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Putin Says Russia Will Honor Gas Commitment But Flows Will Drop As Much As 20% Of Capacity

Putin Says Russia Will Honor Gas Commitment But Flows Will Drop As Much As 20% Of Capacity

With Europe still on edge over the risk of an extended…

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Putin Says Russia Will Honor Gas Commitment But Flows Will Drop As Much As 20% Of Capacity

With Europe still on edge over the risk of an extended Nord Stream shutdown in 24 hours, moments ago Russian President Vladimir Putin eased tensions when he said that Russia would fulfill its commitments to supply natural gas to Europe, but he warned that flows via the Nord Stream pipeline could be curbed soon if sanctions prevent additional maintenance on its components.

Translation: as we predicted, Putin will resume NS1 flows, but at levels at or below the pre-repair "new normal" of 40%.

As we reported previously, Nord Stream 1, the main artery for Russian gas to Europe, is currently down due to regular maintenance and European governments are worried the Kremlin won’t restore its flow when the work ends Thursday, roughly around the time the ECB announces a historic rate hike (as much as 50bps according to the latest press reports). A prolonged outage could lead to an even greater energy crisis, prompting governments to ration energy, hurting industry and sending the country into recession even faster.

Putin echoed comments made late Tuesday after his visit to Tehran, where the Russian president said that Kremlin-controlled energy exporter Gazprom PJSC, pipeline operator’s majority shareholder, “has always fulfilled and will fulfill all of its obligations.”

But he added that flows might fall to some 20% of capacity as soon as next week if a critical pipeline turbine that was undergoing repairs in Canada isn’t returned to Russia soon. Putin said that another turbine had to go for maintenance on July 26.

Even before the maintenance began, Gazprom last month cut deliveries on the pipeline to 40% of its capacity, blaming Canadian sanctions that had prevented the return of the turbine being repaired there. European officials have dismissed the turbine explanation as a pretext for Moscow to try and wreak economic havoc on the continent.

Germany has been racing to return the turbine to Russia after Canada earlier this month tweaked its own sanctions, allowing turbines for the Nord Stream pipeline to be repaired and returned to Russia.

In response to the threat of a complete Russian shutdown, the European Union has been pressing governments to step up their energy-conservation campaigns, rolling out new plans for possible rationing on Wednesday. The commission’s plan is expected to offer guidelines for curbing energy use and establish criteria governments can use to determine which industries to give priority to if there isn’t enough gas to go around. The guidelines also call for public buildings to limit air conditioning to 77 degrees Fahrenheit and cap thermostats at about 66 degrees during colder months.

Earlier this week, news hit that Gazprom invoked force majeure for its failure to deliver contractually agreed natural-gas shipments, according to European energy companies. It isn’t clear whether the notice—a legal declaration that exempts the company from fulfilling contractual obligations because of circumstances outside its control—covers a potential decision by Russia not to resume Nord Stream flows after the maintenance.

While some European officials have in recent days cast doubt on whether Nord Stream would come back online on Thursday, Putin’s comments helped fuel expectations the pipeline would restart. Separately, flows of gas through the pipeline spiked several times on Tuesday, which analysts say could be pressure tests ahead of the end of the maintenance.

Analysts at Goldman Sachs said they expected the pipeline to come back online Thursday at its pre-maintenance capacity of 40%.

A full stop “would remove flexibility from Russia’s supply decisions, once you’re at zero, there’s only one place to go: up,” the bank wrote in a note to clients on Tuesday, adding that such a scenario would also deprive Russia of gas revenues.

Below we excerpt from the Goldman Q&A (the full note is available to professional subscribers).

