European energy markets, from natural gas to carbon permits, have reached record highs, signaling that the supply shortage will worsen just as the winter season begins.
Stocks of everything from gas to coal and Norwegian water to power generation are dwindling and there is little sign that the situation will improve anytime soon as demand continues to roar after a lull caused by the pandemic.
“Europe’s supply-demand balance will remain unusually tight as winter approaches, adding further price pressure in a market already at record levels,” BloombergNEF analysts wrote in a published report. Tuesday.
Many of the UK’s small energy providers have collapsed, while some French electricity retailers are struggling to supply their customers and are also at risk of going bankrupt. Meanwhile, European miners have warned that unprecedented prices could disrupt their shift from fossil fuels.
The first month’s Dutch natural gas futures jumped 12% and the UK equivalent contract jumped at the same pace. German electricity for next year also hit new highs, as carbon futures eased after hitting a record high. Brent crude, the international benchmark, broke above $ 80 a barrel for the first time since October 2018, and north-western European coal prices were at their highest since the 2008 financial crisis.
Soaring energy prices will be picked up by European leaders themselves, when they meet in Brussels for a summit on October 21-22, according to a draft meeting agenda seen by Bloomberg.
“This is the first run of a multi-year, if not 10-year, commodities supercycle,” Jeff Currie, global head of commodities research at Goldman Sachs Group Inc., said in an interview with Bloomberg TV. “It is motivated by the war on climate change, the war on income inequality. All these dynamics lead to a structural increase in the demand for raw materials against this whole idea of revenge of the old economy. “
The latest warning that the electricity crisis is spreading across Europe comes from Norwegian grid operator Statnett SF, who said electricity supply in the southwest of the country was “in a hurry” in due to low inflows and declining stocks.
The shortage could hamper exports to other markets, as this part of the country is a hub for overseas electricity shipments. The UK, which is grappling with a supply crisis, as well as Germany and Denmark are all connected to the Norwegian grid via long cables on the seabed.
“There is now a very small amount of water, for this time of year, in many reservoirs here,” Statnett said.
Europe has the most ambitious climate plan in the world, but political will is being tested by soaring energy costs. As countries take action to ease the blow to consumers, Spain has warned the European Union that measures to cut emissions “may not withstand an extended period of price gouging of electricity,” according to a letter of September 20.
Much of the rebound in prices stems from the gas shortage, after a colder and longer winter that depleted stocks. Inventories are now at their lowest in over a decade for this time of year. In the BNEF’s cold winter scenario, Europe’s storage levels at the end of March would be 2.5 billion cubic meters, just 3.8 percent of full capacity, the searcher. The low wind speeds also meant that more of the fuel was used to generate electricity.
Russian gas passes more than half a major transit route on Tuesday morning. While Gazprom PJSC has focused on filling the gas storage in Russia, the company says all of its export sourcing obligations have been met. The current drop in deliveries via the Yamal-Europe route is a “temporary situation” due to customer demand, he said.
The more expensive gas makes coal more attractive for power generation, said Tom Lord, head of trade and risk management at Redshaw Advisors in London.
The chart below shows the German clean-dark spread for November, a measure of the profitability of coal-fired power plants. It has jumped to 49.43 euros ($ 57.73) per megawatt hour and is boosting demand for carbon permits.
As the region’s official heating season begins on Friday, traders are watching for signs of cold weather, which would increase demand. There will also be a key gas auction in Ukraine on October 18 to see how much fuel will come from Russia. Any signal from Gazprom about the start of significant gas flows on the controversial Nord Stream 2 pipeline to Germany will also have an impact on the rally.
“It is very difficult to forecast. Currently, the gas market is extremely tight, ”said Marco Saalfrank, Trading Manager for Continental Europe at the Swiss electricity company Axpo Holding AG. “Much depends on what the winter will be like, if it is a cold winter we will probably see the price of gas continue to rise.”
–With help from Rachel Morison, Anna Shiryaevskaya, Todd Gillespie and Elena Mazneva.