Domestic crude oil, natural gas, and coal sources are limited within the EU. Some member states (i.e, Malta & Luxembourg) import up to 90% of their energy.
The EU is unlikely to simply switch supplying countries, thus leaving energy supplies outside their control again. However, European manufacturers and service suppliers must all contend with a new set of unknowns. A continuing conflict in Ukraine is bringing changes in supplies of components and raw materials. The war is impacting not only wheat supplies but also Europe’s supplies of computer chips. There are also potential costs in so quickly abandoning fossil fuels.
That said, what companies might benefit from this rapid push away from Russia and toward what must be a greener future?
Europe’s New Green Deal Firmly Back on Track (for Now)
Friday, EU leaders agreed to spend the next two months drafting proposals for weaning Europe from dependency on Russian fossil fuels. Leaders set a deadline of 2027 to make Europe more energy independent. The replacement fuels will come from national and European sources, European Commission President Ursula von der Leyen said. EU climate policy chief, Frans Timmermans, stated that Europe could replace two-thirds Russian gas imports by the end of 2022
Coal and gas reserves vary wildly from country to country within the European Union. In 2020, EU production of primary energy was down by 17.7% from a decade before and 7.1% lower than in 2019. In the ten years up to 2020, European renewable energy use increased dramatically while uses of other sources declined. The EU’s recently agreed “Green New Deal” aims to make Europe carbon neutral by 2050. It included a €40bn fund to help coal-reliant regions, like Poland, move to cleaner alternatives
In addition to emphasizing renewable energy, the Green New Deal also mandates a 20% reduction in agricultural fertilizer use. Russia’s invasion of Ukraine has helped send already high fertilizer prices soaring. Global fertilizer producer Yara recently reduced production at plants in Italy and France to 45% of capacity, citing rising gas prices. According to S&P Global Commodity Insights, Dutch natural gas prices have risen 1,100% from a year ago.
Which Companies May May Benefit From These Moves?
The EU’s Green New Deal focuses on transportation, energy production, agriculture sustainability, and improved energy efficiency in buildings. Some companies, like Baywa, work in several sectors that may see increased business because of Europe’s moves away from Russian energy reliance. Companies in energy production and transportation may be most likely to benefit quickly from the energy policy change.
Europe’s moves may not benefit nuclear power development, given rising concerns about potential accidents at Ukraine’s nuclear facilities. Energy companies that could benefit include Brookfield Renewable (NYSE: BEP; TSX: BEP.UN) and Spain’s Iberdrola (OTC: IBDRY), one of the world’s largest renewable energy producers.
Another company that may benefit is Switzerland’s Meyer Burger Technology AG (OTC: MYBUF), which has a focus on solar cells and photovoltaic equipment. Germany’s Baywa (ETR: BYW6) has a focus on agriculture, renewable energy, and construction, all sectors which will be impacted by Europe’s move away from imported fuels. Baywa’s agrovoltaic development center is already working with farmers on pilot projects.
Companies providing goods and services to the public transportation sector and those with increasing production of electric vehicles have growth opportunities from this change. Alstom (EPA: ALO), the French company focused on rail infrastructure, recently acquired the rail division of Canada’s Bombardier. A renewed focus on public transportation could improve Alstom’s fortunes.
Many companies that produce electric vehicles already have long waitlists for their cars, SUVs, and trucks. Volkswagen (OTC: VWAGY) is increasing its electric vehicle production substantially in Europe, while also providing the technology for the seven new electric models that Ford (NYSE: F) will introduce in Europe by 2024.
Any of these stocks that might benefit from the EU’s decision to be independent of Russian energy will, of course, be subject to the whims of market movements. They also are dependent on the availability of raw materials and specific components. Battery improvement and production will underpin both energy and transport improvements.
Mercedes’s (OTC: DDAIF) corporate plan has been to produce only electric vehicles by 2030. To that end, the company has recently opened a battery plant in Alabama, while also taking an equity stake in European battery cell manufacturer Automotive Cells Company. Mercedes is partnering with Total Energy and Stellanis (NYSE: STLA), owner of Peugeot, in that venture.
