Inflation

[divs4ever]

Because a lot of it is beyond their control. When the infrastructure for 3 million barrels a day of russian oil is either blown up or crumbles from lack of maintenance, what then?

Remember back when the lockdowns first hit: Everything, but most of all, energy, PLUMMETED. We didn't see any big inflation in anything other than tech really, precisely because everyone were at home and therefore NOT going out and doing stuff/consuming energy.

Bring that demand back online with 25% of the world's oil offline and it's a massacre. You might have increased the supply of whatever you're producing (microchips or steel or whatever) but you've increased demand for the very energy necessary to produce them.

Green energy is no substitute for coal/oil and this is something all the woke countries have learned the very hard way over the last few months. Take a look at ICLN (clean energy etf) vs IXC (big oil etf) year to date to get an idea:

View attachment 141267

If anything, the last 4 months has actually exposed green energy for the complete fool's errand that it is.

China will be quite willing to help and JV , with their ( new ) major supplier ( in many commodities )

Russia isn't exacting a stone-age economy , but they build things that are robust and durable ( and sure they look crude and lack refinement but they will do so for 20 years or more , with minimal upkeep ) they will create the infrastructure need , and the Chinese will see it is in their best interests to help where they can

the confounding factor will be how much will India participate in the mix ( they are sending exploration probes to Mars , so they are quite technologically capable as well )

 

[over9k]

China will be quite willing to help and JV , with their ( new ) major supplier ( in many commodities )

Russia isn't exacting a stone-age economy , but they build things that are robust and durable ( and sure they look crude and lack refinement but they will do so for 20 years or more , with minimal upkeep ) they will create the infrastructure need , and the Chinese will see it is in their best interests to help where they can

the confounding factor will be how much will India participate in the mix ( they are sending exploration probes to Mars , so they are quite technologically capable as well )

India's power generation is overwhelmingly coal but they're already trying to turn the screws on the russians to send them cheap oil, but fact is that india is right next to the persian gulf, has unrestricted access to the oceans, and a very young population (read: supply of labour and demand for consumer goods). India will be to the next 30 years what china was to the last 30.

A huge part of the russian infrastructure was built (and continued to be maintained) by western companies like schlumberger. Things like the pipelines going from the baku fields (the caspian sea) across to the black sea to be loaded into tankers that then ship to the wider world. Those companies are GONE. So what happens once things start breaking and there's nobody left to fix them?

OPEC are already pumping pretty much flat out and you can't just bring millions of barrels a day of oil online and delivered in five minutes. Fact is we have sanctions on ~5 million barrels a day of russian oil at the moment and about another ~3 million that's going to go offline when it crumbles from lack of maintenance or simply having to be switched off in the cold (which wrecks it anyways).

Remember that a lot of russian oil comes from areas with permafrost - it's not as simple as just opening or closing the taps in a -40 environment.

 

[over9k]

The only thing that really has me worried is the U.S president's ability to restrict or outright ban ALL u.s oil exports. If that happens, the effect will be seismic.

 

[divs4ever]

The only thing that really has me worried is the U.S president's ability to restrict or outright ban ALL u.s oil exports. If that happens, the effect will be seismic.

i think seismic is baked into the cake , regardless of US decisions , a lot of OPEC is now US-neutral ( or unfriendly )

you should be worried about US imports Joe is already killing US production ( and not just oil , you will have US steel costs screaming past the Moon )

 

[divs4ever]

India's power generation is overwhelmingly coal but they're already trying to turn the screws on the russians to send them cheap oil, but fact is that india is right next to the persian gulf, has unrestricted access to the oceans, and a very young population (read: supply of labour and demand for consumer goods). India will be to the next 30 years what china was to the last 30.

A huge part of the russian infrastructure was built (and continued to be maintained) by western companies like schlumberger. Things like the pipelines going from the baku fields (the caspian sea) across to the black sea to be loaded into tankers that then ship to the wider world. Those companies are GONE. So what happens once things start breaking and there's nobody left to fix them?

OPEC are already pumping pretty much flat out and you can't just bring millions of barrels a day of oil online and delivered in five minutes. Fact is we have sanctions on ~5 million barrels a day of russian oil at the moment and about another ~3 million that's going to go offline when it crumbles from lack of maintenance or simply having to be switched off in the cold (which wrecks it anyways).

