Tag Archives: Energy Markets

Business

Chevron Rides High Oil Prices to Record $35.5 Billion Annual Profit

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Chevron Corp.

CVX -4.44%

banked historic profit last year as the pandemic receded and the war in Ukraine pushed oil prices to multiyear highs, with its shares climbing 53% for the year while other sectors tumbled.

The U.S. oil company in its quarterly earnings reported Friday that it collected $35.5 billion in its highest-ever annual profit in 2022, more than double the prior year and about one-third higher than its previous record in 2011. Almost $50 billion in cash streamed in from its oil-leveraged operations, another record that is underpinning plans to pay investors through a new $75 billion share-repurchase program over the next several years.

That payout, announced Wednesday, is roughly equivalent to the stock-market value of companies such as the big-box retailer

Target Corp.

, the pharmaceutical firm

Moderna Inc.

and

Airbnb Inc.

Chevron, the second-largest U.S. oil company after

Exxon Mobil Corp.

, posted revenue of $246.3 billion, up from $162.5 billion the previous year. The San Ramon, Calif., company reported a fourth-quarter profit of $6.4 billion, up from $5.1 billion in the same period the prior year.

The fourth-quarter results came short of analyst expectations, and Chevron shares closed down more than 4% Friday.

For all of its recent winnings, though, Chevron and its rival oil-and-gas producers could face a rockier year in 2023, according to investors and analysts, if an anticipated slowdown in U.S. economic growth dents demand for oil, and if China’s reopening from strict Covid-19 restrictions unfolds slowly.

U.S. oil prices have held steady this year, but are off about 36% from last year’s peak. The industry is proceeding with caution, holding capital expenditures for 2023 below prepandemic levels and saying production will grow only modestly. Chevron has said it plans to spend about $17 billion in capital expenditures this year, up more than 25% from the prior year, but $3 billion less than it planned to spend in 2020 before Covid-19 took root.

Oil companies are still outperforming other sectors such as tech and finance, which have seen widespread job cuts in recent weeks. The energy segment of the S&P 500 index has climbed 43.7% over the past year, compared with a 6.7% drop for the broader index.

Chevron Chief Executive Mike Wirth said the company is unsure of what 2023 will bring after global energy supplies were squeezed because of geopolitical events last year, particularly in Europe following Russia’s invasion of Ukraine. He said markets appeared to be stabilizing.

“We certainly have seen a very unusual and volatile year in 2022,” Mr. Wirth said, noting the European energy crisis has proven less dire than anticipated thanks to milder winter weather, growing natural gas inventories in Europe. “China’s economy has been slow throughout the year, which looks to be turning around. It’s good that markets have calmed.”

Chevron projects its output in the Permian Basin of West Texas and New Mexico to grow at a slower pace this year.



Photo:

David Goldman/Associated Press

Chevron hit a record in U.S. oil-and-gas production in 2022, increasing 4% to about 1.2 million barrels of oil equivalent a day, stemming from its increased focus on capital investments in the Western Hemisphere, particularly in the Permian Basin of West Texas and New Mexico, where it boosted output 16% last year. Worldwide, Chevron’s oil-and-gas production was down 3.2% compared with the prior year, at 2.99 million barrels of oil-equivalent a day.

Its overall return on capital employed came in at 20%, it said.

“There aren’t many sectors generating the type of free cash flow that energy is right now,” said

Jeff Wyll,

an analyst at investment firm Neuberger Berman, which has invested in Chevron. “The sector really can’t be ignored. Given the supply-demand balance, you have to have some things go wrong here to see a pullback in oil prices.”

Even so, institutional investors have shown limited interest so far in returning to the energy sector, after years of poor returns and heightened concerns about their environmental impact prompted large financiers to sell off their stakes in oil-and-gas companies or stop investing in drillers outright.

Pete Bowden,

global head of industrial, energy and infrastructure banking at

Jefferies Financial Group Inc.,

said energy companies in the S&P 500 index are throwing off 12% of the group’s free-cash flow, but only account for about 5% of the index’s weighting—an indication their stock prices are lagging behind.

Investors’ concerns around environmental, social and governance-related issues are a constraint on the share prices of energy companies, “yet the earnings power of these businesses is superior to the earnings power of companies in other sectors,” he said.

Chevron and others have faced criticism from the Biden administration and others that they are giving priority to shareholder returns over pumping oil and gas at a time when global supplies are tight and Americans are feeling pain at the pump. On Thursday, the White House assailed Chevron’s $75 billion buyout program, saying the payout was proof the company could boost production but was choosing to reward investors instead.

Pierre Breber,

Chevron’s finance chief, said the company expects oil prices to be volatile but within a range needed to sustain its dividend and investments. There are some optimistic signs, he added, including that the U.S. economy grew faster than expected in the fourth quarter, at 2.9%.

“Supply is tight. Oil-field services are near capacity, and we continue to have sanctions on Russian production,” Mr. Breber said. “You’re seeing international flights out of China are way up, and low unemployment in the U.S.”

Mr. Breber said Chevron’s output in the Permian this year is expected to grow at a slower pace, around 10%, because it has exhausted much of its inventory of wells that it had drilled but hadn’t brought into production.

Exxon, which has typically posted quarterly earnings on the same day as Chevron, will report Tuesday. Analysts expect it will also post record profit for 2022, according to FactSet.

Both companies expect to slow their output growth this year in the Permian, considered their growth engine. The two U.S. oil majors, which had been growing output faster in the U.S. than most independent shale producers, are beginning to step up their focus on shareholder returns and allow output growth to ease, said Neal Dingmann, an analyst at Truist Securities.

“This has all been driven by investor requirements,” Mr. Dingmann said.

Write to Collin Eaton at collin.eaton@wsj.com

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Business

Natural-Gas Prices Plunge as Unseasonably Warm Weather Is Forecast

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A sudden thaw across the Northern Hemisphere has melted down natural-gas prices, upending dire forecasts of energy shortages and sinking Vladimir Putin’s plan to squeeze Europe this winter.

It isn’t expected to remain as balmy as it was on Wednesday, when temperatures hit 66-degrees Fahrenheit in New York, but the forecasts that energy traders monitor call for abnormally warm weather extending into February, sapping demand for the heating fuel.