1. Why would Russia not keep NS1 at zero?.

Most of the clients we have talked to over the past week are split between the 40% and the 0 flow scenario for NS1 post maintenance, with many market participants in Germany in particular expecting the pipeline to indeed remain at zero. However, we still don’t see NS1 staying at zero as a likely scenario, as (1) it would remove flexibility from Russia’s supply decisions (once you’re at zero, there’s only one place to go: up); (2) it would significantly reduce Russia’s gas revenues, limiting its upside from a potential spike in European gas prices under that scenario; and (3) it would force an even faster rate of gas production shut-ins in Russia. Although we don’t see these shut-ins as a geological/technical issue for Gazprom, they effectively delay an increasing share of its gas revenues to the end of the life of the wells. The large number of clients that have expected the pipeline to remain at zero post maintenance suggests a sell-off in European gas prices from current levels is likely in case NS1 returns to at least 40% of capacity from July 21st. This is in line with today’s TTF move, down 5 EUR at 154 EUR/MWh, following media reports suggesting NS1 will restart below capacity as scheduled. To be clear, under a 40% NS1 flow rate scenario, we don’t believe such lower prices would be sustainable, with a return to a 170 EUR TTF range likely in our view in order to generate enough demand destruction to help take NW European storage to 90% full by end-Oct22.

2. What’s the risk to European gas markets if NS1 flows remain at zero

Under this tightest outcome, even taking into account offsets to the supply losses like coal restarts and government-driven demand destruction, among others, we would expect TTF to average over 210 EUR/MWh in 3Q22. This is based on our expectation that markets (and governments) will act to take NW European gas storage to 90% full ahead of the winter and our estimated demand elasticity of 1 mcm/d per 1.8 EUR/MWh move in price. This scenario would also likely push the Euro area into a clear recession, as recently highlighted by our economists.

3. What changes with the return of the turbine from Canada?.

Not much. Despite the recent focus around the timing of the repaired turbine’s return to Russia, now expected around Jul 24th, after NS1 maintenance is scheduled to end, we don’t believe this will be the sole driver of NS1 flows. In addition to the opaqueness behind the scale of the volume curtailments via NS1 last month, the absence of any Gazprom-driven re-routing of the reduced flows via an alternative pipeline to mitigate the impact to supply suggest Russia’s gas exports are as much a political/economic decision as a technical one.

4. Is it possible to track NS1 flows?

Maintenance is scheduled to end 6am CET this Thursday, July 21st. Intra-day flow data is available on Bloomberg using the OPAL (OPAMRXIF Index) and NEL (NELFPMIF Index) intra-day tickers, which added together show NS1 flows.

5. What is Gazprom’s recent force majeure declaration about?

The recent Gazprom force majeure (FM) declaration retroactively refers to realized export cuts (the NS1 cuts) over the past month, and does not reflect any new changes to gas flows. We see it as an effort by the company not to be seen as liable for the supply cuts to long-term customers observed since mid-June. We do not see this FM claim as particularly relevant to our NS1 flow expectations going forward.

6. Can Russian gas be diverted elsewhere, if it doesn’t flow to Europe?

Not really. The lack of pipeline connectivity between that particular producing region and alternative buyers has resulted in Russian gas export curtailments being split between domestic storage injections and production shut-ins. Specifically, Gazprom’s published data suggest its production is down 10% year-on-year year to date, and down more than 35% year-on-year for the fist half of July. We do not expect this to pose a geological issue, though, given Gazprom’s demonstrated ability to historically swing production up and down without damage to gas well pressure. The most recent example of that was its 50 Bcm production swing in 2020, during the peak of the pandemic. By 2021, Gazprom brought it all back and more, as demand recovered. We also note that, because Gazprom does not rely significantly on associated gas, its gas shut-in process has not impacted Russia’s oil production.

7. Why are our winter gas price forecasts so much lower than summer?

Although we are used to thinking of natural gas prices as being higher in winter than in summer, as that’s when demand is highest, we believe the current tightness in European gas balances flips that around. Without a recovery in Russian gas flows to Europe, the region’s blackout and heating risks in winter are potentially so high that we expect markets (and governments) to act now, in summer, to fix the problem. In particular, our 171 EUR/MWh TTF price forecast for 3Q22 under a 40% NS1 flow rate scenario solves for end-summer storage at 90% full. And the more work (i.e., storage building) is done in summer, the lower the work for prices to do in winter. This is especially the case in 1Q, because winter weather uncertainty drops significantly in the second half of winter vs the first half, taking our spot gas price forecasts then below 80 EUR. That said, this lower price would ultimately be driven higher once again during summer 2023 in our view, as price-driven demand destruction would likely be top of mind once more in the absence of normalized Russian gas flows

Tyler Durden Wed, 07/20/2022 - 07:20

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Economics

Here’s Why Royal Caribbean, Carnival Stock Are Good Buys

Yes, Carnival reported a bigger-than-expected loss but in this case, unlike taking a cruise, it’s the destination not the journey for the cruise lines.

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Yes, Carnival reported a bigger-than-expected loss but in this case, unlike taking a cruise, it's the destination not the journey for the cruise lines.

For the past two years, since the covid pandemic hit in late-February 2020, the cruise industry has taken one punch after another. And, while the situation has improved from the extended period when cruises were not allowed to sail from United States ports, that does not mean that it's back to 2019 for Royal Caribbean International (RCL) - Get Royal Caribbean Group Report, Carnival Cruise Line (CCL) - Get Carnival Corporation Report, and Norwegian Cruise Line (NCLH) - Get Norwegian Cruise Line Holdings Ltd. Report.

The industry has done a remarkable job bringing operations back to near-normal. All three cruise lines not only have put all their ships back in service, they're also still moving forward with plans for new ships and other investments including improvements to private islands, and developing new ports.

That being said, Carnival just reported its second-quarter earnings and the market did not like the numbers at all. Shares of all three cruise lines were down double digits on Sept. 30, but traders clearly missed that aside from rising costs and a loss (both of which were expected) the cruise line largely delivered good news.

Image source: Shutterstock

Carnival Did Well in Areas it Controls  

Carnival reported a GAAP net loss of $770 million for the quarter. That was driven by higher costs with the company specifically citing advertising expenses and having some of its fleet unavailable to produce revenue.

While the company's year-to-date adjusted cruise costs excluding fuel per ALBD during 2022 has benefited from the sale of smaller-less efficient ships and the delivery of larger-more efficient ships, this benefit is offset by a portion of its fleet being in pause status for part of the year, restart related expenses, an increase in the number of dry dock days, the cost of maintaining enhanced health and safety protocols, inflation and supply chain disruptions. The company anticipates that many of these costs and expenses will end in 2022.

If you're investing in any cruise line you have to do so on a very long-term basis. That makes profitability less of a concern than the company building back its business and Carnival showed some very positive signs in that direction.

  • Revenue increased by nearly 80% in the third quarter of 2022 compared to second quarter 2022, reflecting continued sequential improvement.
  • Onboard and other revenue per PCD for the third quarter of 2022 increased significantly compared to a strong 2019
  • Total customer deposits were $4.8 billion as of August 31, 2022, approaching the $4.9 billion as of August 31, 2019, which was a record third quarter.

  • New bookings during the third quarter of 2022 primarily offset the historical third quarter seasonal decline in customer deposits ($0.3 billion decline in the third quarter of 2022 compared to $1.1 billion decline for the same period in 2019).

Carnival (and likely all the cruise lines) is being hurt by prices generally being depressed and some passengers paying for their trips using future cruise credits from cruises canceled during the pandemic. That's not really what matters though. Carnival has been increasing passenger loads and getting people back on its ships.

"Since announcing the relaxation of our protocols last month, we have seen a meaningful improvement in booking volumes and are now running considerably ahead of strong 2019 levels," Carnival CEO Josh Weinstein said. "We expect to further capitalize on this momentum with renewed efforts to generate demand. We are focused on delivering significant revenue growth over the long-term while taking advantage of near-term tactics to quickly capture price and bookings in the interim."

Basically, cruise prices are cheap right now because it's more important to get customers back on board than it is to maintain pricing integrity. That's a tactic that could hurt long-term pricing, but the cruise industry is less vulnerable than other vacation options because there have always been large pricing variations based on the calendar and the age of the ship being booked.

It's a Long Voyage for Cruise Lines

Carnival was trading at its 52-week low after it reported. That's a pretty major overreaction given that the cruise industry was barely operating in the fall of 2021.

Yes, the industry has a long way to go. All three major cruise lines took on billions of dollars of debt during the pandemic. Refinancing that debt in an environment with higher interest rates is a challenge, but it's one Carnival (and its rivals) have been meeting.

That has come with some shareholder dilution. Carnival sold $1.15 billion in new stock during the quarter, but the company has over $7.4 billion in liquidity. Weinstein is optimistic (he has to be, that's part of his job) about the future.

