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Europe is on the brink of an unprecedented energy crisis as Russia continues to tighten gas supply
02.08.2022

Russian president Vladimir Putin continues to cut down the supply of gas through the Nord Stream 1 Pipeline. This leaves Europe in a crisis that is likely to interfere with the continent’s climate change ambitions. But worse than that, it might be forced to ration electricity or even turn off heating in certain places. Although Russia denies gas as a bargaining chip, it is very coincidental that the supplies decrease after Western countries slapped Russia with sanctions for invading Ukraine.

Europe used to rely on Russia for 40% of its gas stock, but reports from last week show that the supply has reduced to 20%. Gazprom, Russia’s energy giant, is blaming it on maintenance issues, but not everyone is convinced. Rober Habeck, German minister of economy, claims that it's a ‘farce’. According to the European Commission, 12 EU countries are struggling with reduced supply while others have been completely cut off. But it might get even worse. Some European officials are expressing concern about a complete shutdown.

Some cities in Germany, like Hanover, have already begun decreasing energy spending, in hopes of having larger gas stocks ahead of the winter months. They have turned off hot water in recreational buildings such as pools and gyms, and plan to turn off their public fountains along with other measures - all in an attempt to decrease energy consumption by 15%. Leipzig, Munich, Cologne and Nuremberg have also introduced similar measures.

Naturally, the price of gas has skyrocketed. This is expected, when the demand is there but the supply weakens. Everytime Russia turns the faucet a little tighter, gas prices see new pressures. This creates pressures on economies across Europe as their spending has to increase, but this isn't just each individual state’s burden. It's a burden for all the people living in Europe as electricity bills are bound to leap. Higher gas prices drive up the price of consumer goods as well, leaving less discretionary income and therefore affecting the economic figures.

On the bright side, oil and gas companies are breaking record highs over the past few months. Just today, BP (British Petroleum) released its Q2 earnings report which indicated that the company has tripled profits since the previous quarter.

Crude Oil

Unlike its gas cousin, crude oil slipped this morning on poor economic outlook for the asset. With global recession fears, manufacturing is likely to slow, and although the OPEC+ meeting is unlikely to yield any increase in production which would normally tighten the supply, there is a cap on how far crude oil prices can soar due to recession. We saw this earlier in the year, when Russia invaded Ukraine and crude prices climbed close to their all-time-highs on fears of supply. However, the asset’s momentum has been fading. It appears that traders are more worried about slowing growth than tight supplies.

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According to Carsten Fritsch, an energy analyst at Commerzbank, “ The noticeable price slide could make OPEC+ more cautious because it was attributable to renewed demand concerns in the wake of disappointing economic data from China, the world’s second-largest oil consumer country.” However, on the other side of the coin, “The news that oil production in Libya has regained its normal level for the first time in nearly four months could also argue against any further expansion of production. After all, this will see around 600,000 barrels per day of Libyan oil return to the market – oil that was still missing in June and July.” Traders will be keeping eyes and ears firmly on OPEC+ meeting decisions.

Key Takeaways

  • The Russian president continues to cut down the supply of gas to Europe through the Nord Stream 1 Pipeline.
  • They’ve already cut the supply half, with many officials concerned that they will shut down supply altogether.
  • Everytime Russia turns the faucet a little tighter, gas prices see new pressures.
  • Oil and gas companies are making bank on these developments.
  • Crude oil slipped this morning on a poor economic outlook.
  • The future of the asset depends on how fast the global economies can rebound and what OPEC+ decides in terms of production quotas.
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