Russia Halts Europe’s Main Gas Pipeline Until Sanctions are Lifted; Oil Markets Rally

Truss declared British PM after Tory ballot win | Judge grants special master re: Mar-A-Lago docs

Russia will not restart the flow of gas to Germany as planned. Gazprom, the Russian-owned energy giant, said it would postpone restarting the pumping of natural gas through the Nord Stream 1 pipeline until the “collective west” lifts sanctions against Moscow over its invasion of Ukraine, the Kremlin said. The announcement, which raises fears of an extended energy shortage in Europe, followed an agreement by the G7 finance ministers to cap the price of Russian oil. More on both topics in Russia/Ukraine section.

A full cutoff of gas to Europe, Russia’s main export market, could cost as much as 400 billion rubles ($6.6 billion) a year in lost tax revenues, according to a report. It won’t be possible to fully compensate the lost sales with new export markets even in the medium term.

European gas prices rose by over a third on Monday morning as markets reacted to Russia’s indefinite suspension of the Nord Stream 1 pipeline.

The euro slipped below $0.99, its lowest level since 2002.

Sterling nears lowest level in decades as new Prime Minister Liz Truss confronts darkening U.K. outlook. Government borrowing costs reached an eight-year high with Britain ‘at a crossroads.’ We have a background on Truss in Politics & Elections section.

In a surprise move to many, OPEC+ agrees to cut crude supply by a small amount to lift oil prices. It succeeded, at least on Monday. Details in Market section.

What is higher than the combined profits of Facebook, Amazon, Netflix and Google? Answer in Market section.

In Ukraine, the head of the U.N. nuclear watchdog agency said the gravest risk to the embattled Zaporizhzhia nuclear plant is from continued shelling that could cause a release of radiation. Two U.N. experts will remain at the plant to provide independent assessments of risk. More on the latest war events below.

Ukraine’s president, Volodymyr Zelenskyy, said that his country’s troops had made steady progress in their counter-offensive against occupying Russian forces in the east and south. But he warned Europe to expect a “difficult winter” of high fuel prices.

Russia may face a longer and deeper recession as the impact of US and European sanctions spreads, handicapping sectors that the country has relied on for years to power its economy, according to an internal report prepared for the government. Details in Russia & Ukraine section.

China threatened over the weekend to take countermeasures after the Biden administration approved the sale of more than $1.1 billion worth of arms to Taiwan. The State Department said that the sales were part of a long-established U.S. policy of providing weapons to Taiwan. More in China section.

Congress will likely add to the $1.5 billion for ag disaster aid for 2022 crops and livestock that the White House asked for via a supplemental funding request. Details in Policy section.

The White House wants $500 million for the Strategic Petroleum Reserve in a supplemental funding request. Details in Policy section.

Biden administration will allow Trump-era tariffs on hundreds of billions of dollars of Chinese merchandise imports to continue while it reviews the need for the duties. Details in Trade Policy section.

There could be a GOP upset in Washington state’s U.S. Senate race. A recent poll shows the GOP candidate just a few percentage points behind in the Democratic-leaning state. More in Politics & Elections section.

Judge sides with Trump, grants special master to review Mar-A-Lago documents. Details below.

Equities ahead: Ahead of the Sept. 20-21 FOMC confab, the last major economic report of note is August CPI on Sept. 13 and is more likely to determine how aggressive the Fed needs to be in the near term.

U.S. equities Friday: The Dow shed 337.98 points, 1.1%, to 31,318.44. The S&P 500 fell 42.59 points, 1.1%, to 3,924.26. The Nasdaq lost 154.26 points, 1.3%, to 11,630.86.

All of the major averages were lower for the week, making it their third negative week in a row after slumping in the final days of August. The Dow and S&P500 lost roughly 3% and 3.3%, respectively, while the Nasdaq fell 4.2%. The S&P 500 is down 8.3% over the past three weeks.

Agriculture markets Friday:

• Corn: December corn futures rose 7 3/4 cents to $6.65 3/4, up 1 1/2 cents for the week.
• Soy complex: November soybeans rose 25 3/4 cents to $14.20 1/2, still down 40 3/4 cents for the week. October soymeal rose $1.40 to $424.00 and October soyoil rose 267 points to 67.94 cents.
• Wheat: December SRW wheat rose 16 3/4 cents to $8.11, up 53/4 cents for the week. December HRW futures gained 9 3/4 cents to $8.77 3/4, down 4 1/2 cents for the week. December spring wheat futures rose 3 1/2 cents to $8.90.
• Cotton: December cotton fell 500 points to 103.21 cents per pound, down 1,447 points, or 12%, from a week ago and the lowest closing price since Aug. 10.
• Cattle: October live cattle futures rose $1.75 to $144.55, up $1.50 for the week.
• Hogs: October lean hogs fell $1.925 to $90.075, down 57.5 cents for the week. The CME lean hog index fell $1.36 to $106.26 (as of Aug. 31), near a three-month low.
  

Market perspectives:

• OPEC+ agrees to small production cut amid recession fears. OPEC+ agreed Monday to cut oil production for the first time in over a year, delegates said, saying it should pull back about 100,000 barrels a day from October amid fears of a global recession and more Iranian crude coming to the market in the event of a revived nuclear deal. The news came just a day after the Wall Street Journal reported Russia did not support a cut at this time. The global oil market that has experienced a 25% decline in Brent crude prices in the past three months. The decline has been fueled by growing concerns that interest rate hikes and Covid-related restrictions in parts of China could slow global economic growth and curtail oil demand.

In a statement, OPEC+ said it would be ready to hold emergency meetings in the coming weeks, signaling that it would act if prices took another dive. The next OPEC+ meeting is scheduled for Oct. 5.

The small cut would reverse the 100,000 barrels a day that OPEC+ said it would add to the market last month following President Biden’s trip to Saudi Arabia, the world’s largest oil exporter.

Brent crude rose 3.76% on Monday to $96.63.

• $200 oil in next nine to 18 months? Potential changes to supply, whether it comes from OPEC+, Iran, or the U.S. Strategic Petroleum Reserve, are just “drops in the bucket” compared with one key, overlooked factor, Salem Abraham, president of Abraham Trading, which manages the Abraham Fortress, told Barron’s. There’s a “lack of reinvestment in drilling new oil wells,” he says, in part due to the rising cost of drilling, which has led to the need for higher break-even oil prices, he adds. There are only about 655 oil rigs currently drilling worldwide, with oil prices close to $100 a barrel, he says. But when prices were around $60 in December 2019, some 825 oil drilling rigs were active. That “disconnect” is the key reason for his belief that oil will climb to $200 in the next nine to 18 months. Getting back to prepandemic production levels will require new wells, says Abraham. “The slingshot demand will catch the supply side flat-footed, resulting in a large price spike” to $200 oil and $10 a gallon gasoline, he predicts.

• Gasoline prices have fallen by 24% since their peak in June, but drivers are still using less of it. For most of this summer, U.S. gasoline demand has been down 6% to 7%. The latest government numbers showed an even steeper drop of 10% year over year — 8.6 million barrels a day versus 9.6 million last year in the week before Labor Day.

• Britain’s supply chains will see more disruption and delay after dockworkers at Liverpool’s container port said they’ll walk out for two weeks later this month over a pay dispute. The strike set for Sept. 19 to Oct. 3 will involve more than 560 maintenance engineers and other workers, the Unite union said in a statement Friday. Peel Ports, which owns the Port of Liverpool, said its proposed pay package represented an 8.3% raise, while the union said it had rejected a 7% offer. Both are under the nation’s inflation rate. Liverpool is Britain’s fourth-largest handler of seaborne trade and is key for transatlantic commerce, according to Department of Transport data. For retailers, it’s peak season for inventory restocking ahead of the holidays.

