Europe energy prices keep soaring as Russia tightens supply

Source: Gazprom

European energy extended a scorching rally as Russia tightened its grip on the region’s supply, further threatening the economy and key markets. 

Natural gas increased as much as 14 per cent, and prices are more than 10 times higher than the usual level for this time of the year, as supplies through a key pipeline slumped. The surge is crippling Europe’s industrial output, driving up household bills and pushing inflation to the highest in decades. It’s also fed through to the power market with German futures rising to unprecedented levels, before easing on Wednesday.

The energy crisis reached a new level this summer as Moscow started to progressively cut flows through the Nord Stream pipeline to Germany, citing sanctions-related issues with a turbine. European leaders have accused Russia of weaponizing supply, even as severe restrictions were placed on the country for its invasion of Ukraine that began in late February. 

“We are in a situation in which gas is now part of Russian foreign policy and possibly part of its war strategy,” Klaus Mueller, president of Germany’s federal network agency, said Wednesday in an interview with Deutschlandfunk radio.

Supplies through Nord Stream fell to just 20 per cent of capacity from Wednesday, according to German grids. It’s already materializing in reduced deliveries to buyers, with Italy’s Eni SpA saying its shipments from Russia will be about 21 per cent less on Wednesday than in recent days. Kremlin insiders are privately admitting that the cuts are to pressure the West over sanctions.

Gazprom PJSC had warned the cuts were coming, saying a turbine needed to be taken down for maintenance. Another similar piece of equipment that was stranded in Canada following repairs was heading back to Russia, but is yet to be pressed back into service. Gazprom and the Kremlin have blamed sanctions on Russia for issues with the servicing of turbines abroad.  

“Gazprom is supplying as much gas as necessary and as much as possible,” Kremlin spokesman Dmitry Peskov said Wednesday. “These sanctions don’t make it possible to promptly carry out technical maintenance, change spare parts, perform major repairs and other routine maintenance with equipment that are necessary for pumping.”

He also raised the possibility that the pipeline could return to 40 per cent capacity – the level it was operating at before the latest cut. But added that “Gazprom can’t guarantee volumes if the imported equipment can’t be serviced because of European sanctions.”

Tough Winter

Europe is preparing for even tougher times ahead as the continent is still heavily reliant on Russian gas, even though it has been securing shipments from elsewhere. The EU’s aim to refill 85 per cent of storage facilities before the winter hinges on curbing demand by 15 per cent – a plan approved on Tuesday – because supply is unlikely to keep up even amid support from the LNG market, which is tightened by outages in the U.S. and competition from Asian buyers, according to Bloomberg Intelligence.

“European gas prices are rising sharply and may have record spikes as Russia further weaponizes supply by suppressing flows via Nord Stream,” BI analysts Patricio Alvarez and Will Hares said.

Dutch front-month futures, the European benchmark, rose 3.2 per cent to 206.41 euros per megawatt-hour as of 2:04 p.m. in Amsterdam, rising for a sixth session. German benchmark power futures slipped 0.7 per cent after earlier reaching a record high of 390 euros a megawatt-hour.

“The futures market remains highly volatile,” said Fabian Roenningen, analyst at Rystad Energy said. “Uncertainties in the gas market continue to be a price driver in the power market.”

© 2022 Bloomberg L.P.

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