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The major consuming regions went into winter with depleted stocks of petroleum, gas and coal and have since struggled with the threat of supply disruptions as a result of Russia’s invasion of Ukraine.
But relatively mild temperatures coupled with very high prices limited further inventory depletion over the last three months and avoided a physical shortage.
Northern hemisphere land surface temperatures were around 1.54°C above the long-term average between December and February, according to the U.S. National Oceanic and Atmospheric Administration.
Temperatures were slightly warmer than the mean for the previous ten winters, which were 1.48°C above the 20th century average (“Climate at a glance: global series”, NOAA, March 15).
Crucially, temperatures were furthest above the 20th-century average in Asia (+2.19°C) and Europe (+2.16°C) where potential energy shortages were greatest while the North American winter was closer to normal (+0.56°C).
The result is that Europe and Asia are exiting winter with oil, gas and coal inventories below normal for the time of year – but the situation could easily have been much worse.
WINTER IS (ALWAYS) COMING
With this winter barely over, the market focus is already turning to rebuilding depleted inventories ahead of next winter.
(Chartbook: https://tmsnrt.rs/35Y1Bm0)
Stocks are ending this winter below average and need to rise above average by the end of the autumn to cope with what will probably be a colder winter next year.
Oil, gas and coal markets will therefore need an unusually large accumulation of stocks over the spring and summer and high prices will likely be needed to enforce the required stock build.
In the United States, total fossil energy consumption typically declines by 11-13% in the three months from March to May compared with the three months from December to February, allowing inventories to rebuild.
U.S. gas consumption falls even further by around 29% in the spring quarter compared with winter, allowing an even bigger recovery, according to estimates prepared by the U.S. Energy Information Administration.
Fossil energy consumption is still 6-8% lower in the summer months from June to August, with gas consumption 21% lower, compared with the winter quarter (“Monthly energy review”, EIA, Feb. 24).
But inventory accumulation is very variable and depends on temperatures remaining mild and avoiding any significant supply disruptions.
This year the market will have to adjust to additional uncertainty about the availability of oil, gas and coal from Russia, which is one of the world’s largest exporters of all three fossil fuels.
Prices for nearby futures contracts for all three fuels have risen in recent weeks to conserve as much inventory at the end of this winter as possible and to enforce an early start to inventory building this spring.
In the face of so much uncertainty, futures prices are likely to remain relatively high to enforce maximum inventory accumulation at the earliest opportunity in April and May.
High prices in the near term would create the potential for lower prices and less pressure for inventory building by August and September, provided Russian exports are not significantly disrupted.
If Russian exports are interrupted by sanctions, it may not be physically possible to rebuild inventories to the desired level before next winter, in which prices are likely to spike again and remain very high until 2023.
John Kemp is a Reuters market analyst. The views expressed are his own.
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