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Make no bones about it – the EU has entered a crisis.
For a while now- Russia has been politicizing energy policy by limiting natural gas flow from Nordstream 1.
Choking off supply has caused prices to skyrocket, causing increased household prices and local businesses to halt operations altogether.
Over in the UK, new PM Liz Truss seems to have skipped the chapter in her economics textbook on inflation and promised to subsidize UK households’ energy bills, ensuring that the average household will pay no more than $2,880/yr for the next two years.
But these handouts are merely a band-aid solution. There has to be something done about bolstering supply in order to strengthen Europe’s fragile energy infrastructure.
As European energy ministers convened in Brussels last week, they tried to address key issues to protect this increasingly important nationalized interest.
This week, in <5 minutes, we’ll provide an update on the EU energy crisis:
Recap on The Nordstream 1 👉 Location, Function, “Maintenance”
Dutch Futures Contracts 👉 Spiking, Coming Back Down a Bit…
The Role of NatGas in EU 👉 Largest Importer in the World
Update On Nuclear 👉 Puzzling Ignorance
What Can We Do From Here? 👉 Stimulus? Rationing? Price Caps?
Let’s get started!
1. Recap on The Nordstream 1 👉 Location, Function, “Maintenance”
Instability in our energy complex has been shocking global markets, sending gas prices from Asia to the US higher amid a race and intense competition for supply.
Russia has been dragging its feet by limiting capacity sent through a critical pipeline: Nord Stream.
Nord Stream 1 stretches 1,200km under the Baltic Sea from the Russian coast near St Petersburg all the way to north-eastern Germany.
It is owned and operated by Nord Stream AG, whose majority shareholder is the Russian state-owned company Gazprom.
By the end of June, Germany was importing 26% of its gas from Russia. Most of it comes through Nord Stream 1 with the rest coming from land-based pipelines.
Germany also agreed to the building of a parallel pipeline—Nord Stream 2—but it never became operational due to the Russian invasion of Ukraine.
Although Gazprom cites “turbine maintenance” as the reason for the closure, we all know it is being politicized in Russia’s war with Ukraine.
The Kremlin had originally insisted that the most recent closure was due to a leak but now says that supplies will be suspended until the "collective West" lifts sanctions (Moscow will also retaliate if the G7 imposes a price cap on Russian oil).
While Germany has been trying to get alternative supplies of gas from Norway and the Netherlands, the overreliance on Russian Gas has handcuffed the country as local gas prices were sent up 450% YoY.
Germany is now back to increasing its use of coal to extend the life of power stations that it had been planning to shut down, despite how harmful coal production is to the environment.
This part might actually sound like a joke, but in order to cope with this complete shock to the energy systems, people in Germany and parts of Europe are actually buying wood stoves. In fact, demand for wood-burning stoves in Germany has doubled compared to last year as households look for cheaper alternatives.
Under the Radar
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2. Dutch Futures Contracts 👉 Spiking, Coming Back down a bit…
The main benchmark used that shows the crazy action lately in prices is Dutch TTF Natural Gas Futures. Here’s the price chart over the last 2 years:
The Title Transfer Facility, more commonly known as TTF, is a virtual trading point for natural gas in the Netherlands. This trading point provides facility for a number of traders in the Netherlands to make futures, physical, and exchange trades.
In the two decades since its inception trades at the TTF have grown exponentially and exceeded domestic volumes in the Netherlands fourteen-fold. This increase, helped by the rise of liquefied natural gas (LNG), caused the TTF to overtake the UK's National Balancing Point (NBP) as Europe's biggest gas benchmark.
Before we continue, let’s check in with our Outrageous Chartered FinMEME Analyst Dr. Patel!
3. The Role of NatGas in EU 👉 Largest Importer in the World
The EU is the largest importer of natural gas in the world and has built much of its grid based on fossil fuels. Natural gas is used for everything, like cooking and heating for consumers, as well as electricity and power generation for heavy industry.
The EU used to be mostly resource-independent back in the 1960s and 70s, but North Sea gas fields have since been depleted while the bloc has reduced its dependence on coal and rejected investments in nuclear energy. At the same time, renewable energy capacity buildout has failed to fill the gap.
As a result, there has been a tremendous reliance on Russia which is now going into full energy weaponization mode.
While there are other sources for natural gas import, capacity is simply not getting added fast enough to make up for the Russia shut-down:
5. What Can We Do From Here? 👉 Stimulus? Rationing? Price Caps?
European energy ministers convened in Brussels on Friday to discuss a series of emergency intervention measures to stave off runaway prices or more painful cuts that could result in de-industrialization and even social unrest.
While ministers debated the effectiveness of the actions and their related consequences, a bigger part of the equation will be to maintain a consensus and preserve the unity of the European Union. Here is what was on the table:
Government support: Looking to prevent ballooning collateral requirements, emergency credit lines would be offered to energy market participants that are facing high margin calls.
Rationing: Proposals range from setting mandatory targets on reducing electricity consumption during peak hours to cutbacks in electricity utilization.
Price caps: The most controversial of the measures is putting a price ceiling on gas imported from Russia and how the caps would impact different regions and countries.
Trading suspensions: Caps may also be imposed on the margin limits that energy exchanges can ask for or other temporary suspensions of European power market derivatives.
Windfall revenues: Levies would be imposed on European electricity producers by setting a threshold at less than the current market rate and using the cash to help reduce households' soaring energy bills.
Result: EU ministers ultimately ended up shying away from imposing price caps on Russia, as Putin declared he would shut off natural gas to any nations who imposed a cap.
Instead, it looks like the ministers agreed on clawing back energy firms’ profits. The EU's windfall plan (yet to be fleshed out) would see governments skim off excess revenues from wind, nuclear and coal-fired power plants that can currently sell their power at record prices determined by the cost of gas, and use the money to curb consumer bills.
Fossil fuel companies would also have to pay a "solidarity contribution," a summary of the meeting said.
"Taking some of those excess profits and recycling them back into the households makes sense," Irish Environment Minister Eamon Ryan said on Friday about the Commission's recommendations.
Wrapping Up…
The solutions proposed in Brussels are largely inadequate band-aid solutions. The real problem here is supply. More needs to be done on capacity build-out subsidization rather than direct handouts, especially in an inflationary environment.
Inflation is high enough as it is. By failing to address structural issues and giving handouts, there is more fuel being thrown on this fire rather than any real fix here.
Oh… and turn back on the Nuclear plants.
Until next time. Always Yours. Incessantly Chasing ROI,
-Genevieve Roch-Decter, CFA
What else we Grittin’ On?
OCEAN FREIGHT. The cost to ship a 40-foot container is down 60% from January. This is typically the industry's peak season.
OPEC+. The group agreed to cut oil production by a symbolic 100,000 barrels per day in October. The decision exactly reverses the September increase in response to Biden's visit.
SERVICES. ISM and S&P Global services data are contradicting each other. One shows contraction while the other gauge points to growth.
HOME PRICES. For the first time in 2 years, consumers expect home prices to drop over the next 12 months. A Fannie Mae survey shows consumers expect a 0.4% drop in prices.
PASSIVE GIANTS. According to a new study, passive investors own ~37.8% of stocks. Or roughly $16 trillion worth.
Sources:
https://seekingalpha.com/news/3881561-eu-discusses-emergency-measures-in-brussels-to-tackle-energy-crisis
https://www.reuters.com/business/energy/eu-countries-seek-emergency-solution-soaring-energy-bills-2022-09-09/
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