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European gas prices increase as a result of Russia's shutdown of the Nord Stream pipeline

Charlie Brooks

Sep 06, 2022 11:24

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European natural gas futures soared at the start of trade on Monday after the Russian gas monopoly Gazprom (MCX:GAZP) shut down the Nord Stream pipeline to Germany, stoking fears of a complete halt in Russian supply over the winter.


The front-month Dutch TTF contract, which serves as a benchmark for northwest Europe, reached a high of 31% before retreating slightly to trade at 263 euros per megawatt-hour as of 03:25 ET (07:25 GMT). This marks an increase of 22.5% from Friday's closing price.


Gazprom's action was the second major escalation in the economic confrontation sparked by Russia's invasion of Ukraine on Friday. The corporation announced its news immediately following the close of natural gas trade in Europe, and only hours after G-7 finance ministers agreed on a long-awaited plan to place a price ceiling on Russian oil exports in an effort to cut off the flow of funding to President Vladimir Putin's government.


Prior to the suspension, Nord Stream was transporting roughly 30 million cubic meters of gas per day, or nearly 20% of its official capacity. This loss makes it more difficult for European utilities to continue filling their storage tanks before the winter heating season.


Despite the fact that storage levels in the Euro area have increased significantly in recent weeks as a result of rising imports of liquefied natural gas, the focus this week will be on the possibility of rationing and additional measures to control demand for gas and electricity costs, according to Saxo Bank strategists. "Demand destruction due to high pricing has already reduced demand, but more must be done, particularly if the upcoming winter is cold.


Germany placed a windfall tax on electricity generators to fund a 65 billion euro rescue plan for consumers suffering unmanageable increases in their bills, while Finland and Sweden launched emergency packages to avert the collapse of energy enterprises as the price of supplies surged.


Given that a substantial amount of Europe's marginal capacity - where output can be easily modified to match natural changes in demand - is gas-powered, gas prices have played a big influence in the increase in electricity prices. On Friday, EU energy ministers will meet to discuss plans to decouple electricity and gas prices, among other topics.


Holger Schmieding, chief economist at Berlin's Berenberg Bank, stated in a client note that the closing of Nord Stream suggests that the euro zone, "and Germany in particular," will see higher inflation and a more severe recession than the European Central Bank and private economists forecast.


At the opening bell on Monday, all European assets reflected this pessimism, with the euro plunging to a new 20-year low of $0.9877 before recovering to $0.9911, a 0.4% decrease. Due to its large weighting of energy-sensitive businesses, the STOXX 600 sank 1.6% while the German DAX fell 3.0%.

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