European natural gas prices are still well below the all-time high set in March, but dig a bit deeper and they are signaling a more protracted disruption than markets anticipated in the immediate aftermath of Russian President Vladimir Putin’s invasion of Ukraine.
While the gas market then priced in a short-lived crisis, lasting perhaps a couple of months, it is now flashing extreme danger for next winter, through next year and, increasingly, into 2024. At the beginning of this month, the whole European gas price curve repriced at a much higher level.
The shift in the forward curve was the most notable development of the gas market in the past month — one that is not gathering enough attention in European capitals.
However, the industry is keenly aware, as it is bearing the cost.
In March, a German manufacturer could lock in gas prices for all of next year at about 80 euros (US$80.70) per megawatt hour; now, it has to pay a record high 145 euros to hedge the same price risk.
In the first week of this month, the closely watched Dutch Title Transfer Facility (TTF) contract, a European spot benchmark, rose to about 175 euros, doubling in a month after Russia cut supplies via the Nord Stream 1 pipeline into Germany.
Even so, spot gas prices remain below the record settlement of 227 euros set during the early days of the war — worrying, but not alarming; prices are high, but not that high. After what the market weathered in March, it can be understood why policymakers are not panicking.
However, that is if you ignore the action on the back end of the curve. On March 5 — when spot gas prices surged to about 185 euros — the contract for delivery in December rose only to about 155 euros; in the first week of this month, when the spot price was slightly lower, the December contract traded at nearly 195 euros.
A year into Russia manipulating European gas supplies, the market is finally convinced that Moscow will continue to do so, and perhaps with greater intensity. The first test comes soon. The Nord Stream 1 pipeline, the most important gas link between Russia and the EU, is undergoing annual maintenance until Thursday. Berlin fears that Moscow could find an excuse to keep it closed for good, cutting gas supplies to Germany completely. After all that Moscow has done, the German government is right to be concerned.
Yet, Russia might want to keep some gas flowing to preserve its long-term leverage. From a game-theory point of view, that makes sense. Once Russia stops shipments completely, it can no longer apply pressure. Tactically, Moscow is likely to keep some gas moving, retaining the option of cutting or slowing flows whenever it chooses.
Moreover, Nord Stream 1 is the main route for Russian gas into Europe indexed against the TTF contract, Goldman Sachs has said.
Not reopening the pipeline after the maintenance shutdown would limit the profit that Gazprom, the Russian state-owned gas giant, enjoys from sky-high gas prices.
Russia has clearly written off its gas relationship with Europe, but for now, the Kremlin is likely to continue to enjoy the best of both worlds: high revenue and compelling leverage. To achieve its objectives, Russia needs to continue selling some gas to Germany, but at reduced rates, as it is doing at present.
The market is right to reprice the gas curve; the only question is why it took so long. There is further risk ahead: At some point, Moscow is likely to completely turn off the tap, probably just before the winter, to try to bring the German economy to its knees. That is an outcome the market has not priced yet.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities, and a former reporter for Bloomberg News and commodities editor at the Financial Times.
This column does not necessarily reflect the opinion of
the editorial board or Bloomberg LP and its owners.
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