All Hell Is Breaking Loose In Energy Markets
https://www.zerohedge.com/markets/all-hell-breaking-loose-energy-markets
By now readers are well aware that Europe is suffering from a historic gas crisis, one which according to Rabobank is now even more extreme than the US oil price shock.
And unfortunately for Europe’s population, with every passing day – and to a lesser extent hedge funds such as Statar Capital which suffered a big loss in the past few days – it’s only getting worse. As Bloomberg’s Javier Blas notes today, both UK NBP and Dutch TTF natural gas benchmarks have closed the day at their highest ever settlement level, up ~11% on the day (to a closing price equal to more than $26 per mBtu).
Natural gas prices in Europe have surged past $25 per million British thermal unit, more than 400% higher than the 2010-2020 average, and significantly higher than in the U.S., where the commodity trades at around $5 per million Btu. In Asia, liquefied natural gas has recently changed hands at around $27 per million Btu, a seasonal record high, as China has also been hit by a widespread energy crisis (see “Millions Of Chinese Residents Lose Power After Widespread, “Unexpected” Blackouts; Power Company Warns This Is “New Normal“”). Also, for those who haven’t read it yet, please check out Rabobank’s extensive recap of Europe’s energy crisis which we posted over the weekend.
Europe’s energy crisis is not contained to nat gas, and as we discussed over the weekend in another flashback to the 1970s US, UK gas station pumps are running dry in British cities on Monday with vendors rationing sales as a shortage of truckers strained supply chains to breaking point. Pumps across British cities were either closed or had signs saying fuel was unavailable on Monday, Reuters reporters said, with some limiting the amount of fuel each customer could buy.
The Petrol Retailers Association (PRA), which represents independent fuel retailers accounting for 65% of all the 8,380 UK forecourts, said members had reported that 50% to 90% of pumps were dry in some areas.
A post-Brexit shortage of truck drivers as the COVID-19 pandemic eases has sown chaos through British supply chains in everything from food to fuel, raising the specter of disruptions and price rises in the run-up to Christmas. Drivers lined up for hours to fill their cars at petrol stations that were still selling fuel, albeit often rationed. There were also calls for National Health Service (NHS) staff and other emergency workers to be given priority.
Hauliers, gas stations and retailers said there were no quick fixes as the shortfall of truck drivers – estimated to be around 100,000 – was so acute, and because transporting fuel demands additional training and licensing. “We need some calm,” Gordon Balmer, executive director of the PRA, told Reuters. “Please don’t panic buy: if people drain the network then it becomes a self-fulfilling prophecy.”
Shifting from gasoline and nat gas to oil, the near-term outlook is looking even more grim. According to Trafigura, one of the world’s largest commodity trading houses, the world faces higher oil and gas prices this winter and beyond as supply struggles to catch up with fast-rising demand.
“We’re going to see higher oil prices,” Ben Luckock, Trafigura’s co-head of oil trading said in an interview with Bloomberg.
Luckock said the market was mispricing forward oil contracts for the next couple of years because traders hadn’t yet woken up to the fact the supply-demand balance will remain tight for some time. Translation: even higher prices are coming with no easing in sight.
“Deferred crude, particularly for December 2022 and 2023, is cheap,” he said. Brent crude for delivery in December 2022 is currently changing hands at around $70 a barrel, but Luckock said it wouldn’t be surprised if Brent has risen to about $100 a barrel by then.
“I struggle to see anything but higher prices going forward in the next two years,” he said, one day after Goldman hiked its price target, now predicting that Brent would hit $90 some time in December. On Monday, Brent crude for immediate delivery surged toward $80 a barrel, setting its highest price in nearly three years.
If he is right, that could prove to be devastating for traders betting on continued backwardation: as of today, the front of the curve is trading above $79 a barrel, but with a backwardated market, the back is far lower. December 2022 is at $71 a barrel, and December 2023 is at $66 a barrel. If Trafigura is right we may be headed for contango which would unleash even greater havoc on the energy market.
On natural gas, he said prices could shoot up even more this winter if cold weather forces demand higher in Europe and Asia.
The bullish outlook comes as oil demand fast recovers toward its pre-pandemic level, with most traders expecting that consumption will reach the 2019 by early-to-mid 2022. As demand rebounds, supply has struggled to keep up: U.S. shale companies have kept a lid on spending, preferring to pay dividends to shareholders. With U.S. shale reacting slowly to higher prices, the OPEC+ oil cartel has been able to keep control of the market.
