This past Friday was a very busy day for the European energy markets. Initially, it appeared that the week would continue the recent positive tone with prices softening under the threat of EU intervention in the markets. Specifically, news leaked a proposed plan under which EU states would cap the price of electricity sold on the spot markets by non-gas generators (i.e., wind, solar, nuclear, etc.) and apply the excess profits to reduce overall energy costs to consumers. The idea that the EU was finally taking action to rein in the market and speculators provided a degree of optimism.
Midday Friday, Reuters broke the news from an undisclosed source that Russia would restart Nord stream 1 on schedule providing the market with additional positive news running into the weekend. However, later in the day, a meeting of G7 finance ministers announced that the nations gathered had given the "go ahead" to develop a plan to apply caps on the price of Russian oil.
After the European markets had closed late Friday, Gazprom issued a press release stating that oil had been detected in the Portovaya station's only operating compressor (see post below).
As a result, the flow of gas through the Nord Stream pipeline would be "fully shut down until the operational defects in the equipment are eliminated." In short, with the Yamal pipeline through Belarus and Soyuz/Brotherhood pipelines through Ukraine not flowing gas and Nord Stream 1 shut down, little to no Russian natural gas will be flowing into Europe for the foreseeable future.
Undoubtedly, European energy markets will react negatively Monday morning on the open. While natural gas inventories in Europe are in good shape due to actions taken by major importers over the past several months the prospect of no more Russian gas this early in the year is a real blow. Russia's President Putin has now played his trump card in the economic war against Europe. This move is slightly earlier than we had originally anticipated, but it makes sense in light of Europe's success in stockpiling natural gas and its assent to the application of price caps to Russian oil.
The critical question now is how does Europe respond to Putin's tightening of the economic screws? One option would be to trigger the next level of emergency measures and start rationing the usage of natural gas in order to protect stockpiles for the oncoming winter and the prospect of no further natural gas supplies from Russia. This would clearly have an immediate negative impact on the European economy and its industrial companies. A second option would be to hold off from taking any further measures and continue to focus on reducing demand since weather remains favorable and natural gas supplies remain available.
Irrespective of the route taken by Europe early next week, we have entered the next phase of the European energy crisis. In our view, in the coming weeks and months, the crisis most likely will get worse before it gets better. Both parties' strategies leave little room for common ground or compromise. Europe's goal is to make it through the winter without capitulating to Putin. In doing so, it would turn the tables and place Russia in a challenging economic situation as sanctions continue to take their toll. Similarly, Putin is attempting to increase the pressure on Europe, forcing it to the negotiating table to secure the lifting, or reduction, of sanctions and eliminating military and financial support for Ukraine.
More: Energy Market Commentary, EU Energy Crisis, Natural Gas, Nord Stream 1