U.S. natural-gas futures for February delivery ended Wednesday at $4.172 per million British thermal units. That is down 57% from the summer highs notwithstanding a 4.6% gain on Wednesday that snapped a four-session losing streak, including an 11% drop on Tuesday. 

The price is now about the same as it was a year ago, when temperatures were also warmer than normal and before Russia’s invasion of Ukraine jolted energy markets.

The plunge is a bad omen for drillers, whose shares were among the stock market’s few winners last year. Cheaper gas is good news for households and manufacturers whose budgets have been busted and profit margins pinched by high fuel prices. Though shocks of cold and problems with pipelines could still push up regional prices, less expensive natural gas should help to cool inflation in the months ahead. 

There are also major geopolitical implications. Mild weather is driving gas prices lower in Europe, too, spelling relief for the region that coming into the winter faced the possibility of rolling blackouts and factory shutdowns. The war threw energy markets into chaos, but benchmark European natural-gas prices are now less than half of what they were a month ago and lower than any point since the February invasion. 

The drop is a welcome surprise for European governments that committed hundreds of billions of dollars to shield consumers and companies from high energy prices. Moscow cut supplies of gas to Europe last year in what European officials described as an attempt to undermine military and financial support for Kyiv.

So far, Russia’s strategy isn’t working. Warm weather is limiting demand, as is a European Union-led effort to curb consumption. But analysts say prices in Europe could shoot up again when the continent tries to refill stores for the 2023-24 winter without much Russian gas.

PHOTOS: How a 102-Year-Old Maritime Law Affects Today’s Home-Heating Prices

Besides being burned to heat roughly half of American homes, natural gas is used for cooking, along with making electricity, plastic, fertilizer, steel and glass. Last year’s high prices were a big driver of the steepest inflation in four decades.

When prices peaked in August, the question was whether there would be enough gas to get through the winter, given record consumption by domestic power producers with few alternatives, as well as demand in Europe, where the race is on to replace Russian gas.

Now the question in the market is how low prices will go.  

They were already falling when the late-December storm brought snow to northern cities and stranded travelers. Frigid temperatures prompted a big draw from U.S. natural-gas stockpiles and froze wells in North Dakota and Oklahoma. At its peak, the storm took nearly 21% of U.S. gas supply offline, according to East Daley Analytics, a gas consulting firm.  

The demand surge and the supply disruptions were fleeting and failed to counteract forecasts for balmy January weather. Prices were also pushed lower by another delay in the restart of a Texas export facility. It has been offline since a June fire left a lot of gas in the domestic market that would have otherwise been shipped overseas. 

Temperatures above 60 degrees Fahrenheit are forecast this week around the Great Lakes and along the Ohio Valley, while highs in the Southeast might reach into the 80s.

As measured in heating-degree days, a population-weighted measure of temperatures below 65 degrees Fahrenheit, this week will be twice as warm relative to normal as the last week of December was cold, said Eli Rubin, senior energy analyst at the gas-trading firm EBW AnalyticsGroup.

The firm estimates that warmer weather over the first half of January will reduce gas demand by about 100 billion cubic feet over that stretch. That is about the volume of gas that the U.S. produces each day. The Energy Information Administration estimates that daily American output hit a record in 2022.

Analysts anticipate similarly strong production in 2023. They expect the year to pass without new LNG export capacity coming online for the first time since 2016, when the U.S. began to ship liquefied natural gas abroad from the Lower 48 States. 

“The market is moving from a mind-set of winter scarcity to looking ahead to exiting winter with more in storage, adding production and not adding any new LNG exports,” Mr. Rubin said. “If anything, the market looks oversupplied.” 

Analysts have been reducing their gas-price assumptions as well as their outlooks for producers as the first weeks of winter pass without sustained periods of cold weather. 

Gabriele Sorbara, an analyst at Siebert Williams Shank, told clients this week that he expected natural gas to average $4.25 in 2023, down from a forecast of $5.50 before the warm spell. As a result, he downgraded shares of

EQT Corp.

, the biggest U.S. producer and one of the top-performing stocks in the S&P 500 last year, from buy to hold. 

“EQT will be dead money until estimates recalibrate and there is visibility of a rebound in natural-gas prices,” he wrote in a note to clients.  

SHARE YOUR THOUGHTS

What price changes are you seeing in your natural-gas bill this winter? Join the conversation below.

Hedge funds and other speculators have, on balance, been bearish on natural-gas prices since the summer, maintaining more wagers on falling prices than on gains, according to Commodity Futures Trading Commission data. Analysts said that is probably the safe bet. 

“We continue to caution against any attempts to time a price bottom,” the trading firm Ritterbusch & Associates told clients this week. 

—Joe Wallace contributed to this article.

Write to Ryan Dezember at ryan.dezember@wsj.com

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Business

Rising Power Prices in Europe Are Making EV Ownership More Expensive

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BERLIN—Rocketing electricity prices are increasing the cost of driving electric vehicles in Europe, in some cases making them more expensive to run than gas-powered models—a change that could threaten the continent’s electric transition.  

Electricity prices have soared in the wake of Russia’s invasion of Ukraine, in some cases eliminating the cost advantage at the pump that EVs have enjoyed. In some cases, the cost difference between driving both types of cars 100 miles has become negligible. In others, EVs have become more expensive to fuel than equivalent gasoline-powered cars.

The price rises for power, which economists expect to last for years, remove a powerful incentive for consumers who were contemplating a switch to EVs, which used to be much cheaper to run than combustion engines. 

Coming just as some governments are removing subsidies for EV buyers, this change could slow down EV sales, threaten the region’s greenhouse-gas emission targets, and make it hard for European car makers to recoup the high costs of their electric transition.

In Germany,

Tesla

has raised supercharger prices several times this year, most recently to 0.71 euros in September before falling somewhat, according to reports from Tesla owners on industry forums. There is no public source to track prices on Tesla superchargers. 

At that price, drivers of Tesla’s Model 3, the most efficient all-electric vehicle in the Environment Protection Agency’s fuel guide in the midsize vehicle category, would pay €18.46 at a Tesla supercharger station in Europe for a charge sufficient to drive 100 miles. 