Remember that a lot of russian oil comes from areas with permafrost - it's not as simple as just opening or closing the taps in a -40 environment.

Mongolia , North Korea and Russia have plenty of coal ( and if they overthrow the regime in QLD , they has some undeveloped coal as well , ready to go brownfields )
i am guessing India will increase the use of other energy sources , to improve the resilience of the power grid .. for example Russia or China would probably be willing to build nuclear power plants in India for a price

 

[divs4ever]

BTW if i was a US oil producer ( operating on US soil ) i wouldn't be rushing to upgrade/repair plant , given the current policy narrative , i could be shut down next month to meet carbon targets

 

[Value Collector]

yes , BUT a currency is also a symbol of trust in the government ( and their economic management )

In some ways, but I think it’s more about trust in a country’s reserve bank and the country’s underlying economy, which pollies like to pretend they control, but which are largely independent.

 

[divs4ever]

well the Russia sanctions made foreign reserves ( potentially ) worthless , they may as well be in Doge coin

the last time i had the tiniest bit of faith/hope in the RBA was November 2016 when they had a cheap opportunity to shock the market ( in a usable fashion )

and if you go outside government budgeting , you are talking trade balances ( which would be the nirvana if it were actually a free-market )

but bureaucrats and politicians need to be appear relevant ... so the 'market' ( international or otherwise ) is intervention central

 

[over9k]

To state the bleeding obvious, the companies that are most outside of the U.S stand to benefit the most if Biden shuts the U.S exports off. I'm grabbing some KSA tonight and going to keep digging for what else I can grab. Finding the supermajors' production & revenue by region is proving surprisingly difficult. Statista doesn't seem to have data on anything but shell. I might have to go digging through their annual reports one by one.

Looks like a busy night ahead.

 

[over9k]

2 mins later:



China lockdowns estimated to have K.O'd about a million a day of demand. EU's currently talking to USA etc about total russian ban by year end. I can't see how they can even think about this without U.S oil which means that the yanks will have to supply europe if they want european sanctions on russia to stick.

Encouraging.

 

[over9k]

@Smurf1976 Feel free to chime in with anything you think I've missed here.

 

[divs4ever]

yes i suspected , that OPEC was somewhere near sustainable peak production ( there is always something needing repair , or maintenance )

and well Russia will be fully occupied servicing Asian customers ( and a handful or European nations )

looks like all those oil wars have come back to devour ( Europe )

 

[divs4ever]

BTW you should be examining the latest Kremlin decree , Russia seems to have made it's first move ( and it is probably enforceable )

 

[Smurf1976]

Interesting to note the inflationary drivers they're considering are Russia-Ukraine and China lockdown. These will likely be temporary drivers of inflation

China I agree could be temporary, albeit with the prospect of recurrence, but I really can't see the world being keen on sourcing goods from Russia anytime soon.

Unless something changes, that could end up as a generational conflict in my view.

 

[divs4ever]

China I agree could be temporary, albeit with the prospect of recurrence, but I really can't see the world being keen on sourcing goods from Russia anytime soon.

Unless something changes, that could end up as a generational conflict in my view.

as a result of the current sanctions , i would think Russia would be extremely reluctant to sell anything at all to 'unfriendly nations ' for an extended period of time and may even repeat the 'Iron Curtain ' for another seventy plus years

so is that one generation ( seen to be 20 to 30 years ) or an open-ended time-line ( 20 years plus )

given recent events i see China working hard to help develop under-developed nations , removing cheap labour sources for Western goods

 

[Smurf1976]

@Smurf1976 Feel free to chime in with anything you think I've missed here.

A few thoughts on the energy stuff (keeping the focus on the financial more than the engineering):

At the consumer (that is, the actual machine that's using the energy) level in some situations energy sources are interchangeable, in others they're not. For examples:

A car needs petrol / diesel and that's the only thing it can use to power it. To use anything else requires fitting a new engine or, more likely, replacing the entire vehicle.

Aircraft are even stricter on fuel specifications.

On the other hand, electricity is electricity regardless of how it was produced. If the price of gas drops below the price of coal well then it's dead easy to burn more gas and less coal.