"During our third quarter, our business continued its positive trajectory, achieving over $300 million of adjusted EBITDA and reaching nearly 90% occupancy on our August sailings. We are continuing to close the gap to 2019 as we progress through the year, building occupancy on higher capacity and lower unit costs," he said.

Usually it's easy to dismiss a CEO making upbeat comments after posting a loss, but in this case, Carnival has basically followed the recovery path it laid out once it returned to sailing. Both Royal Caribbean and Norwegian have followed similar paths and while meaningful shareholder returns may take time, these are strong companies built for the long-term that made a lot of money before the pandemic and should do so again. 

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Spread & Containment

Three reasons a weak pound is bad news for the environment

Financial turmoil will make it harder to invest in climate action on a massive scale.

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Dragon Claws / shutterstock

The day before new UK chancellor Kwasi Kwarteng’s mini-budget plan for economic growth, a pound would buy you about $1.13. After financial markets rejected the plan, the pound suddenly sunk to around $1.07. Though it has since rallied thanks to major intervention from the Bank of England, the currency remains volatile and far below its value earlier this year.

A lot has been written about how this will affect people’s incomes, the housing market or overall political and economic conditions. But we want to look at why the weak pound is bad news for the UK’s natural environment and its ability to hit climate targets.

1. The low-carbon economy just became a lot more expensive

The fall in sterling’s value partly signals a loss in confidence in the value of UK assets following the unfunded tax commitments contained in the mini-budget. The government’s aim to achieve net zero by 2050 requires substantial public and private investment in energy technologies such as solar and wind as well as carbon storage, insulation and electric cars.

But the loss in investor confidence threatens to derail these investments, because firms may be unwilling to commit the substantial budgets required in an uncertain economic environment. The cost of these investments may also rise as a result of the falling pound because many of the materials and inputs needed for these technologies, such as batteries, are imported and a falling pound increases their prices.

Aerial view of wind farm with forest and fields in background
UK wind power relies on lots of imported parts. Richard Whitcombe / shutterstock

2. High interest rates may rule out large investment

To support the pound and to control inflation, interest rates are expected to rise further. The UK is already experiencing record levels of inflation, fuelled by pandemic-related spending and Russia’s war on Ukraine. Rising consumer prices developed into a full-blown cost of living crisis, with fuel and food poverty, financial hardship and the collapse of businesses looming large on this winter’s horizon.

While the anticipated increase in interest rates might ease the cost of living crisis, it also increases the cost of government borrowing at a time when we rapidly need to increase low-carbon investment for net zero by 2050. The government’s official climate change advisory committee estimates that an additional £4 billion to £6 billion of annual public spending will be needed by 2030.

Some of this money should be raised through carbon taxes. But in reality, at least for as long as the cost of living crisis is ongoing, if the government is serious about green investment it will have to borrow.

Rising interest rates will push up the cost of borrowing relentlessly and present a tough political choice that seemingly pits the environment against economic recovery. As any future incoming government will inherit these same rates, a falling pound threatens to make it much harder to take large-scale, rapid environmental action.

3. Imports will become pricier

In addition to increased supply prices for firms and rising borrowing costs, it will lead to a significant rise in import prices for consumers. Given the UK’s reliance on imports, this is likely to affect prices for food, clothing and manufactured goods.

At the consumer level, this will immediately impact marginal spending as necessary expenditures (housing, energy, basic food and so on) lower the budget available for products such as eco-friendly cleaning products, organic foods or ethically made clothes. Buying “greener” products typically cost a family of four around £2,000 a year.

Instead, people may have to rely on cheaper goods that also come with larger greenhouse gas footprints and wider impacts on the environment through pollution and increased waste. See this calculator for direct comparisons.

Of course, some spending changes will be positive for the environment, for example if people use their cars less or take fewer holidays abroad. However, high-income individuals who will benefit the most from the mini-budget tax cuts will be less affected by the falling pound and they tend to fly more, buy more things, and have multiple cars and bigger homes to heat.

This raises profound questions about inequality and injustice in UK society. Alongside increased fuel poverty and foodbank use, we will see an uptick in the purchasing power of the wealthiest.

