European Energy crisis - latest developments
A cold winter ahead with Russia “weaponising” its energy exports
Here we are with another day full of ‘good’ news…
Last week, the G7 Finance Ministers agreed on a price cap for Russian oil, with the aim to implement the price cap with the timeline of related measures in the EU's 6th sanctions package.
On late Friday, Gazprom announced the Nord Stream pipeline will remain shut indefinitely, fully “weaponising” its energy exports.
Today, the Kremlin said that Russian gas supplies to Europe will not resume in full until the 'collective west' lifts sanctions against Moscow over its invasion of Ukraine.
On top on the European energy crisis latest developments we also have:
The ECB council set to deliver a second large rate hike at its upcoming meeting on Thursday with inflation in the Eurozone, already at record highs, rapidly approaching double digits.
Fed Chair Jerome Powell is to speak at a Cato Institute conference on Thursday.
OPEC+ (including Russia) is meeting today to discuss cutting output to support oil prices.
This morning, European equity Futures began 3% down, gas prices surged more than 30%, the Euro sunk back below $0.99 printing a 20-yr-low (since the lowest Dec 2002), following the announcement that Russia would cut off gas deliveries to Germany via the Nord Stream pipeline. Dutch TTF gas (TTFMV2) was down 37% to €215/MWh last week on assumption supply would return and today jumped 30% on the opening to trade around €280/MWh.
The energy war is escalating further, and Europe look set to lose around 30 mcm/d or 4% of its gas supply. While storage levels across the Euro area have grown rapidly in recent weeks due to surging imports of LNG, the prospect for rationing and further initiatives to curb demand for gas and power prices will be the focus this week. In addition, demand destruction from soaring prices has already lowered demand, but more is needed, especially if the winter turns out to be a cold one.
In addition to the price cap for Russian oil, G7 Finance Ministers announced Europe will develop a targeted mitigation mechanism to avoid harming oil-consuming countries.
Russia's Kremlin responded it will stop selling oil to countries which support price caps for Russian oil and as such will ship oil to countries which act in accordance with market rules. Regarding price caps, Kremlin spokesman Dmitry Peskov told reporters:
“We can say one thing with certainty: the adoption of such a decision would lead to a significant destabilization of oil markets”
Now what?
The energy crunch will exacerbate pressure on the euro. Technical signals point to a breach of the August low at 0.9901 per dollar, pushing it to the worst level since 2002. The regional outlook "is almost certainly going to get worse," said Gordon Shannon at TwentyFour Asset Management. Goldman, in a note before the relief package news, said it sees the currency staying below parity with the dollar over six months, and cut its forecast to 97 cents over the next three months from 99 cents.
Finland’s economy minister warns the energy sector is facing a potential “Lehman Brothers” moment (which nearly brought down the whole financial system in 2008) if governments do not provide emergency funding.
How this could happen:
European energy companies hedge their positions by selling energy contracts against the physical electricity that goes to customers
In order to do so, they have to put up ‘collateral’ or cash
As electricity prices go parabolic, firms are losing millions on their short position hedge
Firms are then required to put even more collateral in, draining their cash reserves
This is triggering a liquidity crisis as we have seen with European energy firms
Unless firms get emergency funding, then then will become insolvent if current market conditions persist
At this time electricity prices are continuing to surge and volatility is only increasing, which is triggering more margin calls
The ‘Lehman Brothers’ moment comes if these markets seize up or there is a contagion element where energy firms suffer from liquidity or solvency issues
Banks could pull back from lending if there is a fear of credit losses. Lowering margin calls would only shift systemic risk from the energy sector to the financial industry
Other countries could face problems too. A recent UK survey laid out a dire scenario: 60% of UK companies face bankruptcy risks (Bloomberg). Soaring energy bills are threatening to put six in 10 British manufacturers out of business, according to a survey that lays bare the extent of the crisis facing the next prime minister. MakeUK, the lobby group for UK factories, said that nearly half of manufacturers have experienced a jump in electricity bills of more than 100% in the past year.
EU energy ministers will also consider taking steps to ease the lack of liquidity for energy companies across the bloc.
As we stated in our latest reports, we continue to believe that this is a time to stay conservative and reduce risks.
On the other hand, we also recognize that after the Friday selloff many equity indexes lost 10% in the last two weeks, bringing many indications close to an oversold level.
We believe that this week the equity market could bring a small rebound.