In some cases that can be done in the same power station simply by changing what fuel it burns (and in some cases that switch can be made with the plant remaining at full output uninterrupted) but it's also about changing which ones run flat out constantly (base load) and which are backed off when demand is down. Coal doesn't have unlimited flexibility there, it's inferior to oil or gas in that regard, but it does have a reasonable amount. If price warrants then coal can be turned down roughly half way (varies depending on the facility in question, it's in the 30 - 70% range for any individual facility) at off-peak times and gas left running yes, it's doable within technical limits if there's a financial reason to.

Put that all together and there are two classes of energy consumption:

1. Just need anything that burns and have at least some ability to switch between fuels. Might not be able to totally eliminate oil, gas or coal but there's reasonable ability to shift.

2. Locked in and there's zero flexibility. If your heating needs natural gas and your car needs petrol well then coal, hydro or nuclear aren't going to help in the slightest.

The ability of those in group 1 to shift production can (does) balance physical markets to some extent. Eg there have been plenty of credible reports of switching from LNG to fuel oil for power generation in some countries over the past few months, that being driven by purely economic considerations. So that drops LNG consumption and raises oil consumption very directly.

Once it gets outside that however, once all those who can switch away from a high cost fuel to a cheaper one have done so, well then it's game on.

Future use of EV's aside, motorists are locked into petrol / diesel right now. That goes for everyone from motorcycles to road trains. Wherever the oil price goes they've got no choice but to pay it if they want to keep driving.

Same with gas heating and this one is particularly relevant. The average house in the UK (for example) has a gas boiler in the kitchen which provides heating, via hydronic radiators, to the whole house. That boiler burns gas and nothing else. Same goes for much of Europe, it's all hydronic heating with gas boilers or, if gas isn't available, the boiler is oil-fired. Assuming the occupant doesn't wish to shiver through winter, there's no real choice other than to pay whatever it costs.

That dynamic, the lack of ability to shift to any alternative, can and will push prices to extreme levels once the ability to contain it within group 1 users (power generation etc) is breached and that's exactly what happened this past northern winter, gas prices went through the roof across the EU and UK (in this context there's no practical distinction between the UK and EU since physically it's one interconnected system).

Now for the shocker and this one's closer to home......

Natural gas price in Victoria during 2021 was $6 - $8 per GJ most of the year.

January 2022 it was $10 in round figures.

Now for the ride we've had over the past few days. This is actual spot price data from AEMO and is thus "official".

Prices are set in 4 hourly blocks, that's how the industry works, and the times I've shown are the start of each block. Eg 10:00 means 10:00 to 13:59 and so on.

Exception is overnight as there's no 2am period, a single price applies 22:00 - 06:00. That's just how it's done, one of those things just to be aware of.

2 May @ 18:00 = $15.60
2 May @ 22:00 = $15.65

3 May @ 06:00 = $16.12
3 May @ 10:00 = $16.39
3 May @ 14:00 = $16.73
3 May @ 18:00 = $16.90
3 May @ 22:00 = $16.72

4 May @ 06:00 = $17.14
4 May @ 10:00 = $16.90
4 May @ 14:00 = $17.00
4 May @ 18:00 = $17.35
4 May @ 22:00 = $19:10

5 May @ 06:00 = $19.24
5 May @ 10:00 = $19.10
5 May @ 14:00 = $22.00
5 May @ 18:00 = $23.64
5 May @ 22:00 = $22.99

So what happened? How did we end up with a more than 50% price jump in 3 days?

Weather!

Daily maximum temperatures for Melbourne (Olympic Park BOM site):

2 May = 22.1
3 May = 20.7
4 May = 16.4
5 May = 14.1

Gas is the predominant method of heating buildings in Victoria such that as the temperature drops, consumption soars indeed typical winter consumption is triple that of summer and on a particularly cold day that becomes quadruple.

This screenshot of the AEMO public website shows it clearly. Blue on the chart is gas consumption, purple line is price:


So there you have it and what it comes down to is that supply really just isn't there. Demand increased to 906 TJ (terajoules) on the 6th May, from 687 TJ on the 5th and 465 TJ on the 4th due to the weather and up goes the price.

Now I'll point out a few things:

906 TJ isn't particularly high. Through winter daily demand over 1000 TJ is routine and at the extreme it tops 1200 TJ.

It's not actually winter yet! It's only May and we're right at the very beginning of the heating season, this is literally the first days of significant heating use for 2022. There's the whole winter season yet to come!

