The Calm Before the Storm

Note: This blog is the second in a series addressing key developments affecting the energy industry. In the first, we explained the five reasons oil prices fell despite supply risks. In the third installment, we will explore the outlooks for global weather, economics, and oil markets, analyzed and presented by DTN experts.

In the days immediately following Russia’s invasion of Ukraine we detailed why Russian oil and gas exports would be spared the same sanctions fate that Iran and Venezuela had suffered. Despite starting the largest ground war in Europe since WWII, Europe’s dependence on Russian natural gas and oil simply would not allow for the same sort of immediate hardline approach taken by the United States and Europe in recent oil sanctions regimes. At the time, we emphasized, “the fact that cutting oil and gas flows have been directly avoided by both Russia and the West is proof of the hierarchical economic significance of the oil and gas trade, and the awareness of the mutually assured economic destruction for everyone involved.” And that, “The risk of a global stagflationary recession, which we already feared moving into the winter, has been greatly exacerbated as a result of Russia’s invasion of Ukraine.” But even we have been surprised by how dominant these two themes have been in global energy and financial markets since the time of our initial writing. Energy markets remain front and center on the global economic stage, and with each passing week both the immediate need for continued Russian supply and the longer-term economic costs of moving away from Russian energy are increasingly realized by both policy makers and traders alike.

This summer, Europe and the world continued to buy Russian oil in volumes far exceeding what most market participants had initially expected in the days immediately following the invasion. Furthermore, it became abundantly clear through U.S. Treasury Department and G7 communications that the West was not only coming to terms with the global economic perils but also the domestic political perils of the situation at hand. Russia’s invasion of Ukraine had exacerbated a prevailing inflationary environment created by unprecedented fiscal and monetary stimulus in the 2020-2021 period and ultimately put policy makers in an untenable position. Letting inflation run further out of control risked both their domestic economies and the political will to support Ukraine. Trying to both limit Russian oil and gas revenues while simultaneously fighting inflation at home became the explicit goal.

That western sanctions on Russian energy exports were becoming increasingly toothless and not enacted as quickly as initially expected meant the oil market had become too bullish too early. Stronger than expected Russian supply, combined with demand weakness following sharply slowing economic growth amid rampant inflation, led crude oil prices to drop 40% over the June-September period. As we worked toward autumn with EU natural gas storage levels brimming, European natural gas and electricity prices joined oil prices by moving sharply lower. And with above-normal temperatures across Europe through October, prices have continued to plummet. Unfortunately, this does not mean the energy crisis is over. For Europe in particular, the reshuffling of both oil and natural gas trade flows and the second order effects on economies, sovereign debt markets, and foreign exchange markets are just getting started.


Oil and Refined Products

Because of Europe’s relatively lower dependence on Russian oil and the relative ability to find and import global substitutes when compared to natural gas, sanctions and embargo discussions logically began with Russian oil. While an EU embargo on waterborne imports of Russian crude oil is expected to come into effect December 5th (followed by a ban on waterborne Russian refined product imports on February 5), the fact that we’re having to specify “waterborne” volumes nine months post-invasion is in and of itself evidence of the very struggle that European policy makers have faced since Russia’s invasion began – it has been impossible to get a consensus of nations whose economies are still reliant on Russian supply to agree on an all-out ban.

Here’s what has transpired and how Europe’s position has softened since the invasion on February 24th:

  • In March, Russian oil exports initially dropped sharply as Northwest European refiners voluntarily shun crude oil and products of Russian origin
  • Pipeline flows to Europe via the 1.4 million bpd Druzhba system, however, continued
  • In May, Hungary, Slovakia and the Czech Republic were offered embargo carve-outs
  • Southern European refiners, meanwhile, ramped up purchases of now steeply discounted Russian crude oil
  • In Q2, the IEA and others kept pushing back the expected impact on Russian crude oil production month after month
  • In June, a maritime insurance ban for waterborne transport of Russian oil was included in sanctions packages, the implementation of which was postponed to December
  • The U.S. Treasury and representatives of the G7 began lobbying the world to participate in a Russian price cap to keep supply coming to market while limiting Russian revenues

