The Landscape

Bundling Up

On July 17 we wrote a blog post titled running-out-of-energyIn there, we discussed the brewing energy crisis in Europe. Then, we said we suspect the energy crisis will become front and center in the news as soon as the weather turns cold. 

With winter just around the corner, we wrote a follow-up that didn't leave us with a good feel. At the time, Russia's Gazprom had reduced the flow of NG through the Nordstream pipeline to zero. That in turn caused a 30% upward spike in the price of NG in Europe in a single day and caused the continent to scramble for alternative forms of energy. 

Sometimes, we as a group fear a boogie man that doesn’t exist, but other times, there are genuine problems that need to be dealt with, and the public just doesn’t seem to care. We all have our pet concerns that we can’t understand the lack of interest from the general public, but that isn’t what this is about. 

Part of Europe's solution was going to be alternative supply, but another necessary ingredient was a reduction of demand. In order to get through the current winter, Europeans needed to shorten their showers and turn down the heat. Would they do it? That’s what I wanted to find out on a recent visit with my son.

Upon arrival in Helsinki last week, I immediately felt a tangible difference in the temperature at the airport. I needed to root into my bag for an extra layer, and I couldn’t help but notice everyone else was bundled as well. When I got to my son’s house, he apologized for the temperature, but explained that the cost of electricity has risen so much that they had no alternative but to keep the place cooler. Ok. So at least my son got with the program, but Europe as a group needed to use less gas this year than they did last year in order to get through the season. Were they cooperating? I was aiming to find out. 

We then went to visit various friends, and the story was always the same. Sweaters and thick socks were the order of the day. I had a chill that didn’t go away until I landed back in the States. Even inside the Detroit airport in December, you could feel the heat. Within minutes, we were forced to peel off a layer, and haven’t felt the same chill since. 

Natural gas remains elevated, but off of its highs.

As we can see from the chart above, it has been a wild ride for European natural gas. Although the price has come down substantially from its peak, it remains several times what it was just two years ago. But, there is reason for hope as well. Take a look at the chart below to see how Europe has pivoted away from Russia and now relies on other nations for their energy needs. Much of the alternative supply is coming from the US. Average gas output in the US lower 48 states rose to a record 99.5 bcfd in November up from 99.4 bcfd in October.  

Much of Europes current supply has come from the US.

As of this writing, things are looking much better than they did last summer. Humans around the world got together and remedied the problem of not enough natural gas to get through this winter. Between rationing and finding alternative sources of supply, it is looking like Europe will muddle through this winter. Germany, in particular, embraced a level of frugality that was necessary to get through the cold. Gas consumption by households and businesses is down by 25% in September and October compared to the average use from 2018-2020. That is exactly what was necessary to make it work. 

In addition to reduced demand, ships from around the world, and especially the US, shipped enough LNG to refill depleted stockpiles. Now, reserves are full, and it looks like Europe will easily get through this winter with everyone's cooperation. Stockpiles will be drawn down, but barring an extremely cold winter, it looks like Europe should make it through intact. 

That's not to say there won't be consequences though. I visited with a friend last summer that intended to open a fertilizer business in Finland. When I followed up last week and asked him about the business, he explained that with fuel prices so high, fertilizer companies have simply not been producing fertilizer. This will likely become next year's problem. Shortages in fertilizer will likely result is reduced food production, which will lead to shortages in certain foods. By the time there are food shortages, enough time will have passed that people won't make the connection that the food shortages are a result of a natural gas shortage, but that is the leading culprit right now. 

It seems that no sooner do we get over one problem before life throws us another one. Our goal is to look at the future and try to identify the stuff that is coming that creates opportunity via price movement in the capital markets. A shortage of energy made for solid trading opportunities, and a shortage of food will do the same. 

Shortages of food and energy are a relatively new development in the developed world. It has been decades since Europe had to ration either. It will be interesting to see how today's society deals with what used to be a common problem of not enough food or energy. We are empathetic to the human element of food shortages. Conflict almost never arises when people are well fed and content. This is something we will be following closely in the weeks and months ahead. 

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