Filenews 14 July 2022
By Javier Blas
European gas prices are still well below the all-time high in March. However, they show a more protracted shock than markets expected immediately after the Russian invasion of Ukraine.
While at that time the gas market had discounted a short-term crisis, which would last a few months, now it is ringing a bell for next winter, until 2023 and increasingly until 2024. In recent days, the entire European gas price curve has been repriced to a much higher level.
The shift in the curve has been the most notable development of the gas market over the last month, a development that is not attracting enough attention in European capitals. But the industry is acutely aware, as it bears the costs. In March, a German manufacturer could lock in gas prices for the whole of 2023 at about €80 per megawatt hour. Now, he has to pay €145, a record amount, to compensate for the same price risk.
It's not just the companies that pay the cost. Cornwall Insights predicts that UK households will pay up to £3,244 ($3,886) a year on gas and electricity bills, starting in October, an increase of nearly 65% from £1,971.
Last week, the Dutch contract - a European benchmark - rose to around €175, doubling the amount within a month, after Russia reduced supplies through the Nord Stream 1 pipeline in Germany. Even so, spot gas prices remain 30% below the record high of €227 recorded in the early days of the war. Prices are high, but not so high. After what the market went through in March, we can understand why officials are not panicking.
But this happens if we ignore the movement on the back of the curve. On March 5, when spot gas prices jumped to about €185, the December 2022 delivery contract was increased to only about €155. Last week, when the spot price was slightly lower, the December contract "touched" almost €795.
The first test will take place in the next two weeks. The Nord Stream 1 pipeline, the major gas pipeline between Russia and the European Union, undergoes maintenance work from 11 to 21 July. Berlin, for its part, is worried that Moscow will find an excuse to keep it permanently closed, completely cutting off the supply of gas to Germany. After all that Moscow has done, the German Government is right to be concerned.
However, Russia may want to maintain the flow of some level of gas to maintain its long-term influence. From the point of view of game theory, this makes sense. Once Russia has completely stopped deliveries, it can no longer exert pressure. In terms of tactics, Moscow is likely to maintain the transport of some level of gas, retaining the ability to interrupt or slow down flows whenever it so chooses.
In addition, Nord Stream 1 is the main pipeline for gas to Europe. The non-reopening of the pipeline after the end of the maintenance work will limit the profits of the Russian energy giant Gazprom.
Russia has clearly "erased" its relationship with Europe in terms of gas. For now, however, he will continue to enjoy the profits he can make: High revenues and a significant lever of pressure. To achieve its goals, Russia must continue to sell some level of gas to Germany, but at reduced prices.
There is further danger ahead of us. At some point, Moscow will completely cut off the flows, most likely just before winter, to try to bring the German economy to its knees. Something that the market has not yet evaluated.
Source: BloombergOpinion
