Dutch TTF futures hit $950/'000 m3
Gas price futures for October at the Dutch TTF hub soared to an all-time high of $950/'000 m3 on September 15, trading data shows.
"The imbalance in the European supply/demand balance for gas comes mostly from a sharp year/year increase in demand, driven by a return to more normal weather, with the first half of the year being cooler and less windy than a very warm and blustery 2020," analysts at BCS Global Markets (BCS GM) said in a note. "Given that, we cannot reasonably expect the current situation to be saved by a warm winter. A warm winter could happen, of course, but it could as easily be like this past winter or even colder-than-normal."
Electricity prices have likewise surged, with wholesale prices in Germany topping €135 ($159)/MWh this week, amid low wind generation and the feed-in from gas prices.
BCS GM sees the current situation as partly the result of European policy decisions. The EU has pushed over the years to increase the use of hub-based, gas-on-gas pricing and phase out oil-indexed prices, which the brokerage noted are currently three times lower than futures prices.
BCS GM also pointed broader energy policy in Europe.
"It was European governments that insisted on massively increasing wind and solar electricity production while simultaneously forcing nuclear and coal plants to close well before the end of their useful lives," the brokerage said. "This has driven up the reliance on gas to fill increasingly large gaps in Europe's generation stack."
What is more, Europe has curtailed upstream investment because of climate concerns, hastening a decline in gas production in the North Sea. In the Netherlands, the government is closing down the Groningen field in 2023 after steadily cutting its flow over the years to reduce the risk of earthquakes.
"There is no cheap, easy, or quick way to alter the supply/demand balance in Europe in either gas or power, barring an early-winter gift from the weather gods in the form of unseasonably warm weather," BCS GM said. "This coming winter, if normal or cold, promises to be a painful one on European gas and power markets."
European consumers are likely to put more pressure on governments to address the situation as the year progresses, the brokerage said, noting that "voters' bad temper may be agitated by power outages and by coming up on two years of accumulated social stress induced by lockdowns and aspects of the COVID-19 crisis."