After last week’s free newsletter, I got a small flurry of nasty emails and a handful of cancellations.
“Too political” was the general cry, although the way it was expressed wasn’t quite as nice.
Let me tell you something – I don’t care what your politics are (and mine are pretty well known) – if you AREN’T paying attention to the global political tidal wave taking place today, you are just ignoring the single most important current factor to your energy investments.
Putin couldn’t have known it, but he unleashed the strongest counter-reaction to central populist authoritarianism in Europe that we’ve seen in the last 40 years. I am convinced that he expected the same quick military victories he achieved in Chechnya, Crimea and (by proxy) in Syria. He certainly couldn’t have expected the united front of protest he’s received in Western Europe, supported by the economic sanctions and corporate exits that have come from the United States.
Say what you will about politics, but it’s indisputable that the reaction in Europe and the US would have been different if Donald Trump still held the White House – besides the disarray inside NATO and the weakened relationships he left with our European allies, his particular legacy with Ukraine and Putin himself assures us that the US response to the Russian invasion of Ukraine would have been far less challenging and economically testing. Even today after the bloodshed unleashed in Ukraine, Trump refuses to call out Putin publicly.
Oil and gas are at the center of all of this.
Is that too political for you? OK, let’s try to leave the politics aside for a moment and talk only about oil and gas try to look ahead a little bit.
Biden has led the charge to strangle the Russian economy by curtailing oil and gas imports. He has banned them in the US and has brought strategies using US LNG and coal to help Europe supplant those supplies. Europe is watching what is going on in Ukraine and is understandably terrified – and is attempting to limit Russian energy imports as fast as it can as well. Besides the efforts of Exxon, Total, Shell and other majors to leave Russian assets behind, several European countries have made pledges to abandon Russian energy – Germany, Italy, and the Netherlands have all pledged to stop buying Russian oil and gas by the end of 2022. The world’s top trader of Russian oil cargoes, Vitol, will cease brokering cargo sales by the end of the year as well. Cargos make up 50% of Russia’s oil export volume. China and India remain as Russian oil customers, but at sharply discounted prices — And natural gas that is left in pipelines and doesn’t find a home in Europe is far less fungible than oil and are not easily relocated. These lost mcf’s are not recouped elsewhere by Russian gas producers. The bottom line is that both oil and gas are yielding smaller volumes and cheaper prices for Putin. The money cow is growing thinner.
The slowdown of exports and the lack of Western expertise is having a secondary profound effect — Russia’s ability to merely get their oil and gas out of the ground is suffering as well. There is now satellite evidence that the production of Russian oil is beginning to sharply slow, already removing a million barrels a day of daily production from global supply. This is unprecedented and astounding.
These efforts are having an unprecedented impact on Putin’s oil and gas money machine. The downside is that Putin has been stockpiling cash in the Russian treasury for seven years, and the ultimate effects of these efforts can’t be seen right away. This problem of time is really the most difficult one to ponder or predict. The ultimate effect of corporate abandonment of Russian markets and US and allied sanctions is designed to collapse the economy so that the people of Russia will question Putin’s leadership and demand change. No one expects Putin to go quietly. Releasing the iron grip Putin has on his country will need many months, perhaps even years.
Will Europe be up to this task for the long-haul? Will the US? Will oil and gas companies and traders continue to collectively resist the temptations of the quick buck in Russia? It won’t be easy, that’s for sure. Prices are guaranteed to rise even more as Russian supplies are cut. Europeans will question policy as gas and oil get more expensive. Runaway inflation, led by oil and gas prices will weaken resolve here in the US as well. We’ve already pointed out that Putin is banking that these collective measures will fail. He might be right. The future of global oil and gas markets and therefore our oil and gas investments hang to a large degree upon the answers to these questions.
And here we must necessarily get back to the politics, whether it offends us or not.
In France, Emmanuel Macron defeated populist and Putin-supported Marine Le Pen by 17 points on Sunday, when the results were expected to be much, much closer. In Slovenia, the populist, hard-right Prime Minister Jansa lost spectacularly to the environmentalist party. In Germany, ex-chancellor Gerhard Schroeder is coming under new scrutiny for the very close relationship Germany built with Russian oil companies under his watch and the relationship he still maintains as a paid consultant, as Germany now tries to free itself from Russian oil dependence. For now, the Europeans seem to have charted their course firmly against Putin and Russian oil and gas — and with it, the authoritarianism it represents.
But, will these anti-Russian, anti-populist, anti-authoritarian reactions be as strong three months from now? How about a year from now? Will they figure into the coming US midterms and the 2024 Presidential elections?
Answering these political questions are the key to some of the perhaps best energy opportunities I’ve ever seen in my 40 years of charting the course of oil and gas markets. The disruption that is taking place in the global energy supply chain could have long-term effects on prices unlike anything that’s happened in energy markets since the futures markets were deregulated and unleashed in 2000, putting the historic highs in oil we saw in 2007 very much in jeopardy and heralding a concurrent tidal wave of profits for US oil and gas companies (and renewable companies as well).
So, try to be apolitical – or even offended by these very obvious connections I am making between global politics and global oil and gas markets – but do it at the risk of missing some of the best opportunities I’ve seen in my 40-year long career following energy.
