European gas surged on signs Russia won’t deliver the boost in supplies President Vladimir Putin promised.
Russia, a key supplier of European gas, has been sending the bare minimum of natural gas to Europe to what is contracted. This is possibly to put some pressure on the politically controversial approval of its new Nord Stream 2 pipeline, a recently completed project that will let Russia transport gas directly to Germany without needing to pay distribution costs to the Ukraine or Poland for transporting it through their pipelines, as is the current situation.
Keep reading to find out more about the current natural gas supply situation, from an excerpt of our Manager’s Report by ISGAM’s Portfolio Management team:
A supply crunch in natural gas has sent prices soaring with Europe already in the throes of an energy crisis.
Gas prices are notoriously volatile and gas contracts are traded regionally. The US, Canada, and Mexico trade among each other and are also exporters. Other top exporters are Qatar, Australia, and Russia. Asia and Europe are importers and in competition with each other for liquefied natural gas (LNG) imports. The main culprit for this year’s surge in demand, as well as lack of supply of gas is probably the weather. Unusual weather patterns have meant elevated demand for both heating and cooling when it is usually not needed. Extreme weather events including Hurricane Ida also effected supply at times. There have been disruptions to oil and gas supply in the US and Australia. Droughts in countries including Brazil caused a lack of hydro power. Unusually low wind output and nuclear power plant outages have exacerbated the power shortage. Meanwhile China’s strong economic recovery earlier this year meant a big increase in energy demand; high prices offered by Asia to secure LNG imports resulted in less offer to Europe. At the same time Russia, a key supplier of European gas, has been sending the bare minimum of natural gas to Europe to what is contracted. This is possibly to put some pressure on the politically controversial approval of its new Nord Stream 2 pipeline, a recently completed project that will let Russia transport gas directly to Germany without needing to pay distribution costs to the Ukraine or Poland for transporting it through their pipelines, as is the current situation.
The result has been a surge in Dutch TTF front-month gas prices (a European benchmark) to as high as euro 160 per megawatt hour on 5 October – up from just euro 19.80/MWh at the start of the year. Meanwhile, European gas storage for the winter months is only 71% of capacity, compared to the usual seasonal norm of 92%.
Russia does need to balance its desire for approval of Nord Stream 2 with being regarded as a dependable supplier by Europe; at the time of writing Dutch TTF gas has eased back to 108 euros/MWh after an assertion from Vladimir Putin, on urging of the IEA (International Energy Agency), that his country is ready to help stabilize global energy markets. However, as we can see in the news as of beginning of November, Russia won’t be delivering the boost in supplies after all.
As gas and coal are often interchangeable in power generation, coal prices have also been driven up. Oil prices too have been trending higher, for a different reason: OPEC has not raised output as much as it had promised. Under more normal supply/demand conditions, the medium term sustainable natural gas price is seen to be around 20 to 30 Euro/MWh, but prices are likely to remain volatile and elevated until after the Northern Hemisphere winter, i.e., Q2 2022. How elevated will depend, again, for a large part on the weather – whether this winter will be mild or cold.
Renewable energy sources will, in the long run, be far cheaper and less volatile than coal and gas, but we still lack the technology for sufficient storage capacity for wind and solar energy which is why they are used alternately with gas and coal, depending on how much is generated – this transition phase will last a while yet. The question is, if eventually, these will enable Europe to remain independent in its energy supply in the future.
By Marianne Rameau, ASIP, Portfolio Management Team, ISGAM AG
Manager’s Report published on 30 September 2021
Featured Image Source: Bloomberg
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