The Energy Report: Europe Surging

Chestnuts roasting on an open fire might be Europeans' best chance to stay warm. Europe is hoping for coal in its stocking as cold temperatures across the continent unmask its poorly planned and short-sighted energy transition.

As New York is now banning natural gas in new buildings, it is obvious that it is not learning from this European energy tragedy that is putting lives at risk and is leaving the entire continent vulnerable from an economic and geopolitical situation.

Reuters reports that European gas prices hit a new high on Tuesday after Russian shipments to Germany via a major transit pipeline reversed direction, a move the Kremlin said had no political backdrop.

Oh right. As one western firm said Gazprom (MCX:GAZP) was meeting its supply obligations. Reuters says that westward gas flows through the Yamal-Europe pipeline had been falling since Saturday and, after stopping early on Tuesday, reversed direction, data from German network operator Gascade showed.

Russia is showing their dominance over the European market and is using this advantage to pressure Europe into approving the Nord stream pipeline 2 as well as putting them in a position where if they decide to invade the Ukraine, that Europe will have difficulty putting sanctions on the country because of their dependence on Russia as a supplier of oil and gas.

If that wasn’t enough, ZeroHedge reported that France’s energy crisis worsened overnight when another nuclear power plant had to reduce electricity output. Power prices jumped as the government requested one of the largest utility companies to restart more nuclear reactors amid cold weather.

Following last week’s shuttering of two nuclear power plants by Électricité de France S.A., commonly known as EDF (PA:EDF), a French electric utility company primarily owned by the state, after safety inspections found cracks in at least one nuclear reactor, another one was closed Monday due to a worker strike.

EDF said an unplanned outage at the Bugey Nuclear Power Plant in eastern France was due to a strike. Output at reactor four was cut from 800 megawatts to 180 megawatts.

Javier Blass of Bloomberg writes that:

“When you see fuel-oil power plants firing up, that’s the telltale of a grid throwing some of its very last defenses to keep supply and demand balanced. I’m in France right now, multiple fuel-oil units at the Brennilis, Dirinon, Vaires, and Montereau power plants are working."

In the meantime, the fact that US lockdowns are off the table and the US is saying that the Omicron variant has mild symptoms is giving the oil a bit of a boost.

Political issues in Libya have cut off oil supply and the market has to separate the demand destruction that might happen versus the strong demand that we are clocking right now against tightening supply.  Libya says its oil production is down by 300,000 barrels a day after militias forced it to close several fields including Sharara, the country’s biggest. That amount of light oil will start to matter if it remains offline for a while.

Reports say that NATO-backed Libya leader Mohamed Yunus al-Menfi is behind an armed assault in Tripoli to cancel elections that could elect Gaddafi’s son as the next President of Libya. Russia, for their part, is warning that the US should not meddle in the Libyan election.

Despite worries about Omicron, we’re seeing signs that demand in India is rising. Argus Media reported that India refined 3% more oil products in the last month as refineries operated at maximum or higher capacity and fuel demand picked up across the nation.

The fear factor that we saw in oil over the Omicron and potential lockdowns seems to be easing—just a little bit. Still, it’s a problem if the market perceives that Omicron is going to shut down major parts of the global economy. We are going to get a reality check when we get today’s American Petroleum Institute supply report which, despite another 2 million barrel release from the strategic petroleum reserve, should show a big draw in inventory.

I expect a drawdown of four million barrels for oil and a 2 million barrel drawdown in gasoline supplies and a 2 million barrel drawdown in the distillate.

The situation for oil is still bullish in the long term once we get through this Omicron variant fear. Geopolitical risks factors rising should give oil a nice bounce in the next couple of weeks. Still we have to be on guard for corrections, but use this sell-off as a hedging opportunity if you haven’t done so already.

Natural gas futures are being supported by the European energy crisis but are offset by warm temperatures in the United States. We believe that natural gas prices should rebound here as soon as the weather turns and with all of this support from Europe, should keep the market well supported.

The Wall Street Journal reports that now might be the time for an LNG export boom. The Journal says that

“Right now market conditions are creating an ideal negotiating position for potential U.S. liquefied natural gas export terminals, which chill and liquefy home-sourced natural gas to be shipped abroad. Natural-gas prices in Europe and Asia are still high, while a mild start to the winter has helped bring U.S. prices down. Benchmark European prices are about 10 times as expensive as in the U.S."

In October and November alone, Chinese companies have signed at least four long-term deals to buy LNG from the U.S. Three are with Cheniere Energy (NYSE:LNG); one is with a private developer, Venture Global LNG. Meanwhile, there is a potential opening to find willing buyers in Europe, where the tense Ukraine situation bodes poorly for the prospect of Russian natural gas refilling depleted European inventory.

S&P Global Platts expects three to five North American LNG export projects to reach a final investment decision in 2022, heralding a “third wave” of new U.S. LNG terminals after years of stalling for many would-be exporters. For some developers, getting those projects across the finish line involves signing a few more contracts, which is far from easy.

 The Journal says that even without the so-called third wave of new projects, the U.S. is still on track to have the world’s largest LNG export capacity by the end of 2022, according to recent estimates from the Energy Information Administration. Keeping that crown on will be a tougher task.

Yep. While other countries may benefit from US natural gas production, residents of New York City won’t be so lucky.  New York's ridiculous edict to ban natural gas in new buildings is only going to raise the cost of energy for these buildings by as much as 78%.

I don’t know if New York knows this but electricity also comes from fossil fuels, in most cases, unless you totally change the grid in New York which isn’t going to happen anytime soon.

In the meantime, you’re going to leave yourself vulnerable—like Europe has—to potential energy shortages and blackouts. This madness doesn’t even take into account the fact that it has been US natural gas production that has reduced greenhouse gas emissions by allowing many coal plants to be retired. This move will backfire; it will make New York a more expensive city and will drive more people out of that great metropolis.