• What is higher than the combined profits of Facebook, Amazon, Netflix and Google? Container shipping companies’ record-high profits in the second quarter, with net income hitting an all-time high of $63.7 billion, according to a tally maintained by John McCown of Blue Alpha Capital.

• One-third of Pakistan submerged by flooding, satellite data shows. Link to the Financial Times which has some graphics on the topic.

• Record-high heat blasted parts of California. Regulators asked residents to lower their energy consumption fearing for the state’s electric grid. The California Independent System Operator, which operates the state’s power grid, said the extended heat wave has driven the demand for electricity to the brink of overload. As of Sunday afternoon, that demand stood at 42,480 megawatts and will probably climb to 48,817 megawatts Monday, then surpass 50,000 megawatts Tuesday, just shy of the record set in 2006.

Meanwhile, Georgia declared a state of emergency over flash floods. And, there’s no end in sight to the water crisis in Jackson, Mississippi. It remains unclear when access to safe running water will be restored for all residents, despite progress on fixing water pressure.

• NWS weather: Blistering heat continues over the next few days throughout the West and into the northern/central Plains... ...Scattered to numerous flash floods possible early this week from southern New England to the southern Appalachians...

— Summary: Ukraine says its air force has been striking Russian troops using jets, helicopters and drones, mostly in the country’s south where the nation is mounting a counteroffensive. According to U.K. intelligence, Ukrainian forces have pushed the front line back some distance in places, exploiting relatively thinly held Russian defenses. Meanwhile, the U.N. has stationed two nuclear experts at the Zaporizhzhia power plant in Ukraine, hoping their presence will lower the risk of a catastrophic attack.

• More on G7 price cap on Russian oil. The group of wealthy countries is moving ahead with a solution to dent Russian oil revenue and stabilize energy markets: It’s going to ban the insurance and financing of Russian oil shipments unless they’re priced at a certain level or below. The level of the cap has not yet been set, but it will take effect on December 5. The capping mechanism will take effect simultaneously with an EU embargo on Russian oil imports, Dec. 5 for crude and Feb. 5, 2023, for refined products. Western countries believe this can work given their stranglehold over the maritime insurance market — a London-based association insures more than 90% of the world’s ships. Without the threat of secondary sanctions, countries are likely to continue buying Russian oil using tankers and insurance services outside the G7 coalition countries, possibly allowing Russia to continue selling its oil above the cap and rendering it ineffective.

  Russia is attempting to dissuade the largest purchasers of its oil, India and China, from joining the coalition by threatening to end deliveries to them and send oil prices higher.

  Former Russian President Dmitry Medvedev warned the European Union that Moscow could halt the flow of natural gas to the bloc if it introduces a price cap on Russian supplies as urged by European Commission chief Ursula von der Leyen. Medvedev said a cap would trigger a response and “there will simply be no Russian gas in Europe.”

  “Use of gas as a weapon will not change the resolve of the EU,” European Council President Charles Michel said on Twitter. “We will accelerate our path towards energy independence.”

• Russia delays reopening a vital pipeline; European gas prices jumped more than 25% on Monday. Russia’s energy giant, Gazprom, said the Nord Stream 1 (NS1) pipeline to Europe wouldn’t reopen as planned, raising fresh concerns in Europe over scarce energy supplies. The pipeline already was running at only 20% capacity. Russia had pledged to restart gas flows starting early Saturday after three days of maintenance, but Friday Gazprom claimed it found an oil leak that would require the pipeline to be shut down indefinitely. (See next item for Russia’s real reason.) EU leaders are skeptical of these maintenance problems and accuse Russia of withholding gas as payback for Western sanctions. On Saturday Russian gas flows to Europe via an overland pipeline were slightly higher than a day earlier — but not by enough to make up for the missing NS1 deliveries.