The explosion of an underwater volcano off Tonga last week was unexpected. It triggered tsunami warnings and evacuation orders in Japan and caused large waves in several South Pacific islands. Footage on social media showed waves crashing into coastal homes. NASA said the volcano’s eruption was more powerful than an atomic bomb.
Volcanic explosions have changed weather throughout history, but be especially glad you’re not living in 536 A.D. That year erupting volcanoes plunged Europe into a foggy darkness for 18 months. Average temperatures in North America, Asia, and Europe plummeted by up to 4.5 degrees Fahrenheit, causing the coldest decade in the last 2300 years. Snow fell in summer in China, crops failed in many places. This was followed by plague in the Mediterranean.
What happened in tonga?
Shock waves from Tonga’s unusual eruption were felt as far as Alaska. The explosion caused a major oil spill thousands of miles away in Peru, a tsunami, and a seven-hour lightning storm. Its ash went up to about 65,000 feet. Luckily, the damage was isolated to the Island of Tonga but only a few people were injured.
The Hunga Tonga volcano spread a shock wave around the world several times. This was caused by something we call “Gravity Waves”. Think of when you throw a rock in a lake and see the ripples and how they speed up.
Scientists still “do not understand” many issues concerning magma-water interaction and these types of volcanoes. Much research will go into predicting if this will have any lasting effect that cools the climate.
Based on analysis of data from global weather satellites, the Tonga volcanic cloud could have reached an altitude of 39km (128,000ft).
At this height, a volcano can have a net cooling effect on the planet. Will this one? I do not think that low solar activity from the Tonga explosion is having a cooling effect.
THE ASH PLUME REACHED THE MESOSPHERE
The eruption’s initial blast caused the plume of ash and vapor to climb some 55 kilometers, or more than 34 miles, high into the atmosphere.
Typically, the air stops rising far below 60,000 feet, where air temperatures begin to warm and the air loses its buoyancy. In this case, the upward force of the explosion combined with the heat of the plume allowed the vapor to rise to 180,000 feet.
The top of the plume was a relatively narrow column of volcanic material, likely located directly over the volcano. This feature, which somewhat resembles the top of a smashed witch’s hat, is called an overshooting top in meteorology.
How MUCH volcanic gas did tonga’s explosion release?
The Hunga Tonga volcano has emitted more than 112 kilotons (kt) of SO2. For comparison, Pinatubo (1991) emitted 20,000 kt of SO2 and El Chichón (1982) emitted 7,500 kt, Both were climate-cooling eruptions and the Tonga eruption may continue and may emit more SO2. However, a significant climate-cooling SO2 release that may cause La Niña changes are not yet apparent.
Sulfur dioxide that is released from volcanic eruptions like this one can have a cooling effect on Earth, but Hunga Tonga released a relatively minuscule amount of SO2 compared to other climate-changing eruptions.
What Will Be The Impact on LA Niña?
If this underwater volcano has a potential climatic impact in the next few months, it “might” be prolonging La Niña a bit longer than some computer models suggest. I will discuss this and more about volcanoes in the weeks ahead.
The UN’s Food and Agriculture Organization (FAO) and the World Food Programme described this year’s outbreaks, which started in Africa, as “…unprecedented in modern times.” On May 20th, the World Bank pledged US$500 million to combat the locusts and the impacts of their destruction.
Where the Bugs Are Headed
The swarms are already in East Africa, the Middle East, and Southwest Asia. Experts say they may reach West Africa by June but their arrival depends on the winds and rain. Up to 42 million people in East Africa and Yemen alone face food insecurity and insects moving west will add more. Yemen’s war made it a breeding ground, while locusts also continue to reproduce in Iran. The country had no swarms in the previous 50 years. Affected provinces make up Iran’s breadbasket and locusts could impact food security for one-third of the country’s population.
While not at great risk, even China exhorted its southern provinces like Tibet and Yunnan to be on alert. The country’s leaders fear that the swarms will make their way north from India and Pakistan if not contained.
