European energy extended its blistering rally on Aug. 25 as the worst supply crunch in decades heightens pressure on politicians to do more to rescue industries and households.
German and French power soared to fresh records, as benchmark natural gas futures jumped as much as 8.9%. The fuel is near the level last seen in the early weeks of Russia’s invasion of Ukraine, when prices had hit unprecedented intraday highs.
Soaring energy costs are fueling inflation, undermining the euro currency, and disrupting factories as Russia squeezed supplies to the continent following its war on Ukraine six months ago. With the region already heading toward recession, failure to contain the crisis threatens to spur social unrest and political upheaval if the supply crunch sparks blackouts and cold homes this winter.
The continent relies heavily on liquefied natural gas imports to fill the gap left by Russia, but competition for the fuel with Asia has intensified after a relative lull earlier this summer. Asian prices are also surging as utilities there rush to secure supplies ahead of winter.
European Union energy ministers may hold an emergency meeting to discuss price spikes as leaders strike a more urgent tone. Member states have already earmarked almost $280 billion to ease the price burden, but that is unlikely to be enough, while more than half of UK households risk being pushed into energy poverty with bills likely to rise by roughly 80% from October.
Dutch month-ahead gas, the European benchmark, was 6.1% higher at €310 per megawatt-hour by 11:50 a.m. in Amsterdam on Aug. 25. The contract hit a record €345 in early March. The UK equivalent rose as much as 13%.
German power prices for next year surged 17% to a record €750 a megawatt-hour. The equivalent contract in France jumped 12% to €880, about 10 times the level it was a year ago.
These have contributed to an ever-lengthening list of casualties, as costs for everything from fertilizer to zinc and aluminum production to surge. Announcements on output curtailments are coming almost daily.
“Europe’s energy prices show little sign of cooling,” BMO Capital Markets said in a research note, as cited by Bloomberg. “The mounting global power crisis has already led to production curtailments across several commodities.”
A big test for the market will come next week, when Russia’s Gazprom PJSC halts gas flows through the key Nord Stream pipeline for three days of maintenance starting Aug. 31. European authorities are concerned that supplies may not resume after the work.
Meanwhile, gas facilities in Norway are undergoing seasonal maintenance that will continue next month, while a major LNG terminal in the US, damaged by an explosion earlier this year, has delayed its restart to November.
“LNG imports are already running up against regasification bottlenecks; other pipeline supplies, such as from Norway, the UK, or North Africa, are broadly maxed out,” analysts at Morgan Stanley said in a note. “This raises the question whether demand can fall quickly enough.”
Adding to the crunch, Russia’s push to consolidate control over gas is beginning to curb supply in Asia. The nation’s Sakhalin Energy LLC scrapped an LNG shipment to at least one customer in the region over payment issues, according to traders familiar with the matter.
The project’s investor, Shell Plc, which is ditching its Russian assets, may lose its long-term purchase contract with the plant, Kommersant newspaper reported on Aug. 25, citing unidentified sources familiar with the matter.