Will the gas market keep inflating?

Morgan Stanley analysts say Europe’s LNG import surge has been helped by weak demand from Asia owing to China’s Covid lockdowns.

(Image credit: © Getty)

By Alex Rankine

published 31 August 2022

in Features

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.

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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”.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.