- Russian gas supply into German down to 40 per cent of capacity, sending power prices up again
- Bleak forecasts for winter across Europe and UK
Key European energy sector players are already getting ready for a winter without Russian gas after supply into Germany was dramatically reduced, raising fears of further price rises and rationing.
Already, businesses and consumers across the UK and the continent are calling for more government handouts to cope with gas price hikes. Russia’s decision to further reduce supply into Germany – which Gazprom put down to a lack of necessary parts - has seen exports in the Nord Stream 1 pipeline fall to 40 per cent of capacity.
The German minister for economic affairs and climate action Robert Habeck has already called it a "crisis". The government said on Friday it was still able to add to gas stores, but private buyers would be facing far higher prices as a result of the supply cut. Power prices across Europe have already surged to new highs since March's record levels, according to consultancy Rystad Energy.
The UK has far less exposure to Russian gas than Germany but would still feel “knock-on” effects, according to National Grid (NG.) chief executive John Pettigrew, who said last week the current outlook to winter was “very similar to last year”. The UK government received heavy criticism last week for planning to cut gas supplies to Europe in the event of further curtailments.
While continued higher gas prices will further boost the profits of London-listed gas producers like Harbour Energy (HBR) and Serica Energy (SQZ) as prices rebound, UK manufacturers and other energy-intensive businesses have repeatedly warned of the damage that these higher costs will have on investment plans.
The “increasingly difficult” UK trading conditions that have driven oil and gas profits have knocked business confidence down to the lowest level since mid-2020, according to Rob Dobson at S&P Global Market Intelligence.
“Jobs growth also slowed sharply amid the increasingly uncertain outlook and recent surge in energy costs,” he added.
War price
At the heart of the storm, the German government has readied the country for a full Nord Stream 1 shutdown once a planned 11-day maintenance programme begins on 11 July, saying supply may not be restarted at all. Bernstein analysts said a four-day manufacturing week in Germany was an “active scenario” that investors should be considering, given the potential hit to production.
In a situation of “severe disruption” to Russian oil and gas exports to Europe, the European Central Bank (ECB) said inflation would average 8 per cent this year across the euro area and remain over 6 per cent next year, while GDP would contract by 1.7 per cent next year as well.
The immediate impact of the reduction in gas supply was seen in German equities. Energy giant Uniper (DE:UN01) received a state-aid package, while other major companies such as BASF (DE:BAS) continued a months-long downward share price move.
Although some gas supplies have arrived in Europe from the US in recent months, the prospects of this repeating are not good, with a major export terminal currently out of action. This has reduced US prices, as more gas is available domestically, but means Europe will have to go elsewhere for extra liquefied natural gas (LNG) imports.
Asian LNG suppliers will not help this time, either. "Besides prospects of even lower gas flows from Russia, Europe is also encountering increasing competition for LNG against Asian markets with soaring demand," said Rystad analyst Vladimir Petrov. He also said forecasts for weaker wind in the coming weeks in Germany and the UK would add on pressure to fossil fuel plants.
One positive is that there is space for more LNG imports, with terminals at around 75 per cent of total capacity according to Rystad.
Bernstein analysts said the pinchpoint may not come this year, however: "We [could] muddle through the winter but then the storage situation post the 2022/23 winter period presents a colossal challenge for the 2023/24 winter period".
