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Long outage:
The Snøhvit gas liquefaction plant near Hammerfest in northern Norway has been idle since October 2020
Photo: PR
The rather dreary gas market has not seen so much movement for a long time.
The wholesale price curve for natural gas looks like the next hot crypto bet: steeply up.
At the largest continental European trading center TTF in the Netherlands, a megawatt hour of natural gas with a delivery date in November cost up to 160 euros this Wednesday - three times as much as a month before, almost ten times as much as a year ago.
The rally threatens to "set back the upswing, hit disposable household incomes and damage the production of energy-intensive goods," warns Unicredit economist Edoardo Campanella.
In addition, the gas crisis could also counteract efforts to protect the climate.
What's going on there?
Who Needs Natural Gas?
For German private households, natural gas is by far the most important energy source ahead of oil and electricity, mainly because around half of the apartments are heated with it - as is the majority of offices and other commercial properties.
The industry consumes even more.
The chemical industry in particular depends on natural gas for steam processes and as a feedstock.
In addition, electricity is generated in gas-fired power plants, which has made the greatest contribution to climate protection to date in countries such as Great Britain and the USA.
Because although natural gas is a fossil fuel, it is significantly lower in CO2 than the directly competing coal.
Why is gas suddenly running out?
Mike Fulwood from the Oxford Institute for Energy Studies speaks of an "unusual combination of economic forces": One factor after the other is causing rising demand and falling supply - in every respect the opposite of the market situation in 2020, when gas was in abundance and prices fell.
In the first place, the Oxford Institute mentions a "strong pull from Asia".
Especially in China, the economy is booming again after the Corona crisis.
Liquefied natural gas (LNG), which serves as a valve between the various regional gas markets, has been flowing eastwards for years, where gas prices are traditionally higher.
Now even more.
According to Nikos Tsafos of the Institute for Strategic & International Studies, China bought 80 percent of the new LNG supply this year
In Northeast Asia as well as in Europe and North America, the winter of 2020/21 was unusually cold, which drove up gas consumption and emptied storage facilities. At the beginning of the new winter season they are still not completely full, in Germany around 69 percent instead of the more than 95 percent usual at the beginning of October. Many utilities such as Sinopec in China are now topping up their supplies with panic buying in order to be prepared for a new cold winter
Gas-fired power plants that can be used flexibly are needed because other power sources, depending on the weather and climate, fail.
A severe drought in Brazil in the middle of the year throttled the hydropower plants that dominate there, now something similar is happening in China.
Not quite as dramatic, but also noticeable on the gas market, is the weak wind in Europe over the course of the year - natural gas is playing its role as a backup for the energy transition
The LNG supply is growing, but much more slowly than in previous years - a consequence of reduced investment plans after the collapse of energy prices in 2014/15.
New systems that cost several billions are usually ready after a good five years.
Investing for today's needs seemed too risky for the corporations at the time
In addition, many existing systems fail at the same time, in part due to scheduled maintenance work that was postponed due to the 2020 corona pandemic and is now being rescheduled.
The Norwegian Equinor group has to repair its LNG platform Snøhvit in the North Sea after a fire in October 2020.
There, too, the restart will be delayed until the coming year due to the corona
And production from many gas fields is falling either for natural reasons, because the developed stores are exhausted, or on purpose - the Netherlands in particular, as the largest gas producer in the EU, decided to take a radical turn after the earthquake in the Groningen production region: there should be as early as 2022 Be over
As Europe's main supplier, the Russian state-owned company Gazprom suddenly cut back the flow of gas through the most important Yamal-Europe pipeline via Belarus and Poland to Germany at the beginning of October. Some suspect a calculation to put pressure on a quick opening of the controversial Baltic Sea pipeline Nord Stream 2 - especially since Western Europe's largest natural gas storage facility in Rehden, Lower Saxony, which Gazprom belongs to, is particularly empty with a filling level of 9.5 percent. However, network operators and customers such as Uniper report that Gazprom is serving all orders. According to the Oxford Institute, Russia's overall gas exports to Europe are higher than ever. Gazprom is "firing from all pipes" and has probably simply reached its limit in view of the high demand in its own country
The situation is particularly acute in Great Britain, which has made itself dependent on a mix of wind power and mainly imported natural gas - and that in a wild market made up of many providers with sometimes risky business models
What are the consequences?