The ACCC's calculated LNG netback price, which can be found on their website, is as follows:

May 2022 (actual data based on contracts etc) = $38.09

June 2022 = $27.04
July 2022 = $26.47
August 2022 = $27.06
September 2022 = $29.91
October 2022 = $32.46
November 2022 = $33.54
December 2022 = $33.59

So assuming a reasonably normal winter which brings Australian east coast (which in this context is all states except WA) demand up to the point where physical gas production cannot meet both domestic demand + the physical limit on exports (from Qld) then we see domestic prices rise up to that LNG netback price.

In the event that there's a physical disruption to production, or the netback price rises further, well then the sky's the limit.

Now I hear everyone say that either they don't use gas at all, or their gas price is at fixed rates not a spot price that constantly changes. Good point but....

For your fixed price domestic supply, you can be pretty sure that a rise in the wholesale price will be passed on at some point. Gas retailers aren't there to lose money so whilst the price might not vary daily, ultimately it'll be passed through.

And the big one - there's an awful lot of things you do buy which have gas as an input. If it's cooked or heated at an industrial scale then most likely the heat source is gas. Then there's everything from gas-fired power generation to hotels using gas to heat water to large commercial buildings heated with gas and so on. All of that's ultimately going to be passed onto consumers one way or another either directly or indirectly but bottom line is someone will be paying.

We are of course also seeing that energy price inflation for petroleum products as everyone who uses them will be well aware. And of course it's not just the petrol or diesel you use directly but the reality that every tractor and harvester is run on diesel, so is almost every truck and so on. Whatever you eat today, diesel was an input to its supply that's a given. Then there's public transport and so on too.

Plus also electricity. Average spot prices per MWh across all states excluding NT:

2019 calendar year average = $89.31

2020 = $57.03

2021 = $77.47

September 2021 = $40.90
October 2021 = $72.69
November 2021 = $103.77
December 2021 = $107.47
January 2022 = $126.12
February 2022 = $150.31
March 2022 = $124.95
April 2022 = $213.74

2022 calendar year to date average = $152.07

Even those figures are slightly understating it since the inclusion of WA and Tas is skewing them lower. Average price for Queensland in April 2022 was $316.35

My point in all that is purely an economic one, inflation, not an engineering one. Some technical mishaps with production haven't helped but primarily it's an economic situation more than anything else. Loss of a coal plant isn't such a deal if you can afford to run gas turbines as a replacement but when gas costs a fortune that's very different. So there's a technical aspect to it but ultimately it's the price of fuel that's the key issue driving it.

Now that's all about energy yes but I've no doubt similar would apply to various metals and other things with far reaching consequences.

 

[Smurf1976]

so is that one generation ( seen to be 20 to 30 years ) or an open-ended time-line ( 20 years plus )

My thinking is the sort of timeframe that's indefinite until a new paradigm emerges due to some future situation.

Point being I'm not expecting it to be over in any timeframe soon enough to be of relevance (but how long is anyone's guess).

 

[divs4ever]

My thinking is the sort of timeframe that's indefinite until a new paradigm emerges due to some future situation.

Point being I'm not expecting it to be over in any timeframe soon enough to be of relevance (but how long is anyone's guess).

yes , i think long but indefinite , as well

i think one mistake the West is making , is that ( most ) resources left IN THE GROUND are ageless , where as a manufactured item only has a limited time to be easily salable ( some classic watches. autos etc being the exception )

so Russian could chose to wind down resources extracted down to national consumption levels , and might not even face significant job losses ( i think they will simply divert extra sales to China , India , Vietnam and other willing customers like a developing Afghanistan and Iran )

if German manufacturing crumbles , will the majority of the EU follow , there are already distressed member states , the tipping point can't be that far away

 

[over9k]

Pretty wild profit taking friday, bond yields have just soared in a total dismissal of powell's comments yesterday.

But:



HMMMMMMMMM

 

[waterbottle]

BoE has hiked rates to 1% overnight, citing inflation expectations of 10% into until Q4 2022 with energy costs playing the biggest contribution.
Interestingly, a 1% interest is the highest they've had since the GFC.... Big shifts on currency markets too, AUDUSD down 2%, BTC down 8%, US tech getting slaughtered, bonds up 5% - it was a risk-off day....
Whether this is continuation of a trend or volatility it might be too early to say, but US tech is starting to look oversold - FANG now approaching/past previd COVID 2020 prices....