EU Gas Prices Break New Records on Supply Jitters

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European natural gas and power prices are brushing new highs and look poised to rise further in the coming weeks stoked by a combination of soaring demand and supply shortages.

Already under strain, the European gas and power system was dealt a sharp shock when unplanned nuclear outages in France increased the call on fossil fuel generation, primarily fed by natural gas but also coal.

French utility EDF found systematic piping issues in its 3 gigawatt Civaux 1 and 2 reactors, shutting them for the first quarter of 2022, and has also temporarily shut its 3 GW Chooz 1 and 2 reactors, which use the same technology, although they are expected to restart on Jan. 23.

EDF estimates that the outages will take out a combined 1 terawatt hours of power supply by end-2021 and leave power supplies tight into next year.

Tight supplies of Russian pipeline gas to Europe, handled solely by Russia’s state-run Gazprom, continues to support high natural gas prices. Escalating geopolitical tensions over the situation in Ukraine and further delays to Nord Stream 2 are only increasing anxiety levels that have been running high for more than a month.

The ICE Dutch TTF month-ahead January contract — the continental benchmark — settled at €142.76 per megawatt hour on Thursday ($46.50 per million Btu), a nearly ninefold increase from the same time a year ago, and a 50% rise since the start of December. On Friday prices had retreated, to settle at €134.77/MWh, seemingly due to a drop in EU carbon futures and a reassessed weather forecast.

Russian Supply Restrictions

Gazprom's exports to Europe were rising from 2020 levels in the first seven months of this year, although Gazprom was still restricting flows via Ukraine and later also via Yamal-Europe. But starting from August, exports show a year-on-year decline every month.

Some point to prices simply being too high for end-users to stomach further Gazprom volumes, as gas-dependent industries have cut back across Europe.

Nevertheless, Gazprom hasn’t booked any extra transit capacity in Ukraine for December beyond the nearly 110 million cubic meters per day agreed in the current five-year deal signed in late 2019. Its daily flows via the Yamal-Europe pipeline across Poland averaged below 25 MMcm/d in the first half of December, compared with the pipe's overall capacity of around 90 MMcm/d.

Gazprom books Yamal-Europe capacity on a daily basis after failing to book it at a monthly auction. Immediate results of a daily capacity auction on Thursday showed the firm did not book Yamal-Europe capacity for Friday, which contributed to the spike in the TTF January price to over €145/MWh during the day on Thursday, analysts say.

It later emerged that Gazprom did book 27 MMcm/d in capacity that day.

But low supply and storage levels in Europe come amid further delays to the approval of the 55 billion cubic meter per year Nord Stream 2 pipeline project. The head of German regulator Bundesnetzagentur said this week that no final decision on whether to certify the start of operations would be made in the first half of 2022.

LNG to the Rescue?

Given the skyrocketing European gas prices, the continent could rapidly become the favored destination of spot LNG volumes.

European spot LNG prices, which track the TTF, are now trading at a premium over delivered spot Asian LNG prices, incentivizing vessels to stay in the Atlantic in the next quarter.

But the paper profits available have yet to pull in physical cargoes. Unfortunately for European consumers, gas prices may need to stay higher for longer to change the direction of a global gas trade that has favored sales to Asia in recent months.

EU Energy Commissioner Kadri Simson this week tried to quell fears of full blackouts, saying Europe had access to enough gas to keep boilers burning and power plants on line.

But she warned of very low EU gas storage levels — they were 62% full on Dec. 13, down from 81% year on year, according to storage data from Gas Infrastructure Europe.

Simson admitted that the biggest variable in the equation was weather, where some forecasters are calling for colder-than-normal temperatures across much of the Northern Hemisphere.

Gas Supply, Gas Demand, Gas Spot Markets, Gas Inventories
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