By comparison, drivers in Germany would pay €18.31 for gasoline to drive the same distance in a Honda Civic 4-door, the equivalent combustion-engine model in the EPA’s ranking. 

Tesla didn’t immediately respond to requests for comment.

The change has been particularly notable in Germany, Europe’s largest car market, where household electricity cost €0.43 per kWh on average in December. This puts it well ahead of France, where consumers paid €0.21 per kWh in the first half of the year, but behind Denmark, where a kWh cost €0.46, according to the German statistics office.

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The cost of electricity isn’t the only factor that can make an EV cheaper or more expensive to run than a gas-powered car. The price of the car, including potential subsidies, the cost of insurance and the price of maintenance all play a role in the cost equation over a car’s lifetime. 

Maria Bengtsson, a partner at Ernst & Young responsible for the company’s EV business in the U.K., said studies of the total cost of owning an EV now show that with much higher electricity prices, it will take longer for EVs to become more affordable than conventional vehicles.

“When we looked at this before the energy crisis, we were looking at a tipping point of around 2023 to 2024. But if you assume you have a tariff going forward of $0.55, the tipping point then moves to 2026.”

If costs for operating EVs rise again, the tipping point would be pushed even further into the future, she said.

So far, there is no sign that the higher costs to charge electric cars has affected EV sales. Sales of all-electric cars totaled 259,449 vehicles in the three months to the end of September, up 11% from the previous quarter and 22% from the year earlier, according to the European Automobile Manufacturers’ Association. In the third quarter, all-electric cars accounted for 11.9% of total new vehicle sales in the EU. 

There is no relief in sight for EV users. In Germany, power prices have risen by a third from €0.33 per kWh in the first half of this year, according to Germany’s federal statistics office, and some power companies have announced prices will increase to more than €0.50 per kWh in January.  

The German government’s independent panel of economic experts forecast that in the medium term these prices are likely to decline but won’t return to precrisis levels, meaning that higher costs for EV owners are here to stay. 

Rheinenergie, a municipal utility in Cologne, said in November that it would raise its prices to €0.55 per kWh in January. In October, EnBW, a Stuttgart-based regional power company, raised its prices for a kWh of electricity to €0.37, up 37% from the previous month. 

The most expensive way to charge an EV in Europe is on one of the fast-charging networks. Operators such as Tesla, Allego and Ionity have built roadside charging stations along major highways, where EV owners can drive up, plug in, and charge their batteries in as little as 15 minutes.

Fuel-economy estimates calculated by the EPA and current charging and gas prices in Europe show that some conventional vehicles are now cheaper to fuel with gasoline than equivalent electric models using fast-charging stations.

In the subcompact segment of the EPA’s 2023 Fuel Economy Guide, the Mini Cooper Hardtop was the most efficient model among EVs and gasoline-powered cars. 

A 100-mile ride cost the Mini EV owner €26.35 at the Allego fast-charging network, which charges €0.85 per kWh. The conventional Mini cost €20.35 to pump enough fuel to accomplish the same journey. 

Mini and its owner,

Bayerische Motoren Werke AG

, didn’t immediately respond to a request for comment. 

In the small two-door SUV category, the gasoline-powered Nissan Rogue handily beats the Hyundai Kona Electric, at a cost difference of €19.97 to €22.95. The Subaru Ascent standard SUV with four-wheel drive costs less to drive 100 miles than the Tesla Model X.

If an EV owner only charges their vehicle at home, they are generally still paying less for driving than conventional car users, although this gap has narrowed considerably. 

Analysts say about 80% of EV charging takes place at home or at work, so if an electric vehicle is only used close to home it generally remains the least expensive option. But once the vehicle is used for longer road trips, drivers are more likely to use fast-charging stations because other options would take too long to charge the battery.

Charging a Tesla on 120V AC power—the power that comes from a standard U.S. wall socket—would take days. In Europe, 230V is the AC standard, according to Germany’s ZVEI electronics-industry association. European chargers installed on street corners, at supermarkets, places of work and in home garages can charge a powered down Tesla battery overnight. 

The supercharger networks run on DC power, requiring at least 480 volts of power, and can charge up to around 200 miles of range within 15 minutes. 

Write to William Boston at william.boston@wsj.com

Corrections & Amplifications
Standard household power is 120 volts in the U.S. An earlier version of this article incorrectly said 120 volts is the standard in Europe. (Corrected on Dec. 25)

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World

EU Likely to Approve G-7 Cap on Russian Oil Price in Two Steps

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BERLIN—The European Union has advanced work on a price cap for Russian oil under an approach that keeps the U.S.-led effort on track but holds off on final approval.

EU member states have agreed on a two-stage approach to the international price cap on Russian oil, which is being developed within the Group of Seven industrial economies. Member states signed off on the legislation needed to implement the measures on Wednesday morning but will hold off approving it until the rest of the G-7 is ready, diplomats and officials said.

The price-cap decision is part of an eighth package of sanctions against Russia over the invasion of Ukraine. The measures will come into effect Thursday morning.

The EU approach reflects concern among some member states about the proposal, which would place a maximum price on what can be paid for Russian seaborne oil. Hesitation is greatest in EU members with large shipping sectors, including Greece, Cyprus and Malta.

The emerging EU approach means the price-cap proposal remains on track to enter into force, but raises fresh questions about how quickly it can be implemented.

Washington has pushed the international oil-price cap as a way of minimizing the Kremlin’s revenue from foreign oil sales without inflating oil prices by preventing oil sales to Asia and Africa. The idea is to set a maximum price at which shippers from G-7 countries may legally transport Russian oil to countries in Asia and Africa. The plan would also permit those companies to buy insurance for Russian oil cargoes, a critical aspect of the shipping industry. The G-7 hopes other countries will join the system.

The G-7 still must agree on the details of the price cap, including the price at which to set the cap, its precise implementation methods and how many other countries they need to join the G-7 in launching the cap. U.S. lawmakers are advocating increasing penalties for foreign buyers who don’t abide by the price cap.

U.S. officials have been flexible about how the other G-7 countries decide to implement the cap.

The EU formally backed the measure at the G-7, but European officials have repeatedly raised concerns about how the mechanism would function and its effectiveness in crimping Russia’s oil revenues.

