Gas surges further as Europe’s summer misery keeps piling up

Natural gas valves Source: iStock/Ryosha

Natural gas extended a rally as a scorching summer in Europe triggers higher-than-normal demand, exacerbating an energy crisis that’s threatening to push major economies into recession.

Benchmark futures surged as much as 11 per cent, while electricity prices surged to a record. Hot and dry weather is causing river water levels to drop rapidly, hampering the transport of energy commodities. It’s likely to force utilities to use more gas as a replacement at a time when supply from Russia continues to be limited.

“The seemingly inexorable move higher in European natural gas continued,” analysts at Deutsche Bank Research said in a note. “Prices have been bolstered by the latest European heat wave, which has seen rivers dry up and caused issues with fuel transportation, further compounding the continent’s existing woes on the energy side.”

The water level at a key point in the Rhine – western Europe’s most important river for the transport of fuel and other industrial goods – hit a new low this week, making it uneconomical for many barges to transit. Energy prices in Europe have been soaring after Russia cut gas supplies, including via the key Nord Stream pipeline, slamming the region’s economy.

Dutch front-month futures, the European benchmark, were at 244 euros a megawatt-hour as of 2:19 p.m. in Amsterdam, more than 11 times higher than the seasonal average of the past five years. The UK equivalent surged 16%.

Russian gas giant Gazprom PJSC said Tuesday that if the current trend continues, prices could surge to the equivalent of about 347 euros per megawatt-hour. That would take it above the record 345 euros level in early March in the aftermath of Russia’s invasion into Ukraine.

Turbine Trouble

Meanwhile, the standoff continues between Germany and Russia over a Nord Stream pipeline turbine that’s been stuck in transit after repair works were carried out in Canada. Moscow cut gas shipments through the link to 20 per cent of capacity last month, citing technical problems. Germany’s Economy Minister Robert Habeck said Monday the turbine is available and that Russia was using the equipment as an “excuse” to cut supplies to Europe.

Germany has taken one of the biggest hits from the energy crisis as it is heavily dependent on Russian supplies. The government has urged lower consumption, warned of rationing and this week slapped a levy on gas use. It also signed a deal with the nation’s major energy companies to import liquefied natural gas through two new terminals this winter.

But LNG – which has helped Europe fill up storage sites as Russian supply fell – may also become more difficult to get as competition for cargoes ramps up. High temperatures are increasing demand in Asia, while companies in the region are also boosting purchases to stockpile for the winter.  

“There is a sense of urgency in South Korea, and to a lesser extent, Japan, to rebuild stockpiles ahead of winter as high temperatures have intensified withdrawals,” Olympe Mattei, a BloombergNEF analyst, said in a report.

Even so, an LNG cargo was sent from Australia to the UK via a ship-to-ship transfer in Malaysia, marking an unusual source of supply. 

© 2022 Bloomberg L.P.

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