Column: Forget Russian intentions, fundamentals have driven up gas prices in Europe

LONDON, October 8 (Reuters) – EU policymakers and some traders blame Russia for the low volume of gas stored in the region, which has pushed gas and electricity prices to record highs.

The Russian gas export monopoly Gazprom has honored its commitments for long-term contracts, confirm its customers. But he has not rushed to reserve additional pipeline capacity for cash buyers, despite European calls for more supplies.

Some policymakers and traders have speculated that additional gas was deliberately withheld to assert a diplomatic point of view and speed up approval of the Nord Stream 2 pipeline.

Others say Russia has withheld gas to create a shortage, drive up prices and boost export earnings, much like the OPEC + producer group is raising oil prices and revenues.

The other possibility is that Russia has not supplied more gas as it faces its own shortage and wants to replenish its domestic stocks after they were depleted by a cold winter in 2020/21.

There is no empirical way to determine which theory is correct or what Russia’s intentions have been.

But whatever the reason, the result is the same: gas is running out and European energy prices have reached record highs.

Soaring energy prices are a global phenomenon. Shortages of gas, coal, electricity and, to a lesser extent, oil are evident in North America and Asia as well as in Europe.

Either way, the very high and rapidly rising prices this year are a reaction to the very low and rapidly falling prices last year during the coronavirus recession.

Energy prices have always been strongly cyclical. In this case, an unusually severe cyclical recession in 2020 produced an equally extreme cyclical recovery in 2021.

Both energy production and consumption fell sharply over the past year, with consumption generally declining earlier and faster than production, causing inventories to rise sharply and increasing downward pressure on prices.

Since then, the process has been reversed. Energy consumption recovered rapidly, while production resumed more slowly, causing a large inventory drawdown and increasing prices.

MARKET PRIMING

In the gas market, the long cold winter across North America and Eurasia further depleted stocks and accelerated the routine cyclical shift from collapse to boom.

Compared to five-year averages, energy stocks fell from large surpluses in 2020 to neutral in winter 2020/21 and to deficits at the end of 2021.

In Europe, the volume of gas stored started winter 2020/21 at an almost record level of 1,069 terawatt-hours (TWh) but ended at only 323 TWh.

The winter pullback of 2020/21 was the second largest on record and left stocks at a three-year low.

The United States experienced a similar, albeit less severe, drawdown that left working gas inventories in underground storage facilities slightly below the same average.

In early spring 2021, the conditions for a future gas shortage and a sharp rise in prices were in place if production and deliveries did not increase faster than normal over the summer.

When Russia failed to increase deliveries to Europe above contract levels, and U.S. shale producers failed to increase drilling, the potential shortage in the spring of 2021 turned into a shortage. real in the fall.

PRESSING

“You are always squeezed with the grain of a market, never against it,” as a senior commodity trader once told me.

Tight fundamentals and deliberate cuts are inseparable. But it is the tight fundamentals that create the conditions for a tightening and not the other way around.

Has Russia this year seen an opportunity to squeeze an already tight market by deliberately reducing gas exports? Or has Russia prioritized rebuilding its own depleted stocks? We’ll probably never know.

But what is clear is that most or all of the rise in gas, coal and electricity prices in Europe and the rest of the world can be explained in terms of the regular fundamentals of the economy. supply and demand.

If the gas market had been comfortably supplied at the start of the year, Russia would not have been able to raise prices by suspending production, whether or not this was its intention.

Likewise, had the oil market been comfortably supplied, with increasing production from the US shale fields and other sources, OPEC + supply restrictions would not have been able to drive up prices. so much.

The price cuts favor the downturn and consolidation of energy producers, leaving those who survive with more pricing power and higher incomes when the cycle resumes.

Current energy shortages are an extreme version of the normal industry cycle, an exceptional price spike in 2021 in reaction to the exceptional decline in 2020.

In the same vein, the exceptionally high prices of 2021 create the conditions for a more balanced market or even a surplus later in 2022 and 2023.

John Kemp is a market analyst at Reuters. The opinions expressed are his own.

Graphic books:

World gas prices: https://tmsnrt.rs/3DhpLTy

Global energy markets: https://tmsnrt.rs/3DjNFxN

Editing by Edmund Blair

Our Standards: Thomson Reuters Trust Principles.