Energy prices surged in Europe on Monday after Russia halted its biggest natural gas pipeline to the continent indefinitely, plunging the region deeper into a crisis that could push major economies into recession and force rationing.
Benchmark gas futures jumped as much as 35 per cent, the most in almost six months, and electricity prices increased. The supply cutoff rippled through markets, hitting equities and pushing the euro to a 20-year low.
Russia’s Gazprom PJSC made a last-minute decision late Friday not to turn the crucial Nord Stream pipeline back on after three days of maintenance. It was meant to restart on Saturday, but the company said an oil leakage was detected at a gas turbine that helps pump the fuel into the pipeline. There’s no indication how long it may take to fix it.
Europe’s politicians have been bracing for weeks for the halt, and are now rushing to put emergency measures in place. Sweden and Finland created backstops over the weekend to help utilities struggling with collateral requirements in a bid to prevent a “Lehman” moment. European energy ministers are set to discuss radical proposals to curb power prices when they hold a special meeting on Friday -- including gas-price caps and a suspension of power derivatives trading.
Moscow’s latest move threatens to drive inflation that’s already at the highest in decades even further, pushing many households into poverty and potentially triggering social unrest. The European Union has been building up its gas stockpiles in an attempt to prepare, and has a buffer for at least part of the winter. The situation could get worse once stockpiles dwindle, especially closer to the end of the heating season, or if the continent is hit with a severe cold snap.
“Given the gas supply tightness, one cannot exclude mandatory gas curtailment for non-essential industries or even ‘rolling gasouts’ this winter depending on the weather,” analysts at JPMorgan said in a note.
Dutch front-month gas, a benchmark for Europe, was 31 per cent higher at 281 euros per megawatt-hour by 10:37 a.m. in Amsterdam. The contract lost 37 per cent last week. The U.K. equivalent rose as much as 36 per cent. Benchmark German year-ahead power jumped as much as 33 per cent to 675 euros a megawatt-hour as the cost of running gas-fired power stations increased.
“Of course, prices are strongly up this morning, but at levels we can consider as ‘reasonable’ and, which may surprise, that lead to optimism,” EnergyScan, the market analysis platform of Engie SA, said in a note. With relatively high stock levels, evidence of demand destruction, and the possibility of political intervention, “a wait-and-see position seems more relevant.”
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