The Financial Jigsaw Part 2 – SPECIAL REPORT –- Why are Nat Gas Prices High but Oil is Stable? - What Next? – (08-25-2022)
Analysing the Nat Gas & Oil markets and associated Geopolitics
LATEST: Natural Gas (Nat Gas) prices continue volatile; Wolf Richter has the detail today: https://wolfstreet.com/2022/08/22/us-natural-gas-spikes-81-in-7-weeks-hits-new-14-year-high-unwinds-plunge-in-june-and-july/
THE FUTURE: The forecast is not good news for Brits next year: https://dailysceptic.org/2022/08/23/energy-bills-could-hit-6552-in-april/
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TODAY'S SITREP: Economic difficulties are caused by a range of negative factors including supply chain disruption from the inappropriate government response to lockdowns and crucially, in Europe, by US/NATO sanctions imposed on Russia over the conflict in Ukraine. The subsequent decrease in Russian natural gas supplies to the EU has caused economic mayhem for UK, Europe, and Germany in particular and the world in general as Nat Gas global market prices have soared. Although Britain is not directly dependent on Russia for energy, it’s been hard-hit by prices on the global market whilst our useless politicians' think they know who is to blame: READ MORE: Blame Putin for economic failings – UK chancellor
Nat Gas is widely used in energy generation, transportation, commercial and household sectors, as well as in energy-intensive industries such as chemical, iron and steel manufacturing and especially for fertilizer. The United States, Europe, Russia, and China, the top four Nat Gas consumers, together accounted for 53% of global consumption in 2019.
While thermometers have been rising across the northern hemisphere this summer, people are panicking about how to fund the cost of energy bills once winter starts to bite. According to the latest forecasts in Britain, the minimum price cap for household electricity and heating costs will more than triple in September and over the winter; it will increase again in January 2023 as the regulator, Ofgem, will revise cap prices quarterly in future.
I have been paying around 19p per kWh at the beginning of the year and was quoted 58p/kWh on August 10 2022. I will describe my plan and budgets on how I will handle these extremes in future 'Letters from Great Britain'. This HM Government report is worse now: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1086569/quarterly_energy_prices_uk_june_2022.pdf
Some commentators have suggested that fears are being overdone, and that the weakening global economy and moves to fix energy supply issues will bring down prices. I think they are whistling in the wind because as time passes the situation deteriorates even further with no happy ending in sight.
Energy prices are mainly affected by recessions and higher interest rates. At present, the prospects for the global economy are getting gloomier and interest rates are set to rise further. The Ukraine SMO appears to be a stand-off entrenched for the foreseeable future so relief from this aspect is far away at present.
When interest rates are low, speculators can borrow money cheaply to make bets on energy prices going up, but this becomes less attractive as rates rise. Commodities also always have the disadvantage that you are not paid to hold them, unlike dividends on shares or interest payments on bonds.
The yields on these assets tend to go up when interest rates rise, which makes commodities relatively less attractive to investors. Even compared to another commodity like gold, oil is much more expensive to store, so you are also paying a penalty to hold the investment. Oil was $120 (May 2022) - $90 (Aug 2022) so why have Nat Gas prices held up better than oil? Oil prices vary but are fairly stable at the moment. ZeroHedge has details this morning: https://www.zerohedge.com/energy/wti-slides-despite-us-crude-production-cut-cushing-stocks-8-straight-weeks
This is because oil can easily be sold elsewhere. If Europe doesn’t buy Russian oil, it can be shipped to Asia; although it is unlikely that EU restrictions for insuring ships carrying Russian exports will be effective when they come into force later this year.
However when Russia decides not to sell its gas to Bulgaria, Poland or Finland because they refuse to pay in rubles or gold as directed by Mr. Putin, the gas either stays in the ground or gets burned in Russia. In effect we are losing regular and expected supplies to the world market, whereas the overall drop in oil exports from Russia during the SMO has been small.
Europe also doesn’t have many alternatives to Russian gas. It has to buy LNG (liquefied natural gas) from Asia on the spot market, bidding up the price shipment by shipment. This is seen by everyone else in the market and therefore increases the sense of panic and price. It’s a very similar situation to oil in 1979, during the Iran hostage crisis, when majors like BP had too little to fulfil supply contracts and had to go to the spot market and bid for barrels of oil. So what will determine what happens next to gas prices?