In the days immediately following Russia’s invasion of Ukraine, with wide-reaching and ever-escalating sanctions announcements from the EU, UK and U.S., buyers of waterborne Russian oil dried up rapidly. This led the International Energy Agency (IEA) and many others to conclude that the global market could lose 2-3 million bpd of Russian crude oil and refined products supply by April. The expectation of this impending loss of Russian supply helped lead oil prices higher through April and May, even though ship-tracking data showed exports were already rebounding as the initial sanctions-shock wore off. In fact, despite Northwest European refiners increasingly shunning Russian oil, Russian exports surged to multi-year highs in the spring as buyers in India, China, Southern Europe, and the Mediterranean took advantage of steep discounts for Urals crude.

Bar graphRussian Waterborne Crude Exports

In April, the IEA pushed back their expectations of a substantial decline in Russian oil supply to May. The May 15 deadline for oil trading houses to halt transactions with state-owned Russian oil companies was expected to ensure this decline. By the time of the IEA’s May Oil Market Report release, however, the agency was already pushing off their supply loss expectations to the second half of 2022. As European and Asian refiners continued to buy Russian oil and Russian exports continued to hold up, by June the IEA (and others) were reporting that the market had unexpectedly moved into surplus and, by their July report, concluded retrospectively that global oil inventories had been building through the second quarter.

In a nutshell, voluntary cutbacks by Northwest European buyers seem so far to have done little to cripple Russian oil production and revenues – something the EU hoped to work towards with the sanctions package coming into effect in December. However, the EU’s planned embargo only targets waterborne shipments of Russian oil. Deliveries via the Druzhba pipeline system, which last year accounted for 45% of Russian crude flows to Europe, will be unaffected by this embargo. Contrary to Northwest European refiners who voluntarily reduced purchases of Russian oil after the invasion, flows to Southern Europe ramped up in response to the resulting steep discount for Urals crude. While these volumes will need to find a different home come December 5, the embargo’s effect on Russian oil production, exports and revenues is almost negligible compared to the proposed shipping and insurance ban.

Line graphUrals North vs. Brent CFD

Sanctions banning the use of EU maritime services and insurance are set to come into effect alongside the crude embargo on December 5. Given Russia’s immense dependency on the European shipping sector for its Urals crude exports and with most of the maritime insurance industry situated in Europe, this would inevitably shut in a substantial amount of Russian crude production – enough to lead to a severe global oil supply crisis and rocketing prices. After experiencing months of stalling economic growth, persistent inflation at a four-decade high, back-breaking prices at the pump and the lowest level of consumer confidence on record, the U.S., initially in full support of this ban, became increasingly concerned about the ramifications of these impending EU sanctions on the global economy.

Over the past few months, the U.S. Treasury Department has spearheaded worldwide lobbying efforts for adoption of the G7 price-cap on Russian oil, which would allow for the continued use of these maritime services (provided the oil is sold at or below said cap), thus keeping the Russian crude spigots open and prices from spiking. The explicit intent of the policy is to keep the market well-supplied while also limiting Russian revenues by pricing oil around the Russian break-even price of production. Furthermore, the treasury department has been explicit in stating that those who skirt the G7 price cap will not face retaliatory sanctions – once again highlighting their concern for potential policy blowback. As of the writing of this blog and with six weeks left until December 5, the EU has still not committed to this G7 replacement plan. In light of the economic circumstances, however, the bloc is left without much alternative.

Northwest European refiners voluntarily avoiding Urals in their crude slates has already exacerbated the multi-year diesel supply shortage even before the planned embargos have gone into effect. Slowing Russian crude oil, feedstock and diesel flows, lost refining capacity and high natural gas prices have left the energy-intensive-to-produce fuel in short supply. As many refiners went into scheduled maintenance in October, unplanned outages at some of the continent’s largest refineries and refinery worker strikes in France intensified the diesel supply crisis. European front month futures for low sulfur gasoil, which averaged $586/mt in 2021 and $788/mt in the first two months of 2022 and which peaked at $1665/mt shortly after Russia’s invasion of Ukraine, have traded in the $900-$1400/mt range since. European low sulfur gasoil cracks—which doubled after the invasion—gained further support from softening crude oil prices over the summer and set a new record high in mid-October just shy of $60/bbl – more than fourfold peak-2021 levels. Importantly, however, this diesel strength came not on the back of strong economic growth but amid a perfect storm of supply losses.