  Germany-based Siemens Energy, which services Nord Stream 1 turbines, said a leak of this nature should not force the pipeline to halt operations. Siemens also said the Portovaya compressor station has other turbines for Nord Stream to keep operating. “Such leaks do not normally affect the operation of a turbine and can be sealed on site. It is a routine procedure within the scope of maintenance work,” the company said.

  The complete halt of Nord Stream, which runs under the Baltic Sea to Germany, would leave only two major routes supplying gas to the European Union: one via Ukraine and TurkStream through the Black Sea. Flows through Ukraine have also been curbed, while TurkStream to the south of Europe is operating without disruptions.

  A WSJ editorial notes: “Europe is paying for its energy dependence on Russia. Mr. Putin may pay later for exploiting it.”

• Russia’s gas supplies to Europe via the Nord Stream 1 pipeline will not resume in full until the “collective west” lifts sanctions against Moscow over its invasion of Ukraine, the Kremlin said. Dmitry Peskov, President Vladimir Putin’s spokesman, blamed EU, U.K. and Canadian sanctions for Russia’s failure to deliver gas through the key pipeline, which delivers gas to Germany from St. Petersburg via the Baltic Sea. “The problems pumping gas came about because of the sanctions western countries introduced against our country and several companies,” Peskov was quoted as saying by the Interfax news agency. “There are no other reasons that could have caused this pumping problem.”

  Russia is still supplying gas to Europe via Soviet-era pipelines through Ukraine that have remained open despite the invasion, as well as the South Stream pipeline via Turkey.

  Germany’s gas storage is already nearly 85%. As of Tuesday, the last full day when gas flowed through the Nord Stream 1 pipeline, Russian gas accounted for around 10% of Germany’s gas mix, down from 55% in February. Currently, Germany receives the bulk of its natural gas from Norway, the Netherlands and Belgium.

• Germany unveiled its third energy crisis relief package this year to shield consumers from soaring prices over the winter, following Russia indefinitely suspending gas deliveries to Europe’s largest economy. The new measures — totaling 65 billion euros, equivalent to $64.7 billion — had been flagged before Russian gas giant Gazprom PJSC cut deliveries via its Nord Stream natural gas pipeline. “Russia is no longer a reliable supplier of energy,” German Chancellor Olaf Scholz said on Sunday as he unveiled the package.

  The measures include a price cap on electricity; a cut in the value-added tax on natural gas; the postponement of a rise in carbon emissions prices for one year; and one-off payments to pensioners and students aimed at offsetting part of their higher energy bills. The package also includes tax changes to prevent income taxes from rising with inflation and government assistance for energy-intensive industries and several other, smaller measures targeting low-income earners, commuters, families and others.

• EU set to unveil $5 billion package for Ukraine. The European Union is preparing to release a new funding package of 5 billion euros ($5 billion) for Ukraine as the nation battles to find resources for the war against Russia and for running the country. The European Commission, the EU’s executive arm, will propose the loan package to help Kyiv cover urgent costs including salaries and benefits, according to EU diplomats familiar with the plan. The money is part of a bigger package of 9 billion euros pledged by the bloc last May that remains largely to be transferred due to disagreement between the commission and member states over the details of the aid program.

• Russia may face a longer and deeper recession as the impact of U.S. and European sanctions spreads, handicapping sectors that the country has relied on for years to power its economy, according to an internal report prepared for the government. The document by officials and experts trying to assess the true impact of Russia’s economic isolation due to President Vladimir Putin’s invasion of Ukraine, paints a far more dire picture than officials usually do in their upbeat public pronouncements. Bloomberg viewed a copy of the report, drafted for a closed-door meeting of top officials on Aug. 30. Bloomberg said people familiar with the deliberations confirmed its authenticity.