Several variables are in effect; the first of which is the weather. If the winter is mild, then given current European stock levels we might be fine. If it’s very cold, then it's a different matter as demand rises in the face of supply restrictions, market prices always increase.
The Russian SMO in Ukraine will be crucial; if there were even a hint of peace negotiations beginning, Nat Gas prices might change overnight – this is how sensitive these prices are to rumour and innuendo which we call volatility. But I doubt this will happen when the geopolitical stakes are so high.
Ukraine's leaders are vowing they will not enter any peace negotiations, and Zelensky starting this month, has even called for the "liberation" of Crimea. This is the madness of the US 'Total Spectrum Domination' strategy that has kept the world at war ever since WW2. ZeroHedge today explains their crazed sycophant, Puppy-dog BoJo, in Ukraine this week: https://www.zerohedge.com/geopolitical/boris-johnson-arrives-kiev-3rd-time-time-bearing-gifts
Putin isn't going to fail because he has been preparing and watching US/NATO encroach more and more upon his borders, deliberately baiting Russia to react, over many years. US Military action has been going on quietly in Ukraine well before the Maiden 2014 ("F*k the EU" Newland faux pas) coup instigated by the CIA. If you want someone to blame for all our woes look no further than the 'Empire of Lies' explained further down by Pepe Escobar. A 2018 West Point video:
Of course we can't forget China, silently observing on the side-lines as two nuclear-armed states engage in a proxy war. China is a very big consumer of Nat Gas. Europe has been extremely fortunate that China has been distracted with its own issues with their crazy self-inflicted 'Zero Covid' policy and property market difficulties. Word-on-the-Street suggests it too is heading for recession.
As a result, Chinese demand for LNG though 2022 is likely to fall by at least 10% from the 2021 level. If Chinese demand returns and it starts buying more LNG again, prices still have the potential to increase much more.
In the USA, its LNG production has been reduced by the temporary closure of a major terminal in Texas following an explosion. The latest news suggests it will be back on-stream by October, making more LNG available to Europe but at much higher prices than they previously paid. And LNG costs more than Nat Gas anyway as processing and transportation incurs high cost inputs.
But don’t assume that demand in the US will remain as strong as in the past. It’s highly unlikely that the US will avoid a recession; in fact latest statistics suggest they are already in recession notwithstanding Biden's outrageous revision of the economic model determining when a recession actually has begun.
Even if inflation is on a downward trajectory (disinflation) in the coming years, we will need further large increases in benchmark interest rates to get anywhere near positive real rates, (being a positive rate having deducted the calculated rate of inflation), which itself fails to reflect inflation being felt by Joe Public. It is notoriously difficult, if not impossible, to publish a true rate of inflation anywhere.
Whereas oil is very sensitive to economic growth, it is not for Nat Gas because a lot is used in domestic use, heating and electricity generation. Britain is more dependent on these applications than most countries, which means demand is inelastic which, in economics means demand volume isn't affected much by price.
Demand for all consumed products does fall during a recession, when less costly substitutes fall in price, but it’s difficult to substitute for Nat Gas because I can't think of a cheaper alternative. Most options like coal or wood have historically been fairly equivalent in price for domestic use, and now demand will push these price up too.
The bigger problem is for business, commerce and industrial Nat Gas users. These enterprises are not protected by the Ofgem cap and rely on medium term contract supplies often offered through specialist brokers. There are already anecdotes about many of our ubiquitous pubs becoming unviable and closing; the same applies to our traditional fish & chips shops.
An SME glass blowing business proprietor in Bath, Somerset employing 20 people was on our local radio this week, explaining that her existing supply contract is coming to an end in September, which was £14,000pa. She has been quoted £115,000pa going forward in 2023. She has no way of managing such an increase and will have to close. However she is fighting on for the time being, trying to think of another way to fire her furnaces.
