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Gas pipeline closure brings potential natural gas and DAX price volatility


MongiIG

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Russia-Europe relations have sparked sharp gains for natural gas prices, and with the Nord Stream pipeline shutdown it is worthwhile considering the implications to gas and the DAX if Putin uses energy to blackmail Europe.

DAXSource: Bloomberg
 
 Joshua Mahony | Senior Market Analyst, London | Publication date: Tuesday 12 July 2022 

Natural gas shows signs of rebound as fears grow around maintenance shutdown

Natural gas prices have been cooling after an initial ramp-up in the wake of the Ukraine-Russia war.

Understandably, the fear for markets is how Europe will replace the Russian imports that have traditionally helped keep the lights on.

Below, we can see why Germany has particularly been at the forefront of this issue, with the European powerhouse typically receiving 65% of their gas from Russia pre-crisis.

Natural gas importsSource: Refinitiv

 

Notably, the Nord Stream pipeline that runs through Germany provides the dominant source of gas from Russia to Europe, with product via Turkey, Ukraine, and Belarus all shrinking rapidly over recent months.

However, that German pipeline has entered a scheduled maintenance period, with all imports shut off for a 10-day period. Nonetheless, there are fears that Russian president, Vladimir Putin, will utilise this event to keep the pipe closed and turn the screw on an already struggling Europe.

The plan to shift reliance away from Russian imports may be an obvious strategy to follow, but there simply isn’t the capacity to complete that transition over the near-term. Thus, there is a significant risk attached to this shutdown period, as the German economy draws down gas reserves and markets consider the impact of an extension enforced by Putin.

Yes, Russia will want to sell their products to Europe at elevated prices. However, a decision to slightly delay the end to this blackout could really bring home the importance of Russian gas in Germany.

UK natural gas prices

For natural gas, this could provide some near-term uplift as markets price in a chance of a near-term supply shock.

The chart below represents the UK natural gas price (June 23 contract), with price looking to have based out after an initial pop as the war took shape back in late-February.

The key thing to watch here is whether we see price break up through the 1984 threshold to signal further upside to come.

UK natural gas price chartSource: ProRealTime

 

US natural gas prices

Looking at the US natural gas market, we see a similar potential resurgence coming into play.

The declines seen over the course of June could set us up for another push higher, with a rise through $6830 bringing that fresh bullish signal.

However, it is worthwhile noting that the confluence of 76.4% and trendline support do point towards a possibility of another deeper retracement should we not take out this impending resistance level.

US natural gas chartSource: ProRealTime

 

German economy at risk

Higher natural gas prices will impact both business and consumer decisions alike, ramping up costs and potentially delaying investment. This will have a significant knock-on effect on German growth, with the economy so heavily reliant upon manufacturing and physical goods.

The table below shows how some particular products would be particularly affected in the event of a full Nord Stream shutdown.

Hardest hit industriesSource: VBW

 

DAX volatility ahead if Russia maintains pipeline closure

Given the potential impact on Germany in particular, it is worthwhile noting the potential impact on the DAX if things go sour.

The chart below highlights the ratio between the FTSE 100 and DAX, with the German bourse lagging behind as investors consider the disproportionately greater impact this Russia-Europe breakdown could have compared with the UK.

An extended shutdown from Russia would likely bring further underperformance from the DAX.

FTSE 100 vs DAX 40 chartSource: TradingView

 

The DAX chart below highlights how price has started this week on the back foot, with price heading lower from trendline horizontal resistance.

Nonetheless, we have seen price tentatively form a higher low, bringing some confidence that the index could stabilise after a June to forget for bulls. Nevertheless, the risk posed by this Russian gas pipeline could dent confidence for now.

Thus, keep an eye out for near-term downside if we see any commentary that could heighten the chance of a prolongued shut-down of the Nord Stream pipeline.

DAX 40 chartSource: ProRealTime

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