Line graphULSD Brent Differential

The EU’s embargo on Russian oil products, to come into effect in February 2023, is set to make Europe’s formerly primary source of diesel imports off limits. Exorbitant natural gas prices will continue to limit profitability of the energy-intensive desulfurization process, further chipping away at European diesel production at a time when diesel is already in short supply globally. This portends rising European diesel imports from Asian, Arab Gulf and U.S. refiners. The U.S. East Coast, home to the NYMEX ULSD futures contract delivery point, is currently starved of diesel with record-low inventories ahead of winter. This is particularly problematic for the Northeast U.S. given their disproportionate reliance on heating oil and oil-fired winter power generation. High natural gas prices will support diesel demand by leading to more gas-to-oil switching in both Europe and the U.S. this winter. However, with European industrial and economic activity in sharp contraction, global trade slowing markedly and the global economy likely to skid into recession in early 2023, slowing diesel demand elsewhere should help buffer winter supply side price risks.

Line graphEuropean Low Sulfur Gasoil Crack


Natural Gas

Given the substantially higher dependency rates and lack of importable substitutes when compared to oil, the EU spared Russian natural gas imports in the months (and many rounds of sanctions announcements) following the invasion. Unfortunately, that of course did not mean smooth sailing for global natural gas and LNG markets this summer. By early summer, European nations had at least one clear unanimous objective – fill natural gas storage to the brim as rapidly as possible and at all costs ahead of winter. But just as Europe had begun to fill natural gas storage at a far more rapid clip than normal by combining continued access to Russian pipeline supply with record-strong LNG imports, multiple rounds of “maintenance” on Russian pipelines quickly became problematic for both markets and policy makers. What followed was a multi-month political and corporate drama, best summarized in a simplified timeline:

  • In June, Gazprom cut gas supply through Nord Stream 1 to just 40% of its 55 bcm capacity, citing delays of the return of a turbine Siemens Energy was servicing in Canada.
  • Official Russian data showed Russian natural gas production plummeting 20% in June from May and dropping 23% year-on-year.
  • On July 11, Nord Stream 1 was idled for routine maintenance for 10 days.
  • Just five days after gas started flowing through Nord Stream 1 following the 10-day maintenance, Gazprom announced it would once again reduce gas flows to just 20% of capacity, with just one operational turbine.
  • By mid-July, Russian President Vladimir Putin was routinely claiming that Russia and Gazprom were not to blame for the reduction of gas exports to Europe, placing the fault on western sanctions and Siemens Energy.
  • Throughout July and August, Russian officials continued to claim that they needed official confirmation from the EU, Canada and the UK before taking delivery of repaired turbines.
  • In a public statement in early August, Siemens Energy CEO Christian Bruch stated that there was no technical justification for Russia refusing delivery of the gas turbines. Germany also contested the Russian claims, saying the equipment was not affected by sanctions.
  • Nord Stream 1 was once again completely shut in the final week of August for repair work that was supposed to last three days, but three days later on September 2 (just hours after the G7 agreed to a Russian oil price cap) Gazprom announced the pipeline would stay closed indefinitely.

Line graphEU+UK Natural Gas Imports from Russia by Exporting Route

Over the course of the June–August period, this sharp throttling of gas flows helped send Dutch TTF day ahead natural gas prices from $23/MMBtu to $92/MMBtu. For context, the pre-COVID five-year average of TTF day ahead natural gas prices was just $5.79/MMBtu. In the UK, NBP day ahead natural gas went from $10/MMBtu in early June to $65/MMBtu by late August. European natural gas prices pushed so high as to attract every spot cargo available and to pressure some contractual LNG buyers to turn into resellers as European premiums surged. This came at extreme costs to many emerging economies which were priced out of the market. Across the pond in the U.S., record-strength in LNG exports helped pull front-month Henry Hub futures to their highest since July 2008 at $10/MMBtu in August – more than doubling from pre-war levels despite export capacity constraints following a fire at Freeport LNG’s export facility.

Line graphDutch TTF Day Ahead Natural Gas

As we discussed in March, natural gas is truly both an asset and a potential weapon for Putin, given Russia’s domination of the European market. But that weapon has tremendous potential for backfiring. The mutual dependence of the Russian and European economies on the continuation of Russian natural gas flows was long thought to be the ultimate check against the potential weaponization of energy. To cut natural gas supply to Europe is ultimately a decision so drastic and self-destructive for Russia that it was hoped to never happen. However, as it became abundantly clear through the summer that Russia was not only losing the war in Ukraine but was also slowly losing their largest energy trading partners, Russian calculus on the weaponization of energy supply had clearly begun to change. We had witnessed glimpses of Russia seemingly manipulating natural gas flows to Europe in the lead up to the war last winter, but something of the scale of completely shutting in the largest pipeline to Europe indefinitely was a tremendous escalation.

Line graph
EU Gas Storage

With Nord Stream 1 flows to Europe halted and combined Russian flows via Ukraine and Poland at a fraction of normal volumes, total Russian gas pipeline flows to Europe plummeted to just a sixth of pre-war levels by September. However, just as European pipeline imports of Russian gas were marking new post-invasion lows, European natural gas prices began to plummet. Weakening demand, rising natural gas flows from Algeria, and record-strong LNG imports meant European natural gas inventories were continuing to build rapidly despite the absence of Nord Stream 1 flows. As it became clear that Europe’s largest economies were going to hit their natural gas storage targets well ahead of the arrival of winter weather, prices continued to plummet; by September 25, Dutch TTF day ahead prices had dropped 48% from their late August highs of nearly $93/MMBtu back to $48/MMBtu. On September 26, explosive detonations triggered four gas leaks on the idled Nord Stream system, completely removing the potential of Nord Stream 1’s 167mcm of capacity returning to service anytime soon.

Line graph
EU+UK Natural Gas Imports by Source

While the pipeline sabotage briefly caused gas prices on the continent to bounce higher, by the end of September European gas prices were plummeting once more. With favorable weather conditions, all but four EU nations having natural gas in storage above 90% of capacity, and some of the EU’s largest economies like Germany and France having storage more than 96% full, by mid-October Dutch TTF day ahead prices plummeted to just $17/MMBtu – the lowest since September 2021. NBP day ahead natural gas plummeted from $65/MMBtu in late August to just $6.63/MMBtu. An overabundance of LNG arrivals amid brimming onshore storage and weak industrial and commercial demand has, for the moment, meant a backlog of VLGC’s and discounted same-day delivery. And with European prices plummeting amid a backlog of LNG tankers, U.S. Henry Hub natural gas futures have dropped from $10/MMBtu in August to just $4.88/MMBtu.

With no risk of natural gas scarcity in the very near term, it would be easy to think that the natural gas supply crisis and all the second order economic impacts are now behind us. But the hard truth is that European natural gas inventories alone – even if full – cannot sustain Europe through the winter. German regulators have warned that gas in storage would last for just two cold winter months, and if shared among nations, EU supplies will at best last three months. The recent balmy temperatures across the continent and the current outlook for a warmer-than-normal winter could not have come at a better time, but inventories will inevitably begin to draw down in the coming month. Which is why, despite spot TTF gas prices plummeting to $17/MMBtu in October, November TTF Futures continue to trade at more than $41/MMBtu. While not a forecast of where prices will ultimately be by then, February 2023 TTF futures still currently trade at $46/MMBtu. For context of just how expensive this still is, prior to the war, February 2023 TTF futures traded at just $15/MMBtu and U.S. Henry Hub futures for February currently trade at $6/MMBtu. The continued strength in winter European gas prices should help support oil demand via gas-to-oil switching, as industries shift to oil from gas powered generation to save money and reduce gas demand where possible this winter. In Europe, this could account for 250-350,000 bpd of oil demand in the first quarter of 2023 – primarily residual fuel oil and gasoil.

Dutch TTF Natural Gas, October 2021-2022

The harsh reality is that for the foreseeable future, Europe still needs a high enough natural gas price to continue to pull LNG cargoes away from other global buyers, combined with demand curtailment of around 15%, continued Russian pipeline flows through Ukraine and mild temperatures to prevent further price spikes this winter. Europe has been a beneficiary of China cutting LNG imports 22% so far this year, but as winter arrives, reports indicate that Beijing has instructed state owned LNG importers to stop reselling cargoes into the global market. Without Nord Stream 1 supply, Europe will need to source 200-220bcm of LNG in 2023 in preparation for the winter of 2024. To put it another way: after increasing 2022 LNG imports by roughly 60bcm from 2021 levels, Europe will need to lift LNG imports another 60bcm in 2023 from 2022 levels to offset Russian losses.

It’s not only a matter of securing supply, but also a matter of building out the required infrastructure to onshore, re-gasify, transport, and store the gas. The German government has chartered five floating LNG import terminals but only two of the five are likely to be operational this winter. The buildout of global LNG export capacity, firming up long term LNG contracts, and building out the infrastructure needed to facilitate such large LNG import volumes is a multi-year (perhaps decade long) task. In the meantime, balancing the European gas market will require both demand curtailment and prices far higher than historical norms in order to claw LNG tankers away from the rest of the world. This points to continued strength in U.S. LNG exports providing a tailwind for U.S. natural gas prices for years to come.


Second Order Effects of the European Energy Crisis

Record-high energy prices this summer have sent the European economy into a tailspin. Energy intensive yet crucial industries to European economies (like steel and aluminum production, fertilizer production, and manufacturing) have all been feeling the pain of sharply higher energy prices for a full year at this point and it is taking a major toll. European natural gas consumption has dropped by 10% from 2021 levels in the first eight months of the year, pulled lower by a 15% drop in industrial sector gas demand. Demand is going to need to drop by another 5-10% to help keep homes heated and key infrastructure operating, assuming normal weather conditions this winter. The European industrial sector is now increasingly uncompetitive on the global economic stage and after this winter will have to make hard decisions about the long-term viability of their operations in light of a new energy supply and pricing paradigm.

German producer price index data for September show factory gate inflation rising by a staggering 45.8% year-on-year, with energy prices up 132% year-on-year serving as the largest contributing factor. The EU saw inflation as measured by CPI break double digits in September, registering 10.9% year-on-year for the month. In the UK, inflation rose 10.1% year-on-year in September, matching the 40-year high set in July. Led lower by the German S&P flash manufacturing PMI plummeting to just 45.7 in October, the Eurozone S&P flash manufacturing PMI dropped to just 46.6 – the lowest since May 2020. Likewise, the Eurozone S&P flash services PMI remains firmly in contraction territory at just 48.2. European stagflation is straining not only every part of the economy but is also straining political relations between allies and countrymen.

The EU’s two largest economic and political powers, Germany and France, are having growing disagreements as we move through October. France has pushed for a natural gas and electricity price cap, but Germany has rejected both proposals. With such high dependency on imported LNG for the foreseeable future, Germany simply cannot agree to a gas price cap which has the potential to cause shortages. Germany, Spain and Portugal are also locked in a debate with France over a gas pipeline from the Iberian Peninsula to Northern Europe that would send gas arriving to Spain and Portugal through the Pyrenees to France and from there on to Germany. A joint summit between the two EU powerhouses was recently postponed until January amid growing disagreements.