“The U.S. shale industry is showing very strong discipline. Oil prices are roughly double what they were a year ago and despite that we’re not seeing a huge increase in drilling,” Luckock said.
Luckock said that it was difficult to see lower natural gas prices this winter in Europe, despite the commodity trading at a record high already: “If it’s a cold winter in Europe or Asia, we have a big problem,” he said. “If it’s cold, and on top, it isn’t windy, then we have a much bigger problem. We will face shortages.”
Notably, Luckock said he was skeptical that Russia, the biggest gas supplier to Europe, was intentionally tightening the market for political gain, suggesting that Moscow was already pumping as much gas as it could right now.
“It’s easy to say that’s politically motivated, but I think it’s simpler than that: Russia is facing maintenance in many gas fields, very low domestic inventories, substantially increased flows to Turkey, and Gazprom is struggling to increase production,” he said.
Millions Of Chinese Residents Lose Power After Widespread, “Unexpected” Blackouts; Power Company Warns This Is “New Normal”
Just yesterday we warned that a “Power Supply Shock Looms” as the energy crisis gripping Europe – and especially the UK – was set to hammer China, and just a few hours later we see this in practice as residents in three north-east Chinese provinces experienced unannounced power cuts as the electricity shortage which initially hit factories spreads to homes.
People living in Liaoning, Jilin and Heilongjiang provinces complained on social media about the lack of heating, and lifts and traffic lights not working.
Local media in China – which is highly dependent on coal for power – said the cause was a surge in coal prices leading to short supply. As shown in the chart below, Chinese thermal coal futures have more than doubled in price in the past year.
There are several reasons for the surge in thermal coal, among them already extremely tight energy supply globally (that’s already seen chaos engulf markets in Europe); the sharp economic rebound from COVID lockdowns that has boosted demand from households and businesses; a warm summer which led to extreme air condition consumption across China; the escalating trade spat with Australia which had depressed the coal trade and Chinese power companies ramping up power purchases to ensure winter coal supply.
Then there is Beijing’s pursuit of curbing carbon emissions – Xi Jinping wants to ensure blue skies at the Winter Olympics in Beijing next February, showing the international community that he’s serious about de-carbonizing the economy – that has led to artificial bottlenecks in the coal supply chain.
The coal price surge prompted the China Electricity Council to publish a statement saying that “to ensure winter coal supply, power companies continue to increase market purchases *regardless of cost* under the situation of substantial losses.”
Whatever the reason, it’s just getting started: as BBC reported, one power company said it expected the power cuts to last until spring next year, and that unexpected outages would become “the new normal.” Its post, however, was later deleted.
At first, the energy shortage affected factories and manufacturers across the country, many of whom have had to curb or stop production in recent weeks. In the city of Dongguan, a major manufacturing hub near Hong Kong, a shoe factory that employs 300 workers rented a generator last week for $10,000 a month to ensure that work could continue. Between the rental costs and the diesel fuel for powering it, electricity is now twice as expensive as when the factory was simply tapping the grid.
“This year is the worst year since we opened the factory nearly 20 years ago,” said Jack Tang, the factory’s general manager. Economists predicted that production interruptions at Chinese factories would make it harder for many stores in the West to restock empty shelves and could contribute to inflation in the coming months.
Three publicly traded Taiwanese electronics companies, including two suppliers to Apple and one to Tesla, issued statements on Sunday night warning that their factories were among those affected. Apple had no immediate comment, while Tesla did not respond to a request for comment.
But over the weekend residents in some cities saw their power cut intermittently as well, with the hashtag “North-east electricity cuts” and other related phrases trending on Twitter-like social media platform Weibo.
The extent of the blackouts is not yet clear, but nearly 100 million people live in the three provinces.
In Liaoning province, a factory where ventilators suddenly stopped working had to send 23 staff to hospital with carbon monoxide poisoning.
There were also reports of some who were taken to hospital after they used stoves in poorly-ventilated rooms for heating, and people living in high-rise buildings who had to climb up and down dozens of flights of stairs as their lifts were not functioning. Some municipal pumping stations have shut down, prompting one town to urge residents to store extra water for the next several months, though it later withdrew the advice.
One video circulating on Chinese media showed cars travelling on one side of a busy highway in Shenyang in complete darkness, as traffic lights and streetlights were switched off. City authorities told The Beijing News outlet that they were seeing a “massive” shortage of power.
Social media posts from the affected region said the situation was similar to living in neighboring North Korea.
