“Brace yourself…winter is coming.” A saying made famous by Game Of Thrones may now have a more significant meaning to Europeans this winter. An energy crisis of unrivaled proportions is unfolding in the European Union as Russia has indefinitely shut down the Nordstream 1 pipeline.
The Norsdtream 1 Pipeline, which came at the hefty cost of €8.8 Billon, spans 745 miles across the Baltic Sea and supplies 1.9 trillion cubic feet of gas annually, approximately one-third of Germany’s natural gas.
Key Take-Away
- Russia states economic sanctions from western countries are responsible for preventing needed repairs to the Nordstream 1 Pipeline.
- European leaders have accused Russia of “weaponizing” its energy supply in retaliation for economic sanctions stemming from the war in Ukraine.
- German Economic Minister has stated that Germans should confront the possibility that Russia will suspend gas flows beyond the scheduled maintenance period.
European Economic Implications
German energy giant Uniper CEO Klaus-Dieter Maubach emphasized the vital need to address the economic impact of soaring prices as millions of Europeans rely on gas to heat their homes in the winter. “What we see on the wholesale market is 20 times higher than the prices we saw 2 years ago, 20 times…” – Maubach said in an interview on CNBC.
Since Russia has slowly choked supplies, natural gas prices have soared 300% in Europe. Goldman Sach strategists believe Europe’s recession chances are around 60%, or twice that of the United States’s 30%. The European bloc has been heavily dependent on Russian oil for decades. With the current commodity crunch, analysts fear that the increased spending on energy will deepen a possible recession and have many second-level effects on consumer spending.
Germany has been reliant on Russian energy for more than 50 years. As Europe’s largest economy, Germany is first in line to suffer the economic implications of the unofficial energy embargo. These repercussions may prove enormous as Germany’s economic fate will heavily influence the rest of the European Union this winter.
How Will This Affect U.S. Energy Prices?
Natural gas prices in the U.S. are about double last year’s prices. As the energy crisis in Europe continues to unfold, it will continue to affect domestic energy prices. Europe’s need for liquified natural gas will only increase as winter approaches. As one of the world’s largest producers of liquified natural gas, it would take the U.S. years to build the export facilities needed to supply Europe with the additional natural gas needed. With the current infrastructure in place, the U.S. exporting capability is maxed out.
This means that regardless of the high natural gas prices in Europe, U.S. natural gas prices will likely not follow European natural gas prices into orbit. Domestic natural gas prices will likely stay elevated and may even rise into winter.
The U.S. natural gas supply is on the lower side of a 5-year average, but the vital thing to note is that this supply is more than adequate, and the U.S. is energy independent.
How Can Traders Hedge Against Rising Energy Prices?
Although the price of the aforementioned news is probably already baked into the United States Natural Gas Fund LP (UNG) price, it may be that UNG price continues to stay elevated or may rise slightly. Typically if a trader is looking to profit from this type of movement, they may consider selling vertical credit spreads. To learn more about this specific strategy, click here.
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FAQ’s
The Nordstream 1 Pipeline is a 745-mile-long pipe that crosses the Baltic Sea. This pipeline is responsible for supplying Germany with more than 30% of its total natural gas. This pipeline has become a point of contention between Russia and the European Union as war and economic sanctions have gutted stability in the region.
Russia has been clear that the indefinite shutdown of the Nordstream 1 Pipeline is not in retaliation to economic sanctions stemming from the war in Ukraine. European Officials have blamed Russia for weaponizing its natural gas supply, causing an energy crisis in the region.
