America’s “energy crisis” continued to grab headlines Tuesday, where “crisis” just meant (and forgive me here) it got cold and some states didn’t know what to do.
There’s more nuance to it than that, but not much. “Gas pipelines began to seize up, wind turbines started to freeze, and oil wells shut in — just as homes and businesses raised demand for heating to record levels,” Bloomberg recounted. At least two people are dead.
“To prevent the collapse of their networks, suppliers from North Dakota to Texas are having to institute rolling power cuts to limit demand,” a separate article said, recapping the events of the past 72 hours, and noting that “more than a million barrels a day of oil and 10 billion cubic feet of gas production are shut [while] massive refineries have halted gasoline and diesel output.”
So, temperatures plunged, people wanted to keep warm (as they’re wont to do when it gets cold) and faltering supply collided with surging demand. What generally happens when there’s a supply/demand imbalance skewed to the latter? Well, prices surge.
As noted Monday, wholesale power prices jumped above $9,000 a megawatt-hour in Texas. A couple of people have asked for the chart (below). I’ll oblige, although this is one of those situations where the visual is pure eye candy — that is, there’s very little informational value beyond what you could glean simply by reading the headlines.
To reiterate what’s implicit in the brief commentary above, this isn’t solely the “fault” of icy wind turbines. I alluded to this on Monday too, and I’ll say it again here: One problem is Texas’s “unique” (a euphemism) electricity market.
In any event, mistakes were made. Planning needs to be better. And the US has, again, shown itself incapable of dealing with something which, while rare, was hardly unforeseeable. It does get cold sometimes. Records are meant to be broken. Climate change means extreme weather is likely to become more commonplace. Plan accordingly, as they say.
Rabobank’s Michael Every had a characteristically colorful take. “Yes, higher oil pushes up US breakevens and hence a lot of the ‘reflation trade’ momentum. But does anybody believe that pushing up energy bills 10,000% is what people mean when they conceive of ‘reflation’?,'” he wondered. “I bet an hour of good ‘ol Texas electricity that Joe Public is thinking of higher wages – not oil, gas, electricity, rent, or food prices as a sign of ‘recovery’.”
That gets us to markets, where delusional human beings enamored with their own capacity to create not just wholly fictitious entities (companies, countries), but derivatives based on them (stocks, bonds, etc.), pushed global equities higher. World stocks rose a twelfth session. That’s the best streak since 2003. I suppose I’ll reprint the visual from Monday — plus one.
Hong Kong came back online, and dutifully rallied nearly 2%. Especially buoyant were shares tied to the Chinese entertainment industry. Lunar New Year box-office revenue surged to a record, data showed. In China, it’s safe to go to the movies. What a world that must be. Americans can only hope.
10-year US yields hit 1.25% coming off the holiday, and breakevens rose to the highest since 2014. Rangebound theses will be tested, apparently.
So far, this is the worst year for global bonds since 2013, Bloomberg trumpeted Tuesday, as though it’s not just February. Still, it’s a point worth making. After all, 2013 featured an infamous bond market event (the taper tantrum) and there’s a ton of duration embedded across markets, either explicitly or implicitly. So, a vicious bond bear has the potential to be destabilizing.
Bitcoin is back near $50,000. “Those who need to hedge will want to put their hands on any assets,” PVM’s Tamas Varga wrote, commenting on the prospect of the reflation trade morphing into actual, real-world inflation. “When Bitcoin, which has a fundamental value of zero, is deemed an acceptable vehicle to use against inflation then oil must surely fall in this category, too.”