The Jilin provincial government said efforts were being made to source more coal from Inner Mongolia to address the coal shortage.
As noted previously, power restrictions are already in place for factories in 10 other provinces, including manufacturing bases Shandong, Guangdong and Jiangsu.
Of course, a key culprit behind China’s shocking blackouts is Xi Jinping’s recent pledge that his country will reach peak carbon emissions within nine years. As a reminder, two-thirds of China’s electricity comes from burning coal, which Beijing is trying to curb to address climate change. While coal prices have surged along with demand, because the government keeps electricity prices low, particularly in residential areas, usage by homes and businesses has climbed regardless.
Faced with losing more money with each additional ton of coal they burn, some power plants have closed for maintenance in recent weeks, saying that this was needed for safety reasons. Many other power plants have been operating below full capacity, and have been leery of increasing generation when that would mean losing more money, said Lin Boqiang, dean of the China Institute for Energy Policy Studies at Xiamen University.
“If those guys produce more, it has a huge impact on electricity demand,” Professor Lin said, adding that China’s economic minders would order those three industrial users to ease back.
Meanwhile, even as it cracks down on conventional fossil fuels, China still does not have a credible alternative “green” source of energy. Adding insult to injury, various regions have been criticized by the government for failing to make energy reduction targets, putting pressure on local officials not to expand power consumption, the BBC’s Stephen McDonell reports.
And while the blackouts starting to hit household power usage are at most an inconvenience, if one which may soon result in even more civil unrest if these are not contained, a bigger worry is that the already snarled supply chains could get even more broken, leading to even greater supply-disruption driven inflation.
As Source Beijing reports, several chip packaging service providers of Intel and Qualcomm were told to shut down factories in Jiangsu province for several days amid what could be the worst power shortage in years.
The blackout is expected to affect global semiconductor supplies – which as everyone knows are already highly challenged – if the power cuts extend during winter.
The NYT confirms as much, writing today that the electricity shortage is starting to make supply chain problems worse. The sudden restart of the world economy has led to shortages of key components like computer chips and has helped provoke a mix-up in global shipping lines, putting in the wrong places too many containers and the ships that carry them.
Nationwide power shortages have prompted economists to reduce their estimates for China’s growth this year. Nomura, a Japanese financial institution, cut its forecast for economic expansion in the last three months of this year to 3 percent, from 4.4 percent.
It is not clear how long the power crunch will last. Experts in China predicted that officials would compensate by steering electricity away from energy-intensive heavy industries like steel, cement and aluminum, and said that might fix the problem. State Grid, the government-run power distributor, said in a statement on Monday that it would guarantee supplies “and resolutely maintain the bottom line of people’s livelihoods, development and safety.”
Maybe China should just blame bitcoin miners for the crisis to avoid public anger… alas, it can’t do that since it already banned them and drove most of its technological innovators out of the country.
Container Ships Now Piling Up At Anchorages Off China’s Ports
By Greg Miller of FreightWaves,
There are over 60 container ships full of import cargo stuck offshore of Los Angeles and Long Beach, but there are more than double that — 154 as of Friday — waiting to load export cargo off Shanghai and Ningbo in China, according to eeSea, a company that analyzes carrier schedules.
The number of container ships anchored off Shanghai and Ningbo has surged over recent weeks. There are now 242 container ships waiting for berths countrywide. Whether it’s due to heavy export volumes, Typhoon Chanthu or COVID, rising congestion in China is yet another wild card for the trans-Pacific trade.
Goldman Cuts China’s Q3 GDP Growth To 0% As A Result Of Growing Energy Crisis
It’s not just Europe that is suffering the mother of all commodity and energy price shocks: slowly but surely a similar fate is befalling China, where a perfect storm of increased regulation, extremely tight global energy supply, the escalating trade spat with Australia, surging coal prices and a crackdown on carbon has led to energy shortages first at factories and manufacturers and more recently, mass blackouts hitting tens of millions of residents in at least three Chinese provinces (as we discussed earlier).
In our commentary to China’s growing energy problem we said that “while the blackouts starting to hit household power usage are at most an inconvenience, if one which may soon result in even more civil unrest if these are not contained, a bigger worry is that the already snarled supply chains could get even more broken, leading to even greater supply-disruption driven inflation.”
But there’s more than just supply chains: as Goldman’s China strategist Hui Shan writes in a note published late on Monday, “the recent sharp cuts to production in a range of high-energy-intensity industries add to the already significant downside pressures in the growth outlook.”
While the Goldman strategist explains more in detail further, the production cuts are due primarily to increased regulatory pressure on provinces to meet energy use targets for 2021 but also reflect surging energy prices in some cases. He notes that the NDRC issued ratings in mid-August showing nine provinces as performing poorly based on H1 energy usage, and reportedly intensified its efforts to bring underperformers into line in mid-September.
Based on the number of provinces (9 in NDRC ‘red’ classification) and share of industrial activity affected (Goldman estimates 44%), as well as informed assumptions about the extent of the cutbacks, the bank has estimated the hit to industrial production and overall economic activity for the remainder of the year. The bank’s initial estimate is roughly a 1 percentage-point annualized hit to Q3 GDP growth and double this impact on Q4 growth. The bank then also adjusted its fiscal deficit estimates to reflect a smaller augmented deficit
for 2021 (11.0%, vs 11.6% previously), accounted for by a lower deficit in the second half of the year: “This trims our growth assumption by about 25bp in Q3 and 50bp in Q4, given a relatively low multiplier and typical lags.”
Putting it all together, Goldman’s new growth forecasts for Q3 shrink to flat, or 0% qoq (4.8% yoy), for Q4 to 6% qoq ann (3.2% yoy), and for 2021 as a whole to 7.8% (down from 5.1%, 4.1%, and 8.2% yoy previously.) Here, Goldman caveats that “considerable uncertainty” remains with respect to the fourth quarter, with both upside and downside risks relating principally to the government’s approach to managing the Evergrande stresses, the strictness of environmental target enforcement and the degree of policy easing. In short, how Beijing responds will impact the forecast. Regardless of said response, however, Goldman also takes down its 2022 GDP growth forecast to 5.5% yoy, well below China’s new redline in the 6% range.
* * *
Elaborating further, Goldman writes that in recent weeks markets have been focused on developments with respect to Evergrande, its real estate development business, and risks to the broader Chinese property sector. The downward pressures on property sales and construction have added to a myriad of other headwinds for the economy including a relatively tight macro policy stance (epitomized by a balanced official fiscal budget in H1), Covid-related restrictions to counter local outbreaks, and regulatory tightening across a range of other sectors.
To this, we can now add a “new but tightening” constraint on growth from increased regulatory pressure to meet environmental targets for energy consumption and energy intensity (the so-called “dual controls”). As part of the country’s longer-term goal to reach peak carbon emissions by 2030, policymakers formulated shorter term targets for 2021 in March’s Government Work Report – including a 3% reduction in energy intensity of GDP this year. The National Development and Reform Commission (NDRC) monitors these at the provincial level on a quarterly basis. In August, it released a report classifying 9 provinces as category “red” – having missed their H1 targets, including Qinghai, Ningxia, Guangxi, Guangdong, Fujian, Xinjiang, Yunnan, Shaanxi and Jiangsu (Exhibit 1). Another 10 provinces were classified as “yellow”. In mid-September, the NDRC published a plan for “dual controls” and was reported to pressure provinces that had lagged behind to curb energy use.
Why did the energy use targets become binding so soon after being implemented?
While it presumably was not the intention of policymakers to provoke a sharp tightening, at least when the goals were initially formulated, the peculiar nature of the Covid shock has made the economy more energy-intensive, at least temporarily. The boom in exports has boosted energy-intensive manufacturing industries (Exhibit 2), while Covid-related restrictions have primarily affected interaction-intensive service businesses. Meanwhile, efforts to reduce coal-fired related emissions and a reduction in coal imports have affected supply levels at least on the margin, contributing to the sharp increase in prices discussed earlier.
What follows below is Goldman’s attempt to quantify the impact of these production cutbacks on growth in Q3 and Q4.
First, quantifying the impact of energy-related production cuts.
Given the uncertainty associated with the degree and duration of production cuts, Goldman has made a number of simplifying assumptions to size the impact on GDP. Exhibit 4 displays these assumptions and calculations.
First, the bank categorizes affected regions by their 1H 21 energy control ratings given by the NDRC. For the nine provinces where the rating is red, the local governments need to aggressively reduce energy consumption to meet the year-end target and we assume the largest production cuts in those provinces. This means even more pain is coming.
Second, Goldman divides industries by their energy intensity. For ferrous metals, non-ferrous metals and non-metal mineral products, the NDRC labels them as “high energy intensity” sectors and they are also cited most frequently in the news related to the latest power cuts (see here for example). Therefore, the bank assumes the sharpest production cuts (20-40%) in these three industries. Petroleum, coking & nuclear fuel and chemical material & product are also labeled as “high energy intensity” sectors, and are likely to suffer medium levels of production cuts (10-20%). Mining, textile, paper making, chemical fiber and rubber & plastic product require significant energy inputs and have been quoted in news articles as well. Goldman assumes 5-10% of production cuts depending on the province for these industries.
Altogether, Goldman expects the 10 days of production cuts at the end of September to reduce real GDP growth by nearly one percentage point (annualized) in Q3. The rightmost column in Exhibit 4 shows the hit to the level of GDP in Q3 for each set of industries; these sum to 23bp, and given this is a quarter-on-quarter change, the annualized change is slightly less than one percentage point (92bp).
Assuming the production cuts continue in Q4 and affect 10 days per month, they would reduce Q4 real GDP growth by about 1.8% sequentially. Here, Goldman hands out the usual caveats: namely that there is a great deal of uncertainty in our estimates. On the one hand, the bank assumes no places outside of the red and yellow provinces and no industries beyond the 10 industries mentioned above are affected, which will likely underestimate the actual production impact. On the other hand, affected companies may resort to shifting maintenance timing in response to power cuts and production may increase in provinces with non-binding energy caps, leading to less damage to overall growth.
Cutting fiscal deficit forecast
After Chinese authorities quickly unwound the macro policy easing deployed in the first half of 2020, credit growth decelerated, excess liquidity was drained, and the fiscal deficit declined. In fact, fiscal policy normalized so quickly that the country ran an official deficit of zero in the first half of the year. Goldman had expected some reduction in the overall fiscal deficit, but the tighter-than-expected H1 caused the bank to revise its deficit estimate for 2021 lower. While there has been some fiscal easing in July and August, this partly reflects typical seasonal patterns and the deficit is tracking below these downwardly-revised estimates. Significant off-budget elements of the augmented deficit including policy bank lending, trust lending, and land sales are tracking below the bank’s forecasts, and the latter in particular seems likely to continue to underperform given the ongoing property market tightening and failed land auctions seen in recent months. On the other hand, local government special bond issuance has accelerated somewhat but remains below the pace needed to fully utilize this year’s quota. Therefore, Goldman is revising a second time, and moving its forecast for the full-year augmented deficit to 11.0% from 11.6% previously.
Adjusting the new second-half deficit forecasts 1.2% lower and applying a multiplier of 0.2 (as well as a modest lag to some spending), Goldman now estimates an impact on qoq annualized growth of roughly -1/4pp in Q3 and -1/2pp in Q4.
The new GDP growth forecasts
Combining these new estimates for the impact of supply-side cuts to energy-intensive production and slightly less support from fiscal policy, Goldman cuts its growth forecasts for:
- Q3 to 0% (qoq annualized), from +1.3% previously,
- Q4 to 6.0% annualized, from 8.5% previously.
As a result, Goldman’s year-over-year forecasts are now just 4.8% for Q3, 3.2% for Q4, and 7.8% for 2021 as a whole.
Finally, the lower starting point for early 2022 activity pulls the growth forecast for that year down one tenth, to 5.5%, despite modestly stronger sequential growth as restrictions become less binding and policy eases.
Uncertainties and policy response
While the third quarter is nearly over, uncertainty around the Q4 pace remains very large, and a lot of this comes down to the stance of both macro and regulatory policy, i.e., Beijing’s reponse. Key drivers of the Q4 outcome will include the timing and extent of:
- government measures to stabilize housing sector activity and stretch out the deleveraging in the property sector,
- any temporary relaxation of regulatory pressures to meet energy use targets, and/or
- macro policy support.
Each of these factors could materialize on either the positive or negative side relative to these new reduced growth forecasts.
Millions Of Chinese Residents Lose Power After Widespread, “Unexpected” Blackouts; Power Company Warns This Is “New Normal”
Just yesterday we warned that a “Power Supply Shock Looms” as the energy crisis gripping Europe – and especially the UK – was set to hammer China, and just a few hours later we see this in practice as residents in three north-east Chinese provinces experienced unannounced power cuts as the electricity shortage which initially hit factories spreads to homes.
People living in Liaoning, Jilin and Heilongjiang provinces complained on social media about the lack of heating, and lifts and traffic lights not working.
Local media in China – which is highly dependent on coal for power – said the cause was a surge in coal prices leading to short supply. As shown in the chart below, Chinese thermal coal futures have more than doubled in price in the past year.
