Gazprombank Sanctions, Croatian gas & mispriced coal: The Market doesn't allow vacuums

On 21st November 2024, the Treasury's Office of Foreign Assets Control (OFAC) of the US issued sanctions on Gazprombank and six of its subsidiaries in Europe and further pushed back against the adaptation of the Russian financial messaging system Sistema Peredachi Finansovykh Soobscheniy or SPFS. The sanctions come to force from 20th December 2024.

Some great person said, "Correlation does not imply causality." Though true in spirit, the person was definitely not a participant in a market. One week after sanctions on Gazprom bank were announced by the US, 11 republican states in the US have also started legislative action against the most well-known asset management companies in the world for antitrust misuse for climate action against coal which led to higher energy prices for the consumer. Well, the behaviour of correlation in univariate and multivariate settings are quite different as such, I would not go as far as to say energy lobbies have been a distributed part of multiple PACs showing democratic support to the republican campaign. The contributions to PACs are opaque as such all of what I assume above is only a speculation and there is no track of contributions to hint at anything. Well, now that we have an ex-lobbyist heading staff at the white house from January 2024, the legislative policies will be implemented in the subtle political nuance they deserve.

The three European countries primarily affected by this are Hungary, Slovakia and Austria which have been receiving natural gas from Russia after the sanctions primarily due to a lack of re-gasification capacity to enable supply to the landlocked part of Europe. There was a gentleman's agreement between the US and the European Union that the energy security of the land-locked part of the union would be allowed to be maintained till an alternative arrangement could be found. Now, Uncle Sam feels that Gazprombank is enabling Russia's war effort in Ukraine and needs to be sanctioned out of the Euro-Dollar system.

Underutilization Vaccum: Though there has been much talk about insufficient re-gasification capacity development in the EU, the import terminals are currently under capacity.

As we are concerned about the landlocked part of Europe, let's look at the regasification capacity usage rates of Croatia, Lithuania and Poland which can be the alternative supply routes to Hungary, Slovakia and Austria.

It can be easily seen from the development of regasification capacity utilization of the alternative routes to the Ukrainian route to natural gas import to European midlands that the import market has been pricing in the possible shutdown of the tap from the east.

Now, thankfully Europe has been going through a deflationary demand cycle and the European heartlands have been hit more than the areas with access to sea ports. If one looks up the current natural gas demand in Hungary, Slovenia and Austria for conversion into power and heating, it is apparent that the demand is in line with 2023 and we are waiting for the winter demand to come in.

Now if we double-click into the power production sector which is the primary consumer, the current energy mix of the 3 large consumers of landlocked Europe is as follows:

Out of these 3 countries, the one with the least capacity of hydropower is Hungary and it forms the most interesting case of energy commodity balance going into the winter of 2024. As of imports in 2024, a significant portion of Hungarian natural gas has been imported via Ukraine.

Everyone has written about how alternative imports using Turkstream can help work around the Gazprombank sanctions or imports from other nearby regasification facilities which are currently about to top out going into the winter. One variable that seems to not have been considered is the path of least resistance. The path of least resistance is changing the energy consumption mix in midland Europe at the lowest cost for the winter of 2024-2025 till the EU and the US figure out a solution for the Gazprom bank sanctions. Since the mid-lands of Europe are industrialized by world standards, there is sufficient coal power capacity that remains from the early era of industrialization.

As markets never allow vacuums, the missing energy of the Ukrainian pipelines into mid-land Europe would be challenged by direct electricity exports, regasified LNG imports and last but not least the domestic protectionist sentiments of taking the path of least resistance. This creates an interesting case of winter volatility of coal demand delivered into the hearts of fortress Europa.