Invest-ability daily 06/10/21: Playing Putin’s Great Game

Why investors need to tread carefully in the energy markets

Photo by Ilse Driessen on Unsplash

It’s cold outside, and inside too, but given the goings on in the energy market I’m sticking to my jumpers-and-slippers strategy for the time being rather than resorting to switching the heating on. I have a full tank of heating oil and a big pile of firewood but having received ample warning about the brutality of Suffolk winters I think that saving them for as long as possible is probably the sensible option.

Besides which I don’t want to have to fill up any time soon because the cost of kerosene 28, a widely used fuel in rural areas, has gone through the roof. A year ago, it was trading at just under 30p a litre; as of yesterday, it had doubled to 60p. I suspect it may increase further still as the wider pressures in the energy market filter through – but a lot can happen in a day.

I am, of course, referring to what has been going on in the natural gas market, where the UK price per therm for delivery in November jumped 40 per cent overnight to over £4. The rise of the UK benchmark, the National Balancing Point, has been particularly acute, doubling in a week due mainly to a lack of storage – it’s said to stand at just 4 days, which makes the UK more reliant on the more volatile spot market, particularly in Liquified Natural Gas (LNG). And that’s just the latest crazy move in a wider European market that had already gone parabolic to hit a 13-year high – as demand started to recover after the pandemic, the price of gas started an upwards ascent that has seen it increase fivefold.

That’s what’s behind the recent crunch that saw many smaller domestic energy suppliers go to the wall, but today’s price action is likely to inflict further casualties. Ratings agency Moody’s said this morning that more suppliers will fail, and that the larger groups that have taken on their customers will see profits hit hard given their ability to pass those prices on is capped – bad news for the likes of Centrica. Meanwhile, heavy industry is growing increasingly concerned that they’ll be forced to curtail activity this winter and, like energy suppliers, are calling on the government for support.  

Even commodity traders are said to be suffering, facing huge margin calls on their natural gas hedges which they’ll need to borrow heavily to cover. Whilst stronger players like Glencore or Trafigura may have the capacity to do so, there will inevitably be those that don’t – and all that capital tied up means less opportunity to deploy it profitably elsewhere. With further tightness in the market expected over the winter, talk of an adverse credit event is even doing the rounds.

You’d expect someone to be making money from this, though, and look no further than Russia and Gazprom, one of the world’s largest gas producers. Much of Europe is dependent on piping in Russian gas, which adds a geopolitical dimension to the entire mess – essentially, Putin can hold the West to ransom, as some have put it “weaponizing” gas supplies. He’s blamed an unbalanced transition to a low carbon economy in Europe for the current trouble, in particular “cutting back investment in the extractive industries”.

Maybe he’s trolling ahead of next month’s United Nations’ Climate Change Conference (COP26) – diverting LNG supplies to Asia and reducing flows to Europe has also been a key factor in the market’s imbalance. And as I’ve sat here writing he’s now said Russia can stabilise the global energy market, bringing gas futures back to earth again – a reminder that we are mere pawns in Putin’s great game, and a warning to anyone thinking they can make a quick buck trading the oil and gas industry.

But maybe he’s also right – the fashionable divestment of fossil fuel investments in recent years which even saw the LSE temporarily rebadge the entire hydrocarbon sector as “Non-renewable energy” a while back has made it more difficult for the sector to invest in new supply, even before its carbon-neutral replacement has been firmly established. I don’t dispute the need for a transition to cleaner energy, but doing so without a roadmap was always going to be problematic – and almost as stupid as investors writing off entire sectors as uninvestable when a large proportion of the planet still depends on what they produce.

Enjoying this article?   

Join our list for more quality insight and analysis. No spam, unsubscribe any time.

%d bloggers like this: