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Daily Intelligence Briefing

Wednesday, March 30, 2022

Identifying Change-Driven Investment Themes


I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

US-Europe LNG Trade Set to Skyrocket as Russia Rolls Out Rubles for Gas Threat

Summary: The flow of Russian gas to Europe continues to wind down and has been further complicated by Russia’s new demand for “unfriendly” nations to pay up in rubles. It remains to be seen when or how Russia will enforce a gas for rubles policy, but it is further proof that European reliance on their eastern counterpart is increasingly unsustainable due to a geopolitical firestorm ignited by Russia’s invasion of Ukraine.

In response, Europe will expand its liquefied natural gas (LNG) trade with the US and boost imports from across the Atlantic. Eventually, the US hopes to ship up to 50 billion cubic meters (bcm) of gas per year to Europe, up from 22 bcm last year. That agreement could spur a 25% rise in US natural gas production through 2050 and provide a boon to firms involved in the oil and gas services industry.

Related ETFs: VanEck Vectors Oil Services ETF (OIH), United States Natural Gas Fund, LP (UNG)

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Yamal Pipeline Supply Plummets to Zero, Russia Demands Rubles for Gas

When MRP begun highlighting a potential energy crisis in Europe all the way back in the autumn of 2021, we specifically noted a 77% drop in Russian gas supplies travelling through the critical Yamal-Europe pipeline. By December, it was obvious that thinning gas flows from Russia to Europe were becoming more deliberate and threatening, reflecting geopolitical tensions between the two regions and Russia’s buildup of troops along Ukraine’s eastern border.

Just about a month into Russia’s invasion of Ukraine, Reuters now reports physical gas flows through the Yamal-Europe pipeline at Germany’s Mallnow point have fallen to zero. Though gas continues to flow through the Nord Stream 1 pipeline, those shipments could potentially be impacted if European nations do not comply with Russia’s new demand that “unfriendly” nations pay for their natural gas exports in rubles. In a bid to prop up the Russian currency, which looked ready to collapse in the immediate aftermath of their attack on Ukraine, President Vladimir Putin has ordered Gazprom, the country’s biggest gas company, and the Russian central bank to outline plans for ruble payments by tomorrow.

Though the initial response from the G7, which includes key European economies like France, Germany, Italy, and the UK, has been a resounding rejection of this plan, European countries that rely on Russia for 40% of their gas and 25% of their oil could end up further exacerbating energy shortages and crippling power prices. Rising electricity prices have been slamming European households and even begun to curtail the continent’s industrial output earlier this month as steel plants from Spain to the UK were forced to suspend operations. Even with steel prices spiking, Bloomberg noted that many mills would still be operating at a loss by running their electric-arc furnaces.

It remains to be seen how serious the threat is, but the AP reports that Putin’s ruble proposal did lead to Germany’s utilities association, the BDEW, to call on the government to declare an “early warning” of a severe energy shortage – the first of three stages of energy emergency in EU and German law. As MRP covered two weeks ago, Russia previously threatened to cease dollar-denominated debt payments in USD, insisting that they’d only be able to pay coupons in rubles, but Moscow avoided default and ended up paying in USD after all. In a similar way, Russian gas agreements with Europe are not contracted in rubles and some commentators say Russia has no choice but to accept euro and dollars for payment.

Early reports this morning indicate Russia may be backing off of their own deadline and that it may “take time” before ruble payments for natural gas supplies can actually begin.

Regardless, this volatile state of affairs is untenable and, if geopolitical tension and sanctions between many European states and Russia are to become entrenched for the long-term, there will also have to be long-term solutions to stabilize European energy markets.

US Export Boost Could Supercharge Gas Output Through the Next Decade

One of the potential solutions is to rely more heavily on US gas. The White House announced last week that the US will rapidly increase exports of liquefied natural gas (LNG) to Europe. Per Scientific American, the move will 
ramp up LNG shipments carried by seagoing tankers by 15 billion cubic meters (bcm) this year. That would be a two-thirds increase of gas supplies when compared to a record 22 bcm of LNG the US sent to Europe last year. According to President Joe Biden, the ultimate goal is to increase that annual total to as high as 50 bcm through at least 2030.

This marks a change in priorities for the administration and a slight shift away from Biden’s relatively hard line on US fossil fuel production. Per the Wall Street Journal, the White House’s announcement came just one day after Democrats on the Federal Energy Regulatory Commission (FERC) backtracked on new environmental regulations, perhaps signaling a broader change in sentiment.

Rising demand for US gas will obviously require quite a boost in output. The US Energy Information Administration (EIA) now projects that annual US natural gas production will grow by almost 25% through 2050 in their Annual Energy Outlook 2022 reference case. Largely in line with the US’s new export agreement with Europe, the EIA sees natural gas exports continuing to rise through the early 2030s before leveling off. Overall US LNG capacity expansions, coupled with increasing demand for natural gas abroad, result in an increased forecast of LNG exports to 5.86 trillion cubic feet by 2033 in the reference case, up 65% from current levels.

Already, IHS has reported an 80% YoY jump in European LNG imports from the US. For the first time, the country is providing more natural gas to Europe via ship than Russia is through its pipelines. The US has now jumped into first place among the world’s largest natural-gas producers and, in January and December, it was the largest exporter of LNG as well. WSJ writes that nearly 70% of US LNG shipments went to the 27 nations of the EU, the UK, and Turkey. Per US Energy Secretary Jennifer Granholm, “We are exporting right now every molecule that has a terminal available to liquefy it.”


MRP added Long Oil & Gas Services to our list of themes on October 22, 2021, due to our expectation that energy demand would re-energize investment and output of oil and gas.

Though large energy majors have been slow to re-open their production, smaller drillers are not holding back. “Drilling economics today are better than they’ve ever been since the shale revolution started,” Chris Wright, chief executive officer of Liberty Oilfield Services, told Reuters last month. Spending budgets among US independent producers are up 13% YoY, according to analysts at Cowen. MRP has been highlighting this “under the radar” rise in spending in US shale basins among smaller, privately-held firms since last October. 

The Dallas Fed’s most recent energy survey indicated that half of the large firms surveyed will be increasing their output by anywhere between 0% – 5% through the end of 2022. That compares to 75% of small firms planning to boost production by more than 5%. Median growth among large firms was assessed at 6% versus 15% for small firms.

Though it may be hard to gain exposure to independent drillers, we expect publicly traded oil and gas service firms to reap the benefits of resurgent downstream investment in oil services, exploration, and production. Since we initiated this theme, the VanEck Vectors Oil Services ETF (OIH) has returned about +28%, outperforming a +2% gain in the S&P 500 over the same period. With all of that in mind, we are re-affirming our LONG Oil & Gas Services theme today.


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