ELS #Energy - High European Energy Prices Lead to Political Worries

The European energy and fuel complex is in a rally fuelled by the perfect storm. Multiple combining factors are pushing fuel, carbon and energy prices to record levels and a justified worry, ahead of winter, is shaking market actors, as well as politicians.
Gas, the main driver behind soaring energy prices. There seem to be no limit to how high international gas prices can go, which is taking both the market and politicians by surprise. Yesterday (October 30) TTF DA closed at €93.15/MWh, compared to last year when TTF DA traded around €12/MWh. The extreme movement can of course be explained by the fact that COVID lockdowns hit gas demand last year. However, to put current prices in relation to the rest of the global and energy complex, current TTF price levels equal an oil price of about $182/bbl, while Brent closed yesterday at $78.09/bbl.

So what about the switch? Looking at the European fuel complex, gas has for some time now lost its competitive advantage over coal in the fuel switch. As a consequence, coal use has significantly gone up in Northwest Europe (NWE). This has of course spurred demand for carbon (EU ETS) which is now trading above €60/t. However, if there seem to be no obvious price ceiling for gas, there are signs that both carbon and coal are meeting some resistance to further upward moves for now. This can be explained by rumours that coal capacity is starting to hit its upper limit. This is of course in line with the overall European coal phase out, but is for now putting the system under pressure.

Is there a light in the tunnel? We suggest keeping an eye on the gas market, as we have seen the rest of the European fuel and energy complex tracking movements in gas prices. There are, however, few signs pointing towards softening market conditions for gas. Russian capacity nominations are lower than expected through especially Mallnow and Yamal and Russia’s Gazprom has not filled their European gas storages to sufficient levels ahead of the coming winter. There is obviously a political dimension to this related to European acceptance of Nord Stream II and we do not expect the current certification process to be ready ahead of the winter season. A current tight supply situation is not only connected to Russian exports, however, but is also due to an extremely tight global LNG market and limitations from other pipeline imports to Europe.

The market is clearly worried as winter is closing in and the risk premium for winter contracts is highly visible. Politicians around Europe are also starting to raise concerns and the need for market intervention is being discussed.

It is important to remember that these sort of measures will have to be in line with EU market rules and legislation. Given how different member states have diverging abilities to intervene should security of supply be threatened, the EU energy commissioner Kadri Simons promised last week to provide member states with support and guidances on which measures that, under EU law, would be acceptable.

Share post

Related posts