Of course, the U.S. hasn’t been spared from disputes. Growing domestic debate over use of the Strategic Petroleum Reserve has been followed with a very public spat between the Biden administration and Saudi Arabian officials. This followed the Saudis pushing OPEC+ to cut oil production targets by 2 million bpd at their October meeting just weeks after claiming the physical oil market was tighter than futures prices implied. Furthermore, French President Emmanuel Macron just last week remarked that U.S. trade and energy policies created a “double standard” because the U.S. economy gets to enjoy both lower domestic energy prices and the benefit of exporting LNG volumes to Europe at high prices.

Government responses to the energy crisis have varied widely from country to country given that each nation has very different energy supply, storage, and demand dynamics. Government spending plans to support the energy industry and to help cushion the blow to both energy producers and consumers across Europe range from lows of 3% of GDP in the Netherlands to highs of 8-10% of GDP in Germany. Already, ahead of the first winter of severely reduced pipeline supplies to the continent, European sovereign debt, credit, and foreign exchange markets are reflecting this economic burden. While well off its lows, the British pound is currently still its weakest against the U.S. dollar since 1985. The Euro has now traded below parity with the dollar for over a month and remains its weakest since 2002 at $0.98.



After an initial failed invasion, Russian President Vladimir Putin appears to once again be digging in for a long war of attrition in Ukraine. The strategy is one of exhausting the West. Not by way of exhausting Western military resources, but by slowly exhausting Western political support for Ukraine amid the economic costs at home. After all, unlike Putin, Western politicians are vulnerable to election cycles and the will of the people. While we do not pretend to be military strategists, we feel the need to underscore this outlook given what it means to energy markets and economies more broadly. In our view, the realization that this is truly a long-term shift in European energy supply and demand dynamics, and therefore a long-term shift in global trade flows, is just beginning to set in on global markets.

With the Nord Stream attacks conveniently leaving one Nord Stream 2 pipeline intact, Putin has already stated that he could still supply gas to Germany if only German politicians would commission the line. And although there are real long term political risks that could cause growing European and Western division around Russian energy policy, we believe this war is a true “Rubicon-crossing” event for Putin. Given that Western leaders have been reminded that a lack of energy security is tantamount to a lack of national security, Western governments seem prepared to test the limits of their nations’ finances and economies in an effort to not wind up returning to Russian energy dependency. Nations are going to lengths with both financial and energy policy that few believed were politically possible just a year ago. Germany, for example, has now allowed the country’s three remaining nuclear power plants to continue operating beyond the end of this year and plans to return 6.9 gigawatts of coal-powered generation to the grid.

While much remains uncertain, more investment in energy production both in Europe and outside of Russia will undoubtedly be needed if this European transition away from Russian energy will prove sustainable for the long term. With Putin actively threatening to cut oil supply to those who participate in the G7 price cap and the December 5 deadline on EU sanctions just around the corner, this saga is far from over. Buckle up for a winter of price volatility as oil prices look set to be pulled in a tug-of-war between a slowing global economy and Russian supply risks while natural gas prices will be increasingly dictated by European weather developments and the ability of European nations to curtail demand.


About the Authors

Troy Vincent
Troy Vincent is a senior energy market analyst at DTN. He worked at the Charles Koch Institute and studied at the Mises Institute while completing his Bachelor of Science in business economics and public policy from Indiana University and has been in the economic research and energy risk management industry for the past decade. Throughout that period, he has served as an analyst covering electricity, carbon dioxide, coal, natural gas, crude oil, and refined products markets. After advising companies on their energy risk management strategies while at Schneider Electric and Trane, Vincent served as a senior oil market analyst for innovative technology startup ClipperData, providing actionable intelligence for oil traders and investors. He currently specializes in crude oil, natural gas, and refined products markets; you can find his past comments and analysis across industry reports from RBN to Barron’s, MarketWatch, and Bloomberg.

Karim Bastati
Karim Bastati is a market analyst at DTN. Bastati has nearly a decade of experience in data analysis, spending the last few years in the energy industry interpreting data and building predictive models. He often acts as the central link between quantitative and qualitative research, joining an extensive knowledge of global oil markets with an analytical, numbers-oriented approach. In his previous position at ClipperData, he authored several weekly reports on crude oil and petroleum products, delivering data-derived insights.


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