Russia Threats Push Energy Higher - InvestingChannel

Russia Threats Push Energy Higher

Proprietary Data Insights

Financial Pros Top Natural Gas Searches in January

#1Exxon Mobil229
#2Energy Transfer LP183
#5Callon Petroleum Co.125

Why Do We Import & Export Energy?

We hear this question a lot. It’s borne out of a lack of understanding the market dynamics.

For example, some in the press don’t understand why the U.S. exports and imports oil and natural gas.

Right now we are still a net importer of oil.

Because of logistics, regulations, and quality considerations, exporting some petroleum makes sense.

For example, refiners in the U.S. Gulf Coast frequently find that it makes more sense to send some of their gas to Mexico than the U.S. East Coast because that region can get lower-cost gas from Europe.

As we note in our main story below, Liquid Natural Gas (LNG) companies now send exports to Europe to take advantage of the continent’s higher prices.

In turn, that’s sent U.S. inventories lower, pushing up prices here.

Why don’t we just stop those exports?

Think of the reverse. If we stop our exports, others could do the same, creating net higher costs for everyone.

And thus, we have the free market.


Russia Threats Push Energy Higher

Key Takeaways

  • A Russian invasion of Ukraine would send already high natural gas prices soaring as Europe imports a huge amount of the commodity via pipelines from Russia.
  • Much of Europe already faces natural gas shortages which could cripple the economy.
  • On the other hand, U.S. natural gas producers have begun to export more to Europe to achieve higher prices, leaving U.S. utilities forking over more for input costs.

Russia continues to flex its muscles at the border of Ukraine.

Here’s what it means for markets.

Energy Shortages

Russia annexed Crimea back in 2014 after a revolution that ousted Ukrainian president Victor Yanukovych, sparking a political crisis in the region.

This time around, Russia’s ambiguity leaves no clear goals as to what they would want to achieve or how far they would attempt to go.

Shortages in oil and especially natural gas already plague Europe. Any invasion is likely to curtail supply, sending prices higher and leading countries like the U.K. to another crisis.

It also creates a problem for Germany and the Nord Stream 2 pipeline from Russia. Invading a country, although not a NATO member, could push them to nix the deal.

Benchmark gas prices already shot up to $144 a MWH, more than seven times as high as last year.

European Economy Slows Down

Europe faces a cold winter. The lack of fuel is reaching levels so critical that it may force plant shutdowns. France has been noted as particularly at risk through the second half of January. Part of that stems from a 25% reduction in Electricite de France SA’s 56 atomic reactors due to Covid disrupting the utility’s maintenance program.

On top of that, higher energy costs mean lower profits and economic activity in the European region. Consumers already face inflation not seen in their lifetimes. 

With central banks set to raise rates, the combination could send Europe into a recession that may last years.

U.S. Wins and Loses

The unlikely winner in the mix happens to be US gas companies which are exporting record amounts.

Economically, it makes more sense for them to ship gas to Europe where they can achieve higher prices than in the U.S. even accounting for transportation.

On the flip side, utility companies are being forced to shell out more as natural gas prices rose in the U.S.

Green Energy is Happy

It should be noted that green energy companies are thrilled with higher fossil fuel prices. This makes their products more economically viable.

The Bottom Line: Utilities (XLU) and European stocks are a no go for the time being.

Solar companies, like those in the TAN ETF, and Oil & Gas Explorers, like those in the XOP ETF, should see a nice pop in demand over the coming months.

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