July 20, 2022

A Winter Offensive For Russia?

In the Summer of 1941, Nazi Germany launched Operation Barbarossa, an invasion of Russia to capture Moscow. This move was in direct contravention of the Molotov-Ribbentrop (German, Soviet) Non-Aggression Pact signed just two years before.

In 81 years, we've traveled from the Kinetic War of Nazis and Bolsheviks to the Economic War of today's Germans and Russians. In the Summer of 2022, Germany boycotts the Nord Stream 1 and 2 Agreements dating back to 2011. Thus the conflict between these two principal European Powers is brought forward.

The Nord Stream Pipelines are a marvel of engineering and the longest undersea pipeline in the world. But perhaps even more impressive, the Nord Stream Pipelines represent an incredible cooperative effort from Gazprom, the Russian-owned energy company, the country of Germany, as well as other European Countries, and several multinational oil companies, including Royal Dutch Shell, among others.

Things began when Russia began its Special Military Action in Ukraine. The United States, as well as most of Western Europe, immediately placed Sanctions, more correctly began Boycotting Russian goods and products. Germany promptly joined the sanction/boycott and announced that they would reduce the purchase of Russian oil and phase out completely in 5 years.

The action began, the struggle between essentially Gazprom and the country of Germany has been on the German side of the border.

Let me interject as a vendor who has dealt with demanding clients. When your client tells you they're going to stop doing business with you. You lose all sense of urgency and cooperation. You immediately begin to write that client off.

But let's return to our timeline.

Then the whirlwind began. Earlier this summer, the Nord Stream Pipeline was shut down for routine repairs. It seems that the massive Turbines used to push the oil through the pipeline required maintenance and repair. So the turbines were shipped from Germany to their Canadian manufacturer. The Canadian government decided they could not return the turbines because to do so would violate Canada's boycott/sanction of all things Russian. So for days, the turbines sat in Canada.

Only this past Sunday were the Turbines to return to Germany. Once Gazprom re-installs the turbines, they can reopen that part of the pipeline.

But not so fast.

I know you're going to think I'm making this up, but honestly, it's true.

Just yesterday, Gazprom announced that a "Force Majeure," the legal term for circumstance beyond their control, had occurred, and Gazprom could not fulfill its contract. In other words, the other side of the border, Gazprom, is saying that even when those turbines are operational, Gazprom will not be delivering any oil.

If there is a bright spot in this entire mess, it is that Germany is in the middle of summer.

Currently, Germans are looking to cool their homes. Coal-fired plants produce nearly three-quarters of German's electricity. And because almost all air conditioners run on electricity, this is not the peak time of the year to use oil and gas. Only 11% of German electricity comes from oil or gas.

It's in the winter that everything will change.


Germany is dependent on heating oil and natural gas to warm its homes in the winter. The combination of those two fuels, heating oil, and natural gas, make up three-quarters of all the heat for Germans in the winter. And I don't need to tell you that it gets mighty cold in Germany come wintertime.

A real crisis is brewing for Germans come this cold season.

Therein lies a remarkable parallel. A sense that we have seen something like this before. Historically, Russia prefers not to go to war in the wintertime. They know that the cold and snow can stop almost any army's advance. But when attacked, Russia will come out and fight.

The last time this occurred, as we noted earlier, was in World War II. When the Nazis invaded Russia to capture Moscow, Germany began their March in the warm summer days. It ended in the brutal Russian winter.

Today German began their Russian boycott/sanctions in the warm days of summer. I wonder when it will end?


Economic News

 

It looks like China is going back into lock-down. Two new variants of the Covid Strain are the reason that several prefects in China have once more gone into lock-down. Officials in the cities of Chengdu and Lanzhou, are apparently ordering their citizens to once again stay at home, and restrict outside activities.

 

All together this represents about 21 million residence. And, as we all know when China goes into lock-down, the American Supply Chain grinds to a halt. That's how dependent the US Economy is on Chinese materials and components.

 

Wall Street is certainly taking note, as yesterday's strong rally, has been completely reversed this morning, and all of the averages are down currently.

 

 

Earnings season is gaining momentum, as 54 companies are scheduled to report their results today. Leading the way will be health care companies: Abbott Labs and Biogen, along with health insurance companies: Anthem Health Insurance and Elevance Health, formerly known as Anthem Health.

 

Then topping off earnings today will be the closely watched Tesla Motors which will report after the markets close.