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Client Update - 1st April 2022

With ongoing concerns about energy price rises and supply for the months ahead, it has been interesting to read this week about US President Joe Biden invoking a presidential determination from the Korean war era to secure additional materials crucial to the production of electric vehicles and batteries. To boost US energy independence, Biden has looked to use the Defense Production Act to force companies to prioritise Government supply requirements over the private sector. The move will also look to provide additional financing aid to boost manufacturing in these key areas. This may not all be good news as rumours are swirling about company’s new abilities to bypass a strict environmental review process to secure these additional resources from within the US soil. The Defense Production Act was last used by President Trump to secure additional medical resources to deal with the initial onset of Covid. This is another of the many recent examples we have seen since Russia invaded the Ukraine of a global effort to secure and store more energy independently. In an effort to cool the price of oil, Joe Biden is also considering another large release of oil from the US emergency stocks.

Away from the US, in Europe there has been progress made on joint purchases of gas across member states to secure better prices, and gas storage will be better supervised to improve the EU’s energy security. The elephant in the room however is that to secure large enough gas inventories for next winter, the EU will have to accelerate imports significantly, and for now this means accepting significant Russian supply. President Biden’s latest offer of exports of US liquified natural gas to the EU would cover only the equivalent of 10% of Russian natural gas. Still, the message to Moscow is that at the latest by 2030 the EU wants to wean itself entirely off Russian gas. Russia is incentivized to maximize its profits “while it can”, i.e. as long as the EU does not have a clear alternative supply sources. So, it is in Moscow’s interest to try to lift gas prices as much as possible without switching supply off. This may be what is behind Putin’s demand last week that EU gas imports from Russia are paid in rubles. Drawing attention again on the gas supply issue pushed prices up at the end of last week.

Still, the cost to Russia of the war in Ukraine is piling up rapidly even beyond the economic realm. Support from China may be more hesitant, as Sinopec’s reported decision to suspend an investment project in Russia suggests. Militarily, Russia seems to be scaling down its ambitions in Ukraine to focus on the Donbas region.

What a quarter it has been to start 2022. January began with a US Federal Reserve induced panic on central bank policy errors and higher than expected interest rates twinned with a reduction in Government debt, this then fell over into Russia’s invasion of the Ukraine. The last few weeks have proved why it is always best to try and keep calm and stay invested as the market has been recovering to some extent and we continue to monitor the news flow with great interest. Do have a good weekend.

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