Last week I wrote of the end of summer. Given last Fridays latest Gazprom Nord Stream pipeline shut down, and its impact on Dax, I immediately thought "Winter´s Coming". It might not have exactly the same reference as in Game of Thrones with its dark overtones of doom destruction and death.... but.. hey, on second thoughts in some sense its already here given the Russian Ukraine war right at the heart of Europe. Anyhow not dwelling on that I thought today it might be useful to take a look at what gas supply issues could mean for Europe and its impact on markets particularly Germany and the Dax40.
I don't know about you but I have been struggling to get to grips with "the facts" with regard to gas i.e. how reliant is Germany on Russian gas, where else does it get its gas from and what might all this mean for the coming months from a trading perspective.
So first some data gathered from a few sources in my attempt to get up to speed with the issue.
How dependent is Germany On Russian Gas?
Taking the below graphic from Reuters we can see that Russia was the main supplier of natural gas to Germany as at Dec 2021.
Which pipelines deliver gas to Germany?
All the talk of Nord Stream made me wonder if this was the only pipeline to supply gas to Germany. It is not although it is / was the main supply route. The below graphic from Global Energy Monitor shows the other pipelines supplying gas from Russia.
Will Germany run out of Gas?
According to what I can gather it will depend on measures put in place to increase storage and reduce consumption although it seems doubtful it will actually run out. There will have to be conservation and perhaps rationing, the former is currently underway and its likely there will be increased measures in future as the weather turns and demand increases. Moreover other supply routes are being stepped up as quickly as possible. This includes increasing flows from Norway and the Netherlands and importing more LNG from the US / Canada and Qatar. As far as I can gather it appears rationing will impact industry less badly than German homes which rely on gas and Russian oil for home heating. Bearing in mind Russian oil also hit the headlines Friday with talks of price capping, none of this looks good for German energy supply.
What does Fridays Shutdown mean for Dax40?
The announcement from Russia that gas supply will shut down through Nord Stream 1 immediately after the EU and G7 kicked off talks about capping Russian oil prices tells us all we need to know about how Putin is weaponizing gas as a political and economic tool ( if we didn't already know this).
If this continues the Dax is likely to suffer further bouts of volatile price spike action on an intraday basis as unscheduled gas news hits the headlines. For day traders this needs to be top of mind with regard to risk as rips and dips are probably going to increase in the run up to the end of the year as gas gathers importance as the winter starts to bite.
From a macro perspective this, inflation, restrictive rates policy and fears of a recession hardly suggest everything is well in the world and we can expect peace, prosperity and light. Commerzbank last month said Germany could fall into a deep recession if Russia cuts off gas completely and the economy would shrink 2.7% accordingly calling up fears of a 2008-9 style economic crisis. Dax dropped from around 7100 in May 08 to 3600 in March 09 roughly a 50% drop!
Such a drop now would take us to around 6500. While that seems highly unlikely a drop to 8000 / 9000 the lows of the covid crisis don't seems out of the question. Certainly a drop to 11500 wouldn't be out of the ball park in the coming month(s) should there be no catalyst to lift the macro view and sentiment. It seems the bears definitely have the upper hand right now.
As a day trader I´m not too concerned about the bigger picture and where all this might lead. I´ll take my chances from intraday price action as always. Sure as a human being I´m concerned but my job is to trade what I see each day.
I hope the above sheds at least a little light on the Gazprom / Nord Stream issue with regards to Germany the Dax40 and what is fast becoming the number driver of short term volatility and price action.
Daily "On the Level" Dax40 levels, set ups and trade plan will be out before the kick off tomorrow morning to help guide you through the at least the day ahead :).