LNG futures are out of control:

Oil is a poor second cousin but still rose:

The trigger was a China panic:

China’s central government officials ordered the country’s top state-owned energy companies — from coal to electricity and oil — to secure supplies for this winter at all costs, according to people familiar with the matter.

The order came directly from Vice Premier Han Zheng, who supervises the nation’s energy sector and industrial production, and was delivered during an emergency meeting earlier this week with officials from Beijing’s state-owned assets regulator and economic planning agency, the people said, asking not to be named discussing a private matter. Blackouts won’t be tolerated, the people said.

Prices to rise to keep the lights on:

Some Chinese regions are relaxing controls on power prices to allow coal-fired power plants to charge higher prices when coal prices surge, in a move to boost electricity production and ease the ongoing power crunch.

Southern China’s Hunan province said it will make power plants’ coal purchase prices as a parameter for deciding base power prices and it will regularly adjust the cap for power prices according to changes in coal prices, according to a notice issued by the local government on Monday. The new measures become effective from October and will not affect residential power users.

Under China’s current power pricing system, power prices are set as base price plus float which can deviate up to 10 per cent higher or 15 per cent lower. Due to runaway coal prices so far this year, the current pricing can no longer cover power plants’ production costs.

Hunan authority said it aimed to set up a mechanism linking changes in coal prices and the cap of power prices to reasonably reflect the cost of electricity production and consumption as well as lower risks, according to the notice.

“When power plants’ average coal purchase prices exceed 1,300 yuan per tonne, transaction price of coal-fired power will rise by 1.5 cents per kWh for each 50 yuan/tonne rise in coal prices, ” it said.

On Thursday, southern China’s Guangdong province said it will improve peak-valley price mechanism, adjust the peak-normal-valley power price ratio to 1.7 : 1 : 0.38 from 1.65 : 1 : 0.5 and float peak-hour power prices up by 25% from previous peak-hour level, effective from October 1, according to a notice released by the Guangdong provincial economic planner.

The peak-valley price mechanism and peak-hour power price don’t apply to residential power users, it said.

The National Development and Reform Commission (NDRC), China’s top economic planner, said on Wednesday that the government would not stop electricity prices from floating within a reasonable range and would let them reflect market fundamentals and changes in cost.

The problem is this. China’s thermal coal inventories are depleted:

Europe’s gas inventories are depleted:

US and global oil inventories are depleted:

There is still no underlying shortage. It remains the case that there is plenty of all three raw materials.

However, for now, the super-rapid COVID rebound in goods production has come up against a perfect storm of supply disruptions and inventory depletions to deliver us an energy shock the likes of which we have not seen since the GFC.

As futures markets are clearly indicating, it will not last, but by the time markets re-adjust, anything is possible in prices, and the whole caboodle is swiftly developing into a demand destruction shock worldwide.

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Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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