Gas prices are already an important driver of inflation.
Most end consumers are likely to feel the force of the market rally only after a delay because the suppliers only adjust their contracts periodically - often annually - and are also regulated.
Price portals such as Verivox report tariffs that are two-digit more expensive, but not three-digit as in wholesalers.
The situation is immediately threatening for the suppliers themselves, insofar as they are not secured with long-term supply contracts and futures contracts.
Twelve smaller British providers had to give up this year.
Because of the higher prices, some industrial production has also become uneconomical. Large consumers like BASF with its own gas giant Wintershall Dea are relatively safe, but ammonia plants in particular for fertilizer production are now at a standstill. This not only threatens the supply of agriculture, but also has indirect consequences: CO2 obtained as a by-product is becoming scarce, and thus an important aid for the food, beverage and packaging industries is missing. To keep meat production going, the British government is already subsidizing ammonia.
Most importantly, the gas price rally is also affecting a number of other energy prices that are felt across the economy. Unicredit economist Campanella attributes the fact that the oil price recently jumped over 80 dollars per barrel to the pressure from the gas market - even if only a few users can actually switch from gas to oil. The price of electricity on the European exchanges is currently following the upward trend in gas because gas-fired power plants are suddenly the decisive factor. The pecking order on the electricity market has been reversed, and this is also leading to a backward energy turnaround. The so-called clean spark spread, which determines the ratio of profit margins between comparatively clean gas-fired and dirtier coal-fired power plants, has been negative since the summer. In other words, if there is any doubt, coal wins the competition for every new kilowatt-hour demanded.Accordingly, it is burned more often - which drives up CO2 emissions and also the market price for CO2 certificates. It has risen to over 60 euros in the EU, and significantly more in the separate British trading system.
The rise in gas prices is "so dramatic that it feeds concerns about stagflation," said Allianz portfolio manager Mike Riddell of the Financial Times.
Stagflation means a scenario of a non-growing economy in which prices nevertheless rise, as in the oil crisis of the 1970s.
For this reason, the prices of government and corporate bonds have now fallen.
Which reactions are possible?
Politicians are already reacting - by combating the symptoms. The French government has frozen gas prices after the latest increase by an eighth until April 2022, at the expense of utilities like Engie (with the state as a major shareholder). In addition, low-wage earners receive 100 euros energy money per household so that they can survive the winter. Italy subsidizes gas consumers with billions from the state treasury and has reduced the value added tax for gas from 22 to 5 percent. Several states have put the issue on the agenda of the euro finance ministers and are calling for intervention in the market. The EU Commission is in favor of a strategic gas reserve.
But in the short term, it is hardly possible to procure large quantities of natural gas; the shortage can only be remedied over years with investments that cost billions. The hurdles are even higher for replacing natural gas with other fuels such as hydrogen, which is now almost exclusively produced on the basis of natural gas, i.e. only offers an inefficient detour without a massive expansion of renewables. The decision for house and apartment owners to replace gas heating systems with alternatives such as heat pumps or stoves with wood pellets seems almost easy - the current gas crisis could provide a boost here, but that also takes years.
The situation in Western Europe could at least relax a little with the new Nord Stream 2 pipeline, which the Russian side is already filling with gas.
However, Gazprom is only allowed to deliver once the Federal Network Agency approves the politically sensitive project.
Oxford energy expert Fulwood provides another hope: "It would take a longer and colder winter than last year for a price increase to last above today's level," he writes in the Financial Times.
So much bad news has already come together and priced in.
Therefore, he thinks "a sharp correction in the near future is likely".
Fulwood does not want to commit to when and how much prices will fall again.
The market regulates it, but in an unpredictable way.
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