European energy prices are reaching astounding heights. Wholesale gas prices, as measured by the Dutch TTF benchmark, hit €337 per megawatt hour (MWh) last week, a more than sixfold increase on the price a year ago. That is as if oil cost $500 a barrel. Electricity, whose price is closely linked to gas, has also surged. German and French power prices for delivery next year have topped €1,000 per MWh, says Bloomberg. “UK day-ahead electricity is trading at ten times its two-decade average.” The price spike is being driven by pressure to fill gas storage before winter, says Stanley Reed in The New York Times. The prospect of a Russian embargo means energy firms want to buy up gas at virtually any price.
The Nord Stream 1 pipeline between Russia and Germany is running at only 20% capacity, with Russia’s Gazprom repeatedly scheduling downtime for supposed “maintenance”. UK power for December 2022 “is fast approaching £1,000 per megawatt hour”, says Javier Blas on Bloomberg. Conversations between traders and managers of the national grid are “getting scarier by the week”, with talk of “shortages” and emergency planning for the winter.
A multi-year problem
The energy picture has improved since panic set in earlier this summer, says George Saravelos of Deutsche Bank. Firstly, European liquefied natural gas (LNG) imports have surged, leaving German gas tanks more than 80% full and “on track to completely fill up capacity” by October. Secondly, the country has done an unexpectedly good job at encouraging gas-intensive industries to switch to other fuels, sending gas use down about 14%. “If these trends continue, outright gas rationing may be avoided over winter even without any Russian gas volumes”. Indeed, TTF gas futures tumbled by 21% on Monday, although prices remain volatile and historically elevated.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Morgan Stanley analysts say Europe’s LNG import surge has been helped by weak demand from Asia owing to China’s Covid lockdowns, says Anviksha Patel for MarketWatch. They think that this winter may prove “manageable” even “if Nord Stream 1 flows fall to zero”. Yet “if those flows don’t recover, the accumulating loss next year would then create an exceptionally tight winter 2023-2024”.
“We won’t see ‘normal’ prices... for at least three to four years,” Jonathan Stern of the Oxford Institute for Energy Studies told Euronews.
The “Putin shock” is being felt around the world, says Ambrose Evans Pritchard in The Telegraph. High LNG prices are prompting South Asian nations to switch to coal and Japan to turn back to nuclear power. While stoppages at “gas-guzzling” zinc smelters and fertiliser plants will unleash more “supply-chain horror”, they should also take the edge off the gas crisis. “Gas futures in Europe have essentially discounted a full gas blockade” by Russia, prompting some to wonder if we are close to the peak. “Hedge funds are already itching to short gas futures”, says Ole Hansen of Saxo Bank. For the UK, this winter’s energy crisis should be “bad but manageable”.
SEE ALSO
- The energy price cap hits £3,549 – here’s what this means for you
- Why we are in a cost of living crisis today
-
Family investment companies explained: how the ultra wealthy shield their money from the taxmanWealthy families are increasingly turning to family investment companies to keep more of their money away from HMRC – but what are these arrangements and how do they work?
-
How to boost your pension pot as 35% of UK over 50s face huge retirement savings gapOver 50s are facing a later life with little to no funds - but there are steps you can take now to boost your pot.
-
Yoshiaki Murakami: Japan’s original corporate raiderThe originator of Japanese activism, Yoshiaki Murakami, was disgraced by an insider-trading scandal in 2006. Now, he's back, shaking things up
-
Cash in on the vast growth potential of the companies electrifying the worldOpinion Martin Todd, portfolio manager, head of sustainable equities, Federated Hermes, highlights three electrification companies where he'd put his money
-
Galliford Try has firm foundations for strong growthBuilder Galliford Try has a finger in a wide range of pies, notably important work in the public sector
-
Card Factory is a stand-out small-cap going cheapIn a digital world, we still value the personal touch. That’s good news for Card Factory, whose unique business model is suited to weather all economic storms
-
8 of the best smallholdings for sale nowThe best smallholdings for sale – from a medieval cross-passage farmhouse in Taunton, Somerset, to a former farmhouse with an orchard in the Welsh Marches
-
How much gold does China have – and how to cash inChina's gold reserves are vastly understated, says Dominic Frisby. So hold gold, overbought or not
-
How to invest in undervalued gold minersThe surge in gold and other precious metals has transformed the economics of the companies that mine them. Investors should cash in, says Rupert Hargreaves
-
Debasing Wall Street's new debasement trade ideaThe debasement trade is a catchy and plausible idea, but there’s no sign that markets are alarmed, says Cris Sholto Heaton
