This week is shaping up to be one of the most consequential in the global energy markets for a long time. On Thursday, the Nord Stream 1 pipeline, the main artery feeding Russian gas into Germany, is scheduled to reopen after roughly a two-week closure for maintenance. Energy prices in Europe (and around the globe) have increased sharply over the past several weeks on the fear that the pipeline will not reopen and Europe would be compelled to implement emergency plans, including natural gas rationing. Based on the analysis of numerous financial and government institutions, Europe's economy and global supply chains would be significantly and severely adversely impacted if this were to occur. The pain would be felt far and wide. German manufacturers provide critical parts and components to other companies – this possible new supply disruption would come on top of the globe's current struggles to recover from the COVID pandemic.
Any analysis concerning Thursday's announcement is effectively speculation. In short, the decision rests solely with President Putin. A consummate geopolitical chess player, he will assess each option and its ultimate consequences on the various parties. The winner will be the one that most favors Russia and its leadership over the long term.
If we had to speculate, it would seem the most likely outcome on Thursday would be an announcement delaying the reopening of Nord Stream 1 for technical reasons, combined with ambiguous assurances that natural gas would start to flow in the coming weeks.
Such an announcement would preserve Putin's options in that he could continue claiming to be a reliable partner (i.e., arguing that he is living up to his contractual commitments) while maintaining pressure on European governments. We would expect European governments to react cautiously to such an announcement. European leaders do not wish to trigger an economic crisis but know that each passing day without Russian gas means being less prepared for winter and the potential widespread gas shortage when the public needs it most.
Undoubtedly, consumers should be prepared for increased market volatility with each news leak leading up to the announcement. Despite the market's recent repricing for negative news, an announcement halting future gas shipments would (as expected) result in a steep price increase. In contrast, should the announcement conform with our expectations (or better – the resumption of limited gas shipments), we would expect to hold current levels awaiting more clarity or decline in the form of a relief rally.
As we said at the start, this will undoubtedly be a consequential week for the energy markets.
More: Energy Market Commentary, Natural Gas, Nord Stream 1, Ukraine Crisis