I don't blame Putin using Nat Gas as a weapon just as USA continues to weaponise the dollar, an ironic twist that has America swallowing its own medicine – and about time. But Putin is not acting belligerently – he has been forced to act because of the crazy sanctions imposed by US/NATO and the US having stolen his £330bn-odd funds held in western banks. But don't take my word for it; Pepe Escobar is on the case:
"Dugin – correctly – defines the US as a “thalassocracy”, heir to “Britannia rules the waves”; yet now the geopolitical tectonic plates are spelling out a new order: The Return of the Heartland. Putin himself first spelled it out at the Munich Security Conference in 2007. Xi Jinping started to make it happen when he launched the New Silk Roads in 2013. The Empire struck back with Maidan in 2014. Russia counter-attacked coming to the aid of Syria in 2015.
The 'Empire of Lies' doubled down on Ukraine, with NATO weaponizing it non-stop for eight years. At the end of 2021, Moscow invited Washington for a serious dialogue on “indivisibility of security” in Europe. That was dismissed with a non-response response. Moscow took no time to confirm a trifecta was in the works: an imminent Kiev blitzkrieg against Donbass; Ukraine flirting with acquiring nuclear weapons; and the work of US bioweapon labs: http://thesaker.is/geopolitical-tectonic-plates-shifting-six-months-on/
These moves not only sparked Putin's demand for payment of gas and oil in rubles or gold but of course inadvertently caused the EU to create their own energy crisis. As long as the Ukraine conflict prevails there will be no respite for suffering consumers. I think the energy markets will continue trading above prices equivalent to about $60 (£50) per British thermal unit, whilst the equivalent price in the US is floating around $9. I have to ask: are there any reasons to optimistic?
Our Labour Party leader, Kier Starmer, together with other politicians and 'experts', are screaming for a cap on prices at the current £2,000pa in Britain. Europeans likewise call for price freezes, but they haven't thought through the effects of such measures - they are panicking. Any arbitrary interventions into market pricing will only encourage more fossil fuel use when we need to be limiting demand. The correct option is for temporary subsidies on energy especially for those on low and fixed incomes like pensioners.
Market distortions by interventions of this kind is a favourite with politicians so they can at least show Joe Public they are 'doing something', but they never work. Think back to eras of price controls in history – they all ended in disaster without exception.
We find ourselves in this mess because our ruling classes, who make the key national decisions such as energy security, have for decades failed to plan properly and fire up nuclear, tidal and hydro power plants which provide base load as opposed to investing in intermittent generators like wind and solar. Yes, these do have a place in the energy mix, but need to be phased as part of an adult integrated national energy plan – not seen yet.
If you want to point the finger at the culprits, look no further than the millionaire Tory Party leadership, past and present, over the last 12 years of gross misrule. It has led to the greatest obscene wealth disparity ever, with rent-seeking billionaires making out like bandits, especially during the scamdemic, leaving the mass of Producer-Workers with devalued wages even over generations past.
Crass politicians like the idiot BoJo and coterie have signed up to the 'UN2030 Agenda' together with 'Net Zero' when a child with even a working brain cell could tell you it would be a recipe for disaster. The Green Lobby must be hanging their heads in shame with Greta Thunberg currently returning to the care of a suitable institution. BoJo is now swanning around in Ukraine collecting trinket gongs from a criminal and corrupt supposed 'hero' of a totally unnecessary bloody war. He is pompously announcing that the Brits must 'take the pain' (but not him and his cronies of course). He and his motley crew have a massive shock coming to them this time around.
The many decades of shearing the sheep has ended because the people that really keep the wheels of industry rolling are now better informed and are not going to take this nonsense anymore as I explain in my book, 'The Financial Jigsaw'. However now we have GB News with Neil Oliver et al telling truth to power every day and the internet offering deep analysis and understanding about what is really going on. I expect a general strike this winter forewarning of an imminent Great Depression II in 2023/4.
In the meantime, our civilisation must have energy to do any work whatsoever and this means uninterrupted oil supply chains. I expect prices to remain around $100 per barrel for the foreseeable future resulting in prices at the pump approximately £1.80/Ltr. In the early stages of the Ukraine SMO prices shot up to $120/barrel but inflation and the economic forecasts have moderated the costs as the 'R' word has re-entered the lexicon.
