Europe hopes for winter without gas rationing

Originally published at Europe in Review on November, 2022

With European gas storage levels climbing toward 95 percent, households may be able to avoid rationing this winter if the weather behaves as predicted: long-term forecasts indicate drier and warmer months than normal for the northern, central and north-eastern parts of the continent. [Accuweather] [CNN]

Daily gas price levels reached below zero at the Dutch Title Transfer Facility (TTF) on October 24, indicating that the amount of liquified natural gas being offloaded was temporarily exceeding available storage as demand dropped during an unseasonably mild period. [Bloomberg]

Natural gas futures remained priced at over 125 percent of 2021 levels. However, the current price of approximately EUR 100 per megawatt hour represents a 70 percent decline between August and October. [CNN]

European wholesale gas prices briefly rose earlier in the month to EUR 175 per megawatt hour when a bomb scare in Norway raised concerns about the security of gas infrastructure. Norway is playing a new role for the continent as an alternative supplier of gas in the wake of Russian cutoffs. [WSJ] The Nordic state now accounts for 27 percent of natural gas supplies for continental Europe, up from 23 percent in 2021. [NGI]

The rapid decline of natural gas prices over the month indicates that in the run-up to winter, prices have achieved a steady state. Storage is full and LNG is regularly being shipped to Europe. While damage to European industry may be significant, households will have sufficient supplies under current conditions.

Risks remain

However, market risk remains high, as demonstrated by the one-day price spike of almost 50 percent caused by the Norwegian incident. Damage to critical energy infrastructure, maritime shipping disruption, or unexpected cold weather could still result in price surges and significant hardship in Europe. Russia could also unilaterally end the reduced gas shipments currently sent through Ukraine and Turkey to Europe, which could lead to blackouts, energy rationing, and significantly higher energy prices.

Russia resumed gas deliveries to Italy the first week of October. [WSJ] The Italian gas recipient company, ENI, agreed to provide a EUR 20 million monetary guarantee required by Austria when Russian shipper Gazprom stated it would only pay in roubles, temporarily interrupting shipment through the only Russian gas pipeline supplying Italy.

A leak in the Russian Druzhba oil pipeline in Poland in mid-October led to a brief rise in Brent oil prices, which fell again when no service interruption resulted. [Bloomberg] Otherwise, oil prices remained steady throughout the month, even as new sanctions on Russian fuel were imposed by the EU in the form of a price cap on seaborne crude. [Reuters]

However, global demand, not sanctions on Russia, was the driver behind oil prices over the last month. OPEC + announced a two million barrel per day production cut in early October to maintain higher prices in the face of weakening international demand – demonstrating that Russian supply was not a central factor in oil prices for Europe, unlike gas. [Intercept]

Meanwhile, Hungary and Serbia agreed to build a new pipeline to bring Russian oil to Serbia under EU exemptions to sanction policies. [RFERL]

Industrial cutbacks

The German president, Frank-Walter Steinmeier, noted that permanently higher energy prices will inevitably lead to reductions in industrial output. [WSJ] Leading German-headquartered global chemicals company BASF SE announced cost cuts of EUR 500 million as its energy costs rose EUR 2.2 billion in the first nine months of 2022 compared to the same period in 2021.

In France, nuclear reactor repairs fell behind schedule, and the lack of nuclear-generated electricity continued to exacerbate power prices. [WSJ] In total, 26 of 56 French reactors remain offline heading into winter, making the country dependent on imported electricity instead of being able to support Europe with energy exports as in previous years. Additionally, a strike by French refinery workers led to an increase in the country’s energy prices in October. [France24] Although largely resolved, the strike led to a 70 percent spike in diesel prices across the country.

Help for homes and firms

Germany announced the formation of a EUR 200 billion fund to help businesses and households defray soaring energy prices, as well as both retroactive subsidies and a price cap starting in December for both homes and companies. [Reuters] [Reuters] The German government is also considering windfall profit taxes on domestic utility firms.

France announced the formation of a EUR 12 billion facility to support small and medium-sized businesses. [Bloomberg]

Britain began household energy subsidies in October as part of combined household and business support plans initially estimated to cost approximately EUR 150 billion. But the final amount may be unbounded as the move caps the prices that homes pay while the government assumes the price difference. [UK Government] [UKandEU]

Italy led a request by southern European countries for an EU price cap on natural gas as clothing firms and other light industries suffered under local energy prices up to 500 percent higher than last year.

The EU ended a Brussels summit on October 20 without agreement on price caps, but subsequent statements by European Commission chief Ursula von der Leyen indicate that some form of caps are imminent. [Reuters] [Reuters]

(rw/pk)