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This week we’ve seen a lot around dollar hitting almost 110. We’ve seen a lot in the US market downturn. There’s a lot of speculation around the Fed. But we’re really focusing on Europe this week.
1. European Natgas Stock vs Flow
2. Russian Oil Price Cap Fallout
3. Europe’s Food and Fertilizer Fallout
4. What’s ahead for next week?
This is the 32nd episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
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Listen on Spotify
1:51 European natgas: stocks VS flows
8:26 What to expect in manufacturing in Europe
9:26 Difficult environment for the German Finance Ministry?
10:27 Fertilizer fallout and impacts on Europe’s food supply
14:19 Is Europe getting relief soon, or will this crisis continue to 2024?
15:33 Russian oil price cap: is it going to come about?
19:12 What’s to stop countries from indirectly buying Russian crude?
22:00 What’s for the week ahead?
Tony Nash: Hi, and welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Sam Rines, Tracy Shuchart and Albert Marko. We’re going through the events this week and looking toward next week.
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So this week we’ve seen a lot around dollar hitting almost 110. We’ve seen a lot in US market downturn. There’s, a lot of speculation around the Fed. But we’re really focusing on Europe this week.
The key themes this week are really around European natgas stock versus flows. Russian oil price caps and the fallout that has come with that. Food and fertilizer in Europe. And then we’ll look to the week ahead. So I think we’ll look at some non Europe activities for the week ahead.
First for European natgas, Sam Rines in his newsletter came out with some really interesting points around natural gas stocks and flows. You can see the chart on the screen. Sam, can you talk us through kind of what’s happening in storage for natural in Europe and what we should be looking for as winter approaches?
Sam Rines: Yeah, sure. So you get this really interesting dynamic where everybody talks about the stock but very few people talk about the flow. So talking about the stocks of that gas in Europe is a really interesting one. Yeah, you’ve got stocks building up pretty quickly, particularly in Germany, sitting north of 82% overall for European stocks in general, north of 80%.
So it’s good, right? Stocks seem to be well ahead of where you would anticipate. Germany has a 95 target for November. They might actually reach it even with the shutdown of Ms one, Nordstream One. It’s actually not that big of a deal incrementally to Germany in particular. You go from about call it a 3.2 kilowatt hour type pump into Germany to about a three.
You didn’t really lose that much. I mean, it was pretty much anticipated anyway. So if they keep it off
for longer, whatever. You don’t have significant usage coming through at the moment for natural gas.
It’s a time where you can actually afford to not have those significant closing. They’ll probably still have some stock bill that will just be slower.
So overall, I think it’s a lot of headlines that a lot of it’s already priced in. If you were looking at the expectations of complete and utter frozen winter, you’re pretty much not looking at that assuming that Norway and Belgium continue to put their flows through to Germany at the current rate.
So overall, you’re actually sitting on a decent call it stock level. Right? That’s fine. And as long as you continue to have the flows from call it Northern Europe, you should be okay for the winter. You’re not going to be great. It’s going to be expensive, and it’s going to suck. But relative to the expectation of Europe’s going to freeze this winter,
I think that might actually be a little bit of an overblown one, and you might begin to have a significant blowback on that. And you’ve seen significant declines in things like electricity pricing ahead, which is a ridiculous contract anyway. And Dutch TTF, the net gas contract you’ve seen collapse this week, even with the shutdown of Nordstream.
So I think a little bit of the froth, a little bit of that angst is beginning to come out of the market, and you might actually have a positive surprise relative to expectations in Europe.
TN: So Dutch TTF peaked on Tuesday or something, right? It was early in the week, right?
TN: And Tracy, what are you seeing with that? Do you expect us to hit back up to those peaks, and do you think that was kind of a one time hit? And what Sam saying about storage is really kind of starting to take hold.
