Natural gas prices in Europe are still well below the record high reached in March. Dig a little deeper, however, and they point to a more protracted disruption than markets had expected in the aftermath of Vladimir Putin’s invasion of Ukraine.
Europe’s natural gas crisis is worse than it looks
The shift in the futures curve has been the most notable development in the gas market over the past month – one that is not getting enough attention in European capitals. But the industry is well aware of this, because it bears the cost. In March, a German manufacturer could lock in gas prices for all of 2023 at around 80 euros per megawatt hour; now he has to pay a record amount of 145 euros to cover the same price risk.
It’s not just businesses that are paying the price. Cornwall Insights, a consultant, predicts UK households will pay up to £3,244 ($3,886) a year on their gas and electricity bills, from October, up nearly 65% on at £1,971. Before the curve reassessed higher in recent weeks, UK energy consultants were anticipating a smaller rise.
Last week, the closely watched Dutch TTF contract, a European spot benchmark, rose to around 175 euros, doubling in a month, after Russia cut off supplies through the Nord Stream 1 gas pipeline to Germany. Even so, spot gas prices remain 30% below the record €227 settlement set at the start of the war – worrying, but not alarming; the prices are high, but not that high. After what the market held up in March, one can understand why policymakers aren’t panicking.
But that’s if you ignore the action at the back of the curve. On March 5 – when spot gas prices jumped to around 185 euros – the contract for delivery in December 2022 only increased to around 155 euros; last week, when the spot price was slightly lower, the December contract was trading at nearly 195 euros.
A year after Russia manipulated European gas supplies, the market is finally convinced that Moscow will continue to do so, and perhaps with greater intensity. The first test will take place in the next two weeks. The Nord Stream 1 gas pipeline, the most important gas link between Russia and the European Union, undergoes annual maintenance from July 11 to 21. Berlin fears that Moscow will find an excuse to keep it permanently closed, completely cutting off Germany’s gas supply. After all that Moscow has done, the German government has reason to be concerned.
Still, Russia might want to keep gas flowing to preserve its long-term leverage. From a game theory perspective, this makes sense. Once Russia completely halts the shipments, it can no longer exert pressure. Tactically, Moscow is likely to keep some of the gas moving, retaining the ability to cut off or slow flows at any time.
Moreover, Nord Stream 1 is the main Russian gas route to Europe pegged to the TTF contract, according to Goldman Sachs. Failure to reopen the pipeline after the shutdown for maintenance will limit the profits that Gazprom, the Russian state-owned gas giant, makes from exorbitant gas prices. Russia has clearly canceled its gas relationship with Europe. For now, however, the Kremlin will continue to enjoy the best of both worlds: high revenues and compelling leverage. To achieve its goals, Russia must continue to sell gas to Germany, but at reduced prices, as it does now. The market is right to reprice the gas curve; the only question is why it took so long. There are other risks ahead: at some point Moscow will turn off the tap completely, probably just before winter, in an attempt to bring the German economy to its knees. This is a result that the market has yet to value.
More from this writer and others on Bloomberg Opinion:
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• The energy war against Russia requires sacrifices: Liam Denning
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former Bloomberg News reporter and commodities editor at the Financial Times, he is co-author of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”
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