  Two of the three scenarios in the report show the contraction accelerating next year, with the economy returning to the prewar level only at the end of the decade or later. The “inertial” one sees the economy bottoming out next year 8.3% below the 2021 level, while the “stress” scenario puts the low in 2024 at 11.9% under last year’s level.

  On a sectoral basis, the report details the breadth of the hit from sanctions:

• Agriculture: Fully 99% of poultry production and 30% of Holstein dairy cattle output depends on imports. Seeds for staples like sugar beets and potatoes are also mostly brought in from outside the country, as are fish feeds and aminoacids.
• Aviation: 95% of passenger volume is carried on foreign-made planes and the lack of access to imported spare parts could lead the fleet to shrink as they go out of service.
• Machine-building: only 30% of machine tools are Russian-made and local industry doesn’t have the capacity to cover rising demand.
• Pharmaceuticals: About 80% of domestic production relies on imported raw materials.
• Transport: EU restrictions have tripled costs for road shipments.
• Communications and IT: Restrictions on SIM cards could leave Russia short of them by 2025, while its telecommunications sector may fall five years behind world leaders in 2022.

— Biden supplemental funding request includes funding for the SPR. The language says:

“This request would provide the Department of Energy, Energy Security and Infrastructure Modernization Fund account $500 million for modernization activities of the four Strategic Petroleum Reserve (SPR) sites. Funding would enable the SPR to maintain operational levels by alleviating anticipated shortfalls due to supply chain issues, the Covid-19 pandemic, and related schedule delays.

“This request would extend the allowable timeframe of current-law mandatory sales of crude oil from the Strategic Petroleum Reserve (SPR) through FY 2032. This extension would allow sufficient time to buy back crude oil to partially refill the SPR so that these mandatory sales can be honored.”

— Biden administration’s supplemental funding request for $1.5 billion for ag disaster aid will likely be increased by billions via farm-state lawmakers. Sen. John Hoeven (R-N.D.) has led the move in recent years and will likely do so again relative to 2022 crop and livestock related disaster aid.

We reported via The Week Ahead (link) that the White House is asking for $6.5 billion for emergency disaster relief. Of that, USDA would get $1.5 billion to provide direct payments to farmers and ranchers who’ve lost crops and livestock. And the Department of Housing and Urban Development would receive $1.4 billion in longer-term recovery funding for disasters that struck last year in Louisiana, California and Texas. The ag disaster aid, that would be available until Dec. 31, 2024, would include “crops prevented from planting in 2022 and acreage impacted by reduced federal water allocations as announced in Fall of 2021 or 2022 as a consequence of a natural disaster, including drought, occurring in calendar year 2022, or reduced federal water allocations in calendar years 2021 and 2022 under such terms and conditions as determined by the Secretary.” The request adds, “This request would provide $1.5 billion to the Department of Agriculture, Processing, Research and Marketing account for agricultural relief due to natural disasters in calendar year 2022. Funding would be used to assist farmers that experienced revenue, crop, or livestock losses and for administrative costs to streamline the application process and ease the burden on county office employees.”

— U.S. ambassador to Russia leaves post. The envoy, John Sullivan, was picked to be ambassador to Russia in 2019 by President Donald Trump, and his nomination passed the Senate with a 70-22 vote. He was one of a small group of Trump-appointed diplomats to be asked by the Biden administration to stay in their post. Following his departure, announced in a statement from the U.S. embassy in Russia, Sullivan will retire from a career in public service. Sullivan worked under five presidents across four decades in the public service. The statement from the U.S. Embassy in Russia said Deputy Chief of Mission Elizabeth Rood will assume duties as Charge d’Affaires at the embassy until Sullivan’s successor is appointed.

— The U.S. agreed to sell military equipment worth $1.1 billion to Taiwan. The package includes anti-ship missiles and a radar warning system. A spokesman for the Chinese embassy in Washington warned that China would “resolutely take legitimate and necessary counter-measures” in response. The sale comes days after U.S. warships passed through the Taiwan Strait without incident.

