NEW LOW OBSERVER

Although we’re not out of the woods yet, a recent article in The Straits Times reminds of what we’ve been through since last year and what was said at the time.

Many items stand out in the article above and we’ll address the most salient.  The very first item is the issue of European economic meltdown.  As noted above:

“The danger of a complete economic meltdown, a core meltdown of European industry, has – as far as we can see – been averted…”

Prior to averting economic meltdown, there was a lot alarm over the European energy situation, as noted below:

At the time, it was believed that the energy crisis in Europe would last for a decade, at least that was the claim. Our claim at the time was that we had seen this type of situation before and that potentially there would be a reversal of the crisis environment.

Prices don’t usually go parabolic and then plateau.  The exceptions being in instances where a company is acquired by another company and the acquisition is completed.  Otherwise, price spikes  quickly revert to the prior starting point before gradually ascending.

The second issue of interest in the article is the point about Russian energy supplies to Europe.  The article says:

"The European Union is no longer importing coal and crude oil from Russia, and gas deliveries have been significantly curtailed."

This is a point that we addressed when we said that Gazprom seems to go through a cycle of throttling their customers and then end up paying the ultimate price for such action.

At present, there is a real risk that Gazprom and other Russian energy suppliers have a significantly diminished market for their merchandise.  This could set the stage for bailouts and bankruptcies if  conditions do not materially improve. Like when Enron throttled California, the state lost in the short-term but Enron lost in the long term.  Normally, re-emerging from a pandemic is the hoped for condition for improvement.  However, the initial reading is that Russia will be among the last to benefit from a global recovery.

Adding insult to injury, Germany has significantly increased their storage of energy as seen below:

"In Germany, storage facilities are about 91 per cent full, compared with 54 per cent a year ago..."

Markets are a restless beast.  They don’t tolerate imbalances for very long. 

Germany’s actions are the natural workaround to a condition that was always going to be temporary. This makes it surprising that there could be an energy crisis of a decade. Accelerating the alternatives and workaround process was the LNG flotilla.

The parade of ships attempting to supply Europe with LNG had the expected outcome:

"The dynamic has shifted to such an extent that there is now too much LNG arriving..."

These are basis economic principles that shouldn’t need further explanation. 

"Germany, once the biggest buyer of Russian gas, is opening three terminals this winter, and Europe's largest economy expects it new LNG facilities to cover about a third of its previous requirements."

The workarounds being applied by many nations in Europe may have a long term effect on energy prices.

Finally, it was thought that because winter was approaching there was a level of certainty in the demand for energy and therefore prices must increase.  Unfortunately, for European natural gas prices, that was not the case.

A mild winter (for now) has only exaggerated a dramatic oversupply of energy for European nations.  Regarding Russia, as we’ve continually said in the past, energy throttlers typically pay the price for their actions in the worst way.