European gas rally shows no signs of easing on supply concerns

Benchmark futures jumped as much as 8% for a fifth consecutive advance.
The Troll A natural gas platform, operated by Statoil ASA, stands in the North Sea, Norway. Image: Krister Soerboe/Bloomberg.

European natural gas prices rose to the highest level in almost four months on persistent supply concerns amid the worst energy crunch in decades.

Benchmark futures jumped as much as 8% for a fifth consecutive advance. European energy markets are in turmoil with Russia’s supplies at multiyear lows, coupled with intense competition for liquefied natural gas with Asia, where prices soared to the highest ever seen during the summer.

Traders are also closely watching exports from Norway, where strikes planned for this week threaten to cut gas and oil production. Output at three fields began shutting on Tuesday as the labour action started, with two more walkouts planned in the coming days.

For now, shipment orders published by Norway’s grid operator show flows little changed for Tuesday. But the strike could escalate on Wednesday and into the weekend if no solution to an ongoing wage dispute is found, according to a local union.

“Another day, another fear and liquidity driven spike in European gas and power pricing,” analysts at Alfa Energy Ltd. said in a note.

Dutch front-month gas futures, the European benchmark, traded 6.4% higher at 173.29 euros per megawatt-hour by 11:07 a.m. in Amsterdam. The UK equivalent jumped as much as 13%. German 2023 power is trading at a record, near the highest-ever level for the benchmark.

Another near-term risk is that the Nord Stream pipeline — Europe’s key channel for gas from Russia — won’t restart after 10 days of maintenance that begin July 11. That’s a development the region’s biggest consumer, Germany, is already considering as an option.

German gas giant Uniper SE is in talks with the government over a potential bailout package of as much as 9 billion euros, ($9.3 billion) according to a person familiar with the situation. German Economy Minister Robert Habeck has warned the gas crunch risks triggering a collapse in the market, similar to the role of Lehman Brothers in the financial crisis.

“News out of Germany only fanned the flames,” Alfa Energy said.

‘Unpredictable’ Russia

Developments in the market are hard to predict, given “Russia’s unpredictable behavior,” the International Energy Agency said in its quarterly market report published Tuesday. “A complete cut of Russian gas flows cannot be excluded.”

A full cut of the supply made permanent is “the least likely scenario,” but chances that the Nord Stream flows will remain reduced are high, analysts at Goldman Sachs Group Inc. said in a note, raising its price forecasts for Europe.

For the moment, shipments through the pipeline remain at about 40% of capacity after Russia curbed supplies last month, citing technical issues.

Flows from Germany to Poland via the Yamal-Europe link dropped to zero early Tuesday, grid data show, amid seasonal maintenance at the Mallnow compressor station between the countries scheduled for Tuesday-Wednesday.

© 2022 Bloomberg

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