EUROPE POWER FUTURES PROJECTION 2025EUROPE POWER FUTURES PROJECTION 2025
Based on science.
in science we trust!
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The Price of Freedom: NS2 pipeline cf German base energy pricesThe Nord Stream 2 runs through the Baltic Sea from the St Petersburg region (Russia) to Baltic Coast in north-east Germany. It can transport 55 billion cubic metres of gas per year from Russia to Germany, enough to power 26 million homes for a year. Europe's total consumption of Russian gas per year is approximately 200 billion cubic metres per year, which accounts for about 40% to 50% of Europe's energy consumption.
The Nord Stream 2 pipeline completely bypasses Ukraine. Prior to the war Ukraine was earning approximately $1.2 billion per year in gas transit fees from Russia to the EU through its territory.
Construction of the pipeline began in 2016. In Jan 2019 US ambassador to Germany threatens sanctions on companies participating in Nordstream 2 construction. In December 2019 these sanctions are passed into law. Merkle labels these sanctions when they passed as US interference in EU internal affairs.
July 2020 NY Times article provides a good explanation of the tensions between the USA and Germany over the opening of the Nordstream 2 pipeline : www.nytimes.com
Pipeline construction was completed in September 2021, but Germany did not approve gas to start flowing.
In the same month, NATO and Ukraine conduct joint military exercises. In December 2021 Russia threatens military action in Ukraine.
Things escalated, as we all now know. Shortly after Russia's invasion of Ukraine in late Feb 2022, Germany (finally) suspends the Nordsteram 2 pipeline.
German energy base energy prices per megawatt hour have gone from 50 euro since the announcement of US sanctions on Nordstream 2 in 2019, to 150 euro in September 2021 when Ukraine and Nato conducted joint military exercises, to 300 euro after Germany announces in August in has no plans to open Nordstream 2.
Contract at the time of this writing is at 420 euro, up 8x since the US announced sanctions on Nordstream 2 in Dec 2019.
In April 2022 when it became clear to me that NATO was willing to put its populations under extreme energy duress and significant security duress to retaliate against Russia's invasion of Ukraine, I placed bets on unlisted US defense companies.
In retrospect, having caught up on the history of the Nordstream 2 pipeline conflict, with the US and Ukraine aligned against Russia and Germany caught in the middle, as well as the sheer scale of the EU's dependence on Russian gas, the cleaner bet would have been on German base energy prices.
The 12 month energy contract is actually trading at 1,000 euro. I.e. the 12 month spot / futures basis is telling us that even though prices are up 8x from Dec 2019, this is about to get far far worse.
The question now is how much pain can EU citizens bear before they say enough is enough and cut a deal with Russia. At the moment they are sustaining a huge amount of pain and and still holding up, they have probably surprised Russia (and themselves) with their willingness to bear the pain. However, winter is coming and it's not going to be pretty.
It's possible the EU is willing to (or has no choice but to) completely obliterate its economy to wean itself off from Russian gas rather than cut a deal with Russia. If that's the case we can expect energy prices to remain high, perhaps even pump further
At some point there will be enough incentive though for supply to flow from US, maybe Africa, and arrest the rise in prices.
This may be coupled with US aid to Europe to cover their gas bill as European allies ask for help in continuing the economic war. It would be plausible for big aid to be forthcoming as it would essentially be taxpayer money that would essentially flow to the US energy producers, and so far the tax base in the U.S. seems supportive of continuing the war on Russia.
Signs to look out for are signs that both EU and US electorates are tiring of the cost of waging this war. If these signs emerge as German baseline prices continue to rise, this might be a good time to place a short on energy prices.
Any signs of Germany agreeing to start gas flows through Nordstream 2 might also be a good opportunity to place a short
Of course, energy markets are highly efficient so my main concern with this strategy would be inside information or simply people closer to the national policy movements underway that might signal a fraying of resolve in maintaining the economic war on Russia, at least as it relates to energy.
Germany is toast....if electricity prices are not coming down quickly. Reminder: In August the EU is banning russian coal imports, at the end of the year the country's last nuclear plants shut down.
UK Base Electricity Prices Decision time.
Hopefully this finally rolls over.
Will certainly skew inflation data
Credit Kevin Woodsworth (@Northstar69) for the idea.
S
Wait what??Last post (for today) in the context of my sporadic coverage of the european energy debacle. The chart displays the German baseload future for electricity deliverable in February and the development is absolutely insane. What in the what is the market pricing in here?? A russian invasion? Omicron related shutdowns of the entire energy sector? Anyways. I hope folks in Germany are loading up on firewood..
