The (Literal) Coal Mine Canary

Risk appetite returned Thursday, as a variety of key macro risks receded. For now, anyway.

Most obviously, lawmakers in Washington managed to strike a deal that averts a technical US default. The can will be kicked to December, which is now a triple threat of sorts.

Meanwhile, the energy squeeze abated thanks in part to Vladimir Putin, who won’t miss an opportunity to exploit a crisis for geopolitical gain. Effectively, Putin promised to help Europe avert a total disaster. Russia, he suggested, won’t countenance a “speculative frenzy.” His remarks came amid a truly absurd spike in benchmark gas prices.

Needless to say, he’ll want concessions. And not just on Nord Stream 2, although that most politicized of all politicized pipelines will grab most of the headlines. The more desperate Europe is, the more leverage Putin has. Suffice to say if you’re a world leader, the last place you want to find yourself is on the wrong side of the leverage equation with Putin.

Oil retreated from multi-year highs and continued to fall on Thursday, although attempting to “live-blog” (if you will) crude prices is an exercise in abject futility.

The give and take is straightforward enough: Part of the surge in crude is down to assumptions about switching from expensive gas, so if the latter comes off, so does the former. “It has been evident in the past few weeks and even more so after [Wednesday’s] frantic trading session that oil is partly driven by natural gas,” PVM’s Tamas Varga said, calling the rise in gas prices “merciless.”

That, PVM wrote, is “as much, if not more, guilty for the jump [in oil] as perceived and continuous drawdown in global oil inventories in the last quarter of the year.”

The list of contributing factors to the gas price surge is by now so familiar that even casual market observers can recite it. “The reasons for the unprecedented bull run in gas prices are well publicized,” Varga went on to say, citing “low stock levels, insatiable thirst for LNG from China and Europe, operational issues at export terminals, constrained Russian exports to Europe and fears of another cold winter north of the Equator.”

Meanwhile, the US is considering an SPR release. “All tools are on the table,” Energy Secretary Jennifer Granholm said.

If you ask Goldman, such a move would be a “modest help,” but represents just a $3 downside risk to the bank’s year-end forecast, which Goldman hiked last week. Damien Courvalin cited “structural deficits” going forward in suggesting that any relief from a reserve release would prove “transient.” He said an export ban might be “counterproductive.”

For their part, RBC described the SPR speculation as “clearly aimed at trying to incentivize Saudi Arabia and its OPEC+ partners to put more barrels on the market.”

Irrespective of the daily swings and headline hockey, the “energy crisis” (as a theme and a narrative) isn’t going away. Politicians, well-meaning and otherwise, are caught between competing priorities. Governments are under considerable pressure to hasten the transition away from fossil fuels and each new natural disaster only increases the sense of urgency.

At the same time, the events of the past week are a reminder that averting an existential crisis later may mean enduring rolling crises now.

The cruel irony is that, to the extent climate change is in part responsible for extreme weather including vicious cold snaps, efforts to ameliorate the problem could very well entail freezing to death (figuratively and literally) as the transition away from traditional energy sources begets power crunches.

“At the low end of the income range, potential strain from high gas prices could be an issue, but it can easily be addressed with a small fraction of current stimulus plans,” JPMorgan’s Marko Kolanovic wrote, on the way to suggesting that coal may be a harbinger.

“While oil is currently cheap relative to other assets, this is not the case with other forms of energy such as LNG, coal, natural gas, electricity and uranium, which are all at or near all-time highs,” Kolanovic went on to write, adding that in the bank’s view, “the evolution of coal prices might reflect supply, demand, cost of capital and energy transitioning issues for all fossil fuels, and it would certainly be possible that oil prices will follow the same pattern.”

If that’s the case, it would imply oil prices rising into the $150-200/bbl range.

“The risk,” Marko concluded, “is that coal is a proverbial ‘canary in a coal mine’ for the much more important commodity.”