Winter Is Coming: Natural Gas Rationing Is Coming To Europe--Plus, An Update On Our Natural Gas Play

Poke The Bear, Suffer A Frosty Winter

In hindsight, launching an economic war against your key energy supplier wasn't the smartest idea. It wasn't the smartest idea in foresight either, as we noted at the time ("Sanctioning Ourselves"; "Economic War Against A Real Economy"), but now it looks like Germany is going to suffer next winter. There was a good piece on Tuesday by an industrial chemist explaining how, in addition to freezing ordinary Germans, the expected shortage of natural gas is going to hammer the German chemical industry. I've posted it in full below. Before that, a brief update on our natural gas post from a couple of weeks back. 

Riding The Natural Gas Rollercoaster, Two Weeks Later

A couple of weeks ago, we shared a natural gas idea here ("Riding The Natural Gas Rollercoaster"). 

Heads you’re up 108%: tails you’re down 30%. https://t.co/l9dyQwvLr4 $BOIL $UNG $OXY $KOLD

— Portfolio Armor (@PortfolioArmor) July 16, 2022

In that post, we shared our top ten names from July 15th, noting that it included the ProShares Ultra Bloomberg Natural Gas ETF (BOIL), a 2x leveraged bet on American natural gas, along with the un-leveraged United States Natural Gas Fund, LP (UNG), and Warren Buffett's new favorite energy name, Occidental Petroleum Corporation (OXY). 

Screen capture via Portfolio Armor on 7/15/2022.

Here's how BOIL and the rest of July 15th's top ten names have done since, as of Tuesday's close:

As you can see, BOIL was up 51.27%, and those top names were up 11.04%, on average, versus SPY which was up 1.5%. 

Now onto the Polymerist's prediction for Germany's next winter. 

Authored by The Polymerist at Substack 

Winter Is Coming

Natural gas rationing in Europe is coming

Hey There,

I don’t usually write about natural gas and oil on Tuesdays, but things are developing quickly over in Europe and I’m concerned. If you don’t know there is a major natural gas pipeline called Nord Stream 1 that delivers natural gas to Germany, Europe’s largest economy and chemical producing powerhouse, and it’s been undergoing maintenance since July 11th. Maintenance is normal. A good preventative maintenance program keeps things running smoothly and it usually only last 10-12 days. Natural gas started flowing again on July 21st, but only at 40% of normal levels, which had started before the planned shutdown.

Nord Stream 1 has been operating at 40% capacity since mid June per reporting at the New York Times and this reduced amount of natural gas is starting to strike up some fear. When winter comes back in six months and demand for natural gas spikes the EU wants to have a plan. Their plan is to start gas rationing to build up a stockpile.

The Plan therefore proposes a voluntary gas demand reduction target of 15% from 1 August 2022 to 31 March 2023. To reach that target, it outlines various measures whereby Member States can encourage the decrease of gas demand and consumption by the public sector, businesses, as well as households. By the end of September, Member States are required to update their existing national emergency plans with their planned demand-reduction measures to meet this target.

ICIS ran a great podcast about what might happen to chemical markets in Europe too recently. The high level overview is that we might see more constraint on production due to rationing i.e. running 3 days/week instead of 5 days/week. This likely means higher overall prices for fertilizer and petrochemical raw materials. IF petrochemical sites do close it might take them 2-3 months to come back online. Further, I suspect all those employees working for German chemical companies are going to be getting paid even if those sites do idled. Storage for natural gas is at about 60-70% capacity, which I took for 30-40% empty and able to store.

Further, the Russian crude oil embargo is still set start December 5th. This means refineries will have to figure out other oil imports that will run similar to the current Russian crude oil. Imports will likely come from the US, South America, Africa, and the Middle East to make up the shortfall. This would be a great time to have those plastic pyrolysis plants that generate naphtha up a running.

Then, just as I thought I was wrapping this post up Gazprom decided to reduce the natural gas to Germany by even more: from 40% to 20% of total capacity.

Breaking News: Gazprom, the Russian energy giant, said it would further reduce the amount of natural gas it sends to Germany. https://t.co/Ze9pNzOppl

— The New York Times (@nytimes) July 25, 2022

Essentially this is what is happening and due to the German reliance on natural gas it’s getting contentious:

Gazprom: The Siemens turbines aren’t working and they need repairs. Going to have to send them to Canada to get fixed

Germany: Bullshit

Siemens: No Comment (went just sent you the paperwork to ship turbines to Canada)

No matter how you look at this problem this is not a good thing for the European chemical industry. The chemical industry is reliant of natural gas for two primary things:

• Feedstock: steam reforming of methane to make carbon monoxide, steam cracking ethane/propane to make ethylene/propylene)
• Steam generation: applying heat and performing #1

If you ever get a chance to hang out in a large scale chemical manufacturing operation the use of steam is everywhere. Steam is how heat gets moved around (heated oil is also used, but less common) and whenever you need steam it’s often generated at the site. If you want to run a distillation you need steam. If you want to steam crack some stuff, guess what, you need steam. If you want to run your reaction at 200 C or higher you need steam. Without steam the chemical industry for the most part stops running and without the raw materials to make stuff, which the chemical industry makes, then supply chains falter even more than they are now.

Hopefully someone figures out how to bypass steam and/or using natural gas for making steam. Anyone got ideas that aren’t nuclear?