The head of one of Britain's leading energy providers is proposing a £100bn rescue plan to protect households from rising bills over the next two years. Keith Anderson, the chief executive of Scottish Power, has proposed capping household energy bills at the current £2,000pa. Anderson’s proposal was made to the business secretary, Kwasi Kwarteng, last week and underlines the scale of the crisis engulfing Britain.
Scottish Power suggests suppliers would cover the gap between the cap and the wholesale price of gas and electricity by borrowing from a “deficit fund”, which the government would arrange through commercial banks. The cost would be gradually amortised by taxes under (yet again) government borrowing or spreading debt over many years. Since HM government has no recourse to 'money' except taxes and debt, Joe Public will be fleeced yet again. I think it might turn out differently this time.
Ofgem, the UK energy regulator, is due to announce a new price cap for the coming quarter tomorrow which is expected to increase about 80% over October 2021 to an estimated £3,600pa plus/minus. This will certainly increase again in January 2023 but only doom-mongering speculations on prices and inflation are available today, so I won't frighten you; be comforted by my own projection for the coming years.
As global economies slow down rapidly we will enter a period of deflationary depression, high unemployment with lower goods and services prices. This has happened before but I won't bore you with the history – you can research it yourself – Goggle has most answers and this is too long-a copy already.
You can follow my weekly 'Letter from Great Britain' to keep abreast of events as they happen:
FOR MORE, READ: “The Financial Jigsaw”, published at my academic network Scroll to view: https://www.researchgate.net/publication/358117070_THE_FINANCIAL_JIGSAW_-_PART_1_-_4th_Edition_2020
Why economic growth has come to an end:
Energy prices: https://theconversation.com/why-are-gas-prices-still-high-despite-oil-getting-cheaper-and-what-will-happen-next-energy-expert
Purported solutions: https://off-guardian.org/2022/08/18/nationalising-the-power-supply-plays-right-into-the-great-resets-hands/
How LNG price is calculated: P(LNG) = A × P(Crude Oil) + B Where: P(LNG) is the price of LNG in $/MMBtu P(Crude Oil) is the price of crude oil in $/bbl - A and B are constants negotiated by the buyer and seller.
U.S. Nat Gas futures: surged more than 11% at one point on Tuesday to $9.75 per million British thermal units (MMBtu), the highest level since July 2008. [26 Jul 2022]: https://tradingeconomics.com/commodity/natural-gas
The prices of LNG and commodities: LNG from the U.S. is at least 30-40% higher than Russian pipeline gas, Russia's Energy Minister Alexander Novak confirmed. All commodity prices are affected: https://tradingeconomics.com/forecast/commodity
Future commodity prices can be judged by the 'Baltic Dry Index' which tracks shipping costs of supply chain bulk raw materials needed eventually to produce consumer goods. It's fallen since May https://tradingeconomics.com/commodity/baltic and is a portent of a global slowdown confirmed by a slowing USA: https://edition.cnn.com/2022/08/23/economy/pmi-sp-august-flash-business-activity
The USA has a good supply of Nat Gas, but a limited capacity to export it, making prices cheaper for US consumers. Nat Gas prices in Europe have spiked to record highs https://www.newsweek.com/who-controls-oil-gas-prices-united-states-1710982
NLG Full Data Charts: https://knoema.com/infographics/ncszerf/natural-gas-price-forecast-2021-2022-and-long-term-to-2050
Can Iran and Russia create a global Nat Gas cartel? https://oilprice.com/Geopolitics/International/Iran-And-Russia-Move-To-Create-A-Global-Natural-Gas-Cartel.html
British Pubs & SMEs closing down fast – no way to pay these high prices for energy: https://www.theguardian.com/business/2022/aug/23/pubs-winter-energy-costs-soar
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Biden can run but he can't hide:
"The Layoff Tsunami Has Begun: 50% Of U.S. Companies Plan To Eliminate Jobs Within The Next 12 Months."
"deflationary depression, high unemployment with lower goods and services prices" - highly likely. When income inequality gets to current levels, the people get motivated to make changes. Given how badly politicians have managed the pandemic, I have little hope of any competent action.
Seeing the decline in productivity and lack of desire to work for wages, the economy will struggle. Can the nominal 10% who really are productive carry the load? No clear way through the collapse of currencies given the debt bomb on nearly every government. What then?