European natural gas prices took a big tumble, leading to a selloff in both oil and natural gas around the globe after Russia said that they might consider raising natural gas supplies to Europe. The supply shortage that we’re seeing in Europe is happening not only because Europe decided to close a bunch of coal plants and shut down oil production but also because they decided to put their energy security into the hands of good ol’ trusty Russian President Vladimir Putin.
Now, shockingly, some Europeans thought that Russia was withholding supplies for their own advantage. Anybody that knows good old Vladimir Putin knows that he would never consider doing such a thing. In the last couple of years when President Donald Trump was warning Europe not to become too dependent on Russia and its natural gas supplies and urged them to use the U.S. as a supplier, they scoffed at him. Europe must have thought that Trump didn’t realize what a sweet and lovable guy Putin was. Some Europeans believed that Russia was colluding with Trump in the last election. The New York Times won a Pulitzer for fantastic coverage of that. I’m sure that if you believe the Trump/Russian collusion story that has now been proven absolutely a falsehood spun by nefarious politicos, you then would also believe that Putin would always make sure that you had enough supply to get you through the winter. Yet, now the International Energy Agency suggests that Vladimir Putin was withholding supplies from Europe. I’m sure they were shocked because this is the same organization that told us that we needed to stop investing in all fossil fuels if we were going to meet our greenhouse gas emission targets. They now blame Russia for withholding supply and it’s making them look bad.
The FT Reports that, “The head of the International Energy Agency said Russia has the capacity to send substantially more gas to Europe and alleviate the energy crisis gripping the continent, in an intervention likely to bolster claims that the country is withholding crucial supplies. Fatih Birol, the executive director of the IEA, told the Financial Times that the agency’s own analysis suggested Russia could raise exports by roughly 15% of peak winter supply to the continent. Speaking the day after Putin hinted at a boost to shipments, Birol urged Russia to prove it is a “reliable supplier” by helping alleviate a supply crunch that has rocked energy prices and threatened the global recovery from pandemic lockdowns. “If Russia does what it indicated yesterday and increases the volumes to Europe, this would have a calming effect on the market,” he said. “I don’t say they will do it, but if they wish so, they have the capacity to do it.” The IEA, which is primarily funded by OECD countries to advise on energy policy and security, first said last month that it believed Russia could boost supplies to Europe but without specifying by how much.
Gas prices have been climbing for months and shot higher on Wednesday on the growing prospect of supply shortages over the winter. But a 40% gain in UK prices quickly snapped back to a 9% drop on the day after Putin hinted at larger supplies. Gazprom (MCX:GAZP) said Putin’s comments had a calming effect on Russian producers and European consumers alike.
“We all let out a sigh of relief in agreement and said ‘Thank God!’” Elena Burmistrova, head of Gazprom’s export arm, told a conference in St. Petersburg on Thursday.
Burmistrova said the turmoil in gas markets threatened the stability of the regional economy and proved that the long-term contracts Gazprom was pushing were a safer option.
“Buying gas at acceptable prices is good, of course, but it’s even better to know for sure in advance how much it’s going to cost a month, a quarter, or a year from now,” she said. “We can all see on markets how much that unpredictability can cost us.” Russia has repeatedly stressed it has fulfilled its long-term contracts but has also indicated more sales could be made available once the Nord Stream 2 pipeline to Germany is approved. That has stoked suspicions from Ukraine and other eastern European countries that it is trying to use higher prices to ensure the project’s speedy approval. The line, which runs through the Baltic Sea, will bypass Ukraine, which turned away from Moscow to the west after a 2014 revolution and has fought a war against Russia-backed separatists in its east ever since.
Dmitry Peskov, Putin’s spokesman, said on Thursday there was “potential” to increase supplies to Europe, and hinted strongly that Nord Stream 2 was the best way to do it. Alternative supply routes “work brilliantly and are much more high-tech and ecological”, Peskov said, according to Interfax.
Jennifer Granholm, the U.S. secretary of energy, said this week that the U.S. was “carefully” watching Russia’s role in the European gas crunch, including assessing whether Gazprom was manipulating the market.
The IEA’s Birol said Russian exports were not solely responsible for the tightness in supplies. The rapid economic rebound from the pandemic, prolonged maintenance at various projects, and weather conditions have also played a role, he said. But he cautioned that soaring prices would damage the industry’s long-term future.
“Very clearly the gas market is not getting good marks from consumers around the world,” Birol said. “It has been presented globally as a clean reliable source to complement the energy transition, but it may be casting a shadow on this image,” Birol said governments needed to insulate consumers from the surge in prices in the short term but added that record prices should also accelerate the transition away from fossil fuels. Do you think?
The overall fundamentals for both oil and gas are still very very bullish. The Energy Information Administration will release their report today for natural gas and we should see the supply injection. Use this short term sell-off to lock in your hedges if you haven’t done so already. You might not get another chance if winter decides to come early.