Greece, Malta and Cyprus have raised concerns that banning EU companies from carrying Russian oil that is sold at rates above the price cap could hurt their economies. They fear losing business to countries that stay outside the mechanism, and they have also raised concerns that some G-7 countries may not enforce the price cap as rigorously as the EU, diplomats said.

At a meeting Tuesday evening, EU ambassadors agreed on a proposal under which they could agree on the legislation, but only formally approve the mechanism at a later date if the other G-7 countries have cleared the way to implement the cap system.

That means the 27 EU member states will need to revisit the three central elements of the price cap proposal. First they would need to sign off an exemption into the June sanctions package that banned EU companies from providing insurance on Russian oil transport after Dec. 5. They would also need to implement a ban on EU shippers transporting Russian oil priced above the cap, and then they would need to sign off on the G-7’s price cap.

The European Union proposed a ban on Russian crude within six months; Moscow and Kyiv accused each other of breaking a cease-fire in Mariupol. Photo: Julien Warnand/Shutterstock

To assuage the concerns of Malta, the ambassadors agreed Tuesday to carry out an impact assessment of the oil price cap mechanism when it enters into force. That will take into account the price cap’s “expected results, international adherence to and informal alignment with the price cap scheme” of non-G-7 countries, according to diplomats. It would also assess its potential impact on the EU.

The European Commission, the EU’s executive body, last week proposed to lay the legal basis for the price cap mechanism as part of a new package of sanctions it was placing on Russia in response to the Kremlin’s claim that it was annexing four regions of Ukraine.

Those sanctions would place an import ban on €7 billion, equivalent to about $7 billion, of Russian sales to the EU and would ban the export to Russia of a number of goods that can be used by its military in the war in Ukraine.

It will also target around three dozen people and companies involved in the latest annexations by Russia of Ukrainian regions.

The EU’s backing for the price cap is critical because the bloc plays a critical role in both the shipping industry and in shipping insurance sector. Sanctions must be approved by all 27 member states.

Under a sanctions package passed in June, the EU agreed to place an oil embargo on Russian seaborne oil by Dec. 5 and, on the same date, ban the provision of services, including shipping insurance, for Russian oil sold outside the bloc. The insurance measure could have choked off oil supplies to Asia and Africa, pushing oil prices higher.

EU diplomats have said that if the G-7 price cap is fully ready and detailed well in advance of Dec. 5, then they can come back and sign off the measures. If the G-7 mechanism is only finalized a few days before the December deadline—or isn’t in place until after it—some member states may demand a transition period to fully implement the measure.

Only Australia has pledged to join the G-7 system. European and U.S. officials say it is unlikely that India, China and some other top buyers of Russian oil will formally participate. Still, U.S. officials hope that by agreeing the price cap, they will at least drive down the price that other countries are willing to pay for Russian oil.

—Andrew Duehren contributed to this article.

Write to Laurence Norman at laurence.norman@wsj.com

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Business

Europe Holds Emergency Talks on Energy-Market Intervention

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BRUSSELS—European energy ministers are debating plans for an intervention in the continent’s energy markets at an emergency meeting that is aimed at tamping down soaring electricity prices.

Diplomats said many countries—including the European Union’s biggest economies, Germany and France—appeared to agree ahead of Friday’s meeting on the idea of imposing a cap on the revenue earned by nuclear, renewable and other nongas producers of electricity, and redistributing the money to businesses and consumers. The details of how such a plan might work weren’t clear, the diplomats said.

Other measures under discussion include a plan to cut electricity use during peak demand this winter and a temporary cap on the price of natural gas imported from Russia. Some governments want the price cap extended to other sources of gas.

Czech Prime Minister Petr Fiala on Thursday at a terminal in the Netherlands intended to help reduce dependence on Russian gas.



Photo:

Siese Veenstra/EPA/Shutterstock

Ministers also want to prevent high prices from upending electricity markets, by extending emergency credit to traders or changing the rules for the collateral that is required in electricity trading.

Friday’s discussion is unlikely to result in immediate action, diplomats said. Instead, officials expect ministers to come up with a mandate for the EU’s executive arm, which hopes to introduce formal proposals next week.

Governments across the EU are tightening their grip on the region’s energy markets, aiming to limit the economic damage inflicted by Moscow’s move to cut gas deliveries to Europe. Friday’s talks come after national governments have imposed price caps and levies on energy producers in response to fears about social unrest and factory shutdowns.

Governments are looking to craft emergency policies that would apply across the 27-nation bloc, from nuclear-energy reliant France to a handful of countries in central Europe that still consume a lot of Russian gas. At the center of the debate is Germany, the EU’s largest economy, which for decades counted on Russian gas to keep its factories humming. Moscow’s decision to shut down indefinitely the Nord Stream pipeline, the main artery for natural-gas deliveries, has the continent idling factories as it faces surging gas and electricity prices.

“Nothing is a nonstarter now,” said

Václav Bartuška,

the special envoy for energy security for the Czech Republic, which holds the EU’s rotating presidency. Mr. Bartuška added that officials’ thinking on how to tackle the energy crisis has evolved rapidly in recent months. The proposal to redistribute companies’ windfall revenue, for example, “was crazy in June, it was fringe in July, and it was mainstream in August,” he said.

Questions remain about where a potential cap should be set, how the revenue would be collected and how it would be redistributed. The European Commission, the EU’s executive arm, has floated a cap of €200 a megawatt hour, equivalent to around $200, well under current prices in western Europe of more than €340 a megawatt hour. Officials said the level of the cap and its details would be part of the discussions on Friday and the following weeks.

A French official said it might be better to have different caps on electricity depending on the technology used to generate it. “The value generated by a French nuclear plant isn’t the same as the value created by a German lignite plant or a Spanish wind turbine,” the official said.

Another concern is who will decide how the money is used. In some cases, it might not be clear which country’s government should be capturing the additional revenue, or which citizens and businesses should benefit from it.

Western leaders are preparing for the possibility that Russian natural-gas flows through the Nord Stream pipeline might never return to full levels. WSJ’s Shelby Holliday explains what an energy crisis could look like in Europe, and how it might ripple through the world. Illustration: David Fang

Support for the idea was not universal. Lithuania’s energy minister, Dainius Kreivys, on Friday morning called the idea “absolutely a red line” because of concerns it would disrupt electricity markets and result in uneven subsidies across the continent.