The India-Pakistan Border Is a Breeding Ground
FAO forecasts that rains on the India-Pakistan border in June could protect India somewhat. The wet weather may encourage the locusts to remain and lay eggs, rather than move across the Indian plains.
However, locust season usually runs from July to October in India, and swarms are unusual there. Taking no chances, the country issued warnings for Rajistan’s neighbor Punjab and other provinces in recent weeks. Punjab is India’s third most productive rice-producing state and also grows a significant amount of cotton. Small locust outbreaks already occurred along the state’s border with Pakistan in January. Gujarat also shares the border with Pakistan and is India’s largest cotton-producing state. This week Gujarat reported small swarms, but Indian agricultural officials declared the situation was under control.
That some crops are between seasons or not planted yet plays in India’s favor. The current swarms in Africa grow to tens of square kilometers, with 40 to 80 million insects per square kilometer. Since a locust chomps through its weight in food each day, a swarm easily decimates fields. A one square kilometer swarm eats the same amount in one day as 35,000 people.
High Tech Sleuths Help Countries Predict Locusts Path
The current locust outbreak is the biggest in some countries for 70 years. Favorable breeding conditions through May could bring new swarms when harvests begin in June and July in some countries. The National Oceanic and Atmospheric Administration (NOAA) and FAO this week announced a web app to forecast the insects’ path. Using NOAA wind data, the app predicts a swarm’s location at five-minute intervals up to seven days in advance. FAO uses the app to help countries to develop an effective strategy for deploying resources against the locusts.
Unfortunately, some fear certain agriculture departments may need the app permanently, since the wet conditions that bring locust swarms may become more frequent. In 2019, warming waters in the Indian Ocean brought eight tropical cyclones to East Africa. The average season brings one or two.
Keith Cressman, FAO’s senior locust forecasting officer told National Geographic that, “…we can assume there will be more locust outbreaks and upsurges in the Horn of Africa.” FAO predicts that, in a worst-case scenario, locusts could impact the livelihoods of one-tenth of the world’s population.
Oil’s price drop, changing weather patterns, armed conflicts, and COVID-19 may bring the worst humanitarian crisis since World War II by the end of 2020.
“[W]e could be facing multiple famines of biblical proportions within a short few months,” David Beasley recently told the UN Security Council. Beasley, Executive Director of World Food Programme, predicted a worst-case scenario of famine in about three dozen countries.
Before COVID-19, an estimated 821 million people were classified by the UN and other agencies as food insecure. Another 135 million were on the edge of starvation. Because of the coronavirus, a further 130 million people are predicted to join that 135 million in 2020.
The fall in oil prices undermines the economies and budgets of many governments, including Venezuela, Nigeria, and Angola. Oil constitutes half of Russia’s exports, while Sudan also is heavily oil dependent.
Petroleum makes up 98.8% of exports in South Sudan. The country, often plagued by armed conflict and currently facing famine, could face more destabilization.
Changing Weather Patterns Already Causing Hunger
In the Horn of Africa, increased rains have brought massive locusts swarms that are destroying potential harvests. Farmers in Uganda, Sudan, Ethiopia and Sudan already face field damage. The worst locust outbreak in 70 years, these new pests also threaten agriculture in the Arabian Penninsula, Iran, and Pakistan
At the same time, several years of increasing drought is bringing hunger to Honduras, Somalia, Zimbabwe and other countries. Combined with a decrease in foreign remittances, increased drought and/or increased flooding have made finding food a challenge for many.
Climate change also may be depressing key nutrients in crops, making malnutrition more likely. Researchers at Stanford University found that zinc and copper is decreasing in crops due to increased carbon dioxide.
Covid-19 Undermines Agriculture Output
COVID-19 is hampering agriculture on both the export and subsistence levels. International supply chains for fertilizers and other inputs have been disrupted. Farmers who are ill cannot work their fields effectively.
Simultaneously, COVID-19 is handicapping the locust fight in countries like Ethiopia, Uganda and Sudan. With lockdowns, farmers and workers are afraid to go to their fields. Pesticides, caught in supply chain tangles, are harder to find.
