Gas markets whipsaw after Russia offers to stabilise energy prices

Gas markets swung sharply on Wednesday after Vladimir Putin said Russia was prepared to stabilise soaring global energy prices that are threatening to curb industrial activity and sharply raise inflation.

UK and European natural gas prices shot higher again early on Wednesday to trade at close to 10 times their level from the beginning of the year. UK gas contracts for November delivery surged almost 40 per cent as trading opened to reach more than £4 per therm, having started the year below 50 pence.

But prices reversed course hours later, sending the UK contracts back to £2.87, when Mr Putin hinted at the prospect that Russia's state-backed monopoly pipeline exporter, Gazprom, may increase supplies to help Europe avoid a full-blown energy crisis.

The Russian president's remarks appeared aimed at staving off criticism from Europe that Russia is holding back supplies as it awaits approval for the controversial new Nord Stream 2 pipeline, which bypasses Ukraine to send gas to Germany. That project edged closer to going live on Wednesday after a judicial opinion in the EU.

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Limiting supplies

Gas traders say one of the key reasons for the rally in prices is that Russia is limiting its European gas supplies to the levels in long-term contracts. But Mr Putin told officials on Wednesday that Gazprom was already exceeding its contractual obligations by “more than 8 per cent”.

It is unclear whether Russia intends to boost supplies any further, however, as Mr Putin also noted that it was “economically disadvantageous” for Gazprom to ship gas through Ukraine. He blamed higher prices on the shift to renewable energy sources in Europe and said it was a “mistake” to shift away from Russian gas.

Ukraine and other eastern European countries have accused Russia of trying to "weaponise" gas supplies. Kremlin spokesman Dmitry Peskov said on Wednesday there was "absolutely no Russian role in what is happening on the gas market".

Record natural gas prices are one symptom of a global battle to secure fuel supplies after demand rebounded rapidly from the depths of the pandemic. The price of coal, which is used to generate electricity and for heating, has also surpassed its all-time peak set in 2008.

Energy crisis

"An energy crisis is unfolding with winter in the northern hemisphere still to begin," said Stephen Brennock of PVM, an energy brokerage in London.

European gas contracts for delivery in November jumped almost 25 per cent on Wednesday to €155 a megawatt hour, up from just €18 six months ago.

Domestic production of gas in Europe has fallen sharply, while demand in Asia has risen as countries increasingly seek an alternative to highly polluting coal, creating a bidding war for cargoes of liquefied natural gas.

Rising energy prices are fuelling concerns about inflation, which has dented government bond prices, particularly in the UK.

The UK is seen as more vulnerable to record gas prices than some countries in Europe because it has very limited storage capacity, leaving it reliant on a near just-in-time system of domestic production and imports both from pipelines and seaborne cargoes.

The vast majority of UK homes are heated with natural gas, and the country has shut more of its coal-fired power stations while adding renewables such as wind farms. On still days when wind power generation is lower, gas can make up more than 50 per cent of all electricity generation.

Europe is also suffering from very high electricity prices as a result of the surge in energy costs. The EU said on Wednesday it would review the region’s power market and consider changes to regulation.

French building materials company Saint-Gobain underscored the corporate impact on Wednesday when it said it was expecting energy and raw material cost inflation of about €1.5 billion in 2021, up from its previous estimate of €1.1 billion.

Spiralling gas prices are forcing utility companies in northeast Asia and Europe to switch to coal where possible, increasing competition for supplies at a time when big producers in South Africa, Indonesia and Russia have struggled to increase production.

On Tuesday, the benchmark index for coal imported to northwest Europe hit a record above $300 a tonne, according to price reporting agencies, with prices doubling since the start of September.

Last week, Beijing ordered its state-owned energy companies to secure supplies for this winter at all costs, while India is turning to the export market for thermal coal to replenish inventories that are nearing critically low levels.

"It's really not about prices any more," said Dmitry Popov, analyst at CRU, a commodities consultancy. "It is trying to secure material for the coming weeks or months." – Copyright The Financial Times Limited 2021