Gas is rising, threatening the European economy and oil demand

The Dutch TTF futures contract touched €295 per megawatt-hour, a level not seen since highly volatile sessions during the first weeks of Russia’s invasion of Ukraine in mid-March.

Natural gas prices continued to rise on Monday, buoyed by the prospect of a temporary disruption in Russian gas supplies via Nord Stream 1, reviving fears that the energy crisis could trigger a recession in Europe.

The Dutch TTF futures contract, the benchmark for the European natural gas market, hit 295 euros per megawatt hour (MWh), a level not seen since highly volatile sessions in the first weeks of the Russian invasion of Ukraine in mid-March.

Russian gas giant Gazprom announced on Friday that its supplies of Russian gas to Europe through the Nord Stream 1 gas pipeline would be suspended for three days, from August 31 to September 2, for “maintenance reasons”.

An “obvious attempt to exploit Europe’s dependence on Russian gas,” according to Ludwig Möhring, general manager of the Federal Association of German Petroleum, Natural Gas and Geothermal Producers (BVEG).

If “a brief closure of the pipeline would not in itself make a big difference,” explains Ludwig Möhring, this news highlights two risks: that Russia, under the pretext of a new technical problem, “falsely claims that it cannot reopen the pipeline” or its to shut down other gas pipelines that supply Europe.

Bjarne Schieldrop of Swedish bank Seb predicts an “extremely difficult” energy situation in Europe this winter, arguing that Russia could “go all out” by further cutting natural gas exports, especially “every time the weather forecast is really cold.

“European gas and power markets are devastated, liquidity is evaporating,” Mr. Schieldrop added in an interview with AFP.

Mechanically, electricity prices for early 2023 delivery in Germany were pushed to over 700 euros on Monday, while the historical norm is 40 euros per MWh, according to Mr Schieldrop. For electricity in France at the beginning of next year, the MWh reached 840 euros.

Therefore, “a recession in Europe is a certainty,” Oanda’s Edward Moya concluded in a note.

Intervention by OPEC?

Natural gas is also booming in the United States, and its price rose to $9.982 per million British Thermal Unit (BTU) on Monday, a first in 14 years.

However, this movement is mainly related to the heat wave that several American regions experienced during the summer, explained Andy Lipow of Lipow Oil Associates.

It increased energy demands, particularly for air conditioning, while low water levels at several hydroelectric power plants in the west limited electricity production from renewable sources.

As a result, reserves, which are currently 12% below their average level over the past five years, have failed to replenish, causing market tensions in the autumn.

Compared to the extreme natural gas and electricity prices in Europe, crude oil now appears “extraordinarily cheap”, notes Bjarne Schieldrop.

Extreme gas prices create a situation with “extremely destructive effects on the European economy”, fuel fears of demand and thus weigh on crude oil prices.

After collapsing earlier in the day on Monday, prices nonetheless recovered to reach near-balance thanks to statements by Saudi Energy Minister Abdulaziz bin Salman to Bloomberg agency.

The official estimated that the current volatility in the oil market and the drop in prices, which he says prematurely integrates a significant economic slowdown, could justify a drop in production from the Organization of the Petroleum Exporting Countries (OPEC+).

A barrel of Brent North Sea crude, the benchmark for crude in Europe, fell just 0.24% on October delivery to close at $96.48. Its American counterpart, the West Texas Intermediate (WTI), lost 0.59% to $90.23 a barrel.

For Andy Lipow, a cut in OPEC production would not be enough to boost oil prices significantly, because “Europe is on the way to a recession and the economic impact will be felt worldwide, weighing on demand and thus prices.

Another factor of support for the black gold, “the long overdue American response to Iran,” in the Iranian nuclear file, a week after Tehran tabled its proposals on the European Union’s latest bid in an attempt to salvage the 2015 international deal would have.

“The market is increasingly skeptical about a deal,” said Bart Melel of TD Bank.

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