Concerns over Markets, Prices, and Impacts
The responses by markets and countries to the various crises may also have an impact on famine in the coming months. Impositions of export bans and tarrifs impact the global food supply chain.
The Tsunami in crude oil futures yesteday is one for the record books. Oil did something on Monday that made even market veterans shake their heads in wonder. The soon-to-expire May contract for West Texas Intermediate crude on the NYMEX traded, and closed, in negative territory. Negative pricing for physical commodity futures only occurred once before in modern times. We will soon post a blog about that incident that took place 65 years ago in Chicago. Stay tuned!
Tom Kloza has been a commodities professional for 40 years. He heads market analysis for Oil Price Information Service. Minutes before the close, he had something to say. “Nobody, whether they’re 120 years old or 20 months old, has ever seen an oil price lower than this.”
The oil price collapse is of course due to the COVID-19 pandemic and lack of global demand as businesses are shut down.
The West Texas Intermediate May crude contract that fell more than 100% on Monday. Thepandemic is causing unprecedented demand loss.Storage tanks are quickly filling. There is no demand for this contract expiring Tuesday.
That’s why it turned negative, meaning oil contract owners paid to get this oil off their hands because there is no one that needs that crude this week with the country shutdown.
This is an extremely unique set of circumstances: the pandemic hit the oil industry very hard. Vehicle use has plunged. People aren’t driving or flying. In turn, this has led to oil storage tanks being near capacity. An analyst at RBC Capital Markets said, “We’re expecting Cushing (in Oklahoma) to reach tank tops by mid-May.” He added that his firm will maintain its bearish sentiment until gasoline demand improves.
Only last week, there was an historic OPEC cut in crude production. Those cuts don’t take effect until May 1st. Currently there are huge volumes of crude in tankers on the water, all headed to refineries that do not need it.
Greenhouse Gases and Pollution Only Temporarily Reduced
Lower oil prices are, of course, good for the American consumer, by lowering gasoline prices. However, I do have one concern. That is, potential complacency by major oil companies and other businesses to continue investing in renewable energy alternatives.
The current drop in oil demand combined with the Saudi-Russia oil price war has simultaneously, if temporarily, lowered greenhouse gas emissions (GHG). However, the drop in GHG emissions is likely to be unsustainable in the long term, and the currently low cost of oil has raised questions about the future of clean energy deployment and climate action
According to a scientist at NASA–“This is the first time I have seen such a dramatic drop-off over such a wide area for a specific event,” Fei Liu, an air quality researcher at Nasa’s Goddard Space Flight Center, said in a statement.
Governments could chart a path to a fully decarbonized energy system by the middle of the century and revive economies hit by the virus if they tailor stimulus packages to boost clean energy technologies.
With governments adopting massive stimulus packages to blunt the shock of the virus, calls are building for a “green recovery”. Last week, 180 European politicians, companies and lawmakers urged the EU to align economic rescue with climate goals.
I certainly hope we “stay the course” of transitioning away from oil and coal to more solar, hydropower and other green technology sources. Up until this pandemic, we seemed to be more on the right course.
Low Oil Prices and Ideal Spring Weather Pressuring Corn Futures
Finally, with respect to commodities, low oil prices have been shutting down US ethanol plants. The combination of ideal spring Midwest planting weather is not a good sign for US corn farmers. Without a summer drought, corn futures could be heading to $3.00 or lower.
We have deviated from our typical global weather reports for commodities and other markets, for the moment. The world panic over CoronaVirus has spared several major black swan events. As of this writing, crude oil prices had one of the largest one night drops in recent memory. At one point, during the overnight trading on March 9th, it was down 35%. The stock market remains in a tail spin.
While prices certainly have not been in a bubble, before this present collapse, the stock market may have been.
The article below shows the typical investor psychology and reaction to an investment before and during a black swan event. I have added an historical review of other infamous market crashes, as well.
From Bull To Bear: What Is Typical Investor Psychology?
First, you buy the equity or commodity and you are optimistic about it.
