Energy Crunch Deepens as U.S. Warns Europe Isn’t Doing Enough

(Bloomberg) -- Europe’s energy crunch is deepening, with gas and power prices hitting fresh records after the U.S. warned the continent isn’t doing enough to prepare for what could be potentially a dire winter.

With about a month to go before the start of the heating season, Europe doesn’t have enough natural gas in storage sites and isn’t building inventories fast enough either. Amos Hochstein, the U.S. State Department’s envoy for energy security, said on Friday he was worried about supplies this winter.

Energy demand is rebounding across the world as economies reopen and people return to the office, while traders are scrambling to create a buffer to avoid a supply shortage they saw last winter. Gas stockpiles in Europe are already at the lowest level in more than a decade for this time of year, pushing up the cost of producing electricity. The rally in European energy prices is just a taste of what’s to come for other commodities, Goldman Sachs Group Inc. said in a report.

“European energy pricing dynamics offer a glimpse of what is in store for other commodity markets, with widening deficits and depleting inventories leading to elevated price volatility,” said Goldman analysts including Jeff Currie. For European gas, “demand destruction is the only option to rebalance markets,” they said.

Europe is struggling to boost supplies, with flows from No. 2 supplier Norway currently limited due to maintenance. Top seller Russia “is coming off an extended period of inexplicably low supply” at a time when U.S. deliveries of liquefied natural gas can’t be increased further, Hochstein said.

“I worry because I don’t think we should ever be in a position knowing that if it’s a cold winter, there’s not enough supply,” he told reporters during a visit to Warsaw.

Benchmark European gas futures traded in the Netherlands exceeded 60 euros a megawatt-hour, climbing as much as 7.7% to a new record. The U.K. contract for next-month surged as much as 7.1% to 155.89 pence a therm.

Concerns are also mounting on a timely start-up of the Nord Stream 2 pipeline from Russia, as the German Federal Network Agency said Monday it has four months to complete the certification process. 

European gas prices have climbed to levels similar to those in Asia, making it a more attractive destination for LNG shipments. However, the U.S. hurricane season isn’t over, casting concerns over the country’s exports as Tropical Storm Nicholas forms in the southern Gulf of Mexico, potentially disrupting production.

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“The North American gas producers and the traders are already trying to line up as much capacity and gas volumes as possible” in case there is a bitter winter, Ogan Kose, a managing director and global lead for Integrated Gas at Accenture, said in an interview. “Even in a very bad winter scenario, the most likely scenario would be significantly increased gas supply prices to Europe.”

Soaring gas prices are fueling a rally in electricity. German power futures for next year, a benchmark for Europe, surged to a record 100.10 euros a megawatt-hour, while the equivalent French contract reached an all-time high of 104 euros on the European Energy Exchange.

Italy’s power prices are set to increase by 40% in the third quarter, after rising 20% in the second, because of higher gas and carbon prices, Ecological Transition Minister Roberto Cingolani said Monday in an Ansa newswire report.

Low Wind

Short-term electricity prices are also gaining, with low wind power across most of Europe boosting costs. A bigger need for more expensive fossil-fueled plants to meet demand has lifted the German day-ahead contract to the highest since 2007 and the U.K. equivalent surged to a record 400.01 pounds ($553) a megawatt-hour.

“Low wind speeds, it’s just like we are not receiving enough renewable production in the U.K.,” Kose said. “The expected case would be that renewable production would contribute up to 18-20% of overall electricity generation, this is not happening at least nowadays.”

Higher energy prices risk acceleration inflation and hurting industrial production that’s just recovering after the pandemic. 

“If supply were to disappoint further and winter weather turns out colder than normal, European gas and power prices may have to rise further to ration demand and thus curb energy-intensive industrial production,” Goldman said.

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