Two days ago on Twitter, I had enough.
So, I posted this:
I’ve never gotten how anyone can celebrate lower prices when you get there by demand destruction.
Because literally, that’s what they’ve done over in Europe.
The politicians who run the place are thrilled natural gas prices plummeted.
Yes, they did.
But at what cost?
Sure, Dutch natural gas turned negative – shades of March 2020 oil, here:
But this isn’t a relief. It’s a disaster.
Storage, Shmorage
There has been a lot of talk about European natural gas storage.
It’s being used as a reason to demonstrate how “overblown” the market fear is regarding winter. There is some truth behind the comments, but it’s much more complicated.
There has been a huge hit to demand with shuttered petrochemical and fertilizer facilities as well as other industrial assets.
Refiners have been rolling out economic run cuts and smaller companies are naturally reducing consumption of electricity/natural gas due to prices.
The shift in demand has put more product into storage, but the cuts aren’t sustainable to have a normally functioning economy.
It also opens them up to additional geopolitical risk, which is playing out now.
Here’s what I wrote earlier, before “parties unknown” sabotaged Nordstream:
Gazprom shut Nordstream 1 to do maintenance with a return to service data on September 3rd.
They didn’t find “an oil leak” at a gas turbine that helps pump gas into the link.
This has delayed the restart with no comment on return to service, which means the whole pipeline will remain shuttered.
The pipeline has been operating well below normal utilization rates, but still delivering natural gas into Europe. If this remains shut, it will be a huge blow to the European markets.
But it’s also a source of funds for Russia. So, it’s a double-edged sword.Let’s see who blinks first.
Hooked On Economics Didn’t Work for Them: Price Caps Edition
The news of the “leak” followed closely to the G7 agreement to issue price caps on Russian crude.
Price caps.
Price caps?
The 70s called and wants it Trickie Dickie back!
The G-7 plan – their word, not mine – is part of broader efforts to punish Russia for its military invasion of Ukraine.
It would allow buyers of Russian oil under a capped price to continue getting crucial services like financing and insurance for tankers.
This would keep insurance and tankers available buttry to reduce the revenue Russia can possibly earned.
The plan faces a couple of problems:
- All 27 EU nations must sign off on it to be adopted. (All but impossible.)
- Russia’s major buyers (India/China) haven’t signed up for the deal. (And they never will.)
According to Bloomberg:
But it remains unclear how effective a price-cap regime would be, particularly since some of Russia’s biggest buyers haven’t agreed to join. India is reluctant to formally join a price-cap scheme, since its industry worries it could lose out to other buyers on the chance to buy discounted Russian crude, according to people familiar with the views of Indian firms.
There are many ways around these initiatives.
So even if it’s adopted, I don’t see this having any impact.
Russia has also said that they won’t sell crude to countries that participate in it.
But the work arounds regarding insurance and ship-to-ship transfers will keep things flowing.
Ship to ship transfers eliminate the need of going into port. And doing the required paperwork that could get one sanctioned, if you know what I mean.
More Demand Destruction
Europe’s natural gas demand over coming winter is seen 7% down from the past five-year average because ofsoaring prices, which is still “notably below” the target set by the European Commission, according to Kateryna Filippenko, an analyst at Wood Mackenzie.
- “There’s potential for even more demand destruction,” Filippenko said in a Bloomberg TV interview.
- Further disruptions in Russian gas supplies to Europe are likely, with Moscow set to keep putting pressure on the bloc.
- A potential slowdown in China due to Covid woes and comfortable storage levels in Japan may limit their appetite for gas, which is “good news for Europe.”
It’s also important to consider that we are also coming into shoulder season.
“Shoulder season” is when demand naturally diminishes mixed with the broad shutdown of the industrial sector.
Electricity prices hit insane levels.
But even as it falls, it will level off at prices that are still insanely expensive.
So, is having above seasonally normal storage good?
Absolutely. But you need to look at the total picture.
The next question is, “What does mother nature bring for the winter?”
If there is a polar vortex, which will pull a significant amount of natural gas out of storage, Europe can’t just buy more by pipe.
Instead, they will have to rely on the LNG markets, which will be even more expensive as well as much tighter given the time of year.
I agree with the view that some of the prices became absurd.
But to ignore the prevailing problems heading into winter just because they have natural gas in storage is crazy.
The below chart puts into perspective the sheer number of cuts that have occurred throughout Europe.
Can the continent’s economy really survive with this much capacity offline?
If all these facilities were to run “normally,” the natural gas in storage would drop quickly with little ability to refill it quickly.
In short, the problems are far from over.
Take care,
Freedom Financial News