Then there is a little bit of a setback. However, you still have potential profits in a position, so you are not too concerned about it.
As the price goes below your entry level, you are not worried. You become complacent because advisors are speaking of “longer term” trading practices. They influence you not to panic and you hold on to your positions.
Here is a good excerpt from “The Week” magazine describing the origin and meaning of the term “black swan”.
Then a sell-off occurs, perhaps one as precipitous as the present crash in equities! Your emotional condition begins to be one of hoping. Now you begin to panic. Yet you do not think necessarily there is a potential black swan event in the making:
That phrase gained currency a decade ago during the Great Recession and its aftermath. It provided a compelling way of thinking about the simultaneous crises in banking and housing. Those economic shocks elevated investor and mathematician Nassim Nicholas Taleb to global celebrity. His 2007 book about unpredictable events, The Black Swan, was a best seller. It seemed eerily prescient of the terrible downturn starting later that year. In addition, it gave readers a conceptual framework for thinking about potential risks that were both highly destructive and low probability.
The final straw for you is you sell everything, perhaps near the lows (!), during the height of panic. The graphic below illustrates the typical time line of investor behavior as a panic runs its course.
Review Of Market Crashes
The first known boom-and-bust was the famous Tulip bubble in 1634-1637. Back then, the now-ubiquitous tulip was a relatively new arrival to northern Europe. It was much admired and sought after, even though there was little knowledge of proper cultivation methods and disease avoidance. In Holland, the Dutch people speculated on tulip prices. They ran the price of a single bulb to a value higher than that of a house. The bubble imploded quickly, causing widespread bankruptcies.
Here is a partial list of other notable market bubbles:
After World War I, the US experienced significant economic growth that was fueled by new technologies and improved production processes. Industrial production output increased 25% between the years 1927 and 1929. The market decline began in late October 1929. It led to panic selling as more investors were unwilling to risk additional losses. The market sharply declined and was followed by the Great Depression.
The mortgage crisis led to public concern over financial institutions. At the center was concern about their exposures in the subprime loan market and in credit default swaps. More and more institutions reported failures. as Lehman Brothers and AIG were some of the biggest names on the list. Market instability deepened, and more investors withdrew their support in. In October, the stock market crash occurred. Dow Jones Industrial Average fell 1,874 points or 18.1% during Black Week which began on October 6. In that same month, S&P 500 and the Nasdaq Composite reached their lowest level since 2003.
Dubai had a significant financial crisis in which its debt accumulated to $80 billion. The state-owned holding company, Dubai World, had liabilities of $60 billion. Its real estate subsidy was at risk to default on repayment of bonds. Yet, the Dubai government was unsuccessful in making a rescue package for the company. The debt problem of Dubai World triggered mass speculation in the property market. In the first quarter of 2009, house prices in Dubai fell 41%.
Many people primarily invest in gold as a hedge against inflation in periods of economic uncertainty. During the second quarter of 2011, the gold price hiked 22.69% and reached its highest price at $1907. On September 23, 2011, gold’s price plunged $101.90, or 5.9%. That was the first $100 daily price drop since January 22, 1980. While gold had reached its top, the global economy was declining. The investors had growing concerns about the global economic decline which raised fears for a potential price fall. The panic selling took place in the gold market and caused the plunge.
Keep a cool head
There have been many more panics than I cited above. The most important thing to remember is to “keep your head” during any market downturn. Use rational and logical thinking. Avoid making decisions based on fear. Consequently, you must learn how professional investors hedge their portfolios. These protective measures require that you also learn about options (puts and calls) and alternative vehicles, such as futures.
Weather And Commodities
With respect to what I do, most global weather patterns have been bearish on commodities. Recently this applied to heating oil, gasoline, natural gas, soybeans and wheat, just to name a few. The US and Europe have had a near record warm winter and South American soybean production is huge this year.
Commodities such as coffee and cocoa may have some weather problems in the weeks or months ahead. At the moment, concerns about CoronaVirus a potential slow down in the global economy and shipping issues or a great concern for many markets.