What’s next

Interest rate rises increase the cost of servicing government debt as well as the cost of new borrowing. One estimate says that the combined cost to government of the new tax cuts and higher cost of borrowing is around £250 billion. This substantial loss in government income reduces the budget available for climate change mitigation and improvements to infrastructure.

The government’s growth plan also seems to be based on an increased use of fossil fuels through technologies such as fracking. Given the scant evidence for absolutely decoupling economic growth from resource use, the opposition’s “green growth” proposal is also unlikely to decarbonise at the rate required to get to net zero by 2050 and avert catastrophic climate change.

Therefore, rather than increasing the energy and materials going into the economy for the sake of GDP growth, we would argue the UK needs an economic reorientation that questions the need of growth for its own sake and orients it instead towards social equality and ecological sustainability.

The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

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Economics

Covid-19 roundup: Swiss biotech halts in-patient PhII study; Houston-based vaccine and Chinese mRNA shot nab EUAs in Indonesia

Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.
Kinarus Therapeutics…

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Another Covid-19 study is hitting the breaks as a Swiss biotech is pausing its Phase II trial in patients hospitalized with Covid-19.

Kinarus Therapeutics announced on Friday that the Data and Safety Monitoring Board (DSMB) has reviewed the company’s Phase II study for its candidate KIN001 and has recommended that the study be stopped.

According to Kinarus, the DSMB stated that there was a low probability to show statistically significant results as the number of Covid-19 patients that are in the hospital is lower than at other points in the pandemic.

Thierry Fumeaux

“As many of our peers have learned since the beginning of the pandemic, it has become challenging to show the impact of therapeutic intervention at the current pandemic stage, given the disease characteristics in Covid-19 patients with severe disease. Moreover, there are also now relatively smaller numbers of patients that meet enrollment criteria, since fewer patients require hospitalization, in contrast to the situation earlier in the pandemic,” said Thierry Fumeaux, Kinarus CMO, in a statement.

Fumeaux continued to state that the drug will still be investigated in ambulatory Covid-19 patients who are not hospitalized, with the goal of reducing recovery time and the severity of the virus.

The KIN001 candidate is a combination of the small molecule inhibitor pamapimod and pioglitazone, which is currently used to treat type 2 diabetes.

The news has put a dampener on the company’s stock price $KNRS.SW, which is down 22% since opening on Friday.

Houston-developed vaccine and Chinese mRNA shot win EUAs in Indonesia

While Moderna and Pfizer/BioNTech’s mRNA shots to counter Covid-19 have dominated supplies worldwide, a Chinese-based mRNA developer and IndoVac, a recombinant protein-based vaccine, was created and engineered in Houston, Texas by the Texas Children’s Hospital Center for Vaccine Development  vaccine is finally ready to head to another nation.

Walvax and Suzhou Abogen’s mRNA vaccine, dubbed AWcorna, has been approved for emergency use for adults 18 and over by the Indonesian Food and Drug Authority.

Li Yunchun

“This is the first step, and we are hoping to see more families across the country and the rest of the globe protected, which is a shared goal for us all,” said Walvax Chairman Li Yunchun, in a statement.

According to Walvax, the vaccine is 83% effective against the “wild-type” of SARS-CoV-2 infection with the strength against the Omicron variants standing at around 71%. The shots are also not required to be stored in deep freeze conditions and can be put in storage at 2 to 8 degrees Celsius.

Walvax and Abogen have been making progress on their mRNA vaccine for a while. Last year, Abogen received a massive amount of funding as it was moving the candidate forward.

However, while the candidate is moving forward overseas, it’s still finding itself stuck in regulatory approval in China. According to a report from BNN Bloomberg, China has not approved any mRNA vaccines for domestic usage.

Meanwhile, PT Bio Farma, the holding company for state-owned pharma companies in Indonesia, is prepping to make 20 million doses of the IndoVac COVID-19 vaccine this year and 100 million doses by 2024.

IndoVac’s primary series vaccines include nearly 80% of locally sourced content. Indonesia is seeking Halal Certification for the vaccine since no animal cells or products were used in the production of the vaccine. IndoVac successfully completed an audit from the Indonesian Ulema Council Food and Drug Analysis Agency, and the Halal Certification Agency of the Religious Affairs Ministry is expected to grant their approval soon.

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