The commission has been careful to avoid referring to the windfall-revenue plan as a tax because a change in tax policy would require unanimous agreement from countries, according to EU officials and diplomats. Officials believe that the way they have framed the plan would allow it to pass with a qualified majority, which requires the support of 15 of the bloc’s 27 member states representing at least 65% of the total EU population.

Another proposal that appears to have general support from many member states is a move to limit demand for electricity, particularly during peak hours of use, when prices are highest. One draft document describing the proposal, which was produced by the commission and seen by The Wall Street Journal, suggested that each country should work to reduce its overall electricity consumption by at least 10%. Governments should also identify a set of peak price hours and reduce electricity use by an average of at least 5% during those hours, the document said.

SHARE YOUR THOUGHTS

Will market intervention be enough to solve Europe’s energy crisis? Why or why not? Join the conversation below.

Earlier this summer, the EU agreed to a plan for member states to cut their overall gas consumption by 15% over an eight-month period, with the possibility of making the target mandatory. Officials said an electricity-savings plan could be modeled on the earlier plan that was focused on gas.

Diplomats said reaching an agreement on a Russian gas-price cap is a more difficult proposition. Although Russia has already sharply reduced the flow of natural gas to Europe, some central European countries continue to depend on Russian gas flows and could be hit hard if the Kremlin decided to turn off the taps entirely.

“We still have questions and worries,” about the idea of putting a cap on Russian gas, Dutch Prime Minister

Mark Rutte

said Thursday. Still, he said his government generally supports the set of proposals that have been put forward, including the idea of a revenue cap for electricity producers.

Write to Kim Mackrael at kim.mackrael@wsj.com and Matthew Dalton at Matthew.Dalton@wsj.com

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Business

Russia Signals Opposition to OPEC+ Oil-Production Cut

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Russia doesn’t support an oil-production cut at this time, and it is likely OPEC+ will keep its output steady when it meets Monday, people familiar with the matter said, as Moscow maneuvers to thwart Western attempts to limit its oil revenue following its invasion of Ukraine.

Russian opposition to a production cut highlights a debate within the Organization of the Petroleum Exporting Countries and Moscow-led allies, collectively known as OPEC+, as oil consumers globally brace for a showdown this winter with the Kremlin over the price of its crude. Oil prices soared above $100 a barrel after Russia invaded Ukraine, hurting Western consumers and filling Moscow’s coffers.

Saudi Arabia, the group’s biggest exporter, floated the idea recently that the alliance could consider reducing output. OPEC members such as the Republic of Congo, Sudan and Equatorial Guinea have said they are open to the idea, as they are already pumping as much as they can and oil prices have fallen in recent weeks. An OPEC+ production cut often lifts prices.

But Russia is concerned that a production cut would signal to oil buyers that crude supply is outstripping global demand—a position that would reduce its leverage with oil-consuming nations that are still buying its petroleum but at big discounts, the people familiar with the matter said. Though Russia has benefited from high oil prices since the Ukraine invasion, Moscow is more concerned about maintaining influence in negotiations with Asian buyers who bought its crude after Europeans and the U.S. began shunning it this year, the people said.

Last week, the Group of Seven wealthy nations rolled out a plan to ban the insurance and financing of shipments of Russian oil and petroleum products unless they are sold under a set price cap. Russia has threatened to stop supplying countries that participate in the price-cap plan.

According to the people familiar with the matter, Russia’s objections to an OPEC+ production cut became clear last week at an internal OPEC+ meeting where the group’s baseline scenario showed the world’s oil supplies would be about 900,000 barrels of oil a day above demand this year and next, a potentially bearish projection for prices.

Officials from Russia and other countries said the numbers were misleading because they assumed that each OPEC+ member would pump the full amount allowed under their agreement, the people said. In fact, OPEC+ members have fallen about 3 million barrels a day short of those targets in recent months. The commission revised its numbers after the objections, predicting a smaller surplus of 400,000 barrels a day by the end of 2022 and a deficit in 2023.

High oil prices have been beneficial for OPEC+, an alliance of oil-producing countries that controls more than half of the world’s output. WSJ’s Shelby Holliday explains what OPEC+ countries are doing with the windfall and why they aren’t likely to distance themselves from Russia. (Originally published July 7, 2022.)

“Russia may be concerned about market assessments that point to a surplus,” said

Helima Croft,

chief commodities strategist at Canadian broker RBC. “It would weaken its hand with buyers just as it negotiates to deter them from adopting the price cap.”

OPEC+ won’t decide until Monday how to proceed with oil production, and an output cut can’t be ruled out, said OPEC+ delegates from multiple countries. Some OPEC delegates said a cut of 100,000 barrels a day could be discussed Monday, the same amount that OPEC+ increased last month after President Biden’s visit to Saudi Arabia.

But the revision in data undermines the case for a production cut, they said, and delegates said there was no appetite for raising output, as the U.S. and Europe have called for.

“Most members can’t boost production so if we had kept widening quotas, we would have a credibility problem,” said an OPEC delegate. “It’s not sustainable.”

A spokeswoman for the Russian Energy Ministry didn’t respond to a request for comment.

The OPEC+ meeting takes places Monday as members are concerned Iran could bring its sanctioned crude back to markets if it strikes an agreement with global powers to revive a nuclear pact. There are also worries that oil demand could weaken if the world enters a recession or if China’s Covid-19 restrictions spur another economic slowdown there.

A U.S. official said the White House was pleased with the OPEC+ production increases over the summer and noted that Saudi Arabia is pumping at a historic high.

Saudi Arabia’s crude production rose to 10.9 million barrels a day on average in the July-to-August period, according to Kpler, compared with just under 10.7 million barrels a day in June. The kingdom’s increase was the main driver behind an overall OPEC+ boost of 400,000 barrels a day to 43.5 million barrels a day in the past two months, the data-intelligence company said.

Amos Hochstein,

the U.S. special presidential coordinator for global infrastructure and energy security, said he welcomed production increases carried out in the summer by Saudi Arabia and OPEC.

