Energy Crisis Explained

Hello friends. This is Vijay Bhambwani here. I hope the markets are treating you well and you're doing very good in the markets.

Friends, I'm in this video, here to discuss what the energy crisis means for us, what it means for us in our day to day life, and what it can mean as investors and traders in the markets.

Now, as I record this video on second of October, Saturday, which I think will probably be uploaded on Thursday, I am going to present you with the facts as I have them at this point in time.

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You see, the seeds of this energy crisis was sewn in 2020 after the covid pandemic hit us. As far as crude oil was concerned, we all remember how the April 2020 expiry of the MCX contract of crude oil saw negative prices. Yes, negative prices. Actually, if a buyer and at any given point in time, he would have made a loss because prices actually went below zero.

Now the matter went subjudice. It went to the court, and for many, many, months, crude oil trade was actually not entertained by many brokers. Same was a case in the US.

Now, oil exporting countries suffered big losses and since they had to provide a stimulus to their population from the covid pandemic, there was obviously a deficit in their budgets.

So OPEC plus was formed. OPEC plus. Non OPEC countries coming together, including Russia, the biggest non OPEC exporter of oil. They came together.

I remember in my video last year, over a year ago, I said now nobody is going to take a fight to the extent where Saudi Arabia and Russia go out there and open all the taps and start triggering a price war, which is what happened. OPEC plus was formed, and crude oil supply was artificially curtailed by all these members to jack prices up and that's precisely what is happening.

Another issue that occurred which hit the gas trade last year was the polar vortex. In late December of 2020 and early January of 2021, a big a cold wave hit the Arctic Circle, which impacted North America and northern parts of Europe. Gas pipelines froze. Many were even disrupted. Some were ruptured and a whole lot of surplus gas was created. Thereafter, in the summer of 2021, you saw gas prices actually collapse.

Now there was only one of the two options available to the gas marketing companies. Either you store this gas and sell it at a later date, in the following winter, or you flare it up. Flaring would mean burning. Burning is a total loss.

So storage was the only option and as it occurs in pure capitalist economies, anything that is in short supply, the prices go up. Storage was in short supply, so companies that owned the storage spaces, typically underground tanks, started hiking their fees up to a factor of four times the usual storage costs.

Which is why we knew that ahead of the winter of 2021, natural gas prices were likely to go up because the sellers would build in this a storage expense into the cost, which is why this year's gas prices were expected to be somewhat, I expected somewhat higher.

But what really happened was that the green movement came in and started pressurising the governments to basically stop allocating fresh capital to drilling and exploration of new oil and gas fields, and in the interim, the memory of the winter of 2020-21 was still fresh in the minds of European and north American buyers.

Fires in Latin American countries like Brazil, drought in Argentina, etcetera, meant that hydropower projects did not generate electricity and gas was used to generate electricity. So this resulted in the price going higher.

As of now, what we are facing is a very, very surprising aspect of the market, which at least I have not yet been able to understand. The Russians have constructed the Nord Stream 2 pipeline, which is a twin track pipeline. Put together, both these pipes can bring 110 billion cubic metres of gas to Germany.

The Russians are very clear that they are ready as off first of October, which is past, first of October 2021 to start turning on the taps and supply gas to Germany. Ironically, the Germans are refusing to buy this gas, unless the Russians apply for registration with the Gas Regulatory Authority, a process, which takes up to four months.

The Russians, well aware of the German laws, are advising the Germans, look, under the Essential Services Act, you can basically have emergency powers. Lives are at stake. You could see people freezing over in the winters if the gas is not available to heat homes. So of course we will apply for the registration, but you can start buying gas now.

The German's refused to budge. So 110 billion cubic metres of gas is being denied to Europe. On the other hand, what has happened is that Britain, after Brexit, which means after exiting the European Union kind of arrangement, has seen migrant truck drivers being sent back to their respective countries.

Now, estimates are, and I'm using the word estimates here, there is a shortage of up to one lakh truck drivers in UK, the United Kingdom, and since there are no truck drivers available, to the horror of the British people, there is a shortage of a CNG, LNG, petrol, diesel at the fuel pumps. Obviously, since transport is disrupted, there are some stores in which supplies are running out.

There is also panic buying among citizens who are fearing shortages and therefore hoarding essential commodities and the problem is that we have a winter ahead of us. Since we are into uncharted territory, where gas prices are going is uncharted territory, because of the simple fact that it's not gone there for 10 or 11 years. 10, 11 years ago, a similar situation had occurred and then gas prices came down again because supplies were restored.

Here, too, supplies are likely to get restored over a period of time because the British prime minister, Boris Johnson, as I am recording this video, has given a go ahead to the British army to be called in to drive these supply trucks so that the shortages can be cleared.

There is also talk as a record this video on a Saturday, that immigrant drivers may be issued temporary visas to come to England and man these trucks. But whether the political situation will allow him to take away British jobs from British nationals is something we'll have to see. Do remember, after covid, locals do not want their jobs to go to foreigners because inflation, job losses, pay cuts, etcetera, are becoming widespread phenomenon.

So as we speak, I think the British problem will get sorted out over a period of time and what we need to look forward to until the end of November now are hurricanes in the US east coast and any kind of typhoons or disruptions in the weather in the Gulf and Southeast Asian seas, South China seas.

So as a recording, this video that has already been disruption in Oman from a storm and there has been flooding. Some refineries have got impacted and therefore, there is disruption and fear in the gas markets all over again.

If at all the winter is harsh, Europe and America will see gas prices, probably, I am using the world probably, go up again. That is, if the North Stream 2 pipeline does not really start transporting gas. So net-net, all in all, there are too many moving parts to this story and if anyone of this moving part breaks down, the entire machine breaks down.

There are too many variables. You have hurricane season in the American coast. You have typhoons in Southeast Asia. You have Nord Stream 2 which is not getting regulatory approval from the Germans. You have the British truckers who were adamant about a pay hike and a shortage of drivers, and you have Norway, which is recently elected a new government which is more friendly to exporting more gas and Brent oil, which is ready to open up its tap and sell more of each commodity.

So there are positives and there are negatives, but the markets are frankly, caught on the wrong foot. Positions will get squeezed. Would we get impacted as a citizens not connected with commodity markets? Chances are you're LPG cylinder will start costing higher. Chances are that you might have to pay more for your petrol and diesel top up in your car, bike, scooter or whatever.

Now, if it all prices rise in the winter, we are fearing some amount of inflation. Don't forget that the Chinese supply chain might also get disrupted extremely critically and China being the factory of the world, everything from clothes to mobile phones, to cars, might just start costing a tad higher.

So these are the fallouts of the oil and gas shortage crisis and we need to brace up and be careful out there. So hold your trades with stop losses. Exercise due diligence. Don't get aggressive. Avoid leveraged long positions, and at this point in time, think long term rather than trying to take short term profits, and avoid greed.

On this sombre note, this is Vijay Bhambwani signing off for now till we meet again in my next, not before reminding you to click like on this video if you agreed with what you saw. Subscribe to my YouTube channel if you haven't already done so. In the comments section, good, bad or ugly, I welcome all your feedback.

Also, help me reach out to fellow like-minded investors and traders by referring my video to your family and friends. Thank you for your patience. I wish you have a very, very profitable day. Bye for now.