Will He, or Won’t He?

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This is the question on everyone's mind. It is almost unimaginable how Europe and much of the world are anxiously awaiting the answer to this simple question.

The Question

Of course, we are referring to whether President Putin will restart the Nord Stream 1 (NS1) pipeline after its scheduled maintenance is supposed to conclude on July 21. There is a multitude of variables to consider in assessing this question. However, the truth is that it is all in Putin's hands. Few would have believed that he would wield such power and influence over the global economy at the start of the year.

Scenario Analysis

Several major banks have undertaken a worst-case scenario analysis – i.e., NS 1 does not restart, and Russia halts gas shipments to Europe in retaliation for its support of Ukraine and its arms shipments into the country. If this were to pass, the consequences would be dire. Most European nations would immediately use emergence rules to trigger natural gas rationing, prioritizing increasing gas storage for the upcoming winter months and limiting availability to commercial and industrial users.

The European exchanges and economy would undergo a steep and swift drop – we have already seen the price of Uniper in Germany fall over 75% and talk of a government bailout. One can see the overall market anxiety in the recent accelerating drop in the Euro, which is now at parity with the US dollar – a level not seen in 20 years. A halting of gas deliveries by Russia through NS1 would truly trigger an economic crisis.

In our view, the higher probability scenario is that Putin restarts NS1 but continues to flow gas into Europe at reduced rates.

Prior to the NS1 maintenance shutdown – the flow rate was a meager 40 percent. Under this scenario, Putin would effectively keep the pressure on Europe, giving them enough gas to continue forward but not enough to bank away robust levels for winter without giving up his trump card. If this were to occur, markets would most like breathe a sigh of relief that the worst did not transpire (despite not being out of the woods), and energy prices would most likely give up a good portion of their recent gains.

There is a hybrid scenario where Putin delays the opening of NS1 on a technical pretext and states that once the technical problem is resolved, gas will start to flow. As one would expect, there is very little trust between the west and Putin, and such an announcement would be met with a great deal of skepticism. In this hybrid scenario – energy markets would most likely react negatively, waiting to see if Putin follows through on his commitment to restart NS1. By taking this approach, Putin would place European governments in a difficult position – do they trigger emergency measures or wait to see if gas flow restarts as promised? At this point in the year, every day is precious.

No one knows what Putin will do. But this is probably one of the most consequential economic and political decisions to be taken in many years.

More: Energy Market Commentary, Natural Gas, Nord Stream 1, Ukraine Crisis

Richard Soultanian