“Current production in the United States and around the world is not sufficient to meet the strong economic recovery from the pandemic and the threats posed by Russia’s continued war against Ukraine and its use of energy as a weapon,” Mr. Hochstein said.

—Michael Amon in Dubai and Vivian Salama in Washington contributed to this article.

Write to Benoit Faucon at benoit.faucon@wsj.com and Summer Said at summer.said@wsj.com

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Business

Stocks Head for Fifth Straight Day of Declines

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U.S. stocks fell, putting indexes on course to fall for a fifth consecutive day, as investors continued to brace for higher-for-longer interest rates. 

The S&P 500 shed 1% Thursday, while the Nasdaq Composite dropped 2.1% and the Dow Jones Industrial Average lost 0.4%. The major indexes suffered their fourth day of losses Wednesday, continuing a selloff that saw them end August with declines of between 4% and 5%.

The first trading day of a new month often sees stocks rise as investment plans inject new money into the market. But right now the market is looking at relatively strong economic reports, like this morning’s jobless-claims data, and expecting they will compel the Federal Reserve to keep raising rates aggressively, said Thomas Hayes, chairman of Great Hill Capital.

“The bears are going to be in control until the 13th,” he said, referring the date of the next inflation report.

Comments from Federal Reserve Chairman

Jerome Powell

last week that doubled down on his message that interest rates must continue rising to tame inflation—even if the economy suffers—have sent stocks tumbling. The declines have reversed much of the gains made during a summer rally that had lifted stocks and bonds from their lows. 

The fall has come as investors reassessed hopes that the Fed could soon ease off from its campaign of interest-rate increases. Instead, many are girding for a lengthier period of higher interest rates, though expectations of when the Fed will start cutting interest rates are likely still too hopeful, said

David Donabedian,

chief investment officer of CIBC Private Wealth US.

“There was too much Fed optimism. The idea that the Fed was getting close to the end of tightening and would begin cutting rates next spring never really made sense to us,” he said.

“I feel a bit more optimistic about the market now over the next three to six months. There has been a reality check and a reassessment of expectations, and I prefer it when the market is in a sober mood rather than a euphoric one,” he said. 

Yields on benchmark U.S. government bonds climbed to their highest levels since June. The yield on the 10-year Treasury note rose to 3.264% from 3.131% on Wednesday. 

Thursday’s data provided new clues on the health of the economy and the employment market ahead of Friday’s highly-anticipated jobs report. U.S. workers’ filings for unemployment benefits fell last week, suggesting layoffs are holding at a low level in a tight job market.

And a survey of U.S. manufacturing activity for August came in stronger than expected. The ISM Manufacturing PMI came in at 52.8, even with July and above expectations of 51.8.

In corporate news, shares of

Okta

fell 35% after the company disclosed some merger integration issues after its acquisition of Auth0, including a higher rate of employee attrition.

Nvidia

fell 12% after the company said it could lose as much as $400 million in quarterly sales after the U.S. imposed new licensing requirements on shipments of some of its most advanced chips to China.

Bed Bath & Beyond

lost 8% after the company said it would close roughly 20% of its namesake stores, cut its workforce and sell stock to raise money to stabilize the business.

In commodity markets, oil extended a streak of declines, falling for a third consecutive day, as worries about global demand mount. U.S. crude futures fell 3% to $86.88. 

Fresh Covid-19 lockdowns in China are threatening to weaken oil demand, adding to jitters about flagging global growth. China’s city of Chengdu with a population of 21 million became the latest to impose restrictions, ordering residents to stay at home from Thursday afternoon, with citywide Covid testing planned through Sunday. 

In foreign exchange, the WSJ Dollar Index was up 0.8% at 101.01. That put the index on course for its highest end-of-day reading since April 2002, according to Dow Jones Market Data. Concurrently, the yen fell to 140.19 against the dollar, its weakest level against the dollar since 1998.

Metals prices are also slumping, dragged down by the stronger dollar—which makes dollar-denominated metals more expensive for holders of other currencies—and rising real yields. As August ended, gold reached its longest monthly losing streak since 2018, while copper hit its longest monthly losing streak since 2008. Both metals fell Thursday by 1% or more. 

Major U.S. stock indexes closed out August with losses of 4% or more.



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Overseas, major indexes fell across the board. In Europe, the pan-continental Stoxx Europe 600 retreated 1.8%, led by losses among mining and resource stocks.

In Asia, stocks closed lower, with Japan’s Nikkei 225 shedding 1.5% and the Hang Seng in Hong Kong dropping 1.8%. In mainland China, the Shanghai Composite lost 0.5%.

—Raffaele Huang contributed to this article.

Write to Will Horner at william.horner@wsj.com

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There Are Signs Inflation May Have Peaked, but Can It Come Down Fast Enough?

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Growing signs that price pressures are easing suggest that June’s distressingly high 9.1% increase in consumer prices will probably be the peak. But even if inflation indeed comes down, economists see a slow pace of decline.

Ed Hyman,

chairman of Evercore ISI, pointed to many indicators that  9.1% might have been the top. Gasoline prices have fallen around 10% from their mid-June high point of $5.02 a gallon, according to AAA. Wheat futures prices have fallen by 37% since mid-May and corn futures prices are down 27% from mid-June. The cost of shipping goods from East Asia to the U.S. West Coast is 11.4% lower than a month ago, according to Xeneta, a Norway-based transportation-data and procurement firm.

Easing price pressures and improvements in backlogs and supplier delivery times in business surveys suggest that supply-chain snarls are unraveling. Mr. Hyman noted that money-supply growth has slowed sharply, evidence that monetary tightening is starting to bite.

Inflation expectations also fell recently—an upbeat signal for the Fed, which believes that such expectations influence wage and price-setting behavior and thus actual inflation. The University of Michigan consumer-sentiment survey showed that longer-term inflation expectations slipped from June’s 3.1% reading to 2.8% in late June and early July, matching the average rate during the 20 years before the pandemic.

Bond investors are less worried about inflation, based on the “break-even inflation rate”—the difference between the yield on regular five-year Treasury bonds and on inflation-indexed bonds—which has dropped to 2.67% from an all-time high of 3.59% hit in late March.

