European gas prices swing as winter supply fears stalk market

NATURAL gas prices fluctuated amid further signs that soaring energy costs are crippling economic output, heaping pressure on politicians to resolve the crisis with winter approaching.

Benchmark futures retreated after earlier rising as much as 5.2%. They settled at a record high on Monday. Prices are about seven times higher than they were at this time last year.

Russia’s Gazprom will halt flows on the key Nord Stream pipeline to Germany for three days of maintenance starting Aug 31, again raising concerns the link won’t return after the work. Lower flows would jeopardize Europe’s efforts to fill storage sites to prepare for the colder months.

The instability has shocked global markets, sending gas prices from Asia to the US soaring amid a race for supplies. In Europe, a prolonged cut would exacerbate a crisis that has dragged on for months - stoking inflation, curtailing industrial production an fanning the risk of recession. The euro is now trading near a two-year low against the dollar.

Poland’s biggest chemicals company, Grupa Azoty, has stopped making some of its key products and trimmed output of ammonia because of record gas prices, it said in a statement on Tuesday.

Gas prices could rise to 400 euros(S$554.2) per megawatt-hour if flows via Nord Stream stop in September, according to Leon Izbicki, a gas analyst at Energy Aspects. “Current prices have a significant impact on industrial gas demand in Europe, with our models indicating a yearly reduction in Western European industrial gas demand of 15% in 2022,” he said. 

French output is contracting for the first time in a year and a half, mirroring the trend seen in Germany as Europe’s biggest economies succumb to record inflation and increasing uncertainty from the war in Ukraine. A recession in the 19-member euro zone is now more likely than not, according to analysts surveyed by Bloomberg. 

Germany, which is highly dependent on Russian gas to power its factories, household heaters and power plants, is particularly exposed to the crisis. The country’s authorities have been trying to seal deals to tap alternative energy sources, and have voiced concerns about the need for rationing during the coldest months of the year. 

Meanwhile, Chancellor Olaf Scholz’s popularity is sagging after six months in office, with pressure mounting for him to quell soaring inflation.

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In a trip to Canada, Scholz on Monday said Russia is no longer a reliable business partner and emphasised the need to increase imports of liquefied natural gas. However, Europe competes for LNG with Asia, where countries are rushing to get more shipments through the end of the year. 

Belgian Prime Minister Alexander De Croo on Monday warned that the energy situation in Europe could be prolonged, saying the next “5 to 10 winters will be difficult.”

While there is no relief in sight for supply, European demand remains abnormally high for the summer. Hot and dry weather has led to high air-conditioning use, low hydro-generation, and declining nuclear as European rivers dry up. 

“Regarding price-driven demand destruction, although it is visible both in the data and anecdotally, this may have plateaued for the time being,” said James Huckstepp, head of EMEA gas analytics at S&P Global Commodity Insights. 

Dutch front-month futures, the European benchmark, traded 1.9% lower at 271.51 euros per megawatt-hour by 9:57 am in Amsterdam. BLOOMBERG