Total Chaos! Terrifying Gas Surge Leaves Analysts Speechless

Chaos reigned on Monday, as traders nervously pondered the prospect of an official embargo of Russian crude.

Weekend comments from Antony Blinken on a prospective oil import ban drove Brent as high as $139, turbocharging an already record-breaking run in commodities.

In Europe, benchmark gas prices jumped 79% at one juncture, to 345 euros a megawatt-hour (figure below).

If you’re keeping score at home, that’s equivalent to more than $600/bbl crude. The UK contract rose 75%, and German month-ahead power jumped 60%.

Late last week, Zoltan Pozsar warned that margin calls were inevitable. “Bloomberg called the commodities rally ‘historic,’ and so the margin calls must be historic too,” he wrote. On Monday, Saxo’s head of commodity strategy, Ole Hansen, was “at a loss for words.” He blamed margin calls and a “very illiquid” market for the price action.

“Tragically, Russia continues its premeditated, unprovoked war against Ukraine, violating its sovereignty and territorial integrity, committing war crimes against civilians and engaging in disinformation about the purpose of their invasion,” Nancy Pelosi wrote, in a letter to Democrats, on the way to describing “strong legislation” aimed at “further isolat[ing] Russia from the global economy.”

“Our bill would ban the import of Russian oil and energy products into the United States, repeal normal trade relations with Russia and Belarus, and take the first step to deny Russia access to the World Trade Organization,” Pelosi went on to say, adding that the legislation “would also empower the Executive branch to raise tariffs on Russian imports.”

Although the impact on the US economy would likely be manageable (notwithstanding the read-through for lower- and middle-income families already struggling with the highest inflation in a generation), the situation in Europe could be considerably more challenging.

“The Euro area is likely to see a double whammy from both oil and natural gas prices,” Goldman’s Jan Hatzius said, in a note published late Sunday evening in the US. If Russian gas continues to flow but prices remain elevated, Goldman sees a 0.6% hit to European GDP from natural gas this year, bringing the “total negative energy impact” to 1.2%.

But, Hatzius cautioned, “a more adverse scenario in which Russian gas shipments through Ukraine are curtailed” might entail a 1% hit to GDP “for gas alone,” with Germany and Italy shouldering an outsized share of the burden. “If Russian gas stopped flowing entirely, the area-wide gas hit could rise to 2.2% for the year as a whole,” Goldman warned.

Monday’s commodity fireworks weren’t confined to energy. Copper hit a record, nickel jumped 30% and wheat traded limit-up for the sixth consecutive day. Recall that wheat went vertical last week, a move that produced “very scary” divergences, as one market participant put it. On Monday, wheat futures in Paris jumped double-digits, bringing 2022’s gains to ~50%.

“Seasonally speaking, the summer months are always a high demand period and especially this year now that pandemic restrictions are falling away rapidly after two years of limited mobility,” Rabobank’s Ryan Fitzmaurice remarked, on the way to noting that,

Several Western oil majors, such as BP, Shell, and Exxon have announced their intention to cease doing business in Russia by divesting assets and dissolving joint ventures. This will have much longer term impacts to the Russian oil industry, as essential technical expertise will be lost, among other factors. At the same time, the US appears likely to capitulate to Iran in a desperate attempt to slow the oil rally that is driving US inflation. As such, while we still see the potential for further oil price upside as European buyers continue to pivot away from Russia, large and abrupt moves in either direction are to be expected given the highly volatile and headline sensitive trading environment we are in.

Plainly, this is a highly combustible situation. Rolling margin calls are likely, and generally speaking, that kind of thing doesn’t happen in a vacuum.

“The symbiotic relationship between Russia’s invasion of Ukraine and rising global inflation will continue to be central to markets in the near term,” Bloomberg’s Mark Cranfield said Monday. “Traders are caught between portfolio hedging and keeping some risk limits open to capture the value expressed in areas of high asset volatility.”

Hope for the best, I suppose. But at this point, you wouldn’t be wrong to expect the worst.