European gas swings with EU planning intervention to fix crisis

Nord Stream 1 Source: Nord Stream

Natural gas fluctuated as the European Union pushed on with its market intervention to ease the worst energy crisis in decades, but the plans are unlikely to include a cap on prices of imported fuel.

Benchmark futures gave up most of an earlier decline of as much as 4.9 per cent. The European Commission is due to unveil its proposals to tackle the crunch on Wednesday, with the EU seeking to curb power consumption and provide liquidity in an attempt to prevent the crisis from engulfing the broader economy. The bloc is also focusing on capping revenue of companies generating power from renewables and nuclear as part of an emergency package.

Capping prices of gas it gets from overseas appears to be off the table. German Chancellor Olaf Scholz was the latest to warn against such a move, saying it could lead to reduced supply from the world market. Controlled rates in Europe could potentially make other demand centers such as in Asia more attractive for sellers. Instead, Germany plans to implement a power-price cap “with great speed” to help consumers and companies cope with soaring costs.

While the policy measures are being worked out, gas continues to be pumped into inventories to allay some fears over winter supply. European storage sites are about 84 per cent full, slightly above the five-year average, and at 88 per cent in Germany, according to Gas Infrastructure Europe. While the heating season in the continent officially starts in just over two weeks, some regions typically keep injecting the fuel into stockpiles as late as October before demand starts draining it.

At the current pace of injections, and in the event of a normal winter, northwest European gas storage will remain 34 per cent full by the end of March even with Russia stopping supply through the Nord Stream pipeline, JPMorgan Chase & Co. said in a note. If it gets colder than average, that level could drop to 14 per cent, the bank said. 

“The strong build-up of gas and coal storage thanks to demand destruction in European industry and elsewhere were on the bearish side,” said Andy Sommer, team leader for fundamental analysis and modeling at Swiss utility and trader Axpo Solutions AG. “Only the current constraints on market liquidity can help fully explain prices which experienced a massive rollercoaster during August, initially more than doubling before dropping back by 30-40 per cent.”

Slams Economy

Russia’s huge gas supply cuts have slammed Europe through the summer with industries producing everything from metals to fertilizers forced to reduce output and bringing the economy to the brink of recession. Inflation has surged to multiyear highs and the cost of living crisis has deepened. It has compelled governments to step in to help ease the pain.

The EU is urging consumers to reduce demand. The bloc’s executive arm is eyeing a target to cut overall power consumption by 10 per cent and a mandatory goal of 5 per cent during selected peak hours, according to people familiar with the talks. The final numbers will need to be approved by the bloc’s commissioners who are meeting on Tuesday and then will require sign-off by national governments.

© 2022 Bloomberg L.P.

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