Four rate hikes in as many months has the market back to watching natural gas attempting to cross $10 in USA, the highest level in more than a decade.
In Europe, gas has lost its head. Up 20x at Dutch TTF Gas Futures and within just a year as the bitcoining of meme stocks seemingly leads to: the bitcoining of gas now?
This massive spike comes amid a growth in global gas production according to the data by the International Energy Agency (IEA).
Their latest report for Q2 2022 shows that Russian gas production has fallen by 50 billion cubic meters, but total production worldwide is up by 14 bcm.
If there is more gas now than when prices were at €14 in Europe last year, how exactly have these prices shot up 20x?
One potential, albeit very partial explanation, may be the equivalent of a bank run, or hoarding causing empty shelves.
Reserves for winter in Europe are at close to 80%, and ahead of schedule. That presumably has artificially increased demand, at a time when supply is under strain.
One big explanation may well be just speculation. Markets are a herd, and so a lot of investors, maybe even big money, might well be buying gas just because they think others will be buying it with none of them really caring to use it.
They might just be bidding it up because narrative and so a boring corner becomes dogecoin with Putin very much obliging as he keeps pumping gas by closing the Caspian pipeline and now Nordstream 1.
There’s only so much that narrative can carry however because Putin has now cut almost all gas to Europe. As such, after the pump presumably comes the dump, and since Putin has not been left with much else to ‘tweet’ now, it might well be a proper crash.
Because global supply is actually up. Moving it may be an issue, but temporarily as we learned how to make ships and trains some centuries ago, with gas both in Spain and Turkey for example currently being very cheap.
This Dogecoin chart of gas therefore reminds us of oil in 2020 when just 10% of demand had fallen, but price plunged 90%.
Here, where actual demand and supply is concerned for Europe, the temporary shortage is also probably no more than 10% or 20% at most, and even that just because transport links are being re-shuffled.
But Fed’s chair Jerome Powell gained deference in the end because it was speculated his tool of hiking interest rates might be energy diplomacy by another method. Now one has to ask: is he actually making things worse?
The dollar strength index has also spiked, trying to break again the two decade high of 109. That dollar appears to go up when gas goes up, and down when gas goes down. Why?
Gas tends to be priced in dollars, and so if gas goes up, there’s more demand for dollars, and thus the dollar strength index goes up.
The dollar strengthening in itself makes demand for usd go up because you need more euros for the same dollar, and so for a small country like Turkey, you get a cascading squeeze up, with speculation piling in to potentially profit.
That has led to an inflation rate of 80% in Turkey, but their economy is still growing in real terms at 7.3% in Q1 2022.
So you have extreme inflation, but only for imported goods. While there’s ordinary inflation for other goods.
Europe is in part seeing some of the same, although Europe is far bigger and so the effects are less acute.
Europe is seeing inflation, but mainly in gas/energy, and what derives from that. Otherwise it is growing at 4% for Q2, and however much corporate media talks about a cost of living crisis, it doesn’t generally feel like it although there is a Dogecoining gas crisis.
But Powell was meant to deal with that. Instead he may have made it worse because the relative strengthening of the dollar due to rising commodity prices has been added fuel by the rise in interest rates which have strengthened the dollar further, leading thus to a combination of pressures that have translated to gas dogecoining in Europe.
Despite these rate hikes and the current currency advantage of the dollar against both CNY and EUR, USA is still seeing 9% inflation, but their gas is not even at all time high yet, let alone 20x.
So we have a problem with national currencies, which are very volatile internationally, though not domestically.
Something like bitcoin is the opposite. It has no volatility internationally as it has the same price everywhere, but it is volatile domestically.
Something like the euro can minimize that international volatility by paying in euros internationally. Why exactly is Europe not doing so?
One reason might be because Qatar does not want to. They want to price it in dollars, with negotiations between Germany and Qatar so stalling.
The Iran nuclear deal however is at its final stages with just US left to approve it. Considering the sensitivity of the matter, it is perhaps best nothing else is said except the new oil and gas should significantly improve the energy situation in Europe, and therefore a US rejection would come with considerable risks.
There are also risks in any further divergence of interest rates between US and EU. Lagarde has now started moving with the European Central Bank expected to further increase interest rates in September, which should start re-adjusting the dollar/euro price and the euro/gas price.
But if Powell also keeps moving, he might prolong this gas crisis with the data and events so seemingly somewhat clearly showing that he no longer has any role in ‘diplomacy.’
The good news though is that, at least where gas is concerned, Putin seems to finally be completely out.
And thus, logically at least, it can’t get any worse as Russia has no further supply to cut to panic markets. But it can get better because there is more than enough supply of gas globally, it’s just about getting it where it needs to be.
Neither bitcoin nor stocks have thus responded to this recent rise in gas prices. Presumably the shock has waned off and now the dogecoin price looks silly.
In China though things keep getting worse with four prominent executives of troubled real estate companies now under investigation for disciplinary violations.
The Shanghai stock index is down 2%, yet this slow-rolling crash of sorts seems to not affect gas prices at all even though it should translate to a significant fall in demand.
But that’s not the main narrative on gas currently as Putin kept attention on his slow cut offs, pre-empting Europe’s plan to cut them anyway.
All that now seems to be done, with markets clearly having priced it in as this time, no one paid attention to Putin any more.
Which perhaps means that there is no longer quite a gas crisis, but more the ending of one, at least as far as markets are concerned and thus presumably the economy.