Gas prices in Europe are vaporizing their records, why and what consequences will this have?

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While meteorologists they predict a cold winter, the price of natural gas in Europe started to skyrocket last month, and this week the continent lived an unprecedented 60% increase in the price of gas futures. Currently, gas storage facilities are only 75% full, while in October 2020 reserves reached 94%, according to Gas Infrastructure Europe, an association which represents the interests of European operators. Why did this situation occur? What consequences will this have?

Context of the crisis

The high cost of gas in Europe became evident in the first half of 2021, when European countries they have exhausted their reserves of gas after a relatively cold winter season. In this context, European partners have started to monitor the shares of the Russian company Gazprom, which controls 33% of the market for this hydrocarbon in Europe, according to The data of the year 2020.

“In European political circles, the claim is gaining ground that the root cause of the current situation is the performance of Gazprom, which, with its reluctance to supply gas to the European market, has triggered a chain of events that quadrupled natural gas prices and doubled electricity prices throughout 2021 ”, To explain industry expert Víktor Katona.

He also indicates that the Russian company “did not break any contracts and did not even reduce traffic volumes of gas via Ukraine, not to mention the fact that hybrid pricing in long-term contracts makes Russian gas significantly cheaper for the buyer than that found in major EU reserves. “

At the same time, several objective factors make it difficult to supply gas to Europe by Gazprom. One of them is the Fire which was declared in August in one of the most important condensate preparation plants of the Yamal-Europa gas pipeline, located in the Siberian city of Surgut. The factory did not come back with Ordinary up to a month later, causing a reduction in gas exports. Likewise, the company must cover the unhappy domestic demand, and all this against a backdrop of continuing uncertainty in the global economy due to the pandemic, that does not allow to increase the production.

In this context, several members of the European Parliament asked the European Commission to investigate any manipulation of the gas market by Gazprom. In turn, the company and the Russian authorities categorically and repeatedly rejected these accusations.

At the same time, the countries of northwestern Europe faced another challenge: the unpredictability of the wind. In the first two weeks of September, the volume of electricity production from North Sea wind turbines only reached half of the norm (6 MW / h instead of 10-12 MW / h) . As a result, the UK, where up to a third of the electricity is produced by wind farms, has been particularly hard hit. However, according to Indian Fatih Birol, Executive Director of the International Energy Agency (IEA), “Is inaccurate and misleading” to blame the crisis only for the transition to clean energy.

At the same time, Europe it continues to compete with Asia for deliveries of liquefied natural gas (LNG). Despite the rebound in prices in the European market, Asian importers, encouraged by the region’s economic recovery, remain willing to pay a higher price in the European market to attract supply. As if that weren’t enough, disruptions in LNG exports from Australia, Malaysia, Peru and Oman, as well as the continued inactivity of a large liquefied natural gas terminal in Norway and a drop in production in Nigeria and Trinidad and Tobago affected the supply, creating a feeling of LNG shortage.

It may appear that European countries could switch to coal as a reliable alternative energy source, but replacing gas with coal is impossible For two reasons. The first of these is that coal prices are also rising significantly, largely due to growing demand from China, which previously imposed an embargo against its largest supplier of coal, Australia. Second, the increased use of coal is not compatible with the principles of sustainable development of the energy complex and the commitments made by European countries to reduce their carbon footprint.

Effects on the economy

With pricing mechanisms in Europe linking the spot price of gas to consumer prices, the latter found themselves in an alarming situation when the turmoil shook the market.

Energy-intensive European companies have started to limit or even cease your activity due to the sharp decline in the profitability of their activities. Additionally, soaring costs are fueling inflationary pressures and fueling fears of slower economic growth after relief from the coronavirus crisis, which, in turn, could lead to a massive drop in the shares of these companies.

Several countries on the continent, including France and Spain, have called on the EU to take urgent action to cushion the blow from high gas prices. European Energy Commissioner Kadri Simson pledged to check the market rules before the end of this year to prevent the current situation from stifling the economic recovery.

In this regard, economist Juan Torres López told MRT that the energy policy of the community bloc is tailored to the interests of large companies and does not take into account the needs of ordinary citizens.

What are the prospects?

However, several experts point out that it is difficult to introduce changes in a price system that has been built over the past decades. In the current situation, any modification of the mechanism could further worsen the imbalances between gas supply and demand.

This point of view is shared by Vladimir Putin. According to the Russian president, investment plans in the energy market are carried out for the long term. Putin pointed out that reckless actions in this sphere they can make the situation worse, because the sector “does not tolerate agitation and swerving”. As an example, he cited the situation in Europe, where, according to him, “this year several unfavorable factors have developed simultaneously” which have contributed to the rise in gas prices.

Tom Marzec-Manser, analyst at consulting firm ICIS, strips off the current rebound in the price of gas futures from “just ridiculous” and assures that it is “almost impossible even not to justify or qualify how and why it is moving so fast and so high”.

“The current price level is clearly unstable, but for the moment it is impossible to exclude new growth, especially if the gas is physically insufficient in winter ”, declared Dmitri Marínchenko, from the Fitch agency.

For his part, Sergei Komlev, senior manager of Gazprom Export, affirms that “with these prices there is no longer any point in buying [gas], this is reflected, among other things, in our supplies; [como resultado] we are faced with a situation of deterioration in demand: Reports are coming from all over that several factories in Europe are closing, for example a fertilizer factory. Suppliers of natural gas to end consumers have gone bankrupt. “

Simone Tagliapietra, member of the Bruegel expert group, based in Brussels (Belgium), holds that “Europe knows a perfect storm in its natural gas market “due to a combination of factors on the supply and demand side”. The big concern of the market is that the level of gas storage in Europe is lower than usual for this period. We are not well prepared to navigate the winter season ”, Mint.

Disclaimer: This article is generated from the feed and is not edited by our team.


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