Tracy Shuchart: I think it really depends over the long run and how slow go. I totally agree with Sam here. Right now, for winter, Europe is pretty much okay, not great, as he said, but I think given if we don’t see increased flows, that storage would drain significantly by February. So we really have to keep an eye on flows from other countries, particularly in the United States, in the Middle East, and to see how those flows go. So I think it’s too early to be completely doom and gloom, but that is something we need to be cognizant of, because that storage can only last until February.
TN: Right. And for those people who aren’t in Northern Europe, northern European winter really stays cold, really until like, April, right. It’s not something that February comes and goes and it’s spring and everything’s great. You still have cold temperatures in Northern Europe until probably April or so. Is that about right?
TS: Yeah, absolutely. Anecdotally, if you’re been on Twitter, you see a lot of people starting to buy wood. The big thing on the European sites is to post how much wood you collected before this winter. So people are sourcing. People are expecting energy prices to be high and doing whatever they can personally, to kind of lower the prices. Because you have to understand, when you’re talking about European power prices, it’s not just your solid power price. They have that almost all of their taxes on top is on top of what they actually would be paying, which is outrageous carbon, et cetera.
TN: And so I just want to go back to one point in Sam’s chart as well. I think sam, you said the storage is about 82% full or something and they’re targeting 95%, but we’re ahead in 2022 from where we were in 2021, is that right?
SR: Yeah, that is correct.
TN: Okay, so the doom and gloom that we’re hearing again, we have inflation, we definitely have shortages, but in terms of storage, we’re ahead of where we were. And we don’t expect like a mass extinction event in northern Europe because of heating or whatever, right?
SR: Correct. I think that is a good base case. That’s good for everything. No mass extinction is low bar, but yes, that’s right.
TN: Exactly. Okay, very good. Do you have anything to add on this?
Albert Marko: I’m on middle of the road here. I do agree with Sam that they’ll be okay so long as they’re okay with no manufacturing, no growth in their economy, and so on and so forth. I mean, if they tried to kick things up and the demand starts to rise, I don’t think it will be okay. I don’t think that the Russians are going to play ball, especially when they start talking about these price caps on Russian oil and gas. It’s one of those things where economically, I can understand where Sam is coming from.
Politically, I’m inclined to say that Europeans are going to screw up and just agitate the Russians. And then you start getting into this back and forth. That economic trade and price.
TN: Let’s set the price cap aside for a minute. But when you say no manufacturing, so we’ve seen some manufacturing dial back and some facilities slow down and shutter. Is that expected to continue or do we expect that to ramp back up?
AM: I expect it to completely be just stalled for the entire winter. I just think the energy prices are so astronomically high that it’s just not economical for companies to manufacture anything.
TN: Okay, so if you’re sourcing things in Germany, then you should expect supply chain issues for the next five or so months. Is that fair to say?
AM: At least six months. And this is why I keep saying that this inflation doom loop keeps recurring because as the demand rises, there’s not enough supply and then you get back into an inflationary event. What’s the inflation rate in the UK right now? Like 20% reported. 20%? And in Germany, I think it’s like 19% and rising. It doesn’t stop.
TN: And PPI is in the 30s or something. Just to play this out, I wouldn’t have a whole lot of time to cover this, but if private sector is shutting down, even parts of it, then government spending has to kick up. And if government spending is kicking up and we have an ECB that’s tightening, that’s a difficult environment for the German Finance Ministry, right? Or is it no big deal then?
SR: No, I would completely disagree. I mean, Germany is one of the few countries in the world that has they could basically print their GDP and they’d still be perfectly fine on an ability to pay basis. They spent, like, three years getting paid to have debt.
TN: So very good, because, look, nobody wants Germany to suffer, right? And if government spending
has to kick up, then great. If they’re not going to suffer as a government to be able to do that, then that’s even more fantastic, because with ECB tightening, it could create some difficult trade offs for some countries in the region, of course.
So let’s take this and park it and let’s move on to fertilizer, because, of course, that’s related to natural gas.
