIFORNIA’s residential electricity customers paid twice as much per kilowatt-hour as those in Texas in 2023. California residential power prices have increased at a compound average rate of almost 6.0% per year over the last decade compared with an increase of just under 2.4%
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TRUMP ADMINISTRATION is now involved in at least six major first-rank international disputes:
* Iran nuclear sanctions
* North Korea nuclear programme
* China trade war
* EU/Japan et al steel tariffs
* NAFTA re-negotiations
* Russia sanctions
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Top analyst lesson I learned over the years - pay no attention to what policymakers say, focus exclusively on what they do
Janet Yellen says the US government has not in any way relaxed sanctions on Iranian oil exports |
#OOTT
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EUROPE-WIDE gas storage has emptied by an average of -57 percentage points in the last ten winters, ranging from a minimum drawdown of -38 percentage points in the winter of 2013/14 to a maximum drawdown of -71 percentage points in 2017/18. Storage sites are currently 76% full:
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DOLLAR SHOCK - United States is exporting its inflation problem via rising interest rates and currency appreciation. Rising yields in the core of financial system (in this case USA) ripple outwards and cause instability on the periphery (UK, EU, China, emerging markets etc):
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My stupidest professional mistake: pretending I understood option pricing theory when I didn’t, bluffing my way for several years until it was too embarrassing to ask for help, then having to get up an hour earlier before work every day for a month to teach myself from a textbook
• If you're wrong, admit it.
• If you're confused, ask questions.
• If you're stuck, seek for help.
• If you make mistake, learn from it.
• If you learn something, teach others.
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UK SUPPLY CHAIN problems are starting to intensify - local supermarket running low in almost all fresh meat and fish - with what remains artfully spread out to avoid appearance of empty shelves. Never seen it so bare since first lockdown and panic buying …
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Prior to this week's sharp drop in oil prices, hedge fund positioning was not showing the congestion signs that often signal an imminent reversal in the price trend:
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CHINA's massive epidemiological study on coronavirus with the key results below:
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WHITE HOUSE tries to blame U.S. oil refiners for its own overheating error:
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GLOBAL COAL-FIRED power generation rose to a record 10,244 terawatt-hours (TWh) in 2021, passing the previous peak of 10,098 TWh set before the pandemic in 2018:
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EUROPEAN natural gas futures show signs of deteriorating liquidity, with large price gaps emerging, indicative of many traders and market-makers avoiding trading in size because short-term volatility has become too extreme and risks are too high:
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GameStop is in many ways the reverse of what happened in WTI futures last April. In that case retail and other inexperienced traders with long positions close to expiry but unable to take delivery were squeezed by professional insiders who understood the delivery mechanism
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SEVEN STAGES of OPEC
1) Despair (low prices forever?)
2) Cautious hope (prices start to rise)
3) Boom (prices and revenues surge)
4) Denial (rising prices not our fault)
5) Acceptance (we can and will boost output)
6) Concern (volatility is unhealthy)
7) Regret (uh oh …)
RPT
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U.S. POWER PRODUCERS are consuming near-record volumes of gas:
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U.S. OIL AND GAS drilling activity is slowing sharply in response to the fall in prices since mid-2022. The total number of active rigs fell by -17 over the seven days ending on May 12 with a particularly large decline in rigs targeting primarily gas-rich formations (-16):
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EU28 GAS PRICES will continue climbing until the market sees signs of actual demand-destruction - most likely announcements of temporary factory closures, longer holiday shutdowns over Christmas, and reductions in street lighting and commercial building thermostat targets
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Either ERCOT was surprised by an unexpected event that was outside its planning system, or there simply wasn't enough generation capacity to cope under a reasonably foreseeable event. Both scenarios suggest the system was not being managed within conservative limits
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REMINDER: “No one can set the price of oil — it’s up to Allah", Saudi Arabia's oil minister Ali al-Naimi said in a television interview with CNBC in May 2015:
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EUROPEAN natural gas futures prices are spiking higher - signalling the need for factory closures this winter to conserve limited gas stocks:
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EUROPE’s natural gas futures prices are climbing again as the the winter starts colder than average, boosting heating demand and drawing down gas stocks rapidly:
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U.K. POWER GRID is relying heavily on gas-fired generation during the heatwave. CCGTs have been supplying roughly 50% of domestic generation in recent days:
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GERMANY’s industrial production fell for the third month running in July as the economy struggled with high energy prices and a slowdown in global trade and business investment:
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PERSONAL NOTE: tomorrow is my 10th anniversary at Reuters . I joined on 13 Oct 2008 at the height of the financial crisis, intending to stay for just 2-3 years. A decade later, and after multiple reinventions, I am still here and enjoying it
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I am on leave for a week. No oil prices. No news. No email. No Twitter. Digital disconnection. I don't want to know what happens in the outside world in the meantime. I plan to immerse myself in some history reading. Back on Oct 19.
