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Europe’s economic slowdown driven by ‘the lack of natural gas’: Analyst

Goldman Sachs Head of Natural Gas Research Samantha Dart joins Yahoo Finance Live to discuss oil rising above $95 a barrel, commodity market uncertainty, recession fears, Europe’s lack of natural gas, and the outlook for the global economy.

Video transcript

[MUSIC PLAYING]

JULIE HYMAN: Oil prices up slightly today above, $95 a barrel. Recession fears are continuing to weigh on commodities broadly. Our next guest says in a note with her peers that it's premature for commodities to succumb to recession concerns. Joining us now to discuss, Goldman Sachs senior energy strategist on the commodities team, Samantha Dart.

Samantha, thank you so much for being here. I actually want to start you on natural gas because that has been-- I know it's an area of focus for you. And it has been such a fascinating story, particularly in Europe and what's going on with the Nord Stream 2 pipeline. What do you think the risk is that we see a further shutdown or restriction of gas flows through that pipeline?

SAMANTHA DART: Yeah, the risks are very real. And the main reason for that is the drop in Nord Stream 1 flows that we started to see in early June, it wasn't fully explained, was it? I mean, I know there has been a lot of discussion about the turbine that went to Canada for repairs. But when that was first brought up, the dropping flows left gas flows through the pipeline at a 65% rate. And then they dropped again to a 40% rate without a lot of additional explanation.

On top of that, Russia always had the option to reroute the reduced flows via the Ukraine. And again, they opted not to do that. So these observations, they leave room for interpretation that, ultimately, the decision of the gas flow is as much a political and economic one as it is a technical one, which brings up all this uncertainty.

Are we going to continue to see flows at 40%? Or are we going to see fluctuations around that? And these fluctuations are absolutely possible from here.

BRIAN SOZZI: Samantha, with the global economy slowing down, US, China, and of course, Europe, how would you characterize supplies of natural gas right now?

SAMANTHA DART: So it's interesting to note that in Europe, for example, the main reason of the slowdown is the lack of natural gas. The lack of natural gas has increased energy costs significantly, and not just gas costs. That spills over directly to electricity prices. So when you look at industrials and their ability to continue to produce, if they can't afford those energy costs, they are going to cut down their production.

We just had, I believe, it was about a week ago, a large fertilizer producer that reduced its operations in Europe by 1/3. This is a direct result of reduced the ability to deal with high energy costs.

Now, to your point, though, when we look at China, it has had the opposite effect. Because of the China lockdowns we saw earlier this year and the sluggish economic recovery since, they have actually bought less liquefied natural gas-- we call it LNG-- leaving more available for Europe. So this has actually helped the supply picture in Europe.

BRAD SMITH: When we think about a broader transition to some of the cleaner energy solutions, how does this entire period that we've been navigating through over the course of this year, where does that either kind of put more of a speed bump in the road at this point in time, or where does this perhaps accelerate some of those clean energy ambitions that we also have?

SAMANTHA DART: Yeah, that's a great question. It has definitely accelerated the rate of investment in renewables. Every new renewable generation target put forth by governments in Europe is higher than the previous one. So we've definitely seen an accelerated target of additions of renewable capacity.

At the same time however, we see that these economies are just going to have to be more tolerant of hydrocarbons for a little bit longer because the reality is, we have a massive deficit in natural gas supply at the moment. And the additions on renewables are just not large enough to fill in the gap.

So you have to use coal. You have to use oil. You have to use whatever you possibly can to fill in that gap and continue to muddle through not just summer, which is storage-building season, but through the winter itself. That's where the highest risk is for supply.

JULIE HYMAN: Samantha, the European Commission has proposed a rationing, if you will, of natural gas. It has to be ratified by all of the member nations. Do you think it will be? And then what effect will that have not just on utility and power bills in the European Union but also on manufacturing, for example?

SAMANTHA DART: Exactly. The proposal is for a blanket 15% reduction in natural gas demand across residential use, commercial, power generation, and industrial use. And the EU is already facing some backlash. There are countries opposed to these measures. We've heard from Spain, from Portugal, from Greece, a lot of countries saying, listen, if we cut by that much, we're just not going to be able to operate normally and get through the winter.

So it's clear that these measures are not going to just be implemented as they were initially proposed. They are working on modifications this week. That said, this 15% drop, I would say at least when it comes to industrial and power generation use, is not too dissimilar from the drop that we do expect to see. And this is because you have this combination of high prices that disincentivise demand and the potential intervention from the government.

So this proposal of demand cut, it starts as a voluntary effort. So for example, in industrial use of natural gas, governments might offer to buy back the gas from industrial consumers so that they don't use it in manufacturing. And instead, the gas can be sent to storage. So you start it with a voluntary effort, and you don't push it into a mandatory curtailment unless necessary.

So for industrial and power, it seems in line with what we think needs to happen. What has been surprising to us is to see such a strong push for curtailments in the residential area as well.

BRAD SMITH: Samantha, quickly before we let you go, on commodities more broadly, do you think the selloffs we've seen have been justified?

SAMANTHA DART: When we look at balances, when we look at storage, they remain very low across the board. So we think it's much more driven by fears than by a reversal of fundamentals. Again, especially on the oil side, we look at oil storage. It's well below average. We look at oil product storage. It's well below average. Same thing across metals.

This has been reflected in very high physical prices in the market. You look at oil product prices. They are still expensive. So in our view, fundamentals haven't really changed. You remain in a tight balance, which means prices can rebound going forward as well.

BRAD SMITH: Samantha Dart, Goldman Sachs senior energy strategist on the commodities team, good to see you. Have a great rest of the week.