Energy crisis and prices

Economic warfare and the role of energy… In response to the economic war, Russia is reducing its oil and gas exports by maintaining high energy prices. Russia wants the West to surrender on sanctions and support for Ukraine and is starting problems in Western economies.

The EU is partially reducing Russian gas as part of sanctions, and Russia “routinely” repairs gas pipelines to Europe. This leads to a 2.5-fold reduction in Russia’s gas supply to Europe compared to last year. Europe is completely As a result, gas in Europe is $1,750 per thousand cubic meters compared to ~$900 at the beginning of 2022, and growth since the beginning of 2021 is ~700%.

EU started using stocks to replace declining Russian flows… Source: Bloomberg, GIE Europe

Energy strategy… The oil shipment through the Caspian Pipeline Consortium (CPC) was stopped at the ports of Novorossiysk. First the storm, then the “discovery of WWII shells”, now “because of the environment”. More than 2/3 of Kazakhstan’s total oil exports pass through this route. Russian oil companies may also choose to cut production. Leonid Fedun, the former vice president of Lukoil, asked: not to accept discounts and save valuable resources for the future.

This strategy has some successes:

·        In Britain, the government is in knots;

·        In France, Macron lost an absolute majority (Parliamentary support);

·        The European economy is in the danger of recession;

·        Biden’s popularity wanes, Democrats likely to lose their majority in Congress in November.

Situations that can go wrong in the market…

1. A possible global recession may harm not only Western governments, but also the budget revenues of the Russian Federation. Metal prices have already collapsed, for example, due to fears of recession.

2. Covid seems to be returning to the agenda. More than 200,000 infections per day are detected in France. In Italy – more than 100 thousand. There is a risk of Covid restrictions and a decrease in oil demand.

3. Weather. If autumn and winter are warm in Europe, fewer energy sources will be needed for heating.

4. Kazakhstan is one of the allies of the Russian Federation, but could relations deteriorate? Russia and Kazakhstan are normally strategically and economically intertwined: Russian companies have many major projects in Kazakhstan, Kazakhstan exports most of its oil through Russia, the countries even have a unified air defense system.

5. If the oil and gas war lasts for years, Europe may switch to other energy sources (both dirty and sustainable).

Russia is aggravating the situation and taking big risks: Western sanctions will be tightened even more and the Russian Federation’s oil and gas revenues will decrease and its budget will be strained.

Why might the oil price stay around $100? The problems on the supply side are huge. If we look at what could cause high oil prices in the near future;

·        OPEC produces almost at the limit: the committee sets production targets but does not meet them. Even Saudi Arabia and the UAE are struggling to increase production;

·        The largest private oil companies in the West complain of underinvestment;

·        Logistic chaos arises due to the embargo imposed on Russia by Europe, oil floats longer in tankers, then reaches consumers;

·        People who have been isolated during the pandemic are now going places.

How the West is trying to deal with this:

·        The West seeks to cool energy prices with various “interventions”: it sells oil from (depleting) strategic reserves, the issue of new Covid waves is brought up to speculate on low demand, and Biden himself encourages the Arabs to produce more.

·        The US also included a strong dollar and a rate hike: the stronger the dollar and the higher the rates, the worse it is for weaker economies because they buy less oil.

Just a year ago, the cost of natural gas in Europe was only ~4 euros per megawatt hour. Today it costs “only” 17 times more – 71 euros per megawatt hour. For suppliers, hope is in vain: production in Norway is falling, Russia has full access to the pipeline (and not partial as the EU proposes) awaits Nord Stream 2 certification, almost all LNG is now going to China, and Europe is on the verge of an energy crisis. The problem isn’t just about natural gas – there’s a serious fuel shortage in the UK right now. According to BP, about 30% of the company’s gas stations were temporarily closed due to gasoline shortages.

European gas prices… Source: Intercontinental Exchange

Evaluating all this from an investor perspective… The winter of 2021-2022 will be a turning point for the global economy. If the winter is mild, everyone will breathe a sigh of relief and they will likely start actively stocking up on cheaper oil and gas for next season. Stable, long-term growth of the economy is needed for raw material prices to grow. If the world economy is knocked out at the end of winter, it will be possible to forget about the “raw material supercycle” for at least a few more years. However, oil and gas appears to be the most attractive sector in the next few months. The reduction of energy stimulus in the United States will likely happen no earlier than November-December, and oil and gas demand will only continue to rise.

Countries with the highest crude oil exports worldwide in 2021 (in billions of dollars)… Source: Statista

Conclusion? Constant shortages of electricity, constant power cuts of cities, problems with fuel supply seem either a phenomenon of the 90s in the CIS, or news from the third world. This winter, it would seem, the “third world” will apply to the whole world, because there may not be enough energy and fuel for everyone.

Oil prices can stay around $100 per barrel. In this environment, Russian oil companies will continue to profit. We think that the correction in energy prices will not last long and prices will continue to rise despite the threat of recession.

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