And we have some there’s a recent Bloomberg story about Europe’s deepening fertilizer crunch. 70% of fertilizer production is halted. And then we have a chart showing the price of nitrogen fertilizer in Germany. Obviously, it looks pretty extreme. Can we cover that, Albert, and look at the impacts of fertilizer and how that’s going to hit food going into spring or summer of next year?
AM: Oh, yeah, the fertilizer, specifically what you’re talking about, nitrogen based ones, are relying on natural gas. Natural gas prices just keep on spiking over there. And again, we can continue this whole discussion about inflationary, commodity prices, but food is a big problem. They shut down their potash.
On top of that, the farmers, they’re notorious penny pinchers, whether it’s the United States, whether it’s Europe, so on and so forth. But they’re going to have to make up the nutrients for the soil in the spring of 2023 and most likely into 2024, they can’t deprive the land of nutrients.
So, of course, they’re going to have to have another round of demand for fertilizer. I don’t know about the night gas based ones, but potash certainly will have a surge.
That’s why I’ve always on Twitter have been big on Mosaic being the 800 pound gorilla outside of Morocco’s. OCP, but OPC, I think it is. But that’s not a tradable stock mosaic fertilizer. I’m very bullish on that. That’s going to relate to bigger increases in food prices, specifically in the UK.
TN: What crops in Europe would be most impacted by this?
AM: Wheat. Most likely wheat.
TN: Yeah. Okay. And where does Germany traditionally, where does it source most of its fertilizer? Is it from Russia?
AM: I believe they get most of their stuff from Belarus originally. And I know that they have potash fertilizer plants inside of Germany itself, but I’m not sure how. I don’t know the exact numbers on the importance of what they do for a fertilizer, but it’s certainly a problem specifically for Germany. Of course it’s a problem for France. It’s even bigger problem because they’re a big food producer.
TN: Okay, Tracy, you’ve said a lot about fertilizer in the past. What are your thoughts on this? Does it just get even more intense or do we see some relief on the horizon?
TS: Well, I think it does get a little bit more intensive when we just saw And, Norway’s largest fertilizer company, all kind of curve back production in various countries wherever their plants are concerned. So it’s definitely a concern. 100% agree with Albert. Going into next year is going to be a very big problem. I mean, everybody’s harvesting right now. Everything’s fine. We’ve seen big pullback in those prices. But going forward, in particular next year, we’re going to have a problem.
AM: And a lot of that, Tracy, has to do with the national governments are going to look out for their national interests, their own farmers, so that although the imports will drop, so the exports will drop and they’ll just keep it closed within their own nation, so they can feed their own people.
TN: Fertilizer nationalism.
AM: Well, it’s just the same thing with oil. I mean, the countries are not export more than they can handle.
TN: Okay, so sounds pretty dire, but do we see any relief next year? Or, like you said, is it going to go into 24, or does it all depend on Russia?
AM: I think it depends on Russia whether the Europeans and the United States come to their senses and stop trying to put their foot on the throat of the Russians. You’re hampering your own economic growth, and they’re sitting there talking about, oh, we’re going to get away from fossil fuels and do this whole new climate thing. That’s just not realistic. And I don’t think they just haven’t come to grips with that yet.
TN: I think it’s a time frame thing. Right? I mean, it’s going to take some time, and I think there’s a hybrid mix in the interim that I think we’re trying to rush.
AM: Well, that’s the point. They’re trying to rush things. When you rush things, your own people are going to suffer economically and so on and so forth. It’s just not politically. They just can’t swallow it. Some of the voters don’t swallow that. Sort of stuff.
TN: And things break. Like Californians can’t charge their electric cars. Right. These are weird times.
Okay, great. Thanks, guys.
And then on the oil price cap, we had about this week, former Russian President Good about this week, saying that Russia just won’t deal with people who subscribe to the price cap.
And then we had Xavier Blossom, Bloomberg tweet about it, saying that he and his friends are going to agree to a price cap on beer at their local pub and that the guys at the pub don’t agree with it, which is a nice analogy, I guess.
Tracy, what are you seeing on the price cap? Is it actually going to come about?