Beijing demanded the Biden administration revoke the weapons deal, and, separately, accused Washington of waging thousands of cyber attacks.

Taiwan said Saturday that it “highly welcomes” the arms sales and said the military equipment was needed to strengthen its defenses. Its Ministry of National Defense said it detected People’s Liberation Army aircraft and naval ships in the region again on Saturday.

— Biden administration will allow Trump-era tariffs on hundreds of billions of dollars of Chinese merchandise imports to continue while it reviews the need for the duties. The tariffs will continue after the administration received a formal request from businesses benefiting from them, the Office of the U.S. Trade Representative said in a statement (link) Friday. It opened the window for comments in May and got hundreds of requests for them to remain.

Background: U.S. law states that the tariffs automatically expire four years after they were imposed, unless the USTR’s office receives a request for their continuation from a beneficiary and analyzes their effectiveness and consequences. July marked the four-year anniversary of the first wave of the duties.

— Grappling with food system risks. Constricted food supplies as the result of geopolitical conflicts and climatic events are further straining the budgets of countries with low purchasing power. Some nations have endured high levels of unemployment and budget deficits as the result of the Covid-19 pandemic. The combined economic stressors may make it more difficult for some of these governments to cope with food shortages in the current moment compared with previous crises, such as the Arab Spring. Link to a McKinsey & Company report, which includes an interactive graphic.

— Meet U.K.’s new prime minister: Liz Truss, one of the most experienced members of the British government. First elected in 2010, she joined the cabinet as agriculture secretary in 2014 under David Cameron. She continued under Cameron’s successors, holding the posts of justice secretary, chief secretary to the Treasury, trade secretary and most recently foreign secretary. Her priority is improving Britain’s low productivity via a combination of tax cuts and regulatory reform. She plans to cut payroll taxes and cancel a planned raise in corporation tax, while brushing aside warnings that fiscal loosening would be inflationary.

Truss is seen as a hawk when it comes to Brexit and has said she will proceed with legislation to unilaterally circumvent customs controls at the Irish Sea and potentially suspend the implementation of the EU-UK Northern Ireland protocol. While the European Union has insisted it prefers a negotiated solution, it has threatened to impose financial fines and hike tariffs on British goods if the United Kingdom violates the protocol.

— Very close Washington U.S. Senate race as Dem incumbent Patty Murray leads GOP candidate Tiffany Smiley. In the Washington U.S. Senate race, a poll conducted by the Trafalgar Group shows incumbent Sen. Patty Murray (D) leading Tiffany Smiley (R) by fewer than 3 percentage points. If the election occurred now, 49.2% of those who participated in the poll would vote for Murray, while 46.3% said they would vote for Smiley. Those who were undecided comprised 4.5%. When it came to party participation, there were 44.2% of Democrats, 33.2% of Republicans and 22.4% of the poll participants who were either a part of another party or none at all. Murray is seeking a sixth term 30 years after her first run for U.S. Senate as a self-described “mom in tennis shoes.” This is Smiley’s first run for public office and she is a nurse and motivational speaker.

— NASA again postponed the launch of its moon rocket, this time because of a hydrogen leak.

— A federal judge in Florida sided with former President Donald Trump in the fight over documents seized from Mar-A-Lago, ordering an independent “special master” to review the documents obtained by the Justice Department, which will likely slow down the investigation into Trump’s actions. U.S. District Judge Aileen M. Cannon, who was appointed by Trump, ordered a special master to review the White House documents and temporarily blocked the DOJ from reviewing them until the special master’s work is complete, though she did allow the Office of the Director of National Intelligence (ODNI) to continue its review of whether the documents posed a national security risk by being at Mar-A-Lago. Trump asked the judge to appoint a special master — a court-appointed third party who would review the documents and filter out privileged materials, instead of DOJ officials — on Aug. 22, two weeks after federal officials conducted a search of Mar-A-Lago.

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