SPOTLIGHT: INFLATION

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GAS PRICES SOAR IN EUROPE AS U.S., RUSSIA CUTS SUPPLIES

An explosion at a U.S. liquefied natural gas (LNG) terminal shut down the facility for repairs for at least 90 days, operator Freeport McMoran announced.

The company handles 20 percent of U.S. LNG exports to Europe and about 10 percent of the continent’s total gas imports.

On 15 June, Russia cut gas flows by 40 percent through the key Nord Stream 1 pipeline into Europe in retaliation for Western sanctions that have prevented Siemens from delivering equipment slated for Nord Stream 1 from Canada.

“Due to sanctions imposed by Canada, it is impossible for Siemens Energy to deliver overhauled gas turbines to the customer,” the company confirmed in a public statement.

The next day, Russia cut flows further, saying that it had shut down a compressor station along the pipeline because of maintenance issues.

Also on 15 June, Russia cut its gas exports to Italy by 15 percent compared to the day before.

The new twin blows sent the European price for natural gas up 24 percent on 15 June to €120 per megawatt-hour, equivalent to about $125. Britain’s gas price jumped 25 percent to £1.97 per therm and the U.S. natural gas price rose 3.2 percent to reach $7.42 per million Btus.

Prices in the Netherlands soared 47 percent during the week and now stand four times higher than a year ago, according to the Financial Times.

The loss of supply seriously damages the region’s plan to replenish its near-empty gas storage reserves ahead of next winter’s heating season and could leave “factories and households across the continent in peril,” the FT said.

Russia said that eventually Nord Stream 1 flows will be slashed by 60 percent or even turned off if the missing parts fail to be delivered.

If that happens, “it will be a disaster for Germany,” Vladimir Chizhov, Russia’s ambassador to the European Union, told RIA Novosti, the Russian news service.

Historically, Russia has supplied almost 40 percent of Europe’s natural gas.

However, Russia had cut its gas deliveries to Europe last fall as a political pressure tactic, sending prices soaring ahead of the winter heating season, as we reported in “High Natural Gas Prices Slow Europe’s Recovery” (14 Sep 2021). 

After the Ukraine invasion, Russia also cut gas deliveries to companies in Bulgaria, the Netherlands, Poland, and other countries after they failed to comply that they pay for Russia’s gas in rubles instead of euros or dollars. (See “Russia Ends Gas Exports to Poland, Bulgaria. Germany and Italy Are Next” (3 May 2022).

Since Russia invaded Ukraine, Europe has banned Russian coal, slashed imports of Russia’s refined products, begun an initiative to end its imports of Russian oil by 2023, and pledged to end its use of all fossil fuels from Russia by 2027. 

However, Europe has exempted most Russian gas from the wartime sanctions regime. Natural gas is harder to replace because there is little surplus in the world and most gas is shipped by pipeline instead of on vessels.

“If Nord Stream is cut off, or even if it remains cut off at 40 percent [of the usual deliveries], the situation is going to be very dire for Europe,” Massimo di Odoardo, vice-president for gas research at consulting firm Wood Mackenzie told the FT.

If all Russian gas deliveries to Europe stop, the continent’s gas storage will run dry in January, he predicted.

TREND FORECAST: As the Ukraine war continues, Europe’s dependence on Russian gas becomes more urgent. 

If Europe enters Dragflation, our Top 2022 Trend in which prices rise and economic activity contracts, the Western alliance holding the sanctions regime together will begin to crack.

The more gas Russia shuts off, the more the alliance will shatter.

U.S. PRODUCER PRICE INDEX CONTINUES TO RISE

The prices producers charge for their products climbed 0.8 percent in May, doubling April’s 0.4-percent rise, the U.S. labor department reported. 

The so-called “core” index, which exempts food, fuel, and producers’ margins from the measure, rose 0.5 percent last month from April, although gasoline’s average U.S. price jumped 5 percent during the 31 days.

Trucking companies’ freight-hauling rate moved up 2.9 percent, indicating that supply chain problems persist.

May’s prices rose at an annual clip of 10.8 percent, easing a fraction from 10.9 percent in April but still marking the sixth consecutive month of double-digit increases.

The continued rise in producer prices indicates that consumers will be paying more in the near future, PNC Bank economist Kurt Rankin told The Wall Street Journal.

That relationship has been increasingly consistent during the post-COVID economic recovery, the WSJ said.

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