TS: First, they just announced that they’ve been talking about this for months. Let me give a little bit of background. And they just now say there’s going to be three different kind of price caps, one for crude and two for refined products.
However, if you look at the actual G7 statement that was out today, they were pretty vague on it. Basically, they said, we invite all countries to provide input on the price cap design and to implement this important measure. So in other words, they’ve decided they’re going to do this, but not exactly holiday.
TN: It’s going to be 2030 before they come to an agreement on.
TS: it’s because. They’Re asking all their stakeholders to join in this. And so what I see as the problems with this right now is that there are four specific problems. One, it’s not really enforceable outside of G Seven countries if people don’t sign up for this. Two, Russia already said, again repeating you, that they won’t sell to countries that enact price caps. Three, part of this is the maritime insurance on vessels carrying Russian oil India is already providing safety and notification through IRGC class.
So by Dubai, subsidiary of the Russian shipping group. So I hope I pronounced that right. But anyway, they’ve already kind of gotten their way around this. And four, they’re also thinking about creating their own benchmark.
So right now, Russian crude oil is expressed as a discount to Brent because rent is the benchmark price. They already have an oil trading platform in place via RTS and MYsix. So they could build out this platform, which they’ve been talking about, and go through near Mir, which is basically their version of Swift, and completely by past that and just let market forces work.
I think this price cap is still way off from seeing the light of day. But this actually could turn out much more bullish because this price cap overlooks how Russia could influence global markets.
If they wanted to, they could opt to cut off the EU and NATO, not just G7. G Seven members shut production and raise global crude oil prices through the roof because they would take barrels off the market there by hurting the G7 nation.
I’m not saying that would happen. I’m just saying that’s within the realm of two box. And it’s not surprising after we just saw today, as soon as an oil price cap was announced as a plan, suddenly we just saw gas problem with Nordstream one, therefore I’m off of national gas.
TN: So what’s to stop, let’s say, a European country that signs onto a price cap from buying, let’s say, Russian crude that is sent to Chinese, say ownership and then resold to say, I don’t know, Germany. I mean, that type of circumvention is already happening, right?
TS: No, you can definitely do that. What we’re really seeing now is that kind of circumvention is happening in the product market. So it’s very easy for, say, India to buy Russian crude oil, refine it until it’s anywhere else because it’s very hard to track where those barrels really came from. It’s easier to track a resale. Right, if that makes sense.
TN: Sure it does. But they put in a barrel of, say, Emirati crude with a million barrels of Russian crude and then they label it Emirati crude. Right? Something like that.
TS: Yeah. If they both have the same API level, depends. You could mix them. If they both were the same exact API level, then you could mix them. It’s kind of different than, say, the natural gas market. Yeah.
AM: The Iranians do this with the Iraqi oil and bozzar. Often they mix it and label it As Iraqi
TS: because they share oil fields. I mean, Albert and I have been talking about this for years now.
TN: Let’s be honest, the rules apply to the people who abide by the rules. Right. And so even if these price caps are put in place, there will be circumvention in a big way, of course, at least a refined product, if not crude product. And so a lot of it’s for sure. Is that fair to say?
AM: Of course, yeah. A lot of it is for show. This is a political thing right now for scapegoating Russia
for inflation problems. Now they’re just snowballing things and saying Russia’s gas is the problem
for inflation, Russia’s oil is the inflation problem, and other caps. But like I said earlier, and even just Tracy reaffirmed it’s like the moment you mentioned price caps against Russia, Moscow finds an issue, whether it’s gas, prom leak or Belarus problems, or Algeria has problems with Wagner. They create these issues all the time.
TN: Of course, anytime there are sanctions on a country, right. These things happen. Okay, very good. Thank you, guys. We spent a lot of time talking about Europe. So let’s move on to the week ahead and
what we expect to happen the week ahead.