Inflation-based derivatives and bonds are projecting that the annual increase in the CPI will fall to 2.3% in just a year, around the Fed’s 2% target (which uses a different price index), according to the Intercontinental Exchange.

Roberto Perli,

economist at Piper Sandler, calls such an outcome “optimistic but not totally implausible.” From February through early June, investors thought inflation would still be between 4% and 5% in a year.

“It’s a step in the right direction, but ultimately, even if June is the peak, we’re still looking at an environment where inflation is too hot,” said

Sarah House,

senior economist at Wells Fargo, who expects fourth-quarter inflation between 7.5% and 7.8%. “So peak or not, inflation is going to remain painful through the end of the year.”

And the slower it is to ebb, the larger the likelihood of a damaging downturn, said

Brett Ryan,

senior U.S. economist at Deutsche Bank.

Core inflation, which strips out volatile food and energy prices and is considered a better measure of inflation trends, was 5.9% in June, down from a peak of 6.5% in March. But Ms. House and Mr. Ryan both expect core inflation to revive and peak sometime around September, as strong price growth for housing and other services combines with low base comparisons in the 12-month calculation.

“The more persistent inflation pressures, the higher the Federal Reserve needs [interest rates] to go to address them,” said Mr. Ryan. “That argues for a larger recession risk.”

Fed Chairman

Jerome Powell

has said the central bank wants to see clear and convincing evidence that price pressures are subsiding before slowing or suspending rate increases.

“The moment of truth comes at the end of this year,” said Mr. Hyman. “If the Fed keeps on raising rates, then they’d invert the yield curve. I think that would increase the odds of recession enormously. It would probably also lower inflation, although it also seems to already be slowing, and will probably be even slower by then.”

Aichi Amemiya,

U.S. economist at Nomura, said that though it is too early to call it, his forecast sees June as the peak for the annual measure of overall inflation. However, the month-over-month change in core CPI will be key to watch in coming months, he said. If it slows from June’s pace of 0.7% to 0.3% on a sustained basis by year-end, he expects the Fed to start planning to ease up on rate increases. That, however, will be hard to achieve, said Mr. Amemiya, “which means the Fed will likely continue tightening even after the economy enters a recession.”

Around the turn of the year, economists were generally confident that inflation would peak in early 2022, as energy prices stabilized and supply-chain pressures eased. Then Russia invaded Ukraine, and energy prices soared. Buzz about  “the peak” crescendoed again when inflation slid to an 8.3% annual rate in April, from 8.5% in March. But gasoline prices flared up again, and gains in food and rent picked up, too.

There is plenty of potential for another reversal in coming months, said Ms. House.

“When we look at ongoing core inflation pressures, it wouldn’t take much in the way of a commodities price shock for us to reach another high,” she said, adding that possible examples include an escalation of the Russia-Ukraine conflict, a hurricane that shuts down an oil refinery, or an outage at a key semiconductor or auto plant. “We all hope we’re at the peak. But hope is not really an inflation strategy right now.”

Write to Gwynn Guilford at gwynn.guilford@wsj.com

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Business

U.S. Inflation Hits New Four-Decade High of 9.1%

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U.S. consumer inflation accelerated to 9.1% in June, a pace not seen in more than four decades, adding pressure on the Federal Reserve to act more aggressively to slow rapid price increases throughout the economy.

The consumer-price index’s advance for the 12 months ended in June was the fastest pace since November 1981, the Labor Department said on Wednesday. A big jump in gasoline prices—up 11.2% from the previous month and nearly 60% from a year earlier—drove much of the increase, while shelter and food prices were also major contributors.

The June inflation reading exceeded May’s 8.6% rate, prompting investors and analysts to debate whether the Fed would consider a one-percentage-point rate increase, rather than a 0.75-point rise, later this month. Slowing demand is key to the Fed’s goal of restoring price stability in an economy that is still struggling with supply issues, but raising interest rates also elevates the risk of a recession.

Core prices, which exclude volatile food and energy components, increased by 5.9% in June from a year earlier, slightly less than May’s 6.0% gain, the Labor Department said.

As inflation climbs in the U.S., rising food and energy costs have pushed the nation’s most popular price index to its highest level in four decades. WSJ’s Gwynn Guilford explains how the consumer-price index works and what it can tell you about inflation. Illustration: Jacob Reynolds

On a month-to-month basis, core prices rose 0.7% in June, a bit more than their 0.6% increase in May—a sign of inflationary pressures throughout the economy.

“Inflation makes everything difficult,” said

Lara Rhame,

chief U.S. economist for FS Investments. “It erodes your savings, your wages, your profits. It’s punishing everybody.”

Stocks declined on Wednesday after wavering for much of the day, with the S&P 500 index falling by 0.5%. Bond yields jumped following the inflation report, but yields on longer-term Treasurys quickly gave up those gains.

Despite June’s inflation reading, economists point to recent developments that could subdue price pressures in the coming months.

Investor expectations of slowing economic growth world-wide have led to a decline in commodity prices in recent weeks, including for oil, copper, wheat and corn, after those prices rose sharply following the Russian invasion of Ukraine. Retailers have warned of the need to discount goods, especially apparel and home goods, that are out of sync with customer preferences as spending shifts to services and away from goods, and consumers spend down elevated savings.

“There’s a pretty serious recession fear affecting a broad range of asset prices,” said

Laura Rosner-Warburton,

senior economist at MacroPolicy Perspectives.

Retailers’ ability to shed unwanted inventory could test whether pricing is returning to prepandemic patterns, Ms. Rosner-Warburton said. Some retailers, such as Target, have already said they are planning big discounts. Others with robust warehouse capacity, such as Walmart Inc., could be more likely to hold on to their excess inventory, analysts say.

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“It would be really important if we do see discounting return, because it would show that we weren’t that far away from the pre-Covid environment in terms of pricing behavior,” Ms. Rosner-Warburton said.

Discounts haven’t shown up prominently in inflation figures so far: Prices for apparel and home goods both rose last month. New and used car price increases, a significant source of upward pressure on inflation, both eased on a month-to-month basis in June.