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UK GAS AND ELECTRICITY expenditure as a percentage of household income - rising prices will hit lower-income deciles much harder than the rest of the population:
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@SebastianEPayne
Like Nigel Lawson campaigning for Brexit while living in France; Priti Patel campaigning against immigration when her parents immigrated from Uganda; Dominic Cummings driving hundreds of miles during lockdown; and Boris most of all. Fake patriotism for an imaginary Little England
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MUST NOT BUY SELF-PRESENTS
MUST NOT BUT SELF-PRESENTS
MUST NOT BUY ...
BAD KEMPY
BAD KEMPY
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TWENTY-FIVE YEARS - some reflections on what I've learned from a quarter century employed as an analyst:
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RISING U.S. CONSUMER PRICES have now erased all the undershooting in core inflation since Sep 2014:
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Twitter remains the most useful aggregator for news and analysis on energy. I find it invaluable for tracking what is happening; it is the site I check first and most often every day ...
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SHRUNKEN U.S. oil inventories point to chronic under-supply:
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DAVOS. Never been. Never thought anything insightful or relevant comes out of the annual meeting. Always seems to produce backward-focused commentary looking in rear-view mirror. I no longer read any articles written about the meeting because there are better uses for my time
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IN TEXAS, the proximate cause of grid failure was likely the extreme cold temperatures across much of the state. But big freezes are not that infrequent in the state. ERCOT's system operating plan should have been able to cope with the cold. The question is why it failed.
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U.S. FEDERAL RESERVE has never fallen this far behind the curve raising interest rates to control inflation at any point in the last 50 years - which explains why inflationary pressures have become so strong in late 2021 and early 2022:
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PERSONAL REQUEST
I have finished writing my slides. I have finished writing my speaking notes. I would prefer it if there was no new oil market news for the rest of the week so I do not have to revise them (again).
Perhaps someone could convey this request to OPEC+
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BEST IN ENERGY: the books and articles I have found most useful in my own research on energy, covering everything from production, consumption, diplomatic relations, technology, markets and risk management:
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OIL TANKER ablaze and drifting in the Red Sea after attack:
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BRITAIN’s seizure of an Iranian tanker at Gibraltar and Iran’s subsequent seizure of a UK-flagged vessel in the Gulf show that Whitehall failed to think through the “morning after problem” properly before acting on a U.S. request to detain the Iranian ship
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OPEC and RUSSIA's strategic problem in one chart:
Output change Q4 2012 to Q4 2019 for the world's top three oil producers:
Russia +0.6 million b/d (+6%)
Saudi + 0.5 million b/d (+5%)
USA +5.8 million b/d (+82%)
Cutting isn't working
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TOP READS from 2021 - the books and articles that had the biggest impact on my thinking this year and in previous years:
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WORLD FOR SALE - a fascinating history of the middlemen who revolutionised global commodity trade since the 1950s by
@jfarchy
and
@JavierBlas
. I learned a huge amount about some of the industry’s larger-than-life figures and innovators. Highly recommended
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U.S. policymakers appear to be considering an SPR crude release in an effort to reduce oil (gasoline) prices after trying and failing to persuade OPEC+ to increase production. Is this a sensible policy? Probably not ...
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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 (1/3)
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CHINA is devaluing the Yuan to nullify the impact of the U.S. import tariffs and ensure its exports remain competitive -- CNY now down -8% since end of March
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WHY are people puzzled by the rise in nonfarm payrolls in May? The reason is fairly obvious - if you read the instructions for filling out the payroll survey forms. I have included a link to the one filled by construction firms:
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RECESSION signals are getting stronger with the two-to-ten year segment of the U.S. Treasury yield curve within 12 basis points of inversion and in the 88th percentile for all months since 1990:
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Congratulations to my super-talented colleague
@kannbwx
, Reuters' expert on agricultural markets, reaching 60,000 followers on Twitter and building the largest audience on Twitter of any
@Reuters
@ReutersCommods
columnists
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BRENT spot prices and calendar spreads have weakened consistently in recent weeks, a sign the recent upward price cycle has begun to break down. Prices and spreads are softening in response to the increased probability of a recession dampening oil consumption:
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TWITTER reminds me I joined five years ago today. I'd been sceptical about social media for many years, but it was one of the best professional decisions I ever made, allowing me to interact with a wider and more varied network, learn so much more, and reach a far bigger audience
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WELL DONE to WTI which has finally made it from contango to backwardation (six-month spread) for the first time since 2014
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HISTORY of commodity markets is encapsulated this extract from Gibbon's "Decline and Fall of the Roman Empire" recounting the response of Emperor Julian (361-363) to a scarcity of corn and bread:
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"Put simply, it (Statistical Review) is bad PR," one company source said.
This has to be one of the most nonsensical comments I have read in a news story:
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TAKING A SHORT BREAK
I am taking a few weeks off to visit family and friends in New Zealand (including a side trip to Stewart Island).
Digitally disconnecting. No email. No news. No Twitter. No oil prices. Even books I’m taking have nothing to do with energy.
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CONTANGO is back as oil production rises rapidly and consumption growth slows in response to higher prices
* OPEC+ boosts output
* U.S. shale output surges
* Iran oil buyers get waivers
* Global growth decelerates
* Fuel economy back in focus
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