We saw some really interesting action in markets, and last week we talked about how Palo speech, we really should have been a surprise to no one, but markets seem to kind of take it on the chin this week, acting shocked that he repeated himself again. So what do we expect going into next week? Do we expect things to kind of moderate a little bit or do we at least in equity markets, do we still expect some downward movement and also, say energy markets? We saw crude down, I think at 86 or something.
Tracy, do you expect, say, energy markets to continue to fall next week?
TS: What I would really look at, and what I’m looking at more, instead of looking at just reprice, which seems highly manipulated right now, especially going into midterms, not suggesting anything, but I think what I would start looking at is in like second and third month spreads or fourth month spreads. Right. So you really want to be looking, I think, just a couple of months down that curve a little bit. And if you start seeing because those curves are still kind of telling us that the market is very tight and curves, you can’t really manipulate as much as you can somewhat of the front line. So I think that’s where you should be looking at. I think we’ll really get a better grasp on these markets and to see what front market is next week is OPEC meeting, right. So they were talking about cuts, right, over the last couple of weeks. That’s right. That’s all. I will be on that. That’s on the fifth.
TN: And SPR keeps going until October. So we’re only looking at November,December before we’ll see some upward pressure on prices. At least a stand up pressure.
TS: Yeah, exactly. And depending on what OPEC says, we could see an initial pull back. The general consensus is they’re not going to do anything in September. However, OPEC has been known
to give us some surprises. So just keep that in mind.
TN: That’s good all right. Very good. Sam, what are you looking for for next week?
SR: Next week I’m looking at the ECB. I want to hear how hawkish they are and how quick they’re going to go and what type of language they’re using. They’re still in the QE boat, right? They’re still buying Italy, they’re still buying Spain, they’re still buying a bunch of the southern debt periphery type debt.
So I want to hear what they’re saying, how they’re saying it, and just how call it, quote, unquote, inflation-oriented. They are. They probably should be particularly versus the bank of England, who is very hawkish and likely to continue to, one, explore actually outright sales from their asset purchases to shrink their balance sheet and how quickly the relative moves are there.
I think that can create some fireworks, particularly called the Euro pound type crossed I think that could be really interesting and cross asset class could be.
TN: Do you think you should be able to surprise hawkish?
TN: You do? Okay, interesting. That would be very interesting to see. Wow. Okay. And so you think the Euro recovers a little bit on that?
SR: I think it knee jerks, yes. But the question is how long does that last? Right. That, I think, is a much more important question than the initial knee jerk. And I think over time, it would be a fade the news move.
TN: Okay, very interesting. Okay, very good. Thanks for that, Albert, close this out. What do you see for next week?
AM: The big boys come back to play from vacation. That’s right, they do. I think they’re going to start holding the market a little bit more accountable for all this bad data. And I think earnings were just atrocious when you look at what inflation was. I’m actually going to be watching though
China as we get closer to the CCP, the Party meeting, I think it’s October 16, I think XI might start announcing many stimulus packages in certain sectors. So I want to see if those materialize and what that does with commodities that are attached to them.
TN: Okay. I just want to say, with regard to the Party meeting in November, if anybody talks about reading tea leaves or any of that garbage, you’re banned immediately. Okay.
So we’re not going to imply, like, cultural mysteriousness on Chinese political processes. It’s just they’re a bureaucracy like everyone else. They make decisions like everyone else. They’re no more or less mysterious than anyone else. So I would say that for the people watching, because the people watching are going to see a lot of kind of China experts or whatever China watchers talked about how mysterious the CCP is and a lot of question marks. A lot of them are Fed talking points from the CCP spin machine. So they’re not mysterious, they’re a bureaucracy. They’re boring, just like every other country.
AM: Yeah. And the Party is I believe that Congress is October 16, not November. Yeah. So it’s closer than people realize. It’s only 30 days away, but China is going to have to probably stimulate some sectors associated with whoever is in line with the party leadership to keep them happy. So that’s what I’ll be watching next week.
TN: Yes. Very good, guys. Thank you so much. Looking forward to have a great holiday weekend, and I look forward to seeing you next week. Thank you very much.