The Fed last month raised its interest-rate target by 0.75 percentage point, the largest increase since 1994. Besides tempering demand, the central bank is trying to prevent consumer expectations of higher inflation from becoming entrenched, as such expectations can be self-fulfilling. Fed Chairman

Jerome Powell

has said the central bank wants to see clear evidence that price pressures are diminishing before slowing or suspending rate increases.

Persistent high inflation is putting a strain on businesses and consumers who, after decades of price stability, aren’t used to it.

Dan Waag,

55 years old, the owner of Arlene’s Sunny Side Cafe in Alcester, S.D., made the difficult decision to close for a week after concluding that a drop in the number of customers was leaving the restaurant’s finances in the red.

“I know these are tough times with this inflation, little to no rain for the farmers, gas prices as high as they are,” he wrote to his customers on Facebook.

Mr. Waag attributes the slowing demand to a poor season for the corn and bean farmers in the area, and the added toll of higher gasoline prices that might make an outing to his restaurant an unaffordable luxury. He hasn’t changed his prices yet, but with his own rising costs and a drop in daily revenue from around $600-$700 to $300-$400, he feels he may have to soon.

High inflation and a poor farm season have driven Dan Waag to close Arlene’s Sunny Side Cafe in Alcester, S.D., for a week.



Photo:

Dan Waag

By closing for a week, he said he is betting customers will realize the value of having a non-fast food restaurant in their town of around 800 people. “I’m trying to show people, ‘This is what it will be like if I have to stay closed,’ ” Mr. Waag said.

Consumer inflation expectations have improved somewhat, according to a Federal Reserve Bank of New York survey this week. Americans expect slower inflation increases over the longer run than they had in recent months. The bank said in its June Survey of Consumer Expectations that respondents see the annual inflation rate three years from now at 3.6%, down from their expectation in May of 3.9%. The bank also said respondents expect the annual inflation rate five years from now to be 2.8%, down from their May expectation of 2.9%.

Higher interest rates won’t have the same effect on all prices simultaneously, economists say. Costs such as mortgages and rents—a big part of household budgets—respond over time to the demand-sapping effects of higher interest rates. Shelter costs rose by 0.6% in June over the prior month, the same rate as they did in May. The rent index rose 0.8% over the month, which was the largest monthly increase since April 1986.

Housing inflation is important because it represents around 40% of core CPI and around 17% of the Fed’s preferred inflation gauge, the personal-consumption expenditures price index.

“High rents are really troubling because they’re locked in once every year or once every two years, and that’s what leads people to go ask their boss for higher wages,” said Ms. Rhame.

Wages aren’t keeping up with inflation. With annual wage growth at 5.1%, average hourly earnings adjusted for inflation are declining at their fastest pace in four decades. After accounting for seasonal and inflation adjustments, average hourly earnings decreased 3.6% from June 2021 to June 2022.

Record home prices and higher mortgage rates in May made it the most expensive month since 2006 to buy a home. Those conditions are leading prospective buyers to drop out of the market for now. But with limited supply and continued demand, it may take months before housing prices see significant declines.

“We entered this year with so much more demand than supply—even with many home buyers unable to compete in the market, there’s still a lot of buyers,” said

Bill Adams,

chief economist at Comerica Bank.

Write to Gabriel T. Rubin at gabriel.rubin@wsj.com

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Business

Stocks Open Mixed, Oil Falls on Growth Concerns

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U.S. stock indexes were mixed shortly after the opening bell, continuing a volatile stretch for global markets.

The S&P 500 slid 0.3% Tuesday, a day after the benchmark stocks gauge skidded  1.2%. The Dow Jones Industrial Average added 0.2%. The technology-focused Nasdaq Composite fell 0.6%.

Oil prices and bond yields fell, dragged lower by worries that major economies are headed toward a recession. Brent-crude futures, the benchmark in international energy markets, fell 4.9% to $102.26 a barrel a barrel.

In the bond market, the yield on 10-year Treasurys slipped to 2.906% from 2.990% Monday. Yields, which move inversely to prices, have drifted lower since late June on expectations that an economic slowdown would prod the Federal Reserve to pull interest rates back down in 2023.

For now, though, the Fed is intent on pushing rates up in an attempt to tame decades-high inflation. Investors say that campaign, coupled with signs that the U.S. economy is losing momentum, could spell more pain for markets after a rough first half of the year. Adding to the challenges for money managers are China’s struggle to contain Covid-19 and the war in Ukraine.

“There is going to be a recession, but we’re not there yet,” said Philip Saunders, co-head of multiasset growth at

Ninety One,

an asset manager based in the U.K. and South Africa. “The key thing that is going on is that financial liquidity is retracting.”

A look at the markets shows asset managers are moving money around in ways that suggest they see a recession coming. WSJ’s Dion Rabouin explains what to look for and why they tell us investors are increasingly pricing in a recession. Illustration: David Fang

Meanwhile, data from the National Federation of Independent Business showed confidence among small-business owners fell to its lowest level in almost a decade in June.

Among individual stocks,

PepsiCo

rose 0.1% after the drinks company said second-quarter profits and revenue beat analysts’ forecasts.

Earnings season among major U.S. companies will pick up speed later in the week with results due from major financial institutions. Investors will pay particular attention to comments by bank executives on the trajectory of the economy, and to the effects of higher input costs on profit margins.

Elsewhere in commodities, copper forwards on the London Metal Exchange fell 2.6% to just over $7,400 a metric ton. The industrial metal, a barometer for the world economy because of its use in construction and heavy industry, has slumped by over a fifth over the past month and is more than 30% below the all-time high of over $10,000 a metric ton recorded in March.

One factor that has weighed on commodities in recent weeks has been a stronger dollar. The greenback’s rally stalled Tuesday, pushing the WSJ Dollar Index down 0.1%. On Monday it rose 1.1%, lifting the dollar to its highest level against a basket of other currencies since 2002.

Traders worked on the floor of the New York Stock Exchange on Monday.



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Michael M. Santiago/Getty Images

International stocks retreated. The Stoxx Europe 600 lost 0.1%. China’s Shanghai Composite Index lost 1%, Hong Kong’s Hang Seng fell 1.3% and Japan’s Nikkei 225 dropped 1.8%.

-Gunjan Banerji contributed to this article.

Write to Joe Wallace at joe.wallace@wsj.com.

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