Rollercoaster energy market now at the mercy of weather

By Rachel Morison,

Everyone may be back to watching the daily number of coronavirus cases as the Omicron variant spreads through Europe, but the energy market is focusing on a more traditional gauge of worry: the temperature.

Prices soared to new records this week because of the impact of unexpected nuclear outages in France and worryingly low stockpiles across the continent. On Friday, natural gas prices plunged as Russia decided to supply the market at the 11th hour, yet they are still at dizzyingly high levels.

Buyers and sellers are now on high alert for signs of cold that would send prices into total meltdown. “Only a mild winter seems capable of alleviating the stress on the energy market,” said Jean-Paul Harreman, an analyst at research firm Enappsys Ltd.

It all adds up to a precarious outlook for European economies and consumers as the pandemic roars back and countries become increasingly concerned about Russia and geopolitics.

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Omicron will likely be dominant across Europe by mid-January and that could lead to de facto lockdowns where companies don’t have the necessary staff to continue as normal. Surging energy prices are driving inflation and forcing gas-hungry industries to curb output. If it’s cold too, then rolling blackouts could be a last resort.

The rest of December is set to be colder than usual and this will persist into January with widespread below-average temperatures for the first two weeks, according to forecaster Maxar Technologies Inc.

Prices are already at record highs in France and Germany while the weather is relatively mild and demand isn’t really testing the limits of the system. Peak consumption usually comes in January or February when it’s coldest. Analysts say it wouldn’t even require a repeat of February 2018’s “Beast from the East” to trigger market meltdowns this year, only a few degrees below normal will be enough.

While there may be enough capacity now — albeit at an eye-watering price — it’s set to deplete more quickly than in previous years, according to Hannis Koenig, head of commissioned projects at Aurora Energy Research Ltd. “Our gas use will go up and that could become an issue toward the end of the winter when gas storage is used up,” he said.

Widespread Covid-19 restrictions where businesses and industries shut could help alleviate the energy crunch by reducing power use. At the height of the 2020 lockdowns, power demand fell by as much as 20 per cent in parts of Europe.

In the meantime, the industry is starting to feel the pressure. Nyrstar, a leading global zinc producer owned by Trafigura Group, will halt production at a smelter in France in the first week of January because of soaring power prices. The trend is hurting the competitiveness of French companies, according to the Uniden trade group that represents energy-intensive industries.

Higher energy prices are having a broader impact too. The European Central Bank is projecting 3.2 per cent inflation for 2022 with two-thirds of that increase attributed to energy price gains. In Britain, “more persistent” inflation was behind a surprise decision to raise interest rates for the first time in three years on Dec. 16.

About a third of France’s nuclear capacity will be halted at the start of January. The nation usually exports power at peak times to its neighbours but now it will require imports, pushing prices up everywhere. Maintenance is also being disrupted by the pandemic. Three of Germany’s nuclear power plants will also shut at the end of this year and thus unavailable during the coldest part of winter.

European Union leaders met this week in Brussels to discuss the energy crisis, the bloc’s pandemic response and Russia’s buildup of troops near Ukraine, a key gas-transit nation.

An escalation of the tensions between Kyiv and Moscow could make the energy crisis worse, with the potential for Russian gas shipments to be curbed or halted altogether in the case of an invasion. Conflict could also further delay the start of the controversial Nord Stream 2 pipeline linking Russia to Germany, which has already suffered repeated delays.

Gas prices fell on Friday after Russian giant Gazprom PJSC booked pipeline space in an auction to deliver gas west through Poland at the last minute after indicating previously it wouldn't. But traders are unsure of what Russia’s supply strategy will be given the political tensions.

Attention is already turning to next winter. If Russian gas exports remain at current levels, Europe’s storage sites will be less than 15% full at the end of March, the lowest on record, according to consultant Wood Mackenzie Ltd. And that’s assuming normal weather conditions.

“We believe there is a high likelihood of both prolonged and even higher prices through winter with after-effects that could stretch beyond the next two years,” said Nathan Piper, head of oil and gas research at Investec Bank Ltd.

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