Global oil and natural gas prices are plunging overnight after Russian President Vladimir Putin resumed gas flows through the Nord Stream One pipeline and risk-off attitude because Italy’s Prime Minister Mario Draghi has resigned. That is raising uncertainty about not only Italy but the EU. The market also is nervous ahead of the ECB decision on interest rates. They could indeed see the ECB break precedent and raise interest rates by more than one that was telegraphed ahead of time. Yet if they fail to meet those expectations, king dollar will roll again, soaring and putting downside pressure on commodity prices.
Russian President Vladimir Putin continues to like to remind Europe that he has a stranglehold over the continent when it comes to natural gas supplies. The Russian President should be careful of overplaying his hand because Europe is already talking about drastic steps to reduce natural gas consumption. At the same time, finding other alternatives for natural gas well majors are looking at Algeria. Is it possible they are the potential replacement that might be able to ease some of the problems in Europe at least?
Russian President Vladimir Putin seems to suggest that Russia all along has been a reliable supplier of natural gas, and only the sanctions have hurt his ability to provide Europe with all the natural gas they need. Yet even before this so-called maintenance under Nord Stream One, pipeline gas flows from Russia to Europe were reduced. Reports say that now the gas stream has returned to pre-maintenance levels, alleviating concerns that Russia would never turn the gas back on.
Reuters reported that supplies via Nord Stream One, which runs under the Baltic Sea to Germany, were halted for maintenance on July 11, but even before that outage, flows had been cut to 40% of the pipeline’s capacity in a dispute prompted by Russia’s invasion of Ukraine. Physical flows were at 29,289,682 kilowatts hour/hour between 0700 and 0800 GMT, the Nord Stream 1 website showed, returning to the pre-maintenance level of flows, according to Reuters.
The news of the Russian pipeline restart caused a plunge in the market, and it didn’t help that Italy’s Prime Minister Draghi had to resign. Italy, which has been long known for its political turmoil, now has to face a very uncertain future at a time when Europe is fighting what the International Energy Agency calls “the worst energy crisis in history," as well as disagreement on how to respond to Russia’s invasion of Ukraine.
European stocks have fallen on this news and uncertainty about the pace of where the ECB is going with interest rates! Stay tuned.
Petroleum markets are also trying to determine exactly how much oil and gas demand destruction has occurred because of the sharp run-up in prices that we saw in July. According to the Energy Information Administration (EIA) it seems that demand bounced back last week, but there are still some concerns overall because demand is not quite as robust as it was a year ago.
EIA reported that total products supplied over the last four-week period went back to 20.1 million barrels a day, which is down 2.6% from last year. The EIA, at the same time, reported that crude oil stocks fell by 400,000 barrels which is incredible when it considers the fact that we released 5 million barrels from the Strategic Petroleum Reserve.
US ready-to-use gasoline inventories increased by 4.2 million barrels last week. That came as US demand for gasoline increased by 447,000 barrels per day. The increase in gasoline demand in the US was probably a reflection of the lower price. At the same time, export demand for gasoline fell by 34,000 barrels a day. The incredible part of the gasoline story is US gasoline production which has risen to 9.4 million barrels a day. That’s an incredible number because the US is working with fewer refineries than we did just a few years ago.
Yes, natural gas futures that were soaring on hot temperatures sold off because of the reports of Russia relenting on the Nord Stream One pipeline and resuming gas flows. Still, the record warm temperatures should keep this market supported on breaks.
Despite today’s weakness, we think the downside is limited from this point. Hedgers, we still believe that this break is a good opportunity to lock in some prices.