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By Paul Homewood

This is how the EU energy crisis looks to a US investment analyst:

Investment thesis

The current high energy price environment in Europe risks becoming more or less permanent, given recent events that center around the Ukraine crisis. Europe’s energy security challenges have their root in the 2014 confrontation over Ukraine.

The EU severely misjudged its own natural gas import needs then. It figured that climate change initiatives will severely diminish natural gas demand. It also overestimated LNG availability, especially coming from America’s shale boom. It switched from long-term contracts to spot contracts, believing that natural gas will continue to be in the buyer’s market state for the foreseeable future. Russia was freed up to shift natural gas to other markets or for internal use as a result.

Contrary to past expectations, EU demand for Russian gas increased about 25% in the 2014-2019 period. In response to further delays to the Nord Stream 2 pipeline, it seems Russia may have been nudged towards a final decision on the Power of Siberia 2 pipeline project. If it will be built, it will pit the EU and China against each other for gas from the same fields, with China probably favored as a customer by Russia, given closer relations. If this happens, the EU’s energy crisis is set to become permanent, which will devastate its economy.

Europe’s petrochemical industry is likely to be the first victim, therefore investors should be aware of the more immediate risks. Russian assets are also likely to suffer a temporary downturn in their value if the Ukraine crisis intensifies, but there should be a swift recovery. Beyond its petrochemical industry, the entire economy of the EU is likely to suffer, therefore most companies with exposure to the EU consumer market are at risk of suffering a hit in coming years.

Full analysis here.

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December 31, 2021