Saturday 29 October 2022

Winter draws on ...

 ... and we are in better shape than might have been the case, all things being considered.  Don Cox noted BTL that the Rough gas storage facility has started up again** - a very curious, nay, fishy 'miracle', as we've noted before - albeit at 20% of its former capacity: but every little helps.  Several UK coal plants have been revived, to be on standby in case the gas runs out and the wind doesn't blow.  And the Germans have moved mountains to get floating LNG receiving import facilities online, again with the caveat that the volumes won't be as great as all that.  They nearly made their ambitious gas storage inventory targets before going into winter, too.  They, also, have been busily reviving coal, and indeed lignite plants for reserve duty.  And they've done what I and others thought was probably not possible, in squeezing a few extra months out of the nukes that were set for closure.  This wasn't possible with Hinkley Point B in this country, despite government pleading and financial blandishments: HPB was closing (and has indeed closed, as of August) due to age and infirmity, whereas the German nukes were closing by political fiat.  That doesn't mean Scholtz will get any more months out of them next year, because the supporting infrastructure has been shutting down, too.

Several other EU nations, notably the Spanish, have been preparing very well, too.

On the supply-side downside, the French are again falling hugely short.  Their nuke fleet was staggering back to its feet for winter in a partial way, after extensive safety-related closures, only to be hit by a wave of strikes.  Well, there you go, Macron: it's a continuation of massive imports and the highest (wholesale) electricity prices in Europe for you, then. 

This is also proving very costly for Germany, too - but I always said nobody should bet against their ability to put their shoulders to the wheel.  You have to laugh when Macron throws a strop when it's announced by Germany that they are budgeting EUR 200 bn for their energy measures.  Merde! That will distort the European energy market!  Well what did he think:  the richest nation in Europe would volunteer to freeze, out of fellow-feeling for the Frogs?

Talking of distorting the market, France is also desperately trying to get the EC to introduce a "cap on wholesale gas prices" - whatever that might conceivably mean in a truly global gas market.  I won't bore everyone with my endless refrain that most European politicians don't understand how markets work.  I used to finger the Germans most specifically for this, but it now looks as though most of the top players in Scholz's government have taken some rapid lessons on this topic since February, and know the score a little better.  Tough titty, Macron - but you had it coming.

I only hope the new government here looks him squarely in the eye and tells him he can forget any hopes for Sizewell C he might have nurtured on behalf of the French équipe nucléaire; not on the terms he had in mind, anyhow.  We've had enough of PMs bowing the knee to EDF in these matters.

Hold tight for the coming winter.



** Anon asked:  anything to do with the cost of gas futures at the mo? And the implications for Russia / Middle East LPG. 

The forward market is in very strong contango at the moment (having been for months in backwardation, which some theorists say is impossible for a commodity like gas).  This betokens market sentiment that for right now (i.e. until really cold weather strikes) Europe is looking OK for gas supply - a function of all those efforts noted above - and that winter 2023-24 now looks to be the big problem, despite some some idiot political pundits saying the coming winter will be the last we need to worry about.  Fully-laden LNG tankers are stacked up off the Atlantic coasts of UK / France / Spain, effectively acting as floating storage.  So yes, Anon, Rough (and UK plc) is in a position to benefit from this current situation.  Rough, as you prob know, is 'seasonal' storage, i.e. designed only really for a single annual cycle of injection and withdrawal; and although there's plenty of volatility across the whole forward curve (which benefits such facilities) it pales into insignificance compared to the vol in the spot and short-dated markets, which benefits facilities with much shorter cycles (e.g. 1 or 2 months).  I hope (but rather doubt) that HMG allowed Centrica to get on with their 'Rough miracle' without public money; because Centrica has played a pretty shifty game on this. 

Whilst on the subject of storage economics: as you'd expect, owners of grid-scale batteries, limited though they are in capability, have been making a fortune for more than a year now: ditto owners of gas-fired peaking plants.  Vol is the main play in town, now that simply going long isn't a one-way bet any more.  For example, the current gas market contango will reverse in a matter of days if a Beast from the East hits (energy beast, that is - not Putin again).

Incidentally, the personal burnout in energy traders has to be seen to be believed.  Initially they were just making fortunes; but now liquidity and credit issues are bearing down on them, and they can drop $10m on a cargo of LNG as easily as make it, in the touch of a button.  Hairy times. 


Don Cox said...

Well, I set the central heating thermostat to 15 degrees, which is perfectly bearable, at least for those of us who were around in the 1940s.

Let's all be thankful for global warming, which with luck may give us another mild winter. Bearing in mind that climate is the average weather over the past ten or fifteen years, not the weather this afternoon.


E-K said...
This comment has been removed by the author.
E-K said...

Well. At least it seems the political consequences of Green have finally been admitted.

Just let these silly feckers glue themselves to street furniture and give them lots of free tea and food.... see what happens. Film it for all to watch.

I was on a tram through beautiful Bordeaux the other day admiring the French and their sophistication - a 'lady' rushed off it, pulled down her kecks and pissed all over the tram stop bench.

I felt right at home again.

Anonymous said...

Ah..the ins and outs of volatility. Can people actually make money by assessing (or guessing) market movements or is it all the luck of the draw?

Local to me, in an AONB, a poultry farmer couldn't make it and decided to sell up. The land being AONB should have stayed as farming but the Local Authority has a housing "target" which bears no resemblance to local need. It's all DFL's (down from London).

Land was rezoned for building and owner was in line for £2mn. Along comes one of these owners of gas-fired peaking plants and decides to offer £3mn. Happy farmer; disappointed LA; grief for Nimby's.

The £3mn? On its was back to the Balkans in the hands of a Croatian chicken farmer as staying in the UK is not worth it now. It'll be spent on a high end Huf Haus. The peaking plants owners have got their cash back too, quite quickly.

So did the farmer overestimate chicken futures; or the gas guys energy futures? And what about the LA and their housing "needs" that aren't needs at all?

Strange times to be trying to make money when sometimes it just falls into your lap.

rwendland said...

ND, I take it this comment in the Guardian about Rees-Mogg as Business & Energy Sec negotiating Russia-style long-term supply contracts with Qatar & Norway was total nonsense. Or were there in the early panic some unsuccessful attempts in his department along these lines?

Rees-Mogg is reportedly negotiating deals with two gas exporting countries, Qatar and Norway, over long-term supply contracts that would commit the UK to buying gas in large quantities at an agreed price for more than a decade.

Nick Drew said...

Mr W: much as I despise Rees-Mogg for the unprincipled 'libertarian' opportunist he is, he was particularly energetic in his few days in office (which speaks well for him): so I can't rule out he didn't seek long-term deals with plausible counterparties. Ordinarily I'd say 'leave it to commercial dealings' as a matter of principle - & maybe he would, too - but we are at war and the rules change.

As regards the appropriate free-market doctrinal principles on long-term contracts, I'd say:

- there's no doubt the trad Russian-style insistence on "35-years and oil indexation or no deal" was, in context, inimical to the development of liquid markets in Europe. But once liquidity is granted (in gas, oil, and any other relevant variable) it ceases to matter very much. Some counterparties have strong business-model drivers to strike floating-price deals (whether via spot markets, or long term deals indexed to spot prices); some want fixed prices (in the absolute sense), or indexed to (e.g.) inflation; some want deals indexed to another commodity. All of these can be completely and utterly rational and commercially justifiable. All can be hedged! (ex hypothesi), making it broadly irrelevant whatever gets agreed in a long-term contract, because any index-based exposure that's not wanted can be swapped out. (Of course, one party is typically going to be more expert in the financials than the other, which tells in favour of them taking on the swapping function. Likewise, and not always working in the same direction, one party is likely to have a stronger credit standing than the other which, other things being equal, speaks to them doing the swapping.)

I won't bore everyone with illustrative examples: but business models are, inevitably and quite properly, many and various. So there's no "one size fits all" as to what deal structure / pricing formula / tenor is best, between consenting adults.

The issue only becomes awkward where the sheer volumes involved in a particular risk-dimension start to impinge on market liquidity.

(BTW, there are good liquidity-based reasons why people should want to do l-t deals indexed to spot prices, however paradoxical that may sound from considerations of commodity exposure alone. Centrica was a pioneer of this in the UK.)

Otherwise, provided ALWAYS that there is liquidity - let a thousand flowers bloom!

(PS, Right now, credit support is buggering up all these considerations.)

Nick Drew said...

Anon: in general terms, the key to exploiting vol is optionality (the financial term for it) / capacity (the equivalent physical-asset, 'engineering' term) / flexibility (the lay term). Plus of course the intelligence & analysis to spot what's going on; the judgement & decision-making capability to know what to do; and the ability to execute on the decision.

Anonymous said...

The funny thing about markets is that they all have hidden factors that drive them. The only market I knew quite well was rough diamonds, those that are polished and sold as gems. Obviously there is supply and demand but there were so many other factors, such as exchange controls in India, that had completely unexpected impacts on demand. People earning money on ready access to foreign exchange could afford to pay far more than seemed sensible. There were many little things like this which were not mentioned because it suited the big producers to pretend that the market was clean and orderly.

I am sure all markets have these little idiosyncratic foibles but they do trip up the unwary. I remember several very big, experienced multinationals burning their fingers in the diamond industry. Bank finance was another horror story as stock valuation was a nightmare and was used for many purposes. The problem with rough diamonds stock valuations is that there are very few people who are qualified to do it, it is even harder to get two people to agree and also the owner of the stock may, shall we say prefer a more conservative valuation.

What this boils down to is that unless you play in the energy market every day you are not going to understand what is going on. I suspect this is what bedevils govt intervention in any market.

Oh and by the way, I never really knew what was going, I just knew enough to sound plausible